As
filed with the Securities and Exchange Commission on
November
16
, 2006
File
No.
333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
F-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
EUROSEAS
LTD.
(Exact
name of registrant as specified in its charter)
Republic
of the Marshall Islands
|
4412
|
N/A
|
(State
or other jurisdiction of
incorporation or
organization)
|
(Primary
Standard Industrial
Classification Code Number)
|
(I.R.S.
Employer Identification No.)
|
|
|
|
Euroseas
Ltd.
Aethrion
Center
40
Ag. Konstantinou Street
151
24 Maroussi, Greece
011
30 211 1804005
|
|
Seward
& Kissel LLP
Attn:
Lawrence Rutkowski, Esq.
One
Battery Park Plaza
New
York, New York 10004
(212)
574-1200
|
(Address
and telephone number of
Registrant’s principal executive
offices)
|
|
(Name,
address and telephone
number of agent for service)
|
|
|
|
|
Copies
to:
|
|
Lawrence
Rutkowski, Esq.
Seward
& Kissel LLP
One
Battery Park Plaza
New
York, New York 10004
(212)
574-1200
(telephone number)
(212)
480-8421
(facsimile number)
|
|
Stephen
P. Farrell, Esq.
Morgan,
Lewis & Bockius LLP
101
Park Avenue
New
York, New York 10178
(212)
309-6000
(telephone number)
(212)
309-6001
(facsimile number)
|
Approximate
date of commencement of proposed sale to the public:
As
soon as practicable after the effective date of this Registration
Statement.
If
any of
the securities being registered on this Form are being offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
o
If
this
Form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, please check the following box and list
the
Securities Act registration statement number of the earlier effective
registration statement for the same
offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered
|
|
Amount
to be Registered(1)
|
|
Proposed
Maximum Offering Price Per Security(2)
|
|
Proposed
Maximum Aggregate Offering Price(2)
|
|
Amount
of Registration Fee(3)
|
|
Series
A Mandatory Convertible Limited Preferred Stock, par value $0.01
per
share
|
|
|
|
|
|
|
|
|
$46,000,000
|
|
|
$4,922
|
|
Common
Stock, par value $0.03 per share
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(1)
Includes shares of convertible preferred stock that may be sold to cover
the
exercise of an over-allotment option granted to the underwriters. Also
includes,
pursuant to Rule 416 under the Securities Act of 1933, an indeterminant
number
of shares that may be issued, offered or sold to prevent dilution resulting
from
stock splits, stock dividends or similar transactions.
(2)
Estimated solely for the purpose of calculating the registration fee pursuant
to
Rule 457 under the Securities Act of 1933, based on the
offering
price of the convertible preferred stock.
(3)
The
shares of common stock issuable upon conversion of the convertible preferred
stock will be issued for no additional consideration, and therefore no
registration fee is required pursuant to Rule 457(i).
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a),
may determine.
The
information in this prospectus is not complete and may be changed. We may
not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to
sell
these securities and it is not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
Subject
to Completion Dated
November
16,
2006
Shares
Series
A
Mandatory Convertible Limited Preferred Stock
We
are
offering
shares of our Series A Mandatory Convertible Limited Preferred Stock,
or
convertible preferred stock, in this offering.
We
will
pay cash dividends on the convertible preferred stock, when, as and
if, declared
by our Board of Directors, out of funds legally available therefore,
in the
minimum amount of
$ per
share, quarterly in arrears on each
,
,
and
until
,
2008. We will pay
a partial dividend of $ on
, 2007. After
,
2008, there will be
no fixed minimum dividends on the convertible preferred stock, however,
dividends we pay on the convertible preferred stock will be no less
than the
dividends we pay on our common stock. Dividends on the convertible
preferred
stock will be cumulative from the date of issuance
until
, 2008;
thereafter dividends will no longer be cumulative.
Prior
to
this offering, there has been no public market for our convertible
preferred
stock. We will apply to list our shares of convertible preferred stock
on the
NASDAQ Global Market upon completion of this offering.
Each
share of convertible preferred stock will have a liquidation preference
of
$
plus
accrued and unpaid dividends until
, 2008; thereafter,
the liquidation preference will be reduced to $
per
share.
Each
share of the convertible preferred stock will mandatorily convert into
one share
of our common stock, subject to specified adjustments, on ,
2008 if our common
stock has been approved for listing on the NASDAQ Global Market or
another
comparable U.S. national securities exchange. If not converted on that
date, the
convertible preferred stock will convert on the first date thereafter
on which
our common stock is approved for listing. At any time prior to ,
,2008, you
may elect to convert your convertible preferred stock into our common
stock, but
only if our common stock is then so listed. The convertible preferred
stock will
not otherwise be convertible into our common stock.
For
a
more detailed description of the convertible preferred stock, see “Description
of Convertible Limited Preferred Stock” beginning on page 117.
Our
common stock is quoted on the Over the Counter Bulletin Board (“OTCBB”) under
the symbol EUSEF.OB. On November 15, 2006 the closing price of our
common stock
on the OTCBB was $8.35 per share.
See
the section of this prospectus entitled “Risk Factors” beginning on page 13
to read about the risks you should consider before buying shares of our
convertible
preferred
stock.
|
|
Per
Share
|
|
Total
|
|
Public
Offering Price
|
|
$
|
|
|
$
|
|
|
Underwriting
Discount
|
|
$
|
|
|
$
|
|
|
Proceeds,
Before Expenses, To Us
|
|
$
|
|
|
$
|
|
|
The
underwriters have a 30-day option to purchase up
to additional shares of
our convertible
preferred
stock
from us to cover any over-allotments.
Delivery
of shares will be made on or
about
, 2006.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus
is
, 2006
Cantor Fitzgerald & Co.
|
Oppenheimer
& Co.
|
|
|
|
TABLE
OF
CONTENTS
|
|
Page
|
ENFORCEABILITY
OF CIVIL LIABILITIES
|
|
|
INTERNATIONAL
DRYBULK AND CONTAINER SHIPPING INDUSTRY DATA
|
|
|
CURRENCY
TRANSLATION
|
|
|
PROSPECTUS
SUMMARY
|
|
1
|
FORWARD-LOOKING
STATEMENTS
|
|
12
|
RISK
FACTORS
|
|
13
|
PRICE
RANGE OF COMMON STOCK
|
|
31
|
DIVIDEND
POLICY
|
|
32
|
USE
OF PROCEEDS
|
|
33
|
CAPITALIZATION
|
|
34
|
RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
|
|
|
SELECTED
HISTORICAL FINANCIAL INFORMATION AND DATA
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
THE
INTERNATIONAL DRYBULK AND CONTAINER SHIPPING INDUSTRY
|
|
|
BUSINESS
|
|
|
MANAGEMENT
|
|
107
|
PRINCIPAL
SHAREHOLDERS
|
|
112
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
|
|
114
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
|
115
|
DESCRIPTION
OF CONVERTIBLE LIMITED PREFERRED STOCK
|
|
117
|
DESCRIPTION
OF CAPITAL STOCK
|
|
123
|
REGISTRAR
AND TRANSFER AGENT
|
|
126
|
MARSHALL
ISLANDS COMPANY CONSIDERATIONS
|
|
127
|
TAX
CONSEQUENCES
|
|
130
|
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
|
|
138
|
UNDERWRITING
|
|
|
LEGAL
MATTERS
|
|
142
|
EXPERTS
|
|
|
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
|
|
144
|
GLOSSARY
OF SHIPPING TERMS
|
|
145
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
F-1
|
We
have not authorized anyone to give any information or to make any
representations other than those contained in this prospectus. Do not rely
upon
any information or representations made outside of this prospectus. This
prospectus is not an offer to sell, and it is not soliciting an offer to
buy (1)
any securities other than shares of our convertible
preferred
stock or (2) shares of our convertible
preferred
stock in any circumstances in which our offer or solicitation is
unlawful. The information contained in this prospectus may change after the
date
of this prospectus. Do not assume after the date of this prospectus that
the
information contained in this prospectus is still correct.
ENFORCEABILITY
OF CIVIL LIABILITIES
We
are a
Marshall Islands company and our executive offices are located outside of
the
United States of America in Maroussi, Greece. Some of our directors and officers
and some of the experts named herein reside outside the United States of
America. In addition, a substantial portion of our assets and the assets
of our
directors, officers and experts are located outside of the United States
of
America. As a result, you may have difficulty serving legal process within
the
United States of America upon us or any of these persons. You may also have
difficulty enforcing, both in and outside the United States of America,
judgments you may obtain in United States of America courts against us or
these
persons in any action, including actions based upon the civil liability
provisions of United States of America federal or state securities laws.
Furthermore, there is substantial doubt that the courts of the Marshall Islands
or Greece would enter judgments in original actions brought in those courts
predicated on United States of America federal or state securities laws.
INTERNATIONAL
DRYBULK AND CONTAINER SHIPPING INDUSTRY DATA
The
discussions contained under the sections of this prospectus entitled “Prospectus
Summary─Industry Trends,” “Business” and “The International Drybulk and
Container Shipping Industry” have been reviewed by Maritime Strategies
International Ltd. (“MSI”), which has confirmed to us that they accurately
describe the international drybulk and container shipping industry, subject
to
the reliability of the data supporting the statistical and graphical information
presented in this prospectus.
The
statistical and graphical information we use in this prospectus has been
compiled by MSI from its database. MSI compiles and publishes data for the
benefit of its clients. Its methodologies for collecting data, and therefore
the
data collected, may differ from those of other sources, and its data does
not
reflect all or even necessarily a comprehensive set of the actual transactions
occurring in the market.
CURRENCY
TRANSLATION
All
references in this prospectus to “Dollars” or “$” are to the lawful currency of
the United States of America and all references to “Euros” or “€” are to the
single currency introduced on January 1, 1999 by those member states of the
European Union who participate in the European Economic and Monetary Union.
For
the convenience of the reader, this prospectus contains translations of certain
amounts from Euros into Dollars. Unless otherwise indicated, prior to June
30,
2006, such amounts are based on the U.S. Dollar exchange in effect at such
time
and, following June 30, 2006, such amounts are based on a U.S. Dollar exchange
rate of €1.00 = U.S.$1.268 as in effect on September 29, 2006.
PROSPECTUS
SUMMARY
This
section summarizes some of the information and consolidated financial statements
that appear later in this prospectus. As an investor or prospective investor,
you should review carefully the risk factors and the more detailed information
and financial statements that appear later in this prospectus. In this
prospectus, references to “Euroseas,” “Company,” “we,” “our,” “ours” and “us”
refer to Euroseas Ltd., and its subsidiaries, unless otherwise stated or the
context requires.
We
use the term “deadweight tons,” or dwt, in describing the capacity of our
drybulk carriers. Dwt, expressed in metric tons, each of which is equivalent
to
1,000 kilograms, refers to the maximum weight of cargo and supplies that a
vessel can carry. We use the term “twenty foot equivalent unit,” or teu, the
international standard measure of containers, in describing the capacity of
our
container ships. For the definition of certain shipping terms used in this
prospectus, see the “Glossary of Shipping Terms” at the end of this prospectus.
Drybulk carriers are categorized as Capesize, Panamax, Handymax and Handysize.
The carrying capacity of a Capesize drybulk carrier is 80,000 dwt and above.
The
carrying capacity of a Panamax drybulk carrier ranges from 60,000 to79,999
dwt.
The carrying capacity of a Handymax drybulk carrier ranges from 40,000 to 59,999
dwt and that of a Handysize drybulk carrier ranges from 10,000 to 39,999 dwt.
Container ships are categorized as Deep Sea, Intermediate, Handysize and Feeder.
The carrying capacity of a Deep Sea container ship is 3,000 teu and above.
The
carrying capacity of an Intermediate container ship ranges from 2,000 to 2,999
teu. The carrying capacity of a Handysize container ship ranges from 1,300
to
1,999 teu and that of a Feeder container ship is less than 1,300 teu. Unless
otherwise indicated, all references to currency amounts in this prospectus
are
in U.S. dollars and all share numbers and per share data give effect to a
1-for-3 reverse stock split effected on October 6, 2006.
Our
Company
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
container ships and multipurpose vessels that transport dry and refrigerated
containerized cargoes, mainly including manufactured products and perishables.
As
of
November
15
, 2006, our fleet consisted of nine vessels, including two Panamax
drybulk carriers, two Handysize drybulk carriers, four container ships and
one
multipurpose vessel with an average fleet age of approximately 18 years.
The
total cargo carrying capacity of our four drybulk carriers and our four
container ships is 207,464 dwt and 6,235 teu, respectively. Our multipurpose
vessel can carry 22,568 dwt or 950 teu, or a combination thereof.
We
intend
to strategically employ our fleet with 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 employ 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. Six of the nine vessels in our fleet are currently employed
under period charters which provide us with both stable cash flow and high
utilization rates that help us generate steady earnings and enhance our ability
to pay dividends to our shareholders. We believe this balanced employment
strategy provides 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.
During
the fiscal year ended December 31, 2005 and the six month period ended June
30, 2006:
●
We
had a
fleet utilization of 98.5% and 99.9%, respectively;
●
We
generated voyage revenues of $44.5 million and $20.4 million,
respectively;
●
Our
net
income was $25.2 million and $10.0 million, respectively; and
●
Our
Adjusted EBITDA was $30.4 million and $14.0 million, respectively.
Our
operations generate significant cash flow, which provides us with flexibility
in
our growth, operating and financial strategy. Since August 2005, we have
declared and paid four consecutive quarterly dividends in a total amount
of
$0.75 per common share. On November 9, 2006, we declared our fifth consecutive
dividend on our common stock in the amount of $0.21 per share, a 16.6% increase
over our prior quarter's dividend of $0.18 per share.
Our
Fleet
Since
August 2005, as part of our fleet growth and renewal strategy, we purchased
four
vessels with an average age of approximately 15 years for an aggregate purchase
price of approximately $82.5 million. During the same period of time, we
sold
two of our oldest drybulk carriers with an average age of 25 years, thus
significantly reducing the average age of our fleet. We sold these two drybulk
carriers for an aggregate sales price of approximately $9.6 million, realizing
a
net gain of approximately $4.5 million.
Our
objective is to expand our fleet with selective acquisitions of cargo carrying
vessels. In furtherance of our objective, on October 12, 2006, we contracted
to
acquire a 1,599 teu, 1993-built handysize container ship, m/v
YM
Xingang I
.
The
vessel was purchased with a charter to Yang Ming at the gross charter rate
of
$26,650 per day. The charter will expire between July 2009 and September
2009.
We took delivery of this container ship on November 15, 2006. We will pay
for a portion of this vessel with $20.0 million under a new credit facility
and the remainder in cash. We expect to repay $7.0 million of the debt under
this new credit facility with a portion of the proceeds from this
offering.
As
of
November
15
, 2006, the profile and employment of our fleet was the
following:
Name
|
|
Type
|
|
DWT
|
|
TEU
|
|
|
Year
Built
|
|
|
Employment
|
|
|
TCE
Rate ($ per day)
|
|
Drybulk
Carriers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARISTIDES
N.P.
|
|
|
Panamax
|
|
|
69,268
|
|
|
—
|
|
|
1993
|
|
|
Spot Charter
until
Jan. 2007
|
|
|
$26,000
|
|
IRINI
|
|
|
Panamax
|
|
|
69,734
|
|
|
—
|
|
|
1988
|
|
|
Baumarine
Pool
until
end 2008
|
|
|
$17,000
to $20,000 (*)
|
|
NIKOLAOS
P.
|
|
|
Handysize
|
|
|
34,750
|
|
|
—
|
|
|
1984
|
|
|
Spot
Charter
until
Nov. 2006
|
|
|
$14,000
|
|
ARIEL
|
|
|
Handysize
|
|
|
33,712
|
|
|
—
|
|
|
1977
|
|
|
Spot Charter
until Dec. 2006
|
|
|
$12,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Drybulk Carriers
|
|
|
4
|
|
|
207,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Container
Ships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Charter
|
|
|
|
|
YM
XINGANG I
|
|
|
Handysize
|
|
|
23,596
|
|
|
1,599
|
|
|
1993
|
|
|
until July
2009
|
|
|
$26,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Charter
|
|
|
$16,000
until
Nov.
2006;
|
|
KUO
HSIUNG
|
|
|
Feeder
|
|
|
18,154
|
|
|
1,269
|
|
|
1993
|
|
|
until
Nov. 2007
|
|
|
|
|
YM
QINGDAO I
|
|
|
Feeder
|
|
|
18,253
|
|
|
1,269
|
|
|
1990
|
|
|
Period
Charter
until Mar. 2007
|
|
|
$11,900
|
|
ARTEMIS
|
|
|
Intermediate
|
|
|
29,693
|
|
|
2,098
|
|
|
1987
|
|
|
Period
Charter
until
Dec. 2008
|
|
|
$19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Container Ships
|
|
|
4
|
|
|
89,696
|
|
|
6,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multipurpose
Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multipurpose
|
|
|
22,568
|
|
|
950
|
|
|
1990
|
|
|
Period
Charter
|
|
|
$8,850
until Dec. 2008;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Multipurpose Vessels
|
|
|
1
|
|
|
22,568
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
FLEET
|
|
|
9
|
|
|
319,728
|
|
|
7,185
|
|
|
|
|
|
|
|
|
|
|
(*)
Our
subsidiary that owns m/v
Irini
,
participates in three short funds (contracts of affreightment to carry cargo)
that provide an effective coverage of 102% in 2006, 77% in 2007 and 42% in
2008.
The combination of the short funds and shipping pool employment secures the
stated rate for the respective percentages for each year. For the remaining
portion of 2007 and 2008, the vessel will effectively earn the spot rate through
its employment in the shipping pool. See “Business-Our Fleet” for more
information.
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
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 18 years of experience, primarily as a partner
at
a Boston based international consulting firm focusing on investment
and
risk management in the maritime industry. We believe their combined
experience, among other things, enables us to identify attractive
purchase
and sale opportunities and efficiently manage the commercial, technical
and financial aspects of our
business.
|
|
·
|
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, our total vessel operating expenses, including
management fees and general and administrative expenses were $4,511
per
day for the six month period ended June 30, 2006. 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 six
month
period ended June 30, 2006, our fleet utilization was 99.9% and
our
vessels had only two unscheduled off-hire
days.
|
|
·
|
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 container
ships 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. Additionally, with the
proceeds from this offering, we plan to expand our fleet to increase our
revenues and earnings and make our drybulk carrier and container ship fleet
more
cost efficient and attractive to our customers. We believe the following
describe our business strategy:
|
·
|
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 will be initially 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 existing contracts,
our
current period charter coverage for the fourth quarter of 2006
is 76.5%
and 56.5% for our fiscal year ending December 31, 2007, 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 container ships 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 container
ships. 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
September 30, 2006 calls for a reduction of more than 50% of our
then
outstanding debt by the end of 2008. 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.
|
Industry
Trends
The
maritime shipping industry is fundamental to international trade with
ocean-going vessels representing the most efficient and often the only method
of
transporting large volumes of many essential drybulk commodities, finished
goods
as
well
as crude
oil and refined petroleum products between the continents and across the seas.
It is a global industry whose performance is closely tied to the level of
economic activity in the world.
Drybulk
Shipping Industry
Drybulk
cargoes are used in many basic industries and in construction, and can be
divided into major bulk
commodities
and
minor bulk commodities. Major bulks consist of iron ore, coal and grains. Minor
bulks cover a wide variety of commodities, such as forest products, iron and
steel products, fertilizers, agricultural products, non−ferrous ores, minerals
and petcoke, cement, other construction materials and salt. Grains include
wheat, coarse grains and soybeans.
According
to Maritime Strategies International Ltd., or MSI, since the fourth quarter
of
2002, the drybulk shipping industry has experienced the highest charter rates
and vessel values in its modern history due to the favorable imbalance between
the supply of drybulk carriers and demand for drybulk transportation. However
after reaching a peak in mid-2005, both charter rates and vessel values
decreased through mid-2005 before another peak in October to November of
that
year. Subsequently they trended lower before recovering significantly in
August
2006.
For
drybulk shipping, factors that affect the supply of drybulk carriers and demand
for transportation of drybulk cargo include:
Supply:
|
·
|
Shipyards
where new ships are constructed are fully booked through 2008,
limiting
the number of new drybulk carriers that will enter the market in
coming
years. In 2006 the drybulk fleet is expected to increase by 7%
while in
2007 and 2008, 5% and 4.4%, respectively (assuming a low scrapping
rate of
1% for those three years, and
|
|
·
|
Port
congestion worldwide as a result of increased shipping activity and
the
implementation of stringent security measures has increased the number
of
days vessels are waiting to load or discharge their cargo, effectively
reducing the supply of drybulk carriers that are available for hire
at any
particular time.
|
Demand:
|
·
|
In
general, the effects of the opening up of world trade and increasing
global production and consumption have driven the strong demand for
ships;
and
|
|
·
|
China
and India have helped drive demand for drybulk carriers as they continue
to expand iron ore imports and steel production, become net importers
of
coal, and increase their grain
inventories.
|
Container
Shipping Industry
The
container shipping industry
is
responsible for the movement of a wide range of goods from one part of the
world
to another in a unitized form by performing regular port calls. It
represents
an important and increasingly
significant
part of
the global seaborne movement of finished goods and perishables. The performance
of the container shipping industry is closely tied to the level of worldwide
economic trade.
According
to MSI, the container shipping industry had been
on
an
upward trend from early 2002 through early 2005, bolstered by relatively rapid
increases in demand. However, from mid−2005 into 2006, container freight rates
out of Asia, and to Europe in particular, saw some downward
movement.
For
container
shipping, recent developments in factors that affect the supply of container
vessels and demand for transportation of containers include:
Supply:
|
·
|
Overall
container ship capacity expanded at an annual average of 10% in
the period
2003−2005. As of September 1, 2006, scheduled deliveries through the
end
of 2008 for large container ships (3,000 + teu) represented 44%
of the
existing fleet, while intermediate, handysize and feeder (500-2,999
teu)
container ships represented 25% of the existing fleet;
and
|
|
·
|
The
greatest portion of the capacity growth has been and is expected
to be
provided by the large container ship sectors of the fleet operating
in the
transpacific and Europe to Far East routes. Capacity growth in
intermediate and feeder container ships that operate in separate
intermediate and intra−regional container trades has and is expected to be
more restrained.
|
Demand:
|
·
|
In
the last three years demand for container shipping has accelerated
strongly. Estimated global container trade increased at a compound
average
annual growth rate of 12% in the period 2003−2005. This growth has been
relatively rapid in comparison with other major shipping sectors,
such as
tankers and bulk carriers;
and
|
|
·
|
In
recent years, container volumes to, from and within Asia have driven
most
of the increase in container trade largely influenced by the growth
of the
Chinese economy. Other recent growth areas include trade out of
Brazil, as
well as trade in and out of Russia and the
Baltic.
|
We
cannot
offer assurances as to charter rates or vessel values in any period or that
the
industry trends described above will continue following the completion of
this
offering.
Our
Corporate History
The
Pittas family, the principal owners of Eurobulk and the largest shareholder
of
Friends Investment Company Inc., or Friends, our largest shareholder, has
operated vessels over the past 135 years. The vessels have been operated through
various partnerships and different entities over these years. The Company’s
roots go back four generations to the 19th century when the first Pittas
shipowner was Nikolaos F. Pittas. The first Pittas family shore office
centralizing ship management was established by Nikolaos’ younger son,
Aristides, in 1926. Before the onset of World War II, the second generation
of
the Pittas family had acquired and disposed of a total of at least six vessels.
In 1960, the sons of Aristides, Nikolaos and John, set up an office in London
together with the Caroussis family. By the early 1990’s, they had acquired,
traded and sold 14 vessels. In late 1991, John Pittas’ sons, Aristides, our
Chief Executive Officer, and Nikos, together with their cousin Aristides P.
Pittas, joined forces with Petros Pappas of Oceanbulk Maritime S.A., or
Oceanbulk, and decided to gradually shift the Pittas family interests to
Piraeus, Greece. This was the beginning of the active involvement of the fourth
Pittas generation in shipping. From 1991, when the Pittas family joined
Oceanbulk, to 1994, Oceanbulk dramatically expanded from a fleet of five vessels
to a fleet of up to 15 vessels.
At
the
end of 1994, Aristides and Nikos Pittas, together with their brother Manolis
Pittas, decided to separate the Pittas family interests from Oceanbulk and
formed Eurobulk to continue the Pittas family presence in shipping. In June
2005, the Pittas family owned the majority of the shares in seven vessels
and on
June 28, 2005, the shareholders of these vessels transferred their shares
in
each of the vessel-owning companies in exchange for shares in Friends. On
June
29, 2006, Friends exchanged all of the shares in the vessel-owning companies
for
shares in Euroseas, thus becoming the 100% owner of Euroseas at that time.
Since
the beginning of the Pittas family’s involvement in shipping, they have owned
and operated approximately 40 vessels. Since the inception of Eurobulk in
1995,
all vessel acquisitions have been profitable and the group’s results, on a
consolidated basis, have been profitable for each of the last five
years.
Formation
of Euroseas Ltd.
Euroseas
Ltd. was organized in May 2005 in the Marshall Islands to consolidate the
ownership of the seven vessel-owning companies referred to above. On August
25,
2005, we raised a net amount of approximately $17.5 million from a private
placement transaction in which we issued 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, as well
as warrants to purchase 585,581 shares of common stock at an exercise price
of
$10.80 per share. At the same time, a subsidiary of ours executed a merger
agreement with Cove Apparel, Inc., or Cove, a public shell company. The merger
was consummated on March 27, 2006.
On
May 5,
2006, our common stock began trading on the OTCBB under the symbol ESEAF.OB.
On
October 6, 2006, we effected a 1-for-3 reverse stock split in order to increase
our share price to satisfy the price per share listing requirements of the
NASDAQ Global Market and our symbol was changed to EUSEF.OB. We will apply
to
list our shares of convertible preferred stock on the NASDAQ Global Market
upon
completion of this offering under the symbol
" ."
Our
executive offices are located at 40 Ag. Konstantinou Street, 151 24, Maroussi,
Greece. Our telephone number is 011 30 211 1804005. The primary residence of
our
Chief Financial Officer, Dr. Anastasios Aslidis, is in the United
States.
The
Offering
The
following summary contains basic information about the convertible preferred
stock and is not intended to be complete. It does not contain all the
information that is important to you. For a more complete understanding
of the
convertible preferred stock, please refer to the section of this prospectus
entitled “Description of Convertible Preferred Stock.” For purposes of the
description of the convertible preferred stock included in this prospectus,
references to “us,” “we” and “our” refer only to Euroseas Ltd. and not to any of
our subsidiaries.
Issuer
|
Euroseas
Ltd.
|
|
|
Securities
Offered
|
shares of Series A Mandatory Convertible Limited Preferred
Stock, which we refer to as the convertible preferred stock (assuming
the
underwriters do not exercise their over-allotment option
for
shares of convertible preferred stock).
|
|
|
Initial
Offering Price
Common
Stock to be
Outstanding
Immediately
After
the Offering(1)
Dividends
|
$
for
each share of convertible preferred stock.
12,620,114
Cumulative
quarterly dividends in the minimum amount of $
per share
of
convertible preferred stock payable in cash on
each
,
,
and
, to holders of record of the convertible preferred stock on
the
immediately
preceding
,
,
and
, when, as and if declared by our Board of Directors. Our first
dividend
on the convertible preferred stock will be a partial dividend,
which will
accrue from the date of
issuance,
until December 31, 2006. Dividends will be paid in arrears on
the basis of
a 360−day year consisting of twelve 30−day months. Dividends on the
convertible preferred stock will accumulate and be cumulative
from the
date of issuance thereof until the mandatory conversion date.
Accumulated dividends on the convertible preferred stock will
not bear
interest. To the extent we declare any quarterly dividends on
any common
stock in excess of the amount declared on our convertible preferred
stock,
we will also pay such excess amount to holders of our convertible
preferred stock.
|
Liquidation
Preference
|
$
per share, plus accumulated and unpaid dividends until the mandatory
conversion date.
|
|
|
Ranking
|
Until
the mandatory conversion date, convertible preferred stock will
rank with respect to dividend rights and rights upon our liquidation,
winding−up or dissolution (after payment of our
creditors):
|
|
|
|
·
senior
to all of our common stock and to each other class of our capital
stock
issued in the future that expressly provides that it ranks junior
to the
convertible preferred stock;
·
on
a parity with any other series of preferred stock issued in the
future
unless the terms of such series of preferred stock expressly
provide that
it will rank other than on a parity with the convertible preferred
stock;
·
junior
to all of our capital stock the terms of which expressly provide
that such
stock will rank senior to the convertible preferred stock. Such
stock may
only be issued with the consent of 66
2/3
%
of the outstanding convertible preferred stock; and
·
junior
to all of our existing and future indebtedness.
|
|
|
Redemption
|
Our convertible
preferred stock will not be redeemable.
|
|
|
Mandatory
Conversion
Date
|
, 2008.
|
|
|
Conversion
Rights
|
The
shares of convertible preferred stock cannot be converted into
shares of
common stock unless and until the common stock has been approved
for
listing on the NASDAQ Global Market or another comparable
U.S. national securities exchange, such as the New York Stock
Exchange or the American Stock Exchange. On the Mandatory Conversion
Date,
the convertible preferred stock will automatically convert
into shares of
our common stock at a conversion rate of one share of common
stock for
each share of convertible preferred stock, if the common
stock has been approved for listing. If not converted on that
date, the convertible preferred stock will convert on the first
date
thereafter on which our common stock is approved for listing. Prior
to the Mandatory Conversion Date, you may convert shares of
convertible
preferred stock into shares of our common stock at a conversion
rate of
one share of common stock for each share of convertible preferred
stock,
subject to adjustment, at any time, if the common stock has
been approved
for listing. If we are unable to obtain approval to list the
common stock
on the NASDAQ Global Market or another comparable U.S. national
securities
exchange by the Mandatory Conversion Date, the
convertible
preferred stock's liquidation preference will be reduced to
$
per share
and
it will lose certain of its preferential rights including, but not
limited to, the right to receive a preferential quarterly dividend.
Instead, our convertible preferred stock will thereafter be
on parity with
our common stock in all respects.
|
|
|
Voting
Rights; Amendments
|
Except
as required by Marshall Islands law and our amended and restated
articles
of incorporation, which include the statement of designations
establishing
the terms of the convertible preferred stock, the holders of
convertible
preferred stock will vote together as one class with the holders
of our
common stock on all matters submitted to a vote of our shareholders.
Each
holder of the convertible preferred stock will be entitled to
one vote for
each share of convertible preferred stock held of record by such
holder.
While
any shares of convertible preferred stock are outstanding,
the affirmative
consent of holders of at least 66 2/3% of the outstanding convertible
preferred stock will be required for the issuance of any class
or series
of stock (or security convertible into stock) ranking senior
to the
convertible preferred stock as to dividend rights or rights
upon our
liquidation, winding-up or dissolution and for amendments to
our articles
of incorporation in a manner that would adversely affect the
rights of the
holders of the convertible preferred stock.
|
|
|
Tax
Consequences
|
The
U.S. federal income tax and Marshall Islands tax consequences
of
purchasing, owning and disposing of the convertible preferred
stock and
any common stock received upon its conversion are described under
“Tax
Consequences.” Prospective investors are urged to consult their own tax
advisors regarding the tax consequences of purchasing, owning
and
disposing of the convertible preferred stock and any common stock
received
upon its conversion in light of their personal investment circumstances,
including consequences resulting from the possibility that actual
or
constructive distributions on the convertible preferred stock
may exceed
our current and accumulated earnings and profits, as calculated
for U.S.
federal income tax purposes, in which case they would not be
treated as
dividends for U.S. federal income tax purposes.
|
|
|
Use
of Proceeds
|
We
estimate that we will receive net proceeds of approximately
$
million from this offering assuming that the underwriters’ over-allotment
option is not exercised. We intend to use approximately $7.0
million of
the net proceeds to repay a portion of the debt that was used
to acquire
m/v
YM
Xingang I
,
with the remaining proceeds being used to acquire additional
vessels. Any
amounts not so used will be applied to general corporate
purposes.
|
|
|
Trading
|
We
will apply to list the convertible preferred stock on the NASDAQ
Global
Market under the symbol
“
.” The convertible preferred stock will be new securities for which
no
market currently exists. We cannot assure you that any active
or liquid
market will develop for the convertible preferred stock.
|
|
|
Common
Stock
|
Our
common stock is currently quoted on the Over the Counter Bulletin
Board
under the symbol “EUSEF.OB.”
|
(1)
The
number of shares of common stock outstanding after this offering excludes the
following:
|
·
|
600,000
shares of common stock reserved for issuance upon the exercise of
stock
options that may be granted under our stock incentive
plan;
|
|
·
|
585,581
shares of common stock reserved for issuance upon the exercise of
outstanding warrants, with an exercise price of $10.80 per share;
and
|
|
·
|
shares of common stock issuable upon conversion of the convertible
preferred stock if the common stock has been approved for listing on
a
national securities exchange.
|
SUMMARY
FINANCIAL INFORMATION AND DATA
The
following summary financial information and data were derived from our audited
financial statements for the years ended December 31, 2003, 2004 and 2005,
and
our unaudited financial statements for the six months ended June 30, 2005
and
2006 included elsewhere in this prospectus. The information is only a
summary and should be read in conjunction with our historical financial
statements and related notes included in this prospectus and the section
of this
prospectus entitled Management’s Discussion and Analysis of Financial Condition
and Results of Operations. The historical data included below and elsewhere
in
this prospectus are not necessarily indicative of our future
performance.
|
|
Year
Ended
December 31,
|
|
Six
Months Ended
June 30,
|
|
(Amounts
in U.S. dollars)
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenues
|
|
$
|
25,951,023
|
|
$
|
45,718,006
|
|
$
|
44,523,401
|
|
$
|
23,833,736
|
|
$
|
20,421,220
|
|
Commissions
|
|
|
(906,017
|
)
|
|
(2,215,197
|
)
|
|
(2,388,349
|
)
|
|
(1,340,228
|
)
|
|
(895,968
|
)
|
Voyage
expenses
|
|
|
(436,935
|
)
|
|
(370,345
|
)
|
|
(670,551
|
)
|
|
(131,903
|
)
|
|
(866,365
|
)
|
Vessel
operating expenses (exclusive of depreciation and amortization
expenses
shown separately below)
|
|
|
(8,775,730
|
)
|
|
(8,906,252
|
)
|
|
(8,610,279
|
)
|
|
(4,270,787
|
)
|
|
(5,055,753
|
)
|
Management
fees
|
|
|
(1,722,800
|
)
|
|
(1,972,252
|
)
|
|
(1,911,856
|
)
|
|
(965,384
|
)
|
|
(1,112,850
|
)
|
General and
administrative expenses
|
|
|
-
|
|
|
-
|
|
|
(420,755
|
)
|
|
-
|
|
|
(521,940
|
)
|
Depreciation
and amortization (1)
|
|
|
(4,757,933
|
)
|
|
(3,461,678
|
)
|
|
(4,208,252
|
)
|
|
(1,824,322
|
)
|
|
(3,195,074
|
)
|
Net
gain on sale of vessel
|
|
|
-
|
|
|
2,315,477
|
|
|
-
|
|
|
-
|
|
|
2,165,799
|
|
Interest and
finance cost, net
|
|
|
(756,873
|
)
|
|
(521,215
|
)
|
|
(1,035,414
|
)
|
|
(456,021
|
)
|
|
(921,606
|
)
|
Other
income/(expenses), net
|
|
|
(690
|
)
|
|
25,221
|
|
|
(99,491
|
)
|
|
(81,717
|
)
|
|
(2,007
|
)
|
Equity
in net gain (loss) of an associate
|
|
|
(167,433
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income for period
|
|
$
|
8,426,612
|
|
$
|
30,611,765
|
|
$
|
25,178,454
|
|
$
|
14,763,374
|
|
$
|
10,015,456
|
|
Earnings
per share, basic and diluted
|
|
$
|
0.85
|
|
$
|
3.09
|
|
$
|
2.34
|
|
$
|
1.49
|
|
$
|
0.80
|
|
Weighted
average number of shares outstanding during period
|
|
|
9,918,056
|
|
|
9,918,056
|
|
|
10,739,476
|
|
|
9,918,056
|
|
|
12,449,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
9,409,339
|
|
$
|
16,461,159
|
|
$
|
25,350,707
|
|
$
|
11,276,109
|
|
$
|
23,535,104
|
|
Vessels,
net
|
|
|
41,096,067
|
|
|
34,171,164
|
|
|
52,334,897
|
|
|
32,978,300
|
|
|
59,679,713
|
|
Total
assets
|
|
|
51,458,019
|
|
|
52,837,501
|
|
|
79,541,433
|
|
|
46,612,184
|
|
|
84,676,165
|
|
Total
current liabilities, including current portion of long term
debt
|
|
|
8,481,773
|
|
|
13,764,846
|
|
|
18,414,877
|
|
|
18,341,155
|
|
|
18,917,393
|
|
Long
term debt, including current portion
|
|
|
20,595,000
|
|
|
13,990,000
|
|
|
48,560,000
|
|
|
41,400,000
|
|
|
47,120,000
|
|
Total
liabilities
|
|
|
23,971,773
|
|
|
21,724,846
|
|
|
52,544,877
|
|
|
44,961,155
|
|
|
52,197,393
|
|
Total
shareholders’ equity
|
|
$
|
27,486,246
|
|
$
|
31,112,655
|
|
$
|
26,996,556
|
|
$
|
1,651,029
|
|
$
|
32,478,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA (2)
|
|
$
|
13,941,418
|
|
$
|
34,594,658
|
|
$
|
30,422,120
|
|
$
|
17,043,717
|
|
$
|
14,048,896
|
|
Net
cash provided by operating activities
|
|
|
10,956,132
|
|
|
34,208,693
|
|
|
20,594,782
|
|
|
8,157,781
|
|
|
11,508,281
|
|
Net
cash provided by (used in) investing activities
|
|
|
214,832
|
|
|
6,756,242
|
|
|
(21,833,616
|
)
|
|
(1,230,155
|
)
|
|
(5,735,387
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(4,778,000
|
)
|
|
(33,567,500
|
)
|
|
6,188,653
|
|
|
(16,972,500
|
)
|
|
(6,014,490
|
)
|
Vessel
acquisition expenditures
|
|
|
-
|
|
|
-
|
|
|
(20,821,647
|
)
|
|
-
|
|
|
(10,854,321
|
)
|
Drydocking
expenditures
|
|
|
(972,671
|
)
|
|
(2,270,418
|
)
|
|
(1,076,233
|
)
|
|
(688,739
|
)
|
|
(299,322
|
)
|
Cash
paid for dividends/return of capital (3)
|
|
|
1,200,000
|
|
|
26,962,500
|
|
|
46,875,223
|
|
|
44,225,000
|
|
|
4,543,240
|
|
Cash
paid for dividends/return of capital, per common share
|
|
|
0.12
|
|
|
2.72
|
|
|
4.36
|
|
|
4.46
|
|
|
0.36
|
|
Ratio
of earnings to combined fixed charges and preferred
dividends
|
|
|
11.8x
|
|
|
44.2x
|
|
|
17.8x
|
|
|
28.1x
|
|
|
8.2x
|
|
|
|
Year
Ended
December 31,
|
|
Six
Months Ended
June 30,
|
|
(Amounts
in U.S. dollars)
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
Fleet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of vessels
|
|
|
8.00
|
|
|
7.31
|
|
|
7.10
|
|
|
7.00
|
|
|
8.19
|
|
Calendar
days
|
|
|
2,920
|
|
|
2,677
|
|
|
2,591
|
|
|
1,267
|
|
|
1,483
|
|
Available
days
|
|
|
2,867
|
|
|
2,554
|
|
|
2,546
|
|
|
1,242
|
|
|
1,460
|
|
Voyage
days
|
|
|
2,846
|
|
|
2,542
|
|
|
2,508
|
|
|
1,239
|
|
|
1,458
|
|
Utilization
rate (4)
|
|
|
99.3
|
%
|
|
99.5
|
%
|
|
98.5
|
%
|
|
99.8
|
%
|
|
99.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Daily Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
TCE rate (5)
|
|
$
|
8,965
|
|
$
|
17,839
|
|
$
|
17,485
|
|
$
|
19,124
|
|
$
|
13,414
|
|
Operating
expenses
|
|
|
3,005
|
|
|
3,327
|
|
|
3,323
|
|
|
3,371
|
|
|
3,409
|
|
Management
fees
|
|
|
590
|
|
|
737
|
|
|
738
|
|
|
762
|
|
|
750
|
|
General
and administrative expenses
|
|
|
-
|
|
|
-
|
|
|
162
|
|
|
-
|
|
|
352
|
|
Total
vessel operating expenses
|
|
|
3,595
|
|
|
4,064
|
|
|
4,223
|
|
|
4,133
|
|
|
4,511
|
|
(1)
|
In
2004, the estimated scrap value of the vessels was increased from
$170 to
$300 per lightweight 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. The m/v
Widar
was sold in April 2004. Depreciation expenses for the m/v
Widar
for 2004 amounted to $136,384 compared to $409,149 for 2003. The
m/v
Pantelis
P
was sold in May 2006. Depreciation expenses for the m/v
Pantelis
P
for the six month period ended June 30, 2006 amounted to $107,587
compared
to $129,104 in the same period in
2005.
|
(2)
|
We
consider Adjusted EBITDA to represent net earnings before interest,
taxes,
depreciation and amortization including the amortization of deferred
revenue from a below market period charter when we acquired m/v
Tasman
Trader
.
Adjusted EBITDA does not represent and should not be considered
as an
alternative to net income or cash flow from operations, as determined
by
United States generally accepted accounting principles, or U.S.
GAAP, and
our calculation of Adjusted EBITDA may not be comparable to that
reported
by other companies. Adjusted EBITDA is included herein because
it is a
basis upon which we assess our liquidity position and because we
believe
that it presents useful information to investors regarding a company’s
ability to service and/or incur indebtedness. The Company’s definition of
Adjusted EBITDA may not be the same as that used by other companies
in the
shipping or other industries.
|
Adjusted
EBITDA Reconciliation to Net Income:
|
|
Year
Ended
December 31,
|
|
Six
Months Ended
June 30,
|
|
(Amounts
in U.S. dollars)
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
Net
income
|
|
$
|
8,426,612
|
|
$
|
30,611,765
|
|
$
|
25,178,454
|
|
$
|
14,763,374
|
|
$
|
10,015,456
|
|
Depreciation
and amortization
|
|
|
4,757,933
|
|
|
3,461,678
|
|
|
4,208,252
|
|
|
1,824,322
|
|
|
3,195,074
|
|
Interest
and finance cost, net
|
|
|
756,873
|
|
|
521,215
|
|
|
1,035,414
|
|
|
456,021
|
|
|
921,606
|
|
Deferred
revenue amortization
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(83,240
|
)
|
Adjusted
EBITDA
|
|
$
|
13,941,418
|
|
$
|
34,594,658
|
|
$
|
30,422,120
|
|
$
|
17,043,717
|
|
$
|
14,048,896
|
|
Adjusted
EBITDA Reconciliation to Cash Flow from Operations:
|
|
Year
Ended
December 31,
|
|
Six
Months Ended
June 30,
|
|
(Amounts
in U.S.
dollars)
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
Cash
flow from operations
|
|
$
|
10,956,132
|
|
$
|
34,208,693
|
|
$
|
20,594,782
|
|
$
|
8,157,781
|
|
$
|
11,508,281
|
|
Net
increase/(decrease) in operating asset/liabilities
|
|
|
2,466,840
|
|
|
(2,427,953
|
)
|
|
8,975,697
|
|
|
8,573,728
|
|
|
(510,663
|
)
|
Loss
on derivative
|
|
|
-
|
|
|
-
|
|
|
(100,029
|
)
|
|
(82,029
|
)
|
|
-
|
|
Gain
(loss) from vessel sales
|
|
|
-
|
|
|
2,315,477
|
|
|
-
|
|
|
-
|
|
|
2,165,799
|
|
Investment
in associate / provision for doubtful accounts
|
|
|
(171,025
|
)
|
|
27,907
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest,
net
|
|
|
689,471
|
|
|
470,534
|
|
|
951,670
|
|
|
394,237
|
|
|
885,479
|
|
Adjusted
EBITDA
|
|
$
|
13,941,418
|
|
$
|
34,594,658
|
|
$
|
30,422,120
|
|
$
|
17,043,717
|
|
$
|
14,048,896
|
|
(3)
|
The
dividend amounts for 2005 and, for the six months ended June 30,
2005
reflect aggregate dividends of $30,175,223 and $27,525,000, respectively,
and a return of capital in the amount of $16,700,000. 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 should not be considered indicative of future dividend payments
and the Company refers you to the other sections in this prospectus
for
further information on the Company’s dividend
policy.
|
(4)
|
During
the three month period ended September 30, 2006, m/v
Ariel
was off-hire for 24 days for
repairs.
|
(5)
|
The
average TCE rate calculation shown above is based on the actual
number of
available and voyage days. In the above table, the number of available
voyage days was rounded to the nearest number of full
days.
|
FORWARD-LOOKING
STATEMENTS
This
prospectus 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 prospectus, or the documents to which we refer
you
in this prospectus, 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.
RISK
FACTORS
Any
investment in our convertible preferred stock involves a high degree of risk.
You should consider carefully the following factors, as well as the other
information set forth in this prospectus, before making an investment in
our
convertible preferred 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 stock. Any of the risk
factors
could significantly and negatively affect our business, financial condition,
operating results and price of our convertible preferred stock and common
stock.
The following risk factors describe the material risks that are presently
known
to us.
Industry
Risk Factors
The
cyclical nature of the shipping industry may lead to volatile changes in freight
rates which may reduce our revenues and net income.
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.
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;
|
|
·
|
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 market value
has declined could result in an impairment charge against our earnings and
a
reduction in our shareholders’ equity. Any change in the assessed 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 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 value of our vessels and the value such
vessels are required to maintain 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, future loans that we may agree
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
include, but are not limited to, maximum fleet leverage covenants and minimum
fair net worth covenants.
Although
charter rates in the international shipping industry reached historic highs
recently, since then rates have declined and future profitability will be
dependent on the level of charter rates and commodity
prices.
Charter
rates for the international shipping industry have reached record highs during
the past two years; however, recently rates have declined. 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 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 September
1,
2006 the capacity of the fully cellular worldwide container vessel fleet was
approximately 9.1 million teu, with approximately 4.4 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.
The
factors affecting the supply and demand for vessels are outside of our control,
and the nature, timing and degree of changes in industry conditions are
unpredictable. Some of the factors that influence demand for vessel capacity
include:
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supply
and demand for drybulk and container ship commodities, and separately
for
containerized cargo;
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·
|
global
and regional economic and political
conditions;
|
|
·
|
the
distance drybulk and containerized commodities are to be moved by
sea;
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|
·
|
environmental
and other regulatory developments;
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·
|
currency
exchange rates;
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·
|
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;
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·
|
the
scrapping rate of older vessels;
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|
·
|
the
price of steel and other materials;
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·
|
changes
in environmental and other regulations that may limit the useful
life of
vessels; and
|
|
·
|
the
number of vessels that are out of
service.
|
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 or India, 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.
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 period 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 period 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.
An
over-supply of drybulk carrier and container ship capacity may lead to
reductions in charter hire rates and profitability.
The
market supply of drybulk carriers and especially container ships has been
increasing, and the number of container ships on order have recently reached
historic highs. These newbuildings are expected to begin being delivered in
significant numbers at the beginning of 2007. An over-supply of drybulk carrier
and container ship 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 container ships’ current charters, such as during 2007, when the
charters under which two of our container ships are currently deployed expire,
we may only be able to recharter those drybulk carriers and container ships
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,
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. Under these conventions, a vessel’s
registered owner is strictly liable for pollution damage 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.
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. Further, fuel may become
much more expensive in future, which may reduce the profitability and
competitiveness of our business versus other forms of transportation, such
as
truck or rail.
If
our vessels fail to maintain their class certification and/or fail any annual
survey, intermediate survey, drydocking 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.
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.
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.
Company
Risk Factors
If
we cannot use proceeds of this offering to acquire vessels and expand our fleet,
we may use the proceeds of this offering for general corporate purposes with
which you may not agree.
We
intend
to use proceeds of this offering to acquire vessels and expand our fleet. Our
management will have the discretion to identify and acquire vessels with the
proceeds of this offering. If our management is unable to identify and acquire
vessels on terms acceptable to us, we may use the proceeds for general corporate
purposes that you may not agree with. We will not escrow the proceeds from
this
offering and will not return the proceeds to you if we do not acquire one or
more vessels. It may take a substantial period of time before we can locate
and
purchase suitable vessels. During this period, the proceeds of this offering
may
not 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 adversly
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.
We
will continue to be controlled by Friends after this offering, which may limit
your ability to influence our actions.
Assuming
that the underwriters do not exercise their over-allotment option, Friends,
our
largest shareholder, will own or control
approximately % of the outstanding shares of
our voting stock immediately following this offering. As a result of this
share
ownership and for so long as Friends owns a significant percentage of our
outstanding voting 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 stock.
We
will be a “controlled company” under NASDAQ rules, and as such we are entitled
to exemption from certain NASDAQ corporate governance standards, and you may
not
have the same protections afforded to stockholders of companies that are subject
to all of the NASDAQ corporate governance
requirements.
After
the
consummation of this offering, Friends will continue to control a majority
of
our outstanding voting stock. As a result, we will be a “controlled company”
within the meaning of the NASDAQ corporate governance standards. Under NASDAQ
rules, a company of which more than 50% of its voting power is held by an
individual, group or another company is a “controlled company” and may elect not
to comply with certain NASDAQ corporate governance requirements, including
(1)
the requirement that a majority of the board of directors consist of independent
directors and (2) the requirement to maintain independent compensation and
nominating committees. Following this offering, we may utilize these exemptions.
As a result, non-independent directors, including members of our management
who
also serve on our board of directors, will, among other things, fix the
compensation of our management, make stock and option awards and resolve
governance issues regarding our company. Accordingly, in the future you may
not
have the same protections afforded to stockholders of companies that are
subject
to all of the NASDAQ corporate governance requirements.
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, container ships 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.
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
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 either
directly or indirectly, 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.
Under
the terms of our convertible preferred stock we will pay regular,
cumulative minimum quarterly dividends of $ per share to
holders of our convertible preferred stock, when, as and if declared by our
Board of Directors. However, we may not earn sufficient charterhire 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.
If
we are
not successful in acquiring additional vessels, any unused net proceeds from
this offering may be used for other corporate purposes or held pending
investment in other vessels. Identifying and acquiring vessels may take a
significant amount time. The result may be that proceeds of this offering are
not invested in additional vessels, or are so invested but only after some
delay. In either case, we will not be able to earn charter hire consistent
with
our current anticipations, and our profitability and our ability to pay
dividends will be affected.
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:
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locating
and acquiring suitable vessels;
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·
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identifying
and consummating acquisitions or joint
ventures;
|
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·
|
integrating
any acquired business successfully with our existing
operations;
|
|
·
|
enhancing
our customer base;
|
|
·
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managing
our expansion; and
|
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·
|
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.
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:
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·
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incur
additional indebtedness;
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·
|
create
liens on our assets;
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|
·
|
sell
capital stock of our subsidiaries;
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|
·
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engage
in mergers or acquisitions;
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|
·
|
make
capital expenditures;
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|
·
|
change
the management of our vessels or terminate or materially amend the
management agreement relating to each vessel;
and
|
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 September 30, 2006, we had total bank debt of
approximately $58.9 million. Our current repayment schedule requires us to
repay
$14.4 million of this debt over the next 12 months. 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. We have purchased,
and may purchase in the future, vessels under loan agreements that provide
for
periodic interest payments 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.
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 period
charters.
Six of
the nine vessels in our fleet are employed under period charters, with remaining
terms ranging between three months and 63 months. Although period charters
provide relatively steady streams of revenue, vessels committed to period
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 period 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.
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:
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environmental
accidents;
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grounding,
fire, explosions and collisions;
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cargo
and property losses or damage;
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business
interruptions caused by mechanical failure, human error, war, terrorism,
political action in various countries, labor strikes or adverse weather
conditions; and
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work
stoppages or other labor problems with crew members serving on our
vessels, substantially all of whom are unionized and covered by collective
bargaining agreements.
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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 convertible preferred 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.
The
operation of container ships has certain unique operational risks.
The
operation of container ships has certain unique risks. Container ships 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 container ship, 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 container ship, 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 September 30, 2006, the average age of our
fleet was approximately 18 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 due to improvements in engine
technology. 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 can give no assurance that we are adequately
insured against all risks. 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 or
lower
our revenue. 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.
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 conducts 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 trade 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 SEC,
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. However, as a non-accelerated filer, we are
not yet subject to this requirement. Currently, we would be subject to such
requirement in 2007, but under proposed regulations, we may not be subject
to
this requirement until 2008. If we have a material weakness in our internal
control over financial reporting, we may not detect errors on a timely basis
and
our financial statements may be materially misstated. We have to dedicate a
significant amount of time and resources to ensure compliance with these
regulatory requirements.
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 recently formed 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 recently formed 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 30% of vessel operating expenses and we incur general
and
administrative expenses in currencies other than the U.S. dollar. This
difference could lead to fluctuations in our vessel 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. We do not currently engage in hedging transactions to minimize
our exposure to currency rate fluctuations, but we may do so in the
future.
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 proposed method of operation, we do not believe that we will be a PFIC
with
respect to any taxable year. In this regard, we intend to 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 proposed
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 below under “Tax
Consequences — 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 or our shares, as if
the
excess distribution or gain had been recognized ratably over the shareholder’s
holding period of our shares. See “Tax Consequences — United States Federal
Income Taxation of U.S. Holders” for a more comprehensive discussion of the U.S.
federal income tax consequences to U.S. shareholders if we are treated as
a
PFIC.
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
expect
that we and each of our subsidiaries qualify for this statutory tax exemption
and we will take 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 after this
offering 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 give any assurances on 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 Stock
There
may not be a liquid market for our convertible preferred stock, which may
cause
our convertible preferred stock to trade at lower prices and make it difficult
to sell your convertible preferred stock.
There
has
been no market for the convertible preferred stock prior to this offering.
We
will apply for the listing of the convertible preferred stock on the NASDAQ
Global Market. We cannot assure you that the convertible preferred stock
will be
listed on the NASDAQ Global Market. The liquidity of any trading market
in the
convertible preferred stock, and the market price quoted for the convertible
preferred stock, may be adversely affected by changes in the overall market
for
convertible securities and by changes in our financial performance or prospects,
changes in the price of our common stock or in the prospects for companies
in
our industry generally. As a result, we cannot assure you that an active
trading
market will develop for the convertible preferred stock, or, if one develops,
that the convertible preferred stock will trade at prices higher than the
initial offering price.
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:
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quarterly
variations in our results of operations;
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changes
in sales or earnings estimates or publication of research reports
by
analysts;
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speculation
in the press or investment community about our business or
the shipping
industry generally;
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changes
in market valuations of similar companies and stock market
price and
volume fluctuations generally;
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strategic
actions by us or our competitors such as acquisitions or restructurings;
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regulatory
developments;
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additions
or departures of key personnel;
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general
market conditions; and
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domestic
and international economic, market and currency factors unrelated
to our
performance.
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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.
Purchasers
of convertible preferred stock may incur dilution.
The
terms
of our convertible preferred stock do not restrict our ability to offer
a new
series of preferred stock that is on parity with the preferred stock in
the
future or to engage in other transactions that could dilute our convertible
preferred stock.
Our
issuance of additional series of preferred stock could adversely affect
holders
of our common stock and our convertible preferred
stock.
Our
Board
of Directors is authorized to issue additional series of preferred stock
on
parity with our convertible preferred stock without requiring any action
or
consent on the part of our shareholders, including holders of our convertible
preferred stock. Our Board of Directors also has the power, without shareholder
approval, to set the terms of any such series of preferred stock that may
be
issued, including voting rights, dividend rights, preferences over stock
with
respect to dividends or if we liquidate, dissolve or wind up our business
and
other terms. If we issue preferred stock in the future that have preference
over
our common stock or is on parity with our convertible preferred stock with
respect to the payment of dividends or upon our liquidation, dissolution
or
winding-up, or if we issue preferred stock with voting rights that dilute
the
voting power of our common stock or convertible preferred stock, the rights
of
holders of our common stock or convertible preferred stock or the market
price
of our common stock or convertible preferred stock could be adversely
affected.
The
shares of convertible preferred stock cannot be converted into shares
of common
stock unless and until the common stock has been approved for listing.
We
will
use our best efforts to list our shares of common stock on the NASDAQ
Global
Market or another comparable U.S. national securities exchange, such
as the New
York Stock Exchange or American Stock Exchange, however, there can be
no
assurance that we will be able to obtain approval to list our common
stock. The
preferred stock is not convertible into common stock unless and until
we are
able to list the common stock.
Our
convertible preferred stock will lose certain of its preferential
rights on the mandatory conversion date.
On
the
mandatory conversion date, our convertible preferred stock's liquidation
preference will be reduced to $
per share and it
will
lose certain of its preferential rights described elsewhere in this
prospectus
including, but not limited to, the right to receive a preferential
quarterly
dividend. Instead, our convertible preferred stock will thereafter
be on parity
with our common stock in all respects.
Our
convertible preferred stock provides limited conversion rate adjustments.
The
number of shares of common stock that you are entitled to receive on conversion
is subject to adjustment in limited circumstances, such as stock splits
and
combinations, stock dividends on our common stock and certain other actions
that
modify our capital stock structure. We will not adjust the conversion rate
for
other events, including offerings of our common stock or preferred stock
for
cash or in connection with acquisitions or our stock incentive plan. As
a
result, an event that adversely affects the value of our convertible preferred
stock, but does not result in an adjustment to the conversion rate, may
occur.
The
shares of our convertible preferred stock are equity and are subordinate
to our
existing and future indebtedness.
The
shares of our convertible preferred stock are equity interests and do not
constitute indebtedness. As such, our convertible preferred stock will
rank
junior to all of our existing and future indebtedness and other non-equity
claims against us with respect to assets available to satisfy such claims,
including in a liquidation. Additionally, unlike indebtedness, where principal
and interest would customarily be payable on specified due dates, in the
case of
preferred securities like our convertible preferred stock, dividends are
payable
only if and as declared by our Board of Directors, and only to the extent
funds
are legally available therefor.
Our
convertible preferred stock will rank junior to all of our and our subsidiaries’
liabilities in the event of a bankruptcy, liquidation or winding-up of
our
assets.
In
the
event of bankruptcy, liquidation or winding-up, our assets will be available
to
pay obligations on our convertible preferred stock only after all of our
liabilities have been paid. In addition, our convertible preferred stock
will
effectively rank junior to all existing and future liabilities of our
subsidiaries. The rights of holders of our convertible preferred stock
to
participate in the assets of our subsidiaries upon any liquidation or
reorganization of any subsidiary will rank junior to the prior claims of
that
subsidiary’s creditors and equity holders. In the event of bankruptcy,
liquidation or winding-up due to losses incurred by us or otherwise, there
may
not be sufficient assets remaining, after paying our and our subsidiaries’
liabilities, to pay amounts due on any or all of our convertible preferred
stock
then issued and outstanding.
Our
stock price may fall below the minimum share price requirements of the NASDAQ
Global Market.
We will
apply to list our convertible
preferred
stock on the NASDAQ Global Market. Although the offering price
is currently above the $5.00 minimum share price requirement to initially
list
our shares on the NASDAQ Global Market, we cannot predict what the price
for our
shares
of
our
convertible preferred stock
will be following this offering. If
our share price falls below $5.00 after being listed, our convertible
preferred
stock will not be marginable and this may reduce the liquidity of
our
of
our convertible preferred
stock. If we are listed on the NASDAQ Global
Market and our share price falls below the required $1.00 minimum share price
requirement for listed stock or we fail to maintain any other listing
requirements, our stock could be delisted. Any of these events could result
in
an active trading market no longer existing for our shares.
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:
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actual
or anticipated fluctuations in quarterly and annual
results;
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mergers
and strategic alliances in the shipping
industry;
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market
conditions in the industry;
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changes
in government regulation;
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fluctuations
in our quarterly revenues and earnings and those of our publicly
held
competitors;
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shortfalls
in our operating results from levels forecasted by securities
analysts;
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announcements
concerning us or our competitors;
and
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the
general state of the securities
markets.
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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.
The
price of our convertible preferred stock may be adversely affected by the
price
of our common stock.
The
market price of our convertible preferred stock may be directly affected
by the
market price of our common stock, which may be volatile, and other factors.
To
the extent there is a secondary market for our convertible preferred stock,
we
believe that the market price of our convertible preferred stock may be
significantly affected by the market price of our common stock. We cannot
predict how our common stock will trade. This may result in greater volatility
in the market price of the convertible preferred stock than would be expected
for nonconvertible preferred stock.
If
we issue additional shares of common stock in the future it may adversely
affect
the price of our convertible preferred stock.
If
we
issue additional common stock, it may materially and adversely affect
the price
of our common stock and, because the convertible preferred stock is convertible
into common stock initially on a 1-for-1 basis, such events may adversely
effect
the trading price of our convertible preferred
stock.
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.
Future
sales of our stock could cause the market price of our convertible preferred
stock to decline.
Sales
of
a substantial number of shares of our common stock or convertible preferred
stock in the public market, or the perception that these sales could occur,
may
depress the market price for our convertible preferred stock. These sales
could
also impair our ability to raise additional capital through the sale of our
equity securities in the future.
Pursuant
to our prior Form F-1 registration statement, we registered for resale 2,342,331
shares of common stock issued in our Private Placement, 585,581 shares of our
common stock issuable upon the exercise of warrants issued in the Private
Placement and 272,868 shares of our common stock issued to certain affiliates
of
Cove, in connection with the merger of Cove with our wholly-owned subsidiary,
Euroseas Acquisition Company Inc. Registration of such shares has, except for
any shares purchased by affiliates, resulted in such shares becoming freely
tradable without restriction under the Securities Act of 1933, as amended (the
“Securities Act”).
In
addition, we have entered into a registration rights agreement with Friends,
our
largest shareholder, pursuant to which we have granted Friends the right to
require us to register under the Securities Act, shares of our common stock
held
by it. Under the registration rights agreement, Friends has the right to request
that we 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 requested by stockholders or initiated by us. Friends
has
agreed to waive its rights under the registration rights agreement, including
the right to have any of its shares of our common stock registered in this
offering, for a period beginning on the date of this prospectus and ending
180
days from the later of the effective date of the Registration Statement or
the
pricing of this offering. Registration of such shares under the Securities
Act
would, except for shares purchased by affiliates, result in such shares becoming
freely tradable without restriction under the Securities Act immediately upon
the effectiveness of such registration. Shares not registered pursuant to the
registration rights agreement may, subject to the lock-up agreement to which
Friends is a party, be resold pursuant to an exemption from the registration
requirements of the Securities Act, including the exemptions provided by Rule
144 and Regulation S under the Securities Act. We refer you to the sections
of
this prospectus entitled “Certain Relationships and Related Party Transactions,”
“Shares Eligible for Future Sale” and “Underwriting” for further information
regarding the circumstances under which additional shares of our common stock
may be sold.
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
, of which 12,620,114 shares
of
common
stock and
shares
of convertible preferred stock
will be outstanding immediately after this
offering, assuming that the underwriters do not exercise their over-allotment
option. Immediately after this offering, assuming that the underwriters do
not
exercise their over-allotment option, entities affiliated with our President
and
Chief Executive Officer and certain other large shareholders will own or
control
10,251,390 shares (assuming no exercise of 83,334 warrants owned by Eurobulk
Marine Holdings, Inc.), or
approximately
%, of our outstanding common stock
and
convertible preferred
stock
.
The
number of shares of stock available for sale in the public market will be
limited by restrictions applicable under securities laws and agreements that
we
and our executive officers, directors and principal shareholders have entered
into with the underwriters of this offering. Subject to certain exceptions,
these agreements generally restrict us and our executive officers, directors
and
certain shareholders from directly or indirectly offering, selling, pledging,
hedging or otherwise disposing of our equity securities or any security that
is
convertible into or exercisable or exchangeable for our equity securities
and
from engaging in certain other transactions relating to such securities for
a
period of 180 days (with respect to our officers, directors and Friends)
and 90
days (with respect to Eurobulk Marine Holdings Inc.) from the later of the
effective date of this Registration Statement or the pricing of this offering
without the prior written consent of Cantor Fitzgerald & Co.
Dividends
paid on the convertible preferred stock to U.S. individuals, trusts and estates
may be taxed as ordinary income.
Although
we will apply to list our convertible preferred stock on the NASDAQ Global
Market, if our convertible preferred stock fails to meet or maintain the
requirements of the NASDAQ Global Market or another established securities
market in the United States, such shares will trade on the OTCBB and any
dividends paid on the shares will be treated for U.S. tax purposes as ordinary
income rather than “qualified dividend income” which would otherwise be taxed to
U.S. individuals, trusts and estates at preferential tax rates. Additionally,
if
you voluntarily convert your shares of convertible preferred stock to common
stock prior to the mandatory conversion date, such common shares will initially
trade on the OTCBB. Accordingly, any dividends paid on your common shares
following such conversion will be treated as ordinary income. There is
no
assurance that we will be able to maintain the listing of our convertible
preferred stock on the NASDAQ Global Market or another established securities
market in the United States. Therefore there is no assurance that any dividends
paid on the convertible preferred stock will be treated as “qualified dividend
income” and subject to tax at preferential rates.
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. For more information with respect to how
stockholder rights under Marshall Islands law compare with stockholder rights
under Delaware law, please read “Marshall Islands Company
Considerations.”
PRICE
RANGE OF COMMON STOCK
Our
shares of convertible preferred stock are not currently listed and do not
trade
on any stock exchange.
The
trading market for shares of our common stock is the OTCBB, on which our
shares
trade under the symbol “EUSEF.OB.” Our common stock began trading on the OTCBB
on May 5, 2006. We will apply to have our convertible preferred stock
listed on the NASDAQ Global Market under the symbol
" " upon completion of this
offering. The following table sets forth the high and low closing prices
for
shares of our common stock as reported by the OTCBB, after giving effect
to our
1-for-3 reverse stock split that was effected on October 6,
2006:
For
the period:
|
|
High
|
|
Low
|
|
Quarterly
for 2006:
|
|
|
|
|
|
Second
Quarter (from May 5, 2006)
|
|
$
|
18.24
|
|
$
|
8.82
|
|
Third
Quarter
|
|
$
|
9.15
|
|
$
|
8.55
|
|
|
|
|
|
|
|
|
|
Monthly
for 2006:
|
|
|
|
|
|
|
|
May
(from May 5, 2006)
|
|
$
|
18.24
|
|
$
|
9.39
|
|
June
|
|
$
|
10.14
|
|
$
|
8.82
|
|
July
|
|
$
|
9.12
|
|
$
|
8.97
|
|
August
|
|
$
|
9.00
|
|
$
|
8.82
|
|
September
|
|
$
|
9.15
|
|
$
|
8.55
|
|
October
|
|
$
|
9.00
|
|
$
|
|
|
November
(through
November
15
, 2006)
|
|
$
|
9.00
|
|
$
|
8.25
|
|
DIVIDEND
POLICY
Dividends
on our convertible preferred stock will be cumulative from the date
of issuance
until the mandatory conversion date and, to the extent we are legally
permitted
to pay dividends and our Board of Directors declares a dividend payable,
we will
pay dividends on the convertible preferred stock in cash in the minimum
amount
of $ per share, payable quarterly in
arrears. Dividends on the convertible preferred stock will be payable
on
,
,
and of each year to holders of record
of the convertible preferred stock on the immediately
preceding
,
, and
. Our first dividend on the convertible preferred stock
will be a partial dividend, which will accrue from the date of
issuance until December 31, 2006.
In
addition, we also currently intend to pay regular cash dividends on our
common
stock on a quarterly basis. To the extent we declare any quarterly dividends
on
our common stock in excess of the amount declared on our convertible preferred
stock, we will also pay such excess amount to holders of our convertible
preferred stock. Any excess operating cash flow may be used to pay additional
dividends, fund our growth or repay Company debt, as determined by our
Board of
Directors.
Since
our
Private Placement in August 25, 2005, we have declared dividends on our common
stock in the amount of $0.21, $0.18, $0.18 and $0.18 per commmon share for
the
fiscal periods ended on September 30, 2005, December 31, 2005, March 31,
2006
and June 30, 2006 respectively for a total of $0.75 per common share. The
aggregate amount of such dividends for the twelve month period ended June
30,
2006 was $9,465,085.
On
November 9, 2006 we declared a dividend on our common stock in the amount
of
$0.21 per share which is payable on or about December 15, 2006 to all common
shareholders of recent as of December 8, 2006.
We expect to declare our
next dividend in
February
2007.
The
exact
amount of dividend payments will be dependent upon 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
distributions to shareholders and other factors, such as the acquisition of
additional vessels. However, we do not believe that the addition of vessels
to
our fleet will adversely 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.
In
addition, 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.
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 the Company. The payment
of dividends is not guaranteed or assured, and may be discontinued at any time
at the discretion of our Board of Directors.
We
paid
$687,500, $1,200,000, $26,962,500, $46,875,223 (consisting of $30,175,223 of
dividends and $16,700,000 as return of capital) and $4,543,240 in 2002, 2003,
2004, 2005 and in the first six months of 2006, respectively. Over the period
January 1, 2002 to June 30, 2005, we paid substantially all of our net income
as
dividends.
USE
OF PROCEEDS
We
estimate that we will receive net proceeds of approximately
$ million from this offering assuming
that the underwriter’s over-allotment option is not exercised. We intend to use
approximately $7.0 million of the net proceeds to
repay
a
portion of the debt that was used to finance our acquisition of
m/v
YM
Xingang I
.
Our
outstanding indebtedness consists of eight loans used to finance all or a
portion of the acquisition costs of our vessels. These loans have final maturity
dates of between May 2008 and November 2013 and bear interest at rates ranging
from LIBOR + 0.90% to LIBOR + 1.6%. We expect to use the remaining proceeds
to acquire additional vessels in the sectors in which we currently operate.
Any
amounts not so used will be applied to general corporate purposes.
CAPITALIZATION
The
following table sets forth our consolidated capitalization at June 30,
2006:
|
·
|
on
a historical basis without any adjustment to reflect subsequent or
anticipated events;
|
|
·
|
as
adjusted for certain subsequent
events:
|
|
(a)
|
repayment
of $1,500,000 to the Bank financing the m/v
John
P
due to the delivery of the
vessel
on July 5, 2006 to its buyer;
|
|
(b)
|
cash
dividend of $2,271,621 paid on or about September 15,
2006;
|
|
(c)
|
new
loans to finance acquisition of the m/v
Aristides
N.P.
of
$15,500,000 which was
drawn
down on September 4, 2006, and to finance the acquisition of m/v
YM
Xingang I
of $20,000,000 which was drawn on November 15, 2006 and
repayments for loans outstanding at June 30,
2006
amounting to $2,730,000;
|
|
(d)
|
cash
dividend of $2,271,621 to be paid on or about December 15,
2006;
|
|
·
|
on
an as further adjusted basis for the sale
of shares resulting in
$ million of net proceeds after
the underwriters’ discount and offering
expenses.
|
There
has
been no material change in our capitalization between June 30, 2006 and the
date
of this prospectus as adjusted as described above. "Current portion of long
term
debt" in the "As Adjusted" and "As Further Adjusted" columns represents current
portion of the new and existing debt as of September 30,
2006.
|
|
Actual
As
of June 30, 2006
|
|
As
Adjusted
|
|
As
Further Adjusted
|
|
Debt:
|
|
|
|
|
|
|
|
Current
portion of long term debt
|
|
$
|
13,840,000
|
|
$
|
18,390,000
|
|
$
|
|
|
Total
long term debt, net of current portion
|
|
|
33,280,000
|
|
|
60,000,000
|
|
|
|
|
Total
debt
|
|
|
47,120,000
|
|
|
78,390,000
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $.03 par value; 100,000,000 shares authorized on an actual
and as
adjusted basis; 12,620,114 shares issued and outstanding on an
actual
basis; 12,620,114 shares issued and outstanding on an as further
adjusted basis
|
|
|
378,603
|
|
|
378,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 20,000,000 shares authorized on an actual
and
adjusted basis; 0 shares issued and
outstanding;
shares issued and outstanding on an as further adjusted
basis
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
17,882,990
|
|
|
17,882,990
|
|
|
|
|
Retained
earnings
|
|
|
14,217,179
|
|
|
14,217,179
|
|
|
|
|
Dividends
declared August 7, 2006 and November 9, 2006
|
|
|
—
|
|
|
(4,543,242
|
)
|
|
|
|
Total
shareholders’ equity
|
|
|
32,478,772
|
|
|
27,935,530
|
|
|
|
|
Total
capitalization
|
|
$
|
79,598,772
|
|
$
|
106,325,530
|
|
$
|
|
|
As
of
June 30, 2006, we had $20.2 million in cash and cash equivalents, $15.7 million
as adjusted for the subsequent events and $56.9 million as further adjusted.
RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
The
following table sets forth the ratio of earnings to combined fixed charges
and
preferred dividends for Euroseas:
·
|
on
a historical basis for each of the four years 2002, 2003, 2004
and 2005
and for the six−month period ended June 30,
2006.
|
For
the
purpose of calculating such ratios, “earnings” consist of income from continuing
operations before income taxes and fixed charges. “Fixed charges” consist of
interest expense and amortization of debt discount or
premiums.
|
|
Six
Months
Ended
June
30,
|
|
2002
|
2003
|
2004
|
2005
|
2006
|
Ratio
of Earnings to combined fixed
charges
and preferred dividends
|
2.1x
|
11.8x
|
44.2x
|
17.8x
|
8.2x
|
SELECTED
HISTORICAL FINANCIAL INFORMATION AND DATA
The
following historical financial information and data were derived from our
audited financial statements for the years ended December 31, 2003, 2004
and
2005 and our unaudited financial statements for the six months ended June
30,
2005 and 2006 included elsewhere in this prospectus. We derived the
information for the year ended December 31, 2002 from our audited financial
statements not included in this prospectus. The information is only a summary
and should be read in conjunction with our historical financial statements
and
related notes included in this prospectus, and the section of this prospectus
entitled Management’s Discussion and Analysis of Financial Condition and Results
of Operations. The historical data included below and elsewhere in this
prospectus are not necessarily indicative of our future
performance.
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
(Amounts
in U.S. dollars)
|
|
2002
(1)
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement Data
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenues
|
|
$
|
15,291,761
|
|
$
|
25,951,023
|
|
$
|
45,718,006
|
|
$
|
44,523,401
|
|
$
|
23,833,736
|
|
$
|
20,421,220
|
|
Commissions
|
|
|
(420,959
|
)
|
|
(906,017
|
)
|
|
(2,215,197
|
)
|
|
(2,388,349
|
)
|
|
(1,340,228
|
)
|
|
(895,968
|
)
|
Voyage
expenses
|
|
|
(531,936
|
)
|
|
(436,935
|
)
|
|
(370,345
|
)
|
|
(670,551
|
)
|
|
(131,903
|
)
|
|
(866,365
|
)
|
Vessel
operating expenses (exclusive of depreciation and amortization
expenses
shown separately below)
|
|
|
(7,164,271
|
)
|
|
(8,775,730
|
)
|
|
(8,906,252
|
)
|
|
(8,610,279
|
)
|
|
(4,270,787
|
)
|
|
(5,055,753
|
)
|
Management
fees
|
|
|
(1,469,690
|
)
|
|
(1,722,800
|
)
|
|
(1,972,252
|
)
|
|
(1,911,856
|
)
|
|
(965,384
|
)
|
|
(1,112,850
|
)
|
General and
administrative expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(420,755
|
)
|
|
-
|
|
|
(521,940
|
)
|
Depreciation
and amortization (2)
|
|
|
(4,053,049
|
)
|
|
(4,757,933
|
)
|
|
(3,461,678
|
)
|
|
(4,208,252
|
)
|
|
(1,824,322
|
)
|
|
(3,195,074
|
)
|
Net
gain on sale of vessel
|
|
|
-
|
|
|
-
|
|
|
2,315,477
|
|
|
-
|
|
|
-
|
|
|
2,165,799
|
|
Interest and
finance cost, net
|
|
|
(793,732
|
)
|
|
(756,873
|
)
|
|
(521,215
|
)
|
|
(1,035,414
|
)
|
|
(456,021
|
)
|
|
(
921,606
|
)
|
Other
income/(expenses), net
|
|
|
2,849
|
|
|
(690
|
)
|
|
25,221
|
|
|
(99,491
|
)
|
|
(81,717
|
)
|
|
(
2,007
|
)
|
Equity
in net gain (loss) of an associate
|
|
|
30,655
|
|
|
(167,433
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income for period
|
|
$
|
891,628
|
|
$
|
8,426,612
|
|
$
|
30,611,765
|
|
$
|
25,178,454
|
|
$
|
14,763,374
|
|
$
|
10,015,456
|
|
Earnings
per share, basic and diluted
|
|
$
|
0.09
|
|
$
|
0.85
|
|
$
|
3.09
|
|
$
|
2.34
|
|
$
|
1.49
|
|
$
|
0.80
|
|
Weighted
average number of shares outstanding during period
|
|
|
9,918,056
|
|
|
9,918,056
|
|
|
9,918,056
|
|
|
10,739,476
|
|
|
9,918,056
|
|
|
12,449,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
3,192,345
|
|
$
|
9,409,339
|
|
$
|
16,461,159
|
|
$
|
25,350,707
|
|
$
|
11,276,109
|
|
$
|
23,535,104
|
|
Vessels,
net
|
|
|
45,254,226
|
|
|
41,096,067
|
|
|
34,171,164
|
|
|
52,334,897
|
|
|
32,978,300
|
|
|
59,679,713
|
|
Total
assets
|
|
|
50,259,121
|
|
|
51,458,019
|
|
|
52,837,501
|
|
|
79,541,433
|
|
|
46,612,184
|
|
|
84,676,165
|
|
Total
current liabilities, including current portion of long term
debt
|
|
|
10,878,488
|
|
|
8,481,773
|
|
|
13,764,846
|
|
|
18,414,877
|
|
|
18,341,155
|
|
|
18,917,393
|
|
Long
term debt, including current portion
|
|
|
23,845,000
|
|
|
20,595,000
|
|
|
13,990,000
|
|
|
48,560,000
|
|
|
41,400,000
|
|
|
47,120,000
|
|
Total
liabilities
|
|
|
28,973,488
|
|
|
23,971,773
|
|
|
21,724,846
|
|
|
52,544,877
|
|
|
44,961,155
|
|
|
52,197,393
|
|
Total
Shareholders’ Equity
|
|
$
|
21,285,634
|
|
$
|
27,486,246
|
|
$
|
31,112,655
|
|
$
|
26,996,556
|
|
$
|
1,651,029
|
|
$
|
32,478,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA (3)
|
|
$
|
5,738,409
|
|
$
|
13,941,418
|
|
$
|
34,594,658
|
|
$
|
30,422,120
|
|
$
|
17,043,717
|
|
$
|
14,048,896
|
|
Net
cash provided by operating activities
|
|
|
5,631,343
|
|
|
10,956,132
|
|
|
34,208,693
|
|
|
20,594,782
|
|
|
8,157,781
|
|
|
11,508,281
|
|
Net
cash provided by (used in) from investing activities
|
|
|
(17,036,079
|
)
|
|
214,832
|
|
|
6,756,242
|
|
|
(21,833,616
|
)
|
|
(1,230,155
|
)
|
|
(5,735,387
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
12,247,355
|
|
|
(4,778,000
|
)
|
|
(33,567,500
|
)
|
|
6,188,653
|
|
|
(16,972,500
|
)
|
|
(6,014,490
|
)
|
Vessel
acquisition expenditures
|
|
|
(16,993,811
|
)
|
|
-
|
|
|
-
|
|
|
(20,821,647
|
)
|
|
-
|
|
|
(10,854,321
|
)
|
Drydocking
expenditures
|
|
|
-
|
|
|
(972,671
|
)
|
|
(2,270,418
|
)
|
|
(1,076,233
|
)
|
|
(688,739
|
)
|
|
(299,322
|
)
|
Cash
paid for dividends/return of capital (4)
|
|
|
687,500
|
|
|
1,200,000
|
|
|
26,962,500
|
|
|
46,875,223
|
|
|
44,225,000
|
|
|
4,543,240
|
|
Cash
paid for dividends/return of capital, per common share
|
|
|
0.07
|
|
|
0.12
|
|
|
2.72
|
|
|
4.36
|
|
|
4.46
|
|
|
0.36
|
|
Ratio
of earnings to combined fixed charges and preferred
dividends
|
|
|
2.1x
|
|
|
11.8x
|
|
|
44.2x
|
|
|
17.8x
|
|
|
28.1x
|
|
|
8.2x
|
|
Fleet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of vessels
|
|
|
6.82
|
|
|
8.00
|
|
|
7.31
|
|
|
7.10
|
|
|
7.00
|
|
|
8.19
|
|
Calendar
days
|
|
|
2,490
|
|
|
2,920
|
|
|
2,677
|
|
|
2,591
|
|
|
1,267
|
|
|
1,483
|
|
Available
days
|
|
|
2,448
|
|
|
2,867
|
|
|
2,554
|
|
|
2,546
|
|
|
1,242
|
|
|
1,460
|
|
Voyage
days
|
|
|
2,440
|
|
|
2,846
|
|
|
2,542
|
|
|
2,508
|
|
|
1,239
|
|
|
1,458
|
|
Utilization
rate (5)
|
|
|
99.7
|
%
|
|
99.3
|
%
|
|
99.5
|
%
|
|
98.5
|
%
|
|
99.8
|
%
|
|
99.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Daily Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
TCE rate (6)
|
|
$
|
6,049
|
|
$
|
8,965
|
|
$
|
17,839
|
|
$
|
17,485
|
|
$
|
19,124
|
|
$
|
13,414
|
|
Operating
expenses
|
|
|
2,877
|
|
|
3,005
|
|
|
3,327
|
|
|
3,323
|
|
|
3,371
|
|
|
3,409
|
|
Management
fees
|
|
|
590
|
|
|
590
|
|
|
737
|
|
|
738
|
|
|
762
|
|
|
750
|
|
General
and administrative expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162
|
|
|
-
|
|
|
352
|
|
Total
vessel operating expenses
|
|
|
3,467
|
|
|
3,595
|
|
|
4,064
|
|
|
4,223
|
|
|
4,133
|
|
|
4,511
|
|
(1)
|
We
have not included financial data for the year ended 2001 since we
were
only formed in May 2005 and incurred significant expense in the
preparation of our consolidated financial statements for 2002, 2003,
2004
and 2005 in connection with the filing of registration statements
with the
SEC for our public offering. We believe that it would constitute
“unreasonable effort or expense” for us to include 2001 financials. The
Company’s predecessors (which are the separate shipowning entities that
became wholly-owned by the Company subsequent to its formation) prepared
financial statements for the year ended December 31, 2001 on a basis
different from the financial statements included in this prospectus
and
the effort and cost involved in converting such financial statements
into
a basis similar to those financial statements included herein would
be
unreasonably burdensome.
|
(2)
|
In
2004, the estimated scrap value of the vessels was increased from
$170 to
$300 per lightweight 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. The m/v
Widar
was sold in April 2004. Depreciation expenses for the m/v
Widar
for 2004 amounted to $136,384 compared to $409,149 for 2003. The
m/v
Pantelis
P
was sold in May 2006. Depreciation expenses for the m/v
Pantelis
P
for the six month period ended June 30, 2006 amounted to $107,587
compared
to $129,104 in the same period in
2005.
|
(3)
|
We
consider Adjusted
EBITDA
to represent net earnings before interest, taxes, depreciation
and
amortization including the amortization of deferred revenue from a
below market period charter when we acquired m/v
Tasman
Trader
.
Adjusted
EBITDA
does not represent and should not be considered as an alternative
to net
income or cash flow from operations, as determined by United States
generally accepted accounting principles, or U.S. GAAP, and our
calculation of Adjusted
EBITDA
may not be comparable to that reported by other companies. Adjusted
EBITDA
is included herein because it is a basis upon which we assess our
liquidity position and because we believe that it presents useful
information to investors regarding a company’s ability to service and/or
incur indebtedness. The Company’s definition of Adjusted
EBITDA
may not be the same as that used by other companies in the shipping
or
other industries.
|
Adjusted
EBITDA Reconciliation to Net Income:
|
|
Year
Ended December 31,
|
|
Six
Months Ended
June
30,
|
|
(Amounts
in U.S.
dollars)
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
891,628
|
|
$
|
8,426,612
|
|
$
|
30,611,765
|
|
$
|
25,178,454
|
|
$
|
14,763,374
|
|
$
|
10,015,456
|
|
Depreciation
and amortization
|
|
|
4,053,049
|
|
|
4,757,933
|
|
|
3,461,678
|
|
|
4,208,252
|
|
|
1,824,322
|
|
|
3,195,074
|
|
Interest
and finance cost
|
|
|
793,732
|
|
|
756,873
|
|
|
521,215
|
|
|
1,035,414
|
|
|
456,021
|
|
|
921,606
|
|
Deferred
revenue amortization
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(83,240
|
)
|
Adjusted
EBITDA
|
|
$
|
5,738,409
|
|
$
|
13,941,418
|
|
$
|
34,594,658
|
|
$
|
30,422,120
|
|
$
|
17,043,717
|
|
$
|
14,048,896
|
|
Adjusted
EBITDA Reconciliation to Cash Flow from Operations:
|
|
Year
Ended December 31,
|
|
Six
Months Ended
June
30,
|
|
(Amounts
in U.S.
dollars)
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operations
|
|
$
|
5,631,343
|
|
$
|
10,956,132
|
|
$
|
34,208,693
|
|
$
|
20,594,782
|
|
$
|
8,157,781
|
|
$
|
11,508,281
|
|
Net
increase/(decrease) in operating asset/liabilities
|
|
|
(661,824
|
)
|
|
2,466,840
|
|
|
(2,427,953
|
)
|
|
8,975,697
|
|
|
8,573,728
|
|
|
(510,663
|
)
|
Loss
on derivative
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(100,029
|
)
|
|
(82,029
|
)
|
|
-
|
|
Gain
(loss) from vessel sales
|
|
|
-
|
|
|
-
|
|
|
2,315,477
|
|
|
-
|
|
|
-
|
|
|
2,165,799
|
|
Investment
in associate / provision for doubtful accounts
|
|
|
30,655
|
|
|
(171,025
|
)
|
|
27,907
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest,
net
|
|
|
738,235
|
|
|
689,471
|
|
|
470,534
|
|
|
951,670
|
|
|
394,237
|
|
|
885,479
|
|
Adjusted
EBITDA
|
|
$
|
5,738,409
|
|
$
|
13,941,418
|
|
$
|
34,594,658
|
|
$
|
30,422,120
|
|
$
|
17,043,717
|
|
$
|
14,048,896
|
|
(4)
|
The
dividend amounts for 2005 and for the six months ended June 30, 2005
reflect aggregate dividends of $30,175,223 and $27,525,000, respectively,
and a return of capital in the amount of $16,700,000. 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 should not be considered indicative of future dividend payments
and the Company refers you to the other sections in this prospectus
for
further information on the Company’s dividend
policy.
|
(5)
|
During
the three month period ended September 30, 2006, m/v
Ariel
was off-hire for 24 days for
repairs.
|
(6)
|
The
average TCE rate calculation shown above is based on the actual
number of
available and voyage days. In the above table, the number of available
voyage days was rounded to the nearest number of full
days.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our financial statements
and footnotes thereto contained in this prospectus. This discussion contains
forward-looking statements, which are based on our assumptions about the future
of our business. Our actual results will likely 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 prospectus. 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.
General
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 container ships and multipurpose vessels that transport dry and
refrigerated cargoes, mainly including manufactured products and perishables.
We
actively manage the deployment of our fleet between spot charters, which
generally last from several days to several weeks, and period 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. Vessels
operating on period 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 shipping
pools
benefit from better scheduling, and thus increased utilization, and better
access to contracts of affreightment due to the larger commercial operation.
Shipping pools may employ the vessels either exclusively in spot charters or
a
combination of spot and period charters and contracts of affreightment. We
are
constantly evaluating opportunities to increase the number of our vessels
deployed on period charters or to participate in shipping pools (if available
for our vessels). However, we only expect to enter into additional period
charters or shipping pools if we can obtain contract terms that satisfy our
criteria. Container ships are employed almost exclusively on period charter
contracts. We carefully evaluate the length and the rate of the period charter
contract at the time of fixing or renewing a contract considering market
conditions, trends and expectations.
As
of
November 15, 2006, our fleet consisted of nine vessels as follows: four drybulk
carriers, comprised of two Panamax drybulk carriers and two Handysize drybulk
carriers, four container ships and one multipurpose vessel. The total cargo
carrying capacity of our four drybulk carriers and our four
container ships is 207,464 dwt and 6,235 teu, respectively. Our
multipurpose vessel can carry 22,568 dwt or 950 teu, or a combination thereof.
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. Since our Private Placement in August 2005, we sold
two
of our drybulk carriers (m/v
John
P
and m/v
Pantelis
P
,
both
built in 1981) and we purchased one multipurpose vessel (m/v
Tasman
Trader
built in
1990), one drybulk carrier (m/v
Aristides
N.P.
built in
1993) and one container ship (m/v
Artemis
built in
1987) in accordance with our strategy of renewing and expanding our fleet.
In
furtherance of our growth strategy, on October 12, 2006 we contracted to
acquire
a 1,599 teu, 1993-built container ship, the m/v
YM
Xingang I
for a
purchase price of $27.3 million. We took delivery of this container ship on
November 15, 2006.
On
November
9, 2006, we declared our fifth consecutive dividend on our common stock.
The
dividend was in the amount of $0.21 per common share and will be paid on or
about December 15, 2006 to all common shareholders of record as of December
8,
2006. This on our common stock follows our dividend declarations of $0.18
per
common share on
August
7,
2006, $0.18 per common share on
May
12, 2006, $0.18 per
share on February 7, 2006 and $0.21 per share on November 2, 2005. Since
our
Private Placement in August 2005, we have declared five consecutive dividends
on
our common stock in a total amount of $0.96 per common share (all the per
share
amounts set forth in this section are adjusted for the 1-for-3 reverse stock
split effected on October 6, 2006, as described below).
On
October 6, 2006, we effected a 1-for-3 reverse stock split in order to increase
our common share price to satisfy the price per share listing requirements
of
the NASDAQ Global Market. As a result of the reverse stock split, the
outstanding number of shares of our common stock was reduced from 37,860,341
to
12,620,114, subject to increase to the extent the reverse stock split results
in
any shareholder receiving fractional shares, in which event such fractional
share will be rounded up to the next whole share. The reverse stock split
did
not affect the number of authorized shares of our common stock or preferred
stock which remain at 100,000,000 shares and 20,000,000 shares,
respectively.
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.
Time
Charter Equivalent (“TCE”)
.
A
standard maritime industry performance measure used to evaluate performance
is
the daily time charter equivalent, or daily TCE. The TCE rate achieved on a
given voyage is expressed in $ per day and is generally calculated by
subtracting voyage expenses, including bunkers and port charges, from voyage
revenues and dividing the net amount (time charter equivalent revenues) by
the
voyage days, including the trip to the loading port. TCE is a standard seaborne
transportation industry performance measure used primarily to compare
period-to-period changes in a seaborne transportation 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 during specific
periods.
Basis
of Presentation and General Information
We
are a
Marshall Islands company formed on May 5, 2005 to consolidate the beneficial
owners of seven ship-owning companies. On June 28, 2005, the beneficial owners
exchanged all their shares in the ship-owning companies for shares in Friends.
On June 29, 2005, Friends then exchanged all the shares in the ship-owning
companies for shares in the Company, thus becoming our sole shareholder. This
transaction constituted a reorganization of companies under common control,
and
was 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 us. Accordingly, the consolidated
financial statements included in this prospectus have been presented as if
the
ship-owning companies were consolidated subsidiaries of the Company for all
periods presented and use the historical carrying costs of the assets and the
liabilities of the ship-owning companies listed therein.
We
use
the following measures to describe our financial performance:
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
container ship markets.
Commissions
.
We pay
commissions on all chartering arrangements of 1.25% to Eurochart, one of our
affiliates, plus additional commissions 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. We also usually pay commissions of up to 2% to other brokers involved
in
purchase and sale transactions.
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 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 affiliated ship manager, under our
subsidiaries’ management agreements with Eurobulk for the technical and
commercial management that Eurobulk performs on our behalf. The current fee
is
€610 (or $773.50) per vessel per day under a new master management agreement
with Eurobulk effective as of October 1, 2006 and is payable monthly in advance,
adjusted annually for inflation.
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.
As
of September 30, 2006, we depreciated all but one of our vessels over a
depreciable life of 25 years. One of our vessels, m/v
Ariel
,
built
in 1977, has already reached its 29th year, is fully depreciated and incurred
no
depreciation charge since the beginning of 2004. During 2004, management
increased its estimate of the scrap value of its vessels from $170 to $300
per
lightweight ton to better reflect market price developments in the scrap metal
market.
Amortization
of deferred drydocking 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 hiring riding crews to effect repairs
on a
vessel and parts used in making such repairs that are reasonably made in
anticipation of reducing the duration or cost of the drydocking; 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.
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 costs are amortized over the period
of
the loan; the un-amortized portion is written-off if the loan is prepaid
early.
General
and administrative expenses
.
We will
incur expenses consisting mainly of the fixed portion of the fees which we
pay
Eurobulk, professional fees, directors’ liability insurance and reimbursement of
our directors’ and officers’ travel-related expenses. General and administrative
expenses have increased since we became a public company. We acquire executive
services of our Chief Executive Officer, Chief Financial Officer and Secretary,
through Eurobulk. As of October 1, 2006, these services will now be provided
to
us under our new master management agreement with Eurobulk. For the period
ended
September 30, 2006, the fixed portion of the management fees which we paid
due
to us being as a public company is estimated to be $379,375. Commencing October
1, 2006, the fee will be $517,500 on an annualized basis. This fee is adjusted
for Greek inflation every July 1 under our master management agreement with
Eurobulk.
Results
from Operations
We
operated the following types of vessels during the six month period ended June
30, 2006:
|
|
Drybulk
Carriers
|
|
Container
Ships
|
|
Multipurpose
Carriers
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of vessels
|
|
|
4.83
|
|
|
3.00
|
|
|
0.36
|
|
|
8.19
|
|
Number
of vessels at end of period
|
|
|
4.00
|
|
|
3.00
|
|
|
1.00
|
|
|
8.00
|
|
Dwt
capacity at end of period
|
|
|
164,400
|
|
|
-
|
|
|
22,600
|
|
|
187,000
|
|
TEU
capacity at end of period
|
|
|
-
|
|
|
4,636
|
|
|
950
|
|
|
5,586
|
|
(1)
|
After
the sale on July 5, 2006 of m/v
John
P
,
a
26,354 dwt, 1981-built drybulk carrier, and the acquisition on September
4, 2006 of m/v
Aristides
N.P.
,
a
69,268 dwt, 1993-built drybulk carrier, the average age of our drybulk
carriers is 20.50 years and of the entire fleet is 18.25
years.
|
Six
month period ended June 30, 2006 compared to six month period ended June 30,
2005.
Voyage
revenues
.
Voyage
revenues for the period were $20.4 million, down 14.3% compared to the same
period in 2005 during which voyage revenues amounted to $23.8 million. The
decrease was primarily due to the lower charter rates our vessels achieved
due,
in turn, to a decline in charter market rates, and despite the fact that we
operated on average more vessels compared to the same period in 2005. Our fleet
of 8.2 vessels had throughout the period less than 2 unscheduled off-hire days
and 23 days of scheduled off-hire for the drydocking of m/v
Kuo
Hsiung
,
generating an average TCE rate per vessel of $13,414 per day compared to $19,124
per day per vessel for the same period in 2005.
Commissions
.
Commissions for the period were $0.9 million. At 4.4% of voyage revenues,
commissions were lower than in the same period in 2005. For the six months
ended
June 30, 2005, commissions amounted to $1.3 million, or 5.6% of voyage revenues.
The lower level of commissions in 2006 is due to the fact that recently
concluded charter contracts had lower commission levels and the fact that m/v
Irini
participated in the Klaveness Baumarine shipping pool, where commissions are
paid mainly at the shipping pool level, in the six months ended June 30, 2006
but not during the same period in 2005.
Voyage
expenses
.
Voyage
expenses for the period were $0.9 million related to expenses for certain voyage
charters. For the six months ended June 30, 2005 voyage expenses amounted to
$0.1 million. In the first six months of 2006, a greater portion of our fleet
operated under voyage charter contracts, where we pay for the voyage expenses.
Still, the majority of our fleet operates under time charter contracts, and
thus
the voyage expenses represent a small fraction of voyage revenues at 4.2% during
the six month period ended on June 30, 2006 versus 0.6% for the same period
in
2005.
Vessel
operating expenses
.
Vessel
operating expenses were $5.1 million for the period. Daily vessel operating
expenses per vessel were $3,409 per day. For the same period in 2005, vessel
operating expenses were $4.3 million, or $3,371 per day.
Management
fees
.
These
are the fees we pay to Eurobulk under our subsidiaries’ management agreements
with Eurobulk. As of June 30, 2006, Eurobulk charged us €610 (or $773.50) per
day per vessel totaling $1.1 million for the period, or $750 per day per vessel
reflecting a lower U.S. dollar per Euro exchange rate, but higher number of
ship
days than in the same period of 2005. For the same period in 2005, management
fees amounted to $1.0 million, or $762 per day per vessel based on a daily
rate
per vessel of €590. The daily rate in Euros was adjusted for inflation on
February 1, 2006 to €610 per day per ship according to the management agreement
with Eurobulk.
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. During the six month period ended June 30, 2006 we had a total of
$0.5
million of general and administrative expenses. We had no such expenses during
the same period of 2005.
Depreciation
and amortization
.
Depreciation and amortization for the period was $3.2 million. This consists
of
$2.6 million of depreciation of vessels and $0.6 million of amortization of
deferred drydocking expenditures. Comparatively, depreciation and amortization
for the same period in 2005 amounted to $1.2 million and $0.6 million,
respectively, for a total of $1.8 million. Depreciation in the six month period
to June 30, 2006 is higher than in the same period in 2005 due to the higher
number of vessels in our fleet. Amortization for the six month period to June
30, 2006 is lower than the same period in 2005 due to the lower capitalized
drydocking expenses being amortized for those of our vessels subject to
amortization. Our two vessel acquisitions between June 30, 2005 and June 30,
2006 had no capitalized drydocking expenses subject to amortization for the
six
month period ended June 30, 2006 and, in addition, m/v
Pantelis
P
was sold
on May 31, 2006.
Gain
from vessel sale
.
There
was one vessel sale in the six months ended June 30, 2006 as m/v
Pantelis
P
was sold
on May 31, 2006 realizing a gain on sale of $2.2 million. During the same period
in 2005, there were no vessel sales.
Interest
and finance costs, net
.
Interest and finance costs, net for the period were $0.9 million. Of this
amount, $1.4 million relates to interest incurred and loan fees and expenses
paid and deferred loan fees written-off during the period, partly offset by
$0.5
million of interest income during the period. Comparatively, during the same
period in 2005, net interest and finance costs amounted to $0.5 million,
comprised of $0.5 million of interest incurred and loan fees and offset by
$0.1
million of interest income. Interest incurred and loan fees were higher in
the
six month period to June 30, 2006 due to the higher loan amount outstanding
as a
result of the new loans undertaken in May 2005 to re-capitalize the company,
in
December 2005 to partly finance the acquisition of m/v
Artemis
and in
June 2006 to partly finance the acquisition of m/v
Tasman
Trader
.
Derivative
and foreign exchange gains or losses
.
There
were no derivative gains or losses in the period and; only a small foreign
exchange loss of $2,007. During the same period in 2005, we had a derivative
loss due to an interest rate swap on a notional amount of $5.0 million of
$82,029 and foreign exchange gains of $312.
Net
income. As a result of the above, net income for the six month period ended
on
June 30, 2006 was $10.0 million compared to $14.8 million for the same period
in
2005, representing a decrease of 32.2%.
Year
ended December 31, 2005 compared to year ended December 31,
2004.
Voyage
revenues
.
Voyage
revenues for the period were $44.5 million, down 2.6% compared to the same
period in 2004 during which voyage revenues amounted to $45.7 million. The
decrease was primarily due to the lower charter rates our vessels achieved,
the
fact that we operated on average fewer vessels compared to the same period
in
2004 (on average 7.1 vessels in 2005 versus 7.3 vessels in 2004) and the lower
utilization rate of our available days (98.5% in 2005 compared to 99.5% in
2004). Our fleet of 7.1 vessels had throughout the period 38 unscheduled
off-hire days, primarily due to an unscheduled repair for m/v
Ariel
,
and 45
days of scheduled off-hire for the drydocking of m/v
Irini
and m/v
John
P
,
generating an average TCE rate per vessel of $17,643 per day compared to $17,839
per day per vessel for the same period in 2004. The average TCE rate our vessels
achieve is a combination of the period charter rate earned by our vessels under
period 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 weakened in the second
half
of 2005 influencing a portion of the TCE earned by some of our
vessels.
Commissions
.
Commissions for the period were $2.4 million. At 5.4% of voyage revenues,
commissions were higher than in the same period in 2004. For the year ended
December 31, 2004, commissions amounted to $2.2 million, or 4.8% of voyage
revenues. The higher level of commissions in 2005 is due to the fact that fewer
vessels operated in shipping pools (where commissions are paid by the shipping
pool thus reducing the commissions paid by us).
Voyage
expenses
.
Voyage
expenses for the year were $0.7 million related to expenses for certain voyage
charters. For the year ended December 31, 2004, voyage expenses amounted to
$0.4
million. Because our vessels are generally chartered under time charter
contracts, voyage expenses represent a small fraction of voyage revenues. In
2005, we had more voyage charters than in 2004, which resulted in higher voyage
expenses.
Vessel
operating expenses
.
Vessel
operating expenses were $8.6 million for the period compared to $8.9 million
for
the same period in 2004. This difference was due to the lower average number
of
vessels we operated in 2005, specifically an average of 7.1 vessels in 2005
compared to 7.3 vessels in 2004. Daily vessel operating expenses per vessel
were
rather stable between the two periods at $3,322 per day in 2005 compared to
$3,327 per day in 2004.
Management
fees
.
These
are the fees we pay to Eurobulk under our subsidiaries’ management agreements
with Eurobulk. As of December 31, 2005, Eurobulk charged us €590 (or $738) per
day per vessel totaling $1.9 million for the period, or $738 per day per vessel.
For the same period in 2004, management fees amounted to $2.0 million, or $737
per day per vessel based on the same daily rate per vessel of €590. The Euro
exchange rate has been on average the same during 2005 and 2004. The increase
in
the management fees paid in 2005 also resulted from an increase in the average
number of vessels we owned during the period. In 2005, we owned 7.4 vessels
compared to an average of 7.1 vessels we owned during 2004.
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. During 2005, we had a total of $0.4 million of general and
administrative expenses incurred in the second half of the year. We had no
such
expenses during 2004.
Depreciation
and amortization
.
Depreciation and amortization for the period was $4.2 million. This consists
of
$2.7 million of depreciation of vessels and $1.6 million of amortization
of
deferred drydocking expenditures. Comparatively, depreciation and amortization
for the same period in 2004 amounted to $2.5 million and $0.9 million,
respectively, for a total of approximately $3.5 million. Depreciation in
2005 is
higher than in 2004 despite the lower average number of vessels because the
depreciation associated with m/v
Artemis
which
was bought in November 2005 was higher than the corresponding depreciation
of
m/v
Widar
which
was sold in April 2004. Amortization for 2005 is higher than the same period
in
2004 due to the amortization of additional drydocking expenditures incurred
in
2004 and 2005.
Gain
from vessel sale
.
There
were no vessel sales in the year ended December 31, 2005. In 2004, m/v
Widar
was sold
on April 24 for a gain on sale of $2.3 million.
Interest
and finance costs, net
.
Interest and finance costs, net for the period were $1.0 million. Of this
amount, $1.5 million relates to interest incurred and loan fees and expenses
paid and deferred loan fees written-off during the period, offset by $0.5
million of interest income during the period. Comparatively, during the same
period in 2004, net interest and finance costs amounted to $0.5 million,
comprised of $0.7 million of interest incurred and loan fees and offset by
$0.2
million of interest income. Interest incurred and loan fees are higher in 2005
due to the higher loan amount outstanding as a result of the new loans
undertaken in May 2005 and December 2005.
Derivative
and foreign exchange gains or losses
.
During
the period, we had a derivative loss of $0.1 million due to an interest rate
swap on a notional amount of $5.0 million, and foreign exchange gains of $538.
In the same period in 2004, there was a net derivative gain of $27,029 (same
interest rate swap) and foreign exchange losses of less than
$1,808.
Net
income
.
As a
result of the above, net income for the year ended on December 31, 2005 was
$25.2 million compared to $30.6 million for the same period in 2004,
representing a decrease of 17.7%.
Year
ended December 31, 2004 compared to year ended December 31,
2003.
Voyage
revenues
.
Voyage
revenues for the year ended December 31, 2004 were $45.7 million, up 76.2%,
compared to $26.0 million for the year ended December 31, 2003. Results for
2004
reflect contributions from m/v
Widar
up to
April 24, as the vessel was sold on that day. Our fleet operated throughout
the
period, with less than 12 unscheduled off-hire days and about 123 days of
scheduled drydocking resulting in a fleet utilization rate of 99.5% and
averaging a TCE rate per vessel of $17,839 per day. The corresponding fleet
utilization and average TCE equivalent for the year ended December 31, 2003
are
99.3% and $8,965 per vessel per day.
Commissions
.
Commissions in 2004 were $2.2 million and amounted to 4.8% of voyage revenues.
Commissions for 2003 were $0.9 million amounting to 3.5% of voyage revenues.
Commissions were higher as a percentage in 2004 than in 2003 due the fact that
fewer vessels participated in shipping pools in 2004. Shipping pools pay most
commissions before distribution of profits, and, thus the distribution to the
shipping pool participants is net of third party commissions (we paid only
commissions to Eurochart for our shipping pool derived revenues).
Voyage
expenses
.
Voyage
expenses in 2004 of $0.4 million relate to expenses for certain voyage charters.
Voyage expenses for 2003 were $0.4 million.
Vessel
operating expenses
.
Vessel
operating expenses in 2004 were $8.9 million reflecting the operation of an
average of 7.3 vessels. Daily vessel operating expenses per vessel were $3,327
per day, about 11.0% higher than daily vessel operating expenses for 2003 which
were $3,005. The increase is primarily due to higher insurance costs of $98
per
vessel per day, higher costs for spare parts and consumable stores of $87 per
vessel per day and an increase of $101 per vessel per day for crew and related
expenses. The total operating expenses in 2003 were $8.8 million reflecting
the
operation of 8 vessels for the full year.
Management
fees
.
These
are the fees we pay to Eurobulk under our subsidiaries’ management agreements
with Eurobulk. Management fees in 2004 amounted to $2.0 million (or $737) per
calendar day per vessel based on our contract rate of €590 per day and the
prevailing exchange rate of U.S. Dollar to Euro. In 2003, management fees
amounted to $1.7 million (or $590) per calendar day per vessel. The difference
of the fee on a per day per vessel basis is primarily attributed to the fact
that the management fee was changed from $590 in 2003 to €590 per day per vessel
in 2004, the different number of ship days and the U.S. Dollar to Euro exchange
rate.
Depreciation
and amortization
.
Depreciation and amortization in 2004 was $3.5 million. As the vessel m/v
Widar
was sold
in April 2004, the depreciation charge was reduced for the period after the
sale
of the vessel and amounted to $2.5 million for the year. In 2004, we have
revised upwards (from $170/ton to $300/ton) our estimate of the scrap price
per
lightweight ton, and, the expected life for m/v
Ariel
from 28
to 30 years (as it had gone through a special survey and was not expected to
be
sold before 2007). As a result, the depreciation charge was lower by $1.4
million reflecting the above adjustments and, consequently, net income for
the
period was $1.4 million higher or $0.14 per share. Amortization of deferred
drydock expenses for the period amounted to $0.9 million, 55.0% higher than
in
2003 due to additional drydocking expenditures during 2003 and 2004.
Depreciation for 2003 was $4.2 million while amortization of deferred drydocking
costs was $0.6 million.
Gain
on vessel sale
.
m/v
Widar
was sold
on April 24, 2004 for a net gain on sale of $2.3 million. There were no vessel
sales during 2003.
Interest
and finance costs, net
.
Interest and finance costs, net in 2004 were $0.5 million. Of this amount,
$0.7
million relates to interest incurred and loan fees and expenses paid and
deferred loan fees written-off during the period offset by $0.2 million of
interest income during the period. Net interest expense for the period ended
December 31, 2003 was $0.8 million reflecting primarily lower interest income
of
$0.4 million and higher interest incurred and loan fees of $0.8
million.
Derivative
and foreign exchange gains or losses
.
During
the year ended December 31, 2004, we had a derivative gain due to an interest
rate swap on a notional amount of $5.0 million of $27,029, and, foreign exchange
losses of $1,808. In the year ended to December 31, 2003, there was no
derivative exposure and foreign exchange losses of $690.
Net
income
.
Net
income for the year ended December 31, 2004 was $30.6 million compared to
$8.4
million for the year ended December 31, 2003, an increase of
263.3%.
Lack
of Historical Operating Data for Vessels Before their Acquisition
Consistent
with shipping industry practice, other than inspection of the physical condition
of the vessels and examinations of classification society records, we do not
conduct historical financial due diligence when we acquire vessels. Accordingly,
we do not obtain the historical operating data for the vessels from the sellers
because that information is not material to our decision to make acquisitions,
nor do we believe it would be helpful to potential investors in our common
shares in assessing our business or profitability. Most vessels are sold under
a
standard agreement, which, among other things, provides the buyer with the
right
to inspect the vessel and the vessel’s classification society records. The
standard agreement does not give the buyer the right to inspect, or receive
copies of, the historical operating data of the vessel. Prior to the delivery
of
a purchased vessel, the seller typically removes from the vessel all records,
including past financial records and accounts related to the vessel. In
addition, the technical management agreement between the seller’s technical
manager and the seller is automatically terminated and the vessel’s trading
certificates are revoked by its flag state following a change in ownership.
Consistent
with shipping industry practice, we treat the acquisition of a vessel (whether
acquired with or without charter) as the acquisition of an asset rather than
a
business. Although vessels are generally acquired free of charter, we may
acquire vessels with a period charter. Where a vessel has been under a spot
charter, the vessel is delivered to the buyer free of charter, and it is rare
in
the shipping industry for the last charterer of the vessel in the hands of
the
seller to continue as the first charterer of the vessel in the hands of the
buyer. In most cases, when a vessel is under spot charter and the buyer wishes
to assume that charter, the vessel cannot be acquired without the charterer’s
consent and the buyer’s entering into a separate direct agreement with the
charterer to assume the charter. The purchase of a vessel itself does not
transfer the charter, because it is a separate service agreement between the
vessel owner and the charterer.
When
we
purchase a vessel and assume or renegotiate a related period charter, we must
take the following steps before the vessel will be ready to commence operations:
|
·
|
obtain
the charterer’s consent to us as the new owner;
|
|
·
|
obtain
the charterer’s consent to a new technical manager;
|
|
·
|
obtain
the charterer’s consent to a new flag for the vessel;
|
|
·
|
arrange
for a new crew for the vessel;
|
|
·
|
replace
all hired equipment on board, such as gas cylinders and communication
equipment;
|
|
·
|
negotiate
and enter into new insurance contracts for the vessel through our
own
insurance brokers;
|
|
·
|
register
the vessel under a flag state and perform the related inspections
in order
to obtain new trading certificates from the flag state;
|
|
·
|
implement
a new planned maintenance program for the vessel; and
|
|
·
|
ensure
that the new technical manager obtains new certificates for compliance
with the safety and vessel security regulations of the flag state.
|
Cash
Flows
As
of
June 30, 2006, we had a cash balance of $20.2 million, funds due from related
companies of $1.8 million and $0.4 million cash in restricted retention
accounts. The $1.8 million due from related companies represents advances to
the
manager of the fleet, Eurobulk, for operating expenses, management fees and
executive services as per the management agreements and executive services
agreement.
Working
capital is current assets minus current liabilities, including the current
portion of long term debt. We have a working capital surplus of $4.6 million
including the current portion of long term debt which was $13.8 million as
of
June 30, 2006. We consider our liquidity sufficient for our operations.
As
of
December 31, 2005, we had a cash balance of $20.5 million plus restricted cash
of $1.1 million. Working capital is current assets minus current liabilities,
including the current portion of long term debt. The current portion of long
term debt included in our current liabilities was $14.4 million as of December
31, 2005. The working capital was $6.9 million as of December 31, 2005. All
of
the $46.9 million dividend declared was paid as of December 31, 2005.
As
of
December 31, 2004, we had a cash balance of $15.5 million plus restricted cash
of $68,980. Working capital is current assets minus current liabilities,
including the current portion of long term debt. The current portion of long
term debt included in our current liabilities was $6.0 million as of December
31, 2004. The working capital was $2.7 million as of December 31, 2004. All
of
the $27.0 million dividend declared was paid as of December 31, 2004.
Net
cash from operating activities.
Our
net
cash from operating activities for the six months ended June 30, 2006 was $11.5
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. This amount
resulted from net income for the period of $10.0 million plus a reduction in
the
amount due from related parties of $1.2 million. In the same period in 2005,
net
cash flow from operating activities was $8.2 million. This amount is
attributable to net income of $14.8 million less an increase in the amount
due
from related parties of $8.6 million offset by other changes in working
capital.
Our
net
cash from operating activities for 2005 was $20.6 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 $25.2
million, which was reduced by amounts due from related parties of $7.6 million.
The increase in the amounts due from related companies is primarily due to
a
payment of the amount due to related companies of $4.6 million as of December
31, 2004 and advances to our fleet manager of funds to pay for all anticipated
vessel expenses. In the same period in 2004, net cash flow from operating
activities was $34.2 million based on a contribution of net income of $30.6
million.
Our
net
cash from operating activities during 2004 was $34.2 million. This is primarily
attributable to the favorable trading conditions which contributed net income
of
$30.6 million, a gain of $2.3 million from the sale of m/v
Widar
in
April, deferred drydocking expenses of $2.3 million, and, a further increase
of
funds due to related companies by $3.5 million during the period. During 2003,
net cash flow from operating activities was $11.0 million, primarily
attributable to net income of $8.4 million.
Net
cash from investing activities.
For
the
six months ended June 30, 2006, net cash flow used in investing activities
was
$5.7 million. We received net proceeds from the sale of m/v
Pantelis
P
of $4.4
million and had a reduction of cash in retention accounts of $0.7 million.
At
the same time we spent $10.9 for the purchase of m/v
Tasman
Trader
resulting in a cash deficit from investment activities of $5.7 million. During
the same period in 2005, cash flow from investing activities amounted to a
deficit of $1.2 million reflecting an increase of cash in retention accounts.
During
2005, we purchased m/v
Artemis
for
$20.8 million and we had to put in retention accounts $1.0 million to satisfy
requirements of our new loan facilities for a total of funds used in investment
activities of $21.8 million. During 2004, cash flow from investing
activities amounted to $6.8 million contribution reflecting the sale of m/v
Widar
in April
2004, while there were no investment activities in 2003 except a release
of $0.2
million of restricted funds.
Net
cash used in financing activities.
Net
cash
used in financing activities for the six month period ended June 30, 2006
was $6.0 million. This mainly relates to $4.5 million of dividends paid, $9.7
million of debt repayments and the drawdown of $8.3 million of new debt to
partly finance the purchase of m/v
Tasman
Trader
.
In the
same period in 2005, net cash used in financing activities was $17.0 million
mainly related to a dividend and return of capital of $44.2 million paid to
shareholders on April 10, 2005 and May 15, 2005, and the net proceeds from
re-financing long term debt of $27.4 million.
In
2005,
net cash provided by financing activities amounted to $6.2 million. This is
mainly accounted by proceeds from our Private Placement and share capital
increases of $18.6 million and net proceeds from long term debt of $34.6 offset
by $46.9 million consisting of dividends and return of capital and $0.2 million
in loan arrangement fees paid. In 2004, net cash used in financing activities
amounted to $33.6 million reflecting dividend payments of $27.0 million and
repayment of debt of $6.6 million.
Net
cash
used in financing activities during 2004 was $33.6 million. This mainly relates
to a dividend of $27.0 million that was paid to existing shareholders, repayment
of long term debt of $6.6 million which included the repayment of the balance
of
the loan of m/v
Widar
when the
vessel was sold. During 2003, net cash used in financing activities was $4.8
million, reflecting primarily a dividend of $1.2 million that was paid to
existing shareholders, repayment of long term debt of $6.3 million and new
debt
incurred of $3.0 million and a repayment of an advance from shareholders of
$0.3
million made in the prior year.
Off-balance
Sheet Arrangements
We
do not
and have never had any off-balance sheet arrangements.
Liquidity
and Capital Resources
Historically,
our sources of funds have been equity provided by our shareholders, operating
cash flows and long-term borrowings. Our principal use of funds has been
capital
expenditures to establish and expand our fleet, maintain the quality of our
vessels, comply with international shipping standards and environmental laws
and
regulations, fund working capital requirements, make principal and interest
payments on outstanding loan facilities, and pay dividends. Our main short
term liability needs are to fund our vessel operations including the
drydocking and special survey requirements of our vessels. We expect to
rely on cash flows from operations and short term borrowings if necessary
to cover our short term liquidity needs. We expect to rely upon funds
raised from this offering, operating cash flows, long term borrowings, as
well
as future offerings to implement our growth plan and meet our liquidity needs
going forward. In our opinion our working capital is sufficient for our present
requirements and for the upcoming 12-month period.
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 the six month period ended on June 30, 2006, we repaid loans of $9.7
million and drew down a new loan of $8.3 million.
As
of
June 30, 2006, after considering the loan repayments and new loan discussed
in
the preceding paragraph, we had five outstanding loans with a combined
outstanding balance of $47.1 million. As of November 15, 2006, we had eight
outstanding loans with a combined outstanding balance of $78.4 million. These
loans have maturity dates between 2008 and 2013. Our long-term debt comprises
bank loans granted to our vessel-owning subsidiaries.
Diana
Trading Ltd. (our subsidiary and the owner of m/v
Irini
)
entered
into a loan agreement with HSBC Bank plc amounting to $4.2 million which
was
drawn down on May 9, 2005. The loan is repayable in twelve consecutive quarterly
installments consisting of four installments of $0.45 each, and eight
installments of $0.3 million each, with the last installment due in May 2008.
The first installment was paid in August 2005. The outstanding amount of
this
facility as of June 30, 2006 is $2.4 million. The interest is calculated
at
LIBOR plus 1.25% per annum. Diana Trading Ltd also has another credit facility
with HSBC Bank plc with an outstanding balance of $2.82 million to be repaid
in
ten consecutive quarterly installments of $0.22 million and a balloon payment
of
$0.6 million along with the last installment.
Alcinoe
Shipping Ltd (the owner of m/v
Pantelis
P
.),
Oceanpride Shipping Ltd. (the owner of m/v
John
P
.),
Searoute Maritime Ltd. (the owner of m/v
Ariel
)
and
Oceanopera Shipping Ltd. (the owner of m/v
Nikolaos
P
)
jointly
and severally entered into a new eurodollar loan agreement with EFG Eurobank
Ergasias S.A. amounting to $13.5 million which was drawn down on May 16, 2005.
Prior to obtaining the loan, an amount of $1.4 million was paid in settlement
of
the outstanding loans as at March 31, 2005 for Alcinoe Shipping Ltd. and
Oceanpride Shipping Ltd. The new loan is repayable in twelve consecutive
quarterly installments consisting of two installments of $2.0 million each,
one
installment of $1.5 million, nine installments of $0.6 million each, and a
balloon payment of $2.6 million payable with the last installment in May 2008.
The first installment was due in August 2005. Interest is calculated on LIBOR
plus 1.5% per annum. As of June 30, 2006 the outstanding amount of this loan
is
$5.9 million due to a repayment of an additional $1.5 million as a result of
the
sale of m/v
Pantelis
P
.
An
additional $1.5 million repayment took place in early July 2006 as a result
of
the sale of m/v
John
P
.
The
remaining amount of $4.4 million will be repaid in eight consecutive quarterly
installments of $0.3 million each, with a balloon payment of $2.0 million along
with the last installment.
Allendale
Investments S.A. (the owner of m/ v
Kuo
Hsiung
)
and
Alterwall Business Inc. (the owner of m/ v
YM
Qingdao1
(ex
Kuo
Jane
))
jointly and severally entered into a loan agreement with Fortis Bank (Nederland)
N.V. amounting to $20.0 million when the outstanding amount of the old loans
were $3.6 million which was drawn down on May 26, 2005. The loan is repayable
in
twenty-four unequal consecutive quarterly installments of $1.5 million each
in
the first year, $1.125 million each in the second year, $0.775 million in
the
third year, $0.45 million each in the fourth through the sixth years and
a
balloon payment of $1.0 million payable with the last installment in May
2011.
The interest is calculated at LIBOR plus 1.25% per annum as long as the
outstanding amount remains below 60% of the fair market value (FMV) of the
vessel and 1.375% if the outstanding amount is above 60% of the FMV of the
vessel. The outstanding portion of this loan as of June 30, 2006 is $14.0
million.
Salina
Shipholding Corp. (the owner m/v
Artemis
)
entered
into a loan agreement with Caylon amounting to $15.5 million which was drawn
on
December 28, 2005. The loan is payable in ten consecutive semi-annual
installments consisting of six installments of $1.75 million each and four
installments of $0.65 million each and a balloon payment of $2.4 million
payable
with the final installment in January 2011. The first installment is due
in June
2006. The interest is based on LIBOR plus a margin that ranges between 0.9-1.1%,
depending on the asset cover ratio. The outstanding amount of this loan as
of
June 30, 2006 is $13.75 million.
Xenia
International Corp. (the owner of m/v
Tasman
Trader
)
entered
into a loan agreement with Fortis Bank N.V./S.A., Athens Branch amounting
to
$8.25 million which was drawn on June 30, 2006. The loan is payable in twenty
three consecutive quarterly installments consisting of $0.265 million each
and a
balloon payment of $2.155 million payable with the final installment in March
2012. The first installment was due in September 2006. The interest is based
on
LIBOR plus a margin of 0.95%.
Prospero
Maritime Inc. (the owner of the m/v
Aristides
N.P.
)
entered
into a loan agreement with Caylon in the amount of $15.5 million dated August
30, 2006. The loan is payable in 14 consecutive semi-annual installments
in the
following amounts: (a) in the case of the first and second installments,
$1.2
million each; (b) in the case of the third installment, $1.0 million; (c)
in the
case of the fourth to fourteenth installments, $0.825 million, and a balloon
payment payable together with the 14th installment in the amount of $3.025
million. The first installment is due in March 2007. The interest is based
on
LIBOR plus a margin that ranges between 0.9-1.1%, depending on the asset
cover
ratio.
Xingang
Shipping Ltd. (the owner of the m/v
YM
Xingang I
)
entered
into a loan agreement with HSBC Bank plc in the amount of $20.0 million
dated
November 14, 2006.
The
loan
is payable in eight consecutive quarterly installments of $1.0 million
each,
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 last installment in November 2013. The first
installment is due in February 2007. The interest is based on LIBOR plus
a
margin of 0.935%.
The
loan
agreements contain ship finance covenants, including restrictions as to changes
in management and ownership of the vessels, distribution of dividends or
any
other distribution of profits or assets, additional indebtedness and mortgaging
of vessels without the lender’s prior consent, the sale of vessels, as well as
minimum requirements regarding the hull ratio cover. We are not in default
of
any credit facility covenant as of November 15, 2006.
Dividend
Policy
Dividends
on our convertible preferred stock will be cumulative from the date
of issuance
until the mandatory conversion date and, to the extent we are legally
permitted to pay dividends and our Board of Directors declares a dividend
payable, we will pay dividends on the convertible preferred stock in
cash in the
minimum amount of $ per share, payable quarterly
in arrears. Dividends on the convertible preferred stock will be payable
on
,
,
and of
each year to holders of record of the convertible preferred stock on
the
immediately
preceding
,
,
and
. Our first dividend on the convertible preferred stock will be
a partial dividend, which will accrue from the date of issuance until
December 31, 2006.
In
addition, we also currently intend to pay regular cash dividends
on our common
stock on a quarterly basis. To the extent we declare any quarterly
dividends on
our common stock in excess of the amount declared on our convertible
preferred
stock, we will also pay such excess amount to holders of our convertible
preferred stock. Any excess operating cash flow may be used to pay
additional
dividends, fund our growth or repay Company debt, as determined by
our Board of
Directors. On November 9, 2006 we declared a dividend on our common
stock in the
amount of $0.21 per share which is payable on or about December 15,
2006 to all
common shareholders of record as of December 8, 2006. We expect to
declare our
next dividend in February 2007.
The
timing and amount of dividend payments will be dependent upon our earnings,
financial condition, cash requirement and availability, restrictions in its
loan
agreements, growth strategy, charter rates in the drybulk and container shipping
industry, the provisions of Marshall Islands law affecting the payment of
distributions to shareholders and other factors, such as the acquisition of
additional 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.
Tabular
Disclosure of Contractual Obligations
Contractual
Obligations and Commitments
Contractual
obligations are set forth in the following table as of September 30,
2006:
(In
thousands of U.S. dollars)
|
|
Total
|
|
Less
Than
One
Year
|
|
One
to Three Years
|
|
Three
to
Five
Years
|
|
More
Than
Five
Years
|
|
Bank
debt
|
|
$
|
58,910
|
|
$
|
14,390
|
|
$
|
21,590
|
|
$
|
13,920
|
|
$
|
9,010
|
|
Interest
Payment (1)
|
|
$
|
11,009
|
|
$
|
3,576
|
|
$
|
4,429
|
|
$
|
2,271
|
|
$
|
734
|
|
Management
fees (2)
|
|
$
|
12,394
|
|
$
|
2,311
|
|
$
|
4,868
|
|
$
|
5,215
|
|
$
|
-
|
|
(1)
Assuming the amortization of the loan described above and an estimated average
effective LIBOR of 5.5% for all the periods shown in the table and margin over
LIBOR ranging from 90 basis points to 160 basis points as the case for each
loan
might be.
(2)
Refers to our obligation for our subsidiaries’ management fees of €610 per day
per vessel (or $773.5), as adjusted annually for inflation, for the eight
vessels owned by Euroseas at September 30, 2006 under our new master management
agreement as of October 1, 2006. We have assumed no change in the number of
vessels, an inflation rate of 3.5% per year and no changes in this U.S. Dollar
to Euro exchange rate.
Contractual
obligations are set forth in the following table as of June 30,
2006:
(In
thousands of U.S. dollars)
|
|
Total
|
|
Less
Than
One
Year
|
|
One
to Three Years
|
|
Three
to
Five
Years
|
|
More
Than
Five
Years
|
|
Bank
debt
|
|
$
|
47,120
|
|
$
|
13,840
|
|
$
|
19,260
|
|
$
|
11,070
|
|
$
|
2,950
|
|
Interest
Payment (1)
|
|
$
|
7,392
|
|
$
|
2,798
|
|
$
|
3,155
|
|
$
|
1,309
|
|
$
|
130
|
|
Management
fees (2)
|
|
$
|
8,169
|
|
$
|
2,009
|
|
$
|
4,229
|
|
$
|
1,931
|
|
$
|
-
|
|
(1)
Assuming the amortization of the loan described above and an estimated average
effective LIBOR of 5.5% for all the periods shown in the table and margin over
LIBOR ranging from 95 basis points to 160 basis points as the case for each
loan
might be.
(2)
Refers to our obligation for our subsidiaries’ management fees of €610 per day
per vessel (or $773.5) as adjusted on February 1, 2006 to account for inflation
in Greece during 2005, and as further adjusted annually for inflation on
February 1
st
of each
year, for the eight vessels owned by Euroseas at June 30, 2006 under our
management agreements at the time. We have assumed no change in the number
of
vessels other than the delivery of m/v
John
P
to its
buyers on July 5, 2006, an inflation rate of 3.5% per year and no changes in
this U.S. Dollar to Euro exchange rate.
|
Contractual
obligations are set forth in the following table as of December 31,
2005:
|
(In
thousands of U.S. dollars)
|
|
Total
|
|
Less
Than
One
Year
|
|
One
to Three Years
|
|
Three
to
Five
Years
|
|
More
Than
Five
Years
|
|
Bank
debt
|
|
$
|
48,560
|
|
$
|
14,430
|
|
$
|
23,630
|
|
$
|
8,600
|
|
$
|
1,900
|
|
Interest
Payment (1)
|
|
$
|
7,242
|
|
$
|
2,910
|
|
$
|
3,215
|
|
$
|
1,061
|
|
$
|
57
|
|
Management
fees (2)
|
|
$
|
10,299
|
|
$
|
2,326
|
|
$
|
4,900
|
|
$
|
3,073
|
|
|
—
|
|
|
(1)
|
Assuming
the amortization of the loan described above and an estimated average
effective interest rate based on an underlying assumption for LIBOR
of
5.50% and margin over LIBOR ranging from 110 basis points to 160
basis
points as the case for each loan might
be.
|
|
(2)
|
Refers
to our obligation for management fees of €590 (approximately $748 based on
a U.S. Dollar exchange rate of €1.00 = U.S.$1.268 as in effect on
September 29, 2006) for the eight vessels owned by Euroseas at December
31, 2005 under our management agreements at the time, which expire
on
January 31, 2010. 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.
|
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 and container shipping industry is a capital intensive
industry, requiring significant amounts of investment. Much of this investment
is provided in the form of long term debt. Our debt usually contains interest
rates that fluctuate with LIBOR. We do not use 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
June 30, 2006, we had $47.1 million of floating rate debt outstanding with
margins over LIBOR ranging from 0.95% 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 three-month
period to June 30, 2006 by approximately $0.1 million assuming that the
current debt level was the same throughout the quarter.
In
March
of 2004, we entered into an interest rate swap agreement on a notional amount
of
$3.0 million. Under this swap agreement, we receive interest based on the
3-month LIBOR rate and we pay based on 1.10% fixed rate if the 1-year LIBOR
remains below 4.02%: otherwise we pay the 1-year LIBOR rate. This agreement
was
terminated in October 2005.
The
following table sets forth the impact on interest expense of a 100 basis points
increase in LIBOR during the next five years:
Twelve
Months Ended June 30,
|
|
Amount
(thousand
US$)
|
|
|
|
|
|
2007
|
|
$
|
418
|
|
2008
|
|
|
296
|
|
2009
|
|
|
178
|
|
2010
|
|
|
126
|
|
2011
and thereafter
|
|
|
93
|
|
On
September 4, 2006, we drew down $15.5 million under our loan agreement signed
on
August 29, 2006 to finance our acquisition of m/v
Aristides
N.P.
This
increased the impact on interest expense of a 100 basis points increases in
LIBOR by approximately: $113,000 until June 30, 2007; $132,000 year ended June
30, 2008; $113,000 year ended June 30, 2009; $96,000 year ended June 30, 2010;
and $200,000 for 2011 and thereafter.
On
November 15, 2006, we drew down $20.0 million under our loan agreement
to
finance our acquisition of m/v
YM
Xingang I
.
This
increased the impact on interest expense of a 100 basis points increases
in
LIBOR by approximately: $97,500 until June 30, 2007; $165,000 year ended
June
30, 2008; $126,000 year ended June 30, 2009; $94,000 year ended June 30,
2010;
and $207,500 for 2011 and thereafter.
Foreign
Exchange Rate Risk
The
international drybulk and container shipping industry’s functional currency is
the U.S. dollar. We generate all of our revenues in U.S. dollars, but incur
approximately 28% of our vessel operating expenses in currencies other than
U.S.
dollars. In addition, our management fee is denominated in euros (€590 per
vessel per day in 2004 and 2005 and €610 or $773.50 per vessel per day, adjusted
annually for inflation, as of February 1, 2006). At June 30, 2006, approximately
27% of our outstanding accounts payable were denominated in currencies other
than the U.S. dollar, mainly in Euros. We do not make use of 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 six month period ending June
30,
2006 were $2,007.
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.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated condensed financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles,
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 shipowners. We use a depreciable life of 25 years for all of our vessels
except one which has already reached an age of 29 years and continues to be
employed. This vessel, m/v
Ariel
,
is
fully depreciated and carried no depreciation charge in 2004, 2005 or the first
six months ended June 30, 2006. 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 lightweight ton to better reflect market price
developments in the scrap metal market. 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.
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 hiring riding crews to perform specific
tasks determined by us in accordance with the requirements of the classification
society in connection with the drydocking and parts used in performing such
tasks, 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 have 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.
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.
Recent
Accounting Pronouncements
In
January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
“Consolidation of Variable Interest Entities,” which clarified the application
of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to
address perceived weaknesses in accounting for entities commonly known as
special-purpose or off-balance sheet entities. It provides guidance for
identifying the party with a controlling financial interest resulting from
arrangements or financial interests rather than voting interests. It requires
consolidation of Variable Interest Entities (“VIEs”) only if those VIEs do not
effectively disperse the risks and benefits amount the various parties involved.
On December 24, 2003, the FASB issued a complete replacement of FIN 46 (“FIN
46R”), which clarified certain complexities of FIN 46. FIN 46R is applicable for
financial statements issued for reporting periods that end after March 5, 2004.
The Company has reviewed FIN 46R and determined that the adoption of the
standard does not have a material impact on the financial
statements.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share Based Payments
(SFAS 123R). This statement eliminates the option to apply the intrinsic value
measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees” to stock compensation awards issued
to employees. Rather, SFAS 123R requires companies to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost will be recognized over
the
period during which an employee is required to provide services in exchange
for
the award-the requisite service period (usually the vesting period). SFAS No.
123R applies to all awards granted after the required effective date, as of
the
beginning of the first interim or annual reporting period that begins after
June
15, 2005, and to awards modified, repurchased, or cancelled after that date.
SFAS 123R will be effective for our fiscal year 2006. The Company does not
anticipate that the implementation of this standard does not have a material
impact on its financial position, results of operations or cash
flows.
On
December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary Assets,
an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions
(“FAS 153”). This statement amends APB Opinion No. 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces it with
a
general exception for exchanges of non-monetary assets that do not have
commercial substance. Under SFAS No. 153, if a non-monetary exchange of similar
productive assets meets a commercial-substance criterion and fair value is
determinable, the transaction must be accounted for at fair value resulting
in
recognition of any gain or loss. SFAS No. 153 is effective for non-monetary
transactions in fiscal periods that begin after June 15, 2005. The Company
does
not anticipate that the implementation of this standard does not have a material
impact on its financial position, results of operations or cash
flows.
FASB
has
issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement
of
APB Opinion No. 20 and SFAS No. 3. The Statement applies to all voluntary
changes in accounting principle, and changes the requirements for accounting
for
and reporting of a change in accounting principle.
SFAS
No.
154 requires retrospective applications to prior periods’ financial statements
of a voluntary change in accounting principle unless it is impracticable. APB
Opinion No. 20 previously required that most voluntary change in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS No.
154
improves financial reporting because its requirements enhance the consistency
of
financial information between periods. The Company is analyzing the effect
which
this pronouncement will have on its financial condition, statement of
operations, and cash flows. This statement is effective for the Company on
January 1, 2006. The statement did not have an effect on the Company’s financial
condition, results of operation or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” This Statement amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” and resolves issues addressed in Statement 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.”
SFAS
No.
155 permits fair value re-measurement for any hybrid financial instruments
that
contains an embedded derivative that otherwise would require bifurcation and
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133. SFAS No. 155 establishes a requirement
to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. SFAS No. 155 also
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition
on
a qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument.
SFAS
No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
The Company has not completed the study of what effect SFAS No. 155 will have
on
its financial position and results of operations.
On
March
29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating to the
FASB accounting standard for stock options and other share-based payments.
The
interpretations in SAB No. 107, “Share-Based Payment,” (SAB 107) express views
of the SEC Staff regarding the application of SFAS No. 123 (revised 2004),
“Share-Based Payment” (Statement 123R). Among other things, SAB 107 provides
interpretive guidance related to the interaction between Statement 123R and
certain SEC rules and regulations, as well as provides the Staff’s views
regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will have
any effect on its financial position, results of operations or cash
flows.
In
March
2005, the FASB issued FASB Interpretation No. (“FIN”) 47 “Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143”, which clarifies the term “conditional asset retirement obligation” as
used in SFAS No. 143 “Accounting for Asset Retirement Obligations”.
Specifically, FIN 47 provides that an asset retirement obligation is conditional
when either the timing and (or) method of settling the obligation is conditioned
on a future event. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. Uncertainty about the timing
and (or) method of settlement of a conditional asset retirement obligation
should be factored into the measurement of the liability when sufficient
information exists. This interpretation also clarifies when an entity would
have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective for fiscal years ending after
December 15, 2005. This statement did no have an impact on the Company’s
financial position and results of operations.
In
March
2006, the FASB issued SFAS No. 156 Accounting for Servicing of Financial
Assets—an amendment of FASB Statement No. 140. The Statement provides a single
definition of fair value, together with a framework for measuring it, and
requires additional disclosure about the use of fair value to measure assets
and
liabilities. Statement 157 also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and sets out a fair value
hierarchy with the highest priority being quoted prices in active markets.
Under
the Statement, fair value measurements are disclosed by level within that
hierarchy. The Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. This statement will be effective for the Company on January 1, 2008.
The
Company does not believe that this pronouncement will have an effect on its
financial position, results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. This statement will be effective
for the Company on January 1, 2008. The Company does not believe that this
pronouncement will have an effect on its financial position, results of
operations or cash flows.
On
September 13, 2006, the SEC released SAB No. 108, which provides guidance on
materiality. SAB No. 108 states that registrants should use both a balance
sheet
(iron curtain) approach and an income statement (rollover) approach when
quantifying and evaluating the materiality of a misstatement, contains guidance
on correcting errors under the dual approach, and provides transition guidance
for correcting errors existing in prior years. If prior-year errors that had
been previously considered immaterial (based on the appropriate use of the
registrant’s prior approach) now are considered material based on the approach
in the SAB, the registrant need not restate prior period financial statements.
SAB No. 108 is effective for annual financial statements covering the first
fiscal year ending after November 15, 2006. This statement will be effective
for
the Company for the fiscal year ending December 31, 2006. The Company is
currently evaluating the effect that adoption of SAB No. 108 will have on its
financial position and results of operations.
THE
INTERNATIONAL DRYBULK AND CONTAINER SHIPPING INDUSTRY
The
information and data in this section relating to the international drybulk
and
container shipping industry has been provided by Maritime Strategies
International Ltd., or MSI, and is taken from MSI databases and other sources
available in the public domain. MSI has advised us that it accurately describes
the international drybulk and container shipping industry, subject to the
availability and reliability of the data supporting the statistical and
graphical information presented. MSI’s methodologies for collecting information
and data, and therefore the information discussed in this section, may differ
from those of other sources, and does not reflect all or even necessarily a
comprehensive set of the actual transactions occurring in the drybulk and
container shipping industry.
Trends
in the International Drybulk Shipping Market
Introduction
Overview
The
international drybulk shipping industry provides seaborne transportation of
drybulk commodities for related industries. The most important of these
commodities are iron ore, coal and grains which together account for an
estimated 75% of total trade. Other key cargoes, commonly referred to as minor
bulks, include agricultural products (e.g. fertilizers), steel products, forest
products, metals, cement and a wide range of other minerals. Shipping companies
provide seaborne transportation to customers that include power utilities,
steelmakers, grain houses, commodity traders and government agencies. In recent
years there has been a substantial increase in the use of commodities
transported in drybulk. In 2005, the amount of cargo transported by the industry
was estimated to have exceeded 2.2 billion metric tons - an increase of over
9%
over the previous year and almost 30% since 2000.
Freight
This
is
the primary source of revenue to a shipping company. The freight rate of
transporting drybulk commodities can be volatile and is related to demand for
and supply of drybulk carriers. Demand for vessels is influenced by many
factors, but particularly by economic activity and changes in production,
consumption, inventories and prices of the commodities mentioned above and
their
substitutes (if any). The distances over which commodities are transported
is
also a key determinant of shipping demand. Drybulk carrier supply is influenced
by newbuildings (or additions to the existing fleet), the scrapping of older
vessels, the drydocking (for maintenance or storage) of existing bulk carriers
and other efficiency factors such as port delays and the speed at which vessels
travel.
Freight
is paid when a customer charters a vessel for a specified period of time
or to
carry a specific cargo. The charter market is highly competitive as shipping
companies compete on the offered freight rate, the location, technical
specification and quality of the vessel and the reputation of the vessel's
manager. Typically, the contractual agreement between the shipping company
and
the customer, known as a charterparty, is based on standard industry terms.
A
vessel
is usually chartered under a voyage charter or a time charter. A voyage charter
is a contract to carry a specific cargo between two ports for an agreed rate
per
ton of cargo carried. Under voyage charters, the shipowner pays voyage expenses
such as port, canal and fuel costs. A time charter is a contract to charter
a
vessel for an agreed period of time at a set daily rate. Under time charters,
the charterer pays for the voyage expenses and decides what ports the vessel
should go. A spot charter is a voyage charter or a time charter that is fixed
for just one trip. A period charter is a longer term time charter. Of course,
a
vessel can carry cargoes on behalf of its own owner like in a case of a steel
mill, or, in case its owner has secured a cargo transportation contract
(“Contract or Affreighment” or “COA”). Variations of the above mentioned
employment types are bareboat charters or shipping pools (please refer to
“Glossary of Shipping Terms” for definitions).
Fleet
Ownership
International
seaborne drybulk transportation services are primarily provided by independent
shipowners, in contrast to the tanker industry where many oil companies also
have their own fleets. As a result ownership of the fleet is highly fragmented,
with no single shipowner controlling more than 5% of the global drybulk carrier
fleet.
The
size
of a drybulk carriers can be from several hundred tons of cargo carrying
capacity (“deadweight tons” or “dwt”) to 300,000 dwt or more. The oceangoing
fleet is considered to be from 10,000 dwt and up as smaller vessels are
generally employed in local trades. The drybulk carriers are generally grouped
in 4 size sectors: Capesize, from 80,000 dwt and above; Panamax, from 60,000
to
79,999 dwt; Handymax, from 40,000 to 59,999 dwt, and, Handysize, from 10,000
to
39,999 dwt.
Drybulk
Carrier Demand
Overview
The
amount of cargo transported in drybulk carriers is governed by demand for the
various commodities, which is affected by international economic activity,
regional imbalances between domestic production and consumption, commodity
prices and inventories. In addition to the volume of cargo, drybulk carrier
demand is driven by the average distance required to transport it from
commodity-producing locations to commodity-consuming destinations. Demand can
be
expressed in “ton-miles”, measured as the product of (a) the amount of cargo
transported, multiplied by (b) the distance over which it is
transported.
The
mile
component is generally the most variable element of ton-mile demand. Seaborne
trading distances for commodities are determined principally by the location
of
production and their efficient distribution for processing and consumption.
To
illustrate the importance of this consider that a ton of ore carried from Brazil
to China generates roughly 2 to 3 times the demand for sea transport as the
same
amount of ore shipped from Australia. Trading patterns are sensitive both to
major geopolitical events and to small shifts, imbalances and disruptions in
all
stages of production and processing through to end-use. Seaborne transportation
distances are also influenced by infrastructural factors, such as the
availability of canal ‘shortcuts’ and capacity at ports and inland distribution.
The following chart outlines seaborne trade in drybulk commodities from 1980
to
2005.
SEABORNE
DRYBULK TRADE
Seaborne
drybulk trade has grown by a compound annual rate of 3% per annum since 1980,
but in the last 5 years growth has risen to over 5% per annum. The acceleration
in trade in recent years has been driven primarily by China, whose economic
growth averaged 10% per annum from 2003-2005. China’s entry into the World Trade
Organisation in 2001 caused a large increase in investment funds flowing into
the country as foreign manufacturers sought to benefit from lower wage costs
and
the future prospects of a large consumer market. China’s growth helped foster a
wider rebound in the other Asian economies, particularly Japan, Korea and
Taiwan. As a result there has been substantial growth of drybulk trade to and
from the Pacific region, for a number of key commodities.
Steel
industry related trades, mainly iron ore and metallurgical coal used in the
production of steel and steel products, account for about 50% of the seaborne
drybulk trade. The table below shows the main drybulk commodities and the main
segments of the drybulk carrier fleet they are transported by.
Commodity
|
|
Seaborne
trade 2005
(million
tons)
|
|
Percent
of seaborne drybulk trade
|
|
Typical
Drybulk carrier segment carried by
|
Iron
Ore
|
|
710
|
|
32.1%
|
|
Capesize,
Panamax
|
Metallurgical
Coal
|
|
199
|
|
9.0%
|
|
Capesize,
Panamax
|
Thermal
Coal
|
|
500
|
|
22.6%
|
|
Capesize,
Panamax
|
Grains
|
|
292
|
|
13.2%
|
|
Panamax,
Handymax, Handysize
|
Minor
Bulks
|
|
511
|
|
23.1%
|
|
Handymax,
Handysize
|
Total
|
|
2,212
|
|
100.0%
|
|
|
Steel
& Iron Ore
Chinese
growth has been very steel-intensive, driven by construction and underpinned
by
large government infrastructure projects. Chinese production of crude steel
has
increased by a compound annual rate of 21.7% per annum from 2000 to 2005 to
339
million tons. The strength of Chinese steel consumption has also contributed
to
an export-led revival in other steel producing nations.
STEEL
PRODUCTION (Million Metric tons)
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
Compound
Annual
Growth
2000-2005
|
|
North
America
|
|
|
135
|
|
|
120
|
|
|
123
|
|
|
126
|
|
|
134
|
|
|
126
|
|
|
-1.4
|
%
|
Western
Europe
|
|
|
163
|
|
|
158
|
|
|
159
|
|
|
160
|
|
|
168
|
|
|
164
|
|
|
0.1
|
%
|
Former
Soviet Union
|
|
|
99
|
|
|
100
|
|
|
102
|
|
|
107
|
|
|
143
|
|
|
112
|
|
|
2.5
|
%
|
China
|
|
|
127
|
|
|
151
|
|
|
182
|
|
|
222
|
|
|
272
|
|
|
339
|
|
|
21.7
|
%
|
Japan
|
|
|
106
|
|
|
103
|
|
|
108
|
|
|
111
|
|
|
113
|
|
|
112
|
|
|
1.1
|
%
|
Other
Asia
|
|
|
98
|
|
|
100
|
|
|
105
|
|
|
109
|
|
|
116
|
|
|
122
|
|
|
4.5
|
%
|
Rest
of World
|
|
|
118
|
|
|
118
|
|
|
126
|
|
|
133
|
|
|
142
|
|
|
143
|
|
|
3.9
|
%
|
Total
|
|
|
846
|
|
|
850
|
|
|
905
|
|
|
968
|
|
|
1,088
|
|
|
1,118
|
|
|
5.7
|
%
|
The
steelmaking process requires 2 major commodity inputs: iron ore and coking
(or
metallurgical) coal. Although China has vast domestic reserves of both
commodities, its domestic reserves of iron ore are poor in quality (i.e. low
in
iron content) and are normally mixed with high quality imported ore. As a
result, the rapid development of steel production has had a significant impact
on Chinese iron ore imports, which have grown by a compound annual rate of
over
30% per annum over the last 5 years.
IRON
ORE IMPORTS (Million Metric tons)
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
Compound
Annual
Growth
2000-2005
|
|
Western
Europe
|
|
|
151
|
|
|
131
|
|
|
136
|
|
|
135
|
|
|
150
|
|
|
140
|
|
|
-1.4
|
%
|
China
|
|
|
70
|
|
|
92
|
|
|
111
|
|
|
148
|
|
|
208
|
|
|
275
|
|
|
31.5
|
%
|
Japan
|
|
|
131
|
|
|
125
|
|
|
132
|
|
|
132
|
|
|
135
|
|
|
132
|
|
|
0.1
|
%
|
Other
Asia
|
|
|
74
|
|
|
79
|
|
|
78
|
|
|
79
|
|
|
80
|
|
|
85
|
|
|
2.8
|
%
|
Rest
of the World
|
|
|
75
|
|
|
64
|
|
|
71
|
|
|
82
|
|
|
80
|
|
|
80
|
|
|
1.2
|
%
|
Total
|
|
|
502
|
|
|
492
|
|
|
528
|
|
|
577
|
|
|
653
|
|
|
713
|
|
|
7.3
|
%
|
CHINESE
STEEL PRODUCTION AND IRON ORE IMPORTS
Australia
and Brazil together account for approximately two thirds of global iron ore
exports. Although both have seen strong demand from China, Australia continues
to benefit the most, accounting for 30% of every extra ton of iron ore imported
by China in 2005 over 2004, compared to a corresponding figure of 20% for
Brazil. However, although Brazilian exports to China have grown more slowly,
the
contribution to ton-mile demand has been greater due to the greater distances
between origin and destination. India is also becoming a major exporter of
ore.
Unlike Australia and Brazil who tend to export primarily in the larger Capesize
vessels, much of India’s exports are in the smaller Panamax/Handymax vessel
sizes.
IRON
ORE EXPORTS (Million Metric tons)
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Compound
Annual
Growth
2000-2005
|
|
Australia
|
|
|
165
|
|
|
175
|
|
|
174
|
|
|
197
|
|
|
221
|
|
|
239
|
|
|
7.7
%
|
|
Brazil
|
|
|
160
|
|
|
156
|
|
|
170
|
|
|
184
|
|
|
201
|
|
|
223
|
|
|
6.9
%
|
|
India
|
|
|
33
|
|
|
41
|
|
|
55
|
|
|
57
|
|
|
63
|
|
|
81
|
|
|
19.7
%
|
|
Africa
|
|
|
33
|
|
|
34
|
|
|
35
|
|
|
34
|
|
|
36
|
|
|
38
|
|
|
3.2
%
|
|
Rest
of the World
|
|
|
115
|
|
|
102
|
|
|
110
|
|
|
123
|
|
|
123
|
|
|
135
|
|
|
3.3
%
|
|
Total
|
|
|
506
|
|
|
507
|
|
|
544
|
|
|
595
|
|
|
644
|
|
|
717
|
|
|
7.2
%
|
|
Coal
Asia’s
rapid industrial development has also contributed to strong demand for coal,
which accounted for roughly a third of the total growth of seaborne bulk trade
between 2000 and 2005. Coal is usually divided into two categories: thermal
coal
(or steam coal), used in power stations, and metallurgical coal (coking coal)
used as an input by the steel industry.
Expansion
in air-conditioned office and factory space, along with industrial use, has
raised demand for electricity, of which nearly half is generated from coal-fired
plants, thus increasing demand for thermal coal. In addition, Japan’s domestic
nuclear power generating industry has suffered from safety problems in recent
years, resulting in the temporary closure of a number of nuclear power reactors
and leading to increased demand for oil, gas and coal-fired power generation.
Furthermore the high cost of oil and gas has lead to increasing development
of
coal fired electricity plants across the world, especially in Asia. Thermal
coal
represents the majority of the total coal trade (72% in 2005) and by itself
accounted for 28% of the growth of total seaborne dry bulk trade between 2000
and 2005.
Metallurgical,
or coking coal, accounted for 9% of seaborne trade in 2005. Future prospects
are
heavily tied to the steel industry. It is used within the blast furnace to
impart its carbon into the iron, giving the final steel product more strength
and flexibility. Because coking coal is of higher quality than thermal coal
(i.e. more carbon and less impurities), its price is higher and its trade more
volatile.
COAL
IMPORTS (Million Metric tons)
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Compound
Annual
Growth
2000-2005
|
|
Western
Europe
|
|
|
184
|
|
|
198
|
|
|
190
|
|
|
206
|
|
|
226
|
|
|
252
|
|
|
6.5%
|
|
Japan
|
|
|
145
|
|
|
156
|
|
|
159
|
|
|
166
|
|
|
179
|
|
|
181
|
|
|
4.5%
|
|
Other
Asia
|
|
|
21
|
|
|
25
|
|
|
39
|
|
|
45
|
|
|
53
|
|
|
39
|
|
|
12.8%
|
|
Rest
of the World
|
|
|
256
|
|
|
272
|
|
|
278
|
|
|
302
|
|
|
314
|
|
|
329
|
|
|
5.1%
|
|
Total
|
|
|
607
|
|
|
652
|
|
|
665
|
|
|
719
|
|
|
773
|
|
|
801
|
|
|
5.7%
|
|
Australia
is the world’s dominant exporter of coal, accounting for approximately 30% of
global exports. However, Indonesia has increased its exports in recent years,
becoming a good source for business for Panamax/Handymax vessels. Growth in
Indonesian exports has been very strong with compound annual growth of 15.9%
between 2000 and 2005.
COAL
EXPORTS (Million Metric tons)
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Compound
Annual
Growth
2000-2005
|
|
North
America
|
|
|
84
|
|
|
73
|
|
|
60
|
|
|
64
|
|
|
70
|
|
|
70
|
|
|
-3.6%
|
|
Colombia
|
|
|
36
|
|
|
38
|
|
|
35
|
|
|
44
|
|
|
51
|
|
|
55
|
|
|
8.9%
|
|
South
Africa
|
|
|
70
|
|
|
69
|
|
|
70
|
|
|
71
|
|
|
68
|
|
|
72
|
|
|
0.6%
|
|
China
|
|
|
55
|
|
|
91
|
|
|
84
|
|
|
94
|
|
|
87
|
|
|
66
|
|
|
3.8%
|
|
Indonesia
|
|
|
57
|
|
|
66
|
|
|
73
|
|
|
89
|
|
|
105
|
|
|
119
|
|
|
15.9%
|
|
Australia
|
|
|
187
|
|
|
194
|
|
|
204
|
|
|
215
|
|
|
225
|
|
|
234
|
|
|
4.6%
|
|
Rest
of World
|
|
|
97
|
|
|
98
|
|
|
116
|
|
|
123
|
|
|
149
|
|
|
167
|
|
|
11.3%
|
|
Total
|
|
|
586
|
|
|
630
|
|
|
643
|
|
|
700
|
|
|
754
|
|
|
783
|
|
|
6.0%
|
|
Grains
Wheat
and
coarse grains are primarily used for direct human consumption or as feed for
livestock. International trade fluctuates considerably. Grains have a long
history of price volatility, government interventionism and weather conditions
which strongly impact trade volumes. In 2005, adverse weather impacted wheat
and
corn harvests in many of the world’s major growing regions and production fell
roughly 3% from 2004, causing total trade to decline by 1%. Soyabean trade
has
risen rapidly in recent years as demand for animal feed and vegetable oil has
increased. However, demand growth for wheat and course grains is fundamentally
linked in the long term to population growth and rising per capita income.
With
Asia experiencing rapid economic growth and increasing standards of living,
it
is expected that meat consumption will increase, leading to rising demand for
animal feed.
WHEAT
AND COARSE GRAINS IMPORTS (Million Metric tons)
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Compound
Annual
Growth
2000-2005
|
|
Latin
America
|
|
|
41
|
|
|
37
|
|
|
35
|
|
|
34
|
|
|
34
|
|
|
34
|
|
|
-3.6%
|
|
Europe/Former
Soviet Union
|
|
|
21
|
|
|
26
|
|
|
32
|
|
|
30
|
|
|
19
|
|
|
17
|
|
|
-4.0%
|
|
Africa
|
|
|
39
|
|
|
39
|
|
|
40
|
|
|
35
|
|
|
44
|
|
|
42
|
|
|
1.4%
|
|
Middle
East
|
|
|
28
|
|
|
28
|
|
|
26
|
|
|
23
|
|
|
27
|
|
|
28
|
|
|
-0.3%
|
|
Japan
|
|
|
26
|
|
|
26
|
|
|
26
|
|
|
26
|
|
|
25
|
|
|
25
|
|
|
-0.6%
|
|
Other
Asia
|
|
|
34
|
|
|
34
|
|
|
35
|
|
|
35
|
|
|
34
|
|
|
34
|
|
|
0.2%
|
|
Rest
of World
|
|
|
15
|
|
|
19
|
|
|
18
|
|
|
19
|
|
|
26
|
|
|
21
|
|
|
6.7%
|
|
Total
|
|
|
204
|
|
|
209
|
|
|
211
|
|
|
201
|
|
|
209
|
|
|
201
|
|
|
-0.3%
|
|
International
trade in grains is dominated by 4 key exporting regions; North America, Latin
America, Oceania and Europe, including the Former Soviet Union which together
account for over 90% of global exports. Large importers are typically North
Africa (Egypt), the Middle East and more recently India.
WHEAT
AND COARSE GRAINS EXPORTS (Million Metric tons)
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Compound
Annual
Growth
2000-2005
|
|
North
America
|
|
|
104
|
|
|
99
|
|
|
80
|
|
|
105
|
|
|
98
|
|
|
108
|
|
|
0.8%
|
|
Latin
America
|
|
|
30
|
|
|
26
|
|
|
24
|
|
|
27
|
|
|
30
|
|
|
20
|
|
|
-7.9%
|
|
Europe/Former
Soviet Union
|
|
|
37
|
|
|
47
|
|
|
67
|
|
|
29
|
|
|
48
|
|
|
52
|
|
|
6.8%
|
|
Oceania
|
|
|
22
|
|
|
22
|
|
|
13
|
|
|
22
|
|
|
21
|
|
|
22
|
|
|
0.4%
|
|
Rest
of World
|
|
|
15
|
|
|
19
|
|
|
29
|
|
|
24
|
|
|
20
|
|
|
17
|
|
|
2.1%
|
|
Total
|
|
|
208
|
|
|
213
|
|
|
215
|
|
|
207
|
|
|
217
|
|
|
219
|
|
|
1.0%
|
|
Minor
Bulks
Trade
in
minor bulks constituted approximately 25% of total seaborne trade for dry
bulk
carriers in 2005. The table below shows that compound annual growth for all
minor bulks was 2.3%, but those related to the steel and construction industries
have grown even faster. Steel scrap trade has grown the fastest as scrap
is the
key input for steel makers using the ‘electric arc furnace’ means of production.
The trade for these minor bulks is geographically widespread but the Middle
East
has been a key importer of construction inputs in recent
years.
TOTAL
SEABORNE TRADE IN SELECTED MINOR BULKS (Million Metric
tons)
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Compound
Annual
Growth
2000-2005
|
|
Steel
Scrap
|
|
|
35
|
|
|
35
|
|
|
40
|
|
|
49
|
|
|
56
|
|
|
58
|
|
|
10.5%
|
|
Steel
Products
|
|
|
184
|
|
|
193
|
|
|
205
|
|
|
211
|
|
|
234
|
|
|
241
|
|
|
5.6%
|
|
Cement
|
|
|
46
|
|
|
46
|
|
|
45
|
|
|
47
|
|
|
60
|
|
|
60
|
|
|
5.5%
|
|
Bauxite
|
|
|
53
|
|
|
51
|
|
|
55
|
|
|
63
|
|
|
67
|
|
|
69
|
|
|
5.6%
|
|
Total
Minor Bulks
|
|
|
456
|
|
|
454
|
|
|
463
|
|
|
483
|
|
|
495
|
|
|
511
|
|
|
2.3%
|
|
Drybulk
Carrier Supply
Overview
The
supply of drybulk shipping capacity is measured by the amount of suitable
deadweight tons (dwt) available to transport cargo. This depends on the
aggregate tons of the existing world fleet, deliveries of newbuildings,
scrapping of older vessels, and the number of vessels undergoing maintenance,
repairs, inspection, or otherwise unavailable for use. The decision to order
newbuildings or scrap older vessels is influenced by many factors, including
prevailing and expected charter rates, newbuilding and scrap prices, and
availability of delivery dates and government and industry regulation of
seaborne transportation practices.
Port
and
inland infrastructure developments in key load and discharge areas (particularly
for iron ore and coal) have struggled to keep pace with strong growth in
seaborne trade of drybulk commodities from 2003 to 2006. This has resulted
in
escalating port congestion and increased the time spent by vessels waiting
to
berth. As the time required to complete a single vessel voyage has increased,
the number of vessels required has also risen, contributing to higher freight
rates.
Newbuildings
In
general, it takes from 18 to 36 months from the date of placing a newbuilding
contract to the date a shipowner takes delivery of the vessel. During the last
three to four years, the high levels of vessel orderbook have resulted in the
average delivery lag being about three years and in some instances even larger.
Vessels are constructed at shipyards of varying size and technical
sophistication. Bulk carriers are generally considered to be the least
technically sophisticated vessels (although there are many clear exceptions
to
this rule) and as such tend to be those where the shipyards can extract the
smallest margin for their construction.
The
price
of newbuildings is linked to the level of demand for and supply of shipyard
space, the cost of steel, labour and other factors. Generally, a shipyard can
build most types of ships hence the price for drybulk carriers is influenced
by
the orderbook of all ship types. High newbuilding ordering activity in a
particular sector is typically driven by high freight rates in that sector.
As
of September 2006, the total drybulk orderbook stood at 70.3 million tons
representing 20% of the existing fleet. The existing orderbook is to be
delivered over the next 3-4 years.
Scrapping
Scrapping
(demolition) is a function of the freight market and the size of the fleet
which
is “over-aged”, usually considered to included vessels 25 years or older.
However, the scrap age of a vessel depends on its size: the scrap age of
smaller
vessels like handysize and handymax carriers tends to be longer than the
scrap
age of larger ones like capsize carriers. The larger the pool of over-aged
vessls, the higher the increase in scrapping during a freight market downturn.
At times of high freight rates, scrapping is rare since shipowners prefer
to
extend the trading life of vessels to earn more freight. Demolition is carried
out by teams of breakers with blow-torches, oxy-acetylene steel cutters,
etc
once the vessel has been purposefully beached. The scrap value of the vessel
depends on the local steel price, the quality and the amount of steel
recoverable from the vessel (“lightweight”, or, “lwt”). Since the beginning of
2004, the scrap price per ton has fluctuated between $300 and $400 per ton
of
steel. For example, a panamax drybulk carrier of about 70,000 dwt typically
has
10-12,000 tons of lightweight; such a vessel if when scrapped gets $350 per
lightweight ton would fetch $3.5 - $4.2 million.
The
graph
below shows that in recent years the average age at which vessels have been
scrapped has increased dramatically. It also shows that smaller vessels tend
to
have considerably longer trading lives.
AVERAGE
SCRAPPING AGE OF DRY BULK CARRIERS
Drybulk
Carrier Sectors
While
there is no standard definition, drybulk carriers are commonly categorised
into
the following size sectors:
DRYBULK
CARRIER SECTORS as at 01/09/2006
|
|
|
|
Number
of
Vessels
|
|
Deadweight
Capacity
|
Segment
|
|
Size
Range (Dwt)
|
|
Total
|
|
Share
(%)
|
|
|
|
Share
(%)
|
Capesize
|
|
|
|
|
|
|
|
|
|
|
Panamax
|
|
|
|
|
|
|
|
|
|
|
Handymax
|
|
|
|
|
|
|
|
|
|
|
Handysize
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
10,000
and above
|
|
5,919
|
|
100%
|
|
349.8
|
|
100%
|
The
table
above provides information concerning the number of vessels and deadweight
capacity of each of these market sectors. Although the majority of capacity
in
number of ships falls into the smaller Handysize and Handymax sectors, over
half
the fleet’s deadweight carrying capacity falls into the larger Panamax and
Capesize sectors.
The
Capesize Sector
The
Capesize sector constitutes 36.5% of the drybulk carrier fleet’s total
deadweight capacity. These vessels are principally designed to provide economies
of scale, as innovations in handling technology tend to favour larger units.
But
the size restrictions of specific ports or trade routes are often taken into
consideration as well - hence, the “Newcastlemax” or “Dunkirkmax” designs of
Capesize bulk carriers. Over half the Capesize bulk carrier fleet falls into
the
160,000 to 200,000 dwt size range, which is capable of passing through the
Suez
Canal.
Capesize
bulk carriers are deployed almost exclusively on the major coal and iron ore
trades. Until the early 1990s, the Atlantic and Pacific Capesize markets were
separate and heavily reliant on long term contracts (though smaller Capesize
vessels, often elderly, were sometimes spot chartered in the Atlantic). As
Rotterdam expanded its capacity, and US draft restricted coal exports gave
way
to increasing Latin American and South African shipments, larger Capesize
vessels began to gain a foothold in the Atlantic. Heightened competition between
suppliers led to longer haul inter-ocean trade. Hence, major Capesize loading
regions include the major iron exporters Brazil, Australia and India. And the
major destinations are China, Japan, Korea, and Western Europe. For coal, the
key Capesize loading areas include Australia, South Africa and
Colombia.
The
Capesize sector has benefited most from Asia’s industrial development. The rapid
expansion of Chinese steel production has lifted imports of iron ore,
principally from Australia, India and Brazil, whilst the recovery in Japanese
steelmaking has drawn imports from both Australia and Brazil.
Ownership
of the Capesize fleets is marginally more concentrated compared to the smaller
vessel sectors, though it is still highly fragmented. 200 shipowner or operators
control 808 Capesize vessels - an average of 4 ships per shipowner. 18 of these
companies control 10 or more Capesize vessels, at an average of 19.4 vessels
per
company, and they constitute 48% of the sector’s total deadweight capacity. 32
companies control between 5 and 9 vessels, at an average of 6.2 ships per
company, and constitute 25% of total capacity. 81 companies own just 1 Capesize
vessel and account for 9% of fleet capacity.
The
chart
below outlines the Capesize fleet by year of build, including scheduled new
deliveries. It shows that the fleet is distributed more evenly across the age
spectrum than the other sectors of the fleet, with almost no 1970s built tonnage
remaining to be scrapped. Capesizes built before 1980 constitute only 1% of
the
sector’s total deadweight capacity, while those built since 2000 constitute 38%.
The average age of the fleet at Sept 1, 2006 was 10.5 years.
The
orderbook at the beginning of September 2006 amounted to 40.8 million dwt or
32%
of the existing fleet. Actual deliveries will depend on whether shipyards alter
their delivery schedules and whether newbuilding contracts are added to the
volume of new orders placed. In practice, however, available yard berths for
new
contracts for delivery prior to 2010 are limited.
CAPESIZE
FLEET BY YEAR OF BUILD AND
SCHEDULED
NEW DELIVERIES (AS AT Sept 1
ST
2006)
Capesize
freight rates can be highly volatile and vary substantially even on a day-to-day
basis. While Capesize rates depend largely on the market fundamentals of
supply
and demand, other factors (including the cost of bunkers and port charges)
also
influence their level. Modern vessels typically earn more than older vessels
due
to fuel and other efficiencies. In addition, older vessels are prone to longer
off-hire periods, which reduce their earnings.
Capesize
spot and time charter rates increased sharply during the second half of 2003
and
reached record levels in 2004, with average spot earnings for modern vessels
briefly exceeding $100,000 per day during January 2004. Although rates
subsequently declined from that peak, they have remained well above pre-2003
historical peaks. During the second half of 2004, the Capesize freight market
underwent a revival, with average earnings briefly surpassing $100,000 per
day
once again in early December 2004. Rates then trended lower in 2005, with
a
brief surge during October and November, before a large increase in August
2006
when their average earnings reached their highest level since April
2005.
MODERN
CAPESIZE (170,000 DWT) FREIGHT RATES
The
Panamax Sector
The
Panamax sector constitutes 26% of the fleet’s total deadweight capacity. Panamax
vessels were originally designed to be the largest vessels able to transit
the
Panama Canal.
Panamaxes
mainly carry coal, grains and minor drybulk cargoes on routes where relatively
short voyage distances, limited cargo volumes or restricted port drafts
and
length of berths discourage the use of larger Capesize vessels. Key Panamax
loading areas include North America, Latin America, Africa and Asia for
coal,
and North America, Latin America and Australia for wheat and coarse grains.
Discharge areas are more uniformly distributed around the world. In recent
years, Panamax vessels have also benefited from strong iron ore trade,
as high
cargo volumes and increased port congestion have constrained the availability
of
Capesize vessels and resulted in charterers using two Panamax vessels to
transport traditional Capesize cargoes.
Ownership
of the Panamax fleet is the most fragmented of the drybulk carrier fleet
on a
vessel per company basis. As of September 1,
2006,
there were an estimated 402 shipowner or operators controlling
approximately 1,270 Panamaxes - an average of only 3.2 vessels per company.
170 of these controlled only 1 vessel each. The top 10 shipowners controlled
21%
of the sector’s deadweight capacity, while the top 20 controlled 29% of the
sector’s deadweight capacity.
The
chart
below outlines the Panamax fleet by year of build, including scheduled
new
deliveries. The chart illustrates that the age distribution is skewed
towards
the younger end of the spectrum. Panamaxes built before 1980 constitute
3% of
the sector’s total deadweight capacity, while those built since 2000 constitute
36%. The average age of the fleet at Sept 1, 2006 was approximately 11.9
years.
The
orderbook at Sept 1, 2006 amounted to 9 million dwt or 10% of the existing
fleet. Actual deliveries will depend on whether shipyards alter their delivery
schedules and whether newbuilding contracts are added to the volume of
new
orders placed. In practice, however,
available
yard berths for new contract delivery prior to 2010 are
limited.
PANAMAX
FLEET BY YEAR OF BUILD AND
SCHEDULED
NEW DELIVERIES (AS AT Sept 1
ST
2006)
Panamax
freight rates can be highly volatile and vary substantially even on a day-to-day
basis though to a lesser extent compared with Capesize freight rates. While
Panamax rates depend largely on the market fundamentals of supply and demand,
other factors (including the cost of bunkers and port charges) also influence
their level. Modern vessels typically earn more than older vessels due
to fuel
and other efficiencies. In addition, older vessels are prone to longer
off-hire
periods, which reduce their earnings.
Panamax
spot and time charter rates increased sharply during the second half of
2003 and
reached record peaks in 2004, with average spot earnings for modern vessels
exceeding $40,000 per day for most of the first quarter of 2004. Although
rates
subsequently declined from that peak, they have remained well above pre-2003
historical peaks. During the second half of 2004, the Panamax freight market
underwent a revival, with average earnings briefly surpassing $40,000 per
day
once again in late November to early December 2004. Rate then trended lower
in
2005 until August 2006 when they moved up again and average earnings touched
$29,000 per day.
MODERN
PANAMAX (75,000 DWT) FREIGHT
RATES
The
Handymax Sector
The
Handymax (40,000-59,000 dwt) is the smallest sector of the drybulk carrier
fleet, accounting for 18% of fleet deadweight capacity as of September
1,
2006.
This sector, along with the Handysizes, has the greatest diversity in cargoes
and routes. Their size and design (vessels are usually equipped with their
own
cranes, and are referred to as “geared”) makes them extremely versatile and able
to access smaller ports where size restrictions or inadequate load and discharge
facilities would exclude larger vessels.
Trading
patterns and cargoes for these types of vessel are highly diversified. Typical
cargoes include wheat and coarse grains, agricultural bulk commodities such
as
sugar and rice, fertilisers, minor ores and minerals, steel products and scrap,
forest products, and semi-processed commodities such as coke and cement. In
addition, Handymax vessels are employed on a limited number of low-volume
short-haul iron ore and coal trades, as well as those where port size or
infrastructure constraints require smaller, geared vessels.
Handymax
fleet ownership is highly fragmented, with 446 different owner operators
of the
approximately 1,330 vessels in the world Handymax fleet: an average of just
3 vessels per company. As of Sept 1, 2006, 17 companies controlled 10 ships
or
more (at an average of 22.5 ships per company), amounting to only 28.4% of
the
fleet. Another 55 companies owned 5 to 9 ships (at an average of 5.8 ships
per
company) or 25% of the fleet. 207 companies control 1 vessel each, accounting
collectively for 15% of the fleet.
The
chart
below outlines the Handymax fleet by year of build, including scheduled new
deliveries. The chart indicates that at Sept 1, 2006, approximately 5% of
the
fleet’s existing deadweight capacity was accounted for by vessels built before
1980, and these may be considered likely candidates for scrapping in the
near
future. Vessels built since 2000 constituted 42% of the existing fleet. The
average age of the fleet at Sept 1, 2006 was 11.2 years.
The
orderbook at the beginning of September 2006 amounted to 14.6 million dwt
or
22.8% of the existing fleet. Actual deliveries will depend on whether shipyards
alter their delivery schedules and whether newbuilding contracts are added
to
the volume of new orders placed.
HANDYMAX
FLEET BY YEAR OF BUILD AND
SCHEDULED
NEW DELIVERIES (AS AT SEPT 1
st
2006)
Handymax
freight rates can be volatile and fluctuate even on a day-to-day basis. While
Handymax rates depend largely on the market fundamentals of supply and demand,
other factors (including the cost of bunkers and port charges) also influence
their level. Modern vessels typically earn more than older vessels due to
fuel
and other efficiencies. In addition, older vessels are prone to longer off-hire
periods, which reduce their earnings.
Handymax
earnings increased sharply during the second half of 2003 in line with the
larger bulk carrier sectors, and reached record peaks in 2004, with average
spot
earnings for modern 45,000 dwt vessels exceeding $38,000 per day in March
2004.
During the second half of 2004, the Handymax freight market underwent a revival,
with earnings briefly surpassing $32,000 per day once again in late November
to
early December 2004. Rates then trended lower in 2005 before a rebound in
March
through September 2006 to average spot earnings of $26,000, the highest rates
since May 2005.
HANDYMAX
AVERAGE FREIGHT RATES
The
Handysize Sector
The
Handysize (10,000-39,000 dwt) sector is the largest sector of the drybulk
carrier fleet by number of vessels, accounting for 42% of the total fleet.
However, in terms of deadweight capacity, it is only marginally larger than
the
Handymax fleet with 19.4% of total capacity. Like Handymax vessels, they
are
fitted with cranes which, along with their shallow drafts, make them extremely
versatile and able to access smaller ports with less sophisticated onshore
facilities. As a result trading patterns and cargoes for these types of vessel
are highly diversified.
Handysize
vessels are generally older than Handymax. The latter have begun to replace
the
former as new developments in ship design has enabled larger vessels to be
constructed with similar drafts. Increasingly the industry is moving towards
building larger vessels to benefit from economies of scale. However this
does
not mean that smaller vessels have become obsolete, for they are less likely
to
have to travel part-laden and are often able to generate substantial
returns.
Like
the
Handymax sector, Handysize fleet ownership is highly fragmented. 815 different
shipowners control 2,511 vessels: an average of just 3 vessels per company.
As
of Sept 1, 2006, 38 companies controlled 10 ships or more (at an average
of 24.5
ships per company), amounting to only 37% of the fleet. Another 76 companies
owned 5 to 9 ships (at an average of 6.1 ships per company) or 18% of the
fleet.
450 companies control 1 vessel each, collectively accounting for 17% of the
fleet.
The
chart
below outlines the Handysize fleet by year of build, including scheduled
new
deliveries. The chart indicates that at Sept 1, 2006, approximately 28% of
the
fleet’s existing dwt capacity was accounted for by vessels built before 1980,
and these may be considered likely candidates for scrapping in the near future.
Vessels built since 2000 constituted 14% of the existing fleet. The average
age
of the fleet at Sept 1, 2006 was 20.7 years.
The
orderbook at the beginning of September 2006 amounted to 5.9 million dwt
or 9%
of the existing fleet. Actual deliveries will depend on whether shipyards
alter
their delivery schedules and whether newbuilding contracts are added to the
volume of new orders placed.
HANDYSIZE
FLEET BY YEAR OF BUILD AND
SCHEDULED
NEW DELIVERIES (AS AT SEPT 1,
2006)
Handysize
earnings increased sharply in the second half of 2003 in line with the larger
bulk carrier sectors. The 18 month time charter peaked in Feb 2004 at $22,000
per day before declining rapidly to a low of $13,000 in June of that year.
During the second half of 2004, rates rebounded and 18 month time charter
rates
in the Handysize sector peaked again in December 2004 at $21,800 per day.
Rates
then trended lower in 2005 until a recent rebound has brought rates to $16,000
their highest level since April 2005.
HANDYSIZE
ONE-YEAR TIME CHARTER RATES
Vessel
Prices
Newbuilding
Prices
Prices
for the construction of new vessels have soared in recent years and have been
sustained by an environment of high freight rates in all shipping sectors which
has spurred ordering of all ship types, limiting the availability of shipyard
berths and pushing up the prices of drybulk carriers. The first quarter of
2005
witnessed the peak of the current newbuilding price cycle. Since then prices
have fallen but remain historically high. An increase in the number of tankers
ordered in the second quarter, was responsible for the rebound in
2006.
BULK
CARRIER NEWBUILDING PRICES
Secondhand
Prices
The
second hand, or sale and purchase, market for drybulk carriers has witnessed
an
unprecedented rise in prices in the last few years as shipowners seek to
increase the size of their fleets to benefit from the rise in trade. Prices
tend
to follow the direction of the freight market.
BULK
CARRIER 10 YEAR OLD PRICES
BULK
CARRIER 15 YEAR OLD PRICES
Trends
in the Container Shipping Market
Introduction
Overview
The
international container shipping industry provides seaborne transportation
for a
wide range of manufactured goods and perishables in a unitized form and
represents an important and increasingly significant part of the global
seaborne
movement of goods. In 2005, global containerized trade (primary port
to port
cargo movements) stood at an estimated 115.00 million teu, while global
trade including transhipment was estimated at 157 million teu as shown
in the
chart below. As of
September
1 2006
,
the
global container shipping fleet contained 3,779 fully cellular container
ships
with a total standing slot capacity of 9.05 million teu, while the total
container capable fleet capacity was slighly over 11.0 million teu.
Source:
Drewry/MSI
Growth
in
the liner shipping market has been relatively rapid in comparison with
other
major shipping sectors such as tankers and bulk carriers. In the last three
years, demand for container shipping has greatly accelerated, with a compound
annual growth rate in world container trade of over 12% per annum.
This
growth has been both integral, with an increase in commodities already
carried
in containers, and plausible through a spread in the scope of containerization
to new cargoes previously carried breakbulk (both dry and
temperature-controlled) or on ro-ro vessels.
Industry
Ownership
The
range
of container ship owners is diverse, including liner companies, who are
often
significant corporate entities, and operators, who are often part of
wider
groups involved in other shipping activities. Shipowning generally requires
a
relatively high level of capital investment. Ownership of the Panamax
size and
larger ship sectors is less fragmented than the ownership of smaller
vessels.
There are several hundred operators who own only a few vessels. As a
result the
ownership is highly fragmented, with no single owner controlling more
than about
10% of the global container fleet.
Container
Ship Demand
Global
container trade is spread over a range of long-haul, regional, and
intra-regional routes. The mainlane container trades on the major East-West
routes are the world's largest in terms of volume, with the Transpacific
forming
the world's largest container trade. In addition to these trades, there are
intermediate trades on the mainlane East-West corridor serving the Middle
East
and the Indian Sub-Continent. North-South trades form the second layer of
the
global liner network, connecting the Northern hemisphere with South America,
Africa and Australasia. Additionally, there are also important intra-regional
container trades such as intra-Asia or intra-Europe.
Total
Loaded Moves
(‘000TEU)
Load
Region
|
|
1995
|
|
2000
|
|
2005
|
|
Avg.
growth per
annum
(%)
|
|
N.America
|
|
|
17,896
|
|
|
23,878
|
|
|
33,472
|
|
|
7
|
%
|
Latin
America
|
|
|
6,829
|
|
|
11,903
|
|
|
20,177
|
|
|
12
|
%
|
W.Europe
|
|
|
26,141
|
|
|
41,845
|
|
|
61,662
|
|
|
9
|
%
|
E.Europe
|
|
|
592
|
|
|
851
|
|
|
3,578
|
|
|
21
|
%
|
Africa
|
|
|
3,400
|
|
|
5,217
|
|
|
8,912
|
|
|
10
|
%
|
Middle
East
|
|
|
4,950
|
|
|
8,118
|
|
|
17,080
|
|
|
13
|
%
|
Indian
SubCont
|
|
|
2,673
|
|
|
4,591
|
|
|
7,728
|
|
|
11
|
%
|
S.E.Asia
|
|
|
18,509
|
|
|
28,067
|
|
|
45,289
|
|
|
9
|
%
|
P.R.China
|
|
|
15,083
|
|
|
29,717
|
|
|
76,291
|
|
|
18
|
%
|
Other
Asia
|
|
|
19,589
|
|
|
27,470
|
|
|
37,260
|
|
|
7
|
%
|
Oceania
|
|
|
2,770
|
|
|
3,985
|
|
|
5,750
|
|
|
8
|
%
|
World
|
|
|
118,435
|
|
|
185,640
|
|
|
317,200
|
|
|
10
|
%
|
Source:
Drewry/MSI
The
Transpacific and the Far East-Europe routes are the world's two largest
container trade routes. In recent years, Chinese trade routes have driven
most
of the increase in volumes from Asia. From 2000 to 2005 loaded exports
from
China have grown over 2.5 times. Other significant
expenses
include Latin America and Eastern Europe (incorporating FSU).
Clearly
the demand for container ship capacity is a function of the volume of traffic
on
the key trades but effective demand is also heavily dependent on trade
distance,
and the operational and trading networks. Seasonality also affects demand
with
the peak season in the 3-4 months prior to December.
Container
Ship Supply
Global
container trade is served by a large and diverse fleet of container carrying
vessels. The most significant part of this fleet is the fully cellular
container
ships, which as of
September 1,
2006
,
comprised 80% of global available teu capacity. The remainder of the container
capable fleet is comprised of a range of non-fully cellular ship types,
including Multi-Purpose/Dry Cargo Vessels (Dry Cargo), Roll-On Roll-Off
vessels
(Ro-Ros) and numerous miscellaneous vessels (Other), which often have container
carrying capacity.
The
container carrying fleet has responded to rapid demand growth. Overall
container
capable standing slot capacity expanded at a compound annual growth rate
of
approximately 8% over the previous 10 years, driven mainly by growth of
the
fully cellular container ship fleet, which has more than doubled in capacity.
As
of
September 1,
2006
,
total
capacity in the fully cellular container capable fleet was 9.05 million
teu. The capacity of the fully cellular container ship fleet has grown
at a
compound annual growth rate of over 10% per annum over the last 10
years.
Container
Capable Capacity
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
20
06
(1)
|
Vessel
Type
|
|
Mn
TEU
|
%
Share
|
|
Mn
TEU
|
%
Share
|
|
Mn
TEU
|
%
Share
|
|
Mn
TEU
|
%
Share
|
|
Mn
TEU
|
%
Share
|
FCC
|
|
6.08
|
74%
|
|
6.62
|
75%
|
|
7.26
|
77%
|
|
8.19
|
78%
|
|
9.05
|
80%
|
Dry
Cargo
|
|
1.43
|
17%
|
|
1.45
|
17%
|
|
1.49
|
16%
|
|
1.52
|
15%
|
|
1.53
|
14%
|
RoRo
|
|
0.33
|
4%
|
|
0.33
|
4%
|
|
0.33
|
4%
|
|
0.33
|
3%
|
|
0.33
|
3%
|
Other
|
|
0.39
|
5%
|
|
0.39
|
4%
|
|
0.40
|
4%
|
|
0.40
|
4%
|
|
0.40
|
4%
|
Total
|
|
8.24
|
100%
|
|
8.80
|
100%
|
|
9.48
|
100%
|
|
10.44
|
100%
|
|
11.32
|
100%
|
(1)
As of
September 1, 2006
The
fully
cellular container ship fleet is made up of a wide range of ships from less
than
500 teu in capacity to more than 8,000 teu. While there is no industry standard
categorization of ships according to their size they are generally divided
into
the following groups. At the top end of the scale are the deep sea container
ships of 3,000 teu and above, which are generally responsible for servicing
the
mainlane East-West trade routes. These ships are designated as Panamax or
Post-Panamax according to their ability to transit the Panama Canal based
on
their physical dimensions. Intermediate container ships are between 2,000
teu
and 2,999 teu in capacity and generally serve intermediate, North-South,
and in
some cases intra-regional, trade routes. Handysize vessels are between 1,300
teu
and 1,999 teu while ships below 1,300 teu in capacity are the conventional
feeder container ships generally operated on an intra-regional basis, that
often
relay or "feed" cargo within a region from or to main port hubs served by
mainlane trade routes. The largest proportion of the growth in container
ship
capacity in recent years has been in the Panamax and Post-Panamax deep sea
segments.
(1)
As of
September 1, 2006
As
of
September 1,
2006
,
the
container ship orderbook of vessels over 500 teu was comprised of 1,195 ships,
with an aggregate 4.375 million teu, and represented over 50% of the
existing fleet in terms of capacity. Vessels over 4,500 teu dominate the
current
orderbook by teu but there is scope for more smaller vessels to be delivered
by
2009 to 2010, given shorter construction times.
(1) As of September 1, 2006
As
of
September 1, 2006, the global container ship fleet had an average age of
just slightly less than 11 years. The Post-Panamax container ship fleet had
an
average age of 4.5 years. Ninety-two per cent of Post-Panamax capacity
(vessels 4,500 teu or larger) was less than 10 years old. This is in stark
contrast to the smaller vessels particularly those under 2,000 teu where
vessels
less than 5 years of age are significantly less than half the total built
in the
previous ten year period. Given the youthful age profile of the fleet, container
ship demolition is marginal in relation to fleet additions. During the periods
of buoyant freight markets, operators generally allow their older vessels
to
trade beyond 25 years of age but the 25+ year old fleet still accounts for
under
5% of the global fleet measured by teu capacity.
Container
Ship Market Sectors
The
table
below highlights the markets in which each container ship sector was deployed
as
at July 1, 2006 across the main trade routes. While certain size ranges are
associated with specific trade routes, this concentration is not as high
as
generally assumed.
Deployment
by Trade as of July 1, 2006
Route
|
|
1,500-
1,999
|
|
2,000-
2,499
|
|
2,500-
3,299
|
|
3,300-
5,100PX
|
|
PPX
|
|
Total
|
|
East-West
Trades
|
|
|
36
|
|
|
60
|
|
|
185
|
|
|
395
|
|
|
404
|
|
|
1,080
|
|
North-
South Trades
|
|
|
215
|
|
|
251
|
|
|
102
|
|
|
81
|
|
|
15
|
|
|
664
|
|
Intra-regional
|
|
|
168
|
|
|
55
|
|
|
58
|
|
|
11
|
|
|
14
|
|
|
306
|
|
South-south
Trades
|
|
|
24
|
|
|
4
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
28
|
|
Inactive
*
|
|
|
13
|
|
|
9
|
|
|
14
|
|
|
11
|
|
|
8
|
|
|
55
|
|
Total
|
|
|
456
|
|
|
379
|
|
|
359
|
|
|
498
|
|
|
441
|
|
|
2,133
|
|
Note
*Includes dry docking and moving between services
The
Post-Panamax and Panamax Container Ship Sectors
The
overwhelming majority of container ship capacity growth has been provided
by the
largest sectors of the fleet. Over two-thirds of the growth in teu container
ship capacity in the worldwide container ship fleet over the last 10 years
has
been recorded in the post Panamax and Panamax sectors.
As
a
result of their physical size (unable to transit the Panama Canal), Post
Panamax
ships are generally restricted to operating on two trade routes only, the
Transpacific, between Asia and the U.S. West Coast, and the Far East to Europe
route. They can also operate on a combination of the two routes.
These
two
routes are the world's largest container trade routes and, given their economies
of scale, Post-Panamax container ships are the vessels of choice with a
commanding market share. As volumes have grown, so have the dimensions of
post
Panamax vessels, with a new breed of ‘super post Panamaxes’ emerging in recent
years to push the economies of scale benefits further.
The
deployment table reveals that of 441 post Panamax ships in service at the
beginning of July, 29 vessels in the 4,300-5,900 teu range were operating
on
trades other than the East-West ones. Fifteen were deployed on North-South
routes (trading on two routes from North Europe - to the East Coast South
America and South Africa) and 14 on intra-regional routes, including 12
operating between the Far East and Middle East or Indian
Subcontinent.
The
Panamax container ship sector is made up of container ships of 3,000 teu
and
above in capacity, with dimensions such that they are able to transit the
Panama
Canal. Consequently, these ships largely operate on the three mainlane trade
routes—the Transpacific (including Far East to US East coast via Panama), the
Far East to Europe and the Transatlantic.
However,
many ships over 3,000 teu now operate on trade routes elsewhere in the global
liner network, such as on secondary East to West trades and increasingly
on
North-South and even a few intra regional trades.
The
deployment table includes data for Panamax ships of 3,300 teu and above,
and
shows that almost one fifth of the ships in this bracket operate outside
the
East-West trades, with 81 on North-South routes and a small number on intra
regional trades.
Intermediate,
Handysize and Feeder Container Ship Sectors
The
dependence of liner operators on the charter market has grown substantially
and
there is also an increasing prevalence of ships chartered in vessel sharing
partnerships.
A
large
number of container ships destined for the charter markets have been financed
by
the German KG system, which provides tax benefits (derived from accelerated
asset depreciation) to private investors in certain shipowning companies.
KG
equity houses are generally responsible for collecting the funds. While
scheduled changes to the structure of the KG system eliminating the tax benefit
to investors have been implemented, KG houses are expected to continue to
promote significant investment in ships through the German tonnage tax system.
Other identifiable charter shipowner groups include Greek shipowners and
companies using other financing schemes such as Scandinavian KS financing.
Interest
in the flexible Handysize sector remains high. Recent newbuilding developments
have seen a focus on the 1,800 teu (25,000 dwt) vessel size which is aimed
mainly at the intra-Asian markets. There is a gap developing between this
size
and the next larger size of 2,600-3,000 teu (35-40,000 dwt), which includes
both
geared and gearless ships from a wide variety of shipyards. Nevertheless,
approximately 50% of Handysize container ships remain active in their
traditional trading areas of Latin America, Africa and, to a lesser extent,
Australasia.
In
the
smaller ship segments, there has been little pressure on Chinese yards for
upsizing beyond the 1,200 teu mark with respect to particular marketing standard
designs. Not many ships are being built in the traditional 1,300-1,700 teu
range.
In
the
Feeder sector, interest remains evenly spread among vessels slightly less
than
and more than the 900 teu threshold. New vessel ordering has been underpinned
by
significant replacement demand.
The
Charter Market
As
liner
shipowners have increased their reliance on chartered in tonnage, the charter
market has matured and become more liquid. This has fostered the development
of
a new breed of shipowners called charter or tramp shipowners who rely on
the
charter market to find ongoing employment for their vessels. Indeed,
charter shipowners have increased their share of the fleet in recent years
and
have been responsible for a substantial share of investment in container
ship
contracting.
The
vast
majority of the charter market is focused on container ships of 4,500 teu
or
less, and the large majority of charter market activity in this sector is
the
time charter business, with charter periods ranging from several months to
three
years or more. However, in other instances, and generally in the case of
larger
Panamax and Post-Panamax container ships, the charter shipowner orders a
container ship newbuilding at a shipyard and then charters it out to one
of the
major liner companies on a long-term time charter for a period of up to 10
or
12 years or more in duration.
Time
Charter Rate Development
As
can be
seen from the index below, there was significant upward movement in time
charter
rates from the beginning of 2002 until mid-2005. Increases in global container
trade initiated this upward market movement. The index below represents a
weighted average of charter rates for vessels between 250 and 4,000 teu,
with
vessels across this spectrum generally moving in unison.
(1)
As of September 1, 2006
Source:
Howe Robinson
This
index does not cover post Panamax vessels, which are not yet a feature of
the
charter market. Large post Panamaxes are ordered against a specific long
term
time charter and assessments for standard deals cannot generally be meaningfully
tracked.
(1)
As of September 1, 2006
In
line
with rising charter rates, the average charter period also escalated rapidly
through 2003 to early 2005, tripling from 11 months in January 2004 to
over 33
months approximately 2 years later. The average period collapsed to
approximately 11 months by the end of 2005 and, after a turbulent 2006,
around
16 by the end of August 2006.
The
Newbuilding Market
Demand
for new container ships has increased in recent years and, because the
supply of
shipbuilding capacity has been relatively tight, the newbuilding price
for
benchmark handysize ships has risen rapidly from approximately $22.0 million
for
a 1,600 teu vessel at the beginning of 2003 to approximately $40.0 million
by
the middle of 2005. This number then declined slightly to the end of
November 2005, and almost regained its peak by the end of August 2006. A
similar pattern is evident for other vessel categories but price variations
have
been less pronounced for the Panamax and Post-Panamax categories where
the
effects of more limited shipyard capacity combined with a period of intense
demand have been overwhelmed by the benefits of economies of scale. Equivalent
price moves for a representative 6,000 teu vessel show contract prices
escalating from around $60.0 million in January 2003 to around $95.0 million
in
July 2005. After dipping at the end of 2005, a renewed surge in ordering
in the
middle of 2006 has recently pushed contracting prices up to $100.0 million.
(1)
As of September 1, 2006
Despite
this volatile charter market, shipowners continue to order vessels. What
is
significant about the container market and separates it from other sectors
is
the commitment to growth demonstrated by the top 20 players, with almost
all operators participating in an orderbook that stands at just over 2.0
million teu.
The
Secondhand Sale & Purchase Market
Growth
in
the charter market has helped to increase liquidity in the sale and purchase
of
secondhand container ships. Not only are liner companies now more willing
to
charter in newbuildings on long term charters but they have begun to consider
acquisitions in the secondhand market as well.
After
doubling in a three year period from 1991to 1994, resale activity levels
fluctuated between 60-120 units over the following 7 years before exploding
to
over 200 units in line with charter market strength. Liquidity is much greater
for small and medium-sized container ships than for large vessels. For instance,
3,000+ teu vessels have constituted roughly 25% of the resale market in the
last
5 years but these figures include time charter back provisions whereby the
liner
company sells the vessel and arranges a time charter of the buyer in order
to
remove the asset from its balance sheet.
In
the
first 8 months of 2006, the resale market has outperformed the previous year
in
teu terms but the share of orders by size ranges highlights continued
volatility, although there is no denying the strong upward trend.
Developments
in secondhand prices are plotted below. It is worth noting that values are
highly correlated for 5, 10 and 15 year old benchmark vessels of 1,500 teu
throughout any cycle. Similar behavior is evident from other vessel sizes
as
well.
Container
Ship Secondhand Price Development
(1)
As of September 1, 2006
BUSINESS
General
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
container ships and multipurpose vessels that transport dry and refrigerated
containerized cargoes, mainly including manufactured products and perishables.
As
of
November
15, 2006, our fleet consisted of nine vessels, including two Panamax
drybulk carriers, two Handysize drybulk carriers, four container ships and
one
multipurpose vessel with an average fleet age of approximately 18 years.
The
total cargo carrying capacity of our four drybulk carriers and our four
container ships is 207,464 dwt and 6,235 teu, respectively. Our multipurpose
vessel can carry 22,568 dwt or 950 teu, or a combination thereof.
Our
drybulk carriers transport major bulk cargoes (such as grain, coal, iron-ore
and
steel products) and minor bulk cargoes (such as bauxite, phosphate and sugar)
along worldwide shipping routes. Our container ships and multipurpose vessel
transport containerized dry and refrigerated cargoes, mainly including
manufactured products and perishables and operate along different shipping
routes depending on their size. Our container ships generally operate along
inter-regional trade routes between Northern Europe and the Mediterranean Sea,
the United States and Europe, the Black Sea, the Persian Gulf and Southeast
Asia
or serve as feeder vessels that transport cargoes between hub ports (where
larger vessels call) and smaller ports in the same geographic region. None
of
our vessels operates in areas where European Union, United States or United
Nations sanctions have been imposed or in areas that are not covered by our
insurance.
Our
Fleet
Since
August 2005, as part of our fleet growth and renewal strategy, we purchased
four
vessels with an average age of 15 years for an aggregate purchase price of
approximately $82.5 million. During the same period of time, we sold two of
our
oldest drybulk carriers with an average age of 25 years, thus significantly
reducing the average age of our fleet. We sold these two drybulk carriers for
an
aggregate sales price of approximately $9.6 million, realizing a net gain of
approximately $4.5 million.
Our
objective is to expand our fleet with selective acquisitions of cargo carrying
vessels. In furtherance of our objective, on October 12, 2006, we contracted
to
acquire a 1,599 teu, 1993-built container ship, m/v
YM
Xingang I
.
We took
delivery of this container ship on November 15, 2006. The vessel was
purchased with a charter to Yang Ming at the gross charter rate of $26,650
which
expires in July/September 2009.
As
of
November
15
, 2006, the profile and employment of our fleet was the
following:
Name
|
|
Type
|
|
DWT
|
|
TEU
|
|
Year
Built
|
|
Employment
|
|
TCE
Rate ($ per day)
|
|
Drybulk
Carriers
|
|
ARISTIDES
N.P.
|
|
|
Panamax
|
|
|
69,268
|
|
|
—
|
|
|
1993
|
|
|
Spot Charter
until Jan. 2007
|
|
$
|
26,000
|
|
IRINI
|
|
|
Panamax
|
|
|
69,734
|
|
|
—
|
|
|
1988
|
|
|
Baumarine
Pool
until end 2008
|
|
$
|
17,000
to $20,000 (*
)
|
|
NIKOLAOS
P.
|
|
|
Handysize
|
|
|
34,750
|
|
|
—
|
|
|
1984
|
|
|
Spot
Charter
until
Nov. 2006
|
|
$
|
14,000
|
|
ARIEL
|
|
|
Handysize
|
|
|
33,712
|
|
|
—
|
|
|
1977
|
|
|
Spot Charter
until Dec. 2006
|
|
$
|
12,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Drybulk Carriers
|
|
|
4
|
|
|
207,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Container
Ships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Charter
|
|
|
|
|
YM XINGANG
I
|
|
|
Handysize
|
|
|
23,596
|
|
|
1,599
|
|
|
1993
|
|
|
until July
2009
|
|
$
|
26,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Charter
|
|
$
|
16,000
until Nov. 2006;
|
|
KUO
HSIUNG
|
|
|
Feeder
|
|
|
18,154
|
|
|
1,269
|
|
|
1993
|
|
|
until
Nov. 2007
|
|
$
|
12,000
until Nov. 2007
|
|
YM
QINGDAO I
|
|
|
Feeder
|
|
|
18,253
|
|
|
1,269
|
|
|
1990
|
|
|
Period
Charter
until Mar. 2007
|
|
$
|
11,900
|
|
ARTEMIS
|
|
|
Intermediate
|
|
|
29,693
|
|
|
2,098
|
|
|
1987
|
|
|
Period
Charter
until Dec. 2008
|
|
$
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Container Ships
|
|
|
4
|
|
|
89,696
|
|
|
6,235
|
|
|
|
|
|
|
|
|
|
|
Multipurpose
Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,850
until Dec. 2008;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Charter
|
|
$
|
9,950
until Dec. 2010;
|
|
TASMAN
TRADER
|
|
|
Multipurpose
|
|
|
22,568
|
|
|
950
|
|
|
1990
|
|
|
until
Mar. 2012
|
|
$
|
9,000
until Mar. 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Multipurpose Vessels
|
|
|
1
|
|
|
22,568
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
FLEET
|
|
|
9
|
|
|
319,728
|
|
|
7,185
|
|
|
|
|
|
|
|
|
|
|
(*)
Our
subsidiary that owns m/v
Irini
,
participates in three short funds (contracts of affreightment to carry cargo)
that provide an effective coverage of 102% in 2006, 77% in 2007 and 42% in
2008.
The combination of the short funds and shipping pool employment secures the
stated rate for the respective percentages for each year. For the remaining
portion of 2007 and 2008, the vessel will effectively earn the spot rate through
it employment in the shipping pool.
Shipping
Pool
Our
subsidiary that owns m/v
Irini
participates in the Klaveness’ Baumarine spot shipping pool, a panamax shipping
pool, the earnings of which largely follow the spot market. m/v
Irini
participates in the shipping pool’s revenues on the basis of “pool points” that
she was assigned when she joined the shipping pool and that reflect her
technical specifications. At the same time, such subsidiary participates in
three “short panamax funds” also managed by Klaveness. A short fund is a
collection of one or more contracts of affreightment (COA). A COA relates to
the
carriage of multiple cargoes over the same route and enables the COA holder
to
nominate different ships to perform the individual sailings. Essentially it
constitutes a number of voyage charters to carry a specified amount of cargo,
at
a fixed price per ton during the term of the COA. Participants in a short fund
undertake the financial obligations under the COAs that belong to the fund.
In
turn, the fund’s manager, Klaveness, fulfills the contractual obligations under
the COAs by chartering vessels from the spot market or using vessels from the
shipping pool, for which it pays the then prevailing spot rate, to carry the
underlying cargoes. If the cost of chartering these vessels from the spot market
is less than the contractual rate per ton under the COAs, then the short fund
earns the difference. Conversely, if the cost of chartering these vessels from
the spot market is higher than the contractual rate per ton under the COAs,
then
the short fund pays the difference. Every month Klaveness makes a payment to
our
subsidiary that owns m/v
Irini
by
calculating the earnings of m/v
Irini
from the
Baumarine shipping pool and adding the earnings or subtracting the losses from
the participation of such subsidiary in the short funds. Thus, for all practical
purposes the subsidiary’s revenue is fixed for the percentage of the ship that
is covered by the participation in the short funds. The subsidiary will earn
the
spot market rate via m/v
Irini’s
participation in the Baumarine shipping pool, will pay the equivalent of a
spot
market vessel cost to fulfill it’s share of the COAs and will receive it’s share
of the COA revenue.
We
believe the daily time charter equivalent earnings of the m/v
Irini
to be
fixed as if the vessel was on a period charter with daily charter hire which
we
currently estimate will range from $17,000 to $20,000 per day for the vessel
percentage covered by the short funds. Our effective coverage for 2006 amounts
to 102% of m/v
Irini
,
which
means that we have contracted to cover 2% more than the capacity of m/v
Irini
,
or
approximately the equivalent of an additional seven days of capacity for such
vessel. We would have to, via the short fund, secure a charter for this capacity
in the spot market. If the rate we pay for this capacity is lower than the
rate
the short fund receives, we will have a gain; otherwise we will have a loss
on
these extra seven days.
Management
of Our Fleet
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. 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 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 October 1, 2006
and
has an initial term of 5 years until September 30, 2011. 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 90
th
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.
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 Navel 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 in the ownership and operation of vessels
carrying
dry cargoes. Dr. Anastasios Aslidis, our Chief Financial Officer,
holds a
Ph.D. in Ocean Systems Management from Massachusetts Institute of
Technology and has over 18 years of experience, primarily as a partner
at
a Boston based international consulting firm focusing on investment
and
risk management in the maritime industry. We believe their combined
experience, among other things, enables us to identify attractive
purchase
and sale opportunities and efficiently manage the commercial, technical
and financial aspects of our
business.
|
|
·
|
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, and without compromising our high standards of performance,
reliability and safety. Despite the average age of our fleet being
approximately 18 years, our total vessel operating expenses, including
management fees and general and administrative expenses were $4,511
per
day for the six month period ended June 30, 2006. 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 six month
period ended June 30, 2006, our fleet utilization was 99.9% and our
vessels had only two unscheduled off-hire
days.
|
|
·
|
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 the structuring acquisitions of drybulk carriers and
container ships 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. Additionally, with
the proceeds from this offering, we plan to expand our fleet to increase our
revenues and earnings and make our drybulk carrier and container ship fleet
more
cost efficient and attractive to our customers. We believe the following
describe our business strategy:
|
·
|
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 will be initially 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 existing contracts,
our
current period charter coverage for the fourth quarter of 2006
is 76.5%
and 56.5% for our fiscal year ending December 31, 2007, 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 container ships 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 container
ships. 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
September 30, 2006 calls for a reduction of more than 50% of our
then
outstanding debt by the end of 2008. We expect this will increase
our
ability to borrow funds to make additional vessel acquisitions to
grow our
fleet and pay consistent and possibly higher dividends to our
shareholders.
|
Vessel
Employment
We
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. Presently, six of our vessels are employed under period
charters that provide relatively steady streams of revenue, including m/v
Irini
which is employed in the Klaveness run Baumarine shipping
pool, and one of our vessels is under a spot charter
.
The
shipowning company of m/v
Irini
also
participates in three short funds managed by Klaveness. We believe this balanced
employment strategy provides 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.
We
strategically monitor developments in the shipping industry on a regular
basis
and, subject to market demand, negotiate the charterhire periods for our
vessels
according to prevailing market conditions and our expectations of future
market
conditions. As at
November
15
, 2006, six of our nine vessels were employed on period charters
with remaining terms (based on latest expiration dates) of between three
and 63 months, providing us with an average period charter coverage of
approximately 1.5 years at an average charter rate of approximately $15,800
per
day per vessel. However, in the future, depending on market conditions, we
may
consider reducing the length of our charters to take advantage of the benefits
of shorter term vessel employment. We expect that the charter periods for
our
vessels will generally be longer under charters that are entered into during
periods of relatively favorable market conditions and shorter under charters
that are entered into during periods of relatively less favorable market
conditions. We seek to enter into charters with customers who we believe
are
blue-chip customers thereby minimizing the risk of default by our charterers.
We
also fix charters in order to manage our exposure to a particular vessel.
We
also try to choose charterers depending on the type of product they want
to
carry and the jurisdictions in which they want to trade.
A
voyage
charter is a contract to carry a specific cargo for a per ton carry amount.
Under voyage charters, we pay voyage expenses such as port, canal and fuel
costs. A time charter is a contract to charter a vessel for an agreed period
of
time at a set daily rate. Under time charters, the charterer pays these voyage
expenses. A spot charter is a voyage charter or a time charter that is fixed
for
just one trip. A longer term time charter is called a period charter. A shipping
pool contract is essentially a period charter with a floating charter rate
that
generally follows the spot market, if the shipping pool employs the vessels
exclusively under spot charters, or fluctuates according to the average charter
hire achieved by the pool from a combination of spot charters, time charters
and
contracts of affreightment. The actual charter hire the vessel in a shipping
pool receives is its corresponding share of all the income generated by all
vessels that participate in the shipping pool. A short fund comprises of one
or
more contracts of affreightment (“COA”). These are contracts secured by the
shipping pool manager for carrying some specific types and quantities of cargo
over a fixed time horizon at a fixed rate per ton of cargo carried. The combined
effect of having a vessel in a spot shipping pool and securing COA’s can be
equivalent to establishing a long term period charter.
Under
all
types of charters, we will pay for vessel operating expenses, which include
crew
costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs. We are also responsible for each vessel’s intermediate
drydocking and special survey costs.
Vessels
operating on period charter 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 increase
profit margins during periods of improvements in charter rates. However, we
would then be exposed to the risk of declining charter rates, which may be
higher or lower than the rates at which we chartered our vessels. Although
we do
not presently do so, we may in the future enter into freight forward agreements
in order to hedge our exposure to market volatility. We are constantly
evaluating opportunities for period charters, but only expects to enter into
additional period charters if we can obtain contract terms that satisfy our
criteria.
In
connection with the arrangement of a charter, we generally pay brokerage
commissions calculated as a percentage of the daily charter hire rate to
Eurochart, an affiliated brokering company who negotiates the terms of the
charters based on market conditions, and to brokers associated with the
charterer, as well as address commissions to the charterer. The total amount
of
these commissions historically has varied between 1.25% and 6.25% of the daily
charter hire rate payable under the charter depending on the number of brokers
involved in the transaction and the address commissions.
International
Operations
Our
vessels trade worldwide and at times may need to trade to areas where there
is
an increased risk of civil conflict, war or war-like operations. However,
our
vessels are at all times covered by war risk insurance and, in case a decision
is taken to sail to a perceived higher risk area, an additional war risk
premium
might be payable by us. Our vessels do not trade to any port sanctioned by
the
United Nations and we have never experienced any significant problem due
to its
worldwide trading pattern.
While
two
of our container ships operate in the Far East, m/v
Artemis
has
extended our container ship operations to Western Europe and the United States.
Specifically, our four container ships are on regular lines calling the
following ports:
|
·
|
Vessel
m/v YM Xingang I
: Indonesia,
Philippines, Hong Kong, China
|
|
·
|
Vessel
m/v YM Qingdao I
:
Japan (Tokyo, Kobe, Osaka, Yokohama), Taiwan (Kaohsiung, Keelung,
Taichung), Hong Kong, China (Tianjin, Dalian), Vietnam (Ho Chi
Mingh)
|
|
·
|
Vessel
m/v Kuo Hsiung
:
Japan (Tokyo, Kobe, Osaka, Yokohama), Taiwan (Kaohsiung, Keelung,
Taichung), Hong Kong, Thailand (Bangkok, Laem
Chabang)
|
|
·
|
Vessel
m/v Artemis
:
Belgium (Antwerp), Germany (Hamburg), England (Liverpool), United
States
(New York, Norfolk, Savannah,
Miami)
|
The
four
drybulk carriers also trade worldwide. Most frequent ports of call by region
are
as follows:
|
·
|
Far
East
:
all major Chinese ports, Taiwan, South Korea, Singapore, Indonesia
(various ports), Malaysia (Port Kelang), Bangladesh, all major Indian
ports, Philippines (Manila)
|
|
·
|
Australia
:
Newcastle, Port Lincoln
|
|
·
|
Middle
East
:
UAE (Dubai, Fujairah), Saudi Arabia, Jordan (Aqaba), Turkey (Eregli,
Istanbul, Izmir)
|
|
·
|
Europe
:
all seaport nations, mostly Italy, Spain, France, Greece, UK, Netherlands,
Belgium, Germany, Poland, Scandinavian countries, Russia, Ukraine,
Romania, etc.
|
|
·
|
Africa
:
South Africa, Egypt, Morocco.
|
Our
multi-purpose vessel trades in the following ports:
New
Zealand (Auckland, New Plymouth, Wellington, Timaru, Bluff, Nelson, Tauranga),
Taiwan (Keelung, Taichung, Kaohsiung), Hong Kong, China (Mawan), Vietnam (Ho
Chi
Minh), Thailand (Sri Racha) and Singapore.
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 for the six month period ended June
30, 2006
include three of our top five customers from 2005 (Cheng Lie, Yang Ming
Lines
and Klaveness). Our top five customers accounted for approximately 58%
of our
total revenues for the six month period ended June 2006, 65% of our total
revenues in 2005, 68% of our total revenues for 2004 and 54% of our total
revenues for 2003. Our three largest customers, Cheng Lie, Klaveness and
Yang
Ming Lines accounted for 26.85%, 17.48% and 12.32% of our total revenues,
respectively, for the year ended 2005. For the six month period ended June
30,
2006, Italia Maritima, Klaveness, Cheng Lie and Yang Ming Lines accounted
for
16.96%, 16.63%, 12.44% and 10.59% of our total revenues,
respectively.
Our
Employees
We
have
no direct employees. The services of our Chief Executive Officer, Chief
Financial Officer and Secretary are provided and paid for by Eurobulk under
our
master management agreement with Eurobulk.
Our
subsidiary shipowning companies recruit through Eurobulk either directly
or
through a crewing agent, the senior officers and all other crew members for
our
vessels. Eurobulk currently has 25 employees.
We
crew
our vessels primarily with Greek Masters and Filipino or Ukrainian officers
and
seamen. Eurobulk is responsible for identifying and recruiting officers and
seamen and its fee for this service is included in its daily management fee.
Our
Filipino officers and seamen are currently referred to us by More Maritime,
a
company based in Manila-Philippines and affiliated to the Pittas family.
Our
Ukrainian officers and seamen are currently referred to us by Epsilon, an
independent crewing agency. The crewing agencies handle each seaman’s training,
travel and payroll. We ensure that all our seamen have the qualifications
and
licenses required to comply with international regulations and shipping
conventions. Additionally, our seafaring employees perform most commissioning
work and supervise work at shipyards, subcontractors and drydock facilities.
We
typically man our vessels with more crew members than is required by the
country
of the vessel’s flag in order to allow for the performance of routine
maintenance duties.
Our
Property
We
do not
at the present time own or lease 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 space for our offices, although we
may
do so in the future.
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, period 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 container ship sector. Ownership of drybulk carriers
and
container ships 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),
Quintana Maritime Limited (NASDAQ: QMAR), 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
container ship 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 container ships are higher. However, fluctuations due to
seasonality in the container shipping industry are much less pronounced than
in
the drybulk shipping industry.
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. We had developed a plan to comply with the Annex VI regulations,
which became effective once Annex VI became effective. 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, there can be no assurance that such certification
will
be maintained 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).
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 intends 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 September
18, 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. Although EPA will likely
appeal this decision, if the 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.
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.
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.
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
|
|
February
2007
|
|
Drydocking
|
YM
QUINGDAO I
|
|
April
2007
|
|
Drydocking
|
ARTEMIS
|
|
May
2007
|
|
Special
Survey
|
ARIEL
(1)
|
|
September
2007
|
|
Drydocking
|
|
|
December
2007
|
|
Drydocking
|
ARISTIDES
N.P.
|
|
January
2008
|
|
Special
Survey
|
KUO
HSIUNG (3)
|
|
April
2008
|
|
Special
Survey
|
IRINI
|
|
June
2008
|
|
Special
Survey
|
NIKOLAOS
P (3)
|
|
January
2009
|
|
Special
Survey
|
|
(1)
|
m/v
Ariel
will
be 30 years old in 2007 and will be due for drydocking in September
2007.
We will decide whether it will undergo drydocking for further
trading, or
be sold for scrap based on market conditions at the
time.
|
|
(2)
|
We
expect to drydock the vessel during the first six months of
2007.
|
|
(3)
|
m/v
Nikolaos
P
and
m/v
Kuo
Hsiung
each underwent drydocking in
2006.
|
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.
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.
Legal
Proceedings
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.
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.
MANAGEMENT
The
following sets forth the name and position of each of our directors and
executive officers.
Name
|
|
Age
|
|
Position
|
Aristides
J. Pittas
|
|
47
|
|
Chairman,
President and Chief Executive Officer; Class A Director
|
Dr.
Anastasios Aslidis
|
|
46
|
|
Chief
Financial Officer and Treasurer; Class A Director
|
Aristides
P. Pittas
|
|
54
|
|
Vice
Chairman; Class A Director
|
Stephania
Karmiri
|
|
38
|
|
Secretary
|
Panagiotis
Kyriakopoulos
|
|
45
|
|
Class
B Director
|
George
Skarvelis
|
|
45
|
|
Class
B Director
|
George
Taniskidis
|
|
45
|
|
Class
C Director
|
Gerald
Turner
|
|
58
|
|
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 18 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.
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 NovaBank and a member of the Board of
Directors of BankEuropa (subsidiary bank of NovaBank 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).
Family
Relationships
Aristides
P. Pittas is the cousin of Aristides J. Pittas, our CEO.
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 in our website: http://www.euroseas.gr
under “Corporate Governance.”
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 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.
Executive
Compensation
We
have
no direct employees. The services of our Chief Executive Officer, Chief
Financial Officer 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.
Pursuant to this agreement, we paid Eurobulk $250,000 which includes the
provision of such services up to June 30, 2006 and $379,375 for the period
up to
September 30, 2006. As of October 1, 2006, these services are now provided
to us
under our master management agreement with Eurobulk. Under this master
management agreement, we pay Eurobulk $517,500 per year, before bonuses,
on an
annualized basis for the provision of these services, adjusted annually
for
Greek inflation.
Equity
Incentive Plan
In
August
2006, we adopted an equity incentive plan which entitles our Board of Directors
to grant to our officers, key employees and directors 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.
Options
No
options were granted during the fiscal year ended December 31, 2005 or
during
the six month period ended June 30, 2006. 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 585,581 shares of our common stock. The warrants have a five year
term
and an exercise price of $10.80 per share. We do not currently have any
other
outstanding warrants.
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.
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·
|
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.
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|
·
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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.
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|
·
|
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.
|
Other
than as noted above, we are in full compliance with all other applicable
NASDAQ
corporate governance standards.
PRINCIPAL
SHAREHOLDERS
The
following table sets forth certain information regarding the beneficial
ownership of our voting stock as of
November
1,
2006 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
before Offering
|
|
Percent
of
Voting Stock
after Offering**
|
Friends
Investment Company Inc.
(2)
|
|
|
9,918,056
|
|
|
|
78.6
|
%
|
|
|
|
%
|
Aristides
J. Pittas
(3)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
George
Skarvelis
(4)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
George
Taniskidis
(5)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
Gerald
Turner
(6)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
Panagiotis
Kyriakopoulos
(7)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
Aristides
P. Pittas
(8)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
Anastasios
Aslidis
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
Stephania
Karmiri
(9)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
All
directors and officers and 5% owners as a group
|
|
|
9,918,056
|
|
|
|
78.6
|
%
|
|
|
|
%
|
|
*
|
Indicates
less than 1.0%.
|
|
**
|
Assumes
underwriters do not exercise their over-allotment
option.
|
|
(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
9,918,056 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 1,190,167 shares of common stock held of record by
Friends, by
virtue of Mr. Pittas’ ownership interest in Friends. Also does not include
40,000 shares of common stock held of record by Eurobulk Marine
Holdings,
Inc. (“Eurobulk Marine”) and 10,000 shares of common stock issuable upon
the exercise of warrants 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.
|
|
(4)
|
Does
not include 525,657 shares of common stock held of record by Friends,
by
virtue of Mr. Skarvelis’ ownership interest in Friends. Also does not
include 17,667 shares of common stock held of record by Eurobulk
Marine
and 4,417 shares of common stock issuable upon the exercise of
warrants 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.
|
|
(5)
|
Does
not include 9,918 shares of common stock held of record by Friends,
by
virtue of Mr. Taniskidis’ ownership in Friends. Also does not include 333
shares of common stock held of record by Eurobulk Marine and 83
shares of
common stock issuable upon the exercise of warrants 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.
|
|
(6)
|
Does
not include 140,836 shares of common stock held of record by Friends,
by
virtue of Mr. Turner’s ownership interest in Friends. Also does not
include 4,733 shares of common stock held of record by Eurobulk
Marine and
1,183 shares of common stock issuable upon the exercise of warrants
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.
|
|
(7)
|
Does
not include 59,508 shares of common stock held of record by Friends,
by
virtue of Mr. Kyriakopoulos’ ownership in Friends. Also does not include
2,000 shares of common stock held of record by Eurobulk Marine
and 500
shares of common stock issuable upon the exercise of warrants 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.
|
|
(8)
|
Does
not include 813,281 shares of common stock held of record by Friends,
by
virtue of Mr. Pittas’ ownership interest in Friends. Also does not include
27,333 shares of common stock held of record by Eurobulk Marine
and 6,833
shares of common stock issuable upon the exercise of warrants 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.
|
|
(9)
|
Does
not include 1,984 shares of common stock held of records by Friends,
by
virtue of Mrs. Karmiri’s ownership in Friends. Also does not include 67
shares of common stock held of record by Eurobulk Marine and 17
shares of
common stock issuable upon the exercise of warrants 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.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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 October 1, 2006
and
has an initial term of 5 years until September 30, 2011. 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 90
th
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 $517,500 annually,
adjusted annually for inflation (every October), and a per ship per day cost
of
€610 (or $773.50) adjusted annually for inflation (every February). Eurobulk
has
received fees for management and executive compensation expenses of $1,722,800,
$1,972,252, $2,161,856, $965,384 and $1,362,850 for years ended December
31,
2003, 2004 and 2005 and the six months ended June 30, 2005 and 2006,
respectively.
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 sale and purchase commissions of $286,605, $604,717, $742,680,
$294,587 and $403,030 for years ended December 31, 2003, 2004 and 2005 and
the
six months ended June 30, 2005 and 2006, respectively.
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.
We
believe that the fees we pay to affiliated entities are no greater than what
we
would pay to non-affiliated third parties and are standard industry practice.
However, there could be conflicts due to these affiliations.
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 such debts. Additionally, Aristides J. Pittas is
currently the President 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, including restrictions
included in the lock-up agreement to which Friends is a party, 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 but has waived such rights in connection
with this offering. We have obtained a waiver from Friends agreeing not to
exercise its rights under the registration rights agreement to register any
of
its shares in connection with this offering.
SHARES
ELIGIBLE FOR FUTURE SALE
Upon
completion of this offering, we will
have
shares of preferred stock outstanding
or
shares if the underwriters’ over-allotment option is exercised in
full. The
shares sold in this offering,
or
shares if the underwriters’ over-allotment option is exercised in full,
will be freely transferable in the United States without restriction under
the
Securities Act, except for any shares purchased by one of our “affiliates,”
which will be subject to the resale limitations of Rule 144 under the Securities
Act.
After
the
consummation of this offering, our existing shareholders will continue
to own
12,620,114 shares of common stock which were acquired in private transactions
not involving a public offering and these shares are therefore treated
as
“restricted securities” for purposes of Rule 144. The restricted securities held
by certain of these existing shareholders, our officers, directors and
certain
other parties will be subject to either the underwriters’ 90-day or 180-day
lock-up agreement. Restricted securities may not be resold except in compliance
with the registration requirements of the Securities Act or under an exemption
from those registration requirements, such as the exemptions provided by
Rule
144, Regulation S and other exemptions under the Securities Act. Securities
currently registered under our existing Form F-1 resale registration statement
may continue to be registered and sold thereunder by some of our shareholders
but may not be sold by certain of our shareholders during the respective
90-day
or 180-day lock-up period with respect to those shareholders that have
executed
lock-up agreements.
In
general, under Rule 144 as currently in effect, a person or persons whose
shares
are aggregated, who owns shares that were acquired from the issuer or an
affiliate at least one year ago, would be entitled to sell within any
three-month period, a number of shares that does not exceed the greater
of (i)
1% of the then outstanding shares of
the
applicable class of
stock, or (ii) an amount equal to the average weekly
reported volume of trading in shares of
the
applicable class of stock
on all national securities exchanges and/or
reported through the automated quotation system of registered securities
associations during the four calendar weeks preceding the date on which
notice
of the sale is filed with the Securities and Exchange Commission. Sales
in
reliance on Rule 144 are also subject to other requirements regarding the
manner
of sale, notice and availability of current public information about us.
A
person or persons whose shares are aggregated, who is not deemed to have
been
one of our affiliates at any time during the 90 days immediately preceding
the
sale may sell restricted securities in reliance on Rule 144(k) without
regard to
the limitations described above, provided that two years have expired since
the
later of the date on which the same restricted securities were acquired
from us
or one of our affiliates. As defined in Rule 144, an “affiliate” of an issuer is
a person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, that same
issuer.
Our
directors and officers and certain of our existing shareholders, have agreed
during the period beginning from the date of the prospectus and continuing
to
and including the date 180 days (in the case of Friends and our directors
and
officers) and 90 days (in the case of Eurobulk Marine Holdings, Inc.) after
the
date of this prospectus, not to offer, sell, contract to sell or otherwise
dispose of any of our securities which are substantially similar to our
common stock or which are convertible or exchangeable into securities which
are
substantially similar to our common stock, without the prior written
consent of Cantor Fitzgerald & Co.
As
a
result a result of these lock-up agreements and rules of the Securities Act,
the
restricted shares will be available for sale in the public market, subject
to
certain volume and other restrictions, as mentioned above, as follows:
Days
After the Date of this Prospectus
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Number
of Shares
Eligible
for Sale
|
|
Comment
|
|
|
|
|
|
Date
of prospectus
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|
|
|
Shares
not locked up and eligible for sale freely or under Rule
144
|
|
|
|
|
|
90
days
|
|
|
|
Lock-up
for Eurobulk Marine released; shares eligible for sale under
Rule
144
|
|
|
|
|
|
180
days
|
|
|
|
Lock-up
for Friends, officers and directors released; shares eligible
for sale
under Rule 144
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Prior
to
this offering, there has been no public market for our convertible preferred
stock and a limited public market for our common stock, and no prediction
can be
made as to the effect, if any, that future sales or the availability of
shares
for sale will have on the market price of our stock prevailing from time
to
time. Nevertheless, sales of substantial amounts of our stock in the public
market, including shares issued upon the exercise of options that may be
granted
under any employee stock option or employee stock award plan of ours, or
the
perception that those sales may occur, could adversely affect prevailing
market
prices for our stock.
DESCRIPTION
OF CONVERTIBLE LIMITED PREFERRED STOCK
The
following is a summary of certain provisions of our Series A Mandatory
Convertible Limited Preferred Stock (which we will refer to as the “convertible
preferred stock”). The following summary of the terms of convertible preferred
stock does not purport to be complete and is subject to, and qualified
in its
entirety by reference to, the provisions of our statement of designations.
As
used in this section, the terms “us”, “we” or “our” refer to Euroseas Ltd. and
not to any of its subsidiaries.
General
When
issued, the convertible preferred stock and any common stock issued upon
the
conversion of the convertible preferred stock will be validly issued,
fully paid
and non-assessable. The holders of the convertible preferred stock will
have no
preemptive or preferential right to purchase or subscribe for our stock,
obligations, warrants or any other securities of ours of any class. The
transfer
agent, registrar, redemption, conversion, calculation and dividend disbursing
agent for shares of both the convertible preferred stock and common stock
is
American Stock Transfer & Trust Company.
Ranking;
Amendments
Until
the
mandatory conversion date, the convertible preferred stock, with respect to
dividend rights or rights upon our liquidation, winding−up or dissolution (after
payment of our creditors), ranks:
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senior
to our common stock and to each other class of capital stock
or series of
preferred stock established after the original issue date of
the
convertible preferred stock (which we will refer to as the
“Issue Date”),
the terms of which expressly provide that such class or series
ranks
junior to the convertible preferred stock as to dividend rights
or rights
upon our liquidation, winding−up or dissolution (which we will refer to
collectively as “Junior Stock”);
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·
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on
parity, in all respects, with any other series of preferred
stock
established after the Issue Date unless the terms of such series
of
preferred stock expressly provide that such class or series
will rank
other than on parity with the convertible preferred stock as
to dividend
rights or rights upon our liquidation, winding−up or dissolution (which we
will refer to collectively as “Parity Stock”);
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·
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junior
to each current class of capital stock or series of preferred
stock
established after the Issue Date, the terms of which expressly
provide
that such class or series will rank senior to the convertible
preferred
stock as to dividend rights or rights upon our liquidation,
winding−up or
dissolution (which we will refer to collectively as “Senior Stock”).
Senior Stock may only be issued with the consent of 66
2/3
%
of the outstanding convertible preferred stock; and
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·
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junior
to all of our existing and future
indebtedness.
|
Each
holder of the convertible preferred stock will be entitled to one vote
for each
share held of record by such holder. Except as required by Marshall Islands
law
and our amended and restated articles of incorporation, which include
the
statement of designations establishing the terms of the convertible preferred
stock, the holders of convertible preferred stock will vote together
as one
class with the holders of our common stock on all matters submitted to
a vote of
our shareholders. While any shares of convertible preferred stock are
outstanding, we may not authorize or issue any class or series of Senior
Stock
(or any security convertible into Senior Stock) or amend our articles
of
incorporation in a manner that would affect adversely the rights of holders
of
the convertible preferred stock, in each case, without the affirmative
vote or
consent of the holders of at least 66
2/3
%
of the
outstanding shares of convertible preferred stock.
Dividends
Holders
of shares of convertible preferred stock will be entitled to receive,
when, as
and if declared by our Board of Directors out of funds legally available
for
payment, cumulative quarterly cash dividends in the minimum amount of
$
per share of
convertible preferred stock until the mandatory conversion date. Dividends
on
the convertible preferred stock will be payable quarterly
on
,
,
and
, of each year (each, a “Dividend Payment Date”) at such rate, and shall
accumulate from the most recent date as to which dividends shall have
been paid
or, if no dividends have been paid, from the Issue Date of the convertible
preferred stock, whether or not in any dividend period or periods there
have
been funds legally available for the payment of such dividends. Dividends
will
be payable to holders of record as they appear on our stock register
on the
immediately
preceding
,
,
and
, of each year (each, a “Record Date”). Our first dividend on the convertible
preferred stock will be a partial dividend, which will accrue from the
date of
issuance until December 31, 2006. Accumulations of dividends on shares
of
convertible preferred stock do not bear interest. Dividends will be payable
on
the convertible preferred stock on the basis of a 360−day year consisting of
twelve 30−day months. If any Dividend Payment Date falls on a day that is not a
business day, we will pay the related dividend on the next day that is
a
business day, with the same force and effect as if the dividend payment
had been
made on the Dividend Payment Date and without any interest or other payment
with
respect to the delay. As used in this prospectus, the term “business day” means
any day, other than a Saturday or Sunday, that is neither a legal holiday
nor a
day on which commercial banks are authorized or required by law, regulation
or
executive order to close in The City of New York.
No
dividend will be declared or paid upon, or any sum set apart for the
payment of
dividends upon, any outstanding share of the convertible preferred stock
with
respect to any dividend period unless all dividends for all preceding
dividend
periods have been declared and paid or declared and a sufficient sum
set apart
for the payment of such dividend, upon all outstanding shares of convertible
preferred stock.
No
dividends or other distributions may be declared, made or paid, or set
apart for
payment upon, any Parity Stock or Junior Stock, nor may any Parity Stock
or
Junior Stock be redeemed, purchased or otherwise acquired for any consideration
(or any money paid to or made available for a sinking fund for the redemption
of
any Parity Stock or Junior Stock) by us or on our behalf (except by conversion
into or exchange for shares of Parity Stock or Junior Stock (in the case
of
Parity Stock) or Junior Stock (in the case of Junior Stock)) unless all
accumulated and unpaid dividends for all preceding dividend periods have
been or
contemporaneously are declared and paid, or are declared and a sum sufficient
for the payment thereof is set apart for such payment, on the convertible
preferred stock and any Parity Stock for all dividend payment periods
terminating on or prior to the date of such declaration, payment, redemption,
purchase or acquisition. Notwithstanding the foregoing, if full dividends
have
not been paid on the convertible preferred stock and any Parity Stock,
dividends
may be declared and paid on the convertible preferred stock and such
Parity
Stock so long as the dividends are declared and paid pro rata so that
the
amounts of dividends declared per share on the convertible preferred
stock and
such Parity Stock will in all cases bear to each other the same ratio
that
accumulated and unpaid dividends per share on the shares of the convertible
preferred stock and such Parity Stock bear to each other. Holders of
shares of
the convertible preferred stock will not be entitled to any dividend
in excess
of full cumulative dividends. To the extent we declare any quarterly
dividends
on any Parity Stock or Junior Stock in excess of the amount declared
on our
convertible preferred stock, we will also pay such excess amount to holders
of
our convertible preferred stock.
In
addition, no dividend will be declared or paid upon, or any sum set apart
for
the payment of dividends upon, any outstanding shares of convertible
preferred
stock at any time when the terms and provisions of any agreement of ours,
including any agreement relating to our indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a
breach or a
default under it, or if such declaration, payment or setting apart for
payment
is restricted or prohibited by law. Our credit facilities permit us to
pay
dividends so long as we are not in default of a loan
covenant.
Liquidation
preference
In
the
event of our voluntary or involuntary liquidation, winding−up or dissolution
prior to or on the mandatory conversion date, each holder of convertible
preferred stock will be entitled to receive and to be paid out of our
assets
available for distribution to our stockholders, before any payment or
distribution is made to holders of Junior Stock (including common stock),
a
liquidation preference in the amount of
$ per share of the
convertible preferred stock, plus accumulated and unpaid dividends on
the shares
to the date fixed for liquidation, winding−up or dissolution prior to or
on the mandatory conversion date. If, upon our voluntary or involuntary
liquidation, winding−up or dissolution, the amounts payable with respect to the
liquidation preference of the convertible preferred stock and all Parity
Stock
are not paid in full, the holders of the convertible preferred stock
and the
Parity Stock will share equally and ratably in any distribution of our
assets in
proportion to the full liquidation preference and accumulated and unpaid
dividends to which they are entitled. After payment of the full amount
of the
liquidation preference and accumulated and unpaid dividends to which
they are
entitled, the holders of the convertible preferred stock will have no
right or
claim to any of our remaining assets.
In
the
event of our voluntary or involuntary liquidation, winding -up or dissolution
after the mandatory conversion date, the liquidation preference will be
reduced to
$ per
share and, thereafter, the holders of our convertible preferred stock and
common stock will share equally ratably in any distribution of our
assets.
Neither the sale of all or substantially all our assets or
business (other than in connection with our liquidation, windingup or
dissolution), nor our merger or consolidation into or with any other
person,
will be deemed to be our voluntary or involuntary liquidation, winding−up or
dissolution.
The
statement of designations will not contain any provision requiring funds
to be
set aside to protect the liquidation preference of the convertible preferred
stock even though it is substantially in excess of the par value thereof.
After
the
mandatory conversion date, the convertible preferred stock will lose
its
preferential dividend rights and will be on parity with our common
stock.
Voting
rights
Except
as
required by Marshall Islands law and our amended and restated articles
of
incorporation, which include the statement of designations establishing
the
terms of the convertible preferred stock, the holders of convertible
preferred
stock will vote together as one class with the holders of our common
stock on
all matters submitted to a vote of our shareholders. Each holder of the
convertible preferred stock will be entitled to one vote for each share
of
convertible preferred stock held of record by such holder.
In
addition, the affirmative vote or consent of the holders of at least
66
2/3
%
of the
outstanding convertible preferred stock, voting separately as a series,
will be
required for the authorization or issuance of any class or series of
Senior
Stock (or any security convertible into Senior Stock) and for amendments
to our
amended and restated articles of incorporation that would affect adversely
the
rights of holders of the convertible preferred stock. The statement of
designations will provide that the authorization of additional classes,
the
increase in the authorized number of shares or the issuance of additional
series
of Parity Stock or Junior Stock will not require the consent of the holders
of
the convertible preferred stock or Parity Stock, and will not be deemed
to
affect adversely the rights of the holders of the convertible preferred
stock.
In
all
cases in which the holders of our voting stock shall be entitled to vote,
each
share of convertible preferred stock shall be entitled to one vote.
Conversion
rights
The
shares of convertible preferred stock cannot be converted into shares of
common stock unless and until the common stock has been approved for
listing on
the NASDAQ Global Market or another comparable U.S. national securities
exchange, such as the New York Stock Exchange or the American Stock Exchange.
The convertible preferred stock will automatically convert into shares
of our
common stock on
, 2008 at a
conversion rate of one share of common stock for each share of convertible
preferred stock, if the common stock has been approved for listing. If
not converted on that date, the convertible preferred stock will convert
on the
first date thereafter on which our common stock is approved for
listing. Prior to
, 2008, each share
of
convertible preferred stock may be converted into a share of common stock
at any
time at the option of the holder if the common stock has been approved
for
listing. The number of shares into which each share of convertible preferred
stock is convertible is referred to as the Conversion Rate and will be
subject
to adjustment as described under “—Conversion rate adjustment.” If we are unable
to obtain approval to list the common stock on the NASDAQ Global Market or
a comparable U.S. national securities exchange by
, 2008, the
preferred stock 's liquidation preference will be reduced to $
per share and
it
will lose certain of its preferential rights including, but not limited to,
the right to receive a preferential quarterly dividend. Instead, our
convertible
preferred stock will thereafter be on parity with our common stock in
all
respects.
The
holders of shares of convertible preferred stock at the close of business
on a
Record Date will be entitled to receive the dividend payment on those
shares on
the corresponding Dividend Payment Date notwithstanding the conversion
of such
shares following that Record Date or our default in payment of the dividend
due
on that Dividend Payment Date. However, shares of convertible preferred
stock
surrendered for conversion during the period between the close of business
on
any Record Date and the close of business on the business day immediately
preceding the applicable Dividend Payment Date, except to the extent
of all
accumulated and unpaid dividends in respect of all Dividend Payment Dates
prior
to the applicable conversion date, must be accompanied by payment of
an amount
equal to the dividend payable on such shares on that Dividend Payment
Date.
Except as provided above with respect to a voluntary conversion, we will
make no
payment or allowance for unpaid dividends, whether or not in arrears,
on
converted shares or for dividends on the shares of common stock issued
upon
conversion.
Fractional
shares
No
fractional shares of common stock or securities representing fractional
shares
of common stock will be issued upon conversion. Any fractional interest
in a
share of common stock resulting from conversion will be paid in cash
based on
the Closing Sale Price of the common stock on the principal national
securities
exchange or market or automated quotation system on which the common
stock is
then listed or authorized for quotation or, if not so listed or authorized
for
quotation, an amount determined in good faith by our Board of Directors
to be
the fair value of the common stock at the close of business on the Trading
Day
immediately preceding the date of conversion.
Conversion
rate adjustment
The
Conversion Rate will be adjusted as described below. If, however, the
application of the following formula would result in a decrease in the
Conversion Rate below the initial Conversion Rate of one share of our
common
stock per share of convertible preferred stock other than in the case
of a share
combination, no adjustment to the Conversion Rate will be
made.
If
we
issue shares of our common stock as a dividend or distribution on shares
of our
common stock, or if we effect a share split or share combination, the
Conversion
Rate will be adjusted based on the following formula:
CR
1
= CRO
times OS1 divided by OSO
where,
CRO
= the
Conversion Rate in effect immediately prior to such event
CR
1
= the
Conversion Rate in effect immediately after such event
OSO
= the
number of shares of our common stock outstanding immediately prior to
such event
OS1
= the
number of shares of our common stock outstanding immediately after such
event
In
addition to this adjustment, we may increase the Conversion Rate as our
Board of
Directors deems advisable to avoid or diminish any income tax to holders
of
shares of our capital stock resulting from any dividend or distribution
of
capital stock (or rights to acquire common stock) or from any event treated
as
such for income tax purposes. We may also, from time to time, to the
extent
permitted by applicable law, increase the Conversion Rate by any amount
for any
period if our Board of Directors has determined that such increase would
be in
our best interests. If our Board of Directors makes such a determination,
it
will be conclusive. We will give holders of convertible preferred stock
notice
of such an increase in the Conversion Rate in accordance with the statement
of
designations and applicable laws. A holder may, in some circumstances,
including
the distribution of cash dividends to stockholders, be deemed to have
received a
distribution or dividend subject to U.S. federal income tax as a result
of an
adjustment or the nonoccurrence of an adjustment to the Conversion Rate.
For a
discussion of the U.S. federal income tax treatment of an adjustment
to the
Conversion Rate, see “Tax Consequences—United States Federal Income Taxation of
U.S. Holders.”
No
adjustment to the Conversion Rate or the ability of a holder of convertible
preferred stock to convert will be made if the holder will otherwise
participate
in the distribution without conversion solely as a holder of convertible
preferred stock. Adjustments to the applicable Conversion Rate will be
calculated to the nearest 1/10,000th of a share.
Consolidation,
merger and sale of assets
The
statement of designations provides that we may, without the consent of
the
holders of any of the outstanding convertible preferred stock, consolidate
with
or merge into any other person or convey, transfer or lease all or substantially
all of our assets to any person or may permit any person to consolidate
with or
merge into, or transfer or lease all or substantially all its properties
to, us;
provided, however, that (i) the shares of convertible preferred stock
will
become shares of such successor, transferee or lessee, having in respect
of such
successor, transferee or lessee the same powers, preferences and relative
participating, optional or other special rights and the qualification,
limitations or restrictions thereon, the convertible preferred stock
had
immediately prior to such transaction; and (ii) certain procedural conditions
are met.
Under
any
consolidation by us with, or merger by us into, any other person or any
conveyance, transfer or lease of all or substantially all our assets
as
described in the preceding paragraph, the successor resulting from such
consolidation or into which we are merged or the transferee or lessee
to which
such conveyance, transfer or lease is made, will succeed to, and be substituted
for, and may exercise every right and power of, ours under the shares
of
convertible preferred stock, and thereafter, except in the case of a
lease, the
predecessor (if still in existence) will be released from its obligations
and
covenants with respect to the convertible preferred stock.
DESCRIPTION
OF CAPITAL STOCK
Given
below is a summary of the material features of our shares. This summary
is not a
complete discussion of the charter documents and other instruments of
Euroseas
that create the rights of our shareholders. You are urged to read carefully
those documents and instruments. Please see “Where You Can Find Additional
Information” for information on how to obtain copies of those documents and
instruments.
On
October 6, 2006 we effected a 1-for-3 reverse stock split. The information
contained herein gives effect to such split. Our authorized capital stock
consists of 100,000,000 shares of common stock, par value, $.03 per share,
of
which 12,620,114 shares are currently issued and outstanding (subject
to
increase to the extent the reverse stock split results in any shareholder
receiving fractional shares, in which event such fractional share will
be
rounded up to the next whole share) and 20,000,000 shares of preferred
stock,
par value, $.01 per share, none of which are outstanding. All of our
shares of
stock are in registered form.
Common
Stock
As
of the
date of this prospectus, we are authorized to issue up to 100,000,000
shares of
common stock, par value $.03 per share, of which 12,620,114 shares are
currently
issued and outstanding. In addition, we have 585,581 shares of common
stock
reserved for issuance upon the exercise of warrants issued in our Private
Placement. Each outstanding share of common stock is entitled to one
vote,
either in person or by proxy, on all matters that may be voted upon by
their
holders at meetings of the shareholders. Holders of our common stock
(i) have
equal ratable rights to dividends from funds legally available therefore,
if
declared by the Board of Directors; (ii) are entitled to share ratably
in all of
our assets available for distribution upon liquidation, dissolution or
winding
up; and (iii) do not have preemptive, subscription or conversion rights
or
redemption or sinking fund provisions. All issued shares of our common
stock
when issued will be fully paid for and non-assessable.
Preferred
Stock
As
of the
date of this prospectus, we are authorized to issue up to 20,000,000
shares of
preferred stock, par value $0.01 per share, of which no shares are currently
issued and outstanding. The preferred stock may be issued in one or more
series
and our Board of Directors, without further approval from our shareholders,
is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights, liquidation preferences and other rights and
restrictions relating to any series. Issuances of preferred stock, while
providing flexibility in connection with possible financings, acquisitions
and
other corporate purposes, could, among other things, adversely affect
the voting
power of the holders of our common stock.
Warrants
On
August
25, 2005, we issued warrants to a number of institutional and accredited
investors to purchase 585,581 shares of common stock as part of a Private
Placement in which we raised approximately $21 million in gross proceeds.
The
warrants have a five year term and an exercise price of $10.80 per share.
The
warrants provide for adjustment to the exercise price and the number
of shares
issuable upon exercise of the warrants in the event we (a) pay a stock
dividend
or otherwise make a distribution or distributions on shares of our common
stock
or any other equity or equity equivalent securities payable in shares
of common
stock, (b) subdivide outstanding shares of common stock into a larger
number of
shares, (c) combine (including by way of reverse stock split) outstanding
shares
of common stock into a smaller number of shares, or (d) issue by
reclassification of shares of the common stock any shares of our capital
stock.
The warrants (i) are exercisable apart from the shares of common stock
sold in
the Private Placement (they are legally detachable), and (ii) may be
exercised
through a cashless exercise mechanism after one year from the issuance
date only
if the common shares trade publicly.
Directors
Our
directors are elected by a plurality of the votes cast at a meeting of
the
shareholders by the holders of shares entitled to vote in the election.
Cumulative voting may not be used to elect directors.
Our
Board
of Directors must consist of at least three directors, such number to
be
determined by the Board of Directors by a majority vote of the entire
Board from
time to time. Shareholders may change the number of our directors only
by an
affirmative vote of the holders of the majority of the outstanding shares
of
capital stock entitled to vote generally in the election of directors.
Our
Board
of Directors is divided into three classes as set out below in “Classified Board
of Directors.” Each director is elected to serve until the third succeeding
annual meeting after his election and until his successor shall have
been
elected and qualified, except in the event of his death, resignation
or removal.
Shareholder
Meetings
Under
our
bylaws, annual shareholder meetings will be held at a time and place
selected by
our Board of Directors. The meetings may be held in or outside of the
Marshall
Islands. Special meetings may be called at any time by the Board of Directors,
the Chairman of the Board or by the President. Notice of every annual
and
special meeting of shareholders must be given to each shareholder of
record
entitled to vote at least 15 but no more than 60 days before such
meeting.
Dissenters’
Rights of Appraisal and Payment
Under
the
BCA, our shareholders have the right to dissent from various corporate
actions,
including any merger or consolidation or sale of all or substantially
all of our
assets not made in the usual course of our business, and receive payment
of the
fair value of their shares. In the event of any further amendment of
our
articles of incorporation, a shareholder also has the right to dissent
and
receive payment for his or her shares if the amendment alters certain
rights in
respect of those shares. The dissenting shareholder must follow the procedures
set forth in the BCA to receive payment. In the event that we and any
dissenting
shareholder fail to agree on a price for the shares, the BCA procedures
involve,
among other things, the institution of proceedings in the high court
of the
Republic of the Marshall Islands or in any appropriate court in any jurisdiction
in which the Company’s shares are primarily traded on a local or national
securities exchange.
Shareholders’
Derivative Actions
Under
the
BCA, any of our shareholders may bring an action in our name to procure
a
judgment in our favor, also known as a derivative action, provided that
the
shareholder bringing the action is a holder of common stock both at the
time the
derivative action is commenced and at the time of the transaction to
which the
action relates.
Anti-takeover
Effect of Certain Provisions of our Articles of Incorporation and Bylaws
Several
provisions of our articles of incorporation and bylaws, which are summarized
below, may have anti-takeover effects. These provisions are intended
to avoid
costly takeover battles, lessen our vulnerability to a hostile change
in control
and enhance the ability of our Board of Directors to maximize shareholder
value
in connection with any unsolicited offer to acquire us. However, these
anti-takeover provisions, which are summarized below, could also discourage,
delay or prevent (1) the merger or acquisition of our company 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 officers and directors.
Blank
Check Preferred Stock
Under
the
terms of our articles of incorporation, our Board of Directors has authority,
without any further vote or action by our shareholders, to issue up to
20,000,000 shares of blank check preferred stock. Our Board of Directors
may
issue shares of preferred stock on terms calculated to discourage, delay
or
prevent a change in control of our company or the removal of our management.
Classified
Board of Directors
Our
articles of incorporation provide for the division of our Board of Directors
into three classes of directors, with each class as nearly equal in number
as
possible, serving staggered, three year terms. Approximately one-third
of our
Board of Directors will be elected each year. This classified board provision
could discourage a third party from making a tender offer for our shares
or
attempting to obtain control of us. It could also delay shareholders
who do not
agree with the policies of our Board of Directors from removing a majority
of
our Board of Directors for two years.
Election
and Removal of Directors
Our
articles of incorporation prohibit cumulative voting in the election
of
directors. Our bylaws require parties other than the Board of Directors
to give
advance written notice of nominations for the election of directors.
Our
articles of incorporation also provide that our directors may be removed
only
for cause and only upon the affirmative vote of a majority of the outstanding
shares of our capital stock entitled to vote for those directors. These
provisions may discourage, delay or prevent the removal of incumbent
officers
and directors.
Limited
Actions by Shareholders
Our
articles of incorporation and our bylaws provide that any action required
or
permitted to be taken by our shareholders must be effected at an annual
or
special meeting of shareholders or by the unanimous written consent of
our
shareholders. Our articles of incorporation and our bylaws provide that,
subject
to certain exceptions, our Board of Directors, our Chairman of the Board
or by
the President and the business transacted at the special meeting is limited
to
the purposes stated in the notice. Accordingly, a shareholder may not
call a
special meeting and shareholder consideration of a proposal may be delayed
until
the next annual meeting.
REGISTRAR
AND TRANSFER AGENT
The
registrar and transfer agent for our convertible preferred stock
and our common
stock is American Stock Transfer & Trust Company.
MARSHALL
ISLANDS COMPANY CONSIDERATIONS
Our
corporate affairs are governed by our articles of incorporation and bylaws
and
by the Business Corporation Act of the Republic of The Marshall Islands,
or BCA.
The provisions of the BCA resemble provisions of the corporation laws of
a
number of states in the United States. While the BCA provides that it is
to be
interpreted according to the laws of the State of Delaware and other states
with
substantially similar legislative provisions, there have been few, if any,
court
cases interpreting the BCA in the Marshall Islands and we can not predict
whether Marshall Islands courts would reach the same conclusions as United
States courts. Thus, you may have more difficulty in protecting your interests
in the face of actions by the management, directors or controlling stockholders
than would stockholders of a corporation incorporated in a United States
jurisdiction which has developed a substantial body of case law. The following
table provides a comparison between the statutory provisions of the BCA
and the
Delaware General Corporation Law relating to stockholders’ rights:
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Marshall
Islands
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Delaware
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|
Stockholder
Meetings
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·
|
Held
at a time and place as designated in the bylaws.
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·
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May
be held at such time or place as designated in the certificate
of
incorporation or the bylaws, or if not so designated, as determined
by the
Board of Directors.
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|
|
|
|
|
·
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May
be held within or without the Marshall Islands.
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·
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May
be held within or without Delaware.
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|
|
|
|
·
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Notice:
|
|
·
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Notice:
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|
|
|
|
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|
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·
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Whenever
stockholders are required to take action at a meeting, written
notice
shall state the place, date and hour of the meeting and indicate
that it
is being issued by or at the direction of the person calling
the
meeting.
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|
|
·
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Whenever
stockholders are required to take any action at a meeting,
a written
notice of the meeting shall be given which shall state the
place, if any,
date and hour of the meeting, and the means of remote communication,
if
any.
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|
|
|
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·
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A
copy of the notice of any meeting shall be given personally
or sent by
mail not less than 15 nor more than 60 days before the
meeting.
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|
|
·
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Written
notice shall be given not less than 10 nor more than 60 days
before the
meeting.
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Stockholder’s
Voting Rights
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·
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Any
action required to be taken by meeting of stockholders may
be taken
without meeting if consent is in writing and is signed by all
the
stockholders entitled to vote.
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·
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Stockholders
may act by written consent to elect directors.
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·
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Any
person authorized to vote may authorize another person to act
for him by
proxy.
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·
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Any
person authorized to vote may authorize another person or persons
to act
for him by proxy.
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|
|
|
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·
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Unless
otherwise provided in the articles of incorporation, a majority
of shares
entitled to vote constitutes a quorum. In no event shall a
quorum consist
of fewer than one third of the shares entitled to vote at a
meeting.
|
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·
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For
non-stock companies, certificate of incorporation or bylaws
may specify
the number of members to constitute a quorum. In the absence
of this,
one-third of the members shall constitute a quorum.
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·
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When
a quorum is once present to organize a meeting, it is not broken
by the
subsequent withdrawal of any stockholders.
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·
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For
stock corporations, certificate of incorporation or bylaws
may specify the
number to constitute a quorum but in no event shall a quorum
consist of
less than one-third of shares entitled to vote at a meeting.
In the
absence of such specifications, a majority of shares entitled
to vote
shall constitute a quorum.
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·
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The
articles of incorporation may provide for cumulative voting
in the
election of directors.
|
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·
|
The
certificate of incorporation may provide for cumulative
voting.
|
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·
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Any
two or more domestic corporations may merge into a single corporation
if
approved by the board and if authorized by a majority vote
of the holders
of outstanding shares at a stockholder meeting.
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·
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Any
two or more corporations existing under the laws of the state
may merge
into a single corporation pursuant to a board resolution and
upon the
majority vote by stockholders of each constituent corporation
at an annual
or special
meeting.
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·
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Any
sale, lease, exchange or other disposition of all or substantially
all the
assets of a corporation, if not made in the corporation’s usual or regular
course of business, once approved by the board, shall be authorized
by the
affirmative vote of two-thirds of the shares of those entitled to vote
at
a stockholder meeting.
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·
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Every
corporation may at any meeting of the board sell, lease or exchange
all or
substantially all of its property and assets as its board deems expedient
and for the best interests of the corporation when so authorized by
a
resolution adopted by the holders of a majority of the outstanding
stock
of a corporation entitled to vote.
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·
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Any
domestic corporation owning at least 90% of the outstanding shares
of each
class of another domestic corporation may merge such other corporation
into itself without the authorization of the stockholders of any
corporation.
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·
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Any
corporation owning at least 90% of the outstanding shares of each class
of
another corporation may merge the other corporation into itself and
assume
all of its obligations without the vote or consent of stockholders;
however, in case the parent corporation is not the surviving corporation,
the proposed merger shall be approved by a majority of the outstanding
stock of the parent corporation entitled to vote at a duly called
stockholder meeting.
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·
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Any
mortgage, pledge of or creation of a security interest in all or any
part
of the corporate property may be authorized without the vote or consent
of
the stockholders, unless otherwise provided for in the articles of
incorporation.
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·
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Any
mortgage or pledge of a corporation’s property and assets may be
authorized without the vote or consent of stockholders, except to the
extent that the certificate of incorporation otherwise
provides.
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Directors
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·
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Board
must consist of at least one member.
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·
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Board
must consist of at least one member.
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·
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Number
of members can be changed by an amendment to the bylaws, by the
stockholders, or by action of the board.
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·
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Number
of board members shall be fixed by the bylaws, unless the certificate
of
incorporation fixes the number of directors.
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|
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·
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If
the board is authorized to change the number of directors, it can only
do
so by a majority of the entire board and so long as no decrease in
the
number shall shorten the term of any incumbent director.
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·
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If
the number of directors is fixed by the certificate of incorporation,
a
change in the number shall be made only by an amendment of the
certificate.
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·
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Removal:
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·
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Removal:
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·
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Any
or all of the directors may be removed for cause by vote of the
stockholders.
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·
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Any
or all of the directors may be removed, with or without cause, by
the
holders of a majority of the shares entitled to vote unless the
certificate of incorporation otherwise provides.
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·
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If
the articles of incorporation or the bylaws so provide, any or all
of the
directors may be removed without cause by vote of the
stockholders.
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·
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In
the case of a classified board, stockholders may effect removal of
any or
all directors only for cause.
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Dissenter’s
Rights of Appraisal
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·
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Stockholders
have a right to dissent from a merger or sale of all or substantially
all
assets not made in the usual course of business, and receive payment
of
the fair value of their shares.
|
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·
|
With
limited exceptions, appraisal rights are available for the shares
of any
class or series of stock of a corporation in a merger or
consolidation.
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·
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A
holder of any adversely affected shares who does not vote on or consent
in
writing to an amendment to the articles of incorporation has the right
to
dissent and to receive payment for such shares if the
amendment:
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·
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alters
or abolishes any preferential right of any outstanding shares having
preference; or
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·
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creates,
alters, or abolishes any provision or right in respect to the redemption
of any outstanding shares; or
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·
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alters
or abolishes any preemptive right of such holder to acquire shares
or
other securities; or
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·
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excludes
or limits the right of such holder to vote on any matter, except
as such
right may be limited by the voting rights given to new shares then
being
authorized of any existing or new class.
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Stockholder’s
Derivative Actions
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·
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An
action may be brought in the right of a corporation to procure a judgment
in its favor, by a holder of shares or of voting trust certificates
or of
a beneficial interest in such shares or certificates. It shall be made
to
appear that the plaintiff is such a holder at the time of bringing
the
action and that he was such a holder at the time of the transaction
of
which he complains, or that his shares or his interest therein devolved
upon him by operation of law.
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·
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In
any derivative suit instituted by a stockholder of a corporation, it
shall
be averred in the complaint that the plaintiff was a stockholder of
the
corporation at the time of the transaction of which he complains or
that
such stockholder’s stock thereafter devolved upon such stockholder by
operation of law.
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·
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Complaint
shall set forth with particularity the efforts of the plaintiff to
secure
the initiation of such action by the board or the reasons for not
making
such effort.
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·
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Such
action shall not be discontinued, compromised or settled, without
the
approval of the High Court of the Republic.
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·
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Reasonable
expenses including attorney’s fees may be awarded if the action is
successful.
|
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|
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·
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Corporation
may require a plaintiff bringing a derivative suit to give security
for
reasonable expenses if the plaintiff owns less than 5% of any class
of
stock and the shares have a value of less than $50,000.
|
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TAX
CONSEQUENCES
The
following is a discussion of the material Marshall Islands and United States
federal income tax consequences relevant to an investment decision by a U.S.
Holder, as defined below, with respect to the convertible preferred stock.
This
discussion does not purport to deal with the tax consequences of owning
convertible preferred 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 the voting power of our stock, may be subject
to
special rules. This discussion deals only with holders who purchase convertible
preferred stock in connection with this offering and hold the convertible
preferred 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 convertible preferred stock.
Marshall
Islands Tax Consequences
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 Consequences
In
the
opinion of Seward & Kissel LLP, 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 convertible
preferred
stock or of common shares received on a conversion of our convertible
preferred 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.
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 shipping 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 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:
|
·
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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 (i) 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 and
(ii) who comply with certain documentation requirements, which we
refer to
as the “50% Ownership Test,” or
|
|
·
|
our
stock is primarily and regularly traded on one or
more established securities markets 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, Panama and Cyprus, the jurisdictions where we and our
shipowning subsidiaries are incorporated, grant “equivalent exemptions” 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.
For
taxable years through the 2006 taxable year, we believe that we will satisfy
the
50% Ownership Test. For taxable years beginning after this offering, it may
be
difficult for us to satisfy the 50% Ownership Test due to the widely-held
ownership of our stock. Our ability to satisfy the Publicly-Traded Test
beginning with the 2007 taxable year is discussed below.
The
regulations provide, in pertinent part, that stock of a foreign corporation
will
be considered to be “primarily traded” on an established securities market in a
country if the number of shares of each class of stock that are traded during
any taxable year on all established securities markets in that country exceeds
the number of shares in each such class that are traded during that year
on
established securities markets in any other single country. Upon completion
of
our offering, we anticipate that our convertible
preferred
stock will be “traded” on the NASDAQ Global Market
and
our
common stock will be traded on the OTC Bulletin Board. The regulations define
an
“established securities market” to include a national securities exchange that
is registered under section 6 of the Securities Act of 1934 (such as the
NASDAQ
Global Market), a “United States over-the-counter market,” and certain foreign
securities exchanges. We believe that, and intend to take the position for
United States federal income tax purposes that, the OTC Bulletin Board qualifies
as an “United States over-the-counter market” and thus is an “established
securities market” under the regulations. Therefore, we expect that our stock
will be “primarily traded” on one or more “established securities markets” in
the United States
.
Under
the
regulations, our stock will be considered to be “regularly traded” if one or
more classes of our stock representing 50% or more of our outstanding shares,
by
total combined voting power of all classes of stock entitled to vote and
total
value, is listed on one or more established securities markets which we refer
to
as the listing threshold. Since our convertible preferred stock and common
stock, our sole classes of stock, will be listed on the NASDAQ Global Market
and
the OTC Bulletin Board, respectively, we will satisfy the listing
requirement.
It
is
further required that with respect to each class of stock relied upon to
meet
the listing requirement (i) such class of the stock is traded on the
market, other than in minimal quantities, on at least 60 days during the
taxable
year or 1/6 of the days in a short taxable year; and (ii) the aggregate number
of shares of such class of stock traded on such market is at least 10% of
the
average number of shares of such class of stock outstanding during such year
or
as appropriately adjusted in the case of a short taxable year. We believe
we
will satisfy the trading frequency and trading volume tests. Even if this
were
not the case, the regulations provide that the trading frequency and trading
volume tests will be deemed satisfied by a class of stock if, as we expect
to be
the case with our common stock and our convertible preferred stock, such
class
of stock is traded on an established market in the United States and such
class
of stock is regularly quoted by dealers making a market in such
stock.
Notwithstanding
the foregoing, the regulations provide, in pertinent part, a class
of stock will not be considered to be “regularly traded” on an established
securities market for any taxable year in which 50% or more of the outstanding
shares of such class of stock are owned, actually or constructively
under specified stock attribution rules, on more than half the days during
the
taxable year by persons who each own 5% or more of such class
of stock, which we refer to as the “5% Override Rule.”
For
purposes of being able to determine the persons who own 5% or more of a class
our stock, or “5% Stockholders,” the regulations permit us to rely on Schedule
13G and Schedule 13D filings with the United States Securities and Exchange
Commission, or the “SEC,” to identify persons who have a 5% or more beneficial
interest in a class of our stock. The regulations further provide that
an investment company which is registered under the Investment Company Act
of
1940, as amended, will not be treated as a 5% Stockholder for such
purposes.
After
the
offering, our 5% Shareholders will own at least 78.6% of our common stock.
Therefore, we anticipate that our common stock will be subject to the
5% Override Rule unless we can establish that among the closely-held group
of 5%
Shareholders, sufficient shares are owned by qualified shareholders for purposes
of Section 883 to preclude non-qualified 5% Shareholders in the closely-held
group from owning 50% or more of the value of such class of our stock for
more
than half the number of days during the taxable year. In order to establish
this, sufficient 5% Shareholders would have to provide us with certain
information in order to substantiate their identity as qualified shareholders.
Friends Investment Company Inc., which owns 78.6% of our common stock, and
certain shareholders of Friends have each agreed to provide such information
pursuant to a letter agreement.
Based
upon this letter agreement, we believe that we will be able, immediately
following the offering, to establish that there are sufficient qualified
shareholders among our 5% Shareholders in order to qualify for the benefits
of
Section 883. However, there can be no assurance that we will be able to continue
to satisfy the requirements for qualification under Section 883, as there
are
events, including changes in the “qualified shareholder” status of certain
shareholders of Friends or dispositions of our shares by Friends that could
leave us unable to satisfy the requirements of Section 883 notwithstanding
compliance with the letter agreement.
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.
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 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 convertible
preferred
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.
If
a
partnership holds our convertible preferred 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
convertible preferred stock, you are encouraged to consult your tax
advisor.
Distributions
Subject
to the discussion of passive foreign investment companies below, any
distributions made by us with respect to our convertible
preferred
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
convertible
preferred
stock will generally be treated as “passive income” (which will be
treated as “passive category income” for taxable years beginning after December
31, 2006) or, in the case of certain types of U.S. Holders, “financial services
income,” (which will be treated as “general category income” income for taxable
years beginning after December 31, 2006) for purposes of computing allowable
foreign tax credits for United States foreign tax credit
purposes.
Dividends
paid on our convertible
preferred
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 convertible
preferred
stock is readily tradable on an established securities market in the United
States (such as the NASDAQ Global Market, on which our convertible preferred
stock will be listed), and (3) the U.S. Individual Holder has owned the
convertible
preferred
stock for more than 60 days in the 121-day period beginning 60 days
before the date on which the convertible preferred stock becomes
ex-dividend
(in
the
case of dividends attributable to periods totaling more than 366 days, the
U.S.
Individual Holder must have owned the convertible preferred stock
for
more
than 90 days during the 181-day period that began 90 days before the ex-dividend
date).
There is no assurance that any dividends paid on our convertible
preferred
stock will be eligible for these preferential rates in the hands of
a
U.S. Individual Holder. In 2005, legislation was in the U.S. Senate which,
if
enacted in its present form, would preclude our dividends from qualifying
for
such preferential rates prospectively from the date of the enactment. This
legislation was referred to the Senate Finance Committee and no further action
has been taken with respect to it. 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. The tax consequences of distributions to an owner of shares
of common stock after conversion should be substantially the same as those
described above (except that the rule regarding dividends attributable to
periods in excess of 366 days would not apply).
Special
rules may apply to any “extraordinary dividend” generally, a dividend in an
amount which is equal to or in excess of five percent (ten percent in the
case of shares of common stock) of a stockholder’s adjusted basis (or fair
market value in certain circumstances) in a share of our stock paid by us.
If we
pay an “extraordinary dividend” on our 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 stock will be treated as long-term capital loss
to the
extent of such dividend.
Sale,
Exchange or other Disposition of Preferred
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 convertible preferred 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. The tax consequences to an owner of common shares after
conversion should be substantially the same as to an owner of convertible
preferred shares.
Conversion
of Convertible Preferred Stock Into Common
Stock
A
U.S.
Holder will not recognize gain or loss on the conversion of convertible
preferred stock into shares of common stock. The common stock received
upon
conversion will have a basis for U.S. federal income tax purposes equal
to the
U.S. Holder’s basis in his convertible preferred stock. The holding period of
the common stock for U.S. federal income tax purposes will include the
U.S.
Holder’s holding period in his convertible preferred stock.
Adjustments
to Conversion Rate
The
conversion rate of the convertible preferred stock is subject to adjustment
under certain circumstances. Section 305 of the Code and the Treasury
Regulations issued thereunder may treat the holders of the convertible
preferred
stock as having received a constructive distribution, resulting in
dividend
treatment (as described above) to the extent of the Company's current
and/or
accumulated earnings and profits as determined under U.S. federal income
tax
principles, if, and to the extent that, certain adjustments in the
conversion
rate (or certain other corporate transactions) increase the proportionate
interest of a U.S. Holder of the convertible preferred stock in the
fully
diluted common stock (particularly an adjustment to reflect a taxable
dividend
to holders of common stock), whether or not such holder ever exercises
its
conversion privilege. Moreover, if there is not a full adjustment to
the
conversion rate of the convertible preferred stock to reflect a stock
dividend
or other event increasing the proportionate interest of the holders
of
outstanding common stock in the assets or earnings and profits of the
Company,
then such increase in the proportionate interest of the holders of
the common
stock may be treated as a distribution to such holders, taxable as
a dividend
(as described above) to the extent of the Company's current and/or
accumulated
earnings and profits.
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:
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·
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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
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·
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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.
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.
As
discussed more fully below, if we were to be treated as a passive foreign
investment company for any taxable year, a U.S. Holder would be subject to
different taxation rules depending on whether the U.S. Holder makes an election
to treat us as a “Qualified Electing Fund,” which election we refer to as a “QEF
election.” As an alternative to making a QEF election, provided that our
convertible preferred shares are listed on the NASDAQ Global Market, a U.S.
Holder should be able to make a “mark-to-market” election with respect to our
convertible
preferred
stock, as discussed below. The tax consequences to an owner of common
shares after conversion should be substantially the same as to an owner of
convertible preferred shares (except that eligibility to make the
mark-to-market election will depend upon the markets on which the common
shares
are listed).
Taxation
of U.S. Holders Making a Timely QEF Election
If
a U.S.
Holder makes a timely QEF election, which U.S. Holder we refer to as an
“Electing Holder,” the Electing Holder must report each year for United States
federal income tax purposes his pro rata share of our ordinary earnings
and our
net capital gain, if any, for our taxable year that ends with or within
the
taxable year of the Electing Holder, regardless of whether or not distributions
were received from us by the Electing Holder. The Electing Holder’s adjusted tax
basis in the convertible
preferred
stock will be increased to reflect taxed but undistributed earnings
and
profits. Distributions of earnings and profits that had been previously
taxed
will result in a corresponding reduction in the adjusted tax basis in the
convertible
preferred
stock and will not be taxed again once distributed. An Electing Holder
would
generally recognize capital gain or loss on the sale, exchange or other
disposition of our convertible
preferred
stock. A U.S. Holder would make a QEF election with respect to any
year
that our company is a passive foreign investment company by filing IRS
Form 8621
with his United States federal income tax return. If we were aware that
we were
to be treated as a passive foreign investment company for any taxable year,
we
would provide each U.S. Holder with all necessary information in order
to make
the QEF election described above.
Taxation
of U.S. Holders Making a “Mark-to-Market” Election
Alternatively,
if we were to be treated as a passive foreign investment company for any
taxable
year and our convertible preferred stock is listed on the NASDAQ Global
Market
and therefore is treated as “marketable stock,” a U.S. Holder would be allowed
to make a “mark-to-market” election with respect to our convertible
preferred
stock, provided the U.S. Holder completes and files IRS Form 8621
in
accordance with the relevant instructions and related Treasury Regulations.
If
that election is made, the U.S. Holder generally would include as ordinary
income in each taxable year the excess, if any, of the fair market value
of the
convertible preferred stock at the end of the taxable year over such holder’s
adjusted tax basis in the convertible
preferred
stock. The U.S. Holder would also be permitted an ordinary loss
in
respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the
convertible
preferred
stock over its fair market value at the end of the taxable year,
but only
to the extent of the net amount previously included in income as a result
of the
mark-to-market election. A U.S. Holder’s tax basis in his convertible
preferred
stock would be adjusted to reflect any such income or loss amount.
Gain
realized on the sale, exchange or other disposition of our convertible
preferred
stock would be treated as ordinary income, and any loss realized
on the
sale, exchange or other disposition of the convertible
preferred
stock would be treated as ordinary loss to the extent that such
loss does
not exceed the net mark-to-market gains previously included by the U.S.
Holder.
Taxation
of U.S. Holders Not Making a Timely QEF or Mark-to-Market
Election
Finally,
if we were to be treated as a passive foreign investment company for any
taxable
year, a U.S. Holder who does not make either a QEF election or a
“mark-to-market” election for that year, whom we refer to as a “Non-Electing
Holder,” would be subject to special rules with respect to (1) any excess
distribution (i.e., the portion of any distributions received by the
Non-Electing Holder on our convertible
preferred
stock in a taxable year in excess of 125 percent of the average
annual
distributions received by the Non-Electing Holder in the three preceding
taxable
years, or, if shorter, the Non-Electing Holder’s holding period for the
convertible
preferred
stock), and (2) any gain realized on the sale, exchange or other
disposition of our convertible
preferred
stock. Under these special rules:
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the
excess distribution or gain would be allocated ratably over the
Non-Electing Holders’ aggregate holding period for
the stock;
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the
amount allocated to the current taxable year and any taxable year
before
we became a passive foreign investment company would be taxed as
ordinary
income; and
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the
amount allocated to each of the other taxable years would be subject
to
tax at the highest rate of tax in effect for the applicable class
of
taxpayer for that year, and an interest charge for the deemed deferral
benefit would be imposed with respect to the resulting tax attributable
to
each such other taxable year.
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These
penalties would not apply to a pension or profit sharing trust or other
tax-exempt organization that did not borrow funds or otherwise utilize
leverage
in connection with its acquisition of our convertible preferred
stock.
If
a Non-Electing Holder who is an individual dies while owning our convertible
preferred stock, such holder’s successor generally would not receive a step-up
in tax basis with respect to such stock.
United
States Federal Income Taxation of “Non-U.S. Holders”
A
beneficial owner of convertible
preferred
stock that is not a U.S. Holder is referred to herein as a “Non-U.S.
Holder.”
Dividends
on Convertible Preferred 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 convertible
preferred
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 Convertible
Preferred 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
preferred
stock
or
the
conversion of our preferred stock into common stock
,
unless:
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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
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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.
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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 coonvertible
preferred
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.
The
tax
consequences to a Non-U.S. Holder of owning our common stock after conversion
should be substantially the same as those described above.
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:
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fail
to provide an accurate taxpayer identification
number;
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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
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in
certain circumstances, fail to comply with applicable certification
requirements.
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Non-U.S.
Holders may be required to establish their exemption from information reporting
and backup withholding by certifying their status on Internal Revenue Service
Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If
you
sell your 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 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 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.
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 our shares,
including the applicability of any state, local or foreign tax laws and any
proposed changes in applicable law.
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
We
estimate the expenses in connection with the issuance and distribution
of
our convertible
preferred
stock in this offering, other than underwriting discounts and commissions,
as
follows:
SEC
Registration Fee
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$
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–
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Printing
and Engraving Expenses
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$
|
–
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Legal
Fees and Expenses
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$
|
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Accountants’
Fees and Expenses
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$
|
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NASDAQ
Entry Fee
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$
|
–
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NASD
Fee
|
|
$
|
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Transfer
Agent’s Fees and Expenses
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$
|
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Miscellaneous
Costs
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$
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Total
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$
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UNDERWRITING
Subject
to the terms and conditions stated in the underwriting agreement
dated
, 2006 among the underwriters and us, each of the underwriters named below
has
severally agreed to purchase, and we have agreed to sell to each named
underwriter, the number of shares set forth opposite the name of each
underwriter.
Underwriters
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Number
of Shares
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Cantor
Fitzgerald & Co.
(1)
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Oppenheimer
& Co. Inc.
(2)
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Total
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(1)
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110
East 59th Street, New York, NY 10022
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(2)
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125
Broad Street, New York, NY 10004
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The
underwriting agreement provides that the obligations of the several underwriters
are subject to various conditions, including approval of legal matters by
counsel. The underwriters are required to purchase and pay for all of the shares
of common stock listed above if any are purchased.
Over-Allotment
Option
We
have
granted the underwriters a 30-day option to purchase up to an aggregate
of additional
shares of our convertible
preferred
stock at the public offering price set forth on the cover page of
this
prospectus less underwriting discounts and commissions. This option may be
exercised at any time, and from time to time, to cover over-allotments, if
any.
To the extent that the option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
proportionate to the underwriter’s initial commitment as indicated in the
preceding table, and we will be obligated, pursuant to the option, to sell
these
shares to the underwriters.
Commissions
and Expenses
The
underwriters have advised us that the underwriters propose to offer
our convertible
preferred
stock directly to the public at the public offering price on the cover of
this
prospectus and to selected dealers, who may include the underwriters, at
such
offering price less a selling concession not in excess of
$ per share. The underwriters may allow and the
dealers may re-allow, a discount not in excess of $
per share to other dealers. After this offering, the underwriters may
change the public offering price and other offering terms.
The
following table summarizes the underwriting discounts and commissions that
we
will pay to the underwriters in connection with this offering. These amounts
are
shown assuming both no exercise and full exercise of the underwriters’
over-allotment option to purchase up to 750,000 additional shares. The
underwriting fee is the difference between the initial price to the public
and
the amount the underwriters pay us for the shares.
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No
Exercise
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Full
Exercise
|
Per
Share
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Total
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We
estimate that the total expenses of this offering, excluding underwriting
discounts and commissions paid by us, will be approximately $0.8
million.
Stabilization,
Short Positions and Penalty Bids
The
underwriters may engage in over-allotment, stabilizing transactions, syndicate
covering transactions, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of our convertible
preferred
stock, in accordance with Regulation M under the Exchange
Act:
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Over-allotment
involves sales by the underwriters of shares in excess of the number
of
shares the underwriters are obligated to purchase, which creates
a
syndicate short position. The short position may be either a covered
short
position or a naked short position. In a covered short position,
the
number of shares over-allotted by the underwriters is not greater
than the
number of shares that they may purchase in the over-allotment option.
In a
naked short position, the number of shares involved is greater than
the
number of shares in the over-allotment option. The underwriters may
close
out any short position by either exercising their over-allotment
option
and/or purchasing shares in the open
market;
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Stabilizing
transactions permit bids to purchase our convertible
preferred
stock so long as the stabilizing bids do not exceed a specified
maximum;
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·
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Syndicate
covering transactions involve purchases of our convertible
preferred
stock in the open market after the distribution has been
completed
in order to cover syndicate short positions. In determining the
source of
shares to close out the short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open
market as compared to the price at which they may purchase shares
through
the over-allotment option. If the underwriters sell more shares
than could
be covered by the over-allotment option, which is called a naked
short
position, the position can only be closed out by buying shares
in the open
market. A naked short position is more likely to be created if
the
underwriters are concerned that there could be downward pressure
on the
price of the shares in the open market after pricing that could
adversely
affect investors who purchase shares in this offering;
and
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Penalty
bids permit the underwriters to reclaim a selling concession from
a
syndicate member when the
convertible
preferred
stock originally sold by the syndicate member is
purchased in a stabilizing or syndicate covering transaction to
cover
syndicate short positions.
|
These
stabilizing transactions, syndicate covering transactions and penalty bids
may
have the effect of raising or maintaining the market price of our convertible
preferred stock or preventing or retarding a decline in the market price
of our
convertible
preferred
stock. As a result, the price of our convertible
preferred
stock may be higher than the price that might otherwise exist in the
open
market. These transactions may be effected on the NASDAQ Global Market or
otherwise and, if commenced, may be discontinued at any time.
Neither
we nor any of the underwriters make any representation or prediction as to
the
direction or magnitude of any effect that the transactions described above
may
have on the price of our convertible
preferred
stock. In addition, neither we nor the underwriters make any
representation that the underwriters will engage in these stabilizing
transactions or that any transaction, once commenced, will not be discontinued
without notice.
Each
of
the underwriters has represented and agreed that:
(a)
it
has not made or will not make an offer of shares to the public in the United
Kingdom within the meaning of Section 102B of the Financial Services and Markets
Act 2000, as amended, or FSMA, except to legal entities which are authorized
or
regulated to operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in securities or
otherwise in circumstances which do not require the publication by us of a
prospectus pursuant to the Prospectus Rules of the Financial Services Authority;
(b)
it
has only communicated or caused to be communicated and will only communicate
or
cause to be communicated an invitation or inducement to engage in investment
activity (within the meaning of Section 21 of FSMA) to persons who have
professional experience in matters relating to investments falling within
Article 19(5) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 or in circumstances in which Section 21 of FSMA does
not
apply to us; and
(c)
it
has complied with, and will comply with, all applicable provisions of FSMA
with
respect to anything done by it in relation to the shares in, from or otherwise
involving the United Kingdom.
In
relation to each member state of the European Economic Area which has
implemented the Prospectus Directive, which we refer to as a Relevant Member
State, each underwriter has represented and agreed that with effect from and
including the date on which the Prospectus Directive is implemented in that
Relevant Member State, which we refer to as the Relevant Implementation Date,
it
has not made and will not make an offer of shares to the public in that Relevant
Member State prior to the publication of a prospectus in relation to the shares
which has been approved by the competent authority in that Relevant Member
State
or, where approved in another Relevant Member State and notified to the
competent authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that it may, with effect from and including the
Relevant Implementation Date, make an offer of shares to the public in that
Relevant Member State at any time:
(a)
to
legal entities which are authorized or regulated to operate in the financial
markets or, if not so authorized or regulated, whose corporate purpose is solely
to invest in securities;
(b)
to
any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year, (2) a total balance sheet of more
than
€43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in
its last annual or consolidated accounts; or
(c)
in
any other circumstances which do not require the publication by us of a
prospectus pursuant to Article 3 of the Prospectus Directive.
For
the
purposes of this provision, the expression an “offer of shares to the public” in
relation to any shares in any Relevant Member State means the communication
in
any form and by any means of sufficient information on the terms of the offer
and the shares to be offered so as to enable an investor to decide to purchase
or subscribe for the shares, as the same may be varied in that Relevant Member
State by any measure implementing the Prospectus Directive in that Relevant
Member State, and the expression “Prospectus Directive” means Directive 2003/71/
EC and includes any relevant implementing measure in each Relevant Member State.
Lock-Up
Agreements
We
have
agreed that, without the prior written consent of Cantor Fitzgerald & Co.,
we will not, directly or indirectly, offer, sell, contract to sell, transfer
the
economic risk of ownership in, grant an option to purchase, make any short
sale
of, pledge or otherwise dispose of any shares of our common stock, options
or
warrants to acquire any shares of our common stock, or any securities
convertible into, exchangeable or exercisable for, or any other rights to
purchase or acquire, any shares of our common stock without the prior written
consent of Cantor Fitzgerald & Co.
for
a
period of 180 days from the later of the effective date of this Registration
Statement or the pricing of this offering (
the
“Lock-Up Period”), except for the shares of convertible
preferred
stock offered in this offering. Notwithstanding the foregoing, if
(i) we
issue an earnings release or material news, or a material event relating
to us
occurs, during the last 17 days of the Lock-Up Period, or (ii) prior to the
expiration of the Lock-Up Period, we announce that we will release earnings
results during the 16-day period beginning on the last day of the Lock-Up
Period, the above restrictions will continue to apply until the expiration
of
the 18-day period beginning on the issuance of the earnings release or the
occurrence of the material news or material event, unless Cantor Fitzgerald
& Co. waives, in writing, such extension.
Our
executive officers, directors and certain existing stockholders will enter
into
lock-up agreements under which they will agree not to, without the prior
written
consent of Cantor Fitzgerald & Co., directly or indirectly, offer, sell,
contract to sell, transfer the economic risk of ownership in, grant an option
to
purchase, make any short sale of, pledge or otherwise dispose of any shares
of
our common stock, options or warrants to acquire any shares of our common
stock,
or any securities convertible into, exchangeable or exercisable for, or any
other rights to purchase or acquire, any shares of our common stock without
the
prior written consent of Cantor Fitzgerald & Co. during the Lock-Up Period
(with respect to Friends and our executive officers and directors) and for
a
90-day period (with respect to Eurobulk Marine Holdings, Inc.). These
restrictions will remain in effect beyond the Lock-Up Period under the same
circumstances described in the immediately preceding
paragraph.
Indemnification
We
have
agreed to indemnify the underwriters against liabilities relating to this
offering, including certain liabilities under the Securities Act of 1933, as
amended, and liabilities arising from breaches of the representations and
warranties contained in the underwriting agreement, and to contribute to
payments that the underwriters may be required to make for these
liabilities.
Listing
Our
common stock is currently quoted on the OTCBB under the symbol “EUSEF.OB”
and
will
continue to trade on the OTCBB after this offering.
We have applied
to have our convertible
preferred
stock listed on the NASDAQ Global Marked under the symbol
“ ” upon
completion of this offering.
Internet
Distributions
A
prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters, or selling group members, if
any
participating in this offering. The representatives may agree to allocate a
number of shares to underwriters and selling group members for the sale to
their
online brokerage account holders. Internet distributions will be allocated
by
the underwriters and selling group members that will make internet distributions
on the same basis as other allocations. The representatives may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders.
LEGAL
MATTERS
The
validity of the convertible
preferred
stock will be passed upon for us by Seward & Kissel LLP, New York,
New York with respect to matters of U.S. and Republic of Marshall Islands
law.
The underwriters have been represented by Morgan, Lewis & Bockius LLP, New
York, New York.
EXPERTS
The
consolidated financial statements of Euroseas Ltd. and subsidiaries as of
December 31, 2005 and 2004, and for each of the three years in the period ended
December 31, 2005, included in this prospectus in the registration statement
have been audited by Deloitte, Hadjipavlou, Sofianos & Cambanis S.A., an
independent registered public accounting firm, as stated in their report
appearing herein and elsewhere in the registration statement, and are included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The
sections in this prospectus entitled “Prospectus Summary
–
Industry
Trends,”
“Business, ” and “The International Drybulk and Container Shipping Industry,”
have been reviewed by Maritime Strategies International Ltd. , which has
confirmed to us that they accurately describe the international shipping
market,
subject to the availability and reliability of the data supporting the
statistical information presented in this prospectus, as indicated in the
consent of Maritime Strategies International Ltd. filed as an exhibit to
the
registration statement on Form F-1 under the Securities Act of which this
prospectus is a part.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have
filed with the Securities and Exchange Commission a registration statement
on
Form F-1 under the Securities Act with respect to the
preferred
stock offered hereby. For the purposes of this section, the term
registration statement means the original registration statement and any
and all
amendments including the schedules and exhibits to the original registration
statement or any amendment. This prospectus does not contain all of the
information set forth in the registration statement we filed. Each statement
made in this prospectus concerning a document filed as an exhibit to the
registration statement is qualified by reference to that exhibit for a complete
statement of its provisions. The registration statement, including its exhibits
and schedules, may be inspected and copied at the public reference facilities
maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549.
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 from the
Public
Reference Section of the Commission at its principal office in Washington,
D.C.
20549. The SEC maintains a website (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC.
We
will
furnish holders of
preferred
stock with annual reports containing audited financial statements
and a
report by our independent public accountants, and intend to make available
quarterly reports containing selected unaudited financial data for the first
three quarters of each fiscal year. The audited financial statements will
be
prepared in accordance with United States generally accepted accounting
principles and those reports will include a “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section for the
relevant periods. As a “foreign private issuer,” we will be exempt from the
rules under the Exchange Act prescribing the furnishing and content of proxy
statements to shareholders, but, will be required to furnish those proxy
statements to shareholders under NASDAQ Global Market rules. Those proxy
statements are not expected to conform to Schedule 14A of the proxy rules
promulgated under the Exchange Act. In addition, as a “foreign private issuer,”
we will be exempt from the rules under the Exchange Act relating to short
swing
profit reporting and liability.
GLOSSARY
OF SHIPPING TERMS
The
following are definitions of certain terms that are commonly used in the
shipping industry and in this prospectus.
Annual
survey
.
The
inspection of a vessel pursuant to international conventions, by a
classification society surveyor, on behalf of the flag state, that takes
place
every year.
Ballast
. A
voyage during which the ship is not laden with cargo.vessel
Bareboat
charter
. A
charter of a vessel under which the shipowner is usually paid a fixed daily
or
monthly rate for a certain period of time during which the charterer is
responsible for the vessel operating expenses and voyage expenses of the
vessel
and for the management of the vessel. In this case, all voyage related costs,
including vessel fuel, or bunker, and port dues as well as all vessel operating
expenses, such as day-to-day operations, maintenance, crewing and insurance
are
paid by the charterer. A bareboat charter is also known as a “demise charter” or
a “time charter by demise” and involves the use of a vessel usually over longer
periods of time ranging over several years. The owner of the vessel receives
monthly charterhire payments on a per day basis and is responsible only for
the
payment of capital costs related to the vessel.
Bunkers
.
Fuel
oil used to operate a vessel’s engines, generators and boilers.
Capesize
.
A
drybulk carrier with a cargo-carrying capacity exceeding 80,000 dwt. These
vessels generally operate along long haul iron ore and coal trade routes. Only
the largest ports around the world possess the infrastructure to accommodate
vessels of this size.
Charter
.
The
hire of a vessel for a specified period of time or to carry a cargo for a fixed
fee from a loading port to a discharging port. The contract for a charter is
called a charterparty.
Charterer
.
The
company that hires a vessel pursuant to a charter.
Charterhire
.
Money
paid to the shipowner by a charterer for the use of a vessel under charter.
Such
payments are usually made during the course of the charter every 15 or 30 days
in advance or in arrears by multiplying the daily charter rate times the number
of days and, under a time charter only, subtracting any time the vessel was
deemed to be off-hire. Under a bareboat charter such payments are usually made
monthly and are calculated on a 360 or 365 calendar year basis.
Charter
rate
.
The
amount of money agreed between the charterer and the shipowner accrued on
a
daily or monthly basis that is used to calculate the vessel’s charterhire.
Classification
society
.
An
independent society that certifies that a vessel has been built and maintained
according to the society’s rules for that type of vessel and complies with the
applicable rules and regulations of the country in which the vessel is
registered, as well as the international conventions which that country has
ratified. A vessel that receives its certification is referred to as being
“in
class” as of the date of issuance.
Container
ships
.
Vessels
which are specially designed and built to carry large numbers of
containers.
Contract
of affreightment
.
A
contract of affreightment, or COA, relates to the carriage of specific
quantities of cargo with multiple voyages over the same route and over a
specific period of time which usually spans a number of years. A COA does
not
designate the specific vessels or voyage schedules that will transport the
cargo, thereby providing both the charterer and shipowner greater operating
flexibility than with voyage charters alone. The charterer has the flexibility
to determine the individual voyage scheduling at a future date while the
shipowner may use different ships to perform these individual voyages. As
a
result COAs are mostly entered into by large fleet operators such as pools
or
shipowners with large fleets of the same vessel type. All of the ship’s
operating, voyage and capital costs are borne by the shipowner while the
freight
rate normally is agreed on a per cargo ton basis.
Deadweight
ton or "dwt"
A unit
of a vessel's capacity for cargo, fuel oil, stores and crew, measured in
metric
tons of 1,000 kilograms. A vessel's dwt or total deadweight is the total
weight
the vessel can carry when loaded to a particular load line.
Deep
sea container ship
.
A Deep
Sea container ship has a cargo carrying capacity of more than 3,000 teu and
mostly serves the mainlane East-West container trade routes.
Drybulk
.
Non-liquid cargoes of commodities shipped in an unpackaged state.
Drybulk
carriers
.
Vessels
which are specially designed and built to carry large volumes of
drybulk.
Drydocking
.
The
removal of a vessel from the water for inspection and/or repair of those parts
of a vessel which are below the water line. During drydockings, which are
required to be carried out periodically, certain mandatory classification
society inspections are carried out and relevant certifications issued.
Drydockings are generally required once every 30 to 60 months.
Feeder
.
A
short-sea container ship having a cargo carrying capacity of less than 1,300
teu
that transfers cargo between a central “hub” port and smaller “spoke”
ports.
Fully
cellular container ship
.
A
container ship e
quipped
throughout with fixed cell guides for containers.
Freight
.
Money
paid to the shipowner by a charterer for the use of a vessel under a voyage
charter. Such payment is usually made on a lump-sum basis upon loading or
discharging the cargo and is derived by multiplying the tons of cargo loaded
on
board by the cost per cargo ton, as agreed to transport that cargo between
the
specific ports.
Gross
ton
.
A unit
of measurement for the total enclosed space within a ship equal to 100 cubic
feet or 2.831 cubic meters used in arriving at the calculation of gross tonnage.
Handymax
.
Handymax vessels are drybulk vessels that have a cargo carrying capacity of
approximately 40,000 to 59,999 dwt. These vessels operate on a large number
of
geographically dispersed global trade routes, carrying primarily grains and
minor bulks. Vessels below 60,000 dwt are usually built with on-board cranes
enabling them to load and discharge cargo in countries and ports with limited
infrastructure.
Handysize
.
Handysize vessels have a cargo carrying capacity of approximately 10,000 to
39,999 dwt and 1,300 to 1,999 teu. These vessels carry exclusively minor bulk
cargo. Increasingly, these vessels are operating on regional trading routes.
Handysize vessels are well suited for small ports with length and draft
restrictions that may lack the infrastructure for cargo loading and unloading.
Hull
.
Shell
or body of a ship.
IMO
.
International Maritime Organization, a United Nations agency that issues
international regulations and standards for seaborne transportation.
Intermediate
container ship
.
An
Intermediate container ship has a cargo carrying capacity between 2,000 and
2,999 teu and mostly serves the North-South and Intermediate container trade
routes.
Intermediate
survey
.
The
inspection of a vessel by a classification society surveyor which takes place
between two and three years before and after each Special Survey for such
vessel
pursuant to the rules of international conventions and classification
societies.
KG
.
Kommanditgesellschaft, a limited partnership.
Lightweight
ton or “lwt”
.
The
actual weight of a vessel without cargo, fuel or stores.
Metric
ton
.
A unit
of weight equal to 1,000 kilograms.
Newbuilding
.
A new
vessel under construction or just completed.
Off-Hire
.
The
period a vessel is unable to perform the services for which it is required
under
a charter. Off-hire periods typically include days spent undergoing repairs
and
dry-docking, whether or not scheduled.
OPA
.
Oil
Pollution Act of 1990 of the United States (as amended).
Panamax
.
Panamax
vessels have a cargo carrying capacity of approximately 60,000 to 79,999 dwt.
The ability of Panamax vessels to pass through the Panama Canal makes them
more
versatile than larger vessels. Panamax drybulk carriers carry coal, grains,
and,
to a lesser extent, minor bulks, including steel products, forest products
and
fertilizers.
Period
charter
.
A
period charter is an industry term referring to both time and bareboat charters
that last for more than a single voyage.
Pools
.
Pooling
arrangements that enable participating vessels to combine their revenues.
Vessels may be employed either exclusively in spot charters or a combination
of
spot and period charters and contacts of affreightment. Pools are administered
by the pool manager who secures employment for the participating vessels. The
contract between a vessel in a shipping pool and the pool manager is a period
charter where the charter hire is based on the vessel's corresponding share
of
the income generated by all the vessels that participate in the pool. The
corresponding share of every vessel in the pool is based on a pre-determined
formula rating the technical specifications of each vessel. Pools have the
size
and scope to combine spot market voyages, time charters and contracts of
affreightment with freight forward agreements for hedging purposes
to
perform more efficient vessel scheduling thereby increasing fleet
utilization.
Protection
and indemnity (or P&I) insurance
.
Insurance obtained through mutual associations (called “Clubs”) formed by
shipowners to provide liability insurance protection against a large financial
loss by one member by contribution towards that loss by all members. To a
great
extent, the risks are reinsured.
Scrapping
.
The
disposal of old or damaged vessel tonnage by way of sale as scrap
metal.
Short
fund
.
A
contract of affreightment to carry cargo.
SOLAS
.
The
International Convention for the Safety of Life at Sea 1974, as amended, adopted
under the auspices of the IMO.
Special
survey
.
An
extensive inspection of a vessel by classification society surveyors that
must
be completed within five years. Special Surveys require a vessel to be
drydocked.
Spot
charter
.
A spot
charter is an industry term referring to both voyage and trip time charters.
These charters are referred to as spot charters or spot market charters due
to
their short term duration, constituting mostly of a single voyage between
one
load port and one discharge port.
Spot
market
.
The
market for immediate chartering of a vessel usually for single
voyages.
Standing
slot capacity
.
Nominal
static ship container capacity on a container ship.
Strict
liability
.
Liability that is imposed without regard to fault.
TEU
.
Twenty-foot equivalent unit, the international standard measure for containers
and container ship capacity.
TCE
.
Time
charter equivalent, a standard industry measure of the average daily revenue
performance of a vessel. The TCE rate achieved on a given voyage is expressed
in
$ per day and is generally calculated by subtracting voyage expenses, including
bunkers and port charges, from voyage revenues and dividing the net amount
(time
charter equivalent revenues) by the voyage days, including the trip to the
loading port. TCE is a standard seaborne transportation industry performance
measure used primarily to compare period-to-period changes in a seaborne
transportation company's performance despite changes in the mix of charter
types
(i.e., voyage charters, time charters and bareboat charters) under which the
vessels may be employed during specific periods.
Time
charter
.
A time
charter is a contract under which a charterer pays a fixed daily hire rate
usually on a semi-monthly basis for use of the vessel for an agreed period.
This
is either a specific fixed period of time or a specific number of loaded
voyages. Subject to any restrictions in the charter, the charterer decides
the
type and quantity of cargo to be carried and the ports of loading and unloading.
The charterer pays the voyage related expenses such as fuel, canal tolls,
and
port charges. The shipowner pays all vessel operating expenses such as the
management expenses and crew costs as well as for the capital costs of the
vessel. Any delays at port or during the voyages are the responsibility of
the
charterer, save for certain specific exceptions such as loss of time arising
from vessel breakdown and routine maintenance.
Trip
time charter
.
A trip
time charter is a short term time charter where the vessel performs a single
voyage between load port(s) and discharge port(s) and the charterer pays
a fixed
daily hire rate usually on a semi-monthly basis for use of the vessel. The
difference between a trip time charter and a voyage charter is only in the
form
of payment for use of the vessel and the respective financial responsibilities
of the charterer and shipowner as described under Time Charter and Voyage
Charter.
Ton
.
See
"Metric ton."
Vessel
operating expenses
.
The
costs of operating a vessel that is incurred during a charter, primarily
consisting of crew wages and associated costs, insurance premiums, lubricants
and spare parts, and repair and maintenance costs. Vessel operating expenses
exclude fuel and port charges, which are known as “voyage expenses.” For a time
charter, the shipowner pays vessel operating expenses. For a bareboat charter,
the charterer pays vessel operating expenses.
Voyage
charter
.
A
voyage charter involves the carriage of a specific amount and type of cargo
from
specific load port(s) to specific discharge port(s), subject to various cargo
handling terms. Most of these charters are of a single voyage nature between
two
specific ports, as trading patterns do not encourage round voyage trading.
The
owner of the vessel receives one payment derived by multiplying the tons
of
cargo loaded on board by the cost per cargo ton, as agreed to transport that
cargo between the specific ports. The owner is responsible for the payment
of
all expenses including voyage, operating and capital costs of the vessel..
The
charterer is typically responsible for any delay at the loading or discharging
ports.
Voyage
expenses
.
Expenses incurred due to a vessel's traveling from a loading port to a
discharging port, such as fuel (bunker) cost, port expenses, agent's fees,
canal
dues and extra war risk insurance, as well as commissions.
Index
to Consolidated Financial Statements
|
|
Pages
|
Unaudited
Condensed Consolidated Balance Sheets as of December 31, 2005 and
June
30, 2006
|
|
F-2
|
|
|
|
Unaudited
Condensed Consolidated Statements of Income for the six
month
periods
ended June 30, 2005 and 2006
|
|
F-3
|
|
|
|
Unaudited
Condensed Consolidated Statements of Changes in Shareholders’ Equity
for
the
six month period ended June 30, 2006
|
|
F-4
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the six month
periods
ended
June 30, 2005 and 2006
|
|
F-5
|
|
|
|
Notes
to the Unaudited Condensed Consolidated Financial
Statements
|
|
F-6
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-27
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2004 and 2005
|
|
F-28
|
|
|
|
Consolidated
Statements of Income for the Years ended
December
31, 2003, 2004 and 2005
|
|
F-29
|
|
|
|
Consolidated
Statements of Shareholders’ Equity for the Years ended
December
31, 2003, 2004 and 2005
|
|
F-30
|
|
|
|
Consolidated
Statements of Cash Flows for the Years ended
December
31, 2003, 2004 and 2005
|
|
F-31
|
|
|
|
Notes
to the Consolidated Financial Statements
|
|
F-32
|
Euroseas
Ltd. and Subsidiaries
Unaudited
Condensed Consolidated Balance Sheets
(All
amounts expressed in U.S. Dollars)
|
|
Notes
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
20,447,301
|
|
|
20,205,705
|
|
Trade
accounts receivable, net
|
|
|
|
|
|
46,118
|
|
|
155,508
|
|
Claims
and other receivables
|
|
|
|
|
|
306,303
|
|
|
171,648
|
|
Due
from related company
|
|
|
6
|
|
|
3,012,720
|
|
|
1,828,647
|
|
Inventories
|
|
|
3
|
|
|
371,691
|
|
|
563,921
|
|
Prepaid
expenses
|
|
|
|
|
|
85,625
|
|
|
231,432
|
|
Restricted
cash
|
|
|
|
|
|
1,080,949
|
|
|
378,243
|
|
Total
current assets
|
|
|
|
|
|
25,350,707
|
|
|
23,535,104
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
|
|
|
|
|
|
|
|
Vessels,
net
|
|
|
|
|
|
52,334,897
|
|
|
59,679,713
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term assets
|
|
|
|
|
|
|
|
|
|
|
Deferred
charges, net
|
|
|
|
|
|
1,855,829
|
|
|
1,461,348
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
|
|
|
54,190,726
|
|
|
61,141,061
|
|
Total
assets
|
|
|
|
|
|
79,541,433
|
|
|
84,676,165
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, current portion
|
|
|
7
|
|
|
14,430,000
|
|
|
13,840,000
|
|
Trade
accounts payable
|
|
|
|
|
|
837,182
|
|
|
1,405,695
|
|
Accrued
expenses
|
|
|
5
|
|
|
1,777,637
|
|
|
1,353,035
|
|
Deferred
revenues
|
|
|
|
|
|
1,370,058
|
|
|
1,164,831
|
|
Fair
value of the below market time charter acquired
|
|
|
4
|
|
|
-
|
|
|
1,153,832
|
|
Total
current liabilities
|
|
|
|
|
|
18,414,877
|
|
|
18,917,393
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
7
|
|
|
34,130,000
|
|
|
33,280,000
|
|
Total
long-term liabilities
|
|
|
|
|
|
34,130,000
|
|
|
33,280,000
|
|
Total
liabilities
|
|
|
|
|
|
52,544,877
|
|
|
52,197,393
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Common
stock (par value $0.03, 100,000,000 shares authorized, 12,260,386
and
12,620,114 issued and outstanding)
|
|
|
11
|
|
|
367,812
|
|
|
378,603
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
shares (par value $0.01, 20,000,000 shares authorized, no shares
issued
and outstanding)
|
|
|
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
11
|
|
|
17,883,781
|
|
|
17,882,990
|
|
Retained
earnings
|
|
|
|
|
|
8,744,963
|
|
|
14,217,179
|
|
Total
shareholders’ equity
|
|
|
|
|
|
26,996,556
|
|
|
32,478,772
|
|
Total
liabilities and shareholders’ equity
|
|
|
|
|
|
79,541,433
|
|
|
84,676,165
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas
Ltd. and Subsidiaries
Unaudited
Condensed Consolidated Statements of Income
(All
amounts expressed in U.S. Dollars)
|
|
|
|
Six
months ended June 30,
|
|
|
|
Notes
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenue
|
|
|
4
|
|
|
23,833,736
|
|
|
20,421,220
|
|
Commissions
|
|
|
6
|
|
|
(1,340,228
|
)
|
|
(895,968
|
)
|
Net
revenue
|
|
|
|
|
|
22,493,508
|
|
|
19,525,252
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(income)/expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
expenses
|
|
|
|
|
|
131,903
|
|
|
866,365
|
|
Vessel
operating expenses
|
|
|
6
|
|
|
4,270,787
|
|
|
5,055,753
|
|
Management
fees
|
|
|
|
|
|
965,384
|
|
|
1,112,850
|
|
General
and administrative expenses
|
|
|
|
|
|
0
|
|
|
521,940
|
|
Amortization
and depreciation
|
|
|
9
|
|
|
1,824,322
|
|
|
3,195,074
|
|
Net
gain on sale of vessel
|
|
|
9
|
|
|
0
|
|
|
(2,165,799
|
)
|
Total
operating expenses
|
|
|
|
|
|
7,192,396
|
|
|
8,586,183
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
15,301,112
|
|
|
10,939,069
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
Interest
and finance cost
|
|
|
|
|
|
(545,719
|
)
|
|
(1,391,947
|
)
|
Derivative
gain/(loss)
|
|
|
8
|
|
|
(82,029
|
)
|
|
0
|
|
Foreign
exchange gain/(loss)
|
|
|
|
|
|
312
|
|
|
(2,007
|
)
|
Interest
income
|
|
|
|
|
|
89,698
|
|
|
470,341
|
|
Other
income (expenses), net
|
|
|
|
|
|
(537,738
|
)
|
|
(923,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
14,763,374
|
|
|
10,015,456
|
|
Earnings
per share - basic and diluted
|
|
|
12
|
|
|
1.49
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year
-
basic and diluted
|
|
|
12
|
|
|
9,918,056
|
|
|
12,449,194
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas
Ltd. and Subsidiaries
Unaudited
Condensed Consolidated Statements of Changes in Shareholders’
Equity
For
the six month period ended June 30, 2006
(All
amounts, except per share data, expressed in U.S. Dollars)
|
|
Comprehensive
Income
|
|
Number
of
Shares
|
|
Common
Shares
Amount
|
|
Preferred
Shares
Amount
|
|
Paid
- in
Capital
|
|
Retained
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December
31, 2005
|
|
|
|
|
|
12,260,386
|
|
|
367,812
|
|
|
-
|
|
|
17,883,781
|
|
|
8,744,963
|
|
|
26,996,556
|
|
Net
income
|
|
|
10,015,456
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,015,456
|
|
|
10,015,456
|
|
Issuance
of shares
|
|
|
|
|
|
359,728
|
|
|
10,791
|
|
|
-
|
|
|
(791
|
)
|
|
-
|
|
|
10,000
|
|
Dividends
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,543,240
|
)
|
|
(4,543,240
|
)
|
Balance
June
30, 2006
|
|
|
|
|
|
12,620,114
|
|
|
378,603
|
|
|
-
|
|
|
17,882,990
|
|
|
14,217,179
|
|
|
32,478,772
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas
Ltd. and Subsidiaries
Unaudited
Condensed Consolidated Statements of Cash Flows
(All
amounts expressed in U.S. Dollars)
|
|
Six
months ended June 30,
|
|
|
|
2005
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
|
14,763,374
|
|
|
10,015,456
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
of vessels
|
|
|
1,191,864
|
|
|
2,632,155
|
|
Amortization
of deferred drydock expenses
|
|
|
632,458
|
|
|
562,919
|
|
Amortization
of deferred finance cost
|
|
|
61,784
|
|
|
36,127
|
|
Gain
on sale of vessel
|
|
|
-
|
|
|
(2,165,799
|
)
|
(Gain)/Loss
on derivative
|
|
|
82,029
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)/decrease
in:
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
236,233
|
|
|
(109,390
|
)
|
Prepaid
expenses
|
|
|
77,845
|
|
|
(145,807
|
)
|
Claims
and other receivables
|
|
|
(13,887
|
)
|
|
134,655
|
|
Inventories
|
|
|
(16,287
|
)
|
|
(192,230
|
)
|
Due
from related company
|
|
|
(8,621,660
|
)
|
|
1,184,073
|
|
Increase/(decrease)
in:
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
|
67,219
|
|
|
568,513
|
|
Accrued
expenses
|
|
|
116,914
|
|
|
(424,602
|
)
|
Deferred
revenue
|
|
|
268,634
|
|
|
(288,462
|
)
|
Dry-docking
expenses paid
|
|
|
(688,739
|
)
|
|
(299,322
|
)
|
Net
cash provided by operating activities
|
|
|
8,157,781
|
|
|
11,508,281
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of vessel
|
|
|
-
|
|
|
(10,854,321
|
)
|
(Contributions
to) and drawings from the cash retention accounts
|
|
|
(1,230,155
|
)
|
|
702,706
|
|
Net
proceeds from sale of a vessel
|
|
|
-
|
|
|
4,416,228
|
|
Net
cash used in investing activities
|
|
|
(1,230,155
|
)
|
|
(5,735,387
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Issuance
of share capital upon merger
|
|
|
-
|
|
|
10,000
|
|
Dividends
paid/return of capital
|
|
|
(44,225,000
|
)
|
|
(4,543,240
|
)
|
Loan
arrangement fees paid, capitalized
|
|
|
(157,500
|
)
|
|
(41,250
|
)
|
Proceeds
from long-term debts
|
|
|
37,700,000
|
|
|
8,250,000
|
|
Repayment
of long-term debts
|
|
|
(10,290,000
|
)
|
|
(9,690,000
|
)
|
Net
cash used in financing activities
|
|
|
(16,972,500
|
)
|
|
(6,014,490
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(10,044,874
|
)
|
|
(241,596
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
15,497,482
|
|
|
20,447,301
|
|
Cash
and cash equivalents at end of year
|
|
|
5,452,608
|
|
|
20,205,705
|
|
Cash
paid for interest
|
|
|
260,376
|
|
|
1,417,443
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas
Ltd. and Subsidiaries
Notes
to the Unaudited Condensed Consolidated Financial
Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
1.
Basis
of Presentation and General Information
Euroseas
Ltd. (the “Company”) was formed on May 5, 2005 under the laws of the Republic of
the Marshall Islands to consolidate the beneficial owners of the ship owning
companies listed below. On June 28, 2005, the beneficial owners exchanged all
their shares in the ship-owning companies for shares in Friends Investment
Company Inc., a newly formed Marshall Islands company. On June 29, 2005, Friends
Investment Company Inc. then exchanged all the shares in the ship-owning
companies for shares in Euroseas Ltd., thus becoming the sole shareholder of
Euroseas Ltd. The transaction described above constitutes a reorganization
of
companies under common control, and has been accounted for in a manner similar
to a pooling of interests, as each ship-owning company was under the common
control of the Pittas family prior to the transfer of ownership of the companies
to Euroseas Ltd. Accordingly, the accompanying unaudited condensed consolidated
financial statements have been presented as if the ship-owning companies were
consolidated subsidiaries of the Company for all periods presented and using
the
historical carrying costs of the assets and the liabilities of the ship-owning
companies listed below.
On
August
25, 2005, Euroseas Ltd. sold 2,342,331 common shares at $9.00 (after adjusted
for the 1-for-3 reverse stock split effected on October 6, 2006) each in an
institutional private placement, together with 0.25 of detachable warrants
for
each common share to acquire up to 585,581 common shares. The total proceeds,
net of issuance costs of $3,500,309, amounted to $17,510,400. The warrants
allow
their holders to acquire one share of Euroseas stock at a price of $10.80 per
share (after adjusted for the 1-for-3 reverse stock split) and are exercisable
for a period of five years from the issue of the warrant.
On
August
25, 2005, as a condition to the institutional private placement described above,
the Company and Cove Apparel, Inc. (“Cove”, an unrelated party and public shell
corporation) signed an Agreement and Plan of Merger (the “Merger Agreement”).
The Merger Agreement provides for the merger of Cove and Euroseas Acquisition
Company Inc., a Delaware corporation and a wholly-owned subsidiary of Euroseas
Ltd. formed on June 21, 2005, with the stockholders of Cove receiving
0.0034323
shares
(after adjusted for the 1-for-3 reverse stock split) of Euroseas Ltd. common
stock for each share of Cove common stock. Euroseas Ltd., as part of the merger,
filed a registration statement with the Securities and Exchange Commission
(“SEC”) to register the shares issued in the merger to the Cove stockholders.
The
SEC
declared effective on February 3, 2006 the Company’s registration statement on
Form F-4 that registered the Euroseas Ltd. common shares issued to Cove
stockholders. The SEC also declared effective on February 3, 2006 the Company’s
registration statement on Form F-1 that registered the re-sale of the 2,342,331
Euroseas Ltd. common shares and 585,581 Euroseas Ltd. common shares issuable
upon the exercise of the warrants issued in connection with the institutional
private placement, as well as 272,868 shares to be issued to certain Cove
stockholders as part of the merger with Cove.
The
Company submitted on February 10, 2006 an application to list the Euroseas
Ltd.
common shares on the OTC Bulletin Board.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
1.
Basis
of Presentation and General Information - Continued
On
March
27, 2006, Euroseas Ltd. consummated the merger with Cove and, as a result,
Cove
merged into Euroseas Acquisition Company Inc., and the separate corporate
existence of Cove ceased. The Cove stockholders received Euroseas Ltd. common
shares and received dividends totaling to $140,334 related to dividends
previously declared by Euroseas Ltd. (the difference of 15 shares is due
to
rounding-up fractional shares during the exchange). Euroseas Acquisition
Company
Inc. changed its name to Cove Apparel, Inc. Also, following the completion
of
the merger, the common stock of Cove was de-listed and no longer trades on
the
OTC Bulletin Board. On the date of the merger, Cove had cash of $10,000,
had no
other assets and had no liabilities.
Euroseas
was approved to trade on March 2, 2006 and started trading on the OTC Bulletin
Board on May 5, 2006.
The
operations of the vessels are managed by Eurobulk Ltd. (the “manager”), a
corporation controlled by members of the Pittas family -- the controlling
shareholder of Friends Investment Company Inc.
The
manager has an office in Greece located at 40 Ag. Konstantinou Street, 151
24,
Maroussi, Greece. The manager provides the Company with a wide range of shipping
services such as technical support and maintenance, insurance consulting,
chartering, financial and accounting services, as well as executive management
services, in consideration for fixed and variable fees (Note 6).
The
Company is engaged in the ocean transportation of drybulk and containers through
the ownership and operation of the following drybulk and container
carriers:
·
|
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.
|
·
|
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.
|
·
|
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.
|
·
|
Alterwall
Business Inc. incorporated in Panama on January 15, 2001, owner of
the
Panama flag 18,253 DWT container carrier motor vessel “
YM
Qingdao1
”
(ex
Kuo
Jane
),
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.
|
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
1.
Basis
of Presentation and General Information - Continued
·
|
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 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
motor vessel “
Tasman
Trader
”,
which was built in 1990 and acquired on April 27, 2006.
|
In
addition, the historical financial statements include the accounts of the vessel
owning company, Silvergold Shipping Ltd., which was managed by Eurobulk Ltd.
during the periods presented. Silvergold Shipping Ltd. was incorporated in
Cyprus on May 16, 1994. Until June 3, 1996, the Company was engaged in ship
owning activities, but thereafter, the Company’s assets and liabilities were
liquidated and the retained earnings were distributed to the shareholders.
The
Company remained dormant until October 10, 2000 when it acquired the 18,000
DWT
Cyprus flag container carrier motor vessel “
Widar
”,
which
was built in 1986. The vessel was sold on April 24, 2004. The Pittas family,
the
controlling shareholders of Friends Investment Company Ltd., who is the
Company’s largest shareholder, also owned the ship owning company Silvergold
Shipping Ltd., and, accordingly, these accompanying financial statements also
consolidate the accounts of Silvergold Shipping Ltd until May 31, 2005, when
Silvergold Shipping Ltd. declared a final dividend of $35,000 to its
shareholders.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Significant
Accounting Policies
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted principles for interim
financial information in the United States of America. Accordingly, they do
not
include all the information and notes required by U.S. generally accepted
accounting principles for complete financial statements and, in the opinion
of
management, reflect all adjustments, which include only normal recurring
adjustments considered necessary for a fair presentation of the Company’s
financial position, results of operations and cash flow for the periods
presented. Operating results for the six month period ended June 30, 2006 are
not necessarily indicative of the results that might be expected for the fiscal
year ending December 31, 2006.
The
unaudited condensed consolidated financial statements as of and for the three
and six months periods ended June 30, 2006 and 2005 should be read in
conjunction with the audited condensed consolidated financial statements for
the
year ended December 31, 2005 as filed with the SEC on Form 20-F.
The
following are the significant accounting policies adopted by the
Company:
Principles
of consolidation
The
accompanying unaudited condensed consolidated financial statements included
the
accounts of Euroseas Ltd. and its subsidiaries. Inter-company transactions
were
eliminated on consolidation.
Use
of estimates
The
preparation of the accompanying unaudited condensed consolidated financial
statements requires management to make estimates and assumptions that affect
the
reported amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the consolidated financial statements, and the
stated amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Other
comprehensive income
The
Company follows the provisions of Statement of Financial Accounting Standards
No. 130, “Statement of Comprehensive Income” (“SFAS 130”), which requires
separate presentation of certain transactions which are recorded directly as
components of stockholders’ equity. The Company has no other comprehensive
income and, accordingly, comprehensive income equals net income for all periods
presented.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Significant
Accounting Policies - continued
Foreign
currency translation
The
Company’s functional currency is the U.S. dollar. Assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at exchange
rates prevailing at the balance sheet date. Income and expenses denominated
in
foreign currencies are translated into U.S. dollars at exchange rates prevailing
at the date of the transaction. Resulting exchange gains and/or losses on
settlement or translation are included in the accompanying consolidated
statements of operations.
Cash
equivalents
Cash
equivalents are time deposits or other certificates purchased with an original
maturity of three months or less.
Trade
accounts receivable
The
amount shown as trade accounts receivable, at each balance sheet date, includes
estimated recoveries from each voyage or time charter, net of a provision for
doubtful accounts. At each balance sheet date, the Company provides for doubtful
accounts on the basis of specific identified doubtful receivables. At December
31, 2005 and June 30, 2006, no provision for doubtful debts was considered
necessary.
Claims
and other receivables
Claims
and other receivables principally represent claims arising from hull or
machinery damages, crew salaries claims or other insured risks that have been
submitted to insurance adjusters or are currently being compiled. All amounts
are shown net of applicable deductibles.
Inventories
Inventories
consist of bunkers, lubricants and victualling on board the Company’s vessels at
the balance sheet date and are stated at the lower of cost and market value.
Victualling is valued using the first-in-first-out (FIFO) method while bunkers
and lubricants are valued on an average cost basis.
Vessels
Vessels
are stated at cost which comprises the vessels’ contract price, costs of major
repairs and improvements upon acquisition, direct delivery and other acquisition
expenses less accumulated depreciation. Subsequent expenditures for conversions
and major improvements are also capitalized when they appreciably extend the
life, increase the earning capacity or improve the efficiency or safety of
the
vessels; otherwise these amounts are charged to expense as
incurred.
Expenditures
for vessel repair and maintenance is charged against income in the period
incurred.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Significant
Accounting Policies - Continued
Depreciation
Depreciation
is calculated on a straight line basis with reference to the cost of the vessel,
age and scrap value as estimated at the date of acquisition. Depreciation is
calculated over the remaining useful life of the vessel, which is estimated
to
range from 25 to 30 years from the completion of its construction. Remaining
useful lives of property are periodically reviewed and revised to recognize
changes in conditions and such revisions, if any, are recognized over current
and future periods.
Revenue
and expense recognition
Revenues
are generated from voyage and time charter agreements. Time charter revenues
are
recorded over the term of the charter as service is provided. Under a voyage
charter, the revenues and associated voyage costs are recognized on a pro-rata
basis over the duration of the voyage. Probable losses on voyages are provided
for in full at the time such losses can be estimated. A voyage is deemed to
commence upon the completion of discharge of the vessel’s previous cargo and is
deemed to end upon the completion of discharge of the current cargo. Demurrage
income, which in included in voyage revenues, represents payments received
from
the charterer when loading or discharging time exceeded the stipulated time
in
the voyage charter and is recognized when earned.
Charter
fees received in advance is recorded as a liability until charter services
are
rendered.
Vessels
operating expenses comprise all expenses relating to the operation of the
vessels, including crewing, repairs and maintenance, insurance, stores,
lubricants and miscellaneous expenses. Vessels operating expenses are recognized
as incurred; payments in advance of services or use are recorded as prepaid
expenses. Voyage expenses comprise all expenses relating to particular voyages,
including bunkers, port charges, canal tolls, and agency fees.
For
the
Company’s vessels operating in shipping pools, revenues and voyage expenses are
pooled and allocated to each pool’s participants on a time charter equivalent
basis in accordance with an agreed-upon formula.
Dry-docking
and special survey costs
Dry-docking
and special survey costs are deferred and amortized over the estimated period
to
the next scheduled dry-docking or survey, which are generally two and a half
years and five years, respectively. Unamortized dry-docking and special survey
costs of vessels that are sold are written-off to income in the year of the
vessel’s sale.
Pension
and retirement benefit obligations - crew
The
ship-owning companies employ the crews on board the vessels under short-term
contracts (usually up to 9 months). Accordingly, they are not liable for any
pension or post retirement benefits.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
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 loans repaid or refinanced are expensed in the period the
repayment or refinancing occurs.
Assets
held for sale
It
is the
Company’s policy to dispose of vessels when suitable opportunities occur and not
necessarily to keep them until the end of their useful life. The Company
classifies assets as being held for sale in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” when the
following criteria are met: management has committed to a plan to sell the
asset; the asset is available for immediate sale in its present condition;
an
active program to locate a buyer and other actions required to complete the
plan
to sell the asset have been initiated; the sale of the asset is probable, and
transfer of the asset is expected to qualify for recognition as a completed
sale
within one year; the asset is being actively marketed for sale at a price that
is reasonable in relation to its current fair value and actions required to
complete the plan indicate that it is unlikely that significant changes to
the
plan will be made or that the plan will be withdrawn.
Long-lived
assets classified as held for sale are measured at the lower of their carrying
amount or fair value less cost to sell. These assets are not depreciated once
they meet the criteria to be held for sale. See also Note 9.
Impairment
of long-lived assets
The
Company follows SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than
the asset’s carrying amount. In the evaluation of the fair value and future
benefits of long-lived assets, the Company performs an analysis of the
anticipated undiscounted future net cash flows of the related long-lived assets.
If the carrying value of the related asset exceeds the undiscounted cash flows,
the carrying value is reduced to its fair value. Various factors including
future charter rates and vessel operating costs are included in this analysis.
The Company determined that no impairment loss needed to be recognized for
applicable assets for any years presented.
Fair
value of time charter acquired
When
a
vessel is acquired with a time charter contract, the fair value of the time
charter is added to the book value of the asset and considered as deferred
revenue. The adjusted book value is depreciated over the remaining life of
the
vessel, while the deferred revenues are amortized over the duration of the
charter. Company calculates the fair value of the charter as the present value
of the difference of the charter rate from the prevailing market rate for a
charter of equivalent duration. In discounting the charter rate differences
in
future periods, the Company uses its Weighted Average Cost of Capital (WACC)
adjusted to account for the credit quality of the charterer.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Derivative
financial instruments
SFAS
No.
133, “Accounting for Derivative Instruments and Hedging Activities” as amended
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value with changes in the instrument’s fair value
recognized currently in earnings unless specific hedge accounting criteria
are
met. Pursuant to SFAS No. 133, the transactions did not qualify as a hedge
or
meet the criteria of hedge accounting. All gains or losses on the derivative
financial instruments are reflected in the consolidated statements of income.
For
the
six month period ended June 30, 2005, the interest rate swaps did not qualify
for hedge accounting treatment. Accordingly, all gains or losses have been
recorded in the consolidated statements of income. The fair value at June 30,
2005 of ($82,029) is included in claims and other receivables. There were no
interest rate swaps for the six month period ended June 30, 2006.
Earning
per common share
Basic
earnings per common share are computed by dividing the net income by the
weighted average number of common shares outstanding during the year. Potential
common shares that are anti-dilutive, such as the warrants outstanding as of
June 30, 2006 since their exercise price exceeds the fair value of Euroseas
Ltd.
common share, are excluded from earnings per share.
Segment
reporting
The
Company reports financial information and evaluates its operations by charter
revenue and not by the length of ship employment for its customers, i.e. spot
or
time charters. The Company does not use discrete financial information to
evaluate the operating results for each such type of charter. Although revenue
can be identified for these types of charters, management cannot and does not
identify expenses, profitability or other financial information for these
charters. As a result, management, including the chief operating decision maker,
reviews operating results solely by revenue per day and operating results of
the
fleet and thus the Company has determined that it operates under one reporting
segment. Furthermore, when the Company charters a vessel to a charterer, the
charterer is free to trade the vessel worldwide and, as a result, the disclosure
of geographical information is impracticable.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Recent
accounting pronouncements
In
January 2003, the Financial Accounting Standards Board (FASB) issued FIN
46,
“Consolidation of Variable Interest Entities,” which clarified the application
of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to
address perceived weaknesses in accounting for entities commonly known as
special-purpose or off-balance sheet entities. It provides guidance for
identifying the party with a controlling financial interest resulting from
arrangements or financial interests rather than voting interests. It requires
consolidation of Variable Interest Entities (“VIEs”) only if those VIEs do not
effectively disperse the risks and benefits among the various parties involved.
On December 24, 2003, the FASB issued a complete replacement of FIN 46 (“FIN
46R”), which clarified certain complexities of FIN 46. FIN 46R is applicable
for
financial statements issued for reporting periods that end after March 5,
2004.
The Company has reviewed FIN 46R and determined that the adoption of the
standard does not have a material impact on the financial
statements.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure
the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will
be
recognized over the period during which an employee is required to provide
services in exchange for the award-the requisite service period (usually
the
vesting period). SFAS 123R applies to all awards granted after the required
effective date, as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005, and to awards modified, repurchased,
or
cancelled after that date. SFAS 123R will is effective for our fiscal year
2006.
The implementation of this standard did not have a material impact on the
Company’s financial position, results of operations or cash
flows.
On
December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary Assets,
an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions
(“SFAS 153”). This statement amends APB Opinion No. 29 to eliminate the
exception for non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that do
not
have commercial substance. Under SFAS No. 153, if a non-monetary exchange
of
similar productive assets meets a commercial-substance criterion and fair
value
is determinable, the transaction must be accounted for at fair value resulting
in recognition of any gain or loss. SFAS 153 is effective for non-monetary
transactions in fiscal periods that begin after June 15, 2005. The Company
does
not anticipate that the implementation of this standard will have a material
impact on its financial position, results of operations or cash
flows.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Recent
accounting pronouncements (continued)
The
FASB
has issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and SFAS No. 3. The Statement applies to all voluntary
changes in accounting principle, and changes the requirements for accounting
for
and reporting of a change in accounting principle.
SFAS
No.
154 requires retrospective applications to prior periods’ financial statements
of a voluntary change in accounting principle unless it is impracticable.
Opinion 20 previously required that most voluntary change in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS No.
154
improves financial reporting because its requirements enhance the consistency
of
financial information between periods. The Company is analyzing the effect
which
this pronouncement will have on its financial condition, statement of
operations, and cash flows. This statement is effective for the Company on
January 1, 2006. This statement did not have an effect on the Company’s
financial condition, results of operation or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” This Statement amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” and resolves issues addressed in Statement 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.”
SFAS
No.
155 permits fair value re-measurement for any hybrid financial instruments
that
contains an embedded derivative that otherwise would require bifurcation and
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133. SFAS No. 155 establishes a requirement
to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. SFAS No. 155 also
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition
on
a qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument.
SFAS
No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
The Company has not completed the study of what effect SFAS No. 155 will have
on
its financial position and results of operations.
In
March
2006, the FASB issued SFAS No. 156 Accounting for Servicing of Financial
Assets—an amendment of FASB Statement No. 140. The Statement provides a single
definition of fair value, together with a framework for measuring it, and
requires additional disclosure about the use of fair value to measure assets
and
liabilities. Statement 157 also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and sets out a fair value
hierarchy with the highest priority being quoted prices in active markets.
Under
the Statement, fair value measurements are disclosed by level within that
hierarchy. The Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. This statement will be effective for the Company on January 1, 2008.
The
Company does not believe that this pronouncement will have an effect on its
financial position, results of operations or cash flows.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
In
September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. This statement will be effective
for the Company on January 1, 2008. The Company does not believe that this
pronouncement will have an effect on its financial position, results of
operations or cash flows.
On
September 13, 2006, the SEC released SAB No. 108, which provides guidance on
materiality. SAB No. 108 states that registrants should use both a balance
sheet
(iron curtain) approach and an income statement (rollover) approach when
quantifying and evaluating the materiality of a misstatement, contains guidance
on correcting errors under the dual approach, and provides transition guidance
for correcting errors existing in prior years. If prior-year errors that had
been previously considered immaterial (based on the appropriate use of the
registrant’s prior approach) now are considered material based on the approach
in the SAB, the registrant need not restate prior period financial statements.
SAB No. 108 is effective for annual financial statements covering the first
fiscal year ending after November 15, 2006. This statement will be effective
for
the Company for the fiscal year ending December 31, 2006. The Company is
currently evaluating the effect that adoption of SAB No. 108 will have on its
financial position and results of operations.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Recent
accounting pronouncements - Continued
In
March 2005, the FASB issued FASB Interpretation No. (“FIN”) 47
“Accounting for Conditional Asset Retirement Obligations, an interpretation
of
FASB Statement No. 143”, which clarifies the term “conditional asset
retirement obligation” as used in SFAS No. 143 “Accounting for Asset
Retirement Obligations”. Specifically, FIN 47 provides that an asset retirement
obligation is conditional when either the timing and (or) method of settling
the
obligation is conditioned on a future event. Accordingly, an entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the
fair
value of an asset retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005. This statement did not have an impact on
the Company’s financial position and results of operations.
3.
Inventories
The
amounts shown in the accompanying consolidated balance sheets consisted of
the
following:
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Lubricants
|
|
|
312,390
|
|
|
416,082
|
|
Victualling
|
|
|
59,301
|
|
|
147,839
|
|
Total
|
|
|
371,691
|
|
|
563,921
|
|
Deferred
voyage revenue represents cash received from charterers prior to it being
earned. These amounts are recognized as income in the period the related
services are rendered. In addition, m/v “
Tasman
Trader
”
was
bought with a time charter contract until December 17, 2008 at $8,850. The
charter rate was below market rates for an equivalent charter at the time
resulting in a below market price for the vessel (see Note 9). The present
value
of the below the market charter was estimated by the Company at $1,237,072
and
was booked as deferred revenue which will be amortized over the duration of
the
charter. $83,240 of the above is included in voyage revenues for the three
and
six month periods ended June 30, 2006, and the remaining $1,153,832 is part
of
deferred revenues.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
5.
Accrued
Expenses
This
account consisted of:
|
|
December
31,
2005
|
|
June
30,
2006
|
|
|
|
|
|
|
|
Accrued
private placement expenses
|
|
|
1,121,397
|
|
|
802,800
|
|
Accrued
payroll expenses
|
|
|
31,928
|
|
|
33,646
|
|
Accrued
interest
|
|
|
139,536
|
|
|
77,913
|
|
Accrued
general and administrative expenses
|
|
|
269,666
|
|
|
159,553
|
|
Other
accrued expenses
|
|
|
215,110
|
|
|
279,123
|
|
Total
|
|
|
1,777,637
|
|
|
1,353,035
|
|
6.
Related
Party Transactions
The
Company’s vessel owning companies are parties to management agreements with the
manager, also controlled by the Pittas family, whereby the manager provides
technical and commercial management for a fixed daily fee of Euro 590 per vessel
for the periods ended June 30, 2005 and an average of Euro 607 for the period
ended June 30, 2006. Such management fees amounted to $965,384 and $1,112,850
in
2005 and 2006, respectively. These agreements were renewed on January 31, 2005
with an initial term of five years and will automatically be extended after
the
initial term until terminated by the parties. Termination is not effective
until
two months following notice having been delivered in writing by either party
after the expiration of the initial five-year period. An annual adjustment
of
the management fee due to inflation as provided under the management agreement
took effect on the annual anniversary of the agreement on January 31, 2006
increasing the management fee by Euro 20 per vessel per day to Euro 610 per
vessel. The increase for the period from February 1 to June 30, 2006 amounted
to
$29,725; the increase for the period February 1, 2006 to March 31, 2006 was
billed in April 2006.
The
Company uses brokers to provide services, as is industry practice. Eurochart
S.A., a company also controlled by the Pittas family, provides sales and
purchases (S&P) and chartering services to the Company. A commission of 1%
on vessel sales price and 1% to 1.25% on charter revenue is paid to Eurochart
S.A. for these services. There was no 1% sales commission paid to Eurochart
S.A.
for the period ended June 30, 2005 as there were no vessel sales or purchases
during either period; for the six month period ended on June 30, 2006 an amount
of $154,250 was paid to Eurochart S.A. as commission for the purchase of m/v
“
Tasman
Trader
”
and
sale of m/v “
Pantelis
P
”.
The
commission on charter revenue for the six month periods ended June 30, 2005
and
2006 amounted to $294,587 and $248,780, respectively.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
6.
Related
Party Transactions (continued)
The
former shareholders of the ship-owning companies that became wholly owned
subsidiaries of the Company, together with another ship management company,
have
one joint venture with the insurance broker Sentinel Maritime Services Inc.
and
one with the crewing agent More Maritime Agencies Inc. The shareholders’
percentage participation in these joint ventures was 58% in 2005 and 68.60%
in
2006. These companies provide certain insurance and crewing services for the
ship-owning subsidiaries and their fees are included in operating expenses.
Amounts
due to or from related parties represent net disbursements and collections
made
on behalf of the vessel-owning companies by the manager during the normal course
of operations for which a right of off-set exists. As of December 31, 2005
and
June 30, 2006, the amount due from related companies was $3,012,720 and
1,828,647 respectively. Based on the management agreement between Euroseas
Ltd.
and Eurobulk Ltd. an estimate of the quarter’s operating expenses, expected
drydock expenses, management fee and executive services fee is to be advanced
in
the beginning of the quarter to Eurobulk Ltd. For the current fleet, this
advance is estimated between $3,300,000 and $3,500,000 excluding any advances
needed for drydock expenses and is paid in advance around the beginning of
each
quarter.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
This
consisted of bank loans of the ship-owning companies as follows:
Borrower
|
|
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Diana
Trading Limited
|
|
|
(a
)
|
|
$
|
6,560,000
|
|
$
|
5,220,000
|
|
Alcinoe
Shipping Limited/Oceanpride Shipping Limited
Searoute
Maritime Ltd
Oceanopera
Shipping Ltd
|
|
|
(b
)
|
|
|
9,500,000
|
|
|
5,900,000
|
|
Alterwall
Business Inc.
Allendale
Investments S.A
|
|
|
(c
)
|
|
|
17,000,000
|
|
|
14,000,000
|
|
Salina
Shipholding Corp.
|
|
|
(d
)
|
|
|
15,500,000
|
|
|
13,750,000
|
|
Xenia
International Corp
|
|
|
(e
)
|
|
|
-
|
|
|
8,250,000
|
|
|
|
|
|
|
|
48,560,000
|
|
|
47,120,000
|
|
Current
portion
|
|
|
|
|
|
(14,430,000
|
)
|
|
(13,840,000
|
)
|
Long-term
portion
|
|
|
|
|
$
|
34,130,000
|
|
$
|
33,280,000
|
|
The
future annual loan repayments are as follows:
To
June 30
|
|
|
|
2007
|
|
|
13,840,000
|
|
2008
|
|
|
12,940,000
|
|
2009
|
|
|
6,320,000
|
|
2010
|
|
|
4,160,000
|
|
Thereafter
|
|
|
9,860,000
|
|
Total
|
|
$
|
47,120,000
|
|
(a)
|
This
consisted of loan amounting to $4,900,000 and $1,000,000 drawn on
October
16, 2002 and on December 2, 2002, respectively. The loan is payable
in
twenty-four consecutive quarterly installments of $220,000 each,
and a
balloon payment of $620,000 payable together with the final quarterly
installment due in October 2008. The interest is based on LIBOR plus
1.6%
per annum.
|
An
additional loan of $4,200,000 was drawn on May 9, 2005. The loan is payable
in
twelve consecutive quarterly installments consisting of four installments of
$450,000 each, and eight installments of $300,000 each with the final
installment due in May 2008. The interest is based on LIBOR plus 1.25% per
annum.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
7.
Long-term
Debt - continued
(b)
|
Alcinoe
Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd. and
Oceanopera Shipping Ltd.
drew
$13,500,000 against a loan facility for which they are jointly and
severally liable. Prior to obtaining the loan, an amount of $1,400,000
was
paid in settlement of the outstanding loans as at June 30, 2005 for
Alcinoe Shipping Ltd. and Oceanpride Shipping Ltd. The loan is payable
in
twelve consecutive quarterly installments consisting of two installments
of $2,000,000 each, one installment of $1,500,000, nine installments
of
$600,000 each and a balloon payment of $2,600,000 payable with the
final
installment due in May 2008. Interest is based on LIBOR plus 1.5%
per
annum.
|
In
2006,
two additional early repayments of $1,500,000 each (for a total of $3,000,000)
corresponding to the sale of m/v
John
P
and m/v
Pantelis
P
took
place in June and July (see Note 9). The repayment schedule starting July 1,
2006 has been agreed to $300,000 per quarter with a $2,000,000 balloon payment
along with the last installment in the second quarter of 2008.
(c)
|
The
loan balance as of December 31, 2004 consisted of the following
loans:
|
|
i.
|
A
$6,000,000 loan drawn by Allendale Investments S.A. on May 31, 2002
with a
balance of $4,500,000. The interest was based on LIBOR plus 1.75%
per
annum.
|
|
ii.
|
A
$6,000,000 loan drawn by Alterwall Business Inc. with a balance of
$3,750,000. The interest was based on LIBOR plus 1.5% per
annum.
|
|
Allendale
Investments S.A. and Alterwall Business Inc. drew $20,000,000 on
May 26,
2005 against a loan facility for which they are jointly and severally
liable. The outstanding amount of their existing loans from the same
creditor bank was $7,800,000 and was repaid in full. The loan is
payable
in twenty-four unequal consecutive quarterly installments of $1,500,000
each in the first year, $1,125,000 each in the second year, $775,000
each
in the third year, $450,000 each in the fourth through sixth years
and a
balloon payment of $1,000,000 payable with the final installment
due in
May 2011. The interest is based on LIBOR plus 1.25% per annum as
long as
the outstanding loan amount remains below 60% of the fair market
value
(FMV) of m/v
YM
Qingdao I
and m/v
Kuo
Hsiung
and 1.375% if the outstanding loan amount is above 60% of the FMV
of such
vessels.
|
(d)
|
This
is a $15,500,000 loan drawn by Salina Shipholding Corp. on December
30,
2005. The loan is payable in ten consecutive semi-annual installments
consisting of six installments of $1,750,000 each and four installments
of
$650,000 each and a balloon payment of $2,400,000 payable with the
final
installment in January 2011. The first installment is due in June
2006.
The interest is based on LIBOR plus a margin that ranges between
0.9-1.1%,
depending on the asset cover ratio. The loan is secured with the
following: (i) first priority mortgage over m/v
Artemis
,
(ii) first assignment of earnings and insurance of m/v
Artemis
,
(iii) a corporate guarantee of Euroseas Ltd., and (iv) a minimum
cash
balance equal to an amount of no less than $300,000 in an account
Salina
Shipholding Corp. maintains with the bank, and, overall liquidity
(cash
and cash equivalents) of $300,000 for each of the Company’s vessels
throughout the life of the facility.
|
(e)
|
This
is a $8,250,000 loan drawn by Xenia International Corp. on June 30,
2006.
The loan is payable in twenty three consecutive quarterly installments
consisting of $265,000 each and a balloon payment of $2,155,000 payable
with the final installment in March 2012. The first installment is
due in
September 2006. The interest is based on LIBOR plus a margin of 0.95%.
The
loan is secured with the following: (i) first priority mortgage over
m/v
“
Tasman
Trader
”,
(ii) first assignment of earnings and insurance of m/v “
Tasman
Trader
”,
(iii) a corporate guarantee of Euroseas Ltd., and (iv) a minimum
cash
balance equal to an amount of no less than $300,000 in an account
Xenia
International Corp. maintained with the bank, and, overall liquidity
(cash
and cash equivalents) of $300,000 for each of the Company’s vessels
throughout the life of the facility.
|
In
addition to the terms specific to each loan described above, all the above
loans
are secured with one or more of the following:
·
|
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 Eurobulk Ltd. and/or 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 mortgaging of vessels without the lender’s
prior consent, the sale of vessels, maximum fleet leverage, minimum requirements
regarding the hull ratio cover and minimum cash retention accounts (restricted
cash). Restricted cash are deposits with certain banks that can only be used
to
pay the current loan installments. The Company is not in default with respect
to
any of the foregoing covenants.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
8.
Derivative
Gains
The
gains
for the period ended June 30, 2005 arose from interest rate swaps that did
not
meet the criteria for hedge accounting treatment. Accordingly, all gains or
losses have been recorded in the statement of income for the period. The swap
was provided for in the period ended September 30, 2005 and settled in October
2005.
9.
Vessels,
net
Since
December 31, 2005 the Company has bought m/v “
Tasman
Trader
”,
sold
m/v “
Pantelis
P
”
and
signed an agreement to sell m/v “
John
P
”.
On
March
20, 2006, Oceanpride Shipping Ltd., a wholly-owned subsidiary of the company,
signed a Memorandum of Agreement to sell m/v “
John
P
”,
a
handysize bulk carrier of 26,354 dwt built in 1981 for a gross price of $4.95
million with 4% sales commissions. As a result of the sale of m/v
“
John
P
”
(see
Note 13(a)), the Company has agreed to make a $1,500,000 additional re-payment
to the bank financing the above ship along with m/v “
Ariel
”
and
m/v
“
Nikolaos
P
”
(see
Note 7(b)). m/v “
John
P
”
was
considered as “asset held for sale” during the period April 1, 2006 to July 5,
2006 and was not further depreciated during the three month period ended
June
30, 2006. For the three month period ended March 31, 2006 m/v “
John
P
”
was
depreciated by $60,697. Its book value as of June 30, 2006 is $2,145,894.
The
vessel was delivered to the buyers on July 5, 2006 resulting in a gain of
approximately $2,295,791.
m/v
Tasman
Trader
was
purchased on April 27, 2006 for $10,775,000 with a time charter until December
17, 2008 at $8,850. The charter rate was below market rates for an equivalent
charter at the time resulting in a below market price. The present value of
the
below the market charter was estimated by the Company at $1,237,072.
Consequently, the book value of the vessel (charter free) was increased by
the
same amount plus capitalized purchase expenses of $79,321 for a total book
value
of $12,091,393. The present value of the below market charter is booked as
deferred revenue and will be amortized over the duration of the
charter.
m/v
“
Pantelis
P
”
was
sold on May 31, 2006. The net sale proceeds from the sale of m/v “
Pantelis
P
”
were
$4,416,228. For the six month period ended June 30, 2006, the depreciation
of
m/v “
Pantelis
P
”
until
it was sold amounted to $107,587 resulting in a book value at the time of sale
of $2,114,421. The unamortized deferred drydock charge at the time of sale
was
$136,008 resulting in a capital gain of $2,165,799. As a result of the sale
of
m/v
Pantelis
P
(see
Note 13(a)), the Company has agreed to make a $1,500,000 additional re-payment
to the bank financing of the above ship along with m/v
Ariel
and m/v
Nikolaos
P
(see
Note 7(b)).
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
10.
|
Commitments
and Contingencies
|
There
are
no material legal proceedings to which the Company is a party or to which any
of
its properties are subject, other than routine litigation incidental to the
Company’s business. In the opinion of the management, the disposition of these
lawsuits should not have a material impact on the consolidated results of
operations, financial position and cash flows.
The
distribution of the net earnings by one of the shipping pools which has one
of
the Company’s vessels in its shipping pool has not yet been finalized for the
period ended June 30, 2006. Any effect on the Company’s income resulting from
any future reallocation of shipping pool income cannot be reasonably estimated
but will not materially affect the Company’s results.
11.
|
Common
Stock and Additional Paid-in
Capital
|
Common
stock relates to 12,620,114 shares with a par value of $0.03 each as adjusted
for the 1-for-3 reverse stock split effected on October 6, 2006. The amount
shown in the accompanying consolidated balance sheets, as additional paid-in
capital, represents payments received in excess of par value which is treated
from the accounting point of view as capital. In 2005, the Company sold
2,342,331 common shares in an institutional private placement, together with
0.25 detachable warrants for each common share to acquire up to 585,581 common
shares (see Note 1). The value of the warrants, which is included in “Additional
Paid-in Capital,” was estimated to be about $600,000.
On
March
27, 2006 and as part of the merger of Euroseas Acquisition Company Inc., a
wholly owned subsidiary of Euroseas Ltd., with Cove Apparel Inc. an additional
359,728 common share were issued to Cove Apparel Inc.’s shareholders (a total of
5 more shares than originally calculated were issued to Cove Apparel Inc.’s
shareholders due to the rounding-up of fractional shares during the exchange).
The issuance of these shares was recorded as an increase of the share capital
($10,791) and a decrease of paid-in capital of $791, as Cove Apparel Inc. had
at
the time of merger net assets of $10,000.
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
Basic
and
diluted earnings per common share are computed as follows:
|
|
June
30, 2005
|
|
June
30, 2006
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
Net
income
|
|
|
14,763,374
|
|
|
10,015,456
|
|
Basic
and Diluted earnings per share:
|
|
|
|
|
|
|
|
Weighted
average common shares -
Outstanding
|
|
|
9,918,056
|
|
|
12,449,194
|
|
Basic
earnings per share:
|
|
|
1.49
|
|
|
0.80
|
|
13.
Subsequent
Events
|
(a)
|
On
July 5, 2006, the Company delivered to its buyers M/V “
John P
”, a
handysize bulk carrier of 26,354 dwt built in 1981. A Memorandum
of
Agreement to sell the vessel was signed on March 27, 2006 for a
gross
price of $4.95 million less 4% sales commissions. The Company expects
a
gain on sale of approximately $2,295,791 during the second half
of
2006.
|
|
(b)
|
On
July 25, 2006, Prospero Maritime Inc., a wholly-owned subsidiary
of the
company signed a Memorandum of Agreement to purchase m/v “
Torm
Tekla
” (renamed m/v “
Aristides N.P.
”), a panamax size
drybulk carrier of 69,268 dwt built in 1993 for $23.46 million.
The vessel
was delivered to Euroseas Ltd. on September 4, 2006. The acquisition
was
financed with about 35% of equity (approximately $8 million) from
the
Company’s cash reserves and the remaining with a bank loan of $15.5
million.
|
|
(c)
|
On
August 7, 2006, the Board of Directors declared a cash dividend of
$0.06
per Euroseas Ltd. common share payable on or about September 15,
2006 to
the holders of record of Euroseas Ltd. common shares as of September
5,
2006.
|
|
(d)
|
On
August 8, 2006, the annual shareholders meeting of the Company approved
the Company’s 2006 Stock Incentive Plan. The plan will be administered by
the Board of Directors which can make awards totaling in aggregate
up to
1,800,000 shares over the next 10 years. The persons eligible to
receive
awards under the Plan are those officers, directors, and executive,
managerial, administrative and professional employees of the Company,
(collectively, “key persons”) as the Board in its sole discretion shall
select based upon such factors as the Board shall deem relevant.
Awards
may be made under the Plan in the form of incentive stock options,
non-qualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, unrestricted stock, restricted
stock
units and performance shares. No awards have been made under this
plan.
|
|
(e)
|
On
September 20, 2006, the Board of Directors on the Company, being
given the
authority at the annual shareholders meeting on August 8, 2006, approved
a
1-for-3 reverse stock split of the Company’s common stock to be effected
before the start of trading on October 6, 2006. The par value of
the
common stock is now $0.03 per share. The number of authorized shares
remains at 100,000,000 shares. No change was made on the par value
or the
number of the authorized preferred stock of the company which remain
at
$0.01 per share and 20,000,000 shares respectively.
|
Euroseas
Ltd. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the six month periods ended June 30, 2005 and 2006
(All
amounts expressed in U.S. Dollars)
|
(f)
|
On
October 12, 2006, the Company purchased a 1,599 TEU containership
(m/v
YM
Xingang I
),
built in 1993, for $27.25 million. The vessel was delivered to
the Company
on November 15, 2006 with a period time charter until July/September
2009
to Yang Ming at the gross charter rate of $26,650 per day. The
acquisition
was financed with approximately $7.25 million from the Company’s cash
reserves and a bank loan of $20.0 million.
The
loan will be repaid 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 last installment in November 2013. The
first
installment is due in February 2007. The interest is based on
LIBOR plus a
margin of 0.935%. The Company has the option to prepay $7.0 million
during
the first year following the drawdown, in which case the remaining
repayment installment during the first three years may be reduced
by a
maximum of 35% each with the balance of the prepayment amount
to be setoff
against the balloon. In the use of the prepayment the margin
will become
0.90%.
The loan is secured with the following: (i) first
priority mortgage over the vessel, (ii) first assignment of earnings
and
insurance, (iii) a corporate guarantee of Euroseas Ltd. and (iv)
a third
mortgage on the Company vessel m/v
Irini
also financed by the same bank. The loan agreement contains ship
finance
covenants including restrictions as to changes in management
and ownership
of the vessel, distribution of dividends or any other distribution
of
profits and assets, additional indebtedness and mortgaging of
the vessel
without the lender’s prior consent, the sale of the vessel, minimum
requirements regarding the hull ratio cover and minimum cash
retention
account.
|
|
(g)
|
On
November 9, 2006, the Board of Directors declared a cash dividend
of $0.21 per Euroseas' common share payable on or about December
15, 2006 to the holders of record of Euroseas' common shares as of
December 8, 2006.
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
of
the
Euroseas Ltd. and subsidiaries
We
have
audited the accompanying consolidated balance sheets of the Euroseas Ltd and
subsidiaries (the “Company”) as of December 31, 2005 and 2004 and the related
consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Euroseas Ltd and subsidiaries at December
31, 2005 and 2004 and the results of their operations and their cash flows
for
each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
Deloitte,
Hadjipavlou,
Sofianos & Cambanis S.A.
Athens,
Greece
March
3,
2006 except for Note 15(e) as to
which
the
date is March 20, 2006, Note 15(f)
as
to
which the date is March 27, 2006, Note 15 (g)
to
which
the date is April 10, 2006, Note 15 (h)
to
which
the date is April 11, 2006 and Note 12 to
which
the
date is October 6, 2006.
Euroseas
Ltd. and Subsidiaries
Consolidated
balance sheets
December
31, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
|
|
Notes
|
|
2004
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
15,497,482
|
|
|
20,447,301
|
|
Trade
accounts receivable, net
|
|
|
|
|
|
245,885
|
|
|
46,118
|
|
Prepaid
expenses
|
|
|
|
|
|
207,551
|
|
|
85,625
|
|
Claims
and other receivables
|
|
|
|
|
|
137,783
|
|
|
306,303
|
|
Due
from related company
|
|
|
8
|
|
|
-
|
|
|
3,012,720
|
|
Inventories
|
|
|
3
|
|
|
303,478
|
|
|
371,691
|
|
Restricted
cash
|
|
|
|
|
|
68,980
|
|
|
1,080,949
|
|
Total
current assets
|
|
|
|
|
|
16,461,159
|
|
|
25,350,707
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
|
|
|
|
|
|
|
|
Vessels,
net
|
|
|
4
|
|
|
34,171,164
|
|
|
52,334,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
assets
|
|
|
|
|
|
|
|
|
|
|
Deferred
charges, net
|
|
|
5
|
|
|
2,205,178
|
|
|
1,855,829
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
|
|
|
36,376,342
|
|
|
54,190,726
|
|
Total
assets
|
|
|
|
|
|
52,837,501
|
|
|
79,541,433
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, current portion
|
|
|
9
|
|
|
6,030,000
|
|
|
14,430,000
|
|
Trade
accounts payable
|
|
|
|
|
|
879,541
|
|
|
837,182
|
|
Accrued
expenses
|
|
|
7
|
|
|
321,056
|
|
|
1,777,637
|
|
Deferred
revenues
|
|
|
|
|
|
1,908,189
|
|
|
1,370,058
|
|
Due
to related company
|
|
|
8
|
|
|
4,626,060
|
|
|
-
|
|
Total
current liabilities
|
|
|
|
|
|
13,764,846
|
|
|
18,414,877
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
9
|
|
|
7,960,000
|
|
|
34,130,000
|
|
Total
long-term liabilities
|
|
|
|
|
|
7,960,000
|
|
|
34,130,000
|
|
Total
liabilities
|
|
|
|
|
|
21,724,846
|
|
|
52,544,877
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
11
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Common
stock (par value $0.03, 100,000,000 shares authorized, 9,918,056
issued
and 12,260,386 outstanding respectively)
|
|
|
12
|
|
|
297,542
|
|
|
367,812
|
|
Preferred
shares (par value $0.01, 20,000,000 shares authorized, no shares
issued
and outstanding)
|
|
|
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
12
|
|
|
17,073,381
|
|
|
17,883,781
|
|
Retained
earnings
|
|
|
|
|
|
13,741,732
|
|
|
8,744,963
|
|
Total
shareholders’ equity
|
|
|
|
|
|
31,112,655
|
|
|
26,996,556
|
|
Total
liabilities and shareholders’ equity
|
|
|
|
|
|
52,837,501
|
|
|
79,541,433
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Euroseas
Ltd. and Subsidiaries
Consolidated
statements of income
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
|
|
Notes
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Voyage
revenue
|
|
|
|
|
|
25,951,023
|
|
|
45,718,006
|
|
|
44,523,401
|
|
Commissions
|
|
|
8
|
|
|
(906,017
|
)
|
|
(2,215,197
|
)
|
|
(2,388,349
|
)
|
Net
revenue
|
|
|
|
|
|
25,045,006
|
|
|
43,502,809
|
|
|
42,135,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(income)/expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
expenses
|
|
|
13
|
|
|
436,935
|
|
|
370,345
|
|
|
670,551
|
|
Vessel
operating expenses
|
|
|
13
|
|
|
8,775,730
|
|
|
8,906,252
|
|
|
8,610,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fees
|
|
|
8
|
|
|
1,722,800
|
|
|
1,972,252
|
|
|
1,911,856
|
|
General
and administrative expenses
|
|
|
|
|
|
-
|
|
|
-
|
|
|
420,755
|
|
Amortization
and depreciation
|
|
|
4,
5
|
|
|
4,757,933
|
|
|
3,461,678
|
|
|
4,208,252
|
|
Net
gain on sale of vessel
|
|
|
4
|
|
|
-
|
|
|
(2,315,477
|
)
|
|
-
|
|
Total
operating expenses
|
|
|
|
|
|
15,693,398
|
|
|
12,395,050
|
|
|
15,821,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
9,351,608
|
|
|
31,107,759
|
|
|
26,313,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and finance cost
|
|
|
|
|
|
(793,257
|
)
|
|
(708,284
|
)
|
|
(1,495,871
|
)
|
Derivative
gain/(loss)
|
|
|
|
|
|
-
|
|
|
27,029
|
|
|
(100,029
|
)
|
Foreign
exchange gain/(loss)
|
|
|
|
|
|
(690
|
)
|
|
(1,808
|
)
|
|
538
|
|
Interest
income
|
|
|
|
|
|
36,384
|
|
|
187,069
|
|
|
460,457
|
|
Other
income (expenses), net
|
|
|
|
|
|
(757,563
|
)
|
|
(495,994
|
)
|
|
(1,134,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in net loss of an associate
|
|
|
6
|
|
|
(167,433
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
8,426,612
|
|
|
30,611,765
|
|
|
25,178,454
|
|
Earnings
per share - basic and diluted
|
|
|
|
|
|
0.85
|
|
|
3.09
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year
-
basic and diluted
|
|
|
9,918,056
|
|
|
9,918,056
|
|
|
10,739,476
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Euroseas
Ltd. and Subsidiaries
Consolidated
statements of shareholders’ equity
Years
ended December 31, 2003, 2004 and 2005
(All
amounts, except per share data, expressed in U.S. Dollars)
|
|
Comprehensive
Income
|
|
Number
of
Shares
(Note
12)
|
|
Common
Stock
Amount
(Note
12)
|
|
Preferred
Shares
Amount
(Note
12)
|
|
Paid
- in
Capital
(Note
12)
|
|
Retained
Earnings
|
|
Total
|
|
Balance,
December
31, 2002
|
|
|
-
|
|
|
9,918,056
|
|
|
297,542
|
|
|
-
|
|
|
19,573,236
|
|
|
1,414,856
|
|
|
21,285,634
|
|
Net
income
|
|
|
8,426,612
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,426,612
|
|
|
8,426,612
|
|
Dividends
paid/return of capital
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(950,000
|
)
|
|
(1,276,000
|
)
|
|
(2,226,000
|
)
|
Balance,
December
31, 2003
|
|
|
|
|
|
9,918,056
|
|
|
297,542
|
|
|
-
|
|
|
18,623,236
|
|
|
8,565,468
|
|
|
27,486,246
|
|
Net
income
|
|
|
30,611,765
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
30,611,765
|
|
|
30,611,765
|
|
Dividends
paid/return of capital
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,549,855
|
)
|
|
(25,435,501
|
)
|
|
(26,985,356
|
)
|
Balance,
December
31, 2004
|
|
|
|
|
|
9,918,056
|
|
|
297,542
|
|
|
-
|
|
|
17,073,381
|
|
|
13,741,732
|
|
|
31,112,655
|
|
Net
income
|
|
|
25,178,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,178,454
|
|
|
25,178,454
|
|
Issuance
of shares, net of issuance costs
|
|
|
|
|
|
2,342,331
|
|
|
70,270
|
|
|
-
|
|
|
17,510,400
|
|
|
-
|
|
|
17,580,670
|
|
Dividends
paid/return of capital
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16,700,000
|
)
|
|
(30,175,223
|
)
|
|
(46,875,223
|
)
|
Balance,
December
31, 2005
|
|
|
|
|
|
12,260,386
|
|
|
367,812
|
|
|
-
|
|
|
17,883,781
|
|
|
8,744,963
|
|
|
26,996,556
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Euroseas
Ltd. and Subsidiaries
Consolidated
statements of cash flows
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
|
|
2003
|
|
2004
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
|
8,426,612
|
|
|
30,611,765
|
|
|
25,178,454
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
of vessels
|
|
|
4,158,159
|
|
|
2,530,100
|
|
|
2,657,914
|
|
Amortization
of deferred charges
|
|
|
667,176
|
|
|
982,259
|
|
|
1,634,082
|
|
Equity
in net loss
|
|
|
167,433
|
|
|
-
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
3,592
|
|
|
(27,907
|
)
|
|
-
|
|
Gain
on sale of a vessel
|
|
|
-
|
|
|
(2,315,477
|
)
|
|
-
|
|
Loss
on derivative
|
|
|
-
|
|
|
-
|
|
|
100,029
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)/decrease
in:
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
110,471
|
|
|
213,762
|
|
|
199,767
|
|
Prepaid
expenses
|
|
|
26,552
|
|
|
(133,437
|
)
|
|
121,927
|
|
Claims
and other receivables
|
|
|
(171,731
|
)
|
|
208,524
|
|
|
(268,549
|
)
|
Inventories
|
|
|
(7,748
|
)
|
|
51,449
|
|
|
(68,213
|
)
|
Increase/(decrease)
in:
|
|
|
|
|
|
|
|
|
|
|
Due
to related company
|
|
|
(482,778
|
)
|
|
3,541,236
|
|
|
(7,638,780
|
)
|
Trade
accounts payable
|
|
|
(650,863
|
)
|
|
77,487
|
|
|
(42,359
|
)
|
Accrued
expenses
|
|
|
(43,308
|
)
|
|
66,193
|
|
|
334,874
|
|
Deferred
revenue
|
|
|
(274,764
|
)
|
|
673,157
|
|
|
(538,131
|
)
|
Dry-docking
expenses paid
|
|
|
(972,671
|
)
|
|
(2,270,418
|
)
|
|
(1,076,233
|
)
|
Net
cash provided by operating activities
|
|
|
10,956,132
|
|
|
34,208,693
|
|
|
20,594,782
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of a vessel
|
|
|
-
|
|
|
-
|
|
|
(20,821,647
|
)
|
(Contributions
to) and drawings from the cash retention accounts
|
|
|
214,832
|
|
|
33,224
|
|
|
(1,011,969
|
)
|
Proceeds
from sale of a vessel
|
|
|
-
|
|
|
6,723,018
|
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
214,832
|
|
|
6,756,242
|
|
|
(21,833,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance
of share capital upon incorporation
|
|
|
-
|
|
|
-
|
|
|
70,270
|
|
Net
proceeds from shares issued in a private placement
|
|
|
-
|
|
|
-
|
|
|
18,632,106
|
|
Dividends
paid/return of capital
|
|
|
(1,200,000
|
)
|
|
(26,962,500
|
)
|
|
(46,875,223
|
)
|
Repayment
of advances from shareholders
|
|
|
(300,000
|
)
|
|
-
|
|
|
-
|
|
Loan
arrangement fees paid
|
|
|
(28,000
|
)
|
|
-
|
|
|
(208,500
|
)
|
Proceeds
from long-term debts
|
|
|
3,000,000
|
|
|
-
|
|
|
53,200,000
|
|
Repayment
of long-term debts
|
|
|
(6,250,000
|
)
|
|
(6,605,000
|
)
|
|
(18,630,000
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(4,778,000
|
)
|
|
(33,567,500
|
)
|
|
6,188,653
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
6,392,964
|
|
|
7,397,435
|
|
|
4,949,819
|
|
Cash
and cash equivalents at beginning of year
|
|
|
1,707,083
|
|
|
8,100,047
|
|
|
15,497,482
|
|
Cash
and cash equivalents at end of year
|
|
|
8,100,047
|
|
|
15,497,482
|
|
|
20,447,301
|
|
Cash
paid for interest
|
|
|
725,034
|
|
|
474,430
|
|
|
1,372,957
|
|
Non
cash items:
|
|
|
|
|
|
|
|
|
|
|
Dividend
and return of capital from investment in an associate (Note
6)
|
|
|
1,026,000
|
|
|
22,856
|
|
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
1.
Basis
of Presentation and General Information
Euroseas
Ltd. (the “Company”) was formed on May 5, 2005 under the laws of the Republic of
the Marshall Islands to consolidate the beneficial owners of the ship-owning
companies listed below. On June 28, 2005 the beneficial owners exchanged
all
their shares in the ship-owning companies for shares in Friends Investment
Company Inc., a newly formed Marshall Islands company. On June 29, 2005,
Friends
Investment Company Inc. then exchanged all the shares in the ship-owning
companies for Euroseas Ltd. common shares, thus, becoming the sole shareholder
of the Company. The transaction described above constitutes a reorganization
of
companies under common control, and has been accounted for in a manner similar
to a pooling of interests, as each ship-owning company was under the common
control of the Pittas family prior to the transfer of ownership of the
ship-owning companies to Euroseas Ltd. Accordingly, the accompanying
consolidated financial statements have been presented as if the ship-owning
companies were consolidated subsidiaries of the Company for all periods
presented and using the historical carrying costs of the assets and the
liabilities of the ship-owning companies.
On
August
25, 2005, Euroseas Ltd. sold 2,342,331 common shares at $9.00 (as adjusted
for
the 1-for-3 reverse stock split effected on October 6, 2006) each in an
institutional private placement, together with 0.25 of detachable warrants
for
each Euroseas Ltd. common share sold to acquire up to 1,756,743 Euroseas
Ltd.
common shares. The total proceeds, net of issuance costs of about $3,500,000,
amounted to $17,510,400. The warrants allow their holders to acquire Euroseas
Ltd. common shares at a price of $10.80 per share
(as
adjusted for the reverse stock split)
and
are
exercisable for a period of five years from the issuance of the warrants.
The
Company and the investors in the institutional private placement have entered
into a registration rights agreement to register with the Securities and
Exchange Commission of the United States (SEC) the Euroseas Ltd. common shares
that were issued in such private placement and the Euroseas Ltd. common shares
that will be issued to satisfy the exercise of the warrants. The registration
rights agreement contains a liquidated damages provision.
On
August
25, 2005, as a condition to the institutional private placement described
above,
the Company and Cove Apparel, Inc. (Cove, an unrelated party and a public
corporation) signed an Agreement and Plan of Merger (the “Merger Agreement”).
The Merger Agreement provides for the merger of Cove and Euroseas Acquisition
Company Inc., a Delaware corporation and a wholly-owned subsidiary of the
Company formed on June 21, 2005, with the current stockholders of Cove
receiving
0.034323
shares
(as adjusted for the reverse stock split) of Euroseas Ltd. common shares
for
each share of Cove common stock they presently own. As part of the merger,
the
Company has agreed to file a registration statement with the SEC to register
for
re-sale the Euroseas Ltd. common shares issuable in the merger to certain
Cove
stockholders (only the 272,868 shares as adjusted for the reverse stock
split to
be issued to Cove-affiliated stockholders, need to be registered; the remaining
86,855 (as adjusted for the reverse stock split) shares to be issued in
the
merger can freely trade). Upon consummation of the merger, the separate
existence of Cove will cease, and Euroseas Acquisition Company Inc. will
continue as the surviving corporation and as a wholly owned subsidiary
of
Euroseas Ltd. under the name Cove Apparel, Inc (see Note 15(f)). As of
the date
of the merger, Cove is required only have cash of approximately $10,000
and
equity of the same amount.
The
operations of the vessels are managed by Eurobulk Ltd. (the “manager”), a
corporation controlled by the Pittas family -- the controlling shareholders
of
Friends Investment Company Inc.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
For
the years ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
1.
Basis
of Presentation and General Information - continued
The
manager has an office in Greece located at 40 Ag. Konstantinou Ave, Maroussi,
Greece. The manager provides the Company with a wide range of shipping services
such as technical support and maintenance, insurance consulting, chartering,
financial and accounting services, as well as executive management services,
in
consideration for fixed and variable fees (see Note 8).
The
Company is engaged in the ocean transportation of drybulk and containers
through
ownership and operation of drybulk 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 “
Ariel
”,
which was built in 1977 and acquired on March 5,
1993.
|
·
|
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.
|
·
|
Alcinoe
Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of
the
Cyprus flag 26,354 dst bulk carrier motor vessel “
Pantelis
P
”,
which was built in 1981 and acquired on June 4,
1997.
|
·
|
Alterwall
Business Inc. incorporated in Panama on January 15, 2001, owner
of the
Panama flag 18,253 dwt container carrier motor vessel “
YM
Qingdao1
”
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 November 25, 2005.
|
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
1.
Basis
of Presentation and General Information - continued
In
addition, the accompanying financial statements include the accounts of the
following ship-owning companies which were also managed by Eurobulk Ltd.
during
the periods presented:
(a)
|
Silvergold
Shipping Ltd. incorporated in Cyprus on May 16, 1994. Up to June
3, 1996,
the Company was engaged in ship owning activities, but thereafter,
the
Company’s assets and liabilities were liquidated and the retained earnings
were distributed to the shareholders. The Company remained dormant
until
October 10, 2000 when it acquired the 18,000 DWT Cyprus flag container
carrier motor vessel “
Widar
”,
which was built in 1986. The vessel was sold on April 24, 2004.
The Pittas
family, the controlling shareholders of Friends Investment Company
Ltd.
which is the Company’s largest shareholder, also owned Silvergold Shipping
Ltd., and, accordingly, these accompanying financial statements
also
consolidated the accounts of Silvergold Shipping Ltd. until May
31, 2005,
when Silvergold Shipping Ltd. declared a final dividend of $35,000
to its
shareholders.
|
(b)
|
Fitsoulas
Corporation Limited which was incorporated in Malta on September
24, 1999,
was the owner of the Malta flag 41,427 DWT bulk carrier motor vessel
Elena
Heart, which was built in 1983 and acquired on October 22, 1999.
The
vessel was sold on March 31, 2003. The group of beneficial shareholders,
which included the Pittas family, which own the above mentioned
ship-owing
companies also exercised significant influence over Fitsoulas Corporation
Limited through their 38% interest in that company, and this investment
was therefore accounted for in the accompanying financial statements
using
the equity method.
|
During
the years ended December 31, 2003, 2004 and 2005, the following charterers
individually accounted for more than 10% of the Company’s voyage and time
charter revenues as follows:
|
|
Year
ended December 31,
|
|
Charterer
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
A
|
|
|
-
|
|
|
-
|
|
|
26.85
|
%
|
B
|
|
|
23.01
|
%
|
|
11.50
|
%
|
|
17.48
|
%
|
C
|
|
|
-
|
|
|
20.60
|
%
|
|
12.32
|
%
|
D
|
|
|
31.30
|
%
|
|
12.20
|
%
|
|
-
|
|
E
|
|
|
-
|
|
|
14.07
|
%
|
|
-
|
|
F
|
|
|
-
|
|
|
10.52
|
%
|
|
-
|
|
G
|
|
|
10.55
|
%
|
|
-
|
|
|
-
|
|
2.
Significant
Accounting Policies
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United
States
of America. The following are the significant accounting policies adopted
by the
Company:
Principles
of consolidation
The
accompanying consolidated financial statements included the accounts of Euroseas
Ltd. and its subsidiaries. Inter-company transactions were eliminated on
consolidation.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
2.
Significant
Accounting Policies - continued
Investment
in an associate
An
associate is an entity over which shareholders of the Company exercises
significant influence but not control. The results of operations, and assets
and
liabilities of an associate are reflected in the accompanying consolidated
financial statements using the equity method of accounting. Under this method
of
accounting, investment in an associate are carried on the consolidated balance
sheet at cost as adjusted for the Company’s share in the post acquisition net
earnings or net loss of an associate.
Use
of estimates
The
preparation of the accompanying consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, the disclosures of contingent assets and liabilities
at
the date of the consolidated financial statements, and the stated amounts
of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other
comprehensive income
The
Company follows the provisions of Statement of Financial Accounting Standards
No. 130, “Statement of Comprehensive Income” (“SFAS 130”), which requires
separate presentation of certain transactions which are recorded directly
as
components of stockholders’ equity. The Company has no other comprehensive
income and, accordingly, comprehensive income equals net income for all periods
presented.
Foreign
currency translation
The
Company’s functional currency is the U.S. dollar. Assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at exchange
rates prevailing at the balance sheet date. Income and expenses denominated
in
foreign currencies are translated into U.S. dollars at exchange rates prevailing
at the date of the transaction. Resulting exchange gains and/or losses on
settlement or translation are included in the accompanying consolidated
statements of operations.
Cash
equivalents
Cash
equivalents are time deposits or other certificates purchased with an original
maturity of three months or less.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
2.
Significant
Accounting Policies - Continued
Trade
accounts receivable
The
amount shown as trade accounts receivable, at each balance sheet date, includes
estimated recoveries from each voyage or time charter, net of a provision
for
doubtful accounts. At each balance sheet date, the Company provides for doubtful
accounts on the basis of specific identified doubtful receivables. At December
31, 2004 and 2005, no provision for doubtful debts was considered
necessary.
Claims
and other receivables
Claims
and other receivables principally represent claims arising from hull or
machinery damages, crew salaries claims or other insured risks that have
been
submitted to insurance adjusters or are currently being compiled. All amounts
are shown net of applicable deductibles.
Inventories
Inventories
consist of bunkers, lubricants and victualling on board the Company’s vessels at
the balance sheet date and are stated at the lower of cost and market value.
Victualling is valued using the FIFO method while bunkers and lubricants
are
valued on an average cost basis.
Vessels
Vessels
are stated at cost which comprises the vessels’ contract price, costs of major
repairs and improvements upon acquisition, direct delivery and other acquisition
expenses less accumulated depreciation. Subsequent expenditures for conversions
and major improvements are also capitalized when they appreciably extend
the
life, increase the earning capacity or improve the efficiency or safety of
the
vessels otherwise these amounts are charged to expense as incurred.
Expenditures
for vessel repair and maintenance is charged against income in the period
incurred.
Depreciation
Depreciation
is calculated on a straight line basis with reference to the cost of the
vessel,
age and scrap value as estimated at the date of acquisition. Depreciation
is
calculated over the remaining useful life of the vessel, which is estimated
to
range from 25 to 30 years from the completion of its construction. Remaining
useful lives of property are periodically reviewed and revised to recognize
changes in conditions and such revisions, if any, are recognized over current
and future periods.
The
Company changed its estimate of the scrap value of its vessels in 2004 (see
Note
4).
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Revenue
and expense recognition
Revenues
are generated from voyage and time charter agreements. Time charter revenues
are
recorded over the term of the charter as service is provided. Under a voyage
charter, the revenues and associated voyage costs are recognized on a pro-rata
basis over the duration of the voyage. Probable losses on voyages are provided
for in full at the time such losses can be estimated. A voyage is deemed
to
commence upon the completion of discharge of the vessel’s previous cargo and is
deemed to end upon the completion of discharge of the current cargo. Demurrage
income, which in included in voyage revenues, represents payments received
from
the charterer when loading or
discharging
time exceeded the stipulated time in the voyage charter and is recognized
when
earned.
Charter
fees received in advance is recorded as a liability until charter services
are
rendered.
Vessels
operating expenses comprise all expenses relating to the operation of the
vessels, including crewing, repairs and maintenance, insurance, stores,
lubricants and miscellaneous expenses. Vessels operating expenses are recognized
as incurred; payments in advance of services or use are recorded as prepaid
expenses. Voyage expenses comprise all expenses relating to particular voyages,
including bunkers, port charges, canal tolls, and agency fees.
For
the
Company’s vessels operating in shipping pools, revenues and voyage expenses are
pooled and allocated to each shipping pool’s participants on a time charter
equivalent basis in accordance with an agreed-upon formula.
Dry-docking
and special survey costs
Dry-docking
and special survey costs are deferred and amortized over the estimated period
to
the next scheduled dry-docking or survey, which are generally two and a half
years and five years, respectively. Unamortized dry-docking and special survey
costs of vessels that are sold are written-off to income in the year of the
vessel’s sale.
Pension
and retirement benefit obligations - crew
The
ship-owning companies employ the crews on board the vessels under short-term
contracts (usually up to 9 months). Accordingly, they are not liable for
any
pension or post retirement benefits.
Financing
costs
Loan
arrangement fees are deferred and amortized to interest expense over the
duration of the underlying loan using the effective interest method. Unamortized
fees relating to loan repaid or refinanced are expensed in the period the
repayment or refinancing occurs.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Assets
held for sale
It
is the
Company’s policy to dispose of vessels when suitable opportunities occur and not
necessarily to keep them until the end of their useful life. The Company
classifies assets as being held for sale in accordance with SFAS No. 144,
“Accounting for the Impairment or the Disposal of Long-Lived Assets” when the
following criteria are met: management has committed to a plan to sell the
asset; the asset is available for immediate sale in its present condition;
an
active program to locate a buyer and other actions required to complete the
plan
to sell the asset have been initiated; the sale of the asset is probable,
and
transfer of the asset is expected to qualify for recognition as a completed
sale
within one year; the asset is being actively marketed for sale at a price
that
is reasonable in relation to its current fair value and actions required
to
complete the plan indicate that it is unlikely that significant changes to
the
plan will be made or that the plan will be withdrawn.
Long-lived
assets classified as held for sale are measured at the lower of their carrying
amount or fair value less cost to sell. These assets are not depreciated
once
they meet the criteria to be held for sale.
Impairment
of long-lived assets
The
Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets
are
less than the asset’s carrying amount. In the evaluation of the fair value and
future benefits of long-lived assets, the Company performs an analysis of
the
anticipated undiscounted future net cash flows of the related long-lived
assets.
If the carrying value of the related asset exceeds the undiscounted cash
flows,
the carrying value is reduced to its fair value. Various factors including
future charter rates and vessel operating costs are included in this analysis.
The Company determined that no impairment loss needed to be recognized for
applicable assets for any years presented.
Derivative
financial instruments
SFAS
No.
133, “Accounting for Derivative Instruments and Hedging Activities” as amended
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value with changes in the instruments' fair value
recognized currently in earnings unless specific hedge accounting criteria
are
met. Pursuant to SFAS No. 133, the transactions did not qualify as a hedge
or
meet the criteria of hedge accounting. All gains or losses on the derivative
financial instruments are reflected in the consolidated statements of income.
For
the
year ended December 31, 2004, the interest rate swaps did not qualify for
hedge
accounting treatment. Accordingly, all gains or losses have been recorded
in the
consolidated statements of income. The fair value at December 31, 2004 of
$27,029 is included in claims and other receivables. There were no interest
rate
swaps for the year ended December 31, 2005.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Earning
per common share
Basic
earnings per common share are computed by dividing the net income by the
weighted average number of common shares outstanding during the year. Potential
common shares that are anti-dilutive, such as the warrants outstanding
as of
December 31, 2005 since their exercise price exceeds the fair value of
Euroseas
Ltd. common shares, are excluded from earnings per share. Additional 1,079,167
Euroseas Ltd. common shares were issued subsequent to December 31, 2005
(see
Note 15(f)).
Segment
reporting
The
Company reports financial information and evaluates its operations by charter
revenue and not by the length of ship employment for its customers, i.e.
spot or
time charters. The Company does not use discrete financial information to
evaluate the operating results for each such type of charter. Although revenue
can be identified for these types of charters, management cannot and does
not
identify expenses, profitability or other financial information for these
charters. As a result, management, including the chief operating decision
maker,
reviews operating results solely by revenue per day and operating results
of the
fleet and thus the Company has determined that it operates under one reporting
segment. Furthermore, when the Company charters a vessel to a charterer,
the
charterer is free to trade the vessel worldwide and, as a result, the disclosure
of geographical information is impracticable.
Recent
accounting pronouncements
In
January 2003, the Financial Accounting Standards Board (FASB) issued FIN
46,
“Consolidation of Variable Interest Entities,” which clarified the application
of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to
address perceived weaknesses in accounting for entities commonly known as
special-purpose or off-balance sheet entities. It provides guidance for
identifying the party with a controlling financial interest resulting from
arrangements or financial interests rather than voting interests. It requires
consolidation of Variable Interest Entities (“VIEs”) only if those VIEs do not
effectively disperse the risks and benefits amount the various parties involved.
On December 24, 2003, the FASB issued a complete replacement of FIN 46 (“FIN
46R), which clarified certain complexities of FIN 46. FIN 46R is applicable
for
financial statements issued for reporting periods that end after March 5,
2004.
The Company has reviewed FIN 46R and determined that the adoption of the
standard will not have a material impact on the financial
statements.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure
the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will
be
recognized over the period during which an employee is required to provide
services in exchange for the award-the requisite service period (usually
the
vesting period). SFAS No.123R applies to all awards granted after the required
effective date, as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005, and to awards modified, repurchased,
or
cancelled after that date. SFAS 123R will be effective for our fiscal year
2006.
The Company does not anticipate that the implementation of this standard
will
have a material impact on its financial position, results of operations or
cash
flows.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Recent
accounting pronouncements (continued)
On
December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets,
an amendment of APB Opinion No. 29, “Accounting for Non-monetary Transactions”
(“SFAS 153”). This statement amends APB Opinion No. 29 to eliminate the
exception for non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that do
not
have commercial substance. Under SFAS 153, if a non-monetary exchange of
similar
productive assets meets a commercial-substance criterion and fair value
is
determinable, the transaction must be accounted for at fair value resulting
in
recognition of any gain or loss. SFAS 153 is effective for non-monetary
transactions in fiscal periods that begin after June 15, 2005. The Company
does
not anticipate that the implementation of this standard will have a material
impact on its financial position, results of operations or cash
flows.
The
FASB
has issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and SFAS No. 3. The Statement applies to all voluntary
changes in accounting principle, and changes the requirements for accounting
for
and reporting of a change in accounting principle.
SFAS
No.
154 requires retrospective applications to prior periods’ financial statements
of a voluntary change in accounting principle unless it is impracticable.
Opinion 20 previously required that most voluntary change in accounting
principle be recognized by including in net income of the period of the
change
the cumulative effect of changing to the new accounting principle. SFAS
No. 154
improves financial reporting because its requirements enhance the consistency
of
financial information between periods. The Company is analyzing the effect
which
this pronouncement will have on its financial condition, statement of
operations, and cash flows. This statement will be effective for the Company
on
January 1, 2006. The Company does not believe that this pronouncement will
have
and effect on it’s financial condition, results of operation or cash
flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” This Statement amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” and resolves issues addressed in Statement 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.”
SFAS
No.
155 permits fair value re-measurement for any hybrid financial instruments
that
contains an embedded derivative that otherwise would require bifurcation
and
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133. SFAS No. 155 establishes a requirement
to
evaluate interests in securitized financial assets to identify interests
that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. SFAS No. 155 also
clarifies that concentrations of credit risk in the form of subordination
are
not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition
on
a qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument.
SFAS
No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
The Company has not completed the study of what effect SFAS No. 155 will
have on
its financial position and results of operations.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
For
the years ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
2.
Summary
of Significant Accounting Policies - Continued
Recent
accounting pronouncements - Continued
On
March
29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating to
the
FASB accounting standard for stock options and other share-based payments.
The
interpretations in SAB No. 107, “Share-Based Payment,” (SAB 107) express views
of the SEC Staff regarding the application of SFAS No. 123 (revised 2004),
“Share-Based Payment “(Statement 123R). Among other things, SAB 107 provides
interpretive guidance related to the interaction between Statement 123R and
certain SEC rules and regulations, as well as provides the Staff’s views
regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will
have
any effect on its financial position, results of operations or cash
flows.
In
March 2005, the FASB issued FASB Interpretation No. (“FIN”) 47
“Accounting for Conditional Asset Retirement Obligations, an interpretation
of
FASB Statement No. 143”, which clarifies the term “conditional asset
retirement obligation” as used in SFAS No. 143 “Accounting for Asset
Retirement Obligations”. Specifically, FIN 47 provides that an asset retirement
obligation is conditional when either the timing and (or) method of settling
the
obligation is conditioned on a future event. Accordingly, an entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the
fair
value of an asset retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005. Management is currently evaluating the
effect that adoption of FIN 47 will have on the Company’s financial position and
results of operations.
3.
Inventories
This
consisted of the following:
|
|
2004
|
|
2005
|
|
Lubricants
|
|
|
256,223
|
|
|
312,390
|
|
Victualling
|
|
|
47,255
|
|
|
59,301
|
|
Total
|
|
|
303,478
|
|
|
371,691
|
|
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
4.
Vessels,
net
The
amounts in the accompanying consolidated balance sheets are as
follows:
|
|
Costs
|
|
Accumulated
Depreciation
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004
|
|
|
61,587,219
|
|
|
(20,491,150
|
)
|
|
41,096,069
|
|
-
Depreciation
for the year
|
|
|
-
|
|
|
(2,530,100
|
)
|
|
(2,530,100
|
)
|
-
Sale
of vessel
|
|
|
(5,826,825
|
)
|
|
1,432,020
|
|
|
(4,394,805
|
)
|
Balance,
December 31, 2004
|
|
|
55,760,394
|
|
|
(21,589,230
|
)
|
|
34,171,164
|
|
-
Depreciation
for the year
|
|
|
|
|
|
(2,657,914
|
)
|
|
(2,657,914
|
)
|
-
Purchase
of vessel
|
|
|
20,821,647
|
|
|
-
|
|
|
20,821,647
|
|
Balance,
December 31, 2005
|
|
|
76,582,041
|
|
|
(24,247,144
|
)
|
|
52,334,897
|
|
The
Company increased in 2004 its estimate of the scrap value of the vessels
to
reflect increases in the market price in the scrap metal market. The effect
of
this change in estimate was to reduce 2004 depreciation expense by $1,400,010
and increase 2004 net income by the same amount, or $0.05 per
share.
In
addition, in 2004, the estimated useful life of the vessel m/v
Ariel
was
extended from 28 years to 30 years as a result of the dry-docking performed
in
such year.
m/v
Widar
was sold
in April 2004 and the Company recognized net gain on sale of $2,315,477.
Depreciation expense for m/v
Widar
for the
year ended December 31, 2004 amounted to $136,384.
This
consisted of:
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
929,757
|
|
|
2,205,178
|
|
Additions
|
|
|
2,270,418
|
|
|
1,284,733
|
|
Amortization
of dry-docking/
special
survey expenses
|
|
|
(931,578
|
)
|
|
(1,550,338
|
)
|
Amortization
of loan arrangement fees
|
|
|
(50,681
|
)
|
|
(83,744
|
)
|
Unamortized
portion written-off upon sale of M/V
Widar
|
|
|
(12,738
|
)
|
|
-
|
|
Balance,
end of year
|
|
|
2,205,178
|
|
|
1,855,829
|
|
The
additions of $1,284,733 in 2005 consisted of loan financing fees of $208,500
and
dry-docking/special survey expenses of $1,076,233. The additions of $2,270,418
in 2004 consisted of dry-docking/special survey expenses.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
For
the years ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
6.
Investment
in an Associate
Fitsoulas
Corporation Limited is 38% owned by common shareholders with the ship-owning
companies listed in Note 1 to the financial statements. The amounts in the
accompanying consolidated financial statements are as follows:
Fitsoulas
Corporation Limited sold its vessel on March 31, 2003. The Company’s share of
the net loss inclusive of the loss on sale of the vessel of Fitsoulas
Corporation Limited was $167,433 for the year ended December 31, 2003.
Thereafter, dividends of $76,000 were declared and capital of $950,000 was
returned directly to the shareholders in 2003 and dividend of $22,856 were
declared and returned directly to the shareholders in 2004.
7.
Accrued
Expenses
This
account consisted of:
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
Accrued
private placement expenses
|
|
|
-
|
|
|
1,121,397
|
|
Accrued
payroll expenses
|
|
|
95,615
|
|
|
31,928
|
|
Accrued
interest
|
|
|
100,366
|
|
|
139,536
|
|
Accrued
general and administrative expenses
|
|
|
-
|
|
|
269,666
|
|
Other
accrued expenses
|
|
|
125,075
|
|
|
215,110
|
|
Total
|
|
|
321,056
|
|
|
1,777,637
|
|
8.
Related
Party Transactions
Management
fees paid to the Manager (see Note 1) amounted to $1,772,800, $1,972,252
and
$1,911,856 in 2003, 2004 and 2005, respectively.
Amounts
due from related parties represent net disbursements and collections made
by the
Manager on behalf of the ship-owning companies during the normal course
of
operations for which they have the right of offset. Amounts due from related
parties mainly consist of advances to the Manager of funds to pay for all
anticipated vessel expenses. The amount of $3,012,720 due from related
parties
as of December 31, 2005 therefore consists entirely of deposits in the
accounts
of the Manager. As of February 28, 2006 the amount due from related party
was
about $
676,675
.
Interest earned on funds deposited in related party accounts is credited
to the
account of the ship-owning companies or Euroseas Ltd.
The
Company uses brokers for various services, as is industry practice. Eurochart
S.A., a company controlled by certain members of the Pittas family and therefore
a related party, provides vessel sales and purchases services, and chartering
services to the Company whereby the Company pays commission of 1% of the
vessel
sales price and 1.25% of charter revenues. Commission expenses for the years
ended December 31, 2003, 2004 and 2005 for vessel sales were $0, $70,000
and
$206,500, respectively, and commissions for chartering services were $286,605,
$534,717 and $536,180, also respectively.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
For
the years ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
8.
Related
Party Transactions - continued
Certain
members of the Pittas family together with another unrelated ship management
company, have one joint venture with the insurance broker Sentinel Maritime
Services Inc. and one with the crewing agent More Maritime Agencies Inc.
The
shareholders’ percentage participation in these joint ventures was 27% in 2003,
35% in 2004 and 48% in 2005. Total fees charged by Sentinel Marine Services
Inc.
and More Maritime Agencies Inc. in 2004 were $209,685 and $23,543, respectively,
and $219,400 and $45,277, respectively, in 2005.
9.
Long-Term
Debt
This
consisted of bank loans of the ship-owning companies are as
follows:
|
|
|
|
December
31,
|
|
Borrower
|
|
|
|
2004
|
|
2005
|
|
Diana
Trading Limited
|
|
|
(a
)
|
|
$
|
4,140,000
|
|
$
|
6,560,000
|
|
Alcinoe
Shipping Limited/
Oceanpride
Shipping Limited/
Searoute
Maritime Ltd/
Oceanopera
Shipping Ltd
|
|
|
(b
)
|
|
|
1,600,000
|
|
|
9,500,000
|
|
Alterwall
Business Inc./
Allendale
Investments S.A
|
|
|
(c
)
|
|
|
8,250,000
|
|
|
17,000,000
|
|
Salina
Shipholding Corp.
|
|
|
(d
)
|
|
|
|
|
|
15,500,000
|
|
|
|
|
|
|
|
13,990,000
|
|
|
48,560,000
|
|
Current
portion
|
|
|
|
|
|
(6,030,000
|
)
|
|
(14,430,000
|
)
|
Long-term
portion
|
|
|
|
|
$
|
7,960,000
|
|
$
|
34,130,000
|
|
The
future annual loan repayments are as follows:
2006
|
|
|
14,430,000
|
|
2007
|
|
|
11,780,000
|
|
2008
|
|
|
11,230,000
|
|
2009
|
|
|
3,720,000
|
|
Thereafter
|
|
|
7,400,000
|
|
Total
|
|
$
|
48,560,000
|
|
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
9.
Long-term
Debt - continued
(a)
|
This
consisted of loan amounting to $4,900,000 and $1,000,000 drawn
on October
16, 2002 and on December 2, 2002, respectively. The loan is payable
in
twenty-four consecutive quarterly installments of $220,000 each,
and a
balloon payment of $620,000 payable together with the final quarterly
installment due in October 2008. The interest is based on LIBOR
plus 1.6%
per annum.
|
An
additional loan of $4,200,000 was drawn on May 9, 2005. The loan is payable
in
twelve consecutive quarterly installments consisting of four installments
of
$450,000 each, and eight installments of $300,000 each with the final
installment due in May 2008. The interest is based on LIBOR plus 1.25% per
annum.
(b)
|
The
balance as of December 31, 2004 represents the balance of the $3,000,000
loan drawn by Alcinoe Shipping Limited and Oceanpride Shipping
Limited on
April 1, 2003 against a loan facility for which they are jointly
and
severally liable. Interest is based on LIBOR plus 1.75% per
annum.
|
Alcinoe
Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd. and Oceanopera
Shipping Ltd.
drew
$13,500,000 against a loan facility for which they are jointly and severally
liable. Prior to obtaining the loan, an amount of $1,400,000 was paid in
settlement of the outstanding loans as at March 31, 2005 for Alcinoe Shipping
Ltd. and Oceanpride Shipping Ltd. The loan is payable in twelve consecutive
quarterly installments consisting of two installments of $2,000,000 each,
one
installment of $1,500,000, nine installments of $600,000 each and a balloon
payment of $2,600,000 payable with the final installment due in May 2008.
Interest is based on LIBOR plus 1.5% per annum.
(c)
|
The
loan balance as of December 31, 2004 consisted of the following
loans:
|
i.
A
$6,000,000 loan drawn by Allendale Investments S.A. on May 31, 2002 with
a
balance of $4,500,000. The interest was based on LIBOR plus 1.75% per
annum.
ii.
A
$6,000,000 loan drawn by Alterwall Business Inc. with a balance of $3,750,000.
The interest was based on LIBOR plus 1.5% per annum.
|
Allendale
Investments S.A. and Alterwall Business Inc. drew $20,000,000 on
May 26,
2005 against a loan facility for which they are jointly and severally
liable. The outstanding amount of their existing loans from the
same
creditor bank was $7,800,000 and was repaid in full. The loan is
payable
in twenty-four unequal consecutive quarterly installments of $1,500,000
each in the first year, $1,125,000 each in the second year, $775,000
each
in the third year, $450,000 each in the fourth through sixth years
and a
balloon payment of $1,000,000 payable with the final installment
due in
May 2011. The interest is based on LIBOR plus 1.25% per annum as
long as
the outstanding loan amount remains below 60% of the fair market
value
(FMV) of m/v
YM
Qingdao I
and m/v
Kuo
Hsiung
and 1.375% if the outstanding loan amount is above 60% of the FMV
of such
vessels.
|
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
9.
Long-term
Debt - continued
(d)
|
This
is a $15,500,000 loan drawn by Salina Shipholding Corp. on December
30,
2005. The loan is payable in ten consecutive monthly installments
consisting of six installments of $1,750,000 each and four installments
of
$650,000 each and a balloon payment of $2,400,000 payable with
the final
installment in January 2011. The first installment is due in June
2006.
The interest is based on LIBOR plus a margin that ranges between
0.9-1.1%,
depending on the asset cover ratio. The loan is secured with the
following: (i) first priority mortgage over m/v
Artemis
,
(ii) first assignment of earnings and insurance of m/v
Artemis
,
(iii) a corporate guarantee of Euroseas Ltd., and (iv) a minimum
cash
balance equal to an amount of no less than $300,000 in an account
Salina
Shipholding Corp. maintains with the bank, and, overall liquidity
(cash
and cash equivalents) of $300,000 for each of the Company’s vessels
throughout the life of the
facility.
|
In
addition to the terms specific to each loan described above, all the above
loans
are secured with one or more of the following:
·
|
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 Eurobulk Ltd. and/or 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 vessels, distribution of profits or assets, additional
indebtedness and mortgaging of vessels without the lender’s prior consent, the
sale of vessels, minimum requirements regarding the hull ratio cover and
minimum
cash retention accounts (restricted cash). Restricted cash are deposits with
certain banks that can only be used to pay the current loan installments.
The
Company is not in default in any of the foregoing covenants.
Interest
expenses for the years ended December 31, 2003, 2004 and 2005 amounted to
$609,741, $566,880 and $1,412,127, respectively.
Euroseas
Ltd. and subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
Under
the
laws of the countries of the companies’ incorporation and/or vessels’
registration, the companies are not subject to tax on international shipping
income, however, they are subject to registration and tonnage taxes, which
have
been included in Vessel operating expenses in the accompanying consolidated
statements of income.
Pursuant
to the Internal Revenue Code of the United States (the “Code”), U.S. source
income from the international operations of ships is generally exempt from
U.S
tax if the company operating the ships meets certain requirements. Among
other
things, in order to qualify for this exemption, the company operating the
ships
must be incorporated in a country, which
grants
an
equivalent exemption from income taxes to U.S corporations. All the company’s
ship-operations subsidiaries satisfy this particular criteria. In addition
these
Companies must be more than 50% owned by individuals who are residents as
defined in the countries of incorporation or another foreign country that
grants
an equivalent exemption to U.S corporations. These companies also currently
satisfy the more that 50% benefit ownership requirement. In addition, upon
completion of the public offering of the company’ shares, the management of the
Company believes that by virtue of the special rule applicable to situations
where the ship operating companies are beneficially owned by a publicly traded
company like the Company, the more than 50% beneficial ownership requirement
can
also be satisfied based on the trading volume and the anticipated widely
held
ownership of the Company’s shares, but no assurance can be given that this will
remain so in the future, since continued compliance with this rule is subject
to
factors outside the Company’s control.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
11.
Commitments
and Contingencies
There
are
no material legal proceedings to which the Company is a party or to which
any of
its properties are subject, other than routine litigation incidental to the
Company’s business. In the opinion of the management, the disposition of these
lawsuits should not have a material impact on the consolidated results of
operations, financial position and cash flows.
The
distribution of the net earnings by one of the shipping pools which has one
of
the Company’s vessels in its shipping pool has not yet been finalized for the
year ended December 31, 2005. Any effect on the Company’s income resulting from
any future reallocation of shipping pool income cannot be reasonably estimated,
however, the effect on the results for the year is not expected to be
significant.
12.
Common
Stock and Additional Paid -in Capital
On
September 20, 2006, the Board of Directors of the Company, being given the
authority at the annual shareholders meeting, approved a 1-to-3 reverse stock
split of the Company’s common stock to be effected before the start of trading
on October 6, 2006. The par value of the common stock is after the split
$0.03
per share. All share and per share data give retroactive effect to the reverse
stock split. The number of authorized shares remains at 100,000,000 shares.
No
change was made on the par value or the number of the authorized preferred
stock
of the Company which remain at $0.01 per share and 20,000,000 shares
respectively. After the split, common stock relates to 12,260,386 shares
with a
par value of $0.03 each as adjusted for the 1-for-3 reverse stock split effected
on October 6, 2006. The amount shown in the accompanying consolidated balance
sheets, as additional paid-in capital, represents payments received in excess
of
par value which is treated from the accounting point of view as capital.
In
2005, the Company sold 2,342,331 common shares as adjusted for the reverse
stock
split in an institutional private placement, together with 0.25 detachable
warrants for each common share to acquire up to 585,581 common shares as
adjusted for the reverse stock split (see Note 1). The value of the warrants,
which is included in “Additional Paid-in Capital,” was estimated to be about
$600,000.
13.
Voyage,
Vessel Operating Expenses and Commissions
These
consisted of:
|
|
Year
ended December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
Voyage
expense
|
|
|
|
|
|
|
|
Port
charges and canal dues
|
|
|
179,745
|
|
|
165,661
|
|
|
234,535
|
|
Bunkers
|
|
|
227,398
|
|
|
182,026
|
|
|
416,712
|
|
Agency
fees
|
|
|
29,792
|
|
|
22,658
|
|
|
19,304
|
|
Total
|
|
|
436,935
|
|
|
370,345
|
|
|
670,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel
operating expenses
|
|
|
|
|
|
|
|
|
|
|
Crew
wages and related costs
|
|
|
4,569,039
|
|
|
4,460,233
|
|
|
4,281,680
|
|
Insurance
|
|
|
1,334,517
|
|
|
1,486,179
|
|
|
1,525,683
|
|
Repairs
and maintenance
|
|
|
595,194
|
|
|
515,820
|
|
|
515,373
|
|
Lubricants
|
|
|
455,931
|
|
|
446,034
|
|
|
484,930
|
|
Spares
and consumable stores
|
|
|
1,555,286
|
|
|
1,660,600
|
|
|
1,465,063
|
|
Professional
and legal fees
|
|
|
34,206
|
|
|
46,997
|
|
|
23,975
|
|
Others
|
|
|
231,557
|
|
|
290,389
|
|
|
313,575
|
|
Total
|
|
|
8,775,730
|
|
|
8,906,252
|
|
|
8,610,279
|
|
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
13.
Voyage,
Vessel Operating Expenses and Commissions - continued
Commission
consisted of commissions charged by:
|
|
Year
ended December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Third
parties
|
|
|
619,412
|
|
|
1,610,480
|
|
|
1,645,669
|
|
Related
parties (see Note 8)
|
|
|
286,605
|
|
|
604,717
|
|
|
742,680
|
|
|
|
|
906,017
|
|
|
2,215,197
|
|
|
2,388,349
|
|
14.
Financial
Instruments
The
principal financial assets of the Company consists of cash on hand and
at banks,
interest rate swaps and accounts receivable due from charterers. The principal
financial liabilities of the Company consist of long-term loans and accounts
payable due to suppliers.
Interest
rate risk
The
Company entered into interest rate swap contracts as economic hedges
to its
exposure to variability in its floating rate long term debt. Under the
terms of
the interest rate swaps the Company and the bank agreed to exchange,
at
specified intervals the difference between a paying fixed rate and floating
rate
interest amount calculated by reference to the agreed principal amounts
and
maturities
.
Interest rate swaps allow the Company to convert long-term borrowings
issued at
floating rates into equivalent fixed rates.
Even
though the interest rate swaps were entered into for economic hedging
purposes,
the derivatives described below do not qualify for accounting purposes
as fair
value hedges, under FASB Statement No. 133, “
Accounting
for derivative instruments and hedging activities”
,
as the
Company does not have currently written contemporaneous documentation,
identifying the risk being hedged, and both on a prospective and retrospective
basis performed an effective test supporting that the hedging relationship
is
highly effective. Consequently, the Company recognizes the change in
fair value
of these derivatives in the consolidated statements of
income.
Concentration
of credit risk
Financial
instruments, which potentially subject the Company to significant concentration
of credit risk consist primarily of cash and trade accounts receivable.
The
Company places its temporary cash investments, consisting mostly of deposits,
with high credit qualified financial institutions. The Company performs
periodic
evaluation of the relative credit standing of these financial institutions
that
are considered in the Company’s investment strategy. The Company limits its
credit risk with accounts receivable by performing ongoing credit evaluations
of
its customers’ financial condition and generally does not require collateral for
its accounts receivable.
Fair
value
The
carrying values of cash, accounts receivable and accounts payable are reasonable
estimates of their fair value due to the short term nature of these financial
instruments. The fair value of long term bank loans bearing interest at
variable
interest rates approximates the recorded values.
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
15.
Subsequent
Events
|
(a)
|
The
SEC declared effective on February 3, 2006 the Company’s registration
statement on Form F-4 that registered the 1,079,167 Euroseas
Ltd. common
shares that will be issued to Cove shareholders (see Note 1).
A definitive
joint information statement/prospectus describing the merger
was mailed to
Cove stockholders on or about February 8, 2006. The Cove common
stock will
continue to trade on the OTC Bulletin Board until the consummation
of the
merger (see item (f) below).
|
|
(b)
|
The
SEC also declared effective on February 3, 2006 the Company’s registration
statement on Form F-1 that registered the re-sale of the 7,026,993
Euroseas Ltd. common shares and 1,756,743 Euroseas Ltd. common
shares
issuable upon the exercise of the warrants issued in connection
with the
institutional private placement as well as 818,604 shares to
be issued to
certain Cove’s shareholders as part of the merger with Cove (see Note
1).
|
|
(c)
|
On
February 7, 2006 the Board of Directors declared a cash dividend
of $0.06
per Euroseas Ltd. common share (i) payable on or about March
2, 2006 to
the holders of record of Euroseas Ltd. common shares as of
February 28,
2006, and (ii) payable to Cove shareholders who are entitled
to receive
Euroseas Ltd. common shares in connection with the merger,
with such
payment being made only to the holders of record of Cove common
stock as
of the effective date of the merger and such dividend payment
being made
upon exchange of their Cove common shares for Euroseas Ltd.
common shares
(see item (f) below).
|
|
(d)
|
The
Company submitted on February 10, 2006 an application to list
the Euroseas
Ltd. common shares on the OTC Bulletin Board. On March 2, 2006 the
Company received approval to list its common stock on the OTC
Bulletin Board.
|
|
(e)
|
On
March 20, 2006, a subsidiary of the Company signed a Memorandum
of
Agreement to sell m/v “
John P
”, a handysize bulk carrier of
26,354 dwt built in 1981 for $4.95 million. The vessel is to
be delivered
to the buyers in late June / early July
2006.
|
|
(f)
|
On
March 27, 2006, Euroseas Ltd. consummated the merger with Cove
and, as a
result, Cove merged into Euroseas Acquisition Company Inc.,
and the
separate corporate existence of Cove ceased. Cove stockholders
received
0.102969 shares of Euroseas Ltd. common shares (or an aggregate
of
1,079,167 Euroseas Ltd. common shares) and received dividends
of $0.01339
for each share of Cove common stock owned (or an aggregate
of $140,334)
related to dividends previously declared by Euroseas Ltd. Euroseas
Acquisition Company Inc. changed its name to Cove Apparel,
Inc. Following
the merger, and following the exchange of all common stock
of Cove into
Euroseas Ltd. common shares, Euroseas Ltd. has a total of 37,860,341
common shares outstanding. Also, the common stock of Cove has
been
de-listed and no longer trades on the OTC Bulletin Board.
|
Euroseas
Ltd. and Subsidiaries
Notes
to the consolidated financial statements
Years
ended December 31, 2003, 2004 and 2005
(All
amounts expressed in U.S. Dollars)
15.
Subsequent
Events - continued
|
(g)
|
On
April 10, 2006, Xenia International Corporation, a wholly-owned
subsidiary
of the Company signed a Memorandum of Agreement to purchase
m/v “
Tasman
Trader
”,
a multipurpose dry cargo vessel of 22,568 dwt and 950 teu built
in 1990
for $10.78 million. The vessel is to be delivered to Euroseas
Ltd. between
April 25 and May 8, 2006 at the sellers’
option.
|
|
(h)
|
On
April 11, 2006, a subsidiary of the Company agreed to sell m/v
“
Pantelis
P
”,
a handysize bulk carrier of 26,354 dwt built in 1981 for $4.65
million.
The vessel is to be delivered to the buyers between May 15 and
June 30,
2006 at Euroseas Ltd. option.
|
|
(i)
|
(unaudited)
The vessel m/v “
Pantelis
P
”
was delivered to the buyers between on May 31, 2006. As a result
of the
sale of m/v “
Pantelis
P
”
and of m/v “
John
P
”,
the Company has agreed to make a $3,000,000 additional re-payment
to the
bank financing the above ships (along with m/v “
Ariel
”
and m/v “
Nikolaos
”)
with the remaining repayments of the loan proportionally reduced
by the
ratio of the $3,000,000 payment over the current outstanding
balance for
this loan of $7,400,000. The revised loan repayment schedule
agreement has
not been signed. $1,500,000 of the additional repayment was
made on May
31, 2006 following the delivery to the buyers of m/v “
Pantelis
P
.”
|
|
(j)
|
(unaudited)
On May 9, 2006, the Board of Directors declared a cash dividend
of $0.06
per Euroseas common share payable on or about June 16, 2006 to
the holders
of record of Euroseas common shares as of June 2,
2006.
|
|
(k)
|
(unaudited)
On June 26, 2006, the Company was informed that a loan facility
for an
amount not to exceed $8,250,000 to partly finance the purchase
of m/v
“
Tasman
Trader
”
was approved by Fortis Bank. The facility is to be repaid in
23 equal
consecutive quarterly installments of $265,000 each, the first
installment
commencing 3 months from drawdown. In addition, a final balloon
payment of
$2,155,000 will be payable together with the 23rd and final installment.
The facility has similar covenants to the rest of the Company’s loans. The
Company signed the loan facility on June 30,
2006.
|
Through
and
including
, 2007 (the 25
th
day
after the date of this prospectus), all dealers effecting transactions
in our
convertible
preferred
stock, whether or not participating in the offering, may be required
to
deliver a prospectus. This is in addition to the dealers’ obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Shares
Series
A Mandatory Convertible Limited Preferred Stock
Cantor
Fitzgerald & Co.
Oppenheimer &
Co.
Prospectus
, 2006
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
6. Indemnification of Directors and Officers.
The
Bylaws of the Registrant provide that any person who is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another, partnership, joint venture, trust or other
enterprise, shall be entitled to be indemnified by the Registrant upon the
same
terms, under the same conditions, and to the same extent as authorized by
Section 60 of the Business Corporations Act (Part I of the Associations Law)
of
the Republic of the Marshall Islands, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section
60 of the Business Corporations Act (Part I of the Associations Law) of the
Republic of the Marshall Islands provides as follows:
Indemnification
of directors and officers.
(1)
Actions
not by or in right of the corporation
.
A
corporation shall have power to indemnify any person who was or is a party
or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a
plea of no contest, or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(2)
Actions
by or in right of the corporation
.
A
corporation shall have the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure judgment in
its
favor by reason of the fact that he is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust
or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or in connection with the defense or settlement
of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue
or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
(3)
When
director or officer is successful
.
To the
extent that director or officer of a corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to
in
subsections (1) or (2) of this section, or in the defense of a claim, issue
or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection
therewith.
(4)
Payment
of expenses in advance
.
Expenses incurred in defending a civil or criminal action, suit or proceeding
may be paid in advance of the final disposition of such action, suit or
proceeding as authorized by the board of directors in the specific case upon
receipt of an undertaking by or on behalf of the director or officer to repay
such amount if it shall ultimately be determined that he is not entitled to
be
indemnified by the corporation as authorized in this section.
(5)
Indemnification
pursuant to other rights
.
The
indemnification and advancement of expenses provided by, or granted pursuant
to,
the other subsections of this section shall not be deemed exclusive of any
other
rights to which those seeking indemnification or advancement of expenses may
be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
(6)
Continuation
of indemnification
.
The
indemnification and advancement of expenses provided by, or granted pursuant
to,
this section shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee
or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
(7)
Insurance
.
A
corporation shall have power to purchase and maintain insurance on behalf of
any
person who is or was a director or officer of the corporation or is or was
serving at the request of the corporation as a director or officer against
any
liability asserted against him and incurred by him in such capacity whether
or
not the corporation would have the power to indemnify him against such liability
under the provisions of this section.
Item
7. Recent Sales of Unregistered Securities
On
August
25, 2005, Euroseas raised a net amount of approximately $17.5 million from
a
private placement transaction of its securities to a number of institutional
and
accredited investors. In the private placement, Euroseas issued 2,342,331 shares
of common stock at a price of $9.00 per share, as well as warrants to purchase
an additional 585,581 shares of common stock. The warrants have a five year
term
and an exercise price of $10.80. All of such shares were issued, and the
warrants were granted, in transactions exempt from the registration requirements
under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof
and pursuant to Rule 506 of Regulation D. In particular, there were not more
than 35 purchasers of securities and each purchaser represented that it was
either (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2),
(a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified
institutional buyer” as defined in Rule 144A(a) under the Securities Act. Each
purchaser further represented that it had such knowledge and experience in
financial and business matters that it was capable of evaluating the merits
and
risks of the prospective investment. Finally, each purchaser acknowledged that
it was not purchasing the securities as a result of any advertisement, article,
notice or other communication regarding the securities published in any
newspaper, magazine or similar media or broadcast over television or radio
or
presented at any seminar or any other general solicitation or general
advertisement. Euroseas filed a Form D with the Commission with respect to
this
private placement. All numbers set forth above give effect to the 1-for-3
reverse stock split effected on October 6, 2006.
Item
8. Exhibits and Financial Statement Schedules.
a.
Exhibits
|
2.1
|
Agreement
and Plan of Merger dated as of August 25, 2005 by and among Euroseas
Ltd.,
Euroseas Acquisition Company Inc., Cove Apparel, Inc., and Kevin
Peterson,
Shawn Peterson, Jodi Hunter and Daniel Trotter
(1)
|
|
2.2
|
Amendment
No. 1 to Agreement and Plan of Merger, dated November 22, 2005
(2)
|
|
3.1
|
Articles
of Incorporation of Euroseas Ltd.
(1)
|
|
3.2
|
Bylaws
of Euroseas Ltd. (1)
|
|
3.3
|
Amendment
to Articles of Incorporation of Euroseas Ltd.
(3)
|
|
3.4
|
Statement of
Designation
(7)
|
|
4.1
|
Specimen
Convertible
Preferred
Stock Certificate (7)
|
|
4.2
|
Form
of Securities Purchase Agreement
(1)
|
|
4.3
|
Form
of Registration Rights Agreement
(1)
|
|
4.5
|
Registration
Rights Agreement between Euroseas Ltd. and Friends Investment Company
Inc., dated November 2, 2005 (2)
|
|
5.1
|
Opinion
of Seward & Kissel LLP, special Marshall Islands Counsel to the
Registrant, as to the validity of the shares of Convertible
Preferred
Stock (3)
|
|
8.1
|
Opinion
of Seward & Kissel LLP, as to certain tax matters
(3)
|
|
10.1
|
Form
of Lock-Up Agreement (1)
|
|
10.2
|
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 USD$5,900,000
(1)
|
|
10.3
|
Loan
Agreement between Diana Trading Ltd., as borrower, and HSBC Bank
plc, as
lender, for the amount of USD$4,200,000 dated May 9, 2005
(1)
|
|
10.4
|
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 US$13,500,000
(1)
|
|
10.5
|
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 USD$20,000,000
(1)
|
|
10.6
|
Form
of Standard Ship Management Agreement
(1)
|
|
10.7
|
Agreement
between Eurobulk Ltd. and Eurochart S.A., for the provision of exclusive
brokerage services, dated December 20, 2004
(1)
|
|
10.8
|
Form
of Current Time Charter (1)
|
|
10.9
|
Master
Management Agreement between Euroseas Ltd. and Eurobulk Ltd. dated
as of
September 29, 2006 (3)
|
|
10.11
|
Loan
Agreement between Salina Shipping Corp., as borrower, and Calyon,
as
lender, for the amount of USD$15,500,000 dated December 28, 2005
(4)
|
|
10.12
|
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 (5)
|
|
10.13
|
Loan
Agreement between Prospero Maritime Inc., as borrower, and Calyon,
as
lender, for the amount of USD$15,500,000 dated August 30, 2006
(5)
|
|
10.14
|
Euroseas
2006 Equity Incentive Plan (3)
|
|
10.15
|
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
(3)
|
|
12.1
|
Computation
of Ratio of Earnings to Combined Fixed Charges and Preferred
Dividends
(3)
|
|
21.1
|
Subsidiaries
of the Registrant (3)
|
|
23.1
|
Consent
of Seward & Kissel LLP (included in its opinions filed as Exhibit
5.1)
|
|
23.2
|
Consent
of Deloitte, Hadjipavlou, Sofianos & Cambanis S.A.
(3)
|
|
23.3
|
Consent
of Maritime Strategies International Ltd.
(3)
|
|
24.1
|
Power
of Attorney (6)
|
(1)
|
Incorporated
by reference to our Registration Statement on Form F-1 (File No.
333-129145) filed on October 20,
2005
|
(2)
|
Incorporated
by reference to our Amendment No. 1 to Registration Statement on
Form F-1
(File No. 333-129145) filed on December 5,
2005
|
(4)
|
Incorporated
by reference to our Amendment No. 2 to Registration Statement on
Form F-1
(File No. 333-129145) filed on January 19,
2006
|
(5)
|
Incorporated
by reference to our Post-Effective Amendment No. 1 to Registration
Statement on Form F-1 (File No. 333-129145) filed on September 12,
2006
|
(6)
|
Included
on the signature page of this Registration
Statement
|
(7)
|
To
be filed by amendment
|
b.
Financial
Statement Schedules
None.
Item
9. Undertakings.
The
undersigned Registrant hereby undertakes:
(1)
To
provide to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
(2)
That
for purposes of determining any liability under the Securities Act of 1933,
as
amended (the “Act”), the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or
(4) under the Act shall be deemed to be part of this Registration Statement
as
of the time it was declared effective.
(3)
That
for purposes of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide
offering
thereof.
(4)
That
insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies
that
it has reasonable grounds to believe that it meets all of the requirements
for
filing this Form F-1 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City
of Maroussi, Country of Greece on November 16, 2006.
|
|
|
|
EUROSEAS LTD.
|
|
|
|
|
By:
|
/s/
Aristides J. Pittas
|
|
Name:
Aristides J. Pittas
Title:
President and Chief Executive
Officer
|
POWER
OF ATTORNEY
Each
person whose signature appears below constitutes and appoints Aristides J.
Pittas, Tasos Aslidis, or any one of them, as his or her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him or her and in his or her name, place and stead in any and all capacities
to execute in the name of each such person who is then an officer or director
of
the Registrant any and all amendments (including post-effective amendments)
to
this Registration Statement, and any registration statement relating to the
offering hereunder pursuant to Rule 462 under the Securities Act of 1933 and
to
file the same with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them full power and authority to do
and
perform each and every act and thing required or necessary to be done in and
about the premises as fully as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them,
or
their or his substitute or substitutes, may lawfully do or cause to be done
by
virtue thereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the date
indicated.
SIGNATURES
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
Aristides J. Pittas
Aristides
J. Pittas
|
|
Chairman
of the Board of Directors, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/
Dr. Anastasios Aslidis
Dr.
Anastasios Aslidis
|
|
Chief
Financial Officer, Treasurer and Director
(Principal
Financial and Accounting Officer) and Authorized Representative
in the
United States
|
|
|
|
|
|
|
|
/s/
Aristides P. Pittas
Aristides
P. Pittas
|
|
Vice
Chairman and Director
|
|
|
|
|
|
|
|
/s/
Stephania Karmiri
Stephania
Karmiri
|
|
Secretary
|
|
|
|
|
|
|
|
/s/
George Skarvelis
George
Skarvelis
|
|
Director
|
|
|
|
|
|
|
|
/s/
George Taniskidis
George
Taniskidis
|
|
Director
|
|
|
|
|
|
|
|
/s/
Gerald Turner
Gerald
Turner
|
|
Director
|
|
|
|
|
|
|
|
/s/
Panagiotis Kyriakopoulos
Panagiotis
Kyriakopoulos
|
|
Director
|
|
|
EXHIBIT
10.14
EUROSEAS
LTD.
2006
STOCK INCENTIVE PLAN
ARTICLE
I.
General
1.1
Purpose
The
Euroseas Ltd. 2006 Stock Incentive Plan (the “Plan”) is designed to provide
certain key persons, on whose initiative and efforts the successful conduct
of
the business of Euroseas Ltd. (the “Company”) depends, with incentives to (a)
enter into and remain in the service of the Company, (b) acquire a proprietary
interest in the success of the Company, (c) maximize their performance, and
(d)
enhance the long-term performance of the Company.
1.2
Administration
(a)
Administration
by Board of Directors
.
The
Plan shall be administered by the Company’s Board of Directors (the
“Administrator”), which shall act at all times so as
to
avoid
inclusion of any amount in gross income pursuant to Section 409A of the
Code
.
The
Administrator shall have the authority
(i) to
exercise all of the powers granted to it under the Plan, (ii) to construe,
interpret and implement the Plan and any Award Agreements executed pursuant
to
Section 2.1 in its sole discretion with all such determinations being final,
binding and conclusive, (iii) to prescribe, amend and rescind rules and
regulations
relating to the Plan, including rules governing its own operations,
(iv) to
make all determinations necessary or advisable in administering the Plan, and
(v) to correct any defect, supply any omission and reconcile any inconsistency
in the Plan.
(b)
Administrator
Action
.
Actions
of the Administrator shall be taken by
the vote
of a majority of its members. Any action may be taken by a written instrument
signed by a majority of the Administrator members, and action so taken shall
be
fully as effective as if it had been taken by a vote at a meeting. Except to
the
extent prohibited by applicable law or the applicable rules of a stock exchange,
the Administrator may allocate all or any portion of its responsibilities and
powers to any one or more of its members and may delegate
all
or
any part of its responsibilities to any person or persons selected by
it,
and may
revoke any such allocation or delegation at any time.
1.3
Persons
Eligible for Awards
The
persons eligible to receive awards under the Plan are those
officers,
directors, and executive, managerial, administrative
and
professional employees of the Company,
(collectively,
“key persons”) as the Administrator in its sole discretion
shall
select, taking into account the duties of the key persons, their present and
potential contributions to the success of the Company, and such other factors
as
the Administrator shall deem relevant in connection with accomplishing the
purpose of the Plan. The Administrator may from time to time, in its sole
discretion, determine that any key person shall be ineligible to receive awards
under the Plan.
1.4
Types
of Awards Under Plan
Awards
may be made under the Plan in the form of (a) incentive stock options, (b)
non-qualified stock options, (c) stock appreciation rights, (d) dividend
equivalent rights, (e) restricted stock, (f) unrestricted stock, (g)
restricted stock units, and (h) performance shares, all as more fully set forth
in Article II. The term
“award”
means any of the foregoing. No incentive stock option may be granted
to
a person
who is not an employee of the Company on the date of grant. Notwithstanding
any
provision of the Plan, to the extent any award would be subject to Section
409A
of the Code, no such award may be granted if it would fail to comply with the
requirements set forth in Section 409A of the Code.
1.5
Shares
Available for Awards
(a)
Aggregate
Number Available
.
Subject
to the provisions of this Section 1.5, the aggregate number of shares of common
stock of the Company (“Common Stock”) with respect to which options or
restricted shares may at any time be granted under the Plan are 1,800,000 shares
of Common Stock.
(b)
Shares
Issued; Certificate Legends
.
Shares
issued pursuant to the Plan may be authorized but unissued Common Stock. The
Administrator may direct that any stock certificate evidencing shares issued
pursuant to the Plan shall bear a legend setting forth such restrictions on
transferability as may apply to such shares.
(c)
Adjustment
Upon Changes in Common Stock
.
Upon
certain changes in Common Stock, the number of shares of Common Stock available
for issuance with respect to awards that may be granted under the Plan pursuant
to Section 1.5(a), shall be adjusted pursuant to Section 3.7.
(d)
Certain
Shares to Become Available Again
.
The
following shares
of
Common Stock shall again become available for awards under the Plan: any shares
that are subject to an award under the Plan and that remain unissued upon the
cancellation or termination of such award for any reason whatsoever; any shares
of restricted stock forfeited pursuant to Section 2.7(e), provided that any
dividends paid on such shares are also forfeited pursuant to such Section
2.7(e); and any shares in respect of which a stock appreciation right or
performance share award is settled for cash.
(e)
Individual
Limit
.
Except
for the limits set forth in this Section 1.5(e) and 2.2(i), no provision of
this
Plan shall be deemed to limit the number or value of shares with respect to
which the Administrator may
make
awards to any eligible person. Subject to adjustment as provided in
Section
3.7, the
total number of shares of Common Stock with respect to which awards
may
be
granted to any one employee of the Company during any one
calendar
year shall not exceed 600,000 shares. Stock options and stock appreciation
rights granted and subsequently canceled or deemed to be canceled in a calendar
year count against this limit even after their cancellation. The provisions
of
this Section 1.5(e) shall not apply in any circumstance with respect to which
the Administrator determines that compliance with Section 162(m) of the Code
is
not necessary.
1.6
Definitions
of Certain Terms
(a)
The
“Fair
Market Value” of a share of Common Stock on any day shall be the closing price
on the Nasdaq National Market (or the Over the Counter Bulletin Board, if not
trading on the Nasdaq National Market) as reported for such day in The Wall
Street Journal or, if no such price is reported for such day, the average of
the
high bid and low asked price of Common Stock as reported for such day. If no
quotation is made for the applicable day, the Fair Market Value of a share
of
Common Stock on such day shall be determined in the manner set forth in the
preceding sentence using quotations for the next preceding day for which there
were quotations, provided that such quotations shall have been made
within
the ten (10) business days preceding the applicable day.
Notwithstanding
the
foregoing, if deemed necessary or appropriate by the Administrator, the Fair
Market Value of a share of Common Stock on any day shall be determined by the
Administrator
based on independent pricing sources. In no event shall the Fair Market Value
of
any share of Common Stock
be less
than its par value.
(b)
The
term
“incentive stock option” means an option that is intended
to
qualify for special federal income tax treatment pursuant to sections 421
and
422 of
the Code as now constituted or subsequently amended, or pursuant to a successor
provision of the Code, and which is so designated in the applicable Award
Agreement. Any option that is not specifically designated as an incentive stock
option shall under no circumstances be considered an incentive stock option.
Any
option that is not an incentive stock option is referred to herein as a
“non-qualified stock option.”
(c)
The
term
“cause” in connection with a termination of employment or Board membership by
reason of a dismissal for cause shall mean:
(i)
to
the
extent that there is an employment, severance or other agreement governing
the
relationship between the grantee and the Company, a Company subsidiary or a
Company joint venture, which agreement contains a definition of “cause,” cause
shall consist of those acts or omissions that would constitute “cause” under
such agreement; and otherwise,
(ii)
the
grantee’s termination of employment or Board membership by the Company or an
affiliate on account of any one or more of the following:
(A)
any
failure by the grantee substantially to perform the grantee’s employment or
Board membership duties;
(B)
any
excessive unauthorized absenteeism by the grantee;
(C)
any
refusal by the grantee to obey the lawful orders of the Board or any other
person or Administrator to whom the grantee reports;
(D)
any
act
or omission by the grantee that is or may be injurious to the Company,
monetarily or otherwise;
(E)
any
act
by the grantee that is inconsistent with the best interests of the
Company;
(F)
the
grantee’s material violation of any of the Company’s policies, including,
without limitation, those policies relating to discrimination or sexual
harassment;
(G)
the
grantee’s unauthorized (a) removal from the premises of the Company or an
affiliate of any document (in any medium or form) relating to the Company or
an
affiliate or the customers or clients of
the
Company or an affiliate or (b) disclosure to any person or entity of
any of
the Company’s, or its affiliates’ confidential or proprietary
information;
(H)
the
grantee’s commission of any felony, or any other crime involving moral
turpitude; and
(I)
the
grantee’s commission of any act involving dishonesty or fraud.
Any
rights the Company may have hereunder in respect of the events giving rise
to
cause shall be in addition to the rights the Company may have under any other
agreement with a grantee or at law or in equity. Any determination of whether
a
grantee’s employment or Board membership is (or is deemed to have been)
terminated for cause shall be made by the Administrator in its discretion,
which
determination shall be final, binding and conclusive on all parties. If,
subsequent to a grantee’s voluntary termination of employment or involuntary
termination of employment without cause, it is discovered that the grantee’s
employment could have been terminated for cause, the Administrator may deem
such
grantee’s employment or Board membership to have been terminated for cause. A
grantee’s termination of employment or Board membership for cause shall be
effective as of the date of the occurrence of
the
event
giving rise to cause, regardless of when the determination of cause
is
made.
(d)
The
term
“Code” means the Internal Revenue Code of 1986, as amended.
ARTICLE
II.
Awards
Under The Plan
2.1
Agreements
Evidencing Awards
Each
award granted under the Plan (except an award of unrestricted
stock)
shall be evidenced by a written certificate (“Award Agreement”)
which
shall
contain such provisions as the Administrator may, in its sole discretion,
deem
necessary or desirable. By executing an Award Agreement pursuant to the Plan,
a
grantee thereby agrees that the award shall be subject to all of the terms
and
provisions of the Plan and the applicable Award Agreement.
2.2
Grant
of Stock Options, Stock Appreciation Rights, Restricted Stock Units and
Dividend
Equivalent Rights
(a)
Stock
Option Grants
.
The
Administrator may grant incentive stock options and non-qualified stock options
(“options”) to purchase shares of Common Stock from the Company, to such key
persons, and in such amounts and subject to such vesting and forfeiture
provisions and other terms
and
conditions, as the Administrator shall determine, in its sole discretion,
subject
to the
provisions of the Plan. The Administrator may not grant incentive stock options
to non-employee directors.
(b)
Stock
Appreciation Right Grants; Types of Stock Appreciation
Rights
.
The
Administrator may grant stock appreciation rights to such key persons, and
in
such amounts and subject to such vesting and forfeiture provisions and other
terms and conditions, as the Administrator shall determine, in its sole
discretion, subject to the provisions of the Plan. The terms of a stock
appreciation right may provide that it shall be automatically exercised for
a
cash payment upon the happening of a specified event that is outside the control
of the grantee, and that it shall not be otherwise exercisable. Stock
appreciation
rights
may be granted in connection with all or any part of, or independently of,
any
option granted under the Plan. A stock appreciation right granted in
connection
with an option may be granted at or after the time
of grant
of such option.
(c)
Nature
of Stock Appreciation Rights
.
The
grantee of a stock appreciation right shall have the right, subject to the
terms
of the Plan and
the
applicable Award Agreement, to receive from the Company an amount equal
to
(i) the
excess of the Fair Market Value of a share of Common Stock on the date of
exercise of the stock appreciation right over the Fair Market Value of a
share
of
Common Stock on the date of grant (or over the option exercise price
if
the
stock appreciation right is granted in connection with an option), multiplied
by
(ii) the number of shares with respect to which the stock appreciation right
is
exercised. Payment upon exercise of a stock appreciation
right
shall be in cash or in shares of Common Stock (valued at their Fair
Market
Value on
the date of exercise of the stock appreciation right) or both, all as the
Administrator shall determine in its sole discretion; provided, however, that
a
stock appreciation right settled in cash shall be exercisable only to the extent
that such exercise complies with Section 409A of the Code. Upon the exercise
of
a stock appreciation right granted in connection with an option, the number
of
shares subject to the option shall be reduced by the number of shares with
respect
to which the stock appreciation right is exercised. Upon the exercise
of
an
option in connection with which a stock appreciation right has been granted,
the
number of shares subject to the stock appreciation right shall be reduced
by
the
number of shares with respect to which the option is exercised.
(d)
Option
Exercise Price
.
Each
Award Agreement with respect to an option shall set forth the amount (the
“option exercise price”) payable by the grantee to the Company upon exercise of
the option evidenced thereby. The
option
exercise price per share shall be determined by the Administrator in its
sole
discretion and in accordance with the requirements of Section 409A of the Code;
provided, however, that the option exercise price of an incentive stock option
shall be at least 100% of the Fair Market Value of a share of Common Stock
on
the date the option is granted, and provided further that in no event shall
the
option exercise price be less than the par value of a share of Common
Stock.
(e)
Exercise
Period
.
Each
Award Agreement with respect to an option or stock appreciation right shall
set
forth the periods during which the award evidenced thereby shall be exercisable,
whether in whole or in part. Such periods shall be determined by the
Administrator in its sole discretion; provided, however, that no option or
a
stock appreciation right shall be exercisable more than 10 years after the
date
of grant, and provided further that, except as and to the
extent
that the Administrator may otherwise provide pursuant to Sections 2.5, 3.7
or
3.8, no
option or stock appreciation right shall be exercisable prior to the first
anniversary of the date of grant. (See the default exercise period provided
for
under Sections 2.3(a) and (b).)
(f)
Reload
Options
.
The
Administrator may, in its sole discretion, include in any Award Agreement with
respect to an option (the “original option”) a provision that an additional
option (the “reload option”) shall be granted to any grantee who, pursuant to
Section 2.3(e)(ii), delivers shares of Common Stock in partial or full payment
of the exercise price of the original option. The reload option shall be for
a
number of shares of Common Stock equal to the number thus delivered, shall
have
an exercise price equal to the Fair Market Value of a share of Common Stock
on
the date of exercise of the original option, and shall have an expiration date
no later than the expiration date of the original option. In the event that
an
Award Agreement provides for the grant of a reload option, such Agreement shall
also provide that the exercise
price
of
the original option be no less than the Fair Market Value of a share
of
Common
Stock on its date of grant, and that any shares that are delivered pursuant
to
Section 2.3(e)(ii) in payment of such exercise price shall have been held for
at
least six months.
(g)
Dividend
Equivalent Rights
.
The
Administrator may, in its sole discretion and subject to the requirements of
Section 409A of the Code, include in any Award Agreement with respect to an
option, stock appreciation right or performance shares, a dividend equivalent
right entitling the grantee to receive amounts equal to the ordinary dividends
that would be paid, during the time such award is outstanding and unexercised,
on the shares of Common Stock covered by such award if such shares were then
outstanding. In the event such a provision is included in an Award Agreement,
the Administrator shall determine whether such payments shall be made in cash
or
in shares of Common Stock, whether they shall be conditioned upon the exercise
of the award to which they relate, the time or times at which they shall be
made, and such other vesting and forfeiture provisions and other terms and
conditions as the Administrator shall deem appropriate.
(h)
Restricted
Stock Units
.
The
Administrator may, in its sole discretion, grant restricted stock units to
such
key persons, and in such amounts and subject to such vesting and forfeiture
provisions and other terms and conditions, as the Administrator shall determine,
in its sole discretion, subject to the provisions of the Plan. A restricted
stock unit granted under the Plan shall confer upon the grantee a right to
receive from the Company, upon the occurrence of an event specified in the
Award
Agreement, such grantee’s vested restricted stock units multiplied by the Fair
Market Value of a share of Common Stock. Restricted stock units
may be
granted in connection with all or any part of, or independently of, any award
granted under the Plan. A restricted stock unit granted in
connection
with another award may be granted at or after the time
of grant
of such award.
(i)
Incentive
Stock Option Limitation: Exercisability
.
To the
extent that the aggregate Fair Market Value (determined as of the time the
option is granted) of the stock with respect to which incentive stock options
are first exercisable by any employee during any calendar year shall exceed
$100,000, or such higher amount as may be permitted from time to time under
section 422 of the Code, such options shall be treated as non-qualified stock
options.
(j)
Incentive
Stock Option Limitation; 10% Owners
.
Notwithstanding
the
provisions of paragraphs (d) and (e) of this Section 2.2, an incentive
stock
option
may not be granted under the Plan to an individual who, at the time the option
is granted, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of his employer corporation or of its parent
or
subsidiary corporations (as such ownership may be determined for purposes of
section 422(b)(6) of the Code) unless (i) at the time such incentive stock
option is granted the option exercise price is at least 110% of
the
Fair
Market Value of the shares subject thereto and (ii) the incentive
stock
option
by its terms is not exercisable after the expiration of 5 years from the date
it
is granted.
2.3
Exercise
of Options, Stock Appreciation Rights and Restricted Stock
Units
Subject
to the other provisions of this Article II, each option, stock appreciation
right and restricted stock unit granted under the Plan shall be exercisable
as
follows:
(a)
Timing
and Extent of Exercise
.
Options, stock appreciation rights and restricted stock units shall be
exercisable at such times and under such conditions as set forth in the
corresponding Award Agreement, but in no event shall any such award be
exercisable prior to the first anniversary or subsequent to the tenth
anniversary of the date on which such award was granted. Unless the applicable
Award Agreement otherwise provides, an option, stock appreciation right or
restricted stock unit may be exercised from time to time as to all or part
of
the shares or units as to which such
award
is
then exercisable. A stock appreciation right granted in connection
with
an
option may be exercised at any time when, and to the same extent that, the
related option may be exercised.
(b)
Notice
of Exercise
.
An
option, stock appreciation right or restricted stock unit shall be exercised
by
the filing of a written notice with the Company or the
Company’s
designated exchange agent (the “exchange agent”), on such form and
in
such
manner as the Administrator shall in its sole discretion prescribe.
(c)
Payment
of Exercise Price
.
Any
written notice of exercise of an option shall be accompanied by payment for
the
shares being purchased. Such payment shall be made: (i) by certified or official
bank check (or the
equivalent
thereof acceptable to the Company or its exchange agent) for the
full
option
exercise price; or (ii) with the consent of the Administrator, by delivery
of
shares
of
Common Stock having a Fair Market Value (determined as of the
exercise
date)
equal to all or part of the
option
exercise price and a certified or official bank check (or the
equivalent
thereof
acceptable to the Company or its exchange agent) for any remaining portion
of
the full option exercise price; or (iii) at the discretion of the Administrator
and to the extent permitted by law, by such other provision, consistent with
the
terms of the Plan, as the Administrator may from time to time prescribe (whether
directly or indirectly through the exchange agent).
(d)
Delivery
of Certificates Upon Exercise
.
Subject
to the provision of section 2.3(e), promptly after receiving payment of the
full
option exercise price, or after receiving notice of the exercise of a stock
appreciation right for which payment will be made partly or entirely in shares,
the Company or its exchange agent shall, subject
to
the
provisions of Section 3.2, deliver to the grantee or to such other
person
as
may
then have the right to exercise the award, a certificate or
certificates
for the
shares of Common Stock for which the award has been exercised. If the method
of
payment employed upon option exercise so requires, and if applicable law
permits, an optionee may direct the Company or its exchange agent, as the case
may be, to deliver the stock certificate(s) to the optionee’s stockbroker.
(e)
Investment
Purpose and Legal Requirements
.
Notwithstanding the foregoing, at the time of the exercise of any option, the
Company may, if it shall deem it necessary or advisable for any reason, require
the holder of such option (i) to represent in writing to the Company that
it is the optionee’s then intention to acquire the Shares with respect to which
the option is to be exercised for investment and not with a view to the
distribution thereof, or (ii) to postpone the date of exercise until such time
as the Company has available for delivery to the optionee a prospectus meeting
the requirements of all applicable securities laws; and no shares
shall
be
issued or transferred upon the exercise of any option unless and until all
legal
requirements applicable to the issuance or transfer of such Shares have been
complied with to the satisfaction of the Company. The Company shall have the
right to condition any issuance of shares to any optionee hereunder on such
optionee’s undertaking in writing to comply with such restrictions on the
subsequent transfer of such shares as the Company shall deem necessary or
advisable as a result of any applicable law, regulation or official
interpretation thereof, and certificates representing such shares may contain
a
legend to reflect any such restrictions.
(f)
No
Shareholder Rights
.
No
grantee of an option, stock appreciation right or restricted stock unit (or
other person having the right to exercise such award) shall have any of the
rights of a shareholder of the Company with respect to shares subject to such
award until the issuance of a stock certificate to such person for such shares.
Except as otherwise provided in Section 1.5, no adjustment shall be made for
dividends, distributions or other rights (whether ordinary or extraordinary,
and
whether in cash, securities or other property)
for
which
the record date is prior to the date such stock certificate is
issued.
2.4
Compensation
in Lieu of Exercise of an Option
Upon
written application of the grantee of an option, the Administrator may
in
its
sole discretion determine to substitute, for the exercise of such
option,
compensation to the grantee not in excess of the difference between the option
exercise price and the Fair Market Value of the shares covered by such written
application on the date of such application. Such compensation may be in cash,
in shares of Common Stock, or both, and the payment thereof may be subject
to
conditions,
all as the Administrator shall determine in its sole discretion. In
the
event
compensation is substituted pursuant to this Section 2.4 for the
exercise,
in whole
or in part, of an option, the number of shares subject to the option shall
be
reduced by the number of shares for which such compensation is
substituted.
2.5
Termination
of Employment
(a)
General
Rule
.
Except
to the extent otherwise provided in paragraphs (b), (c), (d) or (e) of this
Section 2.5 or Section 3.8(b)(iii), a grantee who incurs a termination of
employment may exercise any outstanding option or stock appreciation right
on
the following terms and conditions: (i) exercise may be made only to the extent
that the grantee was entitled to
exercise
the award on the termination of employment date; and (ii) exercise
must
occur
within three months after termination of employment but in no event after the
original expiration date of the award.
(b)
Dismissal
for Cause; Resignation
.
If a
grantee incurs a
termination
of employment as the result of a dismissal for cause or resignation
without
the Company’s prior consent, as applicable, all options and stock appreciation
rights not theretofore exercised shall terminate upon the grantee’s termination
of employment.
(c)
Retirement
.
If
a
grantee incurs a termination of employment as
the
result of his retirement, then any outstanding option, stock appreciation right
or restricted stock unit shall be exercisable pursuant to its terms. For this
purpose “retirement” shall
mean
a
grantee’s termination of employment, under circumstances other than
those
described in paragraph (b) above, on or after: (x) his 65th birthday, (y) the
date on which he has attained age 60 and completed at least five years of
service with the Company, as applicable, (using any
method
of
calculation the Administrator deems appropriate) or (z) if approved by
the
Administrator, on or after he has completed at least 20 years of
service.
(d)
Disability
.
If
a
grantee incurs a termination of employment by
reason
of a disability (as defined below), then any outstanding option, stock
appreciation right or restricted stock unit shall be exercisable pursuant to
its
terms. For this purpose “disability” shall mean, except in connection with any
physical or mental condition that would qualify a grantee for a disability
benefit under the long-term disability plan maintained by the Company, if there
is no such plan, a physical or mental condition that prevents the grantee from
performing the essential functions of the grantee’s position (with or without
reasonable accommodation) for a period of six consecutive months. The existence
of a disability shall be determined by the Administrator in its sole and
absolute discretion.
(e)
Death
.
(i)
Termination
of Employment as a Result of Grantee’s Death
.
If a
grantee incurs a termination of employment as the result of his death,
then
any
outstanding option, stock appreciation right or restricted stock unit shall
be
exercisable
pursuant
to its terms.
(ii)
Restrictions
on Exercise Following Death
.
Any
such
exercise
of an
award following a grantee’s death shall be made only by the grantee’s executor
or administrator or other duly appointed representative reasonably
acceptable
to the Administrator, unless the grantee’s will specifically
disposes
of such
award, in which case such exercise shall be made only by the recipient of such
specific disposition. If a grantee’s personal representative or the recipient of
a specific disposition under the grantee’s will shall be entitled to exercise
any award pursuant to the preceding sentence, such representative or recipient
shall be bound by all the terms and conditions of the Plan and the applicable
Award Agreement which would have applied to the grantee including, without
limitation, the provisions of Sections 3.2 and 3.5 hereof.
(f)
Special
Rules for Incentive Stock Options
.
No
option that remains exercisable for more than three months following a grantee’s
termination of employment for any reason other than death or disability, or
for
more than one year following a grantee’s termination of employment as the result
of his becoming disabled, may be treated as an incentive stock
option.
(g)
Administrator
Discretion
.
The
Administrator, in the applicable Award Agreement, may waive or modify the
application of the foregoing provisions of this Section 2.5 to the extent such
waiver or modification is consistent with favorable tax treatment of amounts
payable hereunder.
2.6
Transferability
of Options, Stock Appreciation Rights and Restricted Stock
Units
Except
as
otherwise provided in an applicable Award Agreement evidencing an option, stock
appreciation right or restricted stock unit, during the lifetime of a grantee,
each such award granted to a grantee shall be
exercisable
only by the grantee and no such award shall
be
assignable or transferable otherwise than by will or by the laws of descent
and
distribution. The
Administrator
may, in any applicable Award Agreement evidencing an option (other than an
incentive stock option to the extent inconsistent with the requirements of
section 422 of the Code applicable to incentive stock options), permit a grantee
to transfer all or some of the options to (A) the grantee’s spouse, children or
grandchildren (“Immediate Family Members”), (B) a trust or trusts for the
exclusive benefit of such Immediate Family Members, or (C) other parties
approved by the Administrator in its sole and absolute discretion. Following
any
such transfer, any transferred options shall continue to be subject to the
same
terms and conditions as were applicable immediately prior to the
transfer.
2.7
Grant
of Restricted Stock
(a)
Restricted
Stock Grants
.
The
Administrator may grant restricted shares of Common Stock to such key persons,
in such amounts, and subject to such vesting and forfeiture provisions and
other
terms and conditions as the Administrator shall determine in its sole
discretion, subject to the provisions of the Plan. Restricted stock awards
may
be made independently of or in connection
with
any
other award under the Plan. A grantee of a restricted stock award
shall
have no
rights with respect to such award unless such grantee accepts the award within
such period as the Administrator shall specify by accepting delivery of a
restricted
stock agreement in such form as the Administrator shall determine and,
in
the
event the restricted shares are newly issued by the Company, makes payment
to
the
Company its exchange agent by certified or official bank check (or
the
equivalent
thereof acceptable to the Company) in an amount at least equal to
the
par
value of the shares covered by the award.
(b)
Issuance
of Stock Certificate(s)
.
Promptly after a grantee
accepts
a
restricted stock award, the Company or its exchange agent shall
issue
to the
grantee a stock certificate or stock certificates for the shares of Common
Stock
covered by the award or shall establish an account evidencing ownership of
the
stock in uncertificated form. Upon the issuance of such stock certificate(s),
or
establishment of such account, the grantee shall have the rights of a
shareholder with respect to the restricted stock, subject to: (i) the
nontransferability restrictions and forfeiture provision described in
paragraphs
(d) and (e) of this Section 2.7; (ii) in the Administrator’s
discretion,
to
a
requirement that any dividends paid on such shares shall be held in
escrow
until
all restrictions on such shares have lapsed; and (iii) any other restrictions
and conditions contained in the applicable restricted stock
agreement.
(c)
Custody
of Stock Certificate(s)
.
Unless
the Administrator shall otherwise determine, any stock certificates issued
evidencing shares of
restricted
stock shall remain in the possession of the Company until such
shares
are free
of any restrictions specified in the applicable restricted stock
agreement.
The Administrator may direct that such stock certificate(s) bear a
legend
setting
forth the applicable restrictions on transferability.
(d)
Nontransferability
.
Shares
of restricted stock may not be sold, assigned, transferred, pledged or otherwise
encumbered or disposed of except as otherwise specifically provided in this
Plan
or the applicable
restricted
stock agreement. The Administrator at the time of grant shall specify
the
date or
dates (which may depend upon or be related to the attainment of performance
goals and other conditions) on which the nontransferability of the restricted
stock shall lapse.
(e)
Consequence
of Termination of Employment
.
A
grantee’s termination of employment for any reason (including death) shall cause
the immediate forfeiture of all shares of restricted stock that have not yet
vested as of the date of such termination of employment. All dividends paid
on
such
shares
also shall be forfeited, whether by termination of any escrow
arrangement
under
which such dividends are held, by the grantee’s repayment of dividends he
received directly, or otherwise.
2.8
Grant
of Unrestricted Stock
The
Administrator may grant (or sell at a purchase price at least equal to par
value) shares of Common Stock free of restrictions under the Plan, to such
key
persons and in such amounts and subject to such forfeiture provisions as
the
Administrator shall determine in its sole discretion. Shares may be thus granted
or sold in respect of past services or other valid consideration.
2.9
Grant
of Performance Shares
(a)
Performance
Share Grants
.
The
Administrator may grant performance share awards to such key persons, and in
such amounts and subject to such vesting and forfeiture provisions and other
terms and conditions, as the Administrator shall in its sole discretion
determine, subject to the provisions of the Plan. Such an award shall entitle
the grantee to acquire shares of Common Stock, or to be paid the value thereof
in cash, as the Administrator shall determine, if specified performance goals
are met. Performance shares may be
awarded
independently of, or in connection with, any other award under the
Plan.
A
grantee shall have no rights with respect to a performance share award unless
such grantee accepts the award by accepting delivery of an Award Agreement
at
such time and in such form as the Administrator shall determine.
(b)
Shareholder
Rights
.
The
grantee of a performance share award
will
have the rights of a shareholder only as to shares for which a stock certificate
has been issued pursuant to the award and not with respect to any other shares
subject to the award.
(c)
Consequence
of Termination of Employment
.
Except
as may otherwise be provided by the Administrator at any time prior to a
grantee’s
termination
of employment, the rights of a grantee of a performance share award
shall
automatically terminate upon the grantee’s termination of employment by the
Company or its subsidiaries for any reason (including death).
(d)
Exercise
Procedures; Automatic Exercise
.
At the
discretion of
the
Administrator, the applicable Award Agreement may set out the procedures to
be
followed
in exercising a performance share award or it may provide that such exercise
shall be made automatically after satisfaction of the applicable performance
goals.
(e)
Tandem
Grants; Effect on Exercise
.
Except
as otherwise
specified
by the Administrator, (i) a performance share award granted in tandem
with
an
option may be exercised only while the option is exercisable, (ii) the exercise
of a performance share award granted in tandem with any other award shall reduce
the number of shares subject to such other award in the manner specified in
the
applicable Award Agreement, and (iii) the exercise of any award granted in
tandem with a performance share award shall reduce the number of shares subject
to the latter in the manner specified in the applicable Award
Agreement.
(f)
Nontransferability
.
Performance shares may not be sold,
assigned,
transferred, pledged or otherwise encumbered or disposed of except
as
otherwise specifically provided in this Plan or the applicable Award
Agreement
.
The
Administrator at the time of grant shall specify the date or dates
(which
may depend upon or be related to the attainment of performance goals
and
other
conditions) on which the nontransferability of the performance shares shall
lapse.
ARTICLE
III.
Miscellaneous
3.1
Amendment
of the Plan; Modification of Awards
(a)
Amendment
of the Plan
.
The
Board may from time to time
suspend,
discontinue, revise or amend the Plan in any respect whatsoever,
except
that
no
such amendment shall materially impair any rights or materially
increase
any
obligations under any award theretofore made under the Plan without the consent
of the grantee (or, upon the grantee’s death, the person having the right to
exercise the award). For purposes of this Section 3.1, any action of the Board
or the Administrator that in any way alters or affects the tax treatment of
any
award shall not be considered to materially impair any rights of any
grantee.
(b)
Shareholder
Approval Requirement
.
Shareholder approval shall be required with respect to any amendment to the
Plan
that (i) increases the aggregate number of shares that may be issued pursuant
to
incentive stock options or changes the class of employees eligible to receive
such options; or (ii) materially increases the benefits under the Plan to
persons whose transactions in Common Stock are subject to section 16(b) of
the
Securities Exchange Act of 1934, as amended, or increases the benefits under
the
Plan to such person, or materially increases the number of shares which may
be
issued to such persons, or materially modifies the eligibility requirements
affecting such persons.
(c)
Modification
of Awards
.
The
Administrator may cancel any award under the Plan. Subject to the requirements
of Section 409A of the Code, the Administrator also may amend any outstanding
Award Agreement, including, without limitation, by amendment which would:
(i) accelerate the time or times at which the award becomes unrestricted or
may be exercised, provided that, except as and to the extent that the
Administrator may otherwise provide pursuant to Section 2.5, 3.7 or 3.8, no
option, stock appreciation right or restricted stock unit shall be exercisable
prior to the first anniversary of its date of grant; (ii) waive or amend any
goals, restrictions or conditions set forth in the Agreement; or (iii) waive
or
amend the operation of Section 2.5 with respect to the termination of the award
upon termination of employment. However, any such cancellation or amendment
(other than an amendment pursuant to Sections 3.7 or 3.8(b)) that
materially impairs the rights or materially increases the obligations of a
grantee under an outstanding award shall be made only with the consent of the
grantee (or, upon the grantee’s death, the person having the right to exercise
the award).
3.2
Consent
Requirement
(a)
No
Plan Action Without Required Consent
.
If the
Administrator shall at any time determine that any Consent (as hereinafter
defined) is
necessary
or desirable as a condition of, or in connection with, the granting
of
any
award under the Plan, the issuance or purchase of shares or other rights
thereunder,
or the taking of any other action thereunder (each such action being
hereinafter referred to as a “Plan Action”), then such Plan Action shall not be
taken, in whole or in part, unless and until such Consent shall have been
effected or obtained to the full satisfaction of the Administrator.
(b)
Consent
Defined
.
The
term “Consent” as used herein with respect to any Plan Action means (i) any and
all listings, registrations or qualifications in respect thereof upon any
securities exchange or under any federal, state or local law, rule or
regulation, (ii) any and all written
agreements
and representations by the grantee with respect to the disposition
of
shares,
or with respect to any other matter, which the Administrator shall deem
necessary or desirable to comply with the terms of any such listing,
registration or qualification or to obtain an exemption from the requirement
that any such listing, qualification or registration be made and (iii) any
and
all consents, clearances and approvals in respect of a Plan Action by any
governmental or other regulatory bodies.
3.3
Nonassignability
Except
as
provided in Sections 2.5(e), 2.6, 2.7(d) and 2.9(f):
(a) no
award or right granted to any person under the Plan or under any Award Agreement
shall be assignable or transferable other than by will or by the laws of descent
and distribution; and (b) all rights granted under the Plan or
any
Award
Agreement shall be exercisable during the life of the grantee only
by the
grantee or the grantee’s legal representative.
3.4
Requirement
of Notification of Election Under Section 83(b) of
the Code
If
any
grantee shall, in connection with the acquisition of shares of
Common
Stock under the Plan, make the election permitted under section 83(b)
of
the Code
(i.e., an election to include in gross income in the year of transfer the
amounts specified in section 83(b)), such grantee shall notify the Company
of
such election within 10 days of filing notice of the election with the Internal
Revenue
Service,
in addition to any filing and notification required pursuant to
regulations issued under the authority of Code section 83(b).
3.5
Requirement
of Notification Upon Disqualifying Disposition Under
Section 421(b) of the Code
Each
Award Agreement with respect to an incentive stock option shall
require
the grantee to notify the Company of any disposition of shares of Common
Stock
issued
pursuant to the exercise of such option under the circumstances described in
section 421(b) of the Code (relating to certain disqualifying dispositions),
within 10 days of such disposition.
3.6
Withholding
Taxes
(a)
With
Respect to Cash Payments
.
Whenever cash is to be paid pursuant to an award under the Plan, the Company
shall be entitled to deduct
therefrom
an amount sufficient in its opinion to satisfy all federal, state
and
other
governmental tax withholding requirements related to such payment.
(b)
With
Respect to Delivery of Common Stock
.
Whenever shares of Common Stock are to be delivered pursuant to an award under
the Plan, the
Company
shall be entitled to require as a condition of delivery that the
grantee
remit to
the Company an amount sufficient in the opinion of the Company to satisfy all
federal, state and other governmental tax withholding requirements related
thereto. With the approval of the Administrator, which the Administrator shall
have sole discretion whether or not to give, the grantee may satisfy the
foregoing condition by electing to have the Company withhold from delivery
shares having a value equal to the amount of tax to be withheld. Such shares
shall
be
valued at their Fair Market Value as of the date on which the amount
of
tax to
be withheld is determined. Fractional share amounts shall be settled in
cash.
Such a withholding election may be made with respect to all or any
portion
of the
shares to be delivered pursuant to an award.
3.7
Adjustment
Upon Changes in Common Stock
(a)
Shares
Available for Grants
.
In
the
event of any change in the
number
of shares of Common Stock outstanding by reason of any stock dividend or
split,
reverse stock split, recapitalization, merger, consolidation,
combination
or
exchange of shares or similar corporate change, the maximum number of shares
of
Common Stock with respect to which the Administrator may grant awards under
Article II hereof, as described in Section 1.5(a), and the individual annual
limit described in Section 1.5(e), shall be appropriately adjusted by the
Administrator. In the event of any change in the number of shares of Common
Stock outstanding by reason of any other event or transaction, the Administrator
may, but need not, make such adjustments in the number and class of shares
of
Common Stock
with
respect to which awards: (i) may be granted under Article II hereof
and
(ii)
granted to any one employee of the Company or a subsidiary during
any
one
calendar year, in each case as the Administrator may deem
appropriate.
(b)
Outstanding
Restricted Stock and Performance Shares
.
Unless
the
Administrator in its sole and absolute discretion otherwise determines, any
securities or
other
property (including dividends paid in cash) received by a grantee with respect
to a share of restricted stock, the issue date with respect to which occurs
prior to such event, but which has not vested as of the date of such event,
as a
result of any dividend, stock split, reverse stock split, recapitalization,
merger, consolidation, combination, exchange of shares or
otherwise
will not vest until such share of restricted stock vests, and shall
be
promptly
deposited with the Company or other custodian designated pursuant to Section
2.7(c) hereof.
The
Administrator may, in its absolute discretion, adjust any grant of shares of
restricted stock, the issue date with respect to which has not
occurred
as of the date of the occurrence of any of the following events, or
any
grant
of
performance shares, to reflect any dividend, stock split, reverse
stock
split,
recapitalization, merger, consolidation, combination, exchange of
shares
or
similar corporate
change
as
the Administrator may deem appropriate to prevent the enlargement or
dilution
of rights of grantees.
(c)
Outstanding
Options, Stock Appreciation Rights and Dividend
Equivalent
Rights—Increase or Decrease in Issued Shares Without Consideration
.
Subject
to any required action by the shareholders of the Company, in the
event
of
any increase or decrease in the number of issued shares of Common
Stock
resulting from a subdivision or consolidation of shares of Common Stock or
the
payment of a stock dividend (but only on the shares of Common Stock), or any
other
increase or decrease in the number of such shares effected without
receipt
of
consideration by the Company, the Administrator shall proportionally adjust
the
number of shares of Common Stock subject to each outstanding option and stock
appreciation right, and the exercise price-per-share of Common Stock of each
such
option and stock appreciation right and the number of any related
dividend
equivalent rights.
(d)
Outstanding
Options, Stock Appreciation Rights, Restricted Stock Units and Dividend
Equivalent Rights—Certain Mergers
.
Subject
to any required action by the shareholders of the Company, in the event that
the
Company shall be the surviving corporation in any merger or consolidation
(except a merger or
consolidation
as a result of which the holders of shares of Common Stock receive
securities of another corporation), each option, stock appreciation right and
dividend equivalent right outstanding on the date of such merger or
consolidation
shall pertain to and apply to the securities which a holder of the
number
of shares of Common Stock subject to such option, stock appreciation right,
restricted stock unit or dividend equivalent right would have received in such
merger or consolidation.
(e)
Outstanding
Options, Stock Appreciation Rights, Restricted Stock Units and Dividend
Equivalent Rights—Certain Other Transactions
. In the event of (i) a
dissolution or liquidation of the Company, (ii) a sale of all or substantially
all of the Company’s assets, (iii) a merger or consolidation involving the
Company in which the Company is not the surviving corporation or (iv) a merger
or consolidation involving the Company in which the Company is the surviving
corporation but the holders of shares of Common Stock receive securities of
another
corporation and/or other property, including cash, the Administrator
shall,
in its
absolute discretion, have the power to:
(i)
cancel,
effective immediately prior to the occurrence of such event, each option, stock
appreciation right and restricted stock unit (including each dividend equivalent
right related thereto) outstanding immediately prior to such event (whether
or
not then exercisable), and, in full consideration of such cancellation, pay
to
the grantee to whom such option or stock appreciation right was granted an
amount in cash, for each share of Common Stock subject to such option or stock
appreciation right, respectively, equal to the excess of (x) the value, as
determined by the Administrator in its absolute discretion applied in accordance
with Section 409A of the Code, of the property (including cash) received by
the
holder of a share of Common Stock as a result of such event over (y) the
exercise price of such option or stock appreciation right; or
(ii)
provide
for the exchange of each option, stock appreciation right and restricted stock
unit (including any related dividend equivalent right) outstanding immediately
prior to such event (whether or not then exercisable) for an option on, stock
appreciation right, restricted stock unit and dividend equivalent right with
respect to, as appropriate, some or all of the property which a holder of the
number of shares of Common Stock subject to such option, stock appreciation
right or restricted stock unit would have received and, incident thereto, make
an equitable adjustment as determined by the Administrator in its absolute
discretion applied in accordance with Section 409A of the Code in the exercise
price of the option, stock appreciation right or restricted stock unit, or
the
number of shares or amount of property subject to the option, stock appreciation
right, restricted stock unit or dividend equivalent right or, if appropriate,
provide for a cash payment to the grantee to whom such option, stock
appreciation right or restricted stock unit was granted in partial consideration
for the exchange of the option, stock appreciation right or restricted stock
unit.
(f)
Outstanding
Options, Stock Appreciation Rights, Restricted Stock Units and Dividend
Equivalent Rights—Other Changes
.
In
the
event of any change in the
capitalization of the Company or a corporate change other than those
specifically referred to in Sections 3.7(c), (d) or (e) hereof, the
Administrator may, in its absolute discretion exercised in accordance with
Section 409A of the Code, make such adjustments in the number and class of
shares subject to options, stock appreciation rights, restricted stock units
and
dividend
equivalent
rights outstanding on the date on which such change occurs and in
the
per-share
exercise price of each such option, stock appreciation right and
restricted
stock unit
as
the
Administrator
may consider appropriate to prevent dilution or enlargement of
rights.
In
addition, if and to the extent the Administrator determines it is appropriate,
the Administrator may elect to cancel each option, stock appreciation right
and
restricted stock unit (including each dividend equivalent right related thereto)
outstanding immediately prior to such event (whether or not then exercisable),
and, in full consideration of such cancellation, pay to the grantee to whom
such
option,
stock
appreciation right or restricted stock unit was granted an amount in cash,
for
each share of Common Stock subject to such option, stock appreciation right
or
restricted stock unit, respectively, equal to
the
excess of (i) the Fair Market Value of Common Stock on the date of such
cancellation over (ii) the exercise price of such option, stock appreciation
right or restricted stock unit.
(g)
No
Other Rights
.
Except
as
expressly provided in the Plan, no
grantee
shall have any rights by reason of any subdivision or consolidation of shares
of
stock of any class, the payment of any dividend, any increase or decrease in
the
number of shares of stock of any class or any dissolution, liquidation, merger
or consolidation of the Company or any other corporation.
Except
as
expressly provided in the Plan, no issuance by the Company of shares
of stock
of any class, or securities convertible into shares of stock of any class,
shall
affect, and no adjustment by reason thereof shall be made with respect to,
the
number of shares of Common Stock subject to an award or the exercise price
of
any option or stock appreciation right.
3.8
Change
in Control
(a)
Change
in Control Defined
.
For
purposes of this Section 3.8, “Change in Control” shall mean the occurrence of
any of the following:
(i)
any
person or “group” (within the meaning of Section 13(d)(3) of the 1934 Act),
other than entities which the President of the Company directly or indirectly
controls (as defined in Rule 12b-2 under the 1934 Act), acquiring “beneficial
ownership” (as defined in Rule 13d-3 under the 1934 Act), directly or
indirectly, of fifty percent (50%) or more of the aggregate voting power of
the
capital stock ordinarily entitled to elect directors of the
Company;
(ii)
the
sale
of all or substantially all of the Company’s assets in one or more related
transactions to a person other than such a sale to a subsidiary of the Company
which does not involve a change in the equity holdings of the Company or to
an
entity which the President directly or indirectly controls; or
(iii)
any
merger, consolidation, reorganization or similar event of the Company or any
of
its subsidiaries, as a result of which the holders of the voting stock of the
Company immediately prior to such merger, consolidation, reorganization or
similar event do not directly or indirectly hold at least fifty-one percent
(51%) of the aggregate voting power of the capital stock of the surviving
entity.
Notwithstanding
the foregoing, for each award subject to Section 409A of the Code, a Change
in
Control shall be deemed to occur under this Plan with respect to such Award
only
if a change in the ownership or effective control of the Company or a change
in
the ownership of a substantial portion of the assets of the Company shall also
be deemed to have occurred under Section 409A of the Code.
(b)
Effect
of a Change in Control
.
Unless
the Administrator provides otherwise in an Award Agreement, upon the occurrence
of a Change in Control:
(i)
notwithstanding
any other provision of this Plan, any award
then
outstanding shall become fully vested and any award in the form of
an
option,
stock appreciation right or restricted stock unit shall be immediately
exercisable;
(ii)
to
the
extent permitted by law, the Administrator may, in its sole discretion, amend
any Award Agreement in such manner as it deems appropriate;
(iii)
a
grantee
who incurs a termination of employment for any
reason,
other than a dismissal for cause, concurrent with or within one year
following
the Change in Control may exercise any outstanding option, stock
appreciation right or restricted stock unit, but only to the extent that the
grantee was entitled to exercise the award on his termination of employment
date, until the earlier of (A) the original expiration date of the award and
(B)
the later of (x) the date provided for under the terms of Section 2.5 without
reference to this Section 3.8(b)(iii) and (y) the first anniversary of the
grantee’s
termination
of employment.
(c)
Miscellaneous
.
Whenever deemed appropriate by the Administrator, any
action
referred to in paragraph (b)(ii) of this Section 3.8 may be made
conditional upon the consummation of the applicable Change in Control
transaction.
3.9
Right
of Discharge Reserved
Nothing
in the Plan or in any Award Agreement shall confer upon any
grantee
the right to continue his employment with the Company or affect any right that
the
Company
may have to terminate such employment.
3.10
Non-Uniform
Determinations
The
Administrator’s determinations under the Plan need not be uniform and may be
made by it selectively among persons who receive, or who are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated).
Without limiting the generality of the foregoing, the Administrator
shall
be
entitled, among other things, to make non-uniform and selective determinations,
and to enter into non-uniform and selective Award Agreements, as to (a) the
persons to receive awards under the Plan, and (b) the terms and provisions
of
awards under the Plan.
3.11
Other
Payments or Awards
Nothing
contained in the Plan shall be deemed in any way to limit or restrict the
Company from making any award or payment to any person under any
other
plan, arrangement or understanding, whether now existing or hereafter
in
effect.
3.12
Headings
Any
section, subsection, paragraph or other subdivision headings
contained
herein are for the purpose of convenience only and are not intended
to
expand,
limit or otherwise define the contents of such subdivisions.
3.13
Effective
Date and Term of Plan
(a)
Shareholder
Approval
.
The
Plan shall be subject to the requisite approval of the shareholders of the
Company in accordance with the requirements of Rule 4350 of the National
Association of Securities Dealers Manual and Section 162(m) of the Code. In
the absence of such approval, any Awards shall be null and void.
(b)
Termination
of Plan
.
Unless
sooner terminated by the Board or
pursuant
to paragraph (a) above, the provisions of the Plan respecting the
grant
of
incentive stock options shall terminate on the tenth anniversary of the adoption
of the Plan by the Board, and no incentive stock option awards shall thereafter
be made under the Plan. All such awards made under the Plan prior to
its
termination shall remain in effect until such awards have been satisfied
or
terminated in accordance with the terms and provisions of the Plan and the
applicable Award Agreements.
3.14
Restriction
on Issuance of Stock Pursuant to Awards
The
Company shall not permit any shares of Common Stock to be issued
pursuant
to Awards granted under the Plan unless such shares of Common Stock
are
fully
paid and non-assessable under applicable law.
3.15
Governing
Law
Except
to
the extent preempted by any applicable federal law, the Plan
will
be
construed and administered in accordance with the laws of the State
of
New
York, without giving effect to principles of conflict of laws.
3.16
Compliance
with Section 409A of the Code
Notwithstanding
anything to the contrary contained in the Plan or in any Agreement, to the
extent that the Administrator determines that the Plan or any Award is subject
to Section 409A of the Code and fails to comply with the requirements of Section
409A of the Code, the Administrator reserves the right to amend or terminate
the
Plan and/or amend, restructure, terminate or replace the Award in order to
cause
the Award to either not be subject to Section 409A of the Code or to comply
with
the applicable provisions of such section.
EXHIBIT
10.15
LOAN
AGREEMENT
Dated
November
14, 2006
BETWEEN
XINGANG
SHIPPING LTD
-
the
Borrower -
DIANA
TRADING LTD
EUROSEAS
LTD
-
the
Corporate Guarantors -
-
and
-
HSBC
BANK PLC
-
the
Bank -
LOAN
AGREEMENT
Dated
November
14, 2006
BETWEEN
1.
XINGANG SHIPPING LTD
,
a
company incorporated under the laws of the Republic of Liberia, whose registered
office is at 80 Broad Street, Monrovia, Liberia (the "Borrower")
2.
DIANA TRADING LTD
3.
EUROSEAS LTD
both
companies incorporated under the laws of the Republic of the Marshall Islands,
whose registered offices are at Trust Company Complex, Ajeltake Road, Ajeltake
Island, Majuro, Marshall Islands MH96960 (together called "the Corporate
Guarantors" and independently "the Corporate Guarantor")
and
HSBC
BANK PLC
,
a
company
incorporated under the laws of England, having its registered office at 8,
Canada Square, London E14 5HQ, acting for the purposes of this Agreement through
its branch at 93 Akti Miaouli, Piraeus, Greece (the "Bank").
1.
|
PURPOSE
AND DEFINITIONS
|
1.01
This
Agreement sets out the terms and conditions upon which HSBC BANK PLC will make
available to the Borrower a loan up to U.S. Dollars twenty million (U.S. $
20.000.000) for a period of seven (7) years from the Drawdown Date of the
facility, for the purpose of financing part of the acquisition cost of the
vessel "YM XINGANG I" which flies the flag of Liberia because of her
registration in the Liberian Bareboat Registry and is also registered in the
Hamburg Registry of Ships in Germany, which upon delivery to the Borrower will
be registered in its ownership under Liberian flag in the same
name.
1.02
|
In
this Agreement, unless the context otherwise
requires:
|
"Accounts
Pledge(s)"
means
the declaration of pledge containing, inter alia, a charge in respect of the
Retention Account to be executed by the holder of such account in favour of
the
Bank in such form as the Bank shall require as the same may from time to time
be
supplemented and/or amended.
"Agreed
Rate"
means
a
rate agreed between the Bank and the Borrower on the basis of which (instead
of
LIBOR) the interest rate is determined pursuant to Clause 3.01.
"Assignment(s)"
means
the deed(s) of assignment of Insurances, Earnings and Requisition Compensation
of the Vessels in favour of the Bank.
"Bank"
means
HSBC BANK PLC acting through its branch at 93 Akti Miaouli, Piraeus, Greece,
and
includes its successors and assignees.
"Banking
Day"
means a
day on which, in each country or place in or at which any act is required to
be
done under this Agreement, banks and the relevant foreign exchange markets
are
open for the transaction of business of the nature concerned.
"Commitment"
means
the total sum of U.S. $ 20.000.000 to be made available by the Bank to the
Borrower in one advance, in accordance with Clause 2, subject to the terms
and
conditions of this Agreement.
"Corporate
Guarantee(s)"
means
the
irrevocable and unconditional guarantees of the Corporate Guarantors in favour
of the Bank contained in Clause 15 hereof.
"Corporate
Obligors"
means
the Borrower and the Corporate Guarantors.
"Dollars"
and
"$"
means
the
lawful currency of the United States of America.
"Drawdown
Date"
means
the date on which the Loan is advanced to the Borrower hereunder pursuant to
Clause 2.
"Drawdown
Notice"
means a
notice substantially in the terms of Schedule 1.
"Drawdown
Period"
means
the period from the date of this Agreement and ending at 11.00 a.m. (London
time) on 15
th
December
2006
or,
if earlier, (i) the date on which the Loan is advanced by the Bank to the
Borrower, or (ii) the date on which the obligation of the Bank to make the
Commitment available is terminated or ceases according to Clauses 10.02 or
12.
"Earnings"
in
relation to the Vessels, means all hires, freights, pool income and other sums
payable to or for the account of the Owner in respect of these Vessels including
(without limitation) all remuneration for salvage and towage services, demurrage
and detention moneys, contributions in general average, compensation in respect
of any requisition for hire and damages (whether awarded by any court or
arbitral tribunal or by agreement or otherwise) for breach or termination of
any
contract for the operation, employment or use of these Vessels.
"Earnings
Account"
means
a
bank account to be opened with the Bank in the name of the Borrower or other
person nominated by the Borrower and designated "EARNINGS ACCOUNT" or with
such
other designation as the Bank shall approve or require, to which (inter alia)
all Earnings of the Vessels are to be paid.
"Encumbrance"
means
any mortgage, charge (whether fixed or floating), pledge, lien, hypothecation,
assignment, security interest, or other encumbrance securing any obligation
of
any person.
"Environmental
Affiliate"
means an
agent, employee, independent contractor, sub-contractor or other person in
a
contractual relationship with the Corporate Obligors relating to the Vessels
or
their carriage of cargo or their operation whose acts or omissions would have
a
Material Adverse Effect.
"Environmental
Approvals"
means
any permit, licence, approval ruling, variance, exemption or other authorisation
required under applicable Environmental Laws.
"Environmental
Claim"
means
any and all enforcement, clean-up, removal or other governmental or regulatory
actions or orders instituted or completed pursuant to any Environmental Laws
or
Environmental Approval together with claims made by any third party relating
to
damage, contribution, loss or injury, resulting from any Release of Materials
of
Environmental Concern.
"Environmental
Laws"
means
all local, state, provincial, national and international laws, regulations,
treaties and conventions (including any amendments and/or protocols thereto)
for
the time being in force pertaining to the pollution or protection of human
health or the environment (including ambient air, surface water, ground water,
land surface or subsurface strata and all or any part of national and
international waters (howsoever called), including laws, regulations, treaties
and conventions (including any amendments and/or protocols thereto) for the
time
being in force relating to the Release (or threatened release) of Materials
of
Environmental Concern.
"Event
of Default"
means
any
of the events or circumstances described in Clause 10.01.
"Final
Maturity Date"
means
the
date falling seven (7) years after the Drawdown Date of the Loan.
"Guarantee(s)"
means
the
Corporate Guarantees incorporated in Clause 15 of this Agreement and the
Personal Guarantee and in the singular means any of them.
"Guarantor(s)"
means
any
or all of the Corporate Guarantors and the Personal Guarantor.
"Indebtedness"
means
any obligation for the payment or repayment of money, whether present or future,
actual or contingent.
"Interest
Payment Date"
means
the last day of an Interest Period and, in respect of any Interest Period of
more than three (3) months duration, the day falling at successive three (3)
monthly intervals after the commencement of such Interest Period.
"Interest
Period"
means
each period for the calculation of interest in respect of the Loan ascertained
in accordance with Clauses 3.02 and 3.03.
"Law"
means
any
law, statute, treaty, convention, regulation, instrument or other subordinate
legislation or other legislative or quasi-legislative rule or measure, including
the ISM CODE, or any order or decree of any government, judicial or public
or
other body or authority.
"LIBOR"
means,
in
relation to a particular period and a particular amount, the rate per cent
per
annum at which the Bank is able in accordance with its normal practices to
acquire dollar deposits in amounts comparable with this amount for that period
in the London Interbank Eurocurrency Market at or about 11.00 a.m. (London
time)
on the second Banking Day before the beginning of that period.
"Loan"
means
the aggregate principal amount owing to the Bank under this Agreement at any
relevant time.
"Manager"
means
the company EUROBULK LTD.
"Margin"
means
zero point nine hundred thirty five per cent (0.935%) per annum which shall
be
reduced to zero point nine per cent (0.9%) per annum if the Borrower effects
the
prepayment of U.S. $ 7.000.000 within the first year following the Drawdown
Date.
"Material
Adverse Effect"
means a
material adverse effect on the Corporate Obligors’ ability to meet their
obligations to the Bank under this Agreement and the other Security Documents.
"Material
of Environmental Concern"
means
and includes all pollutants, contaminants, toxic substances, oil and hazardous
substances as may be defined in any applicable local, state, provincial,
national and international laws, regulations, treaties and conventions
(including any amendments and/or protocols thereto) for the time being in
force.
"Month"
or
"Months
"
means a
period of the required number of calendar months but ending, subject to the
exceptions below, on the day numerically corresponding to the day of the
calendar month on which it started and "monthly" shall be construed accordingly.
The exceptions are that (i) if the period started on the last Banking Day in
a
calendar month or if there is no such numerically corresponding day, it shall
end on the last Banking Day in the relevant calendar month, and (ii) if such
numerically corresponding day is not a Banking Day, the period shall end on
the
next Banking Day in the same calendar month but if there is no such Banking
Day
it shall end on the preceding Banking Day.
"Mortgage(s)"
means
the First Preferred Liberian Mortgage on the Vessel "YM XINGANG I" and the
Third
Preferred Marshall Islands’ Mortgage on the Vessel "IRINI" and in singular means
either of them.
"Obligors"
means
the Corporate Obligors and the Personal Guarantor.
"Owner(s)"
means
the owner (whether Borrower or Guarantor) of the Vessels as specified in the
definition of Vessel(s).
"Permitted
Encumbrance"
means
any encumbrance created pursuant to the Security Documents or permitted to
exist
pursuant to the terms of this Agreement or the Security Documents.
"Personal
Guarantee"
means
the irrevocable and unconditional guarantee to be executed by the Personal
Guarantor in favour of the Bank in form and substance satisfactory to the
Bank.
"Personal
Guarantor"
means
the person nominated by the Borrower and accepted by the Bank who will execute
the Personal Guarantee.
"Release"
means
an
emission, spill, release or discharge into or upon the air, surface water,
groundwater, or soils of any Material of Environmental Concern for which the
Obligors have any liability under Environmental Law, except in accordance with
a
valid Environmental Approval.
"Repayment
Dates"
means
each of the dates specified in Clause 4.01 on which the Repayment Installments
shall be payable by the Borrower to the Bank.
"Repayment
Instalment"
means
each instalment of the Loan which becomes due for repayment by the Borrower
to
the Bank on a Repayment Date pursuant to Clause 4.01.
"Requisition
Compensation"
in
relation to a Vessel, means all compensation or other money which may from
time
to time be payable to the Owner as result of that Vessel being requisitioned
for
title or in any other way compulsorily acquired (other than by way of
requisition for hire).
"Retention
Account"
means a
bank account to be opened in the joint names of the Borrower and the first
Corporate Guarantor with the Bank and designated "
and
others - Retention Account".
"Security
Documents"
means
this Agreement, the ISDA Master Agreement, the Guarantees, the Mortgages, the
Assignments, the Specific Assignment and any such other documents as may have
been or shall hereafter be executed to secure all, or any of the sums of money
from time to time owing (whether the same shall be due and payable or not)
by
the Borrower hereunder.
"Taxes"
means
all levies, imposts, duties, fees or charges deductions and withholdings
(including any related interest and penalties) and any restrictions or
conditions resulting in any charge, other than taxes on the overall net income
of the Bank, and
"Tax"
and
"Taxation"
shall
be
interpreted accordingly.
"Total
Loss"
in
relation to a Vessel means (a) an actual, constructive, arranged, agreed or
compromised total loss of that Vessel or (b) the requisition for title or
compulsory acquisition of that Vessel by or on behalf of any government or
other
authority (other than by way of requisition for hire) or (c) capture, seizure,
arrest, detention or confiscation of that Vessel by any government or by any
person acting or purporting to act on behalf of any government, unless that
Vessel is released within sixty (60) days thereafter.
"Vessel"
means
m/v "YM XINGANG I" to be owned by the Borrower and registered under Liberian
flag and m/v "IRINI" owned by the first Corporate Guarantor and "the Vessel"
means either of them.
1.03
Clause headings are inserted for convenience of reference only and shall be
ignored in the interpretation of this Agreement. In this Agreement, unless
the
context otherwise requires, references to Clauses and Schedules are to be
construed as references to clauses of, and schedules to, this Agreement;
references to (or to any specified provision of) this Agreement or any other
document shall be construed as references to this Agreement, that provision
or
that document as amended with the agreement of the relevant parties and the
prior written consent of the Bank and in force at any relevant time; words
importing the plural shall include the singular and vice-versa and references
to
a person shall be construed as references to an individual, firm, company,
corporation, unincorporated body of persons or any state or any agency
thereof.
2.
THE
LOAN
2.01
The
Bank, relying upon each of the representations and warranties in Clause 7 agrees
to lend to the Borrower upon and subject to the terms of this Agreement, the
principal sum of up to U.S. $ 20.000.000.
2.02
Subject to the terms and conditions of this Agreement, the Loan shall be
advanced in full to the Borrower by the Bank upon receipt by the Bank from
the
Borrower of a Drawdown Notice not later than 12.00 noon (Greek time) on the
third Banking Day before the proposed Drawdown Date of the Loan.
2.03
(a)
The
Loan shall not be advanced on any day which is not a Banking Day or after the
end of the Drawdown Period.
(b)
A
Drawdown Notice shall be effective on actual receipt by the Bank and, once
given, shall, subject as provided in Clause 12, be irrevocable.
2.04
Upon
receipt of a Drawdown Notice complying with the terms of this Agreement the
Bank
shall, subject to the provisions of Clause 9, on the relevant date make the
amount of the Commitment available to the Borrower.
2.05
If
the Loan is not drawn down by the end of the Drawdown Period, the Commitment
shall be automatically cancelled.
3.
INTEREST
AND INTEREST PERIODS
3.01
The
Borrower shall pay interest on the Loan or (as the case may be, each portion
thereof to which a different Interest Period relates) in respect of each
Interest Period (or part thereof) each Interest Payment Date. The interest
rate
for the calculation of interest shall be the rate per annum determined by the
Bank to be the aggregate of (i) the Margin and (ii) LIBOR, unless there is
an
Agreed Rate in which case the interest rate for the calculation of interest
shall be the rate per annum determined by the Bank to be the aggregate of (i)
the Margin and (ii) the Agreed Rate.
3.02
The
Borrower may by notice received by the Bank not later than 12.00 noon (Greek
time) on the second Banking Day before the beginning of each Interest Period
specify whether that Interest Period shall have a duration of 1, 2, 3, 6, 9
or
12 months or any other Period which the Bank may agree.
3.03
Every Interest Period shall be subject to market availability to be conclusively
determined by the Bank of the duration specified by the Borrower pursuant to
Clause 3.02 but so that:
(a)
the
initial Interest Period shall end on the date falling 1, 2, 3, 6, 9 or 12 (as
specified by the Borrower pursuant to Clause 3.02) months after the Drawdown
Date.
(b)
each
subsequent Interest Period in respect of the Loan will commence forthwith upon
the expiry of the previous Interest Period relative thereto.
(c)
if
any Interest Period would otherwise overrun a Repayment Date, then, in the
case
of the last Repayment Date, that Interest Period shall end on such Repayment
Date, and in the case of any other Repayment Date, the Loan shall be divided
into two parts, one in the amount of the repayment instalment falling due on
such Repayment Date and having a separate Interest Period expiring on the
relevant Repayment Date and the other in the amount of the balance of the Loan
having an Interest Period ascertained in accordance with Clause 3.02 and the
other provisions of this Clause 3.03; and
(d)
if
the Borrower fails to specify the duration of an Interest Period in accordance
with the provisions of Clause 3.02 and 3.03, that Interest Period shall have
a
duration of 3 months or other period complying with this Clause
3.03.
3.04
If
the Borrower fails to pay any sum on its due date for payment under this
Agreement, the Borrower shall pay interest on such sum on demand from that
date
up to the date of actual payment (as well after as before judgment) and
compounded at the end of each of the periods determined by the Bank under this
Clause 3.04. Such interest shall be calculated at a rate determined by the
Bank
to be two per cent (2%) per annum above the aggregate of the Margin and the
LIBOR for such period not exceeding 3 months as the Bank may determine from
time
to time in amounts comparable with the sum not paid. Such interest shall be
due
and payable on the last day of each such period as determined by the Bank and
each such day shall for the purposes of this Agreement, be treated as an
Interest Payment Date, provided that if such unpaid sum is of principal which
became due and payable on a date other than an Interest Payment Date relating
thereto, the first such period selected by the Bank shall be of a duration
equal
to the period between the due date of such principal sum and such Interest
Payment Date and interest shall be payable on such principal sum during such
period at a rate two per cent (2%) above the rate applicable thereto immediately
before it fell due.
If,
for
the reasons specified in Clause 12.03, the Bank is unable to determine a rate
in
accordance with the foregoing provisions of this Clause 3.04, interest shall
be
calculated at a rate determined by the Bank to be two per cent (2%) per annum
above the aggregate of the Margin and costs of funds to the Bank as conclusively
determined by the Bank, save for manifest error.
3.05
The
Bank shall notify the Borrower promptly of the duration of each Interest Period
and of each rate of interest determined by it under this Clause 3.
3.06
All
payments of interest in respect of the Loan shall be made in U.S. Dollars.
All
interest and other payments of an annual nature under this Agreement shall
accrue from day to day and be calculated on the basis of actual days elapsed
and
a 360 day year. The certificate of the Bank as to any rate of interest or any
rate of exchange determined by it pursuant to this Agreement shall be conclusive
in the absence of manifest error.
4.
REPAYMENTS
AND PREPAYMENTS
4.01
The
Borrower shall repay the Loan by twenty eight (28) consecutive, quarterly
Repayment Instalments, the first eight (8) of an amount of U.S. Dollars one
million ($ 1.000.000) each, the next four (4) of an amount of U.S. Dollars
seven
hundred fifty thousand ($ 750.000) each and the remaining sixteen (16) of an
amount of U.S. Dollars two hundred fifty thousand ($ 250.000) each, to be repaid
on each of the Repayment Dates so that the first be repaid three (3) months
after the Drawdown Date and each of the subsequent ones consecutively on each
of
the dates falling three (3) months after the immediately preceding Repayment
Date, and (ii) one (1) Balloon Instalment equal to U.S. Dollars five million
($
5.000.000) which shall be repaid together with the last Repayment Instalment,
provided that (a) if the last Repayment Instalment would otherwise fall after
the Final Maturity Date, the final Repayment Instalment shall be the Final
Maturity Date and (b) there shall be no Repayment Dates after the Final Maturity
Date. In the event that the Commitment is not drawn in full, the Loan shall
be
repaid in such proportionate lesser amounts as shall suffice to repay the Loan
over the same period.
4.02
The
Borrower shall have the right, upon giving the Bank not less than ten (10)
Banking Days' notice in writing to prepay without penalty part or all of the
Loan in each case together with all unpaid interest accrued thereon and all
other sums of money whatsoever due and owing from the Borrower to the Bank
hereunder or pursuant to the other Security Documents and all interest accrued
thereon, provided that:
(a)
The
giving of such notice by the Borrower will irrevocably commit the Borrower
to
prepay such amount as stated in such notice;
(b)
Such
prepayment may take place only on the last day of an Interest Period relating
to
the whole of the Loan provided, however, that if the Borrower shall request
consent to make such prepayment on another day and the Bank shall accede to
such
request (it being in the sole discretion of the Bank to decide whether or not
to
do so) the Borrower will pay in addition to the amount to be prepaid, any such
sum as may be payable to the Bank pursuant to Clause 11.01;
(c)
Each
partial prepayment shall be equal to U.S. Dollars
two
hundred fifty thousand ($ 250.000)
or
a
multiple thereof or the balance of the Loan;
(d)
Any
prepayment of less than the whole of the Loan will be applied towards Repayment
Instalments in inverse order of their due dates of payment;
(e)
Every
notice of prepayment shall be effective only on actual receipt by the Bank,
shall be irrevocable and shall oblige the Borrower to make such prepayment
on
the date specified;
(f)
No
amount prepaid may be re-borrowed; and
(g)
The
Borrower may not prepay the Loan or any part thereof save as expressly provided
in this Agreement.
The
Borrower shall have the option to effect a U.S. Dollars seven million ($
7.000.000) prepayment during the first year following the Drawdown Date. In
such
case, the remaining Repayment Instalments due in the first three (3) years
may
be reduced by a maximum of 35% each, with the balance of the prepayment amount
to be set-off against the Balloon Instalment.
4.03
Unless the Bank agrees to accept substitute security in form and substance
satisfactory to the Bank, the Borrower shall, within one hundred and twenty
(120) days of either of the Vessels becoming a Total Loss, prepay the Loan
together with accrued interest to the date of prepayment and all other sums
payable by the Borrower to the Bank pursuant to this Agreement and the other
Security Documents (and if any portion of the Commitment has not been drawn
yet,
the Commitment shall be reduced to zero), provided that:
(a)
an
actual total loss of a Vessel shall be deemed to have occurred at the actual
date and time such Vessel was lost but, in the event of the date of the loss
being unknown, then the actual total loss shall be deemed to have occurred
on
the date on which such Vessel was last reported.
(b)
a
constructive total loss shall be deemed to have occurred at the date and time
notice of abandonment of a Vessel is given to the insurers of such Vessel for
the time being. If the insurers of the Vessel will not admit the claim for
total
loss, the Borrower shall prepay the Loan within 180 days from the time of notice
of abandonment is given to the insurers.
(c)
a
compromised or arranged total loss shall be deemed to have occurred on the
date
on which a binding agreement as to such compromised or arranged total loss
has
been entered into by the insurers of a Vessel.
(d)
requisition for title or other compulsory acquisition of a Vessel shall be
deemed to have occurred on the date upon which the relevant requisition for
title or other compulsory acquisition occurs.
(e)
capture, seizure, detention, arrest or confiscation of a Vessel by any
government or by any person acting or purporting to act on behalf of any
government, which deprives the owner of the relevant vessel of the use of the
Vessel for more than ninety (90) days shall be deemed to occur upon the expiry
of the period of ninety (90) days after the date upon which the relevant
capture, seizure, detention, arrest or confiscation occurred.
4.04
If
subject to the provisions of Clause 8.02 (viii) any of the Vessels is sold,
the
Borrower shall prepay to the Bank the Loan together with the accrued
interest.
5.
FEES
AND EXPENSES
The
Obligors shall pay to the Bank on demand all expenses (including legal, printing
and out-of-pocket expenses) inclusive of Value Added Tax if any, incurred by
the
Bank in connection with the negotiation, preparation and execution of this
Agreement and the Security Documents and of any amendment or extension thereof
and all reasonable expenses (including legal and out-of-pocket expenses)
inclusive of Value Added Tax if any, incurred by the Bank in contemplation
of or
otherwise in connection with the enforcement of, or preservation of any rights
under, any of this Agreement and the Security Documents, or otherwise in respect
of the monies owing under any of this Agreement and the Security
Documents.
6.
PAYMENTS
AND ACCOUNTS
6.01
All
payments to be made by the Obligors under or in respect of any Security Document
shall be made in full in the currency in which the same is due, without any
set-off or counterclaim whatsoever and, subject as provided in Clause 6.03,
free
and clear of any deductions or withholdings, by not later than 10.00 a.m. (local
time in the place of payment) on the due date in immediately available funds
to
the account of the Bank at HSBC BANK U.S.A. New York (Account Number
000-04779-1) or at such other bank in such other place as the Bank may have
notified to the Borrower. All interest and any other payments hereunder of
an
annual nature shall accrue from day to day and be calculated on the basis of
360
day year.
6.02
When
any payment would otherwise be due under this Agreement on a day which is not
a
Banking Day, the due date for payment shall be extended to the next following
Banking Day unless such Banking Day falls in the next calendar month in which
case payment shall be made on the immediately preceding Banking
Day.
6.03
If
at any time any applicable law, regulation or regulatory requirement or any
governmental authority, monetary agency or central bank requires the Obligors
to
make any deduction or withholding in respect of Taxes from any payment due
under
this Agreement, the sum due from the Obligors in respect of such payment shall
be increased to the extent necessary to ensure that, after the making of such
deduction or withholding, the Bank receives a net sum equal to the sum which
it
would have received had no such deduction or withholding been required to be
made and the Obligors shall indemnify the Bank against any losses or costs
incurred by it by reason of any failure of the Obligors to make any such
deduction or withholding. The Obligors shall promptly deliver to the Bank any
receipts, certificates or other proof evidencing the amounts (if any) paid
or
payable in respect of any deduction or withholding as aforesaid.
6.04
If
it shall at any time become unlawful in any jurisdiction or impossible for
the
Obligors to make payment of any sum hereunder to the accounts referred to in
Clause 6.01 or in the currency in which such sum is due (the "Currency of
Obligation") the Obligors may agree with the Bank alternative arrangements
for
payment of such sum in the Currency of Obligation or in another freely
transferable and convertible currency. If it shall be agreed that payment may
be
made in a currency other than the Currency of Obligation such payment shall
only
satisfy the obligations of the Obligors to the Bank hereunder to the extent
of
the amount in the Currency of Obligation which can be purchased with the sum
so
paid at the spot buying rate of the Bank in the London Foreign Exchange market
for the Currency of Obligation with the currency in which payment was made,
and
the Obligors shall be liable to pay to the Bank the balance of the sum in the
Currency of Obligation which the Bank would have received if payment had been
made in accordance with the other provisions of this Agreement.
6.05
All
sums advanced by the Bank to the Borrower under this Agreement and all interest
accrued thereon and all other amounts due under this Agreement from time to
time
and all repayments and/or payments thereof shall be debited and credited
respectively to a separate loan account maintained by the Bank in the name
of
the Borrower. The Bank may, however, in accordance with its usual practices
or
for its accounting needs, maintain more than one accounts, consolidate or
separate them but all such accounts shall be considered parts of one single
loan
account maintained under this Agreement. In case that a ship mortgage in the
form of Account Current is granted as security under this Agreement, the
account(s) referred to in this Clause shall be the Account Current referred
to
in the mortgage.
7.
REPRESENTATIONS
AND WARRANTIES
7.01
Each
of the Obligors hereby represents and warrants to the Bank as at the date hereof
that:
(a)
each
Corporate Obligor is duly incorporated and validly existing in good standing
under the laws of its country of incorporation as a limited liability company,
has power to carry on its business as it is now being conducted and to own
its
property and other assets;
(b)
each
Corporate Obligor has power to execute, deliver and perform its obligations
under this Agreement and the other Security Documents; all necessary corporate,
shareholder and other action has been taken to authorise the execution, delivery
and performance of the same and no limitation on the powers of the Borrower
to
borrow will be exceeded as a result of borrowings hereunder;
(c)
this
Agreement constitutes and the Security Documents as and when they are
respectively executed by the Obligors will constitute valid and legally binding
obligations of the Obligors;
(d)
the
execution and delivery of, the performance of their obligations under, and
compliance with the provisions of, this Agreement and the Security Documents
by
the Obligors will not (i) contravene any existing applicable law, statute,
rule
or regulation or any judgment, decree or permit to which the Obligors are
subject, (ii) conflict with, or result in any breach of any of the terms of,
or
constitute a default under, any agreement or other instrument to which the
Obligors are parties or are subject or by which they or any of their property
is
bound except for the loans of the first Corporate Guarantor dated 16
th
October
2002 and 9
th
May
2005, (iii) contravene or conflict with any provision of the Corporate Obligors’
By-Laws or (iv) result in the creation or imposition of or oblige the Obligors
to create any encumbrance (other than a Permitted Encumbrance) on any of the
Obligors' assets, rights or revenues;
(e)
no
litigation, arbitration or administrative proceeding is taking place, pending
or, to the knowledge of the officers of the Corporate Obligors, threatened
against the Obligors which would have a material adverse effect on the business,
assets or financial condition of the Obligors;
(f)
the
accounts and the financial statements of the Obligors which have been delivered
to the Bank prior to the signing of this Agreement are true and accurate in
every material respect and represent fairly the financial condition of each
of
them as at the date such accounts and financial statements were prepared and
since that date there has been no material adverse change in such financial
condition, and
(g)
no
event or circumstance which constitutes or which with the giving of notice
or
lapse of time or both would constitute an Event of Default has occurred and
is
continuing.
7.02
The
Obligors further represent and warrant to the Bank that:
(a)
every
consent, authorisation, licence or approval of or registration with or
declaration to governmental or public bodies or authorities or courts required
by the Obligors to authorise, or required by the Obligors in connection with,
the execution, delivery, validity or enforceability of this Agreement and each
of the Security Documents or the performance by the Obligors of their
obligations hereunder or thereunder has been obtained or made;
(b)
the
obligations of the Obligors under this Agreement are direct, general and
unconditional obligations of the Obligors and rank at least pari passu with
all
other present and future unsecured and unsubordinated obligations (including
contingent obligations) of the Obligors (with the exemption of such obligations
as are mandatorily preferred by law and not by contract);
(c)
the
Obligors are not (nor with the giving of notice or lapse of time or both) in
breach of or in default under any agreement relating to Indebtedness to which
they are parties or by which they may be bound;
(d)
the
information, exhibits and reports furnished by the Obligors to the Bank in
connection with the negotiation and preparation of this Agreement and each
of
the Security Documents are true and accurate in all material respects and not
misleading, do not omit material facts and all reasonable enquiries have been
made to verify the facts contained therein; there are no other facts the
omission of which would make any fact or statement therein misleading in any
material respect;
(e)
no
Taxes are imposed by withholding or otherwise on any payment to be made by
the
Obligors under this Agreement or are imposed on or by virtue of the execution
or
delivery by the Obligors of this Agreement or any document or instrument to
be
executed or delivered hereunder;
(f)
the
choice by the Obligors of English law to govern this Agreement and the
submission by the Obligors to the non-exclusive jurisdiction of the courts
of
England are valid and binding;
(g)
it is
not necessary to ensure the legality, validity, enforceability or admissibility
in evidence of this Agreement that it or any other instrument be filed,
recorded, registered or enrolled in any court, public office or elsewhere in
England or Greece. This Agreement is in proper form for its enforcement in
the
courts of England or Greece.
7.03
The
representations and warranties in Clause 7 shall be deemed to be repeated by
the
Obligors on and as of the date of the Drawdown Notice, and of each Interest
Payment Date as if made with reference to the facts and circumstances existing
at such date.
8.
UNDERTAKINGS
8.01
Each
of the Obligors undertakes with the Bank that, from the date of this Agreement
and so long as any monies are owing under this Agreement, it will:
(a)
promptly inform the Bank of any occurrence of which it becomes aware which
might
materially adversely affect its ability to perform its obligations under this
Agreement and/or any of the Security Documents and, without limiting the
generality of the foregoing, will inform the Bank of any Event of Default or
any
event which with the giving of notice or lapse of time or both would constitute
an Event of Default forthwith upon becoming aware thereof;
(b)
without prejudice to Clause 7.02 and 9, obtain or cause to be obtained, maintain
in full force and effect and comply in all material respects with the conditions
and restrictions (if any) imposed in connection with, every consent,
authorisation, licence or approval of governmental or public bodies or
authorities and do, or cause to be done, all other acts and things, which may
from time to time be necessary or desirable under applicable law for the
continued due performance of all its obligations under this Agreement and each
of the Security Documents;
(c)
use
the Loan exclusively for the purpose specified in Clause 1.01;
(d)
ensure that its obligations under this Agreement shall, subject to the operation
of Clause 8.02, at all times rank at least pari passu with all its other present
and future unsecured and unsubordinated obligations (including contingent
obligations);
(e)
cause
to be prepared in each financial year, financial statements in a form consistent
with generally accepted accounting principles and practices in Greece
consistently applied;
(f)
send
to the Bank as many copies as the Bank may reasonably require of the annual
balance sheets and income statements and every balance sheet, profit and loss
account, report, notice or like document issued by it to its shareholders within
150 days of the close of its fiscal year;
(g)
provide the Bank with such financial information concerning the Obligors and
related companies and their affairs, commitments and operations, as the Bank
may
from time to time reasonably require;
(h)
duly
and punctually perform each of its obligations under the Security
Documents.
8.02
Each
of the Obligors undertakes with the Bank that, from the date of this Agreement
and so long as any monies are owing under this Agreement, it will not, without
the prior written consent (such consent not to be unreasonably withheld) of
the
Bank permit:
(i)
any
encumbrance other than Permitted Encumbrances by the Obligors to subsist, arise
or be created or extended to secure any present or future Indebtedness of the
Obligors or any other person;
(ii)
any
Indebtedness of the Obligors to be guaranteed or otherwise assured against
financial loss by any person other than the Obligors;
(iii)
the
Indebtedness of the Obligors to be subordinated in priority of payment to any
other present or future Indebtedness of the Obligors;
(iv)
to
conduct any business or activity other than the ownership, chartering, operation
and management of vessels;
(v)
the
Obligors to declare or pay any dividend or make any other distribution of their
assets or profits to any stockholder;
(vi)
to
incur or agree to incur any Indebtedness or material liability (whether by
way
of loan, credit facilities or otherwise) nor make any commitments other than
those occurring in the ordinary course of the trading of the
Vessel;
(vii)
to
issue or agree to issue any guarantee in favour of any persons or legal entities
other than in connection with the ordinary trading and operation of the
Vessel;
(viii)
to
sell, assign, transfer or otherwise dispose of or abandon the
Vessel.
8.03
The
Obligors undertake that none of the documents defining their constitution shall
be altered in any manner whatsoever and will not change their beneficial
ownership and control from that advised to the Bank or the nature, organisation
and conduct of their business as Owners of the Vessel(s) or as manager of the
Vessels, as the case may be and will not change the Manager of the Vessels
or
substantially change the terms and conditions of the management of the Vessels
(including the management fees) without prior consultation with the Bank and
then only if such terms and conditions as the Bank shall approve in writing,
such approval not to be unreasonably withheld.
8.04
The
Obligors will not operate, or permit the operation of the Vessels in any manner
(i) which would violate the laws of the flag of the Vessels, the laws of the
owning company or the laws of the nationality of the officers and crew of the
Vessels or any other applicable jurisdiction, or (ii) which would render the
Loan or the Bank's security in the Vessels, its insurances and earnings illegal
under the laws of any applicable jurisdiction.
8.05
The
Obligors undertake that:
(i)
if at
any time the market value of the Vessels (as determined in accordance with
sub-clause (ii) below) together with the value of any additional security for
the Loan constituted pursuant to the provisions of this Clause 8.05 all as
certified by the Bank (whose certificate in that respect shall be binding upon
the Obligors) such sum as so certified by the Bank being for the purposes of
this Clause 8.05 referred to as "the Security Value" shall be less than one
hundred and twenty five per cent (125%) of the outstanding amount of the loan
(such 125% of outstanding amount of the loan being for the purposes of this
Clause 8.05 referred to as "the Specified Amount") then the Obligors shall
either:
(1)
prepay within sixty days of the date of receipt by the Borrower of the Bank's
said certificate, or on the next Interest Payment Date if the same shall occur
within such sixty day period, such sum in Dollars as is equal to the amount
by
which the Specified Amount exceeds the Security Value, and in the event that
any
such prepayment of part of the Loan shall be made otherwise than on the expiry
of an Interest Period in respect of the Loan, the Borrower shall be obliged
forthwith to pay to the Bank such amount (if any) that shall be determined
by
the Bank to be necessary to compensate the Bank for any loss (including loss
of
profits) incurred by it in liquidating or re-employing fixed deposits from
third
parties acquired to effect or maintain the Loan or any part thereof until the
expiry of the then current Interest Periods in respect of the Loan. Any
prepayment made pursuant to this Clause 8.05(i)(1) shall be applied in reducing
the remaining repayment instalments as provided in Clause 4.01;
(2)
within 21 days of the date of receipt by the Borrower of the Bank's said
certificate constitute to the satisfaction of the Bank such additional security
for the Loan, as shall be acceptable to the Bank having a value for security
purposes (as determined by the Bank in its absolute discretion) at the date
upon
which such additional security shall be constituted which when added to the
Security Value so certified by the Bank shall not be less than the Specified
Amount. Such additional security shall be constituted by:
(a)
Pledged cash deposits in favour of the Bank in an amount equal to such shortfall
with the Bank and in an account and manner to be determined by the Bank,
and/or
(b)
any
other security acceptable to the Bank to be provided in a manner determined
by
the Bank.
(ii)
The
said market value of the Vessels shall be determined for the purposes of
sub-clause (i) above and when the Bank shall require, by two shipbrokers
appointed by the Bank who shall value the Vessels on the basis of a sale between
a willing buyer and a willing seller free of any charter. The average of the
two
valuations of such Shipbrokers shall constitute the market value of the Vessels
for the purposes of sub-clause (i) above and shall be binding upon the parties
hereto.
(iii)
All
reasonable costs in connection with the Bank obtaining any valuation of the
Vessels referred to in sub-clause (ii) above and any valuation either of any
additional security for the purposes of ascertaining the Security Value at
any
time or necessitated by the Borrower electing to constitute additional security
pursuant to sub-clause (i) (2) above (including without prejudice to the
generality of the foregoing costs of the shipbrokers appointed to value the
Vessels) shall be borne by the Borrower.
8.06
The
Corporate Obligors shall establish with the Bank the Earnings Account of the
Vessels. All payments related to the operation of the Vessels shall be made
through this account.
8.07
The
Obligors shall permit any surveyors or other persons appointed by the Bank
to
board the Vessels at all reasonable times for the purpose of inspecting the
condition of the Vessels or for the purpose of satisfying themselves in regard
to proposed or executed repairs recommended by the Vessels' Classification
Society and to afford all proper facilities for such inspection. The Obligors
shall pay the costs and expenses of the Bank and its surveyors for one yearly
inspection, if made.
8.08
The
Obligors undertake that, in respect of the Vessel "YM XINGANG I" from the date
of its delivery to the Borrower and in respect of the Vessel "IRINI" from the
date of this Agreement and as long as any money is due and/or outstanding under
this Agreement or any other Security Documents, the Obligors shall:
(a)
at
all times comply and be responsible for compliance by themselves and the Vessels
and the Manager, with the ISM Code;
(b)
at
all times ensure that:
(i)
the
Vessels have a valid Safety Management Certificate,
(ii)
the
Vessels are subject to a safety management system which complies with the ISM
Code; and
(iii)
the
Manager of the Vessels has a valid Document of Compliance
(c)
promptly notify the Bank of any actual or threatened withdrawal of an applicable
Safety Management Certificate or Document of Compliance;
(d)
promptly notify the Bank of the identity of the person ashore designated for
the
purpose of paragraph 4 of the ISM Code and of any change in the identity of
that
person; and
(e)
promptly upon becoming aware of the same, notify the Bank of the occurrence
of
any accident or major non-conformity requiring action under the ISM
Code.
8.09
(a)
The
Obligors
undertake
that, in respect of the Vessel "YM XINGANG I" from the date of its delivery
to
the Borrower and in respect of the Vessel "IRINI" from the date of this
Agreement and as long as any money is due and/or outstanding under this
Agreement or any other Security Document:
(i)
the
Obligors
and
(to
the best of the
Obligors’
knowledge) their Environmental Affiliates will comply with the provisions of
applicable Environmental Laws, except where non-compliance will not have a
Material Adverse Effect;
(ii)
the
Obligors
and
(to
the best of the
Obligors
’
knowledge) their Environmental Affiliates will obtain all requisite
Environmental Approvals and will comply with such Environmental Approvals,
except where the failure to obtain or comply with any such Environmental
Approvals will not have a Material Adverse
Effect;
(iii)
neither the
Obligors
nor
(to
the best of the
Obligors’
knowledge) any of their Environmental Affiliates will have received notice
of
any Environmental Claim which alleges that the
Obligors
are
not in
compliance with applicable Environmental Laws or Environmental Approvals, where
such non-compliance will have a Material Adverse Effect;
(iv)
there will be no Environmental Claim pending or, to the best of the
Obligors’
knowledge, threatened which will have a Material Adverse Effect;
and
(v)
to
the best of the
Obligors’
knowledge, there will be no Release of Material of Environmental Concern except
where such event will not have a Material Adverse Effect.
(b)
The
Obligors
covenant
with the Bank that, in respect of the Vessel "YM XINGANG I" from the date of
its
delivery to the Borrower and in respect of the Vessel "IRINI" from the date
of
this Agreement and as long as any money is due and/or outstanding under this
Agreement or any other Security Document:
(i)
they
shall not trade within any area if the Obligors cannot or do not comply with
all
Environmental Laws applicable in that area, and that they shall require that
none of their Environmental Affiliates trade within any area if the
Environmental Affiliate cannot or does not comply with all Environmental Laws
applicable in that area which relate to the Vessel or its operation or its
carriage of cargo, except where such non compliance would not have a Material
Adverse Effect;
(ii)
they
shall, upon the request of the Bank, conduct and complete all reasonably
necessary investigations, studies, sampling, audits and testings required in
connection with any known (or threatened) Release of Materials of Environmental
Concern which would have a Material Adverse Effect; and
(iii)
they shall, promptly upon the occurrence of any of the following events, provide
to the Bank a certificate of an officer of the Obligors or of the Obligors’
agents specifying in detail the nature of such event and the proposed response
of the Obligors or Environmental Affiliate concerned:
(A)
the
receipt by the Obligors or any Environmental Affiliate (where the Obligors
have
knowledge of such receipt) of any Environmental Claim which would have a
Material Adverse Effect; or
(B)
any
(or any threatened) Release of Materials of Environmental Concern which would
have a Material Adverse Effect,
and
upon
the written request by the Bank, the Obligors shall submit to the Bank at
reasonable intervals a report updating the status of any occurrence of an
Environmental Claim or a Release of Materials of Environmental Concern, which
would have a Material Adverse Effect.
8.10
The
Borrower undertakes that the family of the Personal Guarantor will maintain
majority shareholding.
8.11
The
Borrower undertakes that the cross default with regard to the Borrower’s other
obligations and/or those of the Corporate Guarantors will be for over U.S.
Dollars one million ($ 1.000.000).
8.12
The
Borrower undertakes to maintain Maximum leverage (long term debt inclusive
of
Curr. Portion divided by total market adjusted assets) at 75% and minimum
“market adjusted” Net Worth of U.S. Dollars fifteen million ($
15.000.000).
9.
CONDITIONS
9.01
The
obligation of the Bank to make the Commitment available shall be subject to
the
condition that the Bank, or its duly authorised representative, shall have
received before the day on which the Loan is intended to be advanced, the
documents and evidence specified in Part 1 of Schedule 2 in form and substance
satisfactory to the Bank.
9.02
The
obligation of the Bank to advance the Loan shall be subject to the condition
that the Bank, or its duly authorised representative, shall have received on
or
prior to the Drawdown Date the documents and evidence specified in Part 2 of
Schedule 2 in form and substance satisfactory to the Bank.
9.03
The
obligation of the Bank to advance the Loan is subject to the further conditions
that at the time of the giving of the Drawdown Notice for, and at the time
of
the advance of the Loan:
(a)
the
representations and warranties set out in Clause 7 are true and correct on
and
as of each such time as if each was made with respect to the facts and
circumstances existing at such time;
(b)
no
event or circumstance which constitutes or which with the giving of notice
or
lapse of time or both would constitute an Event of Default shall have occurred
and be continuing or would result from the advancing of the Loan;
and
(c)
the
Bank shall be satisfied that there is no a material adverse change in the
financial condition and operation of the Borrower and/or the Guarantors or
a
material adverse change of circumstances.
10.
EVENTS
OF DEFAULT
10.01
There shall be an Event of Default if:
(a)
any
of the Obligors fails to pay any sum payable by them under this Agreement and/or
any of the Security Documents when due; or
(b)
any
of the Obligors commits any breach of or omits to observe any of its obligations
or undertakings under this Agreement and/or any of the Security Documents (other
than failure to pay any sum when due) and, in respect of any such breach or
omission which in the opinion of the Bank is capable of remedy, such action
as
the Bank may require shall not have been taken within (14) days of the Bank
notifying the Obligors of such default and of such required action;
or
(c)
any
representation or warranty made or deemed to be made or repeated by or in
respect of the Obligors or any other party (other than the Bank) in or pursuant
to this Agreement and/or any of the Security Documents or in any notice,
certificate or statement referred to in or delivered under this Agreement and/or
any of the Security Documents is or proves to have been incorrect in any
material respect; or
(d)
any
Indebtedness of the Obligors is not paid when due or by reason of breach or
default under the terms of any instrument evidencing or guaranteeing the same
on
the part of the Obligors becomes due (or capable of being declared due) prior
to
the date when it would otherwise have become due or any guarantee or indemnity
given by the Obligors in respect of Indebtedness is not honoured when due and
called upon; or
(e)
any
consent, authorisation, licence or approval of or registration with or
declaration to governmental or public bodies or authorities or courts required
by the Obligors or any other party (other than the Bank) to authorise, or
required by the Obligors or any other party (other than the Bank) in connection
with the execution, delivery, validity or enforceability of this Agreement
and/or any of the Security Documents or the performance by the Obligors or
any
such party of its obligations hereunder or thereunder is modified in a manner
unacceptable to the Bank or is not granted or is revoked or terminated or
expires and is not renewed or otherwise ceases to be in full force and effect;
or
(f)
an
encumbrancer takes possession or a receiver or similar officer is appointed
of
the whole or any part of the assets, rights or revenues of any of the Obligors
or a distress, execution, sequestration or other process is levied or enforced
upon or sued out against any of the assets, rights or revenues of any of the
Obligors and is not discharged within thirty days; or
(g)
any
of the Obligors suspends payment of its debts or is unable to or admits
inability to pay its debts as they fall due or proposes or enters into any
composition or other arrangement for the benefit of its creditors generally
or
proceedings are commenced in relation to the Obligors under any law, regulation
or procedure relating to reconstruction or readjustment of debts;
or
(h)
any
of the Obligors is adjudicated or found bankrupt or insolvent or any order
is
made by any competent court or resolution passed by any Corporate Obligor for
the winding-up or dissolution of such Corporate Obligor or for the appointment
of a liquidator, trustee or conservator of the whole or any part of its assets,
rights or revenues; or
(i)
any
event occurs or proceeding is taken with respect to the Obligors in any
jurisdiction to which they are subject which has an effect equivalent or similar
to any of the events mentioned in Clause 10.01 (f), (g) or (h); or
(j)
any
of the Obligors suspends or ceases or threatens to suspend or ceases to carry
on
its business; or
(k)
all
or a material part of the assets, rights or revenues of any of the Obligors
are
seized, nationalised, expropriated or compulsorily acquired by or under the
authority of any government; or
(1)
there
shall occur, in the reasonable opinion of the Bank, a material adverse change
in
the financial condition of the Obligors by reference to the financial statements
referred to in Clause 7.01 (f); or
(m)
any
other event occurs or circumstances arise which, in the reasonable opinion
of
the Bank, is likely materially and adversely to affect the ability of the
Obligors or any other party (other than the Bank) to perform all or any of
their
obligations under or otherwise to comply with the terms of this Agreement and/or
of the Security Documents.
10.02
The
Bank may, without prejudice to any other rights of the Bank, at any time after
the happening of an Event of Default (so long as the same is continuing) by
notice to the Obligors declare that:
(a)
the
obligation of the Bank to make the Commitment or any part of the Commitment
available shall be terminated, whereupon the Commitment shall be terminated
forthwith; and/or
(b)
the
Loan and all interest and commitment commission accrued and all other sums
payable under this Agreement have become due and payable, whereupon the same
shall immediately or in accordance with such notice, become due and
payable.
11.
INDEMNITIES
AND EXPENSES
11.01
The
Obligors shall indemnify the Bank, without prejudice to any of the Bank's other
rights hereunder, against any loss or expense which the Bank shall certify
as
sustained or incurred by it as a consequence of (i) any default in payment
by
the Obligors of any sum under this Agreement when due, (ii) any Event of
Default, (iii) any prepayment of the Loan or part thereof being made under
Clauses 4.02, 4.03, 12.01, 12.02 or 12.03 otherwise than on an Interest Payment
Date or (iv) the Loan not being made for any reason (including failure to
fulfill any of the conditions precedent set out in Schedule 2 but excluding
any
default by the Bank) after a Drawdown Notice has been given, including, in
any
such case, but not limited to, any loss or expenses sustained or incurred in
maintaining or funding the Commitment or any part thereof or in liquidating
or
re-employing deposits from third parties acquired to effect or maintain the
Loan
or any part thereof.
11.02
No
payment to the Bank under this Agreement pursuant to any judgment or order
of
any court or otherwise shall operate to discharge the obligations of the
Obligors in respect of which it was made unless and until payment in full shall
have been received in the currency in which the relevant sum is payable
hereunder ("the Relevant Currency") and to the extent that the amount of any
such payment shall on actual conversion into the Relevant Currency fall short
of
the amount of the relevant obligation expressed in the Relevant Currency the
Bank shall have a further separate cause of action against the Obligors for
the
recovery of such sum as shall after conversion into the Relevant Currency be
equal to the amount of the shortfall.
11.03
The
Obligors shall pay all stamp, documentary, registration or other like duties
(including any duties payable by the Bank) imposed on or in connection with
this
Agreement and/or any of the Security Documents or the Loan and shall indemnify
the Bank against any liability arising by reason of any delay or omission by
the
Obligors to pay such duties.
11.04
The
obligation of the Obligors to pay any amount pursuant to this Clause 11 shall
constitute a separate and independent obligation of the Obligors from their
other obligations hereunder and shall not be affected by any indulgence granted
by the Bank or by judgment being obtained for any other sums due under this
Agreement and/or any of the Security Documents, and no proof or evidence of
any
actual loss shall be required by the Obligors.
12.
FORCE
MAJEURE, UNLAWFULNESS, INCREASED COSTS,
ALTERNATIVE
INTEREST RATES
12.01
The
Bank shall not be liable for any failure to perform the whole or any part of
this Agreement and/or any of the Security Documents resulting directly or
indirectly from the action or inaction of any governmental or local authority
or
any strike, lock-out, boycott or blockade effected by or upon the Bank or its
employees, or from any act of God or war, whether declared or not.
12.02
If
any law, regulation or regulatory requirement or any judgment, order or
direction of any court, tribunal or authority binding upon the Bank in the
jurisdiction in which it is formed or has its principal office or in which
any
action is required to be performed for the purposes of this Agreement, renders
it unlawful for the Bank to advance, maintain or fund the Loan, the Bank shall
promptly inform the Obligors. If it shall so be unlawful for the Bank to
maintain or fund the Loan the Bank shall give notice to the Obligors requiring
the Obligors to prepay the Loan either (i) forthwith or (ii) on a future
specified date and the Obligors will prepay the Loan in accordance with and
subject to such notice and the provisions of Clause 12.04 and 12.05. Without
prejudice to the obligation of the Obligors to make such prepayment, the
Obligors and the Bank shall negotiate for a period not exceeding 30 days with
a
view to the Bank making available its Commitment and/or maintaining the Loan
in
whole or part in a manner which is not unlawful.
12.03
If
any law, regulation or any directive, request or requirement (whether or not
having the force of law) of any central bank, government, fiscal or other
authority, or any judgment, order or direction of any court, tribunal or
authority binding upon the Bank in the jurisdiction in which it is formed or
has
its principal office or in which any action is required to be performed for
the
purposes of this Agreement taking effect after the date of this Agreement or
if
compliance by the Bank with any direction, request or requirement (whether
or
not having the force of law) of any competent governmental or other authority
shall:
(a)
subject the Bank to Taxes or change the basis of Taxation of the Bank with
respect to any payment under this Agreement (other than Taxes or Taxation on
the
overall net income of the Bank imposed in the jurisdiction in which its
principal office or lending office hereunder is located); or
(b)
impose, modify or deem applicable any reserve requirements (including any type
of liquidity, stock or capital adequacy controls or other banking or monetary
controls or requirements which affect the manner in which the Bank allocates
capital resources to its obligations hereunder) or require the making of any
special deposits against or in respect of any assets or liabilities of, deposits
with or for the account of, or loans by, the Bank; or
(c)
impose on the Bank any other condition with respect to this Agreement or its
obligations hereunder, and, as a result of any of the foregoing, the cost to
the
Bank of making or keeping the Commitment available for advance or maintaining
or
funding the Loan is increased or the amount payable or the effective return
to
the Bank under this Agreement is reduced or the Bank makes a payment or forgoes
a return on or calculated by reference to any amount payable to it under this
Agreement, then and in each such case:
(i)
on
demand, the Obligors shall pay to the Bank the amount which the Bank specifies
(in a certificate setting forth the basis of the computation of such amount,
which certificate, save for manifest error, shall be conclusive and binding
on
the Obligors) to be required to compensate the Bank for such increased cost,
reduction, payment or forgone return; and
(ii)
the
Obligors may, at any time after receipt of such demand and certificate notify
the Bank that they will prepay all (but not part only) of the Loan whereupon
the
Obligors shall prepay the Loan to the Bank in accordance with and subject to
the
provisions of Clause 12.05
Any
demand under Clause 12.03 (i) may be made at any time before or within 12 months
after the end of any Interest Period to which such demand relates whether or
not
the Loan has been repaid.
12.04
(a)
If and whenever, at any time prior to the commencement of any Interest Period
the Bank shall have determined (which determination shall, in the absence of
manifest error, be conclusive) that:
(1)
adequate and fair means do not exist for ascertaining the rate of interest
during such Interest Period pursuant to Clause 3.01; or
(2)
deposits in Dollars are not available to the Bank in the London Interbank
Eurocurrency market in sufficient amounts in the ordinary course of business
for
such Interest Period; or
(3)
by
reason of circumstances affecting the London Interbank Eurocurrency market
generally it is impracticable for the Bank to fund or continue to fund the
Loan
during such Interest Period;
the
Bank
shall forthwith give notice of such determination to the Obligors.
(b)
During the period of 14 days after any notice has been given by the Bank under
Clause 12.04 (a), the Bank shall certify (having consulted with the Obligors)
an
alternative basis (the "Substitute Basis") for the continuance of the Loan.
The
Substitute Basis may (without limitation) include alternative interest periods,
alternative currencies or alternative rates of interest but shall include a
margin above the cost of funds to the Bank or equivalent to the Margin. The
Substitute Basis shall be binding upon the Obligors and shall be retroactive
to
and take effect in accordance with its terms from the date specified in the
notice given by the Bank. During the period when a Substitute Basis is in force
the Obligors and the Bank shall consult not less frequently than once every
30
days with a view to reverting to the normal provisions of this Agreement as
soon
as practicable.
(c)
If
the Obligors determine within 14 days of receipt of such certificate that they
do not wish to continue to borrow the Loan they shall forthwith notify the
Bank
whereupon the Obligors shall forthwith prepay the Loan in accordance with and
subject to the provisions of Clauses 12.04 and 12.05 together with accrued
interest to the date of prepayment, calculated from the date specified in the
notice given by the Bank at a rate per annum equal to the rate certified by
the
Bank to be an interest rate equivalent to the cost to the Bank of funding the
Loan during the period commencing on the date specified in the notice given
by
the Bank and ending on the date of prepayment plus the Margin.
12.05
When the Loan is to be prepaid by the Obligors pursuant to this Clause 12,
the
Obligors shall, at the time of such prepayment, pay to the Bank accrued interest
thereon to the date of actual payment, any additional amount payable under
Clause 12.03 and all other sums payable by the Obligors to the Bank pursuant
to
this Agreement, including, without limitation, any amounts payable under Clause
11.
13.
SET-OFF
SECURITY
13.01
Each Corporate Obligor shall procure that all monies payable to it in respect
of
the Earnings (as that expression is defined in the Earnings Assignment in
respect of the relevant Vessel) of its relevant Vessel shall be paid to the
Earnings Account with the Bank.
13.02
(a)
Upon
the Bank’s request and for so long as any moneys are owing under this Agreement,
the Corporate Obligors hereby jointly and severally undertake to pay to the
Bank
for credit to the Retention Account, at monthly intervals (each such day being
hereinafter called "Monthly Retention Date") such sum (each sum being
hereinafter called "Monthly Retention Amount") as shall be the aggregate
of:
i.
one
third (1/3rd) of the amount of the Repayment Instalment next falling due for
payment pursuant to Clause 4.01;
ii.
the
Applicable Fraction (as hereinafter defined) of the amount of interest falling
due for payment in respect of each part of the Loan at the end of each of the
Interest Periods current at the time of the relevant Monthly Retention Date
and,
for the purpose of this Clause, the expression "Applicable Fraction" in relation
to each Interest Period shall mean a fraction having a numerator of one and
a
denominator equal to the number of Monthly Retention Dates falling within the
relevant Interest Period.
(b)
Unless and until there shall occur an Event of Default (whereupon the provisions
of Clause 13.02(c) shall be applicable) all Monthly Retention Amounts credited
to the Retention Account together with interest from time to time accruing
or at
any time accrued thereon shall be set-off and applied by the Bank (and each
of
the Corporate Obligors hereby irrevocably authorise the Bank so to set-off
and
apply the same and release the Bank to the extent of such set-off and
application) upon each Interest Payment Date in or towards payment of the
Repayment Instalment then falling due and/or (as the case may be) the amount
of
interest then due. Each such set-off application by the Bank shall constitute
a
payment in or towards satisfaction of the Corporate Obligors' corresponding
payment obligations under this Agreement but shall be strictly without prejudice
to the obligations of the Corporate Obligors to make any such payment to the
extent that the aforesaid set-off application by the Bank is insufficient to
meet the same.
(c)
Upon
the occurrence of an Event of Default or at any time thereafter, the Bank shall
be entitled to set-off and apply all sums standing to the credit of the
Retention Account and accrued interest (if any) without notice to any of the
Corporate Obligors in the manner specified in Clause 12.03 (and each of the
Corporate Obligors hereby irrevocably authorises the Bank so to set-off and
apply the same and releases the Bank to the extent of such set-off and
application).
(d)
Any
amount for the time being standing to the credit of the Retention Account shall
bear interest (which shall be credited to the Retention Account) at the rate
normally offered by the Bank for similar accounts (unless otherwise agreed
between the Bank and the Corporate Obligors).
(e)
Each
of the Corporate Obligors hereby undertakes to pledge to the Bank the Retention
Account and agrees not to assign, transfer or suffer any Encumbrance to arise
over the whole or any part of the Retention Account.
(f)
Each
of the Corporate Obligors agrees and confirms that none of the Corporate
Obligors shall be entitled to draw from the Retention Account. (And the Bank
shall have no obligation to pay to any Corporate Obligor any sums from time
to
time standing to the credit of the Retention Account or any interest
thereon).
13.03
All
monies received by the Bank under or pursuant to any of the Security Documents
and expressed to be applicable in accordance with the provisions of this Clause
13.01 shall be applied by the Bank in the following manner:
(a)
first
in or towards payment of all sums other than principal or interest which may
be
owing to the Bank under this Agreement and the Security Documents or any of
them.
(b)
secondly in or towards any arrears of interest owing in respect of the Loan
or
any part thereof.
(c)
thirdly in or towards repayment of the Loan.
(d)
fourthly the surplus (if any) shall be paid to the Obligors or to whomsoever
else may be entitled to receive such surplus.
13.04
The
Obligors hereby authorise the Bank without prejudice to any of the Bank's rights
at law, in equity or otherwise, at any time in the Event of Default and without
notice to the Obligors:
(a)
to
apply any credit balance standing upon any account of the Obligors with any
branch of the Bank and in whatever currency in or towards satisfaction of any
sum due to the Bank under this Agreement and/or any of the Security
Documents;
(b)
in
the name of the Obligors and/or the Bank to do all such acts and execute all
such documents as may be necessary or expedient to effect such application;
and
(c)
to
combine and/or consolidate all or any accounts in the name of the Obligors
with
the Bank.
13.05
The
Obligors hereby covenant and undertake that the Security Documents shall both
at
the date of execution and delivery thereof and so long as any monies are owing
under this Agreement or thereunder be valid and binding obligations of the
respective parties thereto and rights of the Bank enforceable in accordance
with
their respective terms and that they will, at their expense, execute, perfect
and do any and every such further assurance, document, act or thing as in the
reasonable opinion of the Bank may be necessary or desirable for perfecting
the
security contemplated or constituted by the Security Documents.
14.
ASSIGNMENT
AND LENDING OFFICES
14.01
This Agreement shall be binding upon, and enure for the benefit of, the Bank
and
the Obligors and their respective successors.
14.02
The
Obligors may not assign or transfer any of their rights or obligations under
this Agreement.
14.03
The
Bank may assign or transfer all or any part of its rights, benefits or
obligations under this Agreement to any one or more banks or other financial
institutions (each of which is called an "Assignee" for the purposes of this
Clause 14).
Provided
that any assignment or transfer of all or part of the Bank's rights or benefits
under this Agreement shall not cause the Obligors to be required to pay any
additional amounts under the provisions of Clause 6.03 as at the date of such
assignment or transfer except where any such payment had already, or would
already have, become due to the Bank under such provisions as at such
date.
Any
assignment or transfer of all or part of the Bank's rights or benefits under
this Agreement may only be effected with the prior written consent of the
Obligors such consent not to be unreasonably withheld unless the assignee or
the
transferee shall be a subsidiary or the holding company of the Bank or a
subsidiary of such holding company in which case no such consent shall be
required but written notice of such assignment or transfer shall be given to
the
Obligors.
14.04
If
the Bank assigns or transfers its rights, benefits or obligations as provided
in
Clause 14.03 all relevant references in this Agreement to the Bank shall
thereafter be construed as a reference to the Bank and/or its assignee(s) and/or
its transferee(s)to the extent of their respective interests and, in the case
of
an assignment or transfer of all or part of the Bank's obligations, the Obligors
shall thereafter look only to the assignee or transferee in respect of that
proportion of the Bank's obligations hereunder as corresponds to the obligations
assumed by such assignee or transferee.
14.05
The
Bank shall lend initially through its office at Piraeus and subsequently through
any other office of the Bank selected from time to time by it through which
the
Bank wishes to lend for the purposes of this Agreement. If the office through
which the Bank is lending is changed pursuant to this Clause 14.05, the Bank
shall notify the Obligors promptly of such change.
14.06
The
Bank may disclose to a potential assignee, transferee or to any other person
who
may propose entering into contractual relations with the Bank in relation to
this Agreement such information about the Obligors as the Bank shall consider
appropriate, such information to be treated as confidential.
15.
01
Guarantee
In
consideration of the Bank making or continuing the Loan to the Borrower and
for
other sufficient consideration (receipt whereof each Guarantor hereby
acknowledges), each Guarantor hereby irrevocably and
unconditionally:
(a)
guarantees to the Bank, as principal obligor and not merely as surety, and
waiving all rights and objections granted by the Law to each Guarantor, due
and
prompt performance by the Borrower of all its obligations under this Agreement
and the Security Documents and the payment of all sums payable now or in the
future to the Bank by the Borrower thereunder or in connection therewith when
and as the same shall become due, and
(b)
undertakes with the Bank that if and whenever the Borrower shall be in default
in the payment of any sum whatsoever under the Security Documents or in
connection therewith, such Guarantor will on demand pay such sum as if such
Guarantor instead of the Borrower were expressed to be the primary obligor,
together with interest thereon at the rate per annum from time to time payable
by the Borrower on such sum from the date when such sum becomes payable by
such
Guarantor hereunder until payment of such sum in full.
15.02
Continuing
guarantee
This
guarantee is a continuing guarantee and shall extend to the ultimate balance
of
all sums payable by the Borrower under the Security Documents.
Where
any
discharge (whether in respect of the obligations of the Borrower or any security
therefor or otherwise) is made in whole or in part or any arrangement is made
on
the faith of any payment, security or other disposition which is avoided or
must
be repaid on bankruptcy, liquidation or otherwise without limitation, the
liability of the Guarantors under this guarantee shall continue as if there
had
been no such discharge or arrangement. The Bank shall be entitled to concede
or
compromise any claim that any such payment, security or other disposition is
liable to avoidance or repayment.
The
obligations of each Guarantor hereunder shall not be affected by any act,
omission, matter or thing which but for this provision might operate to release
or otherwise exonerate such Guarantor from its obligations hereunder in whole
or
in part, including without limitation and whether or not known to such Guarantor
or the Bank:
(a)
any
time or waiver granted to or composition with the Borrower, another Guarantor
or
any other person.
(b)
the
taking, variation, compromise, renewal or release of or refusal or neglect
to
perfect or enforce any rights, remedies or securities against the Borrower
another Guarantor or any other person.
(c)
any
legal limitation, disability incapacity or other circumstances relating to
the
Borrower, another Guarantor or any other person.
(d)
any
variation or any Security Document or any other document or security so that
references to these conditions in this guarantee shall include each such
variation.
(e)
any
unenforceability, invalidity or frustration of any obligation of the Borrower
or
any other person under the Security Documents or any other document or security,
to the intent that the Guarantors' obligations hereunder shall remain in full
force and this guarantee be construed accordingly as if there were no such
unenforceability, invalidity or frustration.
Each
Guarantor waives any right it may have of first requiring the Bank to proceed
against or enforce any other rights or security of or claim payment from
Borrower or any other person before claiming from a Guarantor
hereunder.
Until
all
amounts which may be or become payable by the Borrower under this Agreement
and
the Security Documents or in connection therewith have been irrevocably paid
in
full, the Guarantors shall not, in any event of default:
(a)
be
subrogated to any rights, security or moneys held, received or receivable by
the
Bank or be entitled to any right of contribution in respect of any payment
made
or moneys received on account of the Guarantors' liability
hereunder.
(b)
be
entitled and shall not claim to rank as creditor against the estate or in the
bankrupcy or liquidation of the Borrower in competition with the
Bank.
(c)
receive, claim or have the benefit of any payment, distribution or security
from
or on account of the Borrower or exercise any right of set-off as against the
Borrower.
The
Guarantors shall forthwith pay to the Bank an amount equal to any such set-off
in fact exercised by it and shall hold in trust for and forthwith pay or
transfer, as the case may be, to the Bank any such payment or distribution
or
benefit of security in fact received by it.
15.07
Confirmation
Each
Guarantor confirms that the giving of this guarantee by such Guarantor is to
the
commercial benefit of such Guarantor in that such Guarantor has close financial
cooperation and mutual assistance with the Borrower.
15.08
Additional
security
This
guarantee shall be in addition to and shall not in any way be prejudiced by
any
other security now or hereafter held by the Bank as security for the obligations
of the Borrower.
15.09
Certificate
A
certificate of the Bank as to any amount owing from the Borrower under the
Security Documents shall be conclusive evidence (save of manifest error) of
such
amount as against the Guarantors.
16.
NOTICES
AND OTHER MATTERS
16.01
Every notice, request, demand or other communication under this Agreement shall
be in writing delivered personally or by registered letter, fax or telex
(confirmed in the case of a telex by registered letter sent within twenty four
hours of its despatch). Every notice, request, demand or communication shall,
subject as otherwise provided in this Agreement, be deemed to have been
received, in the case of a fax or telex at the time of despatch thereof
(provided that if the date of despatch is not a Business Day in the country
of
the addressee it shall be deemed to have been received at the opening of
business on the next such Business Day) and in the case of a letter when
delivered personally or 3 days after it has been put in to the
post.
16.02
Every notice, request, demand or other communication shall be sent:
|
(1)
|
to
the Obligors at:
|
|
|
c/o
Eurobulk Ltd
|
|
|
Aethrion
Center
|
|
|
40,
Ag. Konstantinou Ave.
|
|
|
151
24 Maroussi, Greece
|
|
|
Fax:
(+30) 211 180 4097
|
|
|
Tel.:
|
|
|
|
|
(2)
|
to
the Bank at:
|
|
|
93
Akti Miaouli
|
|
|
185
38 Piraeus, Greece
|
|
|
Attention:
the Manager
|
|
|
Telephone:
(+30) 210 6960 000
|
|
|
Fax:
(+30) 210 4290 506
|
or
such
other address or telex number as is notified by one party to the other party
hereunder.
16.03
Process Agent.
Mr.
Patrick Hawkins of Messrs. Hill Taylor Dickinson, of 2, Defteras Merarchias,
185
35 Piraeus, Greece, is hereby appointed by the Obligors as agent to accept
service (hereinafter "Process Agent") upon whom any judicial process may be
served and any notice, request, demand or other communication under this
Agreement or any of the Security Documents. In the event that the Process Agent
(or any substitute process agent notified to the Bank in accordance with the
foregoing) cannot be found at the address specified above (or, as the case
may
be notified to the Bank), which will be conclusively proved by a deed of a
process server to the effect that the Process Agent was not found to that
address, any process notice, request, demand or other communication to be sent
to any Security Party may be validly effected upon the District Attorney of
the
First Instance Court of Piraeus.
16.04
No
failure or delay on the part of the Bank to exercise any power, right or remedy
under this Agreement and/or any of the Security Documents shall operate as
a
waiver thereof, nor shall any single or partial exercise by the Bank of any
power, right or remedy preclude any other or further exercise thereof or the
exercise of any other power, right or remedy. The remedies provided herein
and
in the Security Documents are cumulative and are not exclusive of any remedies
provided by law.
16.05
All
certificates, instruments and other documents to be delivered under or supplied
in connection with this Agreement shall be in the English language or shall
attach a certified English translation thereof, which translation shall be
the
governing version.
16.06
Any
provision of this Agreement prohibited by or unlawful or unenforceable under
any
applicable law actually applied by any court of competent jurisdiction shall,
to
the extent required by such law, be severed from this Agreement and rendered
ineffective so far as is possible without modifying the remaining provisions
of
this Agreement. Where however the provisions of any such applicable law may
be
waived, they are hereby waived by the parties hereto to the full extent
permitted by such law to the end that this Agreement shall be a valid and
binding agreement enforceable in accordance with its terms.
16.07
Money Laundering
Any
borrowing by the Borrower and the performance of its obligations hereunder
and
under the other Security Documents to which it is a party will be for its own
account and will not involve any breach by it of any law or regulatory measure
relating to money laundering as defined in Article 1 of the Directive
(91/308/EEC) of the Council of the European Communities or any equivalent law
or
regulatory measure in any other jurisdiction.
17.
LAW
AND JURISDICTION
17.01
This Agreement shall be governed by and construed in accordance with the laws
of
England.
17.02
For
the exclusive benefit of the Bank, each of the Obligors hereby irrevocably
submits to the non-exclusive jurisdiction of the High Court of Justice in
London, England. Further, the Obligors agree that any summons, writ or other
legal process issued against them in England shall be served upon Messrs. HILL
TAYLOR DICKINSON, currently located at Irongate House, Duke’s Place, London EC3A
7LP, United Kingdom (tel.: 0044207-2839033, fax: 0044207- 2831144) or their
successors, who are hereby authorised to accept such service which shall be
deemed to be good service on the Obligors.
17.03
The
Obligors further irrevocably agree that the Courts of Piraeus, Greece, shall
have jurisdiction over any proceedings arising hereunder and each Obligor hereby
irrevocably submits to the jurisdiction of such courts for such
purpose.
17.04
Nothing herein shall limit the right of the Bank to take proceedings against
the
Obligors in any other court of competent jurisdiction, whether concurrently
or
not.
17.05
To
the extent that each Obligor or any of its property may in any jurisdiction
enjoy or be entitled to exemption or immunity from any legal process (including
without limitation any relief or execution) each Obligor hereby irrevocably
agrees not to claim or invoke and hereby irrevocably waives such exemption
or
immunity to the full extent permitted by the law of such
jurisdiction.
18.
JOINT
AND SEVERAL LIABILITY
Each
of
the Obligors' obligations under this Agreement are joint and several. No
Obligors' obligations shall in any way be avoided, discharged or released or
otherwise adversely affected if for any reason whatsoever (i) any other Obligor
does not become a party to this Agreement or any Security Document or is at
any
time not effectively bound by the terms of this Agreement or any Security
Document or (ii) this Agreement or any Security Document or the liabilities
of
any other Obligor are at any time in any way or to any extent avoided
invalidated discharged released or otherwise adversely affected. For the purpose
of this Agreement and the Security Documents the Agreement by one Obligor with
the Bank to any matter or thing shall be deemed to be Agreement of all the
Obligors who shall be bound accordingly.
IN
WITNESS
WHEREOF
the
parties hereto have caused this Agreement to be duly executed the day and year
first above written.
Signed
by
for
and
on behalf of
XINGANG
SHIPPING LTD
in
the
presence of:
Signed
by
for
and
on behalf of
DIANA
TRADING LTD
in
the
presence of:
Signed
by
for
and
on behalf of
EUROSEAS
LTD
in
the
presence of:
Signed
by
for
and
on behalf of
HSBC
BANK PLC
in
the
presence of:
SCHEDULE
1
Form
of Drawdown Notice
(referred
to in Clause 2.02)
To
HSBC
BANK PLC
U.S.
$
20.000.000 Floating Rate Loan
Loan
Agreement dated
November
14, 2006
We
refer
to the above Loan Agreement and hereby:
(1)
give
you notice that we wish you to advance of U.S. $ 20.000.000 to us on
and
select a first Interest Period in respect thereof of
months,
the first Interest Period to expire on
.
The
above
amount to be credited to the Account:
(2)
confirm that:
(i)
no
event or circumstance has occurred and is continuing which constitutes or which
with the giving of notice or lapse of time or both would constitute an Event
of
Default under the Loan Agreement.
(ii)
the
representations and warranties contained in Clause 7 of the Loan Agreement
are
true and correct at the date hereof as if made with respect to the facts and
circumstances existing at such date.
(iii)
the
borrowing to be effected by such advance will be within our corporate powers,
has been validly authorized by appropriate corporate action and will not cause
any limit on our borrowings (whether imposed by statute, regulation, agreement
or otherwise) to be exceeded.
(iv)
there has been no material adverse change in our financial
position.
SIGNED
by
for
and
on behalf of
___________________________
XINGANG
SHIPPING LTD
SCHEDULE
2
Documents
and evidence required
as
conditions precedent
Part
1
(a)
copy
of all documents which contain or establish or relate to the constitution of
the
Corporate Obligors including transfer of shares and election of Board of
Directors.
(b)
Resolutions duly passed at meeting(s) of the Board of Directors and Shareholders
of the Corporate Obligors duly convened and held approving the Loan Agreement
and the Security Documents and authorising their signature, delivery and
performance.
(c)
an
opinion of the Law Office of Roger Constantinides special legal advisers in
Greece to the Bank and an opinion of the Obligors' Lawyer.
(d)
there
has been no material adverse change in the financial conditions and/or
operations of the Borrower and/or the Corporate Guarantors.
Part
2
(a)
evidence
that each Vessel:
(i)
is
registered in the name of the relevant Borrower or the Corporate Guarantor
free
of encumbrances other than Permitted Encumbrances
(ii)
is
classed highest with its respective Classification Society, such Classification
Society to be acceptable to the Bank
(iii)
is
insured in accordance with the provisions of the Mortgage and the Assignment
and
all requirements of the Mortgage and the Assignment in respect of such
Insurances have been complied with.
(b)
the
following security Documents duly executed:
(i)
Personal Guarantee duly executed by the Personal Guarantor
(ii)
First Preferred Liberian Mortgage on the Vessel "YM XINGANG I"
(iii)
Deed of Assignment of Insurances, Earnings and any Requisition Compensation
of
the Vessel "YM XINGANG I"
(iv)
Third Preferred Marshall Islands Mortgage on the Vessel "IRINI"
(v)
Deed
of Assignment of Insurances, Earnings and any Requisition Compensation of the
Vessel "IRINI"
(vi)
Specific Assignment of the Vessel’s "YM XINGANG I" time charter to "Yangming
(UK) Ltd" of London, a 100% subsidiary company of "Yangming Marine Transport
Corp., Keelung"
(c)
evidence that each Mortgage has been registered against each
Vessel.