##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 1 5(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 1 5(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 1 5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the transition period from  to  .
 COMMISSION FILE NUMBER 333-124825
 FREESEAS INC.
 (Exact Name of Registrant as Specified in its Charter)
 Republic of the Marshall Islands  (Jurisdiction of incorporation or organization)
 89 Akti Miaouli & 4 Mavrokordatou Street, Piraeus, Greece 18538
 Fax: +30-210-4291010
  Title of each class
    
    Name of each exchange on which registeredShares of common stock, par value $0.001 per share
    
    NASDAQ Global MarketClass W Warrants to purchase shares of common stock
    
    NASDAQ Global MarketClass Z Warrants to purchase shares of common stock
    
    NASDAQ Global Market
 
      o þ
  o þ
  þ o
  Large accelerated filer o   
    Accelerated filer o
    Non-accelerated filer þ
    Smaller reporting company o(Do not check if a smaller reporting company)
  U.S. GAAP þ
    
    IFRS as issued by IASB o
    
    Other o
  o o
  o þ




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##### 



TABLE OF CONTENTS
 PART I
    
    
    1ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    2ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    2ITEM 3. KEY INFORMATION
    
    
    2ITEM 4. INFORMATION ON THE COMPANY
    
    
    21ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    33ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    33ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    48ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    51ITEM 8. FINANCIAL INFORMATION
    
    
    53ITEM 9. THE OFFER AND LISTING
    
    
    53ITEM 10. ADDITIONAL INFORMATION
    
    
    54ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    63ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    64PART II
    
    
    64ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    64ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
    
    
    64ITEM 15. CONTROLS AND PROCEDURES
    
    
    64ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    64ITEM 16B. CODE OF ETHICS
    
    
    65ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    65ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    65ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    65ITEM 16F. CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    
    65ITEM 16G. CORPORATE GOVERNANCE
    
    
    65PART III
    
    
    66ITEM 17. FINANCIAL STATEMENTS
    
    
    66ITEM 18. FINANCIAL STATEMENTS
    
    
    66ITEM 19. EXHIBITS
    
    
    66EX-4.60EX-4.61EX-4.62EX-4.63EX-4.64EX-4.65EX-4.66EX-4.67EX-4.68EX-4.69EX-12.1EX-12.2EX-13.1EX-13.2EX-15.1EX-15.2EX-15.3
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our future operating or financial results;
    
    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;
    
    our ability to pay dividends in the future;
    
    dry bulk shipping industry trends, including charter rates and factors affecting vessel supply and demand;
    
    competition in the seaborne transportation industry;
    
    future, pending or recent acquisitions, business strategy, areas of possible expansion, and expected capital spending
or operating expenses;
    
    increases in costs and expenses, including, but not limited to, crew wages, insurance, provisions, lube oil, bunkers,
repairs, maintenance and general and administrative expenses;
    
    expected compliance with financing agreements and the expected effect of restrictive covenants in such agreements;
    
    our ability to receive in full or partially our insurance claims and accounts receivable;
    
    the overall health and condition of the U.S. and global financial markets, including the value of the U.S. dollar
relative to other currencies;
    
    the remaining useful lives and value of our vessels;
    
    anticipated levels of drybulk vessel newbuilding orders or drybulk vessel scrapping;
    
    changes in costs of other modes of bulk commodity transportation;
    
    availability of crew, number of off-hire days, dry-docking requirements, and insurance costs;
    
    global and regional economic and political conditions;
    
    our ability to leverage to our advantage our managers relationships and reputation in the dry bulk shipping industry;
    
    changes in seaborne and other transportation patterns;
    
    changes in governmental rules and regulations or actions taken by regulatory authorities, including maintenance and
dry-docking standards;
    
    potential liability from future litigation and incidents involving our vessels;
    
    acts of terrorism and other hostilities; and
    
    other factors discussed in the section titled Risk Factors.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 A. Selected Consolidated Financial Data
   2




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Year Ended December 31,2009
    
    2008
    
    2007
    
    2006
    
    2005Statement of Operations
Data:Operating revenues
    
    $
    57,533
    
    
    $
    66,689
    
    
    $
    20,147
    
    
    $
    11,727
    
    
    $
    10,326Income (loss) from operations
    
    
    11, 459
    
    
    
    26,570
    
    
    
    5,761
    
    
    
    (2,281
    )
    
    
    1,205Other expense
    
    
    (4,600
    )
    
    
    (7,378
    )
    
    
    (5,917
    )
    
    
    (1,043
    )
    
    
    (1,053
    )Net income (loss)
    
    
    6,859
    
    
    
    19,192
    
    
    
    (156
    )
    
    
    (3,324
    )
    
    
    152Earnings Per Share Data:Net income (loss) per share:Basic earnings
(loss) per share
    
    $
    0.27
    
    
    $
    0.91
    
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    $
    0.03Diluted earnings
(loss) per share
    
    $
    0.27
    
    
    $
    0.91
    
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    $
    0.03Weighted average number of
shares:Basic weighted average
number of shares
    
    
    25,463,862
    
    
    
    21,006,497
    
    
    
    8,786,287
    
    
    
    6,290,100
    
    
    
    4,574,588Diluted weighted average
number of shares
    
    
    25,463,862
    
    
    
    21,051,963
    
    
    
    8,786,287
    
    
    
    6,290,100
    
    
    
    4,600,444Dividends per share
    
    $
    
    
    
    $
    0.45
    
    
    $
    0.175
    
    
    $
    
    
    
    $
    
 Year Ended December 31,2009
    
    2008
    
    2007
    
    2006
    
    2005Selected Balance Sheet
Data:Cash and cash equivalents
    
    $
    6,341
    
    
    $
    3,378
    
    
    $
    63,394
    
    
    $
    372
    
    
    $
    3,285Restricted cash
    
    
    3,250
    
    
    
    2,595
    
    
    
    350
    
    
    
    
    
    
    
    Fixed assets, net
    
    
    270,701
    
    
    
    275,405
    
    
    
    108,021
    
    
    
    19,369
    
    
    
    23,848Total assets
    
    
    297,321
    
    
    
    307,861
    
    
    
    191,972
    
    
    
    23,086
    
    
    
    29,840Long-term
debt, including current portion
    
    
    137,959
    
    
    
    160,350
    
    
    
    56,300
    
    
    
    7,830
    
    
    
    13,000Total shareholders equity
    
    
    144,452
    
    
    
    120,855
    
    
    
    112,626
    
    
    
    7,007
    
    
    
    9,705
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B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Our business faces certain risks. The risks described below may not be the only risks we face.
Additional risks that we do not yet know of or that we currently think are immaterial may also
impair our business. If any of the events or circumstances described as risks below or elsewhere in
this report actually occurs, our business, results of operations, cash flows or financial condition
could be materially and adversely affected.
 Industry Risk Factors Relating to FreeSeas
 The international drybulk shipping industry is cyclical and volatile and charter rates have
decreased significantly and may further decrease in the future, which may adversely affect our
earnings, vessel values and results of operations.
     While the drybulk carrier charter market has recently strengthened, it remains significantly below
its high in the middle of 2008, which has and may continue to adversely affect our revenues,
earnings and profitability and our ability to comply with our loan covenants.
  Disruptions in world financial markets and the resulting governmental action in the United States
and in other parts of the world could have a further material adverse impact on our results of
operations, financial condition and cash flows .
  4




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While there are certain signs that the global economy is improving, there is still considerable
instability in the world economy, which could initiate a new economic downturn, or introduce
volatility in the global markets. A global economic downturn, or volatility in the global markets,
especially in the Asian region, could reduce drybulk trade and demand, which could reduce charter
rates and have a material adverse effect on our business, financial condition and results of
operations.
   An oversupply of drybulk vessel capacity may lead to reductions in charter rates and profitability.
  Our growth depends on the growth in demand for and the shipping of drybulk cargoes.
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Changes in the economic and political environment in China and policies adopted by the government
to regulate its economy may have a material adverse effect on our business, financial condition and
results of operations.
  The international drybulk shipping industry is highly competitive, and we may not be able to
compete successfully for charters with new entrants or established companies with greater
resources.
  Rising crew costs may adversely affect our profits.
  Charter rates are subject to seasonal fluctuations, which may adversely affect our operating
results.
  The operation of drybulk carriers has certain unique operational risks.
  We are subject to regulation and liability under environmental laws and the failure to comply with
these regulations may subject us to increased liability, may adversely affect our insurance
coverage and may result in a denial of access to, or detention in, certain ports. This could
require significant expenditures and reduce our cash flows and net income.
  6




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Increased inspection procedures and tighter import and export controls could increase costs and
disrupt our business.
    7




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If any of our vessels fail to maintain their class certification and/or fail any annual survey,
intermediate survey, dry-docking or special survey, that vessel would be unable to carry cargo,
thereby reducing our revenues and profitability and violating certain loan covenants of our
third-party indebtedness.
    Our vessels are exposed to operational risks, including terrorism and piracy, that may not be
adequately covered by our insurance.
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Risks involved with operating ocean-going vessels could affect our business and reputation, which
may reduce our revenues.
  
    
    crew strikes and/or boycotts;
    
    marine disaster;
    
    piracy;
    
    environmental accidents;
    
    cargo and property losses or damage; and
    
    business interruptions caused by mechanical failure, human error, war,
terrorism, political action in various countries, labor strikes or
adverse weather conditions.
  The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against
us.
  Maritime claimants could arrest our vessels, which could interrupt our cash flow.
   Governments could requisition our vessels during a period of war or emergency, resulting in loss of
earnings.
  Our vessels may suffer damage and we may face unexpected dry-docking costs, which could affect our
cash flow and financial condition.
  Rising fuel prices may adversely affect our profits.
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Other Risk Factors Relating to FreeSeas
 We intend to continue to charter most of our vessels in the spot market, and as a result, we will
be exposed to the cyclicality and volatility of the spot charter market.
   
    
    demand for and production of drybulk products;
    
    global and regional economic and political conditions including developments in
international trade, fluctuations in industrial and agricultural production and armed conflicts;
    
    the distance drybulk cargo is to be moved by sea;
    
    environmental and other regulatory developments; and
    
    changes in seaborne and other transportation patterns.The factors that influence the supply of vessel capacity include:
    
    the number of newbuilding deliveries;
    
    port and canal congestion;
    
    the scrapping rate of older vessels;
    
    vessel casualties; and
    
    the number of vessels that are out of service, i.e., laid-up, drydocked, awaiting
repairs or otherwise not available for hire.
   When our charters expire, we may not be able to replace such charters promptly or with profitable
charters, which may adversely affect our earnings.
  When our time charters end, we may not be able to replace them promptly or with profitable new time
charters. In addition, any such new charters could be at lower charter rates, reflecting possible
further market rate declines and other market deterioration. In that case, our results of
operations would be materially adversely affected.
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If we do not successfully employ our vessels our revenues, cash flows and profitability, and our
ability to comply with certain of our loan covenants, would be adversely affected.
  We depend upon a few significant customers for a large part of our revenues. The loss of one or
more of these customers could adversely affect our financial performance.
    
    
    the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise;
    
    the customer terminates the charter because we fail to deliver the
vessel within the time specified in the charter, the vessel is
lost or damaged beyond repair, there are serious deficiencies in
the vessel or prolonged periods of off-hire, default under the
charter; or
    
    the customer terminates the charter because the vessel has been
subject to seizure for more than a specified number of days.
 Our charterers may terminate or default on their charters, which could adversely affect our results
of operations and cash flow.
  We may not have adequate insurance to compensate us adequately for damage to, or loss of, our
vessels.
  We may be subject to increased premium payments because we obtain some of our insurance through
protection and indemnity associations.
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Further declines in charter rates and other market deterioration could cause us to incur impairment
charges.
   A decline in the market value of our vessels could lead to a default under our loan agreements and
the loss of our vessels.
  The market values of our vessels have declined and may further decrease, and we may incur losses
when we sell vessels or we may be required to write down their carrying value, which may adversely
affect our earnings.
   Our loan agreements contain covenants that may limit our liquidity and corporate activities,
including our ability to pay dividends. We are currently in compliance with the terms of our loans only because we have received waivers
and/or covenant amendments to our loan agreements waiving our compliance with certain covenants for
certain periods of time. The waivers and/or covenant amendments impose additional operating and
financial restrictions on us and modify the terms of our existing loan agreements. Any extensions
of these waivers, if needed, could contain additional restrictions and might not be granted at all.
    12




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
    
    incur additional indebtedness;
    
    create liens on our assets;
    
    sell capital stock of our subsidiaries;
    
    make investments;
    
    engage in mergers or acquisitions;
    
    pay dividends;
    
    make capital expenditures;
    
    change the management of our vessels or terminate or materially amend
our management agreements; and
    
    sell our vessels.
  Servicing debt may limit funds available for other purposes and inability to service debt may lead
to acceleration of debt and foreclosure on our fleet.
  The aging of our fleet may result in increased operating costs in the future, which could adversely
affect our ability to operate our vessels profitably.
  If we fail to manage our planned growth properly, we may not be able to successfully expand our
market share.
  
    
    locating and acquiring suitable vessels;
    
    placing newbuilding orders and taking delivery of vessels
    
    identifying and consummating acquisitions or joint ventures;
    
    integrating any acquired vessel successfully with our existing operations;
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
    
    enhancing our customer base;
    
    managing our expansion; and
    
    obtaining the required financing.
   Our ability to successfully implement our business plans depends on our ability to obtain
additional financing, which may affect the value of your investment in the Company.
   If we acquire additional dry bulk carriers and those vessels are not delivered on time or are
delivered with significant defects, our earnings and financial condition could suffer.
  We currently rely on Free Bulkers and Safbulk to manage and charter our fleet.
  If Free Bulkers is unable to perform under its vessel management agreements with us, our results of
operations may be adversely affected.
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We, and one of our executive officers, have affiliations with Free Bulkers that could create
conflicts of interest detrimental to us.
  Management and service fees are payable to Free Bulkers, our manager regardless, of our
profitability, which could have a material adverse effect on our business, financial condition and
results of operations.
  Free Bulkers, our manager, is a privately held company, and there is little or no publicly
available information about it. Therefore, an investor could have little advance warning of
problems that affect our manager that could also have a material adverse effect on us.
  Because our seafaring employees are covered by collective bargaining agreements, failure of
industry groups to renew those agreements may disrupt our operations and adversely affect our
earnings.
  Increases in interest rates would reduce funds available to purchase vessels and service debt.
  The derivative contracts we have entered into to hedge our exposure to fluctuations in interest
rates could result in higher than market interest rates and charges against our income.
  The performance of our existing charters and the creditworthiness of our charterers may hinder our
ability to implement our business strategy by making additional debt financing unavailable or
available only at higher than anticipated cost.
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We are a holding company, and we will depend on the ability of our subsidiaries to distribute
funds to us in order to satisfy our financial obligations or to make dividend payments.
  As we expand our business, we will need Free Bulkers, our manager, to upgrade its operational,
accounting and financial systems, and add more staff. If Free Bulkers cannot upgrade these systems
or recruit suitable additional employees, its services to us and, therefore, our performance may
suffer.
  We may be unable to attract and retain key executive officers with experience in the shipping
industry, which may reduce the effectiveness of our management and lower our results of operations.
  Technological innovation could reduce our charter hire income and the value of our vessels.
  Purchasing and operating previously owned, or secondhand, vessels may result in increased operating
costs and vessels off-hire, which could adversely affect our earnings.
   
    
    expenditures for alterations to existing equipment;
    
    the addition of new equipment; or
    
    restrictions on the type of cargo a vessel may transport.
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Our substantial operations outside the United States expose us to political, governmental and
economic instability, which could harm our operations.
  Unless we set aside reserves or are able to borrow funds for vessel replacement, at the end of a
vessels useful life our revenue will decline, which would adversely affect our business, results
of operations and financial condition.
  Our board of directors has determined to suspend the payment of cash dividends as a result of the
prevailing market conditions in the international shipping industry. Until such market conditions
improve, it is not likely that we will reinstate the payment of dividends.
  Because we generate all of our revenues in U.S. dollars but will incur a portion of our expenses in
other currencies, exchange rate fluctuations could have an adverse impact on our results of
operations.
  Investment in derivative instruments such as freight forward agreements could result in losses.
  We may have to pay tax on United States source income, which would reduce our earnings.
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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.
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Risks Related to Our Common Stock
 The market price of our common stock has been and may in the future be subject to significant
fluctuations.
  
    
    quarterly variations in our results of operations;
    
    our lenders willingness to extend our loan covenant waivers, if necessary;
    
    changes in market valuations of similar companies and stock market price and
volume fluctuations generally;
    
    changes in earnings estimates or publication of research reports by analysts;
    
    speculation in the press or investment community about our business or the
shipping industry generally;
    
    strategic actions by us or our competitors such as acquisitions or restructurings;
    
    the thin trading market for our common stock, which makes it somewhat illiquid;
    
    the current ineligibility of our common stock to be the subject of margin loans
because of its low current market price;
    
    regulatory developments;
    
    additions or departures of key personnel;
    
    general market conditions; and
    
    domestic and international economic, market and currency factors unrelated to our
performance.
  If holders of our warrants exercise their warrants to purchase shares of our common stock , our
existing shareholders will experience immediate dilution.
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Issuance of preferred stock may adversely affect the voting power of our existing shareholders and
have the effect of discouraging, delaying or preventing a merger or acquisition, which could
adversely affect the market price of our common stock.
  As long as our stock price remains below $5.00 per share, our existing shareholders will not be
able to use our shares as collateral for margin accounts. Further, if our stock price falls below
$1.00, we may be subject to delisting or be forced to take action to cure this problem.
   Future sales of our stock could cause the market price of our common stock to decline.
  Because the Republic of the Marshall Islands, where we are incorporated, does not have a
well-developed body of corporate law, shareholders may have fewer rights and protections than under
typical United States law, such as Delaware, and shareholders may have difficulty in protecting
their interest with regard to actions taken by our Board of Directors.
  It may not be possible for investors to enforce U.S. judgments against us.
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Anti-takeover provisions in our organizational documents, and under Marshall Islands corporate law,
could make it difficult for our shareholders to replace or remove our current Board of Directors or
have the effect of discouraging, delaying or preventing a merger or acquisition, which could
adversely affect the market price of our common stock.
  
    
    authorizing our Board of Directors to issue blank check preferred stock
without shareholder approval;
    
    providing for a classified Board of Directors with staggered, three year terms;
    
    prohibiting cumulative voting in the election of directors;
    
    authorizing the removal of directors only for cause and only upon the affirmative vote of the
holders of a two-thirds majority of the outstanding shares of our common shares, voting as a
single class, entitled to vote for the directors;
    
    limiting the persons who may call special meetings of shareholders;
    
    establishing advance notice requirements for election to our Board of Directors or proposing
matters that can be acted on by shareholders at shareholder meetings; and
    
    limiting our ability to enter into business combination transactions with certain shareholders.
  
 ITEM 4. INFORMATION ON THE COMPANY
 Our Organization and Corporate Structure
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Free Neptune
    Capital Expenditures and Divestitures
 Free
Fighter Free Fighter
 Free Hero Free Jupiter Free Goddess
 Free Knight Free Impala Free Lady Free Maverick
 Free Neptune M/V Free Neptune
 Our Fleet
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Vessel Name
    
    Type
    
    Built
    
    Dwt
    
    EmploymentM/V Free Destiny
    
    Handysize
    
    
    1982
    
    
    
    25,240
    
    
    45-55 day time charter
trip at $10,750 per day
through June 2010M/V Free Envoy
    
    Handysize
    
    
    1984
    
    
    
    26,318
    
    
    30 day time charter trip
at $15,000 per day
through June 2010M/V Free Goddess
    
    Handysize
    
    
    1995
    
    
    
    22,051
    
    
    Passing scheduled dry-dockM/V Free Hero
    
    Handysize
    
    
    1995
    
    
    
    24,318
    
    
    75-100 day time charter
at $18,000 per day
through August/September
2010M/V Free Impala
    
    Handysize
    
    
    1997
    
    
    
    24,111
    
    
    30 day time charter trip
at $17,600 per day
through July 2010M/V Free Jupiter
    
    Handymax
    
    
    2002
    
    
    
    47,777
    
    
    Balance of time charter
at $25,216 per day
through February 2011 and
any day in excess at
$28,000 per day through
May 2011M/V Free Knight
    
    Handysize
    
    
    1998
    
    
    
    24,111
    
    
    2-4 months time charter
at $16,900 per day
through
August/October 2010M/V Free Lady
    
    Handymax
    
    
    2003
    
    
    
    50,246
    
    
    60 day time charter trip
at $24,000 per day
through August 2010M/V Free Maverick
    
    Handysize
    
    
    1998
    
    
    
    23,994
    
    
    50 day time charter trip
at $14,750 per day
through July 2010M/V Free Neptune
    
    Handysize
    
    
    1996
    
    
    
    30,838
    
    
    3.5  6 months time
charter at $23,500 per
day for the first 150
days & $24,500 for the
remaining period if any,
through
September/December 2010
 Competitive Strengths
  
    
    Experienced management team.We have benefited from the expertise of our executive
officers and of our managers personnel which consists of seasoned shipping professionals
with long-standing experience in the industry. Our management team has significant
experience in commercial, technical, operational and financial areas of our business and
has developed relationships with leading charterers, ship brokers and financial
institutions. Since 1997, Ion G. Varouxakis, our chairman, chief executive officer and
president, has served in various management roles for shipping companies in the dry bulk
sector. We believe that our management team and our Manager have strengthened our company
over the last years.
    
    Solid balance sheet.We have strengthened our balance sheet through (1) the
reduction of our net debt to $128.4 million on December 31, 2009 which reflects a net debt
to capitalization ratio of 45% and (2) the issuing of common stock resulting in net
proceeds of $16.2 million which were mainly utilized in the acquisition of M/V Free
Neptuneat the price of $11.0 million. Furthermore, we raised additional bank financing of
$6.0 million and restructured our loan agreements while maintaining a relatively low cost
of funding (a weighted average interest rate for the year ended December 31, 2009 of
approximately 2.51% per annum).
    
    Strong customer relationships. Through Free Bulkers, our ship management company, we
have established and maintained customer relationships with leading charterers around the
world, such as major international industrial companies, commodity producers and traders
and a number of chartering brokerage houses. We believe that the established customer base
and the reputation of our fleet manager enable us to secure favorable employment for our
vessels with well-known charterers. In addition, in light of current economic conditions,
we have worked to maintain our relationships with our customers by negotiating
strategically appropriate modifications to charters when determined to be in our best
long-term interests.
    
    Cost effective and efficient operations. Through Free Bulkers, we believe that we have
established a strong track record in the technical management of drybulk carriers, which
has enabled us to maintain cost-efficient operations. We actively monitor and control
vessel operating expenses while maintaining the high quality of our fleet through regular
inspections, balanced maintenance programs,
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##### Table of Contents



high standards of operation, and retaining and training qualified crew members. Our strong
operating performance is also highlighted by a utilization rate of 97% during the year ended
December 31, 2009, which may be considered high given the type and the average age of our
fleet.
 Business Strategy
  
    
    Optimize Our Employment Mix.We intend to continue to deploy a large part of
our fleet primarily in the spot market depending on our view of the direction of the
markets and other tactical or strategic considerations. The spot market is volatile and
holds the potential for significant increases or decreases in shipping rates over time.
Additionally, we may pursue time charter coverage to provide cash flow to cover part of our
fleets fixed costs and lock our vessels into medium to long-term charters depending on our
views of the market. We believe this employment strategy will allow us to participate in
the potential upside of the spot market during periods of rising charter rates while
provide us with more predictable operating cashflows and sufficient downside protection.
    
    Handysize and Handymax focus.Our fleet of drybulk carriers will consist
primarily of Handysize and Handymax vessels, although we may consider acquiring larger
vessels if we identify appropriate opportunities. Based on the relatively low number of
drybulk newbuildings on order in the Handysize and Handymax categories, we believe there
will be continued high demand for such vessels. Handysize and Handymax vessels are
typically shallow-drafted and equipped with onboard cranes. This makes them more versatile
and able to access a wider range of loading and discharging ports than larger ships, which
are unable to service many ports due to their size or the local port infrastructure. Many
countries in the Asia Pacific region, including China, as well as countries in Africa and
South America, have shallow ports. We believe that our vessels, and any Handysize or
Handymax vessels that we acquire, should enable us to transport a wider variety of cargoes
and to pursue a greater number of chartering opportunities than if we owned larger drybulk
vessels. Handysize and Handymax vessels have also historically achieved greater charter
rate stability than larger drybulk vessels.
    
    Renew and expand our fleet.We intend to continue growing our fleet in a
disciplined manner through acquisition of well-maintained, secondhand vessels, preferably
not more than 15 years old. We perform a technical review and financial analysis of each
potential acquisition and only purchase vessels as market conditions and opportunities
dictate and warrant. We are focused on purchasing such vessels, because we believe that
secondhand vessels, when operated in a cost-efficient manner, should provide significant
value given the prevailing charter rate environment. The recent upheaval in the credit
markets has led a number of shipowners who had ordered newbuildings at the peak of the
market to seek to sell them prior to taking delivery because they lacked necessary
financing or their credit situation had deteriorated. We may seek to take advantage of such
opportunities, selectively, as they arise. Additionally, we may consider newbuilding
opportunities. Furthermore, as part of our fleet renewal, we will continue to sell vessels
in order to renew our fleet when we believe it is in the best interests of FreeSeas and our
shareholders.
    
    Use of flexible financial strategy.We have used and intend to continue to use
a conservative combination of bank debt, cash flow and proceeds from equity offerings to
fund our vessel acquisitions. We assess the level of debt we will incur in light of our
ability to repay that debt based on the level of cash flow we expect to generate pursuant
to our chartering strategy and our operating cost structure. We believe that the
maintenance of a reasonable ratio of net debt to total capitalization will be important to
our ability to borrow funds to make additional vessel acquisitions, and we have determined
to suspend cash dividends to our shareholders while we focus on reducing our debt and
expand our fleet.
    
    Leveraging our strategic relationships.Free Bulkers and their affiliates have
extensive experience and relationships in the ship brokerage and financial industries as
well as directly with industrial charterers and commodity traders. We use these
relationships to identify chartering and acquisition opportunities and make available to us
sources of additional financing, make contacts, and gain market intelligence.
 Vessel Employment
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##### Table of Contents



Customers
  Management of Operations and Fleet
   
    
    General Administration.Free Bulkers provides us with general
administrative, office and support services necessary for our
operations and our fleet, including technical and clerical personnel,
communication, accounting, and data processing services.
    
    Financial Accounting Services.Free Bulkers maintains our books,
records and accounts and provides all services as are necessary in
connection with our compliance with the rules promulgated by the
Securities and Exchange Commission (the SEC) and the NASDAQ Stock
Market relating to the preparation and maintenance of the our
accounting records in accordance with United States generally accepted
accounting principles (U.S. GAAP), preparing and filing financial
statements with the SEC and NASDAQ in accordance with applicable
financial reporting requirements, and developing, implementing,
monitoring and assessing our internal controls;
    
    Sale and Purchase of Vessels.Free Bulkers advises our board of
directors when opportunities arise to purchase, including through
newbuildings, or to sell any vessels. All decisions to purchase or
sell vessels require the approval of our board of directors. Any
purchases or sales of vessels approved by our board of directors are
arranged and completed by Free Bulkers. This involves the appointment
of superintendents to inspect and take delivery of vessels and to
monitor compliance with the terms and conditions of the purchase
contracts.
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##### Table of Contents



Crewing and Employees
  Loans for Vessels
     Free Destiny Free Envoy
   26




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##### Table of Contents



Loan Covenants
  a)
    
    Credit Suisse loan agreement: (i) the Company should maintain minimum cash
balances of $375 for each of the Companys vessels covered by the loan agreement; (ii)
the aggregate fair market value of the financed vessels must not be less than 135% of
the outstanding loan balance.b)
    
    FBB loan agreement: (i) the Company should maintain an average corporate
liquidity of at least $3,000; (ii) the leverage ratio of the corporate guarantor should
not at any time exceed 55%; (iii) the ratio of EBITDA to net interest expense must not
be less than 3; (iv) the fair market value of the financed vessels should be at least
(i) 100% of the outstanding loan balance up to June 30, 2010, (ii) 115% for the period
July 1, 2010 to June 30, 2011 and (iii) 125% thereafter.c)
    
    HBU loan agreement: (i) the interest coverage ratio should not be less than 3.75;
(ii) the debt service coverage ratio should not be less than 1.00; (iii) the gearing
ratio should not exceed 2.5; (iv) the outstanding loan balance should not be more than a
ratio of the fair market value of the financed vessels as follows: (a) 70% from
September 15, 2009 until and including June 30, 2010, (b) 100% from July 1, 2010 until
and including June 30, 2011, (c) 110% from July 1, 2011 until and including June 30,
2012, (d) 120% from July 1, 2012 until and including December 30, 2012 and (e) 125%
from December 31, 2012 onwards.
   Credit Suisse loan agreement
   FBB loan agreement
   HBU loan agreement
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##### Table of Contents



Competition
   Seasonality
  Environmental and Other Regulations
    International Maritime Organization
   28




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##### Table of Contents



The U.S. Oil Pollution Act of 1990
       The United States Clean Water Act
  29




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Other Environmental Initiatives
     Greenhouse Gas Regulation
  30




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##### Table of Contents



Vessel Security Regulation
  
    
    on-board installation of automatic information systems, 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.
  Inspection by Classification Societies
       
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##### Table of Contents



Next Intermediate
    
    Next Special SurveyVessel
    
    Dry-docking
    
    Dry-dockingFree Destiny
    
    Third quarter 2010
    
    Third quarter 2012Free Envoy
    
    Second quarter 2011
    
    Third quarter 2013Free Goddess
    
    Second quarter 2013
    
    Second quarter 2010Free Hero
    
    Fourth quarter 2013
    
    Fourth quarter 2010Free Impala
    
    Second quarter 2014
    
    Second quarter 2012Free Jupiter
    
    Second quarter 2010
    
    Second quarter 2012Free Knight
    
    Second quarter 2010
    
    Second quarter 2013Free Lady
    
    Second quarter 2011
    
    Second quarter 2013Free Maverick
    
    First quarter 2011
    
    First quarter 2013Free Neptune
    
    Fourth quarter 2014
    
    Third quarter 2011
 Risk of Loss and Liability Insurance
 General
  Hull and Machinery Insurance
   Protection and Indemnity Insurance
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##### Table of Contents



Procedures in the Event of an Insured Event
  Legal Proceedings
  Exchange Controls
  
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
   Overview
    Recent Developments
 New FBB Secured Term Loan
 Free Impala
 th
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##### Table of Contents



Free Impala Free Neptune
  HBU Amendment to Loan Agreement
 Free Destiny Free Envoy
 Credit Suisse Supplemental Agreement
 M/V Goddess, M/V Free
Hero M/V Free Jupiter
 Credit Suisse Value to Loan Financial Covenant Amendment
  Loan Covenant Waivers
  Employment and Charter Rates
  Free Destiny Free Envoy Free Goddess Free Hero Free
Knight Free Maverick Free Impala Free Neptune
  Free Jupiter
 Free Goddess
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##### Table of Contents



Acquisition of Vessels
 Free Neptune
     
    
    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, if applicable;
    
    Arrange for a new crew for the vessel;
    
    Replace all hired equipment on board the vessel, 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, if we
change the flag state;
    
    Implement a new planned maintenance program for the vessel; and
    
    Ensure that the new technical manager obtains new certificates of
compliance with the safety and vessel security regulations of the flag
state.
  
    
    Employment and operation of our drybulk carriers; and
    
    Management of the financial, general and administrative elements
involved in the ownership and operation of our drybulk vessels.
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##### Table of Contents




    
    Vessel maintenance and repair;
    
    Planning and undergoing dry-docking, special surveys and other major repairs;
    
    Organizing and undergoing regular classification society surveys;
    
    Crew selection and training;
    
    Vessel spares and stores supply;
    
    Vessel bunkering;
    
    Contingency response planning;
    
    Onboard safety procedures auditing;
    
    Accounting;
    
    Vessel insurance arrangements;
    
    Vessel chartering;
    
    Vessel hire management; and
    
    Vessel performance monitoring.
 Critical Accounting Policies
  Impairment of Long-lived Assets:
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##### Table of Contents



Vessels Depreciation:
 Accounting for Special Survey and Dry-docking Costs:
 Accounting for Revenue and Expenses:
   Important Measures for Analyzing Results of Operations
  
    
    Ownership days.We define ownership days as the total number of calendar days in
a period during which each vessel in the fleet was owned by us. Ownership days are an
indicator of the size of the fleet over a period and affect both the amount of revenues
earned and the amount of expenses that we incur during that period.
    
    Available days.We define available days as the number of ownership days less
the aggregate number of days that our vessels are off-hire due to major repairs,
dry-dockings or special or intermediate surveys. The shipping industry uses available
days to measure the number of ownership days in a period during which vessels are
actually capable of generating revenues.
    
    Operating days.We define operating days as the number of available days in a
period less the aggregate number of days that vessels are off-hire due to any reason,
including unforeseen circumstances. The shipping industry uses operating days to measure
the aggregate number of days in a period during which vessels actually generate
revenues.
    
    Fleet utilization.We calculate fleet utilization by dividing the number of
operating days during a period by the number of ownership 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 any reason including scheduled repairs, vessel upgrades, dry-dockings
or special or intermediate surveys.
    
    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.
    
    Time charter.A time charter is a contract for the use of a vessel for a
specific period of time during which the charterer pays substantially all of the voyage
expenses, including port costs, canal charges and bunkers expenses. The vessel owner
pays the
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##### Table of Contents



vessel operating expenses, which include crew wages, insurance, technical
maintenance costs, spares, stores and supplies and commissions on gross voyage revenues.
Time charter rates are usually fixed during the term of the charter. Prevailing time
charter rates do fluctuate on a seasonal and year-to-year basis and may be substantially
higher or lower from a prior time charter agreement when the subject vessel is seeking
to renew the time charter agreement with the existing charterer or enter into a new time
charter agreement with another charterer. Fluctuations in time charter rates are
influenced by changes in spot charter rates.
    
    Voyage charter.A voyage charter is an agreement to charter the vessel for an
agreed per-ton amount of freight from specified loading port(s) to specified discharge
port(s). In contrast to a time charter, the vessel owner is required to pay
substantially all of the voyage expenses, including port costs, canal charges and
bunkers expenses, in addition to the vessel operating expenses.
    
    Time charter equivalent (TCE).The time charter equivalent, or TCE, equals
voyage revenues minus voyage expenses divided by the number of operating days during the
relevant time period, including the trip to the loading port. TCE is a non-GAAP,
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 a specific period.
    
    Adjusted EBITDA.We consider Adjusted EBITDA to represent net earnings/ (loss)
before interest, taxes, depreciation and amortization, amortization of
deferred revenue, back log asset, gain/(loss) on derivative instruments and stock based
compensation expense. Under the laws of the Marshall Islands, we are not subject to tax
on international shipping income. However, we are subject to registration and tonnage
taxes, which have been included in vessel operating expenses. Accordingly, no adjustment
for taxes has been made for purposes of calculating Adjusted EBITDA. Adjusted EBITDA is
a non-GAAP measure and does not represent and should not be considered as an alternative
to net income or cash flow from operations, as determined by 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 an alternative measure of
our liquidity performance and indebtedness.
 Revenues
  
    
    The nature and duration of our charters;
    
    The amount of time that we spent repositioning its vessels;
    
    The amount of time that our vessels spent in dry-dock undergoing repairs;
    
    Maintenance and upgrade work;
    
    The age, condition and specifications of our vessels;
    
    The levels of supply and demand in the drybulk carrier transportation market; and
    
    Other factors affecting charter rates for drybulk carriers under voyage charters.
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##### Table of Contents



Vessel Operating Expenses
  Seasonality
  Principal Factors Affecting Our Business
  
    
    Number of vessels owned and operated;
    
    Charter market rates and periods of charter hire;
    
    Vessel operating expenses and direct voyage costs, which are incurred
in both U.S. dollars and other currencies, primarily Euros;
    
    Management fees and service fees
    
    Depreciation and amortization expenses, which are a function of vessel
cost, any significant post-acquisition improvements, estimated useful
lives, estimated residual scrap values, and fluctuations in the
carrying value of our vessels, as well as, drydocking and special
survey costs;
    
    Financing costs related to indebtedness associated with the vessels; and
    
    Fluctuations in foreign exchange rates.
 Performance Indicators
 (All amounts in tables in thousands of U.S. dollars except for fleet data and average daily results)
  For the year ended December 31,2009
    
    2008
    
    2007Adjusted EBITDA (1)
    
    $
    30,337
    
    
    $
    41,296
    
    
    $
    9,500Fleet Data:Average number of vessels (2)
    
    
    9.35
    
    
    
    7.36
    
    
    
    3.3Ownership days (3)
    
    
    3,414
    
    
    
    2,688
    
    
    
    1,206Available days (4)
    
    
    3,373
    
    
    
    2,605
    
    
    
    1,177Operating days (5)
    
    
    3,294
    
    
    
    2,441
    
    
    
    1,048Fleet utilization (6)
    
    
    96.5
    %
    
    
    90.8
    %
    
    
    86.9
    %Average Daily Results:Average TCE rate (7)
    
    $
    16,105
    
    
    $
    25,719
    
    
    $
    17,925Vessel operating expenses (8)
    
    
    5,218
    
    
    
    6,084
    
    
    
    4,976
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For the year ended December 31,2009
    
    2008
    
    2007Management fees (9)
    
    
    549
    
    
    
    727
    
    
    
    601General and administrative expenses(10)
    
    
    1,262
    
    
    
    1,451
    
    
    
    2,249Total vessel operating expenses (11)
    
    
    5,767
    
    
    
    6,811
    
    
    
    5,577
 
 (1)
    
    Adjusted EBITDA reconciliation to net income:Adjusted EBITDA represents net earnings before interest, depreciation and amortization,
amortization of deferred revenue, back log asset, gain /(loss) on derivative instruments
and stock based compensation expense. 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 an alternative measure of our liquidity, performance and indebtedness. The
following is a reconciliation of adjusted EBITDA to net income: For the year ended December 31,2009
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    6,859
    
    
    $
    19,192
    
    
    $
    (156
    )Depreciation and amortization
    
    
    17,748
    
    
    
    14,137
    
    
    
    5,192Amortization of deferred revenue
    
    
    (81
    )
    
    
    (368
    )
    
    
    (1,516
    )Back log asset
    
    
    907
    
    
    
    899
    
    
    
    Stock-based compensation expense
    
    
    494
    
    
    
    107
    
    
    
    96Gain/(loss) on derivative instruments
    
    
    111
    
    
    
    1,456
    
    
    
    749Interest and finance cost, net of interest income
    
    
    4,299
    
    
    
    5,873
    
    
    
    5,135Adjusted EBITDA
    
    $
    30,337
    
    
    $
    41,296
    
    
    $
    9,500
 
 (2)
    
    Average number of vessels is the number of vessels that
constituted our fleet for the relevant period, as measured by the
sum of the number of days each vessel was a part of our fleet
during the period divided by the number of calendar days in the
period.(3)
    
    Ownership days are the total number of days in a period during which
the vessels in our fleet have been owned by us. Ownership 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 a
period.(4)
    
    Available days are the number of ownership days less the
aggregate number of days that our vessels are off-hire due to
major repairs, dry dockings or special or intermediate surveys.
The shipping industry uses available days to measure the number
of ownership days in a period during which vessels should be
capable of generating revenues.(5)
    
    Operating days are the number of available days less the
aggregate number of days that our vessels are off-hire due to any
reason, including unforeseen circumstances. The shipping industry
uses operating days to measure the aggregate number of days in a
period during which vessels actually generate revenues.(6)
    
    We calculate fleet utilization by dividing the number of our fleets
operating days during a period by the number of ownership days during
the 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 scheduled repairs, vessel upgrades, or dry dockings or
other surveys.(7)
    
    Time charter equivalent, or TCE, is a measure of the average daily revenue performance of a vessel on a per voyage
basis. Our method of calculating TCE is consistent with industry standards and is determined by dividing operating
revenues (net of voyage expenses and commissions) by operating days for the relevant time period. Voyage expenses
primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid
by the charterer under a time charter contract. TCE is a standard shipping industry performance measure used
primarily to compare period-to-period changes in a shipping companys performance despite changes in the mix of
charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed
between the periods: 40




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##### Table of Contents



For the year ended December 31,2009
    
    
    2008
    
    
    2007Operating revenues
    
    $
    57,533
    
    
    $
    66,689
    
    
    $
    20,147Voyage expenses and commissions
    
    
    (4,483
    )
    
    
    (3,910
    )
    
    
    (1,362
    )Net operating revenues
    
    
    53,050
    
    
    
    62,779
    
    
    
    18,785Operating days
    
    
    3,294
    
    
    
    2,441
    
    
    
    1,048Time charter equivalent daily rate
    
    $
    16,105
    
    
    $
    25,719
    
    
    $
    17,925
 
 (8)
    
    Average daily vessel operating expenses, which includes crew costs, provisions, deck and engine stores, lubricating oil,
insurance, maintenance and repairs, is calculated by dividing vessel operating expenses by ownership days for the relevant time
periods For the year ended December 31,2009
    
    
    2008
    
    
    2007Vessel operating expenses
    
    $
    17,813
    
    
    $
    16,354
    
    
    $
    6,001Ownership days
    
    
    3,414
    
    
    
    2,688
    
    
    
    1,206Daily vessel operating expense
    
    $
    5,218
    
    
    $
    6,084
    
    
    $
    4,976
 
 (9)
    
    Daily management fees are calculated by dividing total management
fees paid on ships owned by ownership days for the relevant time
period.(10)
    
    Average daily general and administrative expenses are calculated by
dividing general and administrative expenses by operating days for
the relevant period.(11)
    
    Total vessel operating expenses, or TVOE, is a measurement of our
total expenses associated with operating our vessels. TVOE is the sum
of daily vessel operating expense and daily management fees. Daily
TVOE is calculated by dividing TVOE by fleet ownership days for the
relevant time period. Results of Operations
 Year Ended December 31, 2009 as Compared to Year Ended December 31, 2008
 REVENUES
 VOYAGE EXPENSES AND COMMISSIONS
  OPERATING EXPENSES
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DEPRECIATION AND AMORTIZATION
   MANAGEMENT FEES
 GENERAL AND ADMINISTRATIVE EXPENSES
   Free Impala
 42




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##### Table of Contents



Free Impala
     NET INCOME
 Year Ended December 31, 2008 as Compared to Year Ended December 31, 2007
 REVENUES Free Jupiters
 OPERATING EXPENSES Free Envoy Free Impala
 VOYAGE EXPENSES
 DEPRECIATION AND AMORTIZATION Free Envoy Free Hero Free
Goddess
 MANAGEMENT FEES
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##### Table of Contents



COMMISSIONS AND GENERAL AND ADMINISTRATIVE EXPENSES
 INTEREST AND FINANCE COSTS
 LOSS ON DERIVATIVE INSTRUMENTS 
 NET INCOME/(LOSS)
 Liquidity and Capital Resources
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##### Table of Contents



Free Destiny Free Envoy Free Destiny Free Envoy
   Cash Flows
 Year Ended December 31, 2009 as Compared to Year Ended December 31, 2008
 OPERATING ACTIVITIES
 INVESTING ACTIVITIES Free Neptune M/V Free Neptune Free Knight Free Impala Free Lady Free Maverick
 FINANCING ACTIVITIES Free Impala . Free Neptune Free Knight Free Maverick Free Impala, Free Lady,
 Year Ended December 31, 2008 as Compared to Year Ended December 31, 2007
 Free Knight Free Impala Free Lady
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##### Table of Contents



Free Maverick
 OPERATING ACTIVITIES
 INVESTING ACTIVITIES Free Knight, Free
Impala, Free Lady Free Maverick
 FINANCING ACTIVITIES
 Long-Term Debt
     Free Destiny Free Envoy
  Free Goddess Free Hero Free
Jupiter
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##### Table of Contents



Loan Covenants
  a)
    
    Credit Suisse loan agreement: i) the Company should maintain minimum cash
balances of $375 for each of the Companys vessels covered by the loan agreement; ii)
the aggregate fair market value of the financed vessels must not be less than 135% of
the outstanding loan balance.b)
    
    FBB loan agreement: i) the Company should maintain an average corporate liquidity
of at least $3,000 ii) the leverage ratio of the corporate guarantor should not at any
time exceed 55%; iii) the ratio of EBITDA to net interest expense must not be less than
3; iv) the fair market value of the financed vessels should be at least (i) 100% of the
outstanding loan balance up to June 30, 2010, (ii) 115% for the period July 1, 2010 to
June 30, 2011 and (iii) 125% thereafter.c)
    
    HBU loan agreement: i) the interest coverage ratio should not be less than 3.75;
ii) the debt service coverage ratio should not be less than 1.00; iii) the gearing ratio
should not exceed 2.5; iv) the outstanding loan balance should not be more than a ratio
of the fair market value of the financed vessels as follows: (a) 70% from September 15,
2009 until and including June 30, 2010, (b) 100% from July 1, 2010 until and including
June 30, 2011, (c) 110% from July 1, 2011 until and including June 30, 2012, (d) 120%
from July 1, 2012 until and including December 30, 2012 and (e) 125% from December 31,
2012 onwards.
   Credit Suisse loan agreement
   FBB loan agreement
   HBU loan agreement
   47




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##### Table of Contents



(In thousands of U.S. Dollars)
 31/12/2009
    
    Total
    
    <1 yr
    
    1-3 yrs
    
    3-5 yrs
    
    > 5 yrsHBU
    
    
    41.959
    
    
    
    5,400
    
    
    
    27,809
    
    
    
    6,000
    
    
    
    2,750Credit Suisse
    
    
    68,250
    
    
    
    8,000
    
    
    
    16,000
    
    
    
    16,000
    
    
    
    28,250FBB
    
    
    27,750
    
    
    
    2,000
    
    
    
    6,700
    
    
    
    6,700
    
    
    
    12,350Total
    
    
    137,959
    
    
    
    15,400
    
    
    
    50,509
    
    
    
    28,700
    
    
    
    43,350
 Off-Balance Sheet Arrangements
  Summary of Contractual Obligations
  (In thousands of U.S. Dollars)
 Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(U.S. dollars in thousands)Long-term debt
    
    $
    137,959
    
    
    $
    15,400
    
    
    $
    50,509
    
    
    $
    28,700
    
    
    $
    43,350Interest on variable-rate debt
    
    
    18,462
    
    
    
    4,777
    
    
    
    8,043
    
    
    
    4,087
    
    
    
    1,555Services fees to Free Bulkers
    
    
    12,443
    
    
    
    1,422
    
    
    
    2,844
    
    
    
    2,844
    
    
    
    5,333Management fees to Free
Bulkers
    
    
    26,891
    
    
    
    1,942
    
    
    
    3,399
    
    
    
    3,168
    
    
    
    18,382Total obligations
    
    $
    195,755
    
    
    $
    23,541
    
    
    $
    64,795
    
    
    $
    38,799
    
    
    $
    68,620
   
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  DirectorName
    
    Age
    
    Position
    
    ClassIon G. Varouxakis
    
    
    39
    
    
    Chairman of the Board of Directors,
Chief Executive Officer and President
    
    CAlexandros Mylonas
    
    
    36
    
    
    Chief Financial Officer
    
    Kostas Koutsoubelis
    
    
    55
    
    
    Director, Vice President and Treasurer
    
    AMaria Badekas
    
    
    38
    
    
    Secretary
    
    Didier Salomon
    
    
    64
    
    
    Director
    
    AFocko H. Nauta
    
    
    52
    
    
    Director
    
    BDimitrios Panagiotopoulos
    
    
    49
    
    
    Director
    
    CKeith Bloomfield
    
    
    38
    
    
    Director
    
    B
 48




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##### Table of Contents



Ion G. Varouxakis
 Alexandros Mylonas
 Kostas Koutsoubelis
 Maria Badekas
 Didier Salomon
 Focko H. Nauta
 Dimitrios Panagiotopoulos
 Keith Bloomfield
 49




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##### Table of Contents



Compensation
  Board Practices
   Board Committees
  Audit Committee
   Compensation Committee
  Nominating Committee
  Director Independence
  50




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##### Table of Contents



Code of Conduct and Ethics
  Employees
  Amended and Restated 2005 Stock Incentive Plan
     Employment Agreement
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
   51




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##### Table of Contents



Percentage ofNumber of Shares of
    
    Shares of CommonCommon Stock
    
    Stock BeneficiallyName
    
    Beneficially Owned
    
    Owned(1)Ion G. Varouxakis
    
    
    2,731,364
    (2)
    
    
    8.40
    %Directors and executive
officers as a group (eight
persons)
    
    
    3,086,364
    (3)
    
    
    9.50
    %FS Holdings Limited
    
    
    3,240,593
    (4)
    
    
    9.97
    %Newland Capital Management LLC
    
    
    1,603,768
    (5)
    
    
    5.1
    %
 
 1.
    
    For purposes of computing the percentage of outstanding shares of common stock held by
each person named above, any restricted shares granted to the named person are deemed to be
outstanding for that person and for purposes of computing the percentage ownership of any
other person. Any shares that the named person has the right to acquire within 60 days
under warrants or options are deemed to be outstanding for that person and for any total
including that person, but are not deemed to be outstanding when computing the percentage
ownership of any other person. As beneficial owners of shares of common stock, the persons
listed in the table do not have different voting rights than any other holder of common
stock.2.
    
    Reflects 2,514,697 shares and 16,667 shares underlying warrants owned by The Midas
Touch S.A., a Marshall Islands corporation wholly owned by Mr. Varouxakis and 200,000
restricted shares held directly by Mr. Varouxakis and that will vest on December 31, 2010.
Does not include 40,000 shares owned by V Estates S.A., which is controlled by his father,
30,600 shares owned by his mother, or 106,000 shares owned by Edifice Holdings S.A., which
is controlled by his brother, Alexis Varouxakis, or individually held by Alexis Varouxakis.3.
    
    Includes an aggregate of 755,000 restricted shares granted to the directors and
executive officers, of which 305,000 vested immediately, 200,000 will vest on December 31,
2010 and 250,000 will vest on December 31, 2013.4.
    
    Reflects 2,808,782 shares owned by FS Holdings Limited, a Marshall Islands corporation,
and 431,811 shares owned by Benbay Limited, a Republic of Cyprus corporation, each of which
is controlled by the Restis Family.5.
    
    As reported in a Schedule 13D filed with the SEC on May 4, 2010. B. Related Party Transactions
 Free Bulkers S.A .
     52




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First Business Bank (FBB)
  Other Related Parties
  C.
Interest of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 A.
    
    Consolidated Statements and Other Financial InformationPlease see Item 18. Financial Statements for a list of the financial statements filed as part of this annual report.B.
    
    Significant ChangesNot applicable.
 
 ITEM 9. THE OFFER AND LISTING
 A.
    
    Offer and Listing DetailsNot applicable.B.
    
    Plan of DistributionNot applicable.
 53




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##### Table of Contents



C.
    
    Markets
   Common Stock
    
    Class W Warrants
    
    Class Z WarrantsFor the Years Ended:
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowDecember 31, 2007
    
    $
    10.24
    
    
    $
    2.76
    
    
    $
    5.14
    
    
    $
    0.25
    
    
    $
    5.20
    
    
    $
    0.48December 31, 2008
    
    
    7.97
    
    
    
    0.90
    
    
    
    3.05
    
    
    
    0.02
    
    
    
    3.35
    
    
    
    0.05December 31, 2009
    
    
    3.49
    
    
    
    1.17
    
    
    
    0.34
    
    
    
    0.03
    
    
    
    0.65
    
    
    
    0.08
 Common Stock
    
    Class W Warrants
    
    Class Z WarrantsFor the Quarters Ended:
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowMarch 31, 2008
    
    
    6.09
    
    
    
    4.49
    
    
    
    2.45
    
    
    
    1.06
    
    
    
    2.45
    
    
    
    1.40June 30, 2008
    
    
    7.97
    
    
    
    5.90
    
    
    
    3.05
    
    
    
    1.85
    
    
    
    3.35
    
    
    
    1.85September 30, 2008
    
    
    7.07
    
    
    
    3.95
    
    
    
    2.24
    
    
    
    0.97
    
    
    
    2.65
    
    
    
    1.25December 31, 2008
    
    
    4.01
    
    
    
    0.90
    
    
    
    1.15
    
    
    
    0.02
    
    
    
    1.46
    
    
    
    0.05March 31, 2009
    
    
    1.88
    
    
    
    0.54
    
    
    
    0.24
    
    
    
    0.04
    
    
    
    0.33
    
    
    
    0.08June 30, 2009
    
    
    3.49
    
    
    
    1.17
    
    
    
    0.34
    
    
    
    0.07
    
    
    
    0.65
    
    
    
    0.10September 30, 2009
    
    
    2.43
    
    
    
    1.57
    
    
    
    0.31
    
    
    
    0.04
    
    
    
    0.55
    
    
    
    0.16December 31, 2009
    
    
    1.75
    
    
    
    1.27
    
    
    
    0.25
    
    
    
    0.03
    
    
    
    0.32
    
    
    
    0.16March 31, 2010
    
    
    1.34
    
    
    
    1.28
    
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.20
    
    
    
    0.20
 Common Stock
    
    Class W Warrants
    
    Class Z WarrantsFor the Months Ended:
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowDecember 31, 2009
    
    
    1.49
    
    
    
    1.34
    
    
    
    0.15
    
    
    
    0.03
    
    
    
    0.25
    
    
    
    0.16January 31, 2010
    
    
    1.59
    
    
    
    1.28
    
    
    
    0.15
    
    
    
    0.09
    
    
    
    0.25
    
    
    
    0.17February 28, 2010
    
    
    1.41
    
    
    
    1.11
    
    
    
    0.11
    
    
    
    0.06
    
    
    
    0.24
    
    
    
    0.17March 31, 2010
    
    
    1.30
    
    
    
    1.25
    
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.20
    
    
    
    0.19April 30, 2010
    
    
    1.44
    
    
    
    1.38
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.15
    
    
    
    0.14May 31, 2010
    
    
    1.37
    
    
    
    1.29
    
    
    
    0.11
    
    
    
    0.10
    
    
    
    0.15
    
    
    
    0.14
 D.
    
    Selling ShareholdersNot applicable.E.
    
    DilutionNot applicable.F.
    
    Expenses of the IssueNot applicable.
 
 ITEM 10. ADDITIONAL INFORMATION
 A.
    
    Share CapitalNot applicable.
 54




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##### Table of Contents



B.
    
    Memorandum and Articles of Incorporation
   Shareholder Rights Plan
 General
    Detachment of the Rights
  
 
    
 
   Flip-In Event
  55




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##### Table of Contents



Flip-Over Event
  
 
  Antidilution
  Redemption of Rights
  Exchange of Rights
  
 
 Amendment of Terms of Rights
  
 
 
  56




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##### Table of Contents



C. Material Contracts
  D. Exchange Controls and Other Limitations Affecting Security Holders
  E. Taxation
  Taxation of Operating Income: In General
     Exemption of Operating Income from United States Federal Income Taxation
  
    
    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 shareholders, that are persons (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
 57




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##### Table of Contents




    
    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.
           Taxation in Absence of Exemption
  58




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##### Table of Contents




    
    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.
  United States Taxation of Gain on Sale of Vessels
  United States Federal Income Taxation of U.S. Holders
   Distributions.
  59




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##### Table of Contents



Sale, Exchange or Other Disposition of Common Stock.
 Passive Foreign Investment Company Status and Significant Tax Consequences.
 
    
    at least 75% of our gross income for such taxable year consists of
passive income (e.g., dividends, interest, capital gains and rents
derived other than in the active conduct of a rental business); or
    
    at least 50% of the average value of the assets held by the
corporation during such taxable year produce, or are held for the
production of, passive income.
   Tidewater Inc. v. U.S. th Tidewater
  Taxation of U.S. Holders Making a Timely QEF Election.
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Taxation of U.S. Holders Making a Mark-to-Market Election.
 Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election.
 
    
    the excess distribution or gain would be allocated ratably over the
Non-Electing Holders aggregate holding period for the common stock;
    
    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
    
    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.
  United States Federal Income Taxation of Non-U.S. Holders
  Dividends on Common Stock.
  Sale, Exchange or Other Disposition of Common Stock.
 61




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##### Table of Contents




    
    the gain is effectively connected with the Non-U.S. Holders conduct
of a trade or business in the United States. If the Non-U.S. Holder is
entitled to the benefits of an income tax treaty with respect to that
gain, that gain is taxable only if it is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United
States; or
    
    the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more during the taxable year of disposition and
other conditions are met.
  Backup Withholding and Information Reporting
  
    
    fail to provide an accurate taxpayer identification number;
    
    are notified by the Internal Revenue Service that you have failed to report
all interest or dividends required to be shown on your federal income tax returns; or
    
    in certain circumstances, fail to comply with applicable certification
requirements.
     F.
    
    Dividends and Paying AgentsNot applicable.G.
    
    Statement by ExpertsNot applicable.H.
    
    Documents on Display
 http://www.sec.gov
  62




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##### Table of Contents



I.
    
    Subsidiary InformationNot applicable.
 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Fluctuation
    (In thousands of U.S. Dollars)
 Vessel Name
    
    2010
    
    2011
    
    2012
    
    2013
    
    2014Free Hero/Free Goddess/Free Jupiter
    
    $
    347
    
    
    $
    297
    
    
    $
    247
    
    
    $
    195
    
    
    $
    145Free Impala/Free Neptune
    
    $
    273
    
    
    $
    248
    
    
    $
    214
    
    
    $
    179
    
    
    $
    145Free Knight
    
    $
    167
    
    
    $
    137
    
    
    $
    107
    
    
    $
    76
    
    
    $
    46Free Lady
    
    $
    298
    
    
    $
    268
    
    
    $
    238
    
    
    $
    207
    
    
    $
    177Free Maverick
    
    $
    232
    
    
    $
    208
    
    
    $
    156
    
    
    
    
    
    
    
    
  Interest Rate Risk
   Foreign Exchange Rate Risk
  Credit risk
  63




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##### Table of Contents



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
 Managements Annual Report on Internal Control over Financial Reporting
  Attestation Report of the Registered Public Accounting Firm
 Changes in Internal Control over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  64




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##### Table of Contents



ITEM 16B. CODE OF ETHICS
 www.freeseas.gr
 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2008
    
    2009Audit fees (1)
    
    $
    749
    
    
    $
    704Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    Other fees
    
    
    
    
    
    
    Total
    
    
    749
    
    
    
    704
 
 (1)
    
    Audit fees represent fees for professional services related to the audit of our
financial statements for the years ended December 31, 2009 and 2008, which include for 2009
fees for professional services related to the filing of our prospectus supplement to the
Companys previously filed shelf registration statement which we used for July 2009
follow-on offering and fees that relate to the Companys filing on October 22, 2009 with
the U.S. Securities and Exchange Commission of the registration statement on Form F-1 for
the purpose of undertaking possible capital raises in the future and for 2008 fees for
professional services related to the filing with the U.S. Securities and Exchange
Commission of the registration statement on Form F-3  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  
 ITEM 16F. CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
     
 ITEM 16G. CORPORATE GOVERNANCE
  65




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##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 ExhibitNo.:
    
    Exhibit Description
    
    Where Filed1.1
    
    Amended and Restated Articles of Incorporation of
FreeSeas Inc. (formerly known as Adventure Holdings
S.A.)
    
    Exhibit 3.1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on May 11, 2005 and
incorporated herein
by reference1.2
    
    Amended and Restated By-Laws of FreeSeas Inc.
(formerly known as Adventure Holdings S.A.)
    
    Exhibit 3.2 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on May 11, 2005 and
incorporated herein
by reference1.3
    
    First Amendment to the Amended and Restated Bylaws
of FreeSeas Inc.
    
    Exhibit 3.3 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference1.4
    
    First Amendment to the Amended and Restated
Articles of Incorporation of FreeSeas Inc.
    
    Exhibit 99.3 to
Registrants Form
6-K filed on
October 22, 2009
and incorporated
herein by reference2.1
    
    Specimen Common Stock Certificate
    
    Exhibit 4.1 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference2.2
    
    Form of Class A Warrant
    
    Exhibit 4.2 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference2.3
    
    Warrant dated as of May 8, 2007 issued to FS
Holdings Limited
    
    Exhibit 4.3 to
Registrants
Registration
Statement on Form
F-3 filed on August
3, 2007 and
incorporated herein
by reference2.4
    
    Warrant dated as of June 22, 2007 issued to FS
Holdings Limited
    
    Exhibit 4.4 to
Registrants
Registration
Statement on Form
F-3 filed on August
3, 2007 and
incorporated herein
by reference2.5
    
    Form of Class W Warrant
    
    Exhibit 4.3 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference2.6
    
    Form of Class Z Warrant
    
    Exhibit 4.4 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference
 66




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where Filed2.7
    
    Warrant Clarification Agreement dated May 10, 2007
between FreeSeas Inc. and American Stock Transfer &
Trust Company
    
    Exhibit 4.27 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference2.8
    
    Form of Management Stock Option Agreement
    
    Exhibit 4.5 to
Amendment No. 2 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on October 11, 2005
and incorporated
herein by reference2.9
    
    Shareholder Rights Agreement entered into effective
as of January 14, 2009 by and between FreeSeas Inc.
and American Stock Transfer & Trust Company, LLC
    
    Exhibit 2.9 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.1
    
    Employment Agreement between Ion G. Varouxakis and
FreeSeas Inc.
    
    Exhibit 10.2 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference4.2
    
    Amended and Restated 2005 Stock Incentive Plan
    
    Annex A to
Registrants Form
6-K filed on
December 1, 2006
and incorporated
herein by reference4.3
    
    Mortgage dated September 29, 2004 by Adventure
Three S.A. in favor of Hollandsche Bank  Unie N.V.
    
    Exhibit 10.8 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference4.4
    
    Deed of Assignment dated September 29, 2004 between
Adventure Three S.A. and Hollandsche Bank  Unie
N.V.
    
    Exhibit 10.9 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference4.5
    
    Standard Ship Management Agreement dated July 1,
2004 between Free Bulkers S.A. and Adventure Two
S.A.
    
    Exhibit 10.11 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on May 11, 2005 and
incorporated herein
by reference4.6
    
    Amendment No. 1 of July 22, 2005 to the Shipman
98 Agreement dated July 1, 2004 between Adventure
Two S.A. and Free Bulkers S.A.
    
    Exhibit 10.20 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference4.7
    
    Standard Ship Management Agreement dated July 1,
2004 between Free Bulkers S.A. and Adventure Three
S.A.
    
    Exhibit 10.12 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on May 11, 2005 and
incorporated herein
by reference4.8
    
    Amendment No. 1 of July 22, 2005 to the Shipman
98 Agreement dated July 1, 2004 between Adventure
Three S.A. and Free Bulkers S.A.
    
    Exhibit 10.13 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on July 22, 2005
and incorporated
herein by reference4.9
    
    Credit Agreement dated September 23, 2005 between
Adventure Two S.A. and Hollandsche Bank  Unie N.V.
    
    Exhibit 10.22 to
Amendment No. 2 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on October 11, 2005
and incorporated
herein by reference4.10
    
    Credit Agreement dated September 23, 2005 between
Adventure Three S.A. and Hollandsche Bank  Unie
N.V.
    
    Exhibit 10.23 to
Amendment No. 2 of
Registrants
Registration
Statement on Form
F-1 (File No.
333-124825) filed
on October 11, 2005
and incorporated
herein by reference4.11
    
    Mortgage dated October 24, 2005 by Adventure Two
S.A. in favor of Hollandsche Bank  Unie N.V.
    
    Exhibit 4.22 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference4.12
    
    Deed of Assignment dated October 24, 2005 between
Adventure Two S.A. and Hollandsche Bank  Unie N.V.
    
    Exhibit 4.23 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference
 67




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where Filed4.13
    
    Amendment dated January 23, 2006 to Credit
Agreement dated September 23, 2005 between
Adventure Two S.A. and Hollandsche Bank  Unie N.V.
    
    Exhibit 4.27 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference4.14
    
    Amendment dated January 23, 2006 to Credit
Agreement dated September 23, 2005 between
Adventure Three S.A. and Hollandsche Bank  Unie
N.V.
    
    Exhibit 4.28 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2005
and incorporated
herein by reference4.15
    
    Loan Agreement dated September 2006 between
Adventure Four S.A. and First Business Bank S.A.
    
    Exhibit 4.24 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference4.16
    
    Deed of Assignment dated September 2006 between
Adventure Four S.A. in favor of First Business Bank
S.A.
    
    Exhibit 4.25 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference4.17
    
    Mortgage dated September 2006 by Adventure Four
S.A. in favor of First Business Bank S.A.
    
    Exhibit 4.26 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2006
and incorporated
herein by reference4.18
    
    Credit Agreement dated May 7, 2007 among Adventure
Two S.A., Adventure Three S.A. and Hollandsche Bank
 Unie N.V.
    
    Exhibit 10.32 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-145203) filed
on October 15, 2007
and incorporated
herein by reference4.19
    
    Credit Suisse Offer Letter dated August 28, 2007
    
    Exhibit 10.33 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-145203) filed
on October 15, 2007
and incorporated
herein by reference4.20
    
    Memorandum of Agreement dated May 1, 2007 for the
M/V Free Hero
    
    Exhibit 10.34 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-145203) filed
on October 15, 2007
and incorporated
herein by reference4.21
    
    Memorandum of Agreement dated May 1, 2007 for the
M/V Free Jupiter
    
    Exhibit 10.35 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-145203) filed
on October 15, 2007
and incorporated
herein by reference4.22
    
    Memorandum of Agreement dated August 29, 2007 for
the M/V Free Goddess
    
    Exhibit 10.36 to
Amendment No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-145203) filed
on October 15, 2007
and incorporated
herein by reference4.23
    
    Memorandum of Agreement dated January 22, 2008 for
the M/V Free Impala
    
    Exhibit 4.35 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.24
    
    Memorandum of Agreement dated January 22, 2008 for
the M/V Free Knight
    
    Exhibit 4.36 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.25
    
    Memorandum of Agreement dated March 10, 2008 for
M/V Free Lady
    
    Exhibit 4.38 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.26
    
    Facility Agreement dated December 24, 2007 between
FreeSeas Inc. and Credit Suisse
    
    Exhibit 4.39 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference
 68




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where Filed4.27
    
    First Preferred Mortgage on the M/V Free Heroin
favor of Credit Suisse
    
    Exhibit 4.40 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.28
    
    First Preferred Mortgage on the M/V Free Goddessin
favor of Credit Suisse
    
    Exhibit 4.41 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.29
    
    First Preferred Mortgage on the M/V Free Jupiterin
favor of Credit Suisse
    
    Exhibit 4.42 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.30
    
    Loan Agreement dated March 31, 2008 between
Adventure Nine and First Business Bank
    
    Exhibit 4.43 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.31
    
    First Preferred Mortgage on the M/V Free Impalain
favor of First Business Bank
    
    Exhibit 4.44 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.32
    
    Deed of Covenants dated April 2, 2008 between
Adventure Nine and First Business Bank
    
    Exhibit 4.45 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.33
    
    Credit Agreement dated January 21, 2008 among
Adventure Two, Adventure Three and Adventure Seven
with Hollandsche Bank  Unie N.V.
    
    Exhibit 4.46 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.34
    
    Short Term Loan Agreement among Adventure Two,
Adventure Three, Adventure Seven and Hollandsche
BankUnie N.V.
    
    Exhibit 4.47 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.35
    
    Rollover Loan Agreement dated April 3, 2008 among
Adventure Two, Adventure Three, Adventure Seven and
Hollandsche Bank  Unie N.V.
    
    Exhibit 4.48 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.36
    
    First Preferred Mortgage dated March 19, 2008 on
the M/V Free Knightin favor of Hollandsche Bank 
Unie N.V.
    
    Exhibit 4.49 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.37
    
    Deed of Covenants between Adventure Seven and
Hollandsche Bank  Unie N.V
    
    Exhibit 4.45 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.38
    
    Second Preferred Mortgage on the M/V Free Destiny
in favor of Hollandsche Bank  Unie N.V.
    
    Exhibit 4.51 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.39
    
    Second Preferred Mortgage on the M/V Free Envoyin
favor of Hollandsche Bank  Unie N.V.
    
    Exhibit 4.52 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2007
and incorporated
herein by reference4.40
    
    Memorandum of Agreement dated August 7, 2008 for
the M/V Free Maverick
    
    Exhibit 4.53 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.41
    
    First Preferred Mortgage on the M/V Free Maverick
in favor of Hollandsche Bank  Unie N.V
    
    Exhibit 4.54 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.42
    
    Amended Credit Agreement dated August 12, 2008
among Adventure Two, Adventure Three, Adventure
Seven and Adventure Eleven with Hollandsche Bank 
Unie N.V.
    
    Exhibit 4.55 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.43
    
    Supplemental Agreement dated June 26, 2008 to the
    
    Exhibit 4.56 to
 69




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where FiledFacility Agreement dated December 24, 2007 between
FreeSeas Inc. and Credit Suisse
    
    Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.44
    
    Supplemental Agreement dated March 23, 2009 to the
Facility Agreement dated December 24, 2007 between
FreeSeas Inc. and Credit Suisse
    
    Exhibit 4.57 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.45
    
    First Supplemental Agreement dated March 17, 2009
to Loan Agreement dated March 31, 2008 with First
Business Bank S.A.
    
    Exhibit 4.58 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.46
    
    Deed of Amendment dated March 17, 2009 of the Deed
of Covenant dated April 2, 2008 between Adventure
Nine S.A. and First Business Bank S.A.
    
    Exhibit 4.59 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.47
    
    Term Sheet dated March 2009 between HBU and
FreeSeas Inc.
    
    Exhibit 4.60 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.48
    
    Amended and Restated Services Agreement dated
October 1, 2008 between FreeSeas Inc. and Free
Bulkers S.A.
    
    Exhibit 4.61 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 20084.49
    
    Memorandum of Agreement dated August 5, 2009 for
the M/V Free Neptune
    
    Exhibit 99.4 to
Registrants 6-K
filed on October
22, 20094.50
    
    Amendment and Restatement Agreement dated September
1, 2009 among Adventure Two, Adventure Three,
Adventure Seven, Adventure Eleven, FreeSeas Inc.
and New HBU II N.V.
    
    Exhibit 99.5 to
Registrants 6-K
filed on October
22, 20094.51
    
    Facility Agreement dated September 1, 2009 among
Adventure Two, Adventure Three, Adventure Seven,
Adventure Eleven, FreeSeas Inc. and New HBU II N.V.
    
    Exhibit 99.6 to
Registrants 6-K
filed on October
22, 20094.52
    
    Deed of Release of Whole dated September 15, 2009
by New HBU II N.V. in favour of Adventure Two,
Adventure Three, Adventure Seven and Adventure
Eleven
    
    Exhibit 99.7 to
Registrants 6-K
filed on October
22, 20094.53
    
    Deed of Assignment dated September 15, 2009 between
Adventure Two and New HBU II N.V.
    
    Exhibit 99.8 to
Registrants 6-K
filed on October
22, 20094.54
    
    Deed of Assignment dated September 15, 2009 between
Adventure Three and New HBU II N.V.
    
    Exhibit 99.9 to
Registrants 6-K
filed on October
22, 20094.55
    
    Deed of Assignment dated September 15, 2009 between
Adventure Seven and New HBU II N.V.
    
    Exhibit 99.10 to
Registrants 6-K
filed on October
22, 20094.56
    
    Deed of Assignment dated September 15, 2009 between
Adventure Eleven and New HBU II N.V.
    
    Exhibit 99.11 to
Registrants 6-K
filed on October
22, 20094.57
    
    Addendum No. 1 dated September 17, 2009 to the
Amended and Restated Services Agreement dated
October 1, 2008 by and between FreeSeas Inc. and
Free Bulkers S.A.
    
    Exhibit 99.12 to
Registrants 6-K
filed on October
22, 20094.58
    
    Form of Standard Ship Management Agreement by and
between Free Bulkers S.A. and each of Adventure
Five S.A. through Adventure Twelve S.A.
    
    Exhibit 99.13 to
Registrants 6-K
filed on October
22, 20094.59
    
    Form of Addendum to BIMCO Management Agreement by
and between Free Bulkers S.A. and each of Adventure
Two S.A. through Adventure Twelve S.A.
    
    Exhibit 99.14 to
Registrants 6-K
filed on October
22, 20094.60
    
    Loan Agreement dated December 15, 2009 among
    
    Filed herewith
 70




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where FiledAdventure Nine, Adventure Twelve and First Business
Bank4.61
    
    First Priority Mortgage on the M/V Free Impalain
favor of First Business Bank
    
    Filed herewith4.62
    
    First Preferred Mortgage on the M/V Free Neptunein
favor of First Business Bank
    
    Filed herewith4.63
    
    Deed of Covenants dated December 16, 2009 between
Adventure Nine and First Business Bank
    
    Filed herewith4.64
    
    Amendment and Restatement Agreement dated December
1, 2009 among Adventure Two, Adventure Three,
Adventure Seven, Adventure Eleven, FreeSeas Inc.
and New HBU II N.V.
    
    Filed herewith4.65
    
    Restated Facility Agreement dated December 1, 2009
among Adventure Two, Adventure Three, Adventure
Seven, Adventure Eleven, FreeSeas Inc. and New HBU
II N.V.
    
    Filed herewith4.66
    
    Third Supplemental Agreement dated November 27,
2009 to the Facility Agreement dated December 24,
2007 between FreeSeas Inc. and Credit Suisse
    
    Filed herewith4.67
    
    First Preferred Liberian Ship Mortgage on the M/V
Free Goddess in favor of Credit Suisse AG
    
    Filed herewith4.68
    
    First Preferred Liberian Ship Mortgage on the M/V
Free Hero in favor of Credit Suisse AG
    
    Filed herewith4.69
    
    First Preferred Liberian Ship Mortgage on the M/V
Free Jupiter in favor of Credit Suisse AG
    
    Filed herewith8.1
    
    Subsidiaries of the Registrant
    
    Filed as Exhibit
21.1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-162630) filed
on October 22, 2009
and incorporated
herein by reference12.1
    
    Section 302 Certification of Chief Executive Officer
    
    Filed herewith12.2
    
    Section 302 Certification of Chief Financial Officer
    
    Filed herewith13.1
    
    Section 906 Certification of Chief Executive Officer
    
    Filed herewith13.2
    
    Section 906 Certification of Chief Financial Officer
    
    Filed herewith15.1
    
    Letter Regarding Change in Certifying Accountant
    
    Filed herewith15.2
    
    Consent of PricewaterhouseCoopers, S.A.
    
    Filed herewith15.3
    
    Consent of Ernst & Young (Hellas) Certified
Auditors Accountants S.A.
    
    Filed herewith
 71




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##### Table of Contents



SIGNATURES
  FREESEAS INC.By:
Name:
    
    /s/ Alexandros Mylonas

Alexandros MylonasTitle:
    
    Chief Financial Officer
  72




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageNumberReport of Independent Registered Public Accounting Firm
    
    F-2Report of Independent Registered Public Accounting Firm
    
    F-3Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    F-4Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
    
    F-5Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2009,
2008 and 2007
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
    
    F-7  F-8Notes to Consolidated Financial Statements
    
    F-9
 F - 1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      
 F - 2




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
   
 F - 3




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED BALANCE SHEETS
  December 31,
    
    
    December 31,Notes
    
    
    2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    
    
    
    
    $
    6,341
    
    
    $
    3,378Restricted cash
    
    
    
    
    
    
    1,750
    
    
    
    1,095Insurance claims
    
    
    
    
    
    
    9,240
    
    
    
    17,807Due from related party
    
    
    3
    
    
    
    1,410
    
    
    
    1,634Inventories
    
    
    
    
    
    
    601
    
    
    
    579Back log assets
    
    
    6
    
    
    
    
    
    
    
    907Trade receivables, net of allowances for bad debts of $1,443 in 2009 and $221 in 2008
    
    
    
    
    
    
    2,011
    
    
    
    812Prepayments and other
    
    
    
    
    
    
    772
    
    
    
    972Total current assets
    
    
    
    
    
    $
    22,125
    
    
    $
    27,184Vessels, net
    
    
    4
    
    
    
    270,701
    
    
    
    275,405Deferred charges, net
    
    
    5
    
    
    
    2,995
    
    
    
    3,772Restricted cash
    
    
    
    
    
    
    1,500
    
    
    
    1,500Total assets
    
    
    
    
    
    $
    297,321
    
    
    $
    307,861LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    
    
    
    
    $
    10,746
    
    
    $
    10,916Accrued liabilities
    
    
    
    
    
    
    1,310
    
    
    
    11,347Unearned revenue
    
    
    
    
    
    
    416
    
    
    
    1,320Due to related party
    
    
    3
    
    
    
    18
    
    
    
    12Derivative financial instruments at fair value  current portion
    
    
    7
    
    
    
    566
    
    
    
    473Deferred revenue  current portion
    
    
    
    
    
    
    1,032
    
    
    
    Bank loans  current portion
    
    
    8
    
    
    
    15,400
    
    
    
    26,700Total current liabilities
    
    
    
    
    
    $
    29,488
    
    
    $
    50,768Derivative financial instruments at fair value  net of current portion
    
    
    7
    
    
    
    684
    
    
    
    1,337Deferred revenue  net of current portion
    
    
    
    
    
    
    138
    
    
    
    1,251Bank loans  net of current portion
    
    
    8
    
    
    
    122,559
    
    
    
    133,650Total long term liabilities
    
    
    
    
    
    $
    123,381
    
    
    $
    136,238Commitments and Contingencies
    
    
    9
    
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued
    
    
    12
    
    
    
    
    
    
    
    Common stock, $0.001 par value; 250,000,000 shares authorized, 32,487,480 and
21,171,329 shares issued and outstanding at December 31, 2009 and 2008
    
    
    12
    
    
    
    32
    
    
    
    21Additional paid-in capital
    
    
    
    
    
    
    127,049
    
    
    
    110,322Retained earnings
    
    
    
    
    
    
    17,371
    
    
    
    10,512Total shareholders equity
    
    
    
    
    
    $
    144,452
    
    
    $
    120,855Total liabilities and shareholders equity
    
    
    
    
    
    $
    297,321
    
    
    $
    307,861
  F - 4




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Year ended December 31,2009
    
    
    2008
    
    
    2007OPERATING REVENUES
    
    $
    57,533
    
    
    $
    66,689
    
    
    $
    20,147OPERATING EXPENSES:Voyage expenses
    
    
    (1,394
    )
    
    
    (527
    )
    
    
    (267
    )Vessel operating expenses
    
    
    (17,813
    )
    
    
    (16,354
    )
    
    
    (6,001
    )Depreciation expense (Note 4)
    
    
    (16,006
    )
    
    
    (13,349
    )
    
    
    (4,435
    )Amortization of deferred charges (Note 5)
    
    
    (1,742
    )
    
    
    (788
    )
    
    
    (757
    )Management and other fees to a related party
    
    
    (1,874
    )
    
    
    (2,634
    )
    
    
    (875
    )Commissions
    
    
    (3,089
    )
    
    
    (3,383
    )
    
    
    (1,095
    )General and administrative expenses
    
    
    (4,156
    )
    
    
    (2,863
    )
    
    
    (2,207
    )Bad debts
    
    
    
    
    
    
    (221
    )
    
    
    (118
    )Gains on sale of vessel (Note 4)
    
    
    
    
    
    
    
    
    
    
    1,369Income (loss) from operations
    
    $
    11,459
    
    
    $
    26,570
    
    
    $
    5,761OTHER INCOME (EXPENSE):Interest and finance costs
    
    
    (4,323
    )
    
    
    (6,453
    )
    
    
    (5,774
    )Loss on derivative instruments (Note 7)
    
    
    (111
    )
    
    
    (1,456
    )
    
    
    (749
    )Interest income
    
    
    24
    
    
    
    580
    
    
    
    639Other
    
    
    (190
    )
    
    
    (49
    )
    
    
    (33
    )Other income (expense)
    
    $
    (4,600
    )
    
    $
    (7,378
    )
    
    $
    (5,917
    )Net income (loss)
    
    $
    6,859
    
    
    $
    19,192
    
    
    $
    (156
    )Basic earnings (loss) per share
    
    $
    0.27
    
    
    $
    0.91
    
    
    $
    (0.02
    )Diluted earnings (loss) per share
    
    $
    0.27
    
    
    $
    0.91
    
    
    $
    (0.02
    )Basic weighted average number of shares
    
    
    25,463,862
    
    
    
    21,006,497
    
    
    
    8,786,287Diluted weighted average number of shares
    
    
    25,463,862
    
    
    
    21,051,963
    
    
    
    8,786,287
  F - 5




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
  Additional
    
    
    RetainedCommon
    
    
    Common
    
    
    Paid-in
    
    
    EarningsShares
    
    
    Shares $
    
    
    Capital
    
    
    (Accumulated deficit)
    
    
    TotalBalance December 31,
2006
    
    
    6,290,100
    
    
    
    6
    
    
    
    9,703
    
    
    
    (2,702
    )
    
    
    7,007Issuance of shares, net
(Note 12)
    
    
    12,650,000
    
    
    
    12
    
    
    
    95,141
    
    
    
    
    
    
    
    95,153Distributions to shareholders
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    96Stock issued upon exercise
of warrants
    
    
    1,803,356
    
    
    
    2
    
    
    
    8,665
    
    
    
    
    
    
    
    8,667Discount on promissory note
    
    
    
    
    
    
    
    
    
    
    1,865
    
    
    
    
    
    
    
    1,865Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156
    )
    
    
    (156
    )Balance December 31,
2007
    
    
    20,743,456
    
    
    
    20
    
    
    
    115,464
    
    
    
    (2,858
    )
    
    
    112,626Dividend payments
    
    
    
    
    
    
    
    
    
    
    (7,335
    )
    
    
    (5,822
    )
    
    
    (13,157
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    107Stock issued upon exercise
of warrants
    
    
    177,873
    
    
    
    
    
    
    
    836
    
    
    
    
    
    
    
    836Stock issued upon exercise
of options
    
    
    250,000
    
    
    
    1
    
    
    
    1,250
    
    
    
    
    
    
    
    1,250Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,192
    
    
    
    19,192Balance December 31,
2008
    
    
    21,171,329
    
    
    
    21
    
    
    
    110,322
    
    
    
    10,512
    
    
    
    120,855Common shares issued
    
    
    10,041,151
    
    
    
    10
    
    
    
    16,234
    
    
    
    
    
    
    
    16,244Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    
    
    
    
    493Restricted shares issued
    
    
    1,275,000
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,859
    
    
    
    6,859Balance December 31, 2009
    
    
    32,487,480
    
    
    $
    32
    
    
    $
    127,049
    
    
    $
    17,371
    
    
    $
    144,452
  F - 6




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
  Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2007Cash Flows from Operating Activities:Net income (loss)
    
    $
    6,859
    
    
    $
    19,192
    
    
    $
    (156
    )Adjustments to reconcile net income (loss) to net cashDepreciation (Note 4)
    
    
    16,006
    
    
    
    13,349
    
    
    
    4,435Amortization of deferred charges (Note 5)
    
    
    2,087
    
    
    
    1,141
    
    
    
    757Amortization of debt discount
    
    
    
    
    
    
    
    
    
    
    433Provision for bad debts
    
    
    
    
    
    
    221
    
    
    
    118Compensation cost (Note 11)
    
    
    494
    
    
    
    107
    
    
    
    96Write off of deferred financing fees (Note 5)
    
    
    111
    
    
    
    639
    
    
    
    2,570Change in fair value of derivatives (Note 7)
    
    
    (560
    )
    
    
    1,061
    
    
    
    749Amortization of deferred revenue
    
    
    (81
    )
    
    
    (368
    )
    
    
    (1,516
    )Gain on sale of vessel (Note 4)
    
    
    
    
    
    
    
    
    
    
    (1,369
    )Back log asset (Note 6)
    
    
    907
    
    
    
    899
    
    
    
    Changes in:-Trade receivables
    
    
    (1,199
    )
    
    
    (973
    )
    
    
    100-Insurance claims
    
    
    8,567
    
    
    
    (1,691
    )
    
    
    (15,631
    )-Due from related party
    
    
    224
    
    
    
    (597
    )
    
    
    (997
    )-Inventories
    
    
    (22
    )
    
    
    (80
    )
    
    
    (257
    )-Prepayments and other
    
    
    200
    
    
    
    (638
    )
    
    
    (334
    )-Accounts payable
    
    
    (170
    )
    
    
    7,735
    
    
    
    1,178-Accrued liabilities
    
    
    (10,037
    )
    
    
    (5,366
    )
    
    
    15,198-Unearned revenue
    
    
    (904
    )
    
    
    537
    
    
    
    604-Due to related party
    
    
    6
    
    
    
    12
    
    
    
    Dry-docking and special survey (Note 5)
    
    
    (1,097
    )
    
    
    (2,617
    )
    
    
    (907
    )Net Cash from Operating Activities
    
    $
    21,391
    
    
    $
    32,563
    
    
    $
    5,071Cash flows from (used in) Investing Activities:Vessel acquisitions (Note 4 & Note 6)
    
    
    (11,302
    )
    
    
    (182,539
    )
    
    
    (97,585
    )Cash from sale of vessel, net
    
    
    
    
    
    
    
    
    
    
    10,606Net Cash used in Investing Activities
    
    $
    (11,302
    )
    
    $
    (182,539
    )
    
    $
    (86,979
    )Cash flows from (used in) Financing Activities:(Increase) in restricted cash
    
    
    (655
    )
    
    
    (2,245
    )
    
    
    (350
    )Net movement in bank overdraft
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Proceeds from long term loan
    
    
    6,000
    
    
    
    153,650
    
    
    
    104,743Payments of bank loans
    
    
    (28,391
    )
    
    
    (49,600
    )
    
    
    (56,273
    )Payments of shareholders loans
    
    
    
    
    
    
    
    
    
    
    (16,614
    )Proceeds from issuance of common shares, net of
issuance costs (Note 12)
    
    
    16,244
    
    
    
    
    
    
    
    95,153Exercise of warrants (Note 12)
    
    
    
    
    
    
    836
    
    
    
    8,667Exercise of stock options (Note 12)
    
    
    
    
    
    
    1,250
    
    
    
    
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##### Table of Contents



Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2007Shareholders loans
    
    
    
    
    
    
    
    
    
    
    14,000Common stock dividend
    
    
    
    
    
    
    (13,157
    )
    
    
    Deferred financing fees (Note 5)
    
    
    (324
    )
    
    
    (774
    )
    
    
    (2,396
    )Net Cash from (used in) Financing Activities
    
    $
    (7,126
    )
    
    $
    89,960
    
    
    $
    144,930Net increase (decrease) in cash in hand and at bank
    
    $
    2,963
    
    
    $
    (60,016
    )
    
    $
    63,022Cash and cash equivalents, Beginning of year
    
    
    3,378
    
    
    
    63,394
    
    
    
    372Cash and cash equivalents, end of year
    
    $
    6,341
    
    
    $
    3,378
    
    
    $
    63,394Supplemental Cash Flow Information:Cash paid for interest
    
    $
    4,462
    
    
    $
    4,410
    
    
    $
    2,629Non-cash shareholder distributions
    
    
    
    
    
    
    
    
    
    $
    6Discount on promissory note
    
    
    
    
    
    
    
    
    
    $
    1,865Liability assumed in connection with vessel acquisitions
    
    
    
    
    
    
    
    
    
    $
    3,136
  F - 8




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##### Table of Contents



FREESEAS INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation and General Information
   %
    
    
    
    
    
    
    
    
    
    
    
    
    
    Date of
    
    Date ofCompany
    
    Owned
    
    M/V
    
    Type
    
    Dwt
    
    Built
    
    Acquisition
    
    DisposalAdventure Two S.A.
    
    100%
    
    Free Destiny
    
    Handysize
    
    
    25,240
    
    
    1982
    
    08/04/04
    
    
    N/AAdventure Three S.A.
    
    100%
    
    Free Envoy
    
    Handysize
    
    
    26,318
    
    
    1984
    
    09/29/04
    
    
    N/AAdventure Four S.A.
    
    100%
    
    Free Fighter
    
    Handysize
    
    
    38,905
    
    
    1982
    
    06/14/05
    
    
    04/27/07Adventure Five S.A.
    
    100%
    
    Free Goddess
    
    Handysize
    
    
    22,051
    
    
    1995
    
    10/30/07
    
    
    N/AAdventure Six S.A.
    
    100%
    
    Free Hero
    
    Handysize
    
    
    24,318
    
    
    1995
    
    07/03/07
    
    
    N/AAdventure Seven S.A.
    
    100%
    
    Free Knight
    
    Handysize
    
    
    24,111
    
    
    1998
    
    03/19/08
    
    
    N/AAdventure Eight S.A.
    
    100%
    
    Free Jupiter
    
    Handymax
    
    
    47,777
    
    
    2002
    
    09/05/07
    
    
    N/AAdventure Nine S.A.
    
    100%
    
    Free Impala
    
    Handysize
    
    
    24,111
    
    
    1997
    
    04/02/08
    
    
    N/AAdventure Ten S.A.
    
    100%
    
    Free Lady
    
    Handymax
    
    
    50,246
    
    
    2003
    
    07/07/08
    
    
    N/AAdventure Eleven S.A
    
    100%
    
    Free Maverick
    
    Handysize
    
    
    23,994
    
    
    1998
    
    09/01/08
    
    
    N/AAdventure Twelve S.A.
    
    100%
    
    Free Neptune
    
    Handysize
    
    
    30,838
    
    
    1996
    
    08/25/09
    
    
    N/A
 2. Significant Accounting Policies
 a)
    
    FASB Accounting Standards Codification:In June 2009, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard No. 168 (SFAS
168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles  a replacement of FASB Statement No. 162 codified as Accounting
Standards Codification (ASC) 105, which establishes the ASC as the source of
authoritative accounting literature recognized by the FASB to be applied by nongovernmental
entities in addition to rules and interpretive releases of the Securities and Exchange
Commission (SEC), which are sources of authoritative accounting principles generally
accepted in the United States of America (GAAP) for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the Codification will
become non-authoritative. ASC 105 identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of the financial
statements. Following this statement, the FASB will issue new standards in the form of
Accounting Standards Updates (ASU). In conjunction with the issuance of SFAS 168, the
FASB also issued its first Accounting Standards Update No. 2009-1, Topic 105 Generally
Accepted Accounting Principles (ASU 2009-1) which includes SFAS 168 in its entirety as a
transition to the ASC. ASU 2009-1 was effective on a prospective basis for interim and
annual periods ended after September 15, 2009. The Codification was effective for the
Company for the interim reporting period ended September 30, 2009. As a result of the
adoption of this pronouncement, the Companys consolidated financial statements reference
the Codification as the sole source of authoritative literature. Accordingly, all
accounting references have been updated and SFAS references have been replaced with ASC
references as if the SFAS has been adopted into the Codification. The Codification did not
change or alter existing GAAP and, therefore, it did not have an impact of the Companys
financial position, results of operations and cash flows.
 F - 9




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 b)
    
    Principles of Consolidation:The accompanying consolidated financial statements have
been prepared in accordance with US GAAP and include in each of the three years in the
period ended December 31, 2009 the accounts and operating results of the Company and its
wholly-owned subsidiaries referred to in Note 1 above. All significant inter-company
balances and transactions have been eliminated upon consolidation.c)
    
    Use of Estimates:The preparation of consolidated financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.d)
    
    Comprehensive Income:The Company follows the provisions of ASC 220, Comprehensive
Income, which requires separate presentation of certain transactions, which are recorded
directly as components of stockholders equity. For the years ended December 31, 2009, 2008
and 2007 comprehensive income was the same as net income.e)
    
    Concentration of Credit Risk:Financial instruments, which potentially subject the
Company to significant concentrations of credit risk, consist principally of cash and cash
equivalents, trade accounts receivable, insurance claims and derivative contracts (interest
rate swaps). The Company places its cash and cash equivalents, consisting mostly of
deposits, with high credit qualified financial institutions. The Company performs periodic
evaluations of the relative credit standing of those financial institutions. The Company
limits its credit risk with accounts receivable by performing ongoing credit evaluations of
its charterers financial condition. The Company does not obtain rights to collateral to
reduce its credit risk. The Company is exposed to credit risk in the event of
non-performance by counter parties to derivative instruments; however, the Company limits
its exposure by diversifying among counter parties with high credit ratings.Credit risk with respect to trade accounts receivable is high due to the fact that the
Companys total income is derived from few charterers. During the years ended December 31,
2009, 2008 and 2007 charterers that individually accounted for more than 10% of the Companys
voyage revenues are as follows:
 Charterer
    
    FY 2009
    
    FY 2008
    
    FY 2007A
    
    37%
    
    38%
    
    B
    
    18%
    
    13%
    
    C
    
    Less than 10%
    
    10%
    
    Less than 10%D
    
    
    
    
    
    30%E
    
    
    
    
    
    19%
 f)
    
    Foreign Currency Translation:The functional currency of the Group is the U.S. Dollar
because the Companys vessels operate in international shipping markets, and therefore
primarily transact business in U.S. Dollars. The Companys accounting records are
maintained in U.S. Dollars. Transactions involving other currencies during the year are
converted into U.S. Dollars using the exchange rates in effect at the time of the
transactions. At the balance sheet date, monetary assets and liabilities, which are
denominated in other currencies, are translated into U.S. Dollars at the year-end exchange
rates. Resulting gains or losses are included in other income/loss in the accompanying
consolidated statements of operations.g)
    
    Cash and Cash Equivalents:The Company considers highly liquid investments such as time
deposits and certificates of deposit with an original maturity of three months or less to
be cash equivalents.h)
    
    Restricted Cash:Restricted cash includes bank deposits that are required under the
Companys borrowing arrangements to be kept as part of the security required under the
respective loan agreements.i)
    
    Trade Receivables, net:The amount shown as Trade Receivables at each balance sheet
date includes receivables from charterers for hire, freight and demurrage billings, net of
an allowance for doubtful debts. An estimate is made of the allowance for doubtful debts
based on a review of all outstanding amounts at year end, and an allowance is made for any
accounts which management believes are not recoverablej)
    
    Insurance Claims:Insurance claims comprise claims submitted and/or claims in the
process of compilation for submission (claims pending) relating to hull and machinery or
protection and indemnity insurance coverage. They are recorded as incurred on the accrual
basis and represent the claimable expenses incurred, net of deductibles, the recovery of
which is probable under the related insurance policies and the Company can make an estimate
of the amount to be reimbursed. Any non-recoverable amounts are included in
 F - 10




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 accrued liabilities and are classified as operating expenses in the statement of operations.
The classification of insurance claims (if any) into current and non-current assets is based
on managements expectations as to their collection dates.k)
    
    Inventories:Inventories, which are comprised of bunkers and lubricants remaining on
board the vessels at year end, are valued at the lower of cost, as determined on a
first-in, first-out basis, or market.l)
    
    Vessels Cost:Vessels are stated at cost, which consists of the contract purchase
price and any material expenses incurred upon acquisition (initial repairs, improvements,
delivery expenses and other expenditures to prepare the vessel for her initial voyage).
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 expenditures are charged to expense as incurred.m)
    
    Vessels Depreciation:The cost of the Groups vessels is depreciated on a
straight-line basis over the vessels remaining economic useful lives from the acquisition
date, after considering the estimated residual value. Effective April 1, 2009, and
following managements reassessment of the useful lives of the Companys vessels, the fleet
useful life was increased from 27 to 28 years. Managements estimate was based on the
current vessels operating condition, as well as the conditions prevailing in the market
for the same type of vessels. The effect of this change in accounting estimate, which did
not require retrospective application as per ASC 250, Accounting Changes and Error
Corrections was to increase net income for the year ended December 31, 2009 by $1,088 or
$0.04 per weighted average number of share, both basic and diluted.n)
    
    Impairment of Long-lived Assets:The Company follows the guidance under ASC 360,
Property, Plant and Equipment, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The standard requires that, long-lived assets
and certain identifiable intangibles held and used or disposed of by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. When the estimate of undiscounted cash flows,
excluding interest charges, expected to be generated by the use of the asset is less than
its carrying amount, the Company should evaluate the asset for an impairment loss.
Measurement of the impairment loss is based on the fair value of the asset which is
determined based on management estimates and assumptions and by making use of available
market data. The Company evaluates 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, management reviews certain indicators of potential
impairment, such as future undiscounted net operating cash flows, vessel sales and
purchases, business plans and overall market conditions. The Company determines future
undiscounted net operating cash flows for each vessel and compares it to the vessels
carrying value. The future undiscounted net operating cash flows are determined by
considering estimated vessels utilization, its scrap value, the charter revenues from
existing time charters for the fixed fleet days and an estimated daily time charter
equivalent for the unfixed days over the remaining estimated useful life of the vessel, net
of vessel operating expenses adjusted for inflation, and cost of scheduled major
maintenance. When the Companys estimate of future undiscounted net operating cash flows
for any vessel is lower than the vessels carrying value, the carrying value is written
down, by recording a charge to operations, to the vessels fair market value if the fair
market value is lower than the vessels carrying value. As of December 31, 2009, the
Company performed an impairment assessment of its long-lived assets by comparing the
undiscounted net operating cash flows for each vessel to its respective carrying value. The
significant factors and assumptions the Company used in each future undiscounted net
operating cash flow analysis included, among others, operating revenues, off-hire revenues,
dry-docking costs, operating expenses and management fee estimates. Revenue assumptions
were based on contracted time charter rates up to the end of life of the current contract
of each vessel as well as Forward Freight Agreements (FFAs) and historical average time
charter rates for the remaining life of the vessel after the completion of the current
contracts. In addition, the Company used annual operating expenses escalation factor and an
estimate of off hire days. All estimates used and assumptions made were in accordance with
the Groups internal budgets and historical experience of the shipping industry. The
Companys assessment concluded that no impairment of vessel existed as of December 31,
2009, as the future undiscounted net operating cash flows per vessel exceeded the carrying
value of each vessel.o)
    
    Accounting for Special Survey and Dry-docking Costs:The Group follows the deferral
method of accounting for special survey and dry-docking costs, whereby actual costs
incurred are deferred and are amortized over a period of five and two and a half years,
respectively. If special survey or dry-docking is performed prior to the scheduled date,
the remaining un-amortized balances are immediately written-off. Indirect costs and/or
costs related to ordinary maintenance, carried out while at dry dock, are expensed when
incurred as they do not provide any future economic benefit.p)
    
    Financing Costs:Fees incurred for obtaining new loans are deferred and amortized
over the loans respective repayment periods, using the effective interest rate method.
These charges are included in the balance sheet line item Deferred Charges. Any unamortized
balance of costs relating to loans repaid or refinanced is expensed in the period the
repayment or refinancing is made, if the refinancing is deemed to be a debt extinguishment
under the provision of ASC 470-50 Debt: Modifications and Extinguishments.
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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 q)
    
    Unearned Revenue:Unearned revenue includes cash received prior to the balance sheet
date and is related to revenue earned after such date. These amounts are recognized as
revenue over the voyage or charter period.r)
    
    Deferred Revenue and Back-log assets:When a vessel is acquired with an assumed
remaining time charter, the Company records any below or above market value of the time
charter assumed. The difference between market and assumed below-market charter value is
discounted using the weighted average cost of capital method and is recorded as deferred
revenue or a back log asset and amortized on a straight line basis to revenue over the
remaining life of the assumed time charter.s)
    
    Interest Rate Swaps:The Company uses interest rate swaps to manage net exposure to
interest rate changes related to its borrowings and to lower its overall borrowing costs.
Such swap agreements, designated as economic hedges are recorded at fair value with
changes in the derivatives fair value recognized in earnings unless specific hedge
accounting criteria are met. During the years ended December 31, 2007, 2008 and 2009, there
was no derivative transaction meeting such hedge accounting criteria; therefore the change
in their fair value is recognised in earnings. Effective January 1, 2009, the Company
adopted the accounting pronouncement relating to the expanded disclosure requirements about
derivative instruments and hedging activities codified as ASC 815, Derivatives and
Hedging. ASC 815 intends to provide users of financial statements with an enhanced
understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for, and (c) how derivative instruments
and related hedged items affect an entitys financial position, financial performance, and
cash flows.ASC 815 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about the fair value of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in
derivative instruments. ASC 815 relates to disclosures only and its adoption did not have any
effect on the financial condition, results of operations or liquidity of the Company.t)
    
    Financial Instruments:The principal financial assets of the Company consist of cash
and cash equivalents and restricted cash, accounts receivable, trade (net of allowance),
insurance claims, prepayments and advances. The principal financial liabilities of the
Company consist of accounts payable, accrued liabilities, deferred revenue, long-term debt,
and interest-rate swaps. The carrying amounts reflected in the accompanying consolidated
balance sheets of financial assets and liabilities, approximate their respective fair
values.u)
    
    Fair Value Measurements:In September 2006, the FASB issued ASC 820, Fair Value
Measurements and Disclosures which defines and provides guidance as to the measurement of
fair value. ASC 820 creates a hierarchy of measurement and indicates that, when possible,
fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. ASC 820 applies when
assets or liabilities in the financial statements are to be measured at fair value, but
does not require additional use of fair value beyond the requirements in other accounting
principles. The statement was effective for the Company as of January 1, 2008, excluding
certain nonfinancial assets and nonfinancial liabilities, for which the statement was
effective for fiscal years beginning after November 15, 2008 and its adoption did not have
a significant impact on the Companys financial position or results of operations.
Effective January 1, 2009, the Company adopted ASC 820-10-65, Fair Value Measurements and
Disclosures that provides additional guidelines for estimating fair value in accordance
with fair value accounting. The adoption of this guidance did not have a material impact on
the Companys consolidated financial position, cash flows or results of operations. In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which
provides additional guidance on how companies should measure liabilities at fair value
under ASC 820. The ASU clarifies that the quoted price for an identical liability should be
used. However, if such information is not available, a entity may use, the quoted price of
an identical liability when traded as an asset, quoted prices for similar liabilities or
similar liabilities traded as assets, or another valuation technique (such as the market or
income approach). The ASU also indicates that the fair value of a liability is not adjusted
to reflect the impact of contractual restrictions that prevent its transfer and indicates
circumstances in which quoted prices for an identical liability or quoted price for an
identical liability traded as an asset may be considered level 1 fair value. The adoption
of this statement did not have a material impact on the Companys consolidated results of
operations or financial condition.v)
    
    Fair value option:In February, 2007, the FASB issued ASC 825, Financial
Instruments, which permits companies to report certain financial assets and financial
liabilities at fair value. ASC 825 was effective for the Company as of January 1, 2008 at
which time the Company could elect to apply the standard prospectively and measure certain
financial instruments at fair value. The Company has evaluated the guidance contained in
ASC 825, and has elected not to report any existing financial assets or liabilities at fair
value that are not already reported, therefore, the adoption of the statement had no impact
on its financial position and results of operations. The Company retains the ability to
elect the fair value option for certain future assets and liabilities acquired under this
new pronouncement. In April 2009, the FASB issued guidance that amends the requirements for
disclosures about fair value of financial instruments for annual as well as interim
reporting periods. These pronouncements were effective prospectively for all interim and
annual reporting periods ending after June 15, 2009. The adoption of this statement did
not have any impact on the Companys financial condition and results of operations.
 F - 12




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 w)
    
    Accounting for Revenue and Expenses:Revenue is recorded when services are rendered,
the Company has a signed charter agreement or other evidence of an arrangement, the price
is fixed or determinable, and collection is reasonably assured. Voyage revenues for the
transportation of cargo are recognized ratably over the estimated relative transit time of
each voyage while the related voyage expenses are recognized as incurred. A voyage is
deemed to commence when a vessel is available for loading and is deemed to end upon the
completion of the discharge of the current cargo. Estimated losses on voyages are provided
for in full at the time such losses become evident. Under a voyage charter, the Group
agrees to provide a vessel for the transportation of specific goods between specific ports
in return for payment of an agreed upon freight rate per ton of cargo. Revenues from time
chartering of vessels are accounted for as operating leases and are thus recognized on a
straight line basis as the average revenue over the rental periods of such charter
agreements, as service is performed, except for loss generating time charters, in which
case the loss is recognized in the period when such loss is determined. A time charter
involves placing a vessel at the charterers disposal for a period of time during which the
charterer uses the vessel in return for the payment of a specified daily hire rate. Short
period charters for less than three months are referred to as spot charters. Time charters
extending three months to a year are generally referred to as medium term charters. All
other time charters are considered long term. Under time charters, operating cost such as
for crews, maintenance and insurance are typically paid by the owner of the vessel.x)
    
    Profit Sharing Arrangements:From time to time, the Company has entered into profit
sharing arrangements with its charterers, whereby the Company may have received additional
income at an agreed percentage of net earnings earned by such charterer, where those
earnings are over the base rate of hire and settled periodically during the term of the
charter agreement. Revenues generated from the profit sharing arrangements are recorded in
the period they are earned.y)
    
    Repairs and Maintenance:All repair and maintenance expenses, including major
overhauling and underwater inspection expenses, are charged against income as incurred and
are included in vessel operating expenses in the accompanying Consolidated Statements of
Operations.z)
    
    Stock-Based Compensation:Following the provisions of ASC 718, Compensation- Stock
Compensation the Company recognizes all share-based payments to employees, including
grants of employee stock options, in the consolidated statements of operations based on
their fair values on the grant date. Compensation cost on stock based awards with graded
vesting is recognized on an accelerated basis as though each separately vesting portion of
the award was-in substance, a separate award.aa)
    
    Earnings per Share:Basic earnings per share are computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the periods
presented. Diluted earnings per share reflect the potential dilution that would occur if
securities or other contracts to issue common stock were exercised. Dilution has been
computed by the treasury stock method whereby all of the Companys dilutive securities
(warrants, options restricted shares) are assumed to be exercised and the proceeds used to
repurchase common shares at the weighted average market price of the Companys common stock
during the relevant periods. The incremental shares (the difference between the number of shares assumed issued and the number
of shares assumed purchased) are included in the denominator of the diluted earnings per
share computation unless such inclusion would be anti-dilutive.bb)
    
    Segment Reporting:The Group reports financial information and evaluates its
operations by total charter revenues. The Group does not have discrete financial
information to evaluate the operating results for each type of charter. Although revenue
can be identified for these types of charters, management does not identify expenses,
profitability or other financial information for these charters. As a result, management,
including the chief operating decision makers, reviews operating results solely by revenue
per day and operating results of the fleet and thus the Group has determined that it
operates under one reportable 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 geographic information is impracticable.cc)
    
    Subsequent Events:In May 2009, FASB issued ASC 855, Subsequent events. The
objective of this guidance is to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, this guidance sets
forth: (i) the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its financial
statements; and (iii) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This guidance does not result in
significant changes in the subsequent events that an entity reportseither through
recognition or disclosurein its financial statements. This guidance introduces the concept
of financial statements being available to be issued. It requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for that date,
that is, whether that date represents the date the financial statements were issued or were
available to be issued. In accordance with this guidance, an entity should apply the
requirements to interim or annual financial periods ending after June 15, 2009. The
Company has adopted ASC 855 for the financial period ended June 30, 2009. In February 2010,
the FASB issued ASU 2010-09, Subsequent Events
 F - 13




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Topic 855)-Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09
addresses both the interaction of the requirements of Topic 855 with the SECs reporting
requirements and the intended breadth of the reissuance disclosure provision related to
subsequent events (ASC 855-10-50-4). This update amends ASC 855-10 as follows: (1) an entity
that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities
that are traded in a public market (a domestic or foreign stock exchange or an
over-the-counter market, including local or regional markets) is required to evaluate
subsequent events through the date that the financial statements are issued. If an entity
meets neither of those criteria, then it should evaluate subsequent events through the date
the financial statements are available to be issued; (2) the glossary of ASC 855 is amended
to include the definition of SEC filer. An SEC filer is an entity that is required to file or
furnish its financial statements with either the SEC or, with respect to an entity subject to
Section 12 (i) of the Securities Exchange Act of 1934, as amended, the appropriate agency
under that Section. It does not include an entity that is not otherwise an SEC filer whose
financial statements are include in a submission by another SEC filer; (3) an entity that is
an SEC filer is not required to disclose the date through which subsequent events have been
evaluated. This change alleviates potential conflicts between ASC 855-10 and the SECs
requirements; (4) the glossary of ASC 855 is amended to remove the definition of public
entity. The definition of a public entity in ASC 855 was used to determine the date through
which subsequent events should be evaluated. Based on the amendments, that definition is no
longer necessary for purposes of ASC 855; (5) the scope of the reissuance disclosure
requirements is refined to include revised financial statements only. The term revised
financial statements is added to the glossary of ASC 855. Revised financial statements
include financial statements revised either as a result of correction of an error or
retrospective application of U.S. generally accepted accounting principles. The amendments
remove the requirement for an SEC filer to disclose a date in both issued and revised
financial statements. Revised financial statements include financial statements revised as a
result of either correction of an error or retrospective application of U.S. GAAP.
Additionally, the Board has clarified that if the financial statements have been revised,
then an entity that is not a SEC filer should disclose both the date that the financial
statements were issued or available to be issued and the date the revised financial
statements were issued or available to be issued. Those amendments remove potential conflicts
with the SECs literature. All of the amendments in this update are effective upon issuance
of the final update, except for use of the issued date for conduit debt obligors. That
amendment is effective for interim or annual period ending after June 15, 2010. The Company
has adopted ASU 2010-09 for the financial period ended December 31, 2009.dd)
    
    Recent Accounting Standards Updates:
 ASU 2009-16:
 ASU 2009-17:
 ASU 2010-01:
 F - 14




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ASU 2010-06:
 ASU 2010-11:
 ASU 2010-13
 3 Related Party Transactions
 Free Bulkers
 Free Fighter
  Free Neptune
  F - 15




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     First Business Bank (FBB)
 Free Impala
 Other Related Parties
  4. Vessels
 Accumulated
    
    
    Net BookVessel Cost
    
    
    Depreciation
    
    
    ValueDecember 31, 2006
    
    $
    28,273
    
    
    $
    (8,904
    )
    
    $
    19,369Additions new vessels
    
    
    100,721
    
    
    
    
    
    
    
    100,721Depreciation
    
    
    
    
    
    
    (4,435
    )
    
    
    (4,435
    )Disposal of vessel
    
    
    (11,213
    )
    
    
    3,579
    
    
    
    (7,634
    )December 31, 2007
    
    $
    117,781
    
    
    $
    (9,760
    )
    
    $
    108,021Additions new vessels
    
    
    180,733
    
    
    
    
    
    
    
    180,733Depreciation
    
    
    
    
    
    
    (13,349
    )
    
    
    (13,349
    )December 31, 2008
    
    $
    298,514
    
    
    $
    (23,109
    )
    
    $
    275,405Additions new vessels
    
    
    11,302
    
    
    
    
    
    
    
    11,302Depreciation
    
    
    
    
    
    
    (16,006
    )
    
    
    (16,006
    )December 31, 2009
    
    $
    309,816
    
    
    $
    (39,115
    )
    
    $
    270,701
 F - 16




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Free Neptune Free Neptune
 Free Knight, Free Impala, Free Lady Free Maverick
 Free Hero, Free
Jupiter Free Goddess M Free Goddess Free Hero
 Free Fighter Free Fighter
  5. Deferred Charges
 SpecialDry-docking
    
    
    survey
    
    
    Financingcosts
    
    
    costs
    
    
    costs
    
    
    TotalDecember 31, 2006
    
    $
    730
    
    
    $
    1,453
    
    
    $
    117
    
    
    $
    2,300Additions
    
    
    147
    
    
    
    760
    
    
    
    2,396
    
    
    
    3,303Write-offs
    
    
    (350
    )
    
    
    (1,252
    )
    
    
    (1,083
    )
    
    
    (2,685
    )Amortization
    
    
    (285
    )
    
    
    (209
    )
    
    
    (263
    )
    
    
    (757
    )December 31, 2007
    
    $
    242
    
    
    $
    752
    
    
    $
    1,167
    
    
    $
    2,161Additions
    
    
    737
    
    
    
    1,880
    
    
    
    774
    
    
    
    3,391Write-offs
    
    
    
    
    
    
    
    
    
    
    (639
    )
    
    
    (639
    )Amortization
    
    
    (273
    )
    
    
    (515
    )
    
    
    (353
    )
    
    
    (1,141
    )December 31, 2008
    
    $
    706
    
    
    $
    2,117
    
    
    $
    949
    
    
    $
    3,772Additions
    
    
    551
    
    
    
    546
    
    
    
    324
    
    
    
    1,421Write-offs
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    (111
    )Amortization
    
    
    (504
    )
    
    
    (1,238
    )
    
    
    (345
    )
    
    
    (2,087
    )December 31, 2009
    
    $
    753
    
    
    $
    1,425
    
    
    $
    817
    
    
    $
    2,995
 Free Impala Free Neptune
   Free Fighter
 F - 17




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Free Hero Free Jupiter Free Goddess
 6. Back-log Assets
 Free Maverick
 7. Derivatives at Fair Value
      Fair Value Measurements as of December 31, 2009QuotedPricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsLiabilities
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Interest rate swap contracts
    
    $
    1,250
    
    
    $
    
    
    
    $
    1,250
    
    
    $
    Total
    
    $
    1,250
    
    
    $
    
    
    
    $
    1,250
    
    
    $
    
  F - 18




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8. Long-Term Debt
  (In thousands of U.S. Dollars)
 December 31, 2009
    
    
    December 31, 2008Current
    
    
    Long-term
    
    
    
    
    
    
    Current
    
    
    Long-termLender
    
    portion
    
    
    portion
    
    
    Total
    
    
    portion
    
    
    portion
    
    
    TotalHBU (a)
    
    $
    3,000
    
    
    $
    14,750
    
    
    $
    17,750
    
    
    $
    4,000
    
    
    $
    17,750
    
    
    $
    21,750HBU (b)
    
    $
    2,400
    
    
    $
    21,809
    
    
    $
    24,209
    
    
    $
    6,200
    
    
    $
    25,900
    
    
    $
    32,100Credit Suisse (c)
    
    $
    5,000
    
    
    $
    31,975
    
    
    $
    36,975
    
    
    $
    6,725
    
    
    $
    36,975
    
    
    $
    43,700Credit Suisse (d)
    
    $
    3,000
    
    
    $
    28,275
    
    
    $
    31,275
    
    
    $
    6,775
    
    
    $
    31,275
    
    
    $
    38,050First Business Bank S.A. (e)
    
    $
    2,000
    
    
    $
    25,750
    
    
    $
    27,750
    
    
    $
    3,000
    
    
    $
    21,750
    
    
    $
    24,750Total
    
    $
    15,400
    
    
    $
    122,559
    
    
    $
    137,959
    
    
    $
    26,700
    
    
    $
    133,650
    
    
    $
    160,350
  Lender
    
    Vessel
    
    Remaining Repayment Terms(a) HBU
    
    M/V FREE KNIGHT
M/V FREE DESTINY
M/V FREE ENVOY
    
    Twenty-three quarterly
installments of $750
followed by one
installment of $500.(b) HBU
    
    M/V FREE MAVERICK
    
    Eleven quarterly
installments of $600 and
one balloon payment of
$17,609 to be paid with
the last installment.(c) Credit Suisse
    
    M/V FREE HERO
M/V FREE GODDESS
M/V FREE JUPITER
    
    Twenty-four quarterly
installments of $1,250
and a balloon payment of
$6,975 to be paid with
the last installment.(d) Credit Suisse
    
    M/V FREE LADY
    
    Twenty-five consecutive
quarterly installments
of $750 and a balloon
payment of $12,525 to be
paid with the last
installment.(e) First Business Bank
    
    M/V FREE IMPALA
M/V FREE NEPTUNE
    
    Twenty-eight quarterly
consecutive
installments, the first
four installments of
$500 beginning on March
16, 2010, then followed
by twenty-four
installments in the
amount of $837.5 each
plus a balloon payment
in the amount of $5,650,
payable together with
the last installment.
    F - 19




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Free Destiny Free Envoy
  Free Goddess Free Hero Free Jupiter
  Loan Covenants
  a)
    
    Credit Suisse loan agreement: i) the Company should maintain minimum cash balances of
$375 for each of the Companys vessels covered by the loan agreement; ii) the aggregate
fair market value of the financed vessels must not be less than 135% of the outstanding
loan balance.b)
    
    FBB loan agreement: i) the Company should maintain an average corporate liquidity of at
least $3,000 ii) the leverage ratio of the corporate guarantor should not at any time
exceed 55%; iii) the ratio of EBITDA to net interest expense must not be less than 3; iv)
the fair market value of the financed vessels should be at least (a) 100% of the
outstanding loan balance up to June 30, 2010, (b) 115% for the period July 1, 2010 to June
30, 2011 and (c) 125% thereafter..c)
    
    HBU loan agreement: i) the interest coverage ratio should not be less than 3.75; ii)
the debt service coverage ratio should not be less than 1.00; iii) the gearing ratio should
not exceed 2.5; iv) the outstanding loan balance should not be more than a ratio of the
fair market value of the financed vessels as follows: (a) 70% from September 15, 2009 until
and including June 30, 2010, (b) 100% from July 1, 2010 until and including June 30, 2011,
(c) 110% from July 1, 2011 until and including June 30, 2012, (d) 120% from July 1, 2012
until and including December 30, 2012 and (e) 125% from December 31, 2012 onwards.
 F - 20




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Credit Suisse loan agreement
  FBB loan agreement
   HBU loan agreement
    (In thousands of U.S. Dollars)
 Period
    
    Principal RepaymentsJanuary 1, 2010 to December 31, 2010
    
    
    15,400January 1, 2011 to December 31, 2011
    
    
    16,750January 1, 2012 to December 31, 2012
    
    
    33,759January 1, 2013 to December 31, 2013
    
    
    14,350January 1, 2014 to December 31, 2014
    
    
    14,350January 1, 2015 and thereafter
    
    
    43,350Total
    
    
    137,959
 F - 21




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9. Commitments and Contingencies
 Future minimum contractual charter revenue
  Years ending December 31,
    
    Amount*2010
    
    $
    8,7442011
    
    $
    1,150Total
    
    $
    9,894
 
 *
    
    These amounts do not include any assumed offhire. Agreement with financial advisor
    Claims
   F - 22




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  10. Earnings per Share
    For the year
    
    
    For the year
    
    
    For the yearended
    
    
    ended
    
    
    endedDecember 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    , 2007Numerator:Net income (loss)  basic and diluted
    
    $
    6,859
    
    
    $
    19,192
    
    
    $
    (156
    )Basic earnings per share denominator:Weighted average common shares outstanding
    
    
    25,463,862
    
    
    
    21,006,497
    
    
    
    8,786,827Diluted earnings per share denominator:Weighted average common shares outstanding
    
    
    25,463,862
    
    
    
    21,051,963
    
    
    
    8,786,827Dilutive common shares:Options
    
    
    
    
    
    
    17,229
    
    
    
    Warrants
    
    
    
    
    
    
    28,237
    
    
    
    Dilutive effect
    
    
    
    
    
    
    45,466
    
    
    
    Weighted average common shares  diluted
    
    
    25,463,862
    
    
    
    21,051,963
    
    
    
    8,786,827Basic income/(loss) per common share
    
    $
    0.27
    
    
    $
    0.91
    
    
    $
    (0.02
    )Diluted income/(loss) per common share
    
    $
    0.27
    
    
    $
    0.91
    
    
    $
    (0.02
    )
 11. Stock Incentive Plan
   F - 23




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       Class AClass A
    
    
    
    
    
    
    Exercise
    
    
    Options
    
    
    Warrants
    
    
    
    
    
    
    ExerciseOptions
    
    
    Warrants
    
    
    Total
    
    
    Price
    
    
    Exercisable
    
    
    Exercisable
    
    
    Total
    
    
    PriceDecember 31, 2006
    
    
    750,000
    
    
    
    200,000
    
    
    
    950,000
    
    
    $
    5.00
    
    
    
    500,000
    
    
    
    200,000
    
    
    
    700,000
    
    
    $
    5.00Options granted
to directors
    
    
    45,000
    
    
    
    
    
    
    
    45,000
    
    
    $
    8.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted to
officers
    
    
    125,000
    
    
    
    
    
    
    
    125,000
    
    
    $
    8.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    (165,000
    )
    
    
    
    
    
    
    (165,000
    )
    
    $
    5.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled
    
    
    (335,000
    )
    
    
    
    
    
    
    (335,000
    )
    
    $
    5.00
    
    
    
    (335,000
    )
    
    
    
    
    
    
    (335,000
    )
    
    $
    5.00Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,000
    
    
    
    
    
    
    
    85,000
    
    
    $
    5.00December 31, 2007
    
    
    420,000
    
    
    
    200,000
    
    
    
    620,000
    
    
    $
    5.83
    
    
    
    250,000
    
    
    
    200,000
    
    
    
    450,000
    
    
    $
    5.00Options/Class A
warrants exercised
    
    
    (250,000
    )
    
    
    (50,000
    )
    
    
    (300,000
    )
    
    $
    5.00
    
    
    
    (250,000
    )
    
    
    (50,000
    )
    
    
    (300,000
    )
    
    $
    5.00Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,000
    
    
    
    
    
    
    
    140,000
    
    
    $
    8.25December 31, 2008
    
    
    170,000
    
    
    
    150,000
    
    
    
    320,000
    
    
    $
    6.73
    
    
    
    140,000
    
    
    
    150,000
    
    
    
    290,000
    
    
    $
    6.57Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    15,000
    
    
    $
    8.25Options forfeited
    
    
    (110,000
    )
    
    
    
    
    
    
    (110,000
    )
    
    $
    8.25
    
    
    
    (110,000
    )
    
    
    
    
    
    
    (110,000
    )
    
    $
    8.25December 31, 2009
    
    
    60,000
    
    
    
    150,000
    
    
    
    210,000
    
    
    $
    5.93
    
    
    
    45,000
    
    
    
    150,000
    
    
    
    195,000
    
    
    $
    5.75
 12. Shareholders Equity
   F - 24




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            F - 25




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Free Neptune
  Common Stock Dividends
   13. Taxes
   F - 26




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  14. Subsequent Events
  F - 27