##### 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, 2010
 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 000-51672
 FREESEAS INC.
  Republic of the Marshall Islands
 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 Z Warrants to purchase shares of common stock
    
    NASDAQ Global Market




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o þ
  o þ
  þ o
  o o
  Large accelerated filer
o
    
    Non-accelerated filer þ
    
    Accelerated filer o
  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
    
    20ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
    
    31ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    31ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    44ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    46ITEM 8.
    
    FINANCIAL INFORMATION
    
    48ITEM 9.
    
    THE OFFER AND LISTING
    
    48ITEM 10.
    
    ADDITIONAL INFORMATION
    
    49ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    56ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    58PART II
    
    
    
    58ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    58ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    58ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    58ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    58ITEM 16B.
    
    CODE OF ETHICS
    
    58ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    59ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    59ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    59ITEM 16F.
    
    CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    59ITEM 16G.
    
    CORPORATE GOVERNANCE
    
    59PART III
    
    
    
    60ITEM 17.
    
    FINANCIAL STATEMENTS
    
    60ITEM 18.
    
    FINANCIAL STATEMENTS
    
    60ITEM 19.
    
    EXHIBITS
    
    60EX-1.5EX-12.1EX-12.2EX-13.1EX-13.2EX-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 comply with our loan covenants and 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;
    
    drybulk shipping industry trends, including charter rates and factors affecting vessel supply and demand;
    
    future, pending or recent acquisitions, business strategy, areas of possible expansion, and expected capital spending or
operating expenses and general and administrative expenses;
    
    the useful lives and value of our vessels;
    
    our ability to receive in full or partially our accounts receivable and insurance claims;
    
    greater than anticipated levels of drybulk vessel new building orders or lower than anticipated rates of drybulk vessel scrapping;
    
    changes in the cost of other modes of bulk commodity transportation;
    
    availability of crew, number of off-hire days, dry-docking requirements and insurance costs;
    
    changes in condition of our vessels or applicable maintenance or regulatory standards (which may affect, among other things, our
anticipated dry-docking costs);
    
    competition in the seaborne transportation industry;
    
    global and regional economic and political conditions;
    
    fluctuations in currencies and interest rates;
    
    our ability to leverage to our advantage our Managers relationships and reputation in the drybulk shipping industry;
    
    the overall health and condition of the U.S. and global financial markets;
    
    changes in seaborne and other transportation patterns;
    
    changes in governmental rules and regulations or actions taken by regulatory authorities;
    
    potential liability from future litigation and incidents involving our vessels and our expected recoveries of claims under our
insurance policies;
    
    acts of terrorism and other hostilities; and
    
    other factors discussed in the section titled Risk Factors in this annual report.
    1




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
    
    All references to $ and dollars in this document are to U.S. dollars
    
    Financial information presented in this document that is derived from
financial statements appearing elsewhere in this document is prepared in accordance
with the U.S. generally accepted accounting principles, and
    
    All references to dollar amounts in this document are expressed in thousands of U.S.
dollars.
   
 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
  Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Statement of Operations Data:Operating revenues
    
    $
    57,650
    
    
    $
    57,533
    
    
    $
    66,689
    
    
    $
    20,147
    
    
    $
    11,727Income (loss) from operations
    
    
    (17,000
    )
    
    
    11,459
    
    
    
    26,570
    
    
    
    5,761
    
    
    
    (2,281
    )Other expense
    
    
    (4,821
    )
    
    
    (4,600
    )
    
    
    (7,378
    )
    
    
    (5,917
    )
    
    
    (1,043
    )Net income (loss)
    
    
    (21,821
    )
    
    
    6,859
    
    
    
    19,192
    
    
    
    (156
    )
    
    
    (3,324
    )Earnings Per Share Data:Net income (loss) per share:Basic earnings (loss)
per share
    
    $
    (3.46
    )
    
    $
    1.35
    
    
    $
    4.57
    
    
    $
    (0.09
    )
    
    $
    (2.64
    )Diluted earnings (loss)
per share
    
    $
    (3.46
    )
    
    $
    1.35
    
    
    $
    4.56
    
    
    $
    (0.09
    )
    
    $
    (2.64
    )Weighted average number of
shares:Basic weighted average
number of shares
    
    
    6,313,606
    
    
    
    5,092,772
    
    
    
    4,201,299
    
    
    
    1,757,613
    
    
    
    1,258,376Diluted weighted average
number of shares
    
    
    6,313,606
    
    
    
    5,092,772
    
    
    
    4,210,393
    
    
    
    1,757,613
    
    
    
    1,258,376Dividends per share
    
    $
    
    
    
    $
    
    
    
    $
    2.25
    
    
    $
    0.875
    
    
    $
    
 Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Selected Balance Sheet Data:Total cash
    
    $
    10,074
    
    
    $
    9,591
    
    
    $
    5,973
    
    
    $
    63,744
    
    
    $
    372Vessels, net
    
    
    213,691
    
    
    
    270,701
    
    
    
    275,405
    
    
    
    108,021
    
    
    
    19,369Total assets
    
    
    250,984
    
    
    
    297,321
    
    
    
    307,861
    
    
    
    191,972
    
    
    
    23,086Long-term debt, including current portion
    
    
    120,459
    
    
    
    137,959
    
    
    
    160,350
    
    
    
    56,300
    
    
    
    7,830Total shareholders equity
    
    $
    123,190
    
    
    $
    144,452
    
    
    $
    120,855
    
    
    $
    112,626
    
    
    $
    7,007
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B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Risk Factors Relating to the Drybulk Shipping Industry
 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 and the average rates achieved in the three prior years, which has
and may continue to adversely affect our revenues, earnings and profitability and our ability to
comply with our loan covenants.
  Economic recession and 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.
  3




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The earthquake and resulting tsunami and nuclear power plant crisis that struck Japan in March 2011
could, in the near term, result in reduced drybulk trade and demand in Japan, which could reduce
the number of charters to and from Japan and global charter rates and could have a material adverse
effect on our business, financial condition and results of operations.
  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.
   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.
  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
 4




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
    
    business interruptions caused by mechanical failure, human error, war,
terrorism, political action in various countries, labor strikes or
adverse weather conditions.
  Our vessels are exposed to operational risks, including terrorism and piracy, which may not be
adequately covered by our insurance.
     An oversupply of drybulk vessel capacity may lead to reductions in charter rates and profitability.
  5




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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.
  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.
  Deepwater Horizon
    6




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




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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.
  Risk Factors Relating to FreeSeas
 Our operations expose us to global political risks, such as wars and political instability, which
may interfere with the operation of our vessels causing a decrease in revenues from such vessels.
  We intend to continue to charter all 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.
  8




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
    
    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 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 end, we may not be able to replace them promptly, and any replacement charters
could be at lower charter rates, which may materially adversely affect our earnings and results of
operations.
  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.
  9




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Our growth depends on the growth in demand for and the shipping of drybulk cargoes.
   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.
    Our charterers may terminate or default on their charters, which could adversely affect our results
of operations and cash flow.
  Free Jupiter
  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.
  At December 31, 2010 our current liabilities exceeded our current assets, which could impair our
ability to successfully operate our business and could have material adverse effects on our
revenues, cash flows and profitability and our ability to comply with our debt covenants and pay
our debt service and other obligations.
  10




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There may be risks associated with the purchase and operation of secondhand vessels.
  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.
  We may be subject to increased premium payments because we obtain some of our insurance through
protection and indemnity associations.
  Delays or defaults by the shipyards in the construction of the two newbuildings that we currently
have on order and any new vessels that we may order in the future could increase our expenses and
diminish our net income and cash flows.
  Further declines in charter rates and other market deterioration could cause us to incur impairment
charges.
   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.
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A decline in the market value of our vessels could lead to a default under our loan agreements and
the loss of our vessels.
  Our loan agreements contain covenants that may limit our liquidity and corporate activities,
including our ability to pay dividends. If the drybulk market remains depressed or further
declines, we may require further waivers and/or covenant amendments to our loan agreements relating
to our compliance with certain covenants for certain periods of time. The waivers and/or covenant
amendments may impose additional operating and financial restrictions on us and modify the terms of
our existing loan agreements. Any such waivers or amendments, if needed, could contain additional
restrictions and might not be granted at all.
    
    
    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.
  12




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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.
  If we fail to manage our 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;
    
    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 us.
   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.
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We currently rely on our Manager and, to a lesser extent, Safbulk Pty, Ltd., to manage and charter
our fleet.
  If our Manager is unable to perform under its vessel management agreements with us, our results of
operations may be adversely affected.
  We and one of our executive officers have affiliations with our Manager that could create conflicts
of interest detrimental to us.
  Management and service fees are payable to our Manager, regardless of our profitability, which
could have a material adverse effect on our business, financial condition and results of
operations.
  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.
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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.
  Economic conditions and regulatory pressures impacting banks in Greece may cause disruptions to one
of our lenders, which may cause an increase in the cost of our borrowings from that lender.
  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 our Manager to upgrade its operational, accounting and
financial systems, and add more staff. If our Manager cannot upgrade these systems or recruit
suitable additional employees, its services to us and, therefore, our performance may suffer.
  We and our Manager 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.
  15




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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.
   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.
  16




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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.
    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.
     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.
  17




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
    
    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.
  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 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.
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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.
  Provisions in our organizational documents, our management agreement 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.
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ITEM 4. INFORMATION ON THE COMPANY
 Our Organization and Corporate Structure
        Capital Expenditures and Divestitures
  
    
    On August 17, 2010, we entered into two newbuilding contracts with a
Chinese shipyard for the construction of two Handysize drybulk vessels
of approximately 33,600 dwt each, for an aggregate purchase price of
approximately $48,800 (excluding extra costs of approximately $920).
The vessels are scheduled for delivery in the second and third
quarters of 2012.
    
    On July 30, 2010, we entered into an agreement to sell the M/V Free
Destiny for a price of $3,213. The vessel was delivered to the buyers
on August 27, 2010 and we recognized a gain of $807.
    
    On August 5, 2009, we purchased the M/V Free Neptune from an
unaffiliated third party for approximately $11,000 and related
purchase costs of $302.
    
    On September 1, 2008, we purchased the M/V Free Maverick for the cash
purchase price of $39,600 and related purchase costs of $12.
    
    On July 7, 2008, we purchased the M/V Free Lady for a cash purchase price of $65,200 and related purchase costs of $157.
    
    On April 2, 2008, we purchased the M/V Free Impala for the purchase price of $37,500 and related purchase costs of $420.
    
    On March 19, 2008, we purchased M/V Free Knight for the purchase price of $39,250 and related purchase costs of $400.
 Our Fleet
  20




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Vessel Name
    
    Type
    
    Built
    
    Dwt
    
    EmploymentM/VFree Lady
    
    Handymax
    
    
    2003
    
    
    
    50,246
    
    
    About 3-5 month time
charter at $14,000 per
day for the first 120
days and $15,500 for
the balance period
through May/June 2011M/VFree Jupiter
    
    Handymax
    
    
    2002
    
    
    
    47,777
    
    
    Minimum 60 to about 90
day time charter at
$16,000 per day plus
gross delivery bonus
$270,000 through
July/August 2011M/VFree Knight
    
    Handysize
    
    
    1998
    
    
    
    24,111
    
    
    About 80 day time
charter trip at
$10,000 per day
through May/June 2011M/VFree Maverick
    
    Handysize
    
    
    1998
    
    
    
    23,994
    
    
    About 62 day time
charter trip at $9,100
per day through
May/June 2011M/VFree Impala
    
    Handysize
    
    
    1997
    
    
    
    24,111
    
    
    About 30 day time
charter trip at $9,900
per day through
May/June 2011M/VFree Neptune
    
    Handysize
    
    
    1996
    
    
    
    30,838
    
    
    4-6 months time
charter at $14,000 per
day for the first 115
days and $15,250
thereafter, through
May/July 2011M/VFree Hero
    
    Handysize
    
    
    1995
    
    
    
    24,318
    
    
    About 20-25 day time
charter trip at
$10,500 per day
through May 2011M/VFree Goddess
    
    Handysize
    
    
    1995
    
    
    
    22,051
    
    
    4-6 months time
charter at $12,000 per
day through
August/October 2011
 Free Impala Free Neptune Free Hero
 Competitive Strengths
  
    
    Experienced management team.We have benefited from the expertise of
our executive officers including that of Ion G. Varouxakis, our
Chairman, President and Chief Executive Officer, and that of our
Managers personnel, which consists of seasoned shipping professionals
with long-standing experience in the industry. We believe that our
management team and our Manager have strengthened our balance sheet
while actively and decisively renewing the fleet throughout the
challenging economic climate experienced both industry-wide and
world-wide during the past several years:
 
    
    We restructured certain of our debt
agreements, providing us with additional
financial flexibility, while maintaining a
low cost of funding (a weighted average
interest rate of 3.0% for the year ended
December 31, 2010), which has allowed the
continued growth of our fleet.
    
    We successfully initiated our fleet renewal
program, first by acquiring, in August 2009,
the M/V Free Neptune, a 30,838 dwt,
1996-built drybulk carrier. We subsequently
placed an order for the construction of two
33,600 dwt drybulk carriers for delivery
within the second and third quarters of
2012. We also sold our oldest vessels, the
M/V Free Destiny, a 25,240 dwt, 1982-built
drybulk carrier, and the M/V Free Envoy, a
1984-built, 26,318 dwt drybulk carrier,
which were delivered to their buyers in
August 2010 and May 2011, respectively.
 21




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##### Table of Contents




    
    We have secured additional committed
indebtedness of up to $38,400 in the last
two years. Of this total commitment, $6,000
had been drawn as of December 2010. In this
process, we have developed new relationships
with additional financial institutions and
banks.
    
    We have maintained a strong operating
performance of 97% for the year ended
December 31, 2010, which may be considered
remarkable considering the type of vessels
and the average age of our fleet, while
keeping costs on what we believe to be the
lower end of the industry average.
 
    
    Solid balance sheet.We have strengthened our balance sheet through
the reduction of our net debt to $110.4 million as of December 31,
2010, translating into a net debt to total capitalization ratio of
44%. This ratio is calculated by subtracting cash from debt and
dividing by the sum of liabilities and shareholders equity. We
believe that the maintenance of a reasonable ratio of debt to total
capitalization is an important measurement of our ability to borrow
funds to make additional vessel acquisitions.
    
    Strategic relationships.We have extensive experience and
relationships with ship brokers, financial institutions, industrial
partners and commodity traders. We use these relationships to identify
chartering and acquisition opportunities and in order to make
available to us sources of additional financing, to make industry
contacts, and to gain market intelligence. Our current specialization
in a single asset class allows us to not only monitor markets with a
single measure, but also makes us the partner of choice for businesses
that have a need or requirement for a Handysize specialist.
    
    Cost effective and efficient operations.Through our Manager, 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, high
standards of operation, and retaining and training qualified crew
members.
 Business Strategy
  
    
    Handysize and Handymax focus.Our fleet of drybulk carriers consists
of Handysize and Handymax vessels, although we may consider acquiring
larger vessels if we identify appropriate opportunities. Given the
relatively low number of Handysize and Handymax drybulk vessels on
order, and a relatively great number of Handysize and Handymax drybulk
vessels at an age of 20 years or older, we believe there will be
continued 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 that are unable to service many
ports due to their size or the lack of 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 may
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 or selective investments in newbuildings. Since
prices for vessels have fallen significantly since the middle of 2008,
we expect to have significant opportunities to acquire high quality,
high specification secondhand vessels or newbuildings for attractive
prices. We perform a technical review and financial analysis of each
potential acquisition and only purchase vessels as market conditions
and opportunities dictate and warrant. Furthermore, as part of our
fleet renewal program, we will continue to sell vessels in order to
renew our fleet when we believe it is in our and our shareholders
best interests.
    
    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 some of 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 providing us with more predictable
operating cash flows and some downside protection.
    
    Use of flexible financial strategy.We have used and intend to
continue to use a conservative combination of bank debt, cash flow
from operations 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.
In 2009, we suspended the payment of cash dividends on our common
stock because of prevailing economic conditions and to comply with
restrictions in certain of our loan agreements. Because economic
conditions remain uncertain, and because we are focusing on the
renewal of our fleet, we have determined not to resume the payment of
cash dividends at this time.
 22




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##### Table of Contents



Vessel Employment
     Customers
  Management of Operations and Fleet
   
    
    General Administration.Our Manager 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.Our Manager maintains our books,
records and accounts and provides all services as are necessary for
the preparation and maintenance of the our accounting records in
accordance with 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.Our Manager 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 our Manager. 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.
   23




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##### Table of Contents



Crewing and Employees
  Long -Term Debt
  24




---



##### Table of Contents



Charter Hire Rates
      Property
  25




---



##### Table of Contents



Competition
   Seasonality
  Environmental and Other Regulations
    International Maritime Organization
   26




---



##### Table of Contents



The U.S. Oil Pollution Act of 1990
   Deepwater Horizon
 Free Goddess Free Impala Free
Jupiter
   The United States Clean Water Act
  27




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##### Table of Contents



Other Environmental Initiatives
       28




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##### Table of Contents



Greenhouse Gas Regulation
   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
   29




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##### Table of Contents



Next Intermediate
    
    Next Special SurveyVessel
    
    Dry-docking
    
    Dry-dockingM/V Free Goddess
    
    Third quarter 2013
    
    Third quarter 2015M/V Free Hero
    
    Third quarter 2013
    
    Third quarter 2015M/V Free Impala
    
    Third quarter 2015
    
    Third quarter 2012M/V Free Jupiter
    
    Second quarter 2015
    
    Second quarter 2012M/V Free Knight
    
    Second quarter 2016
    
    Second quarter 2013M/V Free Lady
    
    Second quarter 2011
    
    Second quarter 2013M/V Free Maverick
    
    First quarter 2016
    
    First quarter 2013M/V Free Neptune
    
    Third quarter 2014
    
    Third quarter 2011
  Risk of Loss and Liability Insurance
 General
  Hull and Machinery Insurance
   Protection and Indemnity Insurance
   30




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##### Table of Contents



Loss of Hire Insurance
  Kidnap and Ransom
  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
 Sale of M/V Free Destiny
 Free Destiny
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##### Table of Contents



Newbuilding Contracts
  Commitments for Newbuildings Pre-Delivery and Post-Delivery Financing
  1:5 Reverse Stock Split
  Vessels Classified as Held for Sale and Impairment Charges
 Free Hero Free Hero Free Neptune Free Impala Free Hero Free Impala Free Neptune
 Sale of M/V Free Envoy
  Employment and Charter Rates
  Vessel Name
    
    Type
    
    Built
    
    Dwt
    
    EmploymentM/VFree Lady
    
    Handymax
    
    
    2003
    
    
    
    50,246
    
    
    About 3-5 month time
charter at $14,000 per
day for the first 120
days and $15,500 for
the balance period
through May/June 2011M/VFree Jupiter
    
    Handymax
    
    
    2002
    
    
    
    47,777
    
    
    Minimum 60 to about 90
day time charter at
$16,000 per day plus
gross delivery bonus
$270,000 through
July/August 2011M/VFree Knight
    
    Handysize
    
    
    1998
    
    
    
    24,111
    
    
    About 80 day time
charter trip at
$10,000 per day
through May/June 2011M/VFree Maverick
    
    Handysize
    
    
    1998
    
    
    
    23,994
    
    
    About 62 day time
charter trip at $9,100
per day through 
May/June 2011M/VFree Impala
    
    Handysize
    
    
    1997
    
    
    
    24,111
    
    
    About 30 day time
charter trip at $9,900
per day through
May/June 2011M/VFree Neptune
    
    Handysize
    
    
    1996
    
    
    
    30,838
    
    
    4-6 months time
charter at $14,000 per
day for the first 115
days and $15,250
thereafter, through
May/July 2011M/VFree Hero
    
    Handysize
    
    
    1995
    
    
    
    24,318
    
    
    About 20-25 day time
charter trip at
$10,500 per day
through May 2011M/VFree Goddess
    
    Handysize
    
    
    1995
    
    
    
    22,051
    
    
    4-6 months time
charter at $12,000 per
day through
August/October 2011
 32




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##### Table of Contents



Acquisition of Vessels
      
    
    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.
 Business Components and Activities
  
    
    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.The employment and operation of our vessels involve the following activities:
    
    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;
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##### Table of Contents




    
    Vessel insurance arrangements;
    
    Vessel chartering;
    
    Vessel hire management; and
    
    Vessel performance monitoring.
 Critical Accounting Policies
  Impairment of Long-lived Assets: Free Impala Free Hero Free Impala Free Hero
 Vessels Depreciation:
 Accounting for Special Survey and Dry-docking Costs:
 Accounting for Revenue and Expenses:
 34




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##### Table of Contents



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 could actually generate
revenues.
    
    Fleet utilization.We calculate fleet utilization by dividing the
number of operating days during a period by the number of available
days during that period. The shipping industry uses fleet utilization
to measure a companys efficiency properly operating its vessels and
minimizing the amount of days that its vessels are off-hire for any
unforeseen reason.
    
    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 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
before interest, taxes, depreciation and amortization, amortization of
deferred revenue, back log asset, (gain)/loss on derivative
instruments, stock-based compensation expense, vessel impairment loss,
provision and write-offs of insurance claims and bad debts and
(gain)/loss on sale of vessel. 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 performance.
 Revenues
  
    
    The nature and duration of our charters;
    
    The amount of time that we spent repositioning its vessels;
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##### Table of Contents




    
    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.
     Vessel Operating Expenses
  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
  For the year ended December 31,2010
    
    
    2009
    
    
    2008Adjusted EBITDA (1)
    
    $
    26,834
    
    
    $
    30,337
    
    
    $
    41,517Fleet Data:Average number of vessels (2)
    
    
    9.65
    
    
    
    9.35
    
    
    
    7.36
 36




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##### Table of Contents



For the year ended December 31,2010
    
    
    2009
    
    
    2008Ownership days (3)
    
    
    3,523
    
    
    
    3,414
    
    
    
    2,688Available days (4)
    
    
    3,430
    
    
    
    3,373
    
    
    
    2,605Operating days (5)
    
    
    3,329
    
    
    
    3,294
    
    
    
    2,441Fleet utilization (6)
    
    
    97.1
    %
    
    
    97.7
    %
    
    
    93.7
    %Average Daily Results:Average TCE rate (7)
    
    $
    15,742
    
    
    $
    16,105
    
    
    $
    25,719Vessel operating expenses (8)
    
    
    5,282
    
    
    
    5,218
    
    
    
    6,084Management fees (9)
    
    
    561
    
    
    
    549
    
    
    
    616General and
administrative expenses (10)
    
    
    1,117
    
    
    
    1,073
    
    
    
    1,390Total vessel operating expenses (11)
    
    $
    5,843
    
    
    $
    5,767
    
    
    $
    6,700
 
 (1)
    
    Adjusted EBITDA reconciliation to net income: Adjusted EBITDA represents net earnings before, taxes,
depreciation and amortization, amortization of deferred revenue, back log asset, (gain)/loss on
derivative instruments, stock-based compensation expense, vessel impairment loss, interest and finance
cost net, provision and write-offs of insurance claims and bad debts and (gain)/loss on sale of vessel.
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 performance. For the year ended December 31,2010
    
    
    2009
    
    
    2008Net income/(loss)
    
    $
    (21,821
    )
    
    $
    6,859
    
    
    $
    19,192Depreciation and amortization
    
    
    17,253
    
    
    
    17,748
    
    
    
    14,137Amortization of deferred revenue
    
    
    (1,034
    )
    
    
    (81
    )
    
    
    (368
    )Back log asset
    
    
    
    
    
    
    907
    
    
    
    899Stock-based compensation expense
    
    
    559
    
    
    
    494
    
    
    
    107Vessel impairment loss
    
    
    26,631
    
    
    
    
    
    
    
    Gain/(loss) on derivative instruments
    
    
    465
    
    
    
    111
    
    
    
    1,456Interest and finance cost, net of interest income
    
    
    4,338
    
    
    
    4,299
    
    
    
    5,873(Gain) on sale of vessel
    
    
    (807
    )
    
    
    
    
    
    
    Provision and write-offs of insurance claims and bad debts
    
    
    1,250
    
    
    
    
    
    
    
    221Adjusted EBITDA
    
    $
    26,834
    
    
    $
    30,337
    
    
    $
    41,517
 
 (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 could 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 available days during the period. The shipping industry uses fleet
utilization to measure a companys efficiency in properly operating its vessels and
minimizing the amount of days that its vessels are off-hire for any unforeseen reasons.(7)
    
    TCE is a non-GAAP 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: 37




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##### Table of Contents



For the year ended December 31,2010
    
    
    2009
    
    
    2008Operating revenues
    
    $
    57,650
    
    
    $
    57,533
    
    
    $
    66,689Voyage expenses and commissions
    
    
    (5,244
    )
    
    
    (4,483
    )
    
    
    (3,910
    )Net operating revenues
    
    
    52,406
    
    
    
    53,050
    
    
    
    62,779Operating days
    
    
    3,329
    
    
    
    3,294
    
    
    
    2,441Time charter equivalent daily rate
    
    $
    15,742
    
    
    $
    16,105
    
    
    $
    25,719
 
 (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 31,2010
    
    
    2009
    
    
    2008Vessel operating expenses
    
    $
    18,607
    
    
    $
    17,813
    
    
    $
    16,354Ownership days
    
    
    3,523
    
    
    
    3,414
    
    
    
    2,688Daily vessel operating expenses
    
    $
    5,282
    
    
    $
    5,218
    
    
    $
    6,084
 
 (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 (excluding stock-based
compensation expense) by ownership 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 vessel operating expense and 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, 2010 as Compared to Year Ended December 31, 2009
 REVENUES
 VOYAGE EXPENSES AND COMMISSIONS
 OPERATING EXPENSES
 DEPRECIATION AND AMORTIZATION Free Hero Free Destiny
 38




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##### Table of Contents



Free Maverick
 MANAGEMENT FEES
 GENERAL AND ADMINISTRATIVE EXPENSES
 PROVISION AND WRITE-OFFS OF INSURANCE CLAIMS AND BAD DEBTS Free Jupiter
 GAIN ON SALE OF VESSEL Free Destiny,
 VESSEL IMPAIRMENT LOSS Free Hero Free Hero Free Impala Free
Neptune Free Neptune Free Impala
 FINANCING COSTS
 GAIN /(LOSS) ON INTEREST RATE SWAPS
  NET LOSS Free Impala Free Hero Free
Jupiter Free Destiny
 Year Ended December 31, 2009 as Compared to Year Ended December 31, 2008
  39




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##### Table of Contents



Free Impala
    40




---



##### Table of Contents



Liquidity and Capital Resources
     Cash Flows
 Year Ended December 31, 2010 as Compared to Year Ended December 31, 2009
 OPERATING ACTIVITIES
 INVESTING ACTIVITIES Free Destiny Free Neptune
 FINANCING ACTIVITIES Free Destiny
 41




---



##### Table of Contents



Year Ended December 31, 2009 as Compared to Year Ended December 31, 2008
 OPERATING ACTIVITIES
 INVESTING ACTIVITIES Free Neptune Free Knight Free Impala Free Lady Free
Maverick
 FINANCING ACTIVITIES Free Impala . Free Neptune Free
Knight Free Maverick Free Impala, Free Lady,
 Long-Term Debt
         Free Destiny Free Envoy
 42




---



##### Table of Contents



Loan Covenants
  a)
    
    Credit Suisse loan agreement: (i) we should maintain minimum cash
balances of $375 for each of our 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 and
the swap exposure, which has been waived to 115% until April 1, 2011,
at which time the aggregate fair market value of the financed vessels
again must not be less than 135% of the outstanding loan balance.b)
    
    FBB loan agreement: (i) we should maintain an average corporate
liquidity of at least $3,000; (ii) the leverage ratio of the corporate
guarantor shall not at any time exceed 55%; (iii) the ratio of EBITDA
to net interest expense shall not be less than 3; iv) the fair market
value of the financed vessels shall be at least (a) 115% for the
period July 1, 2010 to June 30, 2011 and (b) 125% thereafter.c)
    
    Deutsche Bank Nederland loan agreement: (i) the interest coverage
ratio shall not be less than 3 until December 31, 2010 and thereafter
to be reset by Deutsche Bank Nederland, in its reasonable discretion
in consultation with us; (ii) the debt service coverage ratio shall
not be less than 1.00 until December 31, 2010 and thereafter to be
reset by Deutsche Bank Nederland, in its reasonable discretion in
consultation with us; (iii) the gearing ratio shall not exceed 2.5;
(iv) the outstanding loan balance shall not be more than a ratio of
the fair market value of the financed vessels as follows: (a) 100%
from July 1, 2010 until and including June 30, 2011, (b) 110% from
July 1, 2011 until and including June 30, 2012, (c) 120% from July 1,
2012 until and including December 30, 2012 and (d) 125% from December
31, 2012 onwards.
  Free Hero
   (In thousands of U.S. Dollars)
 Long-term debt repayment due by period*Up to 1
    
    
    1  3
    
    
    3  5
    
    
    More than 5Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsDeutsche Bank Nederland
    
    $
    34,459
    
    
    $
    3,300
    
    
    $
    25,409
    
    
    $
    5,750
    
    
    $
    Credit Suisse
    
    
    60,250
    
    
    
    16,372
    
    
    
    12,896
    
    
    
    17,707
    
    
    
    13,275FBB
    
    
    25,750
    
    
    
    3,350
    
    
    
    6,700
    
    
    
    6,700
    
    
    
    9,000As of December 31, 2010
    
    $
    120,459
    
    
    $
    23,022
    
    
    $
    45,005
    
    
    $
    30,157
    
    
    $
    22,275
 
 *
    
    Excluding the principal repayments for Hull 1 and Hull 2. Off-Balance Sheet Arrangements
  43




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##### Table of Contents



Summary of Contractual Obligations
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt
    
    $
    120,459
    
    
    $
    23,022
    
    
    $
    45,005
    
    
    $
    30,157
    
    
    $
    22,275Interest on variable-rate debt
    
    
    12,151
    
    
    
    3,453
    
    
    
    4,978
    
    
    
    3,342
    
    
    
    378Yard construction installments
    
    
    44,840
    
    
    
    4,880
    
    
    
    39,960
    
    
    
    
    
    
    
    Services fees to the Manager
    
    
    11,021
    
    
    
    1,422
    
    
    
    2,844
    
    
    
    2,844
    
    
    
    3,911Management fees to the Manager
    
    
    34,515
    
    
    
    2,193
    
    
    
    3,645
    
    
    
    3,564
    
    
    
    25,113Total obligations
    
    $
    222,986
    
    
    $
    34,970
    
    
    $
    96,432
    
    
    $
    39,907
    
    
    $
    51,677
  
 ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  TermName
    
    Age
    
    Position
    
    ExpiresIon G. Varouxakis
    
    
    40
    
    
    Chairman of the Board of Directors,
Chief Executive Officer and
President
    
    
    2011Alexandros Mylonas
    
    
    36
    
    
    Chief Financial Officer and Treasurer
    
    George Kalogeropoulos
    
    
    50
    
    
    Director
    
    
    2012Didier Salomon
    
    
    64
    
    
    Director
    
    
    2012Focko H. Nauta
    
    
    53
    
    
    Director
    
    
    2013Dimitrios Panagiotopoulos
    
    
    50
    
    
    Director
    
    
    2011Keith Bloomfield
    
    
    39
    
    
    Director
    
    
    2013Maria Badekas
    
    
    38
    
    
    Secretary
    
    
 Ion G. Varouxakis
 Alexandros Mylonas
 George Kalogeropoulos
 Didier Salomon
 44




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##### Table of Contents



Focko H. Nauta
 Dimitrios Panagiotopoulos
 Keith Bloomfield
 Maria Badekas
 B. Compensation
  C. Board Practices
  Board Committees
  Audit Committee
   Compensation Committee
  45




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##### Table of Contents



Nominating Committee
  Corporate Governance Committee
  Director Independence
  Code of Conduct and Ethics
  D. Employees
  Amended and Restated 2005 Stock Incentive Plan
     
 ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  46




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##### Table of Contents



Number of
    
    Shares ofShares of
    
    CommonCommon Stock
    
    StockBeneficially
    
    BeneficiallyName
    
    Owned
    
    Owned (1)Ion G. Varouxakis (2)
    
    
    546,274
    
    
    
    8.42
    %All directors and executive officers as a group (eight persons)(3)
    
    
    611,674
    
    
    
    9.42
    %FS Holdings Limited (4)
    
    
    648,120
    
    
    
    9.99
    %
 
 (1)
    
    For purposes of computing the percentage of outstanding shares of common
stock held by each person named above, 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, but are not deemed to be outstanding when
computing the percentage ownership of any other person. Based on 6,487,852
shares of common stock outstanding as of May 16, 2011.(2)
    
    Reflects 502,940 shares owned by The Midas Touch S.A., a Marshall Islands
corporation wholly owned by Mr. Varouxakis and 3,334 shares underlying
warrants owned by The Midas Touch. Does not include 8,000 shares owned of
record by V Estates S.A., which is controlled by his father, or 6,120 shares
owned of record by his mother, as to which shares he disclaims beneficial
ownership.(3)
    
    Includes 50,000 restricted shares, which do not vest until December 31, 2013.(4)
    
    Reflects 561,757 shares owned by FS Holdings Limited, a Marshall Islands
corporation, and 86,363 shares owned by Benbay Limited, a Republic of Cyprus
corporation, each of which is controlled by the Restis family. B. Related Party Transactions
 Manager
    Free Destiny Free Neptune
  47




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##### Table of Contents



First Business Bank (FBB)
 Free
Impala Free Impala Free Neptune
 Other Related Parties
  C. Interest of Experts and Counsel
  
 ITEM 8.
    
    FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  B. Significant Changes
  
 ITEM 9.
    
    THE OFFER AND LISTING
 A. Offer and Listing Details
  B. Plan of Distribution
  C. Markets
   Common Stock
    
    Class Z WarrantsFor the Years Ended:
    
    High
    
    Low
    
    High
    
    LowDecember 31, 2006
    
    $
    27.25
    
    
    $
    13.10
    
    
    $
    1.20
    
    
    $
    0.35December 31, 2007
    
    
    51.20
    
    
    
    13.80
    
    
    
    5.20
    
    
    
    0.48December 31, 2008
    
    
    39.85
    
    
    
    4.50
    
    
    
    3.35
    
    
    
    0.05December 31, 2009
    
    
    17.45
    
    
    
    5.85
    
    
    
    0.65
    
    
    
    0.08December 31, 2010
    
    
    7.95
    
    
    
    3.61
    
    
    
    0.25
    
    
    
    0.01
 48




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##### Table of Contents



Common Stock
    
    Class Z WarrantsFor
the Quarters Ended:
    
    High
    
    Low
    
    High
    
    LowMarch 31, 2009
    
    $
    9.40
    
    
    $
    2.70
    
    
    $
    0.33
    
    
    $
    0.08June 30, 2009
    
    
    17.45
    
    
    
    5.85
    
    
    
    0.65
    
    
    
    0.10September 30, 2009
    
    
    12.15
    
    
    
    7.85
    
    
    
    0.55
    
    
    
    0.16December 31, 2009
    
    
    8.75
    
    
    
    6.35
    
    
    
    0.32
    
    
    
    0.16March 31, 2010
    
    
    6.70
    
    
    
    6.40
    
    
    
    0.20
    
    
    
    0.20June 30, 2010
    
    
    7.45
    
    
    
    5.85
    
    
    
    0.20
    
    
    
    0.10September 30, 2010
    
    
    6.00
    
    
    
    4.50
    
    
    
    0.15
    
    
    
    0.02December 31, 2010
    
    
    5.08
    
    
    
    3.61
    
    
    
    0.12
    
    
    
    0.01March 31, 2011
    
    
    3.89
    
    
    
    2.46
    
    
    
    0.09
    
    
    
    0.03June 30, 2011 (through May 16, 2011)
    
    
    2.80
    
    
    
    2.46
    
    
    
    0.08
    
    
    
    0.02
 Common Stock
    
    Class Z WarrantsFor the Months Ended:
    
    High
    
    Low
    
    High
    
    LowNovember 30, 2010
    
    
    5.08
    
    
    
    3.92
    
    
    
    0.12
    
    
    
    0.01December 31, 2010
    
    
    4.08
    
    
    
    3.61
    
    
    
    0.12
    
    
    
    0.04January 31, 2011
    
    
    3.89
    
    
    
    3.44
    
    
    
    0.09
    
    
    
    0.03February 28, 2011
    
    
    3.44
    
    
    
    2.92
    
    
    
    0.09
    
    
    
    0.07March 31, 2011
    
    
    3.49
    
    
    
    2.72
    
    
    
    0.09
    
    
    
    0.05April 30, 2011
    
    
    2.78
    
    
    
    2.46
    
    
    
    0.08
    
    
    
    0.02May 31, 2011 (through May 16, 2011)
    
    
    2.80
    
    
    
    2.46
    
    
    
    0.07
    
    
    
    0.03
 D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 ITEM 10.
    
    ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Incorporation
   Shareholder Rights Plan
 General
    49




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##### Table of Contents



Detachment of the Rights
  
    
    10 days following a public announcement that a person or group of affiliated or associated
persons or an acquiring person has acquired or obtained the right to acquire beneficial
ownership of 15% or more of our outstanding common stock; or
    
    10 business days following the start of a tender or exchange offer that would result,
if closed, in a person becoming an acquiring person.
    
    
    our common stock certificates will evidence the rights, and the rights will be
transferable only with those certificates; and
    
    any new shares of common stock will be issued with rights and new certificates will
contain a notation incorporating the rights agreement by reference.
   Flip-In Event
   Flip-Over Event
  
    
    we are acquired in a merger or other business combination transaction; or
    
    50% or more of our assets, cash flows or earning power is sold or transferred.
  Antidilution
  Redemption of Rights
  50




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##### Table of Contents



Exchange of Rights
  
    
    any person other than our existing shareholders becoming the beneficial owner of
common stock with voting power equal to 50% or more of the total voting power of all shares
of common stock entitled to vote in the election of directors; or
    
    the occurrence of a flip-over event.
 Amendment of Terms of Rights
  
    
    to cure any ambiguity, omission, defect or inconsistency;
    
    to make changes that do not adversely affect the interests of holders of rights,
excluding the interests of any acquiring person; or
    
    to shorten or lengthen any time period under the rights agreement, except that we cannot
change the time period when rights may be redeemed or lengthen any time period, unless such
lengthening protects, enhances or clarifies the benefits of holders of rights other than an
acquiring person.
  C. Material Contracts
  D. Exchange Controls and Other Limitations Affecting Security Holders
  E. Taxation
  Marshall Islands Tax Consequences
  United States Federal Income Tax Consequences
  Taxation of Operating Income: In General
  51




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##### Table of Contents



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
    
    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.
       52




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##### Table of Contents



Taxation in Absence of Exemption
    
    
    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.
  53




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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
  Taxation of U.S. Holders Making a Timely QEF Election.
 54




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##### Table of Contents



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.
 
    
    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.
 55




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##### Table of Contents



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 Agents
  G. Statement by Experts
  H. Documents on Display
 http://www.sec.gov
  I. Subsidiary Information
  
 ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Fluctuation
   56




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##### Table of Contents



(In thousands of U.S. Dollars)Vessel Name
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015Free Hero / Free Goddess /
Free Jupiter
    
    $
    275
    
    
    $
    170
    
    
    $
    135
    
    
    $
    100
    
    
    $
    57Free Impala / Free Neptune
    
    $
    247
    
    
    $
    214
    
    
    $
    179
    
    
    $
    145
    
    
    $
    111Free Knight
    
    $
    137
    
    
    $
    107
    
    
    $
    76
    
    
    $
    46
    
    
    $
    15Free Lady
    
    $
    268
    
    
    $
    238
    
    
    $
    207
    
    
    $
    177
    
    
    $
    147Free Maverick
    
    $
    199
    
    
    $
    156
    
    
    
    
    
    
    
    
    
    
    
    
  Interest Rate Risk
   Foreign Exchange Rate Risk
  Credit Risk
   Charter Market Risk
  Free Jupiter
 57




---



##### 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
  
 ITEM 16B.
    
    CODE OF ETHICS
 www.freeseas.gr
 58




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##### Table of Contents



ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2009
    
    
    2010Audit fees (1)
    
    $
    704
    
    
    $
    464Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    Other fees
    
    
    
    
    
    
    Total
    
    $
    704
    
    
    $
    464
 
 (1)
    
    Audit fees represent fees for professional services related to the audit of our
financial statements for the years ended December 31, 2010 and 2009, 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.  
 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
  
    
    Our board is composed of a majority of independent directors, consistent with
NASDAQ corporate governance requirements; we are not required under Marshall
Islands law, however, to maintain a majority independent directors and we cannot guarantee that we
will always in the future maintain a board with a majority of independent members.
    
    In lieu of obtaining shareholder approval prior to the issuance of designated
securities, we comply with provisions of Marshall Islands law,
requiring that the board
of directors approves share issuances.
    
    In lieu of holding regular meetings at which only independent directors are
present, our entire board of directors, a majority of whom are independent, hold
regular meetings as is consistent with Marshall Islands law.
    
    As a foreign private issuer, we are not required to solicit proxies or provide
proxy statements to NASDAQ pursuant to NASDAQ corporate governance rules or Marshall
Islands law. Consistent with Marshall Islands law and as provided in our bylaws, we will
notify our shareholders of meetings between 15 and 60 days before the meeting. This
notification will contain, among other things, information regarding business to be
transacted at the meeting. In addition, our bylaws provide that shareholders must give
us between 150 and 180 days advance notice to properly introduce any business at a
meeting of shareholders.
 59




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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 reference1.5
    
    Amendment to the Amended and Restated Articles of
Incorporation of FreeSeas Inc.
    
    Filed herewith2.1
    
    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 reference2.6
    
    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 reference2.7
    
    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 reference2.9
    
    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
    
    Amended and Restated 2005 Stock Incentive Plan
    
    Annex A to
Registrants Form
6-K filed on
December 1, 2006
and incorporated
herein by reference4.2
    
    Credit Agreement dated June 24, 2004 between
Adventure Three S.A. and Hollandsche Bank  Unie
N.V.
    
    Exhibit 10.7 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 reference4.3
    
    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 reference
 60




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where Filed4.5
    
    Short-Term Loan Agreement in Euros and Optional
Currencies dated July 8, 2004 between Adventure
Three S.A. and Hollandsche Bank  Unie N.V.
    
    Exhibit 10.10 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 reference4.10
    
    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 reference4.14
    
    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 reference4.26
    
    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 reference4.27
    
    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 reference
 61




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where Filed4.36
    
    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 reference4.39
    
    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 reference4.41
    
    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
Facility Agreement dated December 24, 2007 between
FreeSeas Inc. and Credit Suisse
    
    Exhibit 4.56 to
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, 20084.48
    
    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, 20084.50
    
    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, 20094.54
    
    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, 2009
 62




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where Filed4.58
    
    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
Three S.A. and Adventure Five 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
Adventure Nine, Adventure Twelve and First Business
Bank
    
    Exhibit 4.60 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.61
    
    First Priority Mortgage on the M/V Free Impalain
favor of First Business Bank
    
    Exhibit 4.61 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.62
    
    First Preferred Mortgage on the M/V Free Neptunein
favor of First Business Bank
    
    Exhibit 4.62 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.63
    
    Deed of Covenants dated December 16, 2009 between
Adventure Nine and First Business Bank
    
    Exhibit 4.63 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.64
    
    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.
    
    Exhibit 4.64 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.65
    
    Restated Facility Agreement dated December 1, 2009
among Adventure Two, Adventure Three, Adventure
Seven, Adventure Eleven, FreeSeas Inc. and New HBU
II N.V.
    
    Exhibit 4.65 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.66
    
    Third Supplemental Agreement dated November 27,
2009 to the Facility Agreement dated December 24,
2007 between FreeSeas Inc. and Credit Suisse
    
    Exhibit 4.66 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.67
    
    First Preferred Liberian Ship Mortgage on the M/V
Free Goddess in favor of Credit Suisse AG
    
    Exhibit 4.67 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.68
    
    First Preferred Liberian Ship Mortgage on the M/V
Free Hero in favor of Credit Suisse AG
    
    Exhibit 4.68 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference4.69
    
    First Preferred Liberian Ship Mortgage on the M/V
Free Jupiter in favor of Credit Suisse AG
    
    Exhibit 4.69 to
Registrants Annual
Report on Form 20-F
for the year ended
December 31, 2009
and incorporated
herein by reference8.1
    
    Subsidiaries of the Registrant
    
    Filed as Exhibit
21.1 to Amendment
No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-162630) filed
on March 30, 2011
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 herewith
 63




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##### Table of Contents



ExhibitNo.:
    
    Exhibit Description
    
    Where Filed13.2
    
    Section 906 Certification of Chief Financial Officer
    
    Filed herewith15.1
    
    Letter Regarding Change in Certifying Accountant
    
    Filed as Exhibit
99.1 to Amendment
No. 1 to
Registrants
Registration
Statement on Form
F-1 (File No.
333-162630) filed
on October 22, 2009
and incorporated
herein by reference15.2
    
    Consent of PricewaterhouseCoopers, S.A.
    
    Filed herewith15.3
    
    Consent of Ernst & Young (Hellas) Certified
Auditors Accountants S.A.
    
    Filed herewith
 64




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##### Table of Contents



SIGNATURES
  FREESEAS INC.By:
    /s/ Alexandros MylonasName:
    Alexandros MylonasTitle:
    Chief Financial Officer  65




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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, 2010 and 2009
    
    
    F-4Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008
    
    
    F-5Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2010, 2009 and 2008
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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##### Table of Contents



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
    
    
    2010
    
    
    2009ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    
    
    
    
    $
    3,694
    
    
    $
    6,341Restricted cash
    
    
    
    
    
    
    5,255
    
    
    
    1,750Trade receivables, net of provision of $1,385 and $1,443 for 2010 and 2009 respectively
    
    
    
    
    
    
    2,157
    
    
    
    2,011Insurance claims
    
    
    11
    
    
    
    133
    
    
    
    9,240Due from related party
    
    
    4
    
    
    
    1,285
    
    
    
    1,410Inventories
    
    
    
    
    
    
    1,171
    
    
    
    601Prepayments and other
    
    
    
    
    
    
    390
    
    
    
    772Vessel held for sale
    
    
    5
    
    
    
    13,606
    
    
    
    Total current assets
    
    
    
    
    
    $
    27,691
    
    
    $
    22,125Advances for vessels under construction
    
    
    6
    
    
    
    5,665
    
    
    
    Vessels, net
    
    
    5
    
    
    
    213,691
    
    
    
    270,701Deferred charges, net
    
    
    7
    
    
    
    2,812
    
    
    
    2,995Restricted cash
    
    
    
    
    
    
    1,125
    
    
    
    1,500Total non-current assets
    
    
    
    
    
    $
    223,293
    
    
    $
    275,196Total assets
    
    
    
    
    
    $
    250,984
    
    
    $
    297,321LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    
    
    
    
    $
    4,323
    
    
    $
    10,746Accrued liabilities
    
    
    
    
    
    
    1,227
    
    
    
    1,310Unearned revenue
    
    
    
    
    
    
    430
    
    
    
    416Due to related party
    
    
    4
    
    
    
    98
    
    
    
    18Derivative financial instruments  current portion
    
    
    9
    
    
    
    583
    
    
    
    566Deferred revenue  current portion
    
    
    
    
    
    
    136
    
    
    
    1,032Bank loans  current portion
    
    
    10
    
    
    
    23,022
    
    
    
    15,400Total current liabilities
    
    
    
    
    
    $
    29,819
    
    
    $
    29,488Derivative financial instruments  net of current portion
    
    
    9
    
    
    
    538
    
    
    
    684Deferred revenue  net of current portion
    
    
    
    
    
    
    
    
    
    
    138Bank loans  net of current portion
    
    
    10
    
    
    
    97,437
    
    
    
    122,559Total long term liabilities
    
    
    
    
    
    $
    97,975
    
    
    $
    123,381Commitments and Contingencies
    
    
    11
    
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued
    
    
    15
    
    
    
    
    
    
    
    Common stock, $0.001 par value; 250,000,000 shares authorized, 6,487,852 and 6,497,852
shares issued and outstanding at December 31, 2010 and 2009
    
    
    15
    
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    
    
    
    
    127,634
    
    
    
    127,075Retained earnings/ (Accumulated deficit)
    
    
    
    
    
    
    (4,450
    )
    
    
    17,371Total shareholders equity
    
    
    
    
    
    $
    123,190
    
    
    $
    144,452Total liabilities and shareholders equity
    
    
    
    
    
    $
    250,984
    
    
    $
    297,321
  F-4




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended December 31,2010
    
    
    2009
    
    
    2008OPERATING REVENUES
    
    $
    57,650
    
    
    $
    57,533
    
    
    $
    66,689OPERATING EXPENSES:Voyage expenses
    
    
    (1,887
    )
    
    
    (1,394
    )
    
    
    (527
    )Commissions
    
    
    (3,357
    )
    
    
    (3,089
    )
    
    
    (3,383
    )Vessel operating expenses
    
    
    (18,607
    )
    
    
    (17,813
    )
    
    
    (16,354
    )Depreciation expense (Note 5)
    
    
    (15,365
    )
    
    
    (16,006
    )
    
    
    (13,349
    )Amortization of deferred charges (Note 7)
    
    
    (1,888
    )
    
    
    (1,742
    )
    
    
    (788
    )Management and other fees to a related party (Note 4)
    
    
    (1,978
    )
    
    
    (1,874
    )
    
    
    (2,634
    )General and administrative expenses
    
    
    (4,494
    )
    
    
    (4,156
    )
    
    
    (2,863
    )Provision and write-offs of insurance claims and bad debts
    
    
    (1,250
    )
    
    
    
    
    
    
    (221
    )Gains on sale of vessel (Note 5)
    
    
    807
    
    
    
    
    
    
    
    Vessel impairment loss (Note 5)
    
    
    (26,631
    )
    
    
    
    
    
    
    Income (loss) from operations
    
    $
    (17,000
    )
    
    $
    11,459
    
    
    $
    26,570OTHER INCOME (EXPENSE):Interest and finance costs
    
    
    (4,375
    )
    
    
    (4,323
    )
    
    
    (6,453
    )Loss on derivative instruments (Note 9)
    
    
    (465
    )
    
    
    (111
    )
    
    
    (1,456
    )Interest income
    
    
    37
    
    
    
    24
    
    
    
    580Other
    
    
    (18
    )
    
    
    (190
    )
    
    
    (49
    )Other income (expense)
    
    $
    (4,821
    )
    
    $
    (4,600
    )
    
    $
    (7,378
    )Net income (loss)
    
    $
    (21,821
    )
    
    $
    6,859
    
    
    $
    19,192Basic earnings (loss) per share
    
    $
    (3.46
    )
    
    $
    1.35
    
    
    $
    4.57Diluted earnings (loss) per share
    
    $
    (3.46
    )
    
    $
    1.35
    
    
    $
    4.56Basic weighted average number of shares
    
    
    6,313,606
    
    
    
    5,092,772
    
    
    
    4,201,299Diluted weighted average number of shares
    
    
    6,313,606
    
    
    
    5,092,772
    
    
    
    4,210,393
  F-5




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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
  CommonShares
    
    
    
    
    
    
    Additional
    
    
    Retained(Notes 1 and
    
    
    Common
    
    
    Paid-in
    
    
    Earnings13)
    
    
    Shares $
    
    
    Capital
    
    
    (Accumulated deficit)
    
    
    TotalBalance December 31, 2007
    
    
    4,149,047
    
    
    $
    4
    
    
    $
    115,481
    
    
    $
    (2,858
    )
    
    $
    112,627Dividend payments
    
    
    
    
    
    
    
    
    
    
    (7,335
    )
    
    
    (5,822
    )
    
    
    (13,157
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    107Stock issued upon exercise of warrants
    
    
    35,575
    
    
    
    
    
    
    
    836
    
    
    
    
    
    
    
    836Stock issued upon exercise of options
    
    
    50,000
    
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    1,250Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,192
    
    
    
    19,192Balance December 31, 2008
    
    
    4,234,622
    
    
    $
    4
    
    
    $
    110,339
    
    
    $
    10,512
    
    
    $
    120,855Common shares issued
    
    
    2,008,230
    
    
    
    2
    
    
    
    16,242
    
    
    
    
    
    
    
    16,244Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    494Restricted shares issued
    
    
    255,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,859
    
    
    
    6,859Balance December 31, 2009
    
    
    6,497,852
    
    
    $
    6
    
    
    $
    127,075
    
    
    $
    17,371
    
    
    $
    144,452Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    559
    
    
    
    
    
    
    
    559Restricted shares forfeited
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,821
    )
    
    
    (21,821
    )Balance December 31, 2010
    
    
    6,487,852
    
    
    $
    6
    
    
    $
    127,634
    
    
    $
    (4,450
    )
    
    $
    123,190
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##### Table of Contents



FREESEAS INC.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
  Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008Cash Flows from Operating Activities:Net income (loss)
    
    $
    (21,821
    )
    
    $
    6,859
    
    
    $
    19,192Adjustments to reconcile net income (loss) to net cash provided from operating activitiesDepreciation (Note 5)
    
    
    15,365
    
    
    
    16,006
    
    
    
    13,349Amortization of deferred financing fees (Note 7)
    
    
    211
    
    
    
    345
    
    
    
    353Amortization of deferred dry-docking and special survey costs (Note 7)
    
    
    1,888
    
    
    
    1,742
    
    
    
    788Provision and write-offs of insurance claims and bad debts
    
    
    1,250
    
    
    
    
    
    
    
    221Stock compensation cost (Note 14)
    
    
    559
    
    
    
    494
    
    
    
    107Write off of deferred financing fees (Note 7)
    
    
    
    
    
    
    111
    
    
    
    639Change in fair value of derivatives (Note 9)
    
    
    (129
    )
    
    
    (560
    )
    
    
    1,061Amortization of deferred revenue
    
    
    (1,034
    )
    
    
    (81
    )
    
    
    (368
    )Gain on sale of vessel (Note 5)
    
    
    (807
    )
    
    
    
    
    
    
    Vessel impairment loss
    
    
    26,631
    
    
    
    
    
    
    
    Back log asset (Note 8)
    
    
    
    
    
    
    907
    
    
    
    899Changes in:-Trade receivables
    
    
    (490
    )
    
    
    (1,199
    )
    
    
    (973
    )-Insurance claims
    
    
    4,992
    
    
    
    8,567
    
    
    
    (1,691
    )-Due from related party
    
    
    125
    
    
    
    224
    
    
    
    (597
    )-Inventories
    
    
    (570
    )
    
    
    (22
    )
    
    
    (80
    )-Prepayments and other
    
    
    382
    
    
    
    200
    
    
    
    (638
    )-Accounts payable
    
    
    (3,164
    )
    
    
    (170
    )
    
    
    7,735-Accrued liabilities
    
    
    (133
    )
    
    
    (10,037
    
    
    
    (5,366
    )-Unearned revenue
    
    
    14
    
    
    
    (904
    )
    
    
    537-Due to related party
    
    
    80
    
    
    
    6
    
    
    
    12Dry-docking and special survey costs paid (Note 7)
    
    
    (2,547
    )
    
    
    (1,097
    )
    
    
    (2,617
    )Net Cash from Operating Activities
    
    $
    20,802
    
    
    $
    21,391
    
    
    $
    32,563Cash flows from (used in) Investing Activities:Vessel acquisitions (Note 5)
    
    
    
    
    
    
    (11,302
    )
    
    
    (182,539
    )Advances for vessels under construction (Note 6)
    
    
    (5,665
    )
    
    
    
    
    
    
    Proceeds from sale of vessel, net
    
    
    2,846
    
    
    
    
    
    
    
    Net Cash used in Investing Activities
    
    $
    (2,819
    )
    
    $
    (11,302
    )
    
    $
    (182,539
    )Cash flows from (used in) Financing Activities:Increase in restricted cash
    
    
    (3,130
    )
    
    
    (655
    )
    
    
    (2,245
    )Proceeds from long term loan
    
    
    
    
    
    
    6,000
    
    
    
    153,650Payments of bank loans
    
    
    (17,500
    )
    
    
    (28,391
    )
    
    
    (49,600
    )Proceeds from issuance of common shares, net of issuance costs (Note 15)
    
    
    
    
    
    
    16,244
    
    
    
    Exercise of warrants (Note 14)
    
    
    
    
    
    
    
    
    
    
    836Exercise of stock options (Note 14)
    
    
    
    
    
    
    
    
    
    
    1,250Common stock dividend
    
    
    
    
    
    
    
    
    
    
    (13,157
    )Financing fees (Note 7)
    
    
    
    
    
    
    (324
    )
    
    
    (774
    )Net Cash from / (used in) Financing Activities
    
    $
    (20,630
    )
    
    $
    (7,126
    )
    
    $
    89,960Net increase /(decrease) in cash in hand and at bank
    
    $
    (2,647
    )
    
    $
    2,963
    
    
    $
    (60,016Cash and cash equivalents, beginning of year
    
    
    6,341
    
    
    
    3,378
    
    
    
    63,394Cash and cash equivalents, end of year
    
    $
    3,694
    
    
    $
    6,341
    
    
    $
    3,378Supplemental Cash Flow Information:Cash paid for interest
    
    $
    4,017
    
    
    $
    4,462
    
    
    $
    4,410
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##### Table of Contents



FREESEAS INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1.
    
    Basis of Presentation and General Information
 The accompanying consolidated financial statements include the accounts of FreeSeas Inc. and
its wholly owned subsidiaries (collectively, the Company or FreeSeas). FreeSeas, formerly
known as Adventure Holdings S.A., was incorporated in the Marshall Islands on April 23, 2004
for the purpose of being the ultimate holding company of ship-owning companies. The
management of FreeSeas vessels is performed by Free Bulkers S.A. (the Manager), a Marshall
Islands company that is controlled by the Chief Executive Officer of FreeSeas (see Note 4).Effective October 1, 2010, the Company effected a five-to-one reverse stock split on its
issued and outstanding common stock (Note 13). All share and per share amounts disclosed in
the Financial Statements give effect to this reverse stock split retroactively, for all
periods presented.During the year ended December 31, 2010, the Company owned and operated eight Handysize (one
of which was sold on August 2010), two Handymax dry bulk carriers and placed an order for the
construction of two Handysize bulk carriers. As of December 31, 2010, FreeSeas is the sole
owner of all outstanding shares of the following ship-owning subsidiaries:
 YearBuilt/Expected%
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year of
    
    Date of
    
    Date ofCompany
    
    Owned
    
    M/V
    
    Type
    
    Dwt
    
    Delivery
    
    Acquisition
    
    DisposalAdventure Two S.A.
    
    
    100
    %
    
    Free Destiny
    
    Handysize
    
    
    25,240
    
    
    
    1982
    
    
    
    08/04/04
    
    
    
    08/27/10Adventure 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/AAdventure Fourteen S.A.
    
    
    100
    %
    
    Hull 1
    
    Handysize
    
    
    33,600
    
    
    
    2012
    
    
    
    N/A
    
    
    
    N/AAdventure Fifteen S.A
    
    
    100
    %
    
    Hull 2
    
    Handysize
    
    
    33,600
    
    
    
    2012
    
    
    
    N/A
    
    
    
    N/A
 2.
    
    Significant Accounting Policies
 a)
    
    Principles of Consolidation:The accompanying consolidated financial statements
have been prepared in accordance with U.S. GAAP and include in each of the three years
in the period ended December 31, 2010 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.
FreeSeas as the holding company determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is a voting interest
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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 entity or a variable interest entity. Under ASC 810 Consolidation, (formerly ARB No.
51) a voting interest entity is an entity in which the total equity investment at risk
is sufficient to enable the entity to finance itself independently and provides the
equity holders with the obligation to absorb losses, the right to receive residual
returns and the right to make financial and operating decisions. The holding company
consolidates voting interest entities in which it owns all, or at least a majority
(generally, greater than 50%) of the voting interest. Variable interest entities
(VIE) are entities as defined under ASC 810 that in general either do not have equity
investors with voting rights or that have equity investors that do not provide
sufficient financial resources for the entity to support its activities. The
determination of whether a reporting entity is required to consolidate another entity
is based on, among other things, the other entitys design and purpose and the
reporting entitys power, through voting or similar rights, to direct the activities of
the other entity that most significantly impact the other entitys economic
performance. A controlling financial interest in a VIE is present when a company has
the obligation to absorb losses or the right to receive benefits that could potentially
be significant to the VIE, or both. Only one reporting entity, known as the primary
beneficiary, is expected to be identified as having a controlling financial interest
and thus is required to consolidate the VIE. The Company evaluates all arrangements
that may include a variable interest in an entity to determine if it may be the primary
beneficiary, and would be required to include assets, liabilities and operations of a
VIE in its consolidated financial statements. As of December 31, 2010 and 2009, no such
interest existed.b)
    
    Use of Estimates:The preparation of consolidated financial statements in
conformity with U.S. 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.c)
    
    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, 2010, 2009 and 2008 comprehensive income was the same as net income.d)
    
    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 monitors the credit risk regarding charterers turnover in order to review its
reliance on individual charterers. 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 account receivable is considered high due to the fact
that the Companys total income is derived from a few charterers. During the years ended
December 31, 2010, 2009 and 2008 three charterers individually accounted for more than
10% of the Companys voyage revenues as follows:
 Charterer
    
    FY 2010
    
    FY 2009
    
    FY 2008A
    
    
    16
    %
    
    
    37
    %
    
    
    38
    %B
    
    
    14
    %
    
    
    18
    %
    
    
    13
    %C
    
    
    12
    %
    
    Less than 10%
    
    
    10
    %
 e)
    
    Foreign Currency Translation:The functional currency of the Company 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
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 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.f)
    
    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.g)
    
    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.h)
    
    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 recoverable.i)
    
    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 accrued liabilities and depending on their nature, are classified as
operating expenses or voyage 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.j)
    
    Inventories:Inventories, which are comprised of bunkers and lubricants
remaining on board of the vessels at year end, are valued at the lower of cost, as
determined on a first-in, first-out basis, or market.k)
    
    Advances for vessels under construction:This account includes milestone payments
relating to the shipbuilding contracts with the shipyard, and various pre-purchase costs
and expenses for which the recognition criteria are met.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 Company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
assets, 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.n)
    
    Vessels held for sale:It is the Companys policy to dispose of vessels when
suitable opportunities arise and not necessarily to keep them until the end of their
useful life. The Company classifies assets and disposal groups of assets as being held
for sale in accordance with ASC 360, Property, Plant and Equipment, when the following
criteria are met: (i) management possessing the necessary authority has committed to a
plan to sell the asset; (ii) the asset is immediately available for sale on an as is
basis; (iii) an active program to find the buyer and other actions required to execute
the plan to sell
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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 the asset have been initiated; (iv) the sale of the asset is probable, and transfer of
the asset is expected to qualify for recognition as a completed sale within one year;
(v) the asset is being actively marketed for sale at a price that is reasonable in
relation to its current fair value and (vi) actions required to complete the plan
indicate that it is unlikely that significant changes to the plan will be made or that
the plan will be withdrawn. Long-lived assets or disposal groups classified as held for
sale are measured at the lower of their carrying amount or fair value less cost to
sell. These assets are not depreciated once they meet the criteria to be held for sale
and are classified in current assets on the consolidated balance sheet.o)
    
    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. In
performing the recoverability tests 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 the Companys
alternative courses of action, 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, 2010, 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 days, 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 market historical average time charter rates for the
remaining life of the vessel after the completion of the current contracts. In
addition, the Company used an annual operating expenses escalation factor and an
estimate of off hire days. All estimates used and assumptions made were in accordance
with the Companys internal budgets and historical experience of the shipping industry.
The Companys assessment concluded that for vessels that it is intended to be held and
used no impairment existed as of December 31, 2010, as the future undiscounted net
operating cash flows per vessel exceeded the carrying value of each vessel. For the
vessels for which alternative courses of action (including their sale) are under
consideration, an impairment charge of $26,631 was recognized in 2010 and reflected in
the accompanying consolidated statement of operations.p)
    
    Accounting for Special Survey and Dry-docking Costs:The Company 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
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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 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.q)
    
    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.r)
    
    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.s)
    
    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.t)
    
    Interest Rate Swaps:The Company uses interest rate swaps to manage net exposure
to interest rate changes related to its borrowings. 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, 2008, 2009 and 2010, there was no derivative transaction
meeting such hedge accounting criteria; therefore the change in their fair value is
recognised in earnings.u)
    
    Financial Instruments:The principal financial assets of the Company consist of
cash and cash equivalents and restricted cash, trade receivables (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.v)
    
    Fair Value Measurements:The Company follows the provisions of 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. The
fair value hierarchy gives the highest priority (Level 1) to quoted prices in active
markets and the lowest priority (Level 3) to unobservable data, for example, the
reporting entitys own data. Under the standard, fair value measurements are separately
disclosed by level within the fair value hierarchy. 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. .w)
    
    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 elected not to report any
existing financial assets or liabilities at fair value that are not already reported at
fair value. The Company retains the ability to elect the fair value option for certain
future assets and liabilities acquired under this new pronouncement.x)
    
    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
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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 determinable, and
collection is reasonably assured. A voyage charter involves the carriage of a specific amount and type of
cargo from specific load port(s) to specific discharge port(s), subject to various cargo handling terms, in
return for payment of an agreed upon freight rate per ton of cargo. 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. Voyage revenues for the transportation of cargo are
recognized ratably over the estimated relative transit time of each voyage. A voyage is deemed to commence
when a vessel is available for loading of its next fixed cargo and is deemed to end upon the completion of the
discharge of the current 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 provided,  Voyage expenses, primarily consisting of port, canal and bunker
expenses that are unique to a particular charter, are paid for by the charterer under time charter arrangements
or by the Company under voyage charter arrangements, except for commissions, which are always paid for
by the Company, regardless of charter type. All voyage and vessel operating expenses are expensed as
incurred, except for commissions. Commissions are deferred over the related voyage charter period to the
extent revenue has been deferred since commissions are earned as the Companys revenues are earned.
Probable losses on voyages in progress are provided for in full at the time such losses can be estimated.y)
    
    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.z)
    
    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.aa)
    
    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.bb)
    
    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 and 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.cc)
    
    Segment Reporting:The Company reports financial information and evaluates its
operations by total charter revenues. The Company 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 Company 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.
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 dd)
    
    Subsequent Events:The Company evaluates subsequent events or transactions up to
the date in which the financial statements are issued according to the requirements of
ASC 855.ee)
    
    Recent Accounting Standards Updates:ASU 2010-06:In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820)-Improving Disclosures About Fair Value Measurements. ASU
2010-06 amends ASC 820 to add new requirements for disclosures about transfers into and
out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements. It also clarifies existing fair value
disclosures about the level of disaggregation and about inputs and valuation techniques
used to measure fair value. The ASU also amends guidance on employers disclosures
about postretirement benefit plan assets under ASC 715 to require that disclosures be
provided by classes of assets instead of by major categories of assets. The guidance in
the ASU is effective for the first reporting period (including interim periods)
beginning after December 15, 2009, except for the requirement to provide the Level 3
activity of purchases, sales, issuances, and settlements on a gross basis, which will
be effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. In the period of initial adoption, entities will not
be required to provide the amended disclosures for any previous periods presented for
comparative purposes. However, those disclosures are required for periods ending after
initial adoption. The provisions of ASU 2010-06 did not have a material impact on the
Companys consolidated financial statements.
 3.
    
    Working capital
 At December 31, 2010, the Companys current liabilities exceeded its current assets by
$2,128. In addition and as further discussed in Note 6 the Companys expected short term
capital commitments to fund the construction installments under the shipbuilding contracts in
2011, amount to $4,880. Cash expected to be generated from operations assuming that current
market charter hire rates would prevail in 2011, may not be sufficient to cover the Companys
ongoing working capital requirements and capital commitments, or for the Company to be in
compliance with certain covenants contained in its loan agreements. The Company is currently
exploring several alternatives aiming to manage its working capital requirements and other
commitments in the event of current market charter hire rates will continue including a share
capital increase, disposition of certain vessels in its current fleet as more fully described
in Note 5, and seek to achieve additional reductions in operating and other costs.The Company believes that the above plans will be sufficient to cover its working capital
needs for a reasonable period of time.
 4.
    
    Related Party Transactions
 ManagerAll vessels listed in Note 1 (except M/V Free Fighterand M/V Free Destinywhich were sold in
April 2007 and August 2010, respectively) receive management services from the Manager,
pursuant to ship management agreements between each of the ship-owning companies and the
Manager.On October 1, 2010, the subsidiaries Adventure Fourteen S.A. and Adventure Fifteen S.A.
entered into management agreements with the Manager for the provision of management services
to Hull 1 and Hull 2.Each of the Companys ship-owning subsidiaries pays, as per its management agreement with the
Manager, monthly technical management fee of $16.5 (on the basis that the $/Euro exchange
rate is 1.30 or lower; if on the first business day of each month the $/Euro exchange rate
exceeds 1.30 then the management fee payable will be increased for the month in question, so
that the amount payable in $ will be the equivalent in Euro based on 1.30 $/Euro exchange
rate) plus a fee of $0.4 per day for superintendant attendance and other direct expenses.
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FreeSeas also pays the Manager a fee equal to 1.25% of the gross freight or hire from the
employment of FreeSeas vessels. The Manager has subcontracted the charter and post charter
management of FreeSeas vessels and pays the 1.25% of the gross freight or hire from the
employment of the vessels to Safbulk Pty Ltd (Safbulk), an entity affiliated with one
Companys major shareholder. In addition, FreeSeas pays a 1% commission on the gross purchase
price of any new vessel acquired or the gross sale price of any vessel sold by FreeSeas with
the assistance of the Manager. In this respect, the Company paid Free Bulkers $32 relating to
the sale of M/V Free Destiny(Note 5) and $488 relating to the signing of shipbuilding
contracts for the construction of two handysize vessels (Note 6) in 2010 and $110 relating to
the acquisition of M/V Free Neptunein 2009. In addition, the Company has incurred
commission expense relating to its commercial agreement with the Manager amounting to $728,
$752 and $866 for the years ended December 31, 2010, 2009 and 2008 respectively, included in
Commissions in the accompanying consolidated statements of operations.FreeSeas pays, as per its services agreement with the Manager, a monthly fee of $118.5, (on
the basis that the $/Euro exchange rate is 1.35 or lower; if on the last business day of each
month the $/Euro exchange rate exceeds 1.35 then the service fee payable will be adjusted
for the following month in question, so that the amount payable in dollars will be the
equivalent in Euro based on 1.35 $/Euro exchange rate) as compensation for services related
to accounting, financial reporting, implementation of Sarbanes-Oxley internal control over
financial reporting procedures and general administrative and management services plus
expenses. The Manager is entitled to a termination fee if the agreement is terminated upon a
change of control as defined in its services agreement with the Manager. The termination
fee as of December 31, 2010 would be $100,298.Fees and expenses charged by the Manager are included in the accompanying consolidated
financial statements in Management fees to a related party, General and administrative
expenses, Operating expenses, Gain on sale of vessel, Vessels, Vessel impairment
loss and Advances for vessels under construction. The total amounts charged for the year
ended December 31, 2010, 2009 and 2008 amounted to $3,826 ($1,978 of management fees, $1,439
of services fees, $178 of superintendent fees, $117 for other expenses and $114 for
management fees and supervision expenses for vessels under construction), $3,245 ($1,874 of
management fees, $1,313 of services fees and $58 of superintendent fees) and $2,634 ($1,655
of management fees, $679 of services fees and $300 of partial contribution for the
refurbishment of the office space used by the Company), respectively.On December 31, 2009, the Company granted 84,000 restricted shares to certain of the
Managers employees vesting in December 2012 pursuant to the Companys equity incentive plan
(Note 14).The cost of these shares is amortized over their vesting period and is included in General
and administrative expenses in the accompanying Consolidated Statements of Operations. In
addition, in December 2010 and 2009, a bonus of $400 and $200 respectively, was granted to
the Manager, which is included in General and administrative expenses.The balance due from the Manager as of December 31, 2010 and December 31, 2009 was $1,285 and
$1,410 respectively. The amount paid to the Manager for office space during the year ended
December 31, 2010, 2009 and 2008 was $204, $197 and $206, respectively and is included in
General and administrative expenses in the accompanying consolidated statements of
operations.First Business Bank (FBB)FreeSeas received from FBB, in which one of the Companys major shareholders holds a
substantial interest, and in which the Companys Chairman, Chief Executive Officer and
President owns a minority interest, a loan of $26,250 (Note 10) which has been used to
partly finance the acquisition of the M/V Free Impalain April 2008. On December 15, 2009,
the Company reached an agreement for a new secured term loan of $27,750 from FBB to refinance
its then outstanding loan balance of $21,750 and to receive additional liquidity of up to
$6,000 with a first priority mortgage over the M/V Free Impalaand the M/V Free Neptune. The
outstanding balance of the loan as of December 31, 2010 was $25,750. Interest charged under
the loan
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 facility for the year ended December 31, 2010, 2009 and 2008 amounts to $893, $629 and $874,
respectively, and is included in the Interest and finance cost in the accompanying
consolidated statements of operations.Other Related PartiesThe Company, through Free Bulkers and Safbulk uses from time to time a ship-brokering firm
associated with family members of the Companys Chairman, Chief Executive Officer and
President for certain of the charters of the Companys fleet. During the year ended December
31, 2010, 2009 and 2008 such ship-brokering firm charged the Company commissions of $175, $48
and $112, respectively, which are included in Commissions in the accompanying consolidated
statements of operations. The balance due to the ship-brokering firm as of December 31, 2010
and December 31, 2009 was $98 and $18 respectively.
 5.
    
    Vessels, net/Vessels held for sale
 Accumulated
    
    
    Net BookVessels Cost
    
    
    Depreciation
    
    
    ValueDecember 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
    )
    
    $
    270,701Depreciation
    
    
    
    
    
    
    (15,365
    )
    
    
    (15,365
    )Disposal
    
    
    (7,600
    )
    
    
    5,561
    
    
    
    (2,039
    )Vessel held for sale
    
    
    (27,981
    )
    
    
    5,472
    
    
    
    (22,509
    )Vessel impairment charge
    
    
    (22,921
    )
    
    
    5,824
    
    
    
    (17,097
    )December 31, 2010
    
    $
    251,314
    
    
    $
    (37,623
    )
    
    $
    213,691
 Vessel acquisition during the year ended December 31, 2009In 2009, the Company agreed to purchase the M/V Free Neptunefrom an unaffiliated third party
for $11,000 plus costs directly related to the purchase amounting to $302. The vessel is a
30,838 dwt Handysize vessel built in 1996 in Japan, and was delivered to the Company on
August 25, 2009. The Company financed the acquisition using cash on hand which was raised as
part of the Companys follow on equity offering in July 2009 (Note 15).Vessel acquisitions during the year ended December 31, 2008During 2008, the Company acquired the M/V Free Knight,M/V Free Impala,M/V Free Ladyand M/V
Free Maverickfor a total purchase cost of $180,733.Vessel disposed during the year ended December 31, 2010On July 30, 2010, the Company agreed to sell the M/V Free Destiny, a 1982 built 25,240 dwt
Handysize dry bulk vessel for a consideration of $3,213. The vessel was delivered to the
buyers on August 27, 2010 and the Company recognized a gain of $807 as a result of the sale.
From the proceeds of the sale, the Company paid on November 1, 2010 an amount of $2,700
constituting prepayment towards the Deutsche Bank Nederland N.V. (Deutsche Bank Nederland,
formerly known as Hollandsche Bank Unie) loan facility B (Note 10).
 F-16




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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Vessel classified as assets held for sale during the year ended December 31, 2010, or for
which management has committed to a plan of saleThe Company according to the provisions of ASC 360, has classified the M/V Free Heroas held
for sale in the accompanying consolidated balance sheet for the year ended December 31, 2010
at her estimated market value less costs to sell, as all criteria required for the
classification as Held for Sale were met at the balance sheet date. The vessels carrying
value was adjusted to $13,606 at the date of its classification as held for sale. Furthermore
subsequent to December 31, 2010, at the direction of the Companys Board of Directors, and
after obtaining the respective lenders consent (FBB), the Company initiated a plan of sale of
the vessels M/V Free Neptuneand M/V Free Impalawithin the context of its plans to fund its
working capital requirements as discussed in Note 3 and renew its fleet of vessels. All three
vessels are expected to be disposed off subsequent to March 31, 2011 but prior to December
31, 2011.The Company has individually assessed for recoverability the carrying values of each of the
above vessels, including unamortized deferred dry docking costs of $631. In performing its
assessment, the Company compared the carrying values of these vessels with their estimated
fair values at December 31, 2010. As a result of this assessment the Company has recognized
an impairment loss of $26,631 in the accompanying 2010 consolidated statement of operations,
of which $17,253 relates to the M/V Free Impalaand $9,378 to the M/V Free Hero. No
impairment loss was recognized for the M/V Free Neptuneas its fair value exceeded its
carrying value. The Company estimates that the aggregate net proceeds from the sale of these
vessels, excluding approximately $34,000 of the proceeds that will be applied against Credit
Suisse and FBB loan outstanding balances, will be sufficient to cover its working capital
requirements in case that current market charter rates will continue for an extended period
of time.All of the Companys vessels have been provided as collateral to secure the bank loans
discussed in Note 10 below.
 6.
    
    Advances for Vessels under Construction
 On August 17, 2010, two of the Companys wholly owned subsidiaries entered into shipbuilding
contracts with a Chinese yard for the construction of two drybulk vessels of approximately
33,600 dwt each for an aggregate purchase price of $49,720 including extra costs of
approximately $920 in total. The vessels are scheduled for delivery in the second and third
quarter of 2012. The Company has advanced the first installment on September 20, 2010
amounting to $2,440 for each hull.The amount shown in the accompanying consolidated balance sheet includes milestone payments
relating to the shipbuilding contracts with the shipyard, supervision costs and any material
related expenses incurred during the construction period, all of which are capitalized in
accordance with the accounting policy discussed in Note 2.As of December 31, 2010, the Company has advanced $4,880 under the shipbuilding contracts as
follows:
 December 31, 2010Expected
    
    
    Contract
    
    
    CapitalizedVessel name
    
    delivery
    
    
    payments
    
    
    expenses
    
    
    TotalHull 1
    
    May-12
    
    $
    2,440
    
    
    $
    413
    
    
    $
    2,853Hull 2
    
    July-12
    
    
    2,440
    
    
    
    372
    
    
    
    2,812$
    4,880
    
    
    $
    785
    
    
    $
    5,665
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Month
    
    Hull 1
    
    
    Hull 2March 2011
    
    $
    2,440
    
    
    
    May 2011
    
    
    
    
    
    $
    2,440February 2012
    
    $
    2,440
    
    
    
    April 2012
    
    $
    2,440
    
    
    $
    2,440May 2012
    
    $
    15,100
    
    
    
    June 2012
    
    
    
    
    
    $
    2,440July 2012
    
    
    
    
    
    $
    15,100Total
    
    $
    22,420
    
    
    $
    22,420
  7.
    
    Deferred Charges
 Dry-
    
    
    Specialdocking
    
    
    survey
    
    
    FinancingCosts
    
    
    Costs
    
    
    Costs
    
    
    TotalDecember 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
    
    
    $
    2,995Additions
    
    
    1,610
    
    
    
    937
    
    
    
    
    
    
    
    2,547Write-offs
    
    
    (298
    )
    
    
    (333
    )
    
    
    
    
    
    
    (631
    )Amortization
    
    
    (834
    )
    
    
    (1,054
    )
    
    
    (211
    )
    
    
    (2,099
    )December 31, 2010
    
    $
    1,231
    
    
    $
    975
    
    
    $
    606
    
    
    $
    2,812
 Additions to deferred dry-docking and special survey costs in 2010 related to the dry docking
and special survey of the M/V Free Goddess, the M/V Free Jupiter,the M/V Free Knight and the
M/V Free Hero.An amount of $111 and $639 relating to unamortized deferred financing fees of the FBB and HSH
refinanced loans in 2009 and 2008 respectively, were written off under the provisions of ASC
470-50.
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 8.
    
    Back-log Assets
 The Company estimates the fair values of any below or above market time charters assumed when
a vessel is acquired. The difference between market and assumed below or above 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. The back-log asset relating to the
acquisition of the M/V Free Maverickwhich was acquired in September 2008 was fully amortized
during the year ended December 31, 2009. The amortization for the year ended December 31,
2010, 2009 and 2008 amounted to $nil, $907 and $899, respectively.
 9.
    
    Derivatives at Fair Value
 The Company is exposed to interest rate fluctuations associated with its variable rate
borrowings and its objective is to manage the impact of such fluctuations on earnings and
cash flows of its borrowings. In this respect, the Company uses interest rate swaps to manage
net exposure to interest rate fluctuations related to its borrowings. During the second half
of 2007, in conjunction with the $68,000 HSH Nordbank senior loan, the Company entered into
two interest rate swap agreements that did not qualify for hedge accounting. As such, the
fair value of these agreements and changes therein were recognized in the balance sheets and
statements of operations, respectively. On April 14, 2008, upon completion of the refinancing
of the HSH Nordbank loan, the aforesaid interest rate swap contracts were assumed by Credit
Suisse, the refinancing bank, through the execution of novation agreements.Under the terms of the two swap agreements, the Company makes quarterly payments to the
counterparty based on decreasing notional amounts, standing at $7,646 and $4,093 as of
December 31, 2010 at fixed rates of 5.07% and 5.55% respectively, and the counterparty makes
quarterly floating-rate payments at LIBOR to the Company based on the same decreasing
notional amounts. The swaps mature in September 2015 and July 2015, respectively. There were
no further interest rate swap agreements concluded in 2010 and 2009.The change in fair value on the Companys two interest rate swaps for the year ended December
31, 2010, 2009 and 2008 resulted in an unrealized gain of $129, an unrealized gain of $560
and an unrealized loss of $1,061, respectively. The settlements on the interest rate swaps
for the year ended December 31, 2010, 2009 and 2008 resulted in realized losses of $594, $671
and $395, respectively. The total of the change in fair value and settlements for the year
ended December 31, 2010, 2009 and 2008 aggregate to losses of $465, $111 and $1,456,
respectively, which is separately reflected in Loss on derivative instruments in the
accompanying consolidated statements of operations.The following table presents the assets and liabilities that are measured at fair value on a
recurring basis and are categorized using the fair value hierarchy as defined in ASC 820
Fair value measurements and disclosures. The fair value hierarchy has three levels based on
the reliability of the inputs used to determine fair value.
 QuotedPricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsLiabilities
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Interest rate swap contracts
    
    $
    1,121
    
    
    $
    
    
    
    $
    1,121
    
    
    $
    Total
    
    $
    1,121
    
    
    $
    
    
    
    $
    1,121
    
    
    $
    
 The Companys derivative financial instruments are valued using pricing models that are
used to value similar instruments by market participants. Where possible, the Company
verifies the values produced by its pricing models to market prices. Valuation models require
a variety of inputs, including contractual terms,
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 market prices, yield curves, credit spreads, measures of volatility and correlations of such
inputs. The Companys derivatives trade in liquid markets, and as such, model inputs can
generally be verified and do not involve significant management judgment. Such instruments
are typically classified within Level 2 of the fair value hierarchy.
 10.
    
    Long-Term Debt
 Long-term debt as of December 31, 2010 and 2009 consists of the following bank loans:
 (In thousands of U.S. Dollars)December 31, 2010
    
    
    December 31, 2009Current
    
    
    Long-term
    
    
    
    
    
    
    CurrentLender
    
    Portion
    
    
    portion
    
    
    Total
    
    
    portion
    
    
    Long-term
    
    
    TotalDeutsche Bank Nederland (a)*
    
    $
    3,000
    
    
    $
    11,750
    
    
    $
    14,750
    
    
    $
    3,000
    
    
    $
    14,750
    
    
    $
    17,750Deutsche Bank Nederland (b)*
    
    $
    300
    
    
    $
    19,409
    
    
    $
    19,709
    
    
    $
    2,400
    
    
    $
    21,809
    
    
    $
    24,209Credit Suisse (c)
    
    $
    13,372
    
    
    $
    18,603
    
    
    $
    31,975
    
    
    $
    5,000
    
    
    $
    31,975
    
    
    $
    36,975Credit Suisse (d)
    
    $
    3,000
    
    
    $
    25,275
    
    
    $
    28,275
    
    
    $
    3,000
    
    
    $
    28,275
    
    
    $
    31,275First Business Bank. (e)
    
    $
    3,350
    
    
    $
    22,400
    
    
    $
    25,750
    
    
    $
    2,000
    
    
    $
    25,750
    
    
    $
    27,750Total
    
    $
    23,022
    
    
    $
    97,437
    
    
    $
    120,459
    
    
    $
    15,400
    
    
    $
    122,559
    
    
    $
    137,959
 The remaining repayment terms of the loans outstanding as of December 31, 2010 were as
follows:
 Lender
    
    Vessel
    
    Remaining Repayment Terms(a) Deutsche Bank Nederland
    
    M/V Free Knight
M/V Free Envoy
    
    Nineteen consecutive
quarterly installments
of $750 followed by one
installment of $500.(b) Deutsche Bank Nederland
    
    M/V Free Maverick
    
    One quarterly
installment of $300,
three quarterly
installments of $600 and
one balloon payment of
$17,609 payable together
with the last
installment.(c) Credit Suisse
    
    M/V Free Hero
M/V Free Goddess
M/V Free Jupiter
    
    Three quarterly
installments of $1,250,
sixteen quarterly
installments of $862, an
assumed partial
prepayment of $8,760, as
a result of the intended
sale of M/V Free Hero
and a balloon payment of
$5,673.(d) Credit Suisse
    
    M/V Free Lady
    
    Twenty-one consecutive
quarterly installments
of $750 and a balloon
payment of $12,525
payable together with
the last installment.(e) First Business Bank
    
    M/V Free Impala
M/V Free Neptune
    
    Twenty-four consecutive
quarterly installments
of $837.5 each plus a
balloon payment of
$5,650, payable together
with the last
installment.
 The vessels indicated in the above table are pledged as collateral for the respective
loans.The Company and its subsidiaries have obtained financing from affiliated and unaffiliated
lenders for its vessels (Note 4).
 F-20




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 All the Companys credit facilities bear interest at LIBOR plus a margin, ranging from 2.25%
to 4.25%, and are secured by mortgages on the financed vessels and assignments of vessels
earnings and insurance coverage proceeds. They also include affirmative and negative
financial covenants of the borrowers, including maintenance of operating accounts, minimum
cash deposits, average cash balances to be maintained with the lending banks and minimum
ratios for the fair values of the collateral vessels compared to the outstanding loan
balances. Each borrower is restricted under its respective loan agreement from incurring
additional indebtedness, changing the vessels flag without the lenders consent or
distributing earnings.On November 1, 2011, according to the terms of the loan agreement, the Company shall pay
towards Deutsche Bank Nederland facility in relation to M/V Free Mavericka success fee
calculated on the facility amount then outstanding.The weighted average interest rate for the year ended December 31, 2010 and 2009 was 3.0% and
2.5%, respectively. Interest expense incurred under the above loan agreements amounted to
$3,932 (net of capitalized interest $43), $3,708 and $5,101 for the years ended December 31,
2010, 2009 and 2008, respectively, and is included in Interest and Finance Costs in the
accompanying consolidated statements of operations.Companys remaining undrawn availability from the Deutsche Bank Nederland overdraft facility
commitment as of December 31, 2010 amounted to $125.On September 10, 2010, the Company signed an offer letter with ABN AMRO Bank securing,
subject to customary legal documentation, commitments for pre-delivery and post-delivery debt
financing up to an amount of $32,400 for the construction of two handysize vessels (Note 6).The facility, that will be available for drawdown up to December 31, 2012, is repayable in 20
quarterly installments plus a balloon payable along with the last installments, commencing
three months after the delivery of the vessels. The vessels will be used as collateral
against the facility.According to the agreed terms, the facility will bear interest at LIBOR plus margin and will
include customary financial covenants; an arrangement fee will be paid upon signing of the
agreement and commitment fees on the undrawn portion of the facility are paid, commencing on
the signing of the offer letter. The Company has incurred commitment fees of $171 for the
year ended December 31, 2010, included in the accompanying consolidated statements of
operations in Interest and Finance Costs.On October 4, 2010 ABN AMRO issued letters of guarantee in favor of the Chinese yard covering
the second installment for the vessels under construction, amounting to $2,440 for each
vessel. On the same date, the Company entered into a bank guarantee facility agreement for
the issuance of the above mentioned letter of guarantees. The letters of guarantee mature on
the earliest between the date of the payment of the second installment and November 30, 2011.
In this respect the Company has deposited an amount equal to the second installment for the
vessels under construction on a pledged account with ABN AMRO and is included in the
Restricted cash in the accompanying consolidated balance sheet.On November 1, 2010, the Company paid an amount of $2,700 constituting a prepayment towards
the Deutsche Bank Nederland loan facility due to the sale of M/V Free Destiny. According to
the loan terms, the following 3 installments will be reduced to nil and the installment due
on November 1, 2011 will be reduced to $300. The remaining repayment schedule remains
unchanged.Loan CovenantsAs of December 31, 2010, the Companys loan agreements contain various financial
covenants as follows:
 d)
    
    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
 F-21




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 the financed vessels must not be less than 135% of the outstanding loan balance and
the swap exposure (Note 9), which has been waived to 115% until April 1, 2011.e)
    
    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 shall
not at any time exceed 55%; (iii) the ratio of EBITDA to net interest expense shall not
be less than 3; (iv) the fair market value of the financed vessels shall be at least
(a) 115% for the period July 1, 2010 to June 30, 2011 and (b) 125% thereafter.f)
    
    Deutsche Bank Nederland loan agreement: (i) the interest coverage ratio shall
not be less than 3 until December 31, 2010 and thereafter to be reset; (ii) the debt
service coverage ratio shall not be less than 1.00 until December 31, 2010 and
thereafter to be reset; (iii) the gearing ratio shall not exceed 2.5; (iv) the
outstanding loan balance shall not be more than a ratio of the fair market value of the
financed vessels as follows: (a) 100% from July 1, 2010 until and including June 30,
2011, (b) 110% from July 1, 2011 until and including June 30, 2012, (c) 120% from July
1, 2012 until and including December 30, 2012 and (d) 125% from December 31, 2012
onwards.
 In the event of non-compliance with the covenants prescribed in the loan agreements,
including the result of a sharp decline in the market value of the Companys vessels, such
non-compliance would constitute a potential event of default in the absence of available
additional assets or cash to secure the Companys debt and bring the Company into compliance
with the debt covenants, and could result in the lenders requiring immediate payment of the
loans.As of December 31, 2010, the Company was in compliance with all of its original loan
covenants and the debt continues to be classified as long-term, except for (i) the principal
payments falling due in the next 12 months and (ii) the estimated portion of Credit Suisse
outstanding loan balance relating to M/V Free Heroamounting to $8,760 as a result of the
intended sale of the vessel.Management is in continuous contact with the lending banks and believes that the Company will
cure any potential event of non-compliance in a timely manner should the current market
charter rates prevail for the most part of 2011, and vessel values further deteriorate. In
addition, management expects that the lenders would not declare an event of default,
therefore not demand immediate repayment of the bank debt, provided that the Company pays
loan principal installments and accumulated or accrued interest as they fall due under the
existing bank debt. Cash being generated from operations is expected to be sufficient for
this purpose. There can be no assurance however that if current market conditions further
deteriorate, and in the event of potential non  compliance with such debt covenants in the
future years, the lenders will provide waivers.As of December 31, 2010, the following repayments of principal are required over the next
five years and throughout their term for the Companys debt facilities:
 (In thousands of U.S. Dollars)
 Year ended December 31,
    
    Amount2011
    
    $
    23,0222012
    
    
    32,2072013
    
    
    12,7982014
    
    
    12,7982015
    
    
    17,3592016 and thereafter
    
    
    22,275Total
    
    $
    120,459
 F-22




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 11.
    
    Commitments and Contingencies
 ClaimsVarious claims, suits, and complaints, including those involving government regulations and
product liability, arise in the ordinary course of the shipping business. In addition, losses
may arise from disputes with charterers, agents, insurance and other claims with suppliers
relating to the operations of the Companys vessels. Currently, management is not aware of
any such claims or contingent liabilities, which should be disclosed, or for which a
provision should be established in the accompanying consolidated financial statements. The
Company is a member of a protection and indemnity association, or P&I Club that is a member
of the International Group of P&I Clubs, which covers its third party liabilities in
connection with its shipping activities. A member of a P&I Club that is a member of the
International Group is typically subject to possible supplemental amounts or calls, payable
to its P&I Club based on its claim records as well as the claim records of all other members
of the individual associations, and members of the International Group. Although there is no
cap on its liability exposure under this arrangement, historically supplemental calls have
ranged from 25%-40% of the Companys annual insurance premiums, and in no year have exceeded
$1 million. The Company accrues for the cost of environmental liabilities when management
becomes aware that a liability is probable and is able to reasonably estimate the probable
exposure. Currently, management is not aware of any such claims or contingent liabilities,
which should be disclosed, or for which a provision should be established in the accompanying
consolidated financial statements. The Companys protection and indemnity (P&I) insurance
coverage for pollution is $1 billion per vessel.On September 21, 2007, the vessel M/V Free Jupiterran aground off the coast of the
Philippines. Operations to re-float the vessel were completed under a Lloyds Open Form
agreement with the salvage company. This agreement is a standard agreement used
internationally for such purposes and imposes obligations on the salvage company to conduct
its operations in a manner that will preserve the vessels cargo and that will not cause
damage to the environment. The vessel was returned to service in February 2008. On February
9, 2009, the Company entered into an agreement with the salvors and hull and machinery
insurers pursuant to which a settlement in the amount of $9,500 has been agreed to as the
compensation amount under the Lloyds Open Form services in connection with the salvage
operation. The final adjustment of general average of the casualty was issued on November 30,
2009 apportioning a total of $7,960 between the various insurers and parties involved. On
February 9, 2010, the claims committee of the lead hull underwriters approved the payment of
the amount of $3,393 apportioned to the hull underwriters of the vessel. On February 26, 2010
the Company submitted its claim for the amount of $4,567 to the P&I club involved in
accordance with the final adjustment of general average. Following extensive negotiations
with the P&I club, the Company agreed to settle the claim in exchange for a full and definite
settlement with the salvage company involved in the incident and a cash payment of $530 to
the Company. In accordance with the agreement, the Company wrote-off $986 which is included
in Provision and write-offs of insurance claims and bad debts in the accompanying
consolidated statements of operations for the year ended December 31, 2010. On October 22,
2010, the Company received in cash the amount of $530 from the P&I Club in full and final
settlement of the claim. The aggregate outstanding balance of the Companys other claims as
of December 31, 2010 stands at $133 related to Companys insurance claims for vessel
incidents arising in the ordinary course of business.The Companys capital commitments as of December 31, 2010 relative to its shipbuilding
program are discussed in Note 6.
 12.
    
    Earnings per Share
 The computation of basic earnings per share is based on the weighted average number of common
shares outstanding during the period, as adjusted to reflect the reverse stock split
effective October 1, 2010 (Note 13). The computation of the dilutive common shares
outstanding at December 31, 2010 does not include the Class Z warrants, the Class A warrants
and the 12,000 vested options (adjusted to reflect the reverse stock split) as their exercise
price was greater than the average market price in the period.
 F-23




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Moreover, and as the Company reported losses in the year ended December 31, 2010, the
outstanding warrants, options and unvested shares of restricted stock did not have a dilutive
effect in the 2010 losses per share.The components of the denominator for the calculation of basic (loss) earnings per share and
diluted (loss) earnings per share for the years ended December 31, 2010, 2009 and 2008,
respectively that have been adjusted to reflect the reverse stock split effective October 1,
2010 (Note 13), are as follows:
 For the year
    
    
    For the year
    
    
    For the yearended
    
    
    ended
    
    
    endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008Numerator:Net income (loss)  basic and diluted
    
    $
    (21,821
    )
    
    $
    6,859
    
    
    $
    19,192Basic earnings per share denominator:Weighted average common shares outstanding
    
    
    6,313,606
    
    
    
    5,092,772
    
    
    
    4,201,299Diluted earnings per share denominator:Weighted average common shares outstanding
    
    
    6,313,606
    
    
    
    5,092,772
    
    
    
    4,210,393Dilutive common shares:Options
    
    
    
    
    
    
    
    
    
    
    3,446Warrants
    
    
    
    
    
    
    
    
    
    
    5,648Restricted shares
    
    
    
    
    
    
    
    
    
    
    Dilutive effect
    
    
    
    
    
    
    
    
    
    
    9,094Weighted average common shares  diluted
    
    
    6,313,606
    
    
    
    5,092,772
    
    
    
    4,210,393Basic income/(loss) per common share
    
    $
    (3.46
    )
    
    $
    1.35
    
    
    $
    4.57Diluted income/(loss) per common share
    
    $
    (3.46
    )
    
    $
    1.35
    
    
    $
    4.56
 13.
    
    Reverse stock split
 In the Annual General Meeting of Shareholders, held on September 30, 2010, the Companys
shareholders approved a reverse stock split of the Companys issued and outstanding common
stock at a ratio of one share for every five shares outstanding, effective on October 1,
2010. The reverse stock split consolidates five shares of common stock into one share of
common stock at a par value of $0.001 per share. As a result of the reverse stock split, the
number of outstanding common shares has been reduced from 32,437,480 to 6,487,852, excluding
outstanding and unexercised share options and warrants.The reverse stock split did not affect any shareholders ownership percentage of the
Companys common shares or warrants, except to the limited extent that the reverse stock
split resulted in any shareholder owning a fractional share. Fractional shares of common
stock were rounded up to the nearest whole share.At December 31, 2010, and following the reverse stock split discussed above, the Company had
5,000,000 shares of preferred stock authorized at $0.001 par value of which none was issued,
250,000,000 shares of common stock authorized at $0.001 par value, of which 6,487,852 shares
were issued and outstanding, as well as the number of options, warrants and shares of
restricted stock discussed in Note 14.
 14.
    
    Stock Incentive Plan
 In April 2005, FreeSeas Board of Directors approved the issuance of Class A warrants to the
executive officers of FreeSeas. The terms of the warrants provided that they expire on July
29, 2011 and are not callable. These warrants, the issuance of which was ratified, adopted
and approved by the Board of Directors
 F-24




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 on December 16, 2005, entitle the holders to purchase an aggregate of 40,000 shares of the
Companys common stock at an exercise price of $25.00 per shareIn December 2007, the Companys Board of Directors granted 9,000 options to directors and
25,000 options to executive officers, as adjusted to reflect the reverse stock split
effective October 1, 2010 (Note 13), of which 28,000 would vest in one year, 3,000 would vest
in two years and 3,000 in three years from the grant, all at an exercise price of $41.25 per
share. Effective December 18, 2009, certain of the Companys officers and directors have
forfeited 22,000 of the stock options granted to them, leaving 12,000 stock options
outstanding as of December 31, 2010 and 2009. All the outstanding stock options, which expire
on December 24, 2012, are vested and remain unexercised as of December 31, 2010.On December 31, 2009, the Companys Board of Directors awarded 255,000 restricted shares, as
adjusted to reflect the reverse stock split effective October 1, 2010 (Note 13), to its
non-executive directors, executive officers and certain of Free Bulkers employees. Of the
255,000 restricted shares, 71,000 restricted shares vested on December 31, 2009 while 10,000
restricted shares with an original vesting date on December 31, 2010 have been forfeited in
May 2010. Of the remaining 174,000 restricted shares, 40,000 restricted shares vested on
December 31, 2010, 84,000 restricted shares will vest on December 31 2012 and 50,000
restricted shares will vest on December 31, 2013. Unvested restricted shares amounted to
134,000 as of December 31, 2010.For the year ended December 31, 2010, the recognized stock based compensation expense in
relation to the restricted shares granted is $547. The total unrecognized compensation cost
of the non vested restricted shares granted under the Plan is $636. The cost is expected to
be recognized over a period of thirty-six months, representing a weighted average
remaining life of approximately 29 months. The stock compensation cost during the period for
the stock options is $12. No unrecognized compensation cost related to stock options exists
as of December 31, 2010, as all options are vested.The Companys total stock-based compensation expense for the year ended December 31, 2010,
2009 and 2008 was $559, $494 and $107, respectively and is included in General and
administrative expenses in the accompanying consolidated statements of operations.As of December 31, 2010, the 150,000 Class A and 1,655,006 Class Z warrants (with exercise
price of $5.00 per 1/5 of a share, or $25.00 per share, only exercisable for whole shares)
have no intrinsic value since the difference between the underlying stocks price and the
strike price is negative.The potential proceeds to the Company of all exercisable warrants and vested options as of
December 31, 2010 totaling to the equivalent of 373,001 shares of common stock would amount to $9,520.Presented below is a table reflecting the activity in the restricted shares, options, Class A
warrants, Class W Warrants and Class Z Warrants from January 1, 2008 through December 31,
2010:
 F-25




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Average
    
    
    
    Class A
    
    Class W
    
    Class Z
    
    
    
    
    
    AverageRestricted
    
    
    
    
    
    Class A
    
    Class W
    
    Class Z
    
    
    
    
    
    Exercise
    
    Options
    
    Warrants
    
    Warrants
    
    Warrants
    
    
    
    
    
    ExerciseShares
    
    Options
    
    Warrants
    
    Warrants
    
    Warrants
    
    Total
    
    Price
    
    Exercisable
    
    Exercisable
    
    Exercisable
    
    Exercisable
    
    Total
    
    PriceDecember 31, 2007
    
    
    
    
    
    
    84,000
    
    
    
    200,000
    
    
    
    914,138
    
    
    
    1,655,006
    
    
    
    2,853,144
    
    
    $
    27.14
    
    
    
    50,000
    
    
    
    200,000
    
    
    
    914,138
    
    
    
    1,655,006
    
    
    
    2,819,144
    
    
    $
    26.35Options / Class A warrants exercised
    
    
    
    
    
    
    (50,000
    )
    
    
    (50,000
    )
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    
    
    
    
    (50,000
    )
    
    
    (50,000
    )
    
    
    
    
    
    
    
    
    
    
    (100,000
    )Class W and Z warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127,873
    )
    
    
    
    
    
    
    (127,873
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127,873
    )
    
    
    
    
    
    
    (127,873
    )Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31, 2008
    
    
    
    
    
    
    34,000
    
    
    
    150,000
    
    
    
    786,265
    
    
    
    1,655,006
    
    
    
    2,625,271
    
    
    $
    26.00
    
    
    
    28,000
    
    
    
    150,000
    
    
    
    786,265
    
    
    
    1,655,006
    
    
    
    2,619,271
    
    
    $
    25.83Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Options forfeited
    
    
    
    
    
    
    (22,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,000
    )
    
    
    
    
    
    
    (22,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,000
    )Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares issued
    
    
    255,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares vested
    
    
    (71,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31, 2009
    
    
    184,000
    
    
    
    12,000
    
    
    
    150,000
    
    
    
    786,265
    
    
    
    1,655,006
    
    
    
    2,787,271
    
    
    $
    21.66
    
    
    
    9,000
    
    
    
    150,000
    
    
    
    786,265
    
    
    
    1,655,006
    
    
    
    2,600,271
    
    
    $
    21.55Options vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (786,265
    )
    
    
    
    
    
    
    (786,265
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (786,265
    )
    
    
    
    
    
    
    (786,265
    )Restricted shares vested
    
    
    (40,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares forfeited
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31, 2010
    
    
    134,000
    
    
    
    12,000
    
    
    
    150,000
    
    
    
    
    
    
    
    1,655,006
    
    
    
    1,951,006
    
    
    $
    25.52
    
    
    
    12,000
    
    
    
    150,000
    
    
    
    
    
    
    
    1,655,006
    
    
    
    1,817,006
    
    
    $
    25.52
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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15.
    
    Shareholders Equity
 On April 27, 2005, the Company filed amended Articles of Incorporation in the Marshall
Islands, whereby the name of the Company was changed from Adventure Holdings S.A. to FreeSeas
Inc.The authorized number of shares was increased to 45,000,000, of which 40,000,000 would be
common stock with a par value of $.001 per share and 5,000,000 blank check preferred stock
with a par value of $.001 per share. On September 17, 2009, the Companys shareholders
approved at the Annual Meeting of Shareholders an amendment to the Companys Articles of
Incorporation to increase the number of authorized shares of common stock from 40,000,000 to
250,000,000 shares, par value $0.001 per share.On July 28, 2009, the Company completed the registered offering of 2,008,230 shares of common
stock (as adjusted to reflect the effect of reverse stock split), which includes 261,943
shares (as adjusted to reflect the effect of reverse stock split) issued pursuant to the
underwriters over-allotment option. The offering resulted in net proceeds of $16,244, after
deducting underwriting fees and offering expenses. Proceeds from the offering were used
primarily for the acquisition of the drybulk vessel M/V Free Neptuneas discussed in Note 5
above, for general working capital purposes, and an amount of $1,691 was applied against the
outstanding balance with Deutsche Bank Nederland. The shares were sold under the Companys
previously filed shelf registration statement, which was declared effective by the Securities
and Exchange Commission on May 14, 2008.On October 22, 2009, the Company filed with the U.S. Securities and Exchange Commission a
registration statement on Form F-1 for the purpose of undertaking possible capital raises in
the future. Included in this shelf registration statement are $15 million of the Companys
common stock. This registration statement relating to these securities has been filed with
the SEC but has not yet become effective. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement becomes effective.Common Stock DividendsOn each of February 7, 2008 and May 12, 2008, the Company declared a $0.875 per share of
common stock quarterly dividend amounting to $3,630 and $3,705, respectively. The dividend
was paid on February 28, 2008 and May 30, 2008, respectively, to shareholders of record as of
February 18, 2008 and May 20, 2008, respectively. As of the declaration dates, the Company
was in an accumulated deficit position and no earnings were available to distribute to
shareholders. Therefore, the dividend payments were charged to additional paid-in capital. On
July 31, 2008, the Company declared an increased dividend of $1.00 per share of common stock
to shareholders as of record as of August 20, 2008, payable on August 29, 2008. The dividend
was paid on August 29, 2008 to shareholders amounting to $4,234. On November 13, 2008, the
Company declared a dividend of $0.375 per share of common stock to shareholders of record as
of November 24, 2008 payable on December 3, 2008. The dividend was paid on December 3, 2008
to shareholders amounting to $1,588. On July 31, 2008 and November 13, 2008 dividends were
declared from cash flow available to the Company. As of the declaration date, the Companys
retained earnings position was such that allowed the dividend payments to be charged against
the retained earnings. During the year ended December 31, 2010 and 2009, the Company did not
declare or pay any dividends.
 16.
    
    Taxes
 Under the laws of the Countries of the Company and its subsidiaries incorporation and/or
vessels registration, the Company is not subject to tax on international shipping income;
however, they are subject to registration and tonnage taxes, which have been included in
Vessel operating expenses in the accompanying consolidated statement of operations. Pursuant
to the Internal Revenue Code of the United States (the Code), U.S. source income from the
international operations of ships is generally exempt from U.S. tax if the company operating
the ships meets both of the following requirements, (a) the Company is organized in a foreign
country that
 F-27




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##### Table of Contents



FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 grants an equivalent exemption to corporations organized in the United States,
and (b) either (i) more than 50% of the value of the Companys stock is owned, directly or
indirectly, by individuals who are residents of the Companys country of organization or of
another foreign country that grants an
equivalent exemption to corporations organized in the United States (the 50% Ownership
Test) or (ii) the Companys stock is primarily and regularly traded on an established
securities market in its country of organization, in another country that grants an
equivalent exemption to United States corporations, or in the United States (the
Publicly-Traded Test).To complete the exemption process, the Companys shipowning subsidiaries must file a U.S. tax
return, state the basis of their exemption and obtain and retain documentation attesting to
the basis of their exemptions. The Companys subsidiaries will complete the filing process
for 2010 on or prior to the applicable tax filing deadline.All the Companys ship-operating subsidiaries currently satisfy the Publicly-Traded Test
based on the trading volume and the widely-held ownership of the Companys shares, but no
assurance can be given that this will remain so in the future, since continued compliance
with this rule is subject to factors outside the Companys control. Based on its U.S. source
Shipping Income for 2008, 2009 and 2010, the Company would be subject to U.S. federal income
tax of approximately $197, $159 and $34, respectively, in the absence of an exemption under
Section 883.
 17.
    
    Subsequent Events
 On February 28, 2011, the Companys Board of Directors approved a plan of sale of the vessels
M/V Free Neptuneand M/V Free Impala.
 F-28