##### 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
  x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 COMMISSION FILE NUMBER 333-124825
 FREESEAS INC.
  Republic of the Marshall Islands
 89 Akti Miaouli & 4 Mavrokordatou Street, Piraeus, Greece
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
  
     o x
  o x
  x o
  o o x
  o x
  o x




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##### 



TABLE OF CONTENTS
 PART I
    
    
    1ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    13ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
    
    
    25ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    25ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    38ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    42ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    44ITEM 9.
    
    THE OFFER AND LISTING
    
    
    44ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    45ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    49ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    50PART II
    
    
    51ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    51ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    51ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    51ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    51ITEM 16B.
    
    CODE OF ETHICS
    
    
    52ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    52ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    52ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    52PART III
    
    
    53ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    53ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    53ITEM 19.
    
    EXHIBITS
    
    
    53Ex-4.24 Loan Agreememnt dated September 2006Ex-4.25 Deed of Assignment dated September 2006Ex-4.26 Mortgage dated September 2006Ex-4.27 Warrant Clarification Agreement dated May 10, 2007Ex-4.28 Promissory Note dated May 7, 2007Ex-12.1 Section 302 Certification of CEOEx-12.2 Section 302 Certification of CFOEx-13.1 Section 906 Certification of CEOEx-13.2 Section 906 Certification of CFO




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our future operating or financial results;
    
    future, pending or recent acquisitions, business strategy, areas of possible expansion,
and expected capital spending or operating expenses; and
    
    drybulk market trends, including charter rates and factors affecting vessel supply and
demand.




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PART I
 
 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
    
    
    From InceptionDecember 31,
    
    
    (April 23, 2004) to2006
    
    
    2005
    
    
    December 31, 2004Statement of Operations Data:Operating revenues
    
    $
    11,727,000
    
    
    $
    10,326,000
    
    
    $
    2,830,000Income (loss) from operations
    
    
    (2,281,000
    )
    
    
    1,205,000
    
    
    
    706,000Other expense
    
    
    (1,043,000
    )
    
    
    (1,053,000
    )
    
    
    (236,000
    )Net (loss) income
    
    
    (3,324,000
    )
    
    
    152,000
    
    
    
    470,000Earnings Per Share Data:Net (loss) income per share:Basic (loss) earnings per share
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10Diluted (loss) earnings per share
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10Weighted average number of shares:Basic weighted average number of share
    
    
    6,290,100
    
    
    
    4,574,588
    
    
    
    4,500,000Diluted weighted average number of shares
    
    
    6,290,100
    
    
    
    4,600,444
    
    
    
    4,500,000
 December 31,2006
    
    
    2005
    
    
    2004Selected Balance Sheet Data:Cash in hand and at bank
    
    $
    372,000
    
    
    $
    3,285,000
    
    
    $
    461,000Net working capital deficiency
    
    
    (8,843,000
    )
    
    
    (4,945,000
    )
    
    
    (3,528,000
    )Total assets
    
    
    23,086,000
    
    
    
    29,840,000
    
    
    
    18,335,000Long-term debt
    
    
    7,830,000
    
    
    
    13,000,000
    
    
    
    10,150,000Shareholders loan and advance
    
    
    2,552,000
    
    
    
    3,200,00
    
    
    
    3,828,000Total stockholders equity
    
    
    7,007,000
    
    
    
    9,705,000
    
    
    
    3,386,000
 B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  1




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D. Risk Factors
 Our business faces certain risks. The risks described below may not be the only risks we face.
Additional risks that we do not yet know of or that we currently think are immaterial may also
impair our business. If any of the events or circumstances described as risks below or elsewhere in
this annual report actually occurs, our business, results of operations or financial condition
could be materially and adversely affected.
 The cyclical nature of the shipping industry may lead to volatile changes in freight rates and
vessel values, which may reduce our revenues and net income.
    
    
    economic and market conditions affecting the shipping
industry in general;
    
    supply of drybulk vessels;
    
    demand for drybulk vessels;
    
    types and sizes of vessels;
    
    other modes of transportation;
    
    cost of newbuildings;
    
    new regulatory requirements from governments or
self-regulated organizations; and
    
    prevailing level of charter rates.
 2




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Charter rates, which in the international drybulk shipping industry had reached historic highs
in the second quarter of 2005, may not increase as rapidly or may decline as a result of increased
capacity and slowing worldwide economic growth, thereby reducing our future profitability.
   
    
    supply and demand for drybulk commodities;
    
    global and regional economic conditions;
    
    the distance drybulk commodities are to be moved by sea; and
    
    changes in seaborne and other transportation patterns.
  
    
    the number of newbuilding deliveries;
    
    the scrapping rate of older vessels;
    
    changes in environmental and other regulations that may limit the
useful life of vessels;
    
    the number of vessels that are laid-up; and
    
    changes in global drybulk commodity production.
 3




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An economic slowdown in the Asia Pacific region could materially reduce the amount and/or
profitability of our business.
  We rely on spot charters. The rates on spot charters are very competitive and volatile, which
can result in decreased revenues if spot charter rates decline.
  We are subject to regulation and liability under environmental laws that could require
significant expenditures and reduce our cash flows and net income.
   4




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If any of our vessels fail to maintain their class certification and/or fail any annual
survey, intermediate survey, dry-docking or special survey, that vessel would be unable to carry
cargo, thereby reducing our revenues and profitability and violating certain loan covenants of our
third-party indebtedness.
    5




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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.
  World events outside our control may negatively affect our ability to operate, thereby
reducing our revenues and net income or our ability to obtain additional financing, thereby
restricting the implementation of our business strategy.
   We depend entirely on Free Bulkers and Safbulk PTY Ltd. to manage and charter our fleet.
  6




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We, and one of our executive officers, have affiliations with Free Bulkers that could create
conflicts of interest detrimental to us.
  Operational or financial problems experienced by Free Bulkers, our affiliate, may adversely
impact us.
  We have a limited operating history.
  If we fail to manage our planned growth properly, we may not be able to successfully expand
our market share.
  
    
    locating and acquiring suitable vessels;
    
    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 required financing.
  7




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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 existing loan agreements contain restrictive covenants that may limit our liquidity and
corporate activities.
  
    
    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 the management agreement
relating to each vessel; and
    
    sell our vessels.
  Servicing debt may limit funds available for other purposes.
  8




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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.
  As we expand our business, we will need to upgrade our operational and financial systems, and
add more staff and crew. If we cannot upgrade these systems or recruit suitable additional
employees, our performance may suffer.
  9




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We will be required to evaluate our controls, as required by Section 404 of the Sarbanes-Oxley
Act of 2002, which will require substantial resources. If these evaluations result in the
identification of material weaknesses, we may be adversely affected until these weaknesses can be
corrected.
 ®
 In the highly competitive international drybulk shipping industry, we may not be able to
compete for charters with new entrants or established companies with greater resources.
  We may be unable to attract and retain key management personnel and other employees in the
shipping industry, which may reduce the effectiveness of our management and lower our results of
operations .
  10




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Risks involved with operating ocean-going vessels could affect our business and reputation,
which may reduce our revenues .
  
    
    crew strikes and/or boycotts;
    
    marine disaster;
    
    piracy;
    
    environmental accidents;
    
    cargo and property losses or damage; and
    
    business interruptions caused by mechanical
failure, human error, war, terrorism, political action in
various countries, labor strikes or adverse weather
conditions.
  Our vessels may suffer damage and may face unexpected dry-docking costs, which could reduce
our cash flow and impair our financial condition.
  The loss of service of any vessels could have a material adverse effect on our earnings.
  Purchasing and operating previously owned, or secondhand, vessels may result in increased
operating costs and vessels off-hire, which could adversely affect our earnings.
    11




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We may not have adequate insurance to compensate us adequately for damage to, or loss of, our
vessels.
  Our operations outside the United States of America expose us to global risks that may
interfere with the operation of our vessels.
  The price of our shares may be volatile.
  
    
    actual or anticipated fluctuations in quarterly and annual results;
    
    mergers and strategic alliances in the shipping industry;
    
    market conditions in the industry;
    
    changes in government regulation;
    
    fluctuations in our quarterly revenues and earnings and
those of its publicly held competitors;
    
    shortfalls in our operating results from levels forecasted
by securities analysts;
    
    announcements concerning us or our competitors; and
    
    the general state of the securities markets.
 12




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Our principals, either directly or indirectly, control approximately 66.8% of our outstanding
common stock and effectively control the outcome of matters on which our shareholders are entitled
to vote, including the election of directors and other significant corporate actions.
  Our Articles of Incorporation and By-laws contain anti-takeover provisions that may
discourage, delay or prevent (1) an acquisition of our company and/or (2) the removal of incumbent
directors and officers.
  If a holder of Class W or Class Z warrants exercises their warrant, we will not be able to
issue shares of our common stock.
  
 ITEM 4.
    
    INFORMATION ON THE COMPANY
 Our History and Development
   13




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®
 Recent Developments
 Free Fighter
  Name
    
    Class
    
    DWT
    
    Built
    
    Flag
    
    Purchase Price
    
    Delivery Date
    
    EmploymentFree Jupiter
    
    Handymax
    
    
    47,777
    
    
    
    2002
    
    
    Marshall Islands
    
    $47.00 million
    
    July/Aug 2007
    
    3-year time charter
pendingFree Hero
    
    Handysize
    
    
    24,318
    
    
    
    1995
    
    
    Marshall Islands
    
    $25.25 million
    
    June/July 2007
    
    Currently fixed to
2-year time charter
through Dec 08/Feb
09Free Iris
    
    Handysize
    
    
    23,524
    
    
    
    1996
    
    
    Marshall Islands
    
    $26.75 million
    
    July/Aug 2007
    
    2-year time charter
pendingFree Gentleman
    
    Handysize
    
    
    14,379
    
    
    
    1994
    
    
    Marshall Islands
    
    $15.00 million
    
    June/July 2007
    
    Spot
  
    
    Up to US$67 million to US$68 million in a senior loan from HSH Nordbank and
US$21.5 million in a junior loan from Bank of Tokyo Mitsubishi
for which we received a commitment letter, from both banks;
    
    Up to US$8.5 million in a non-amortizing unsecured shareholder loan;
    
    Up to US$4 million from HBU secured by our other assets for which we have received
a preliminary term sheet; and
    
    Up to an additional US$1 million from our expected available cash.
   14




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Free Fighter
 Business Overview
   Owner
    
    Date of Incorporation
    
    Name
    
    Date of AcquisitionAdventure Two S.A.
    
    February 5, 2004(1)
    
    Free Destiny
    
    August 3, 2004Adventure Three S.A.
    
    February 5, 2004(1)
    
    Free Envoy
    
    September 20, 2004Adventure Four S.A.
    
    April 15, 2005
    
    Free Fighter(2)
    
    June 15, 2005
 
 (1) The company was formed by our initial shareholders for purpose of
acquiring one ship per company. The company is now our wholly owned subsidiary, as explained more
fully below.(2) We sold this vessel during the second quarter of 2007. The vessel was
delivered to the purchaser on April 27, 2007.  Free Champion . Free Destiny Free Envoy
 15




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Our Fleet
  Vessel
    
    Dwt
    
    
    Country Built
    
    Year Built
    
    
    Vessel TypeFree Destiny
    
    
    25,240
    
    
    Bulgaria
    
    
    1982
    
    
    HandysizeFree Envoy
    
    
    26,318
    
    
    Japan
    
    
    1984
    
    
    HandysizeFree Fighter
    
    
    39,240
    
    
    Bulgaria
    
    
    1982
    
    
    Handysize
 Free Fighter
  16




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Competitive Strengths
  
    
    Experienced Management Team.Our management team has significant
experience in operating drybulk carriers and expertise in all aspects of commercial,
technical, operational and financial areas of our business.
    
    Principal Shareholder with Strong Ties in the International Shipping
Industry.FS Holdings Limited., an entity controlled by Bella Restis, Katia Restis,
Claudia Restis and Victor Restis (collectively, the Restis Family) recently acquired
a 33% interest in our common stock. The Restis Familys interests in international
shipping include ownership and operation of a substantial number of vessels along
several segments of the shipping industry as well as cargo and chartering interests.
Our management believes that it will be able to enhance commercially the operations of
our fleet using the resources of the Restis family.
    
    Strong Customer Relationships.We through Free Bulkers, our ship
management company, have many long-established customer relationships, and we believe
we are well regarded within the international shipping community.
 Business Strategy
  Vessel Employment
 Free Destiny Free Envoy Free Fighter
  17




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Customers
  Management of the Fleet
    18




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Crewing and Employees
  Loans for Vessels
  M/V Free Destiny
 Free Envoy Free Envoy
 Free Fighter Free Fighter
  19




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.
  Competition
   Seasonality
  20




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Environmental and Other Regulations
    International Maritime Organization (IMO)
   21




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The U.S. Oil Pollution Act of 1990
       22




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Vessel Security Regulations
  
    
    on-board installation of automatic information systems (AIS),
to enhance vessel-to-vessel and vessel-to-shore communications;
    
    on-board installation of ship security alert systems;
    
    the development of vessel security plans; and
    
    compliance with flag state security certification requirements.
  Inspection by Classification Societies
 .
   23




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Risk of Loss and Liability Insurance
 General
  Hull and Machinery Insurance
   Protection and Indemnity Insurance
  24




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Legal Proceedings
  Property
  
 ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  Principal Factors Affecting Our Business
  
    
    Number of vessels owned and operated;
    
    Charter market rates, which reached historic highs earlier in 2005
and have since decreased somewhat, and periods of charterhire;
    
    Vessel operating expenses and voyage costs, which are incurred in
both U.S. Dollars and other currencies, primarily Euros;
    
    Cost of dry-docking and special surveys;
 25




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
    
    Depreciation expenses, which are a function of the cost, any
significant post-acquisition improvements, estimated useful lives and estimated
residual scrap values of our vessels;
    
    Financing costs related to the indebtedness incurred by us, which
totaled $240,000, $1,076,000 and $1,004,000 for the years ended December 31,
2004, 2005 and 2006, respectively; and
    
    Fluctuations in foreign exchange rates.
 Acquisition of Vessels
       26




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
    
    Obtain the charterers consent to us as the new owner;
    
    Obtain the charterers consent to a new technical manager;
    
    Obtain the charterers consent to a new flag for the vessel, if applicable;
    
    Arrange for a new crew for the vessel;
    
    Replace all hired equipment on board the vessel, such as gas
cylinders and communication equipment;
    
    Negotiate and enter into new insurance contracts for the vessel
through our own insurance brokers;
    
    Register the vessel under a flag state and perform the related
inspections in order to obtain new trading certificates from the flag state, if
we change the flag state;
    
    Implement a new planned maintenance program for the vessel; and
    
    Ensure that the new technical manager obtains new certificates of
compliance with the safety and vessel security regulations of the flag state.
  
    
    Employment and operation of our drybulk carriers; and
    
    Management of the financial, general and administrative elements
involved in the ownership and operation of our drybulk vessels.
  
    
    Vessel maintenance and repair;
    
    Crew selection and training;
    
    Vessel spares and stores supply;
    
    Contingency response planning;
    
    Onboard safety procedures auditing;
    
    Accounting;
    
    Vessel insurance arrangement;
    
    Vessel chartering;
    
    Vessel hire management;
    
    Vessel surveying; and
    
    Vessel performance monitoring.
 27




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Important Factors Affecting Our Results of Operations
  Calendar days
 Available days
 Fleet utilization
 Spot charter rates
 Voyage Revenues
  
    
    Our ability to acquire additional vessels;
    
    The nature and duration of our charters;
    
    Our decisions regarding vessel acquisitions and sales;
    
    The amount of time that we spend repositioning our vessels;
    
    The amount of time that our vessels spend 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.
 28




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Free
Envoy Free Destiny
 29




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Vessel Operating Expenses
  Depreciation
 Free Fighter
 Results of Operations
 Year Ended December 31, 2006 (fiscal 2006) as compared to year ended December 31, 2005
(fiscal 2005)
 Revenues Free Fighter Free Destiny
 Vessel Operating Expenses Free Fighter
 Voyage Expenses Free Fighter
 30




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Management Fees Free Fighter
 Commissions and General and Administrative Expenses M/V Free
Fighter,
 Compensation Cost
 Depreciation and Amortization M/V Free Fighter M/V Free Envoy
 Financing Costs
 Net (Loss)/Income Free Fighter
 31




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Year Ended December 31, 2005 (fiscal 2005) as compared to the period from April 23, 2004
(date of inception) to December 31, 2004 (fiscal 2004).
 Revenues M/V Free Destiny M/V Free Envoy M/V Free Fighter
 Vessel Operating Expenses M/V Free
Destiny M/V Free Envoy M/V Free Fighter
 Voyage Expenses Free Destiny Free Envoy Free Fighter
 Management Fees M/V Free Destiny M/V Free Envoy M/V Free Fighter
 Commissions and General and Administrative Expenses
 32




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Compensation Cost
  Depreciation and Amortization
 Financing Costs M/V Free Destiny M/V Free
Envoy M/V Free
Fighter M/V Free Destiny
 Net Income
 Liquidity and Capital Resources
  33




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Free
Fighter
  Free Fighter
 Free Destiny Free Envoy Free Fighter,
 Free Destiny Free Envoy Free Fighter Free Fighter Free Destiny Free
Envoy
 34




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Cash Flows
 Free Fighter
   Free Destiny Free Envoy M/V Free Fighter
 35




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Off-Balance Sheet Arrangements
  Contractual Obligations and Contingencies
  Year Ended
    
    M/V
    
    
    M/V
    
    
    M/V
    
    
    RelatedDecember 31,
    
    Free Destiny(1)
    
    
    Free Envoy(1)
    
    
    Free Fighter(1)
    
    
    Parties(2)
    
    
    Total2007
    
    $
    462,519
    
    
    $
    2,286,462
    
    
    $
    1,269,579
    
    
    $
    1,250,000
    
    
    $
    5,268,5602008
    
    
    3,293,572
    
    
    
    
    
    
    
    1,522,648
    
    
    
    1,367,000
    
    
    
    6,183,2202009
    
    
    
    
    
    
    
    
    
    
    1,391,201
    
    
    
    
    
    
    
    1,391,2012010
    
    
    
    
    
    
    
    
    
    
    1,337,998
    
    
    
    
    
    
    
    1,337,998TOTAL
    
    $
    3,756,091
    
    
    $
    2,286,462
    
    
    $
    5,521,426
    
    
    $
    2,617,000
    
    
    $
    14,180,979
 (1) M/V Free Destiny M/V Free Envo Free Fighter
 (2)
 Critical Accounting Policies
   36




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Impairment of long-lived assets
 Depreciation Free Fighter
 Deferred dry-dock and special survey costs
   Accounting for revenues and expenses
 37




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ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
   Name
    
    Age
    
    Position
    
    Director ClassIon G. Varouxakis
    
    
    36
    
    
    Chairman of the
Board of Directors,
President, Chief
Executive Officer,
and interim Chief
Financial Officer
    
    CKostas Koutsoubelis
    
    
    51
    
    
    Director, Vice
President and
Treasurer
    
    AAlexis Varouxakis
    
    
    30
    
    
    Secretary
    
    N/AMatthew W. McCleery
    
    
    37
    
    
    Director
    
    AFocko H. Nauta
    
    
    49
    
    
    Director
    
    BDimitrios Panagiotopoulos
    
    
    45
    
    
    Director
    
    C
 Ion G. Varouxakis
 38




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Kostas Koutsoubelis
 Alexis Varouxakis
 Matthew W. McCleery
 Focko H. Nauta
 Dimitrios Panagiotopoulos
  39




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B. Compensation
  Compensation
    
    
    Bonus
    
    
    OptionsName
    
    Received
    
    
    Received in 2006
    
    
    Granted in 2006Ion G. Varouxakis
    
    $
    150,000
    
    
    $
    0
    
    
    
    0Chairman of the Board of
Directors, President, interim
Chief Financial Officer, Chief
Executive OfficerKostas Koutsoubelis
    
    $
    0
    
    
    $
    0
    
    
    
    0Director, Vice President, TreasurerAlexis Varouxakis
    
    $
    0
    
    
    $
    0
    
    
    
    0SecretaryMatthew W. McCleery
    
    $
    26,000
    
    
    $
    0
    
    
    
    0DirectorFocko H. Nauta
    
    $
    26,000
    
    
    $
    0
    
    
    
    0DirectorDimitrios Panagiotopoulos
    
    $
    0
    
    
    $
    0
    
    
    
    0Director
 C. Board Practices
     D. Employees
  E. Share Ownership
  40




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##### Table of Contents



Percentage ofNumber of Shares of
    
    
    Shares of CommonCommon Stock
    
    
    Stock BeneficiallyName
    
    Beneficially Owned
    
    
    Owned(1)Ion G. Varouxakis
    
    
    2,248,031
    (2)
    
    
    34.5
    %Matthew W. McCleery
    
    
    0
    
    
    
    *Focko H. Nauta
    
    
    0
    
    
    
    *Dimitrios Panagiotopoulos
    
    
    0
    
    
    
    *Kostas Koutsoubelis
    
    
    0
    
    
    
    *Alexis Varouxakis
    
    
    0
    
    
    
    *All directors and
officers as a group (six
persons)
    
    
    2,248,782
    
    
    
    34.5
    %
 
 *
    
    Less than 1%.(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. These
percentages are calculated on the basis of 6,290,100 outstanding shares of FreeSeas common stock.(2)
    
    Reflects 2,014,697 shares owned by The Midas Touch S.A., a Marshall
Islands corporation wholly owned by Mr. Varouxakis (The Midas Touch); 66,667 shares issuable
upon the exercise of warrants issued to The Midas Touch; and 166,667 shares that may be acquired
by Mr. Varouxakis pursuant to immediately exercisable stock options. Amended and Restated 2005 Stock Incentive Plan
   Employment Agreements
  41




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##### Table of Contents



ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  Percentage ofNumber of Shares of
    
    
    Shares of CommonCommon Stock
    
    
    Stock BeneficiallyName
    
    Beneficially Owned
    
    
    Owned(1)Ion G. Varouxakis
    
    
    2,248,031
    (2)
    
    
    34.5
    %FS Holdings Limited
    
    
    2,108,782
    
    
    
    33.6
    %Hummingbird Management, LLC(3)
    
    
    467,296
    
    
    
    7.4
    %
 
 (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.(2) Reflects 2,014,697 shares owned by The Midas Touch a Marshall Islands
corporation wholly owned by Mr. Varouxakis; 66,667 shares issuable upon the exercise of warrants
issued to The Midas Touch; and 166,667 shares that may be acquired by Mr. Varouxakis pursuant to
immediately exercisable stock options.(3) Based solely on information contained in a Schedule 13D/A filed with the
Securities and Exchange Commission on February 5, 2007. Hummingbird Management, LLC (f/k/a
Morningside Value Investors, LLC) (Hummingbird), acts as investment manager to Hummingbird Value
Fund, L.P. (HVF), to Hummingbird Microcap Value Fund, L.P. (the Microcap Fund), and to
Hummingbird Concentrated Fund, L.P. (the Concentrated Fund) and has the sole investment
discretion and voting authority with respect to the investments owned of record by each of HVF,
Microcap Fund and Concentrated Fund. Accordingly, Hummingbird may be deemed for purposes of Rule
13d-3 of the Securities and Exchange Act of 1934, as amended (Rule 13d-3), to be the beneficial
owner of the shares owned by HVF, Microcap Fund, and Concentrated Fund. The managing member of
Hummingbird is Paul Sonkin. Mr. Sonkin is also the managing member of Hummingbird Capital, LLC
(f/k/a Morningside Capital, LLC) (HC), the general partner of each of HVF and Microcap Fund. The
total number of shares of common stock owned by Hummingbird includes (a) 47,050 shares of common
stock issuable upon the exercise of warrants held by the HVF, and (b) 47,050 shares of common stock
issuable upon the exercise of warrants held by the Microcap Fund.   42




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##### Table of Contents



B. Related Party Transactions
  Free Destiny Free Envoy
   43




---



##### Table of Contents



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
 ® ®
 44




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##### Table of Contents



®
 For the Years Ended;
    
    Common Stock
    
    
    Class W Warrants
    
    
    Class Z WarrantsHigh
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    LowDecember 31, 2005
    
    $
    5.40
    
    
    $
    5.33
    
    
    $
    1.03
    
    
    $
    0.75
    
    
    $
    1.17
    
    
    $
    0.75December 31, 2006
    
    
    5.45
    
    
    
    2.62
    
    
    
    0.95
    
    
    
    0.55
    
    
    
    1.20
    
    
    
    0.60
 For the Quarters Ended:
    
    Common Stock
    
    
    Class W Warrants
    
    
    Class Z WarrantsHigh
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    LowDecember 31, 2005 (1)
    
    $
    5.40
    
    
    $
    5.33
    
    
    $
    1.03
    
    
    $
    0.75
    
    
    $
    1.17
    
    
    $
    0.75March 31, 2006
    
    
    5.45
    
    
    
    4.50
    
    
    
    0.95
    
    
    
    0.55
    
    
    
    1.20
    
    
    
    0.60June 30, 2006
    
    
    4.85
    
    
    
    3.65
    
    
    
    0.58
    
    
    
    0.46
    
    
    
    0.68
    
    
    
    0.48September 30, 2006
    
    
    5.07
    
    
    
    3.70
    
    
    
    0.60
    
    
    
    0.30
    
    
    
    0.72
    
    
    
    0.42December 31, 2006
    
    
    4.90
    
    
    
    2.62
    
    
    
    0.60
    
    
    
    0.18
    
    
    
    0.70
    
    
    
    0.35
 
 (1)
    
    Includes the high and low information from December 16, 2005, the date on which our
securities began trading on the Nasdaq® Capital Market. For the Months Ended:
    
    Common Stock
    
    Class W Warrants
    
    Class Z WarrantsHigh
    
    Low
    
    High
    
    Low
    
    High
    
    LowNovember 30, 2006
    
    $
    4.20
    
    
    $
    3.22
    
    
    $
    0.44
    
    
    $
    0.26
    
    
    $
    0.60
    
    
    $
    0.56December 31, 2006
    
    
    3.50
    
    
    
    2.56
    
    
    
    0.48
    
    
    
    0.18
    
    
    
    0.65
    
    
    
    0.01January 31, 2007
    
    
    5.52
    
    
    
    2.70
    
    
    
    1.29
    
    
    
    0.24
    
    
    
    1.10
    
    
    
    0.59February 28, 2007
    
    
    4.77
    
    
    
    4.53
    
    
    
    0.84
    
    
    
    0.70
    
    
    
    0.78
    
    
    
    0.98March 31, 2007
    
    
    5.15
    
    
    
    4.40
    
    
    
    1.06
    
    
    
    0.66
    
    
    
    1.15
    
    
    
    0.83April 30, 2007
    
    
    4.997
    
    
    
    4.55
    
    
    
    1.00
    
    
    
    0.81
    
    
    
    1.16
    
    
    
    1.00
 
 (2)
    
    Includes the high and low information from December 16, 2005, the date on which our
securities began trading on the Nasdaq® Capital Market. D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 ITEM 10.
    
    ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Incorporation
  45




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##### Table of Contents



C. Material Contracts
 Memoranda of Agreement dated May 1, 2007 regarding vessel acquisitions.
  Promissory Note dated May 7, 2007 from FreeSeas Inc. to FS Holdings Limited.
  Loan Agreement dated September 2006 between Adventure Four. S.A. and First Business Bank, S.A.
 Mortgage dated September 2006 by Adventure Four S.A. in favor of First Business Bank, S.A. 
Deed of Assignment dated September 2006 between Adventure Four S.A. and First Business Bank, S.A.
 Free Fighter Free Fighter
  Credit Agreement dated September 23, 2005 between Adventure Two S.A. and Hollandsche Bank-Unie
N.V.  Mortgage dated October 24, 2005 by Adventure Two S.A. in favor of Hollandsche Bank-Unie N.V.
- Deed of Assignment dated October 24, 2005 between Adventure Two S.A. and Hollandsche Bank-Unie
N.V.
 46




---



##### Table of Contents



Free Destiny Free Destiny
  Loan Agreement dated August 2, 2004, as amended on April 25, 2005 and October 7, 2005, among
Adventure Holdings S.A. (now known as FreeSeas Inc.), G. Bros S.A., and V Capital S.A., regarding
the M/V Free Destiny and Loan Agreement dated September 20, 2004, as amended on April 25, 2005
and October 7, 2005, among Adventure Holdings S.A. (now known as FreeSeas Inc.), G. Bros S.A., and
V Capital S.A., regarding the M/V Free Envoy
 Free Destiny Free Envoy
 Short-Term Loan Agreement in Euros and Optional Currencies dated July 8, 2004 between
Adventure Three S.A. and Hollandsche Bank-Unie N.V.
  47




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##### Table of Contents



Credit Agreement dated June 24, 2004 between Adventure Three S.A. and Hollandsche Bank-Unie
N.V.  Mortgage dated September 29, 2004 by Adventure Three S.A. in favor of Hollandsche Bank-Unie
N.V .  Deed of Assignment dated September 29, 2004 between Adventure Three S.A. and Hollandsche
Bank-Unie N.V.
 Free Envoy
  D. Exchange Controls and Other Limitations Affecting Security Holders
  E. Taxation
  ®
 48




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##### Table of Contents



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
   49




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##### Table of Contents



Free Destiny
 Year
    
    Amount2007
    
    $
    32,5362008
    
    $
    26,516
 Free Envoy
 Year
    
    Amount2007
    
    $
    15,269
 Free Fighter
 Year
    
    Amount2007
    
    $
    44,1592008
    
    $
    30,3032009
    
    $
    17,8502010
    
    $
    408
  Foreign Exchange Rate Risk
  
 ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  50




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##### Table of Contents



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
  51




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##### Table of Contents



ITEM 16B.
    
    CODE OF ETHICS
 www.freeseas.gr
 
 ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2005(1)
    
    
    2006Audit Fees
    
    $
    200,000
    
    
    $
    227,000Audit-related Fees
    
    $
    92,000
    
    
    $
    3,000
 (1)
 .
 
 ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
  
 ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
  52




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##### Table of Contents



PART III
 
 ITEM 17.
    
    FINANCIAL STATEMENTS
  
 ITEM 18.
    
    FINANCIAL STATEMENTS
  PageNumberReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets
    
    
    F-2Consolidated Statements of Income
    
    
    F-3Consolidated Statements of Cash Flows
    
    
    F-4Consolidated Statements of Stockholders Equity
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6
 
 ITEM 19.
    
    EXHIBITS
 1.1
    
    
    Amended and Restated Articles of Incorporation of FreeSeas Inc. (formerly known as Adventure
Holdings S.A.)(1)1.2
    
    
    Amended and Restated By-Laws of FreeSeas Inc. (formerly known as Adventure Holdings S.A.)(1)2.1
    
    
    Specimen Common Stock Certificate(1)2.2
    
    
    Form of Class A Warrant(1)2.3
    
    
    Form of Class W Warrant(1)2.4
    
    
    Form of Class Z Warrant(1)2.5
    
    
    Form of Management Stock Option Agreement(1)4.1
    
    
    Form of Employment Agreement between Ion G. Varouxakis and FreeSeas Inc.(1)4.2
    
    
    2005 Amended and Restated Stock Incentive Plan(2)4.3
    
    
    Credit Agreement dated June 24, 2004 between Adventure Three S.A. and Hollandsche Bank-Unie
N.V.(1)4.4
    
    
    Mortgage dated September 29, 2004 by Adventure Three S.A. in favor of Hollandsche Bank-Unie
N.V.(1)4.5
    
    
    Deed of Assignment dated September 29, 2004 between Adventure Three S.A. and Hollandsche
Bank-Unie N.V.(1)
 53




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##### Table of Contents



4.6
    
    
    Short-Term Loan Agreement in Euros and Optional Currencies dated July 8, 2004 between
Adventure Three S.A. and Hollandsche Bank-Unie N.V.(1)4.7
    
    
    Standard Ship Management Agreement dated July 1, 2004 between Free Bulkers S.A. and Adventure
Two S.A.(1)4.8
    
    
    Standard Ship Management Agreement dated July 1, 2004 between Free Bulkers S.A. and Adventure
Three S.A.(1)4.9
    
    
    Loan Agreement dated August 2, 2004 among Adventure Holdings S.A. (now known as FreeSeas
Inc.), G. Bros S.A., and V Capital S.A., regarding the M/V Free Destiny(1)4.10
    
    
    First Amendment to Loan Agreement dated effective as of April 25, 2005 among Adventure
Holdings S.A. (now known as FreeSeas Inc.), G. Bros S.A., and V Capital S.A., regarding the
M/V Free Destiny(1)4.11
    
    
    Loan Agreement dated September 20, 2004 among Adventure Holdings S.A. (now known as FreeSeas
Inc.), G. Bros S.A., and V Capital S.A., regarding the M/V Free Envoy(1)4.12
    
    
    First Amendment to Loan Agreement dated effective as of April 25, 2005 among Adventure
Holdings S.A. (now known as FreeSeas Inc.), G. Bros S.A., and V Capital S.A., regarding the
M/V Free Envoy(1)4.13
    
    
    Standard Ship Management Agreement dated April 15, 2005 between Free Bulkers S.A. and
Adventure Four S.A.(1)4.14
    
    
    Amendment No. 1 of July 22, 2005 to the Shipman 98 Agreement dated July 1, 2004 between
Adventure Two S.A. and Free Bulkers S.A.(1)4.15
    
    
    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.(1)4.16
    
    
    Credit Agreement dated September 23, 2005 between Adventure Two S.A. and Hollandsche
Bank-Unie N.V.(1)4.17
    
    
    Credit Agreement dated September 23, 2005 between Adventure Three S.A. and Hollandsche
Bank-Unie N.V.(1)4.18
    
    
    Second Amendment to Loan Agreement dated effective as of October 7, 2005 among FreeSeas Inc.,
G. Bros S.A., and V Capital regarding the M/V Free Destiny(1)4.19
    
    
    Second Amendment to Loan Agreement dated effective as of October 7, 2005 among FreeSeas Inc.,
G. Bros S.A., and V Capital regarding the M/V Free Envoy(1)4.20
    
    
    Mortgage dated October 24, 2005 by Adventure Two S.A. in favor of Hollandsche Bank-Unie N.V.
(3)4.21
    
    
    Deed of Assignment dated October 24, 2005 between Adventure Two S.A. and Hollandsche
Bank-Unie N.V. (3)4.22
    
    
    Amendment dated January 23, 2006 to Credit Agreement dated September 23, 2005 between
Adventure Two S.A. and Hollandsche Bank-Unie N.V. (3)
 54




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##### Table of Contents



4.23
    
    
    Amendment dated January 23, 2006 to Credit Agreement dated September 23, 2005 between
Adventure Three S.A. and Hollandsche Bank-Unie N.V. (3)4.24
    
    
    Loan Agreement dated September 2006 among Adventure Four, S.A. and First Business Bank S.A.4.25
    
    
    Deed of Assignment dated September 2006 between Adventure Four, S.A. in favor of First
Business Bank S.A.4.26
    
    
    Mortgage dated September 2006 by Adventure Four S.A. in favor of First Business Bank S.A.4.27
    
    
    Warrant Clarification Agreement dated May 10, 2007 between FreeSeas Inc. and American Stock
Transfer & Trust Company.4.28
    
    
    Promissory Note dated May 7, 2007 from Free Seas Inc. in favor of FS Holdings Limited8.1
    
    
    Subsidiaries of the Registrant (1)12.1
    
    
    Section 302 Certification of Chief Executive Officer12.2
    
    
    Section 302 Certification of Chief Financial Officer13.1
    
    
    Section 906 Certification of Chief Executive Officer13.2
    
    
    Section 906 Certification of Chief Financial Officer15.1
    
    
    Code of Business Conduct and Ethics(3)
 
 (1)
    
    Previously filed as an exhibit to the Registrants Registration Statement on Form F-1 (File
No. 333-124825) and incorporated herein by reference.(2)
    
    Previously filed as Annex A to Registrants Form 6-K filed on December 1, 2006 and
incorporated herein by reference.(3)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 20-F for the year
ended December 31, 2005 and incorporated herein by reference. 55




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##### Table of Contents



SIGNATURES
  FREESEAS INC.By:
    /s/ Ion G. VarouxakisName:
    Ion G. VarouxakisTitle:
    President and interim Chief Financial Officer  56




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
  To the Shareholders and the Board of Directors of
FreeSeas Inc.
     
 F-1




---



##### Table of Contents



FREESEAS INC.
CONSOLIDATED BALANCE SHEETS
 December 31,Notes
    
    
    2006
    
    
    2005ASSETSCURRENT ASSETSCash in hand and at bank
    
    
    
    
    
    
    372
    
    
    
    3,285Trade receivables, net
    
    
    
    
    
    
    278
    
    
    
    520Inventories
    
    
    
    
    
    
    242
    
    
    
    42Insurance claims
    
    
    
    
    
    
    485
    
    
    
    762Due from related party
    
    
    9
    
    
    
    40
    
    
    
    677Total current assets
    
    
    
    
    
    
    1,417
    
    
    
    5,286Fixed assets, net
    
    
    3
    
    
    
    19,369
    
    
    
    23,848Deferred charges, net
    
    
    4
    
    
    
    2,300
    
    
    
    706Total Assets
    
    
    
    
    
    
    23,086
    
    
    
    29,840LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Bank overdraft
    
    
    
    
    
    
    2,000
    
    
    
    Accounts payable
    
    
    5
    
    
    
    2,003
    
    
    
    1,176Accrued liabilities
    
    
    6
    
    
    
    1,515
    
    
    
    1,540Unearned revenue
    
    
    
    
    
    
    179
    
    
    
    172Shareholders loans, current portion
    
    
    8
    
    
    
    1,218
    
    
    
    950Due to related parties
    
    
    9
    
    
    
    
    
    
    
    893Long-term debt, current portion
    
    
    7
    
    
    
    3,345
    
    
    
    5,500Total current liabilities
    
    
    
    
    
    
    10,260
    
    
    
    10,231Long-term debt, net of current portion
    
    
    7
    
    
    
    4,485
    
    
    
    7,500Shareholders loans, net of current portion
    
    
    8
    
    
    
    1,334
    
    
    
    2,250Other liabilities
    
    
    
    
    
    
    
    
    
    
    154Total long-term liabilities
    
    
    
    
    
    
    5,819
    
    
    
    9,904Total Liabilities
    
    
    
    
    
    
    16,079
    
    
    
    20,135Commitments and contingencies
    
    
    11SHAREHOLDERS EQUITYPreferred shares (5,000,000 authorized with
par value $0.001, nil issued and outstanding
as at 2006 and 2005)
    
    
    13
    
    
    
    
    
    
    
    Common shares (40,000,000 authorized with par
value $0.001, 6,290,100 shares issued and
outstanding as at 2006 and 2005)
    
    
    
    
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    
    
    
    
    9,703
    
    
    
    9,242Retained earnings / (deficit)
    
    
    
    
    
    
    (2,702
    )
    
    
    622Deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    (165
    )Total shareholders equity
    
    
    
    
    
    
    7,007
    
    
    
    9,705Total Liabilities and Shareholders Equity
    
    
    
    
    
    
    23,086
    
    
    
    29,840
  F-2




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##### Table of Contents



FREESEAS INC.
CONSOLIDATED STATEMENTS OF INCOME
 For the Period fromDate of InceptionFor the year ended
    
    
    For the year ended
    
    
    (April 23, 2004) toDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004OPERATING REVENUES
    
    
    11,727
    
    
    
    10,326
    
    
    
    2,830OPERATING EXPENSES:Vessel operating expenses
    
    
    (4,483
    )
    
    
    (3,596
    )
    
    
    (786
    )Voyage expenses
    
    
    (689
    )
    
    
    (55
    )
    
    
    (16
    )Depreciation expense
    
    
    (4,479
    )
    
    
    (3,553
    )
    
    
    (872
    )Amortization of deferred dry-docking and
special survey costs
    
    
    (442
    )
    
    
    (355
    )
    
    
    (109
    )Management fees to a related party
    
    
    (540
    )
    
    
    (488
    )
    
    
    (180
    )Commissions
    
    
    (799
    )
    
    
    (553
    )
    
    
    (127
    )Compensation costs
    
    
    (651
    )
    
    
    (200
    )
    
    
    General and administrative expenses
    
    
    (1,925
    )
    
    
    (321
    )
    
    
    (34
    )(Loss) Income from operations
    
    
    (2,281
    )
    
    
    1,205
    
    
    
    706OTHER INCOME (EXPENSE):Finance Costs
    
    
    (1,004
    )
    
    
    (1,076
    )
    
    
    (240
    )Interest income
    
    
    19
    
    
    
    8
    
    
    
    4Other
    
    
    (58
    )
    
    
    15Other expense
    
    
    (1,043
    )
    
    
    (1,053
    )
    
    
    (236
    )Net (loss) income
    
    
    (3,324
    )
    
    
    152
    
    
    
    470Basic (loss) earnings per share
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10Diluted (loss) earnings per share
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10Basic weighted average number of shares
    
    
    6,290,100
    
    
    
    4,574,588
    
    
    
    4,500,000Diluted weighted average number of shares
    
    
    6,290,100
    
    
    
    4,600,444
    
    
    
    4,500,000
  F-3




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##### Table of Contents



FREESEAS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Period fromDate of InceptionFor the year ended
    
    
    For the year ended
    
    
    (April 23, 2004) toDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Cash Flows from Operating Activities:Net (loss) income
    
    
    (3,324
    )
    
    
    152
    
    
    
    470Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    4,479
    
    
    
    3,553
    
    
    
    872Amortization of deferred charges
    
    
    514
    
    
    
    433
    
    
    
    127Amortization of debt discount
    
    
    77
    
    
    
    153
    
    
    
    66Provision for doubtful receivables
    
    
    202
    
    
    
    
    
    
    
    Write off of deferred finance costs
    
    
    32
    
    
    
    50
    
    
    
    Dry-docking and special survey
    
    
    (2,069
    )
    
    
    (379
    )
    
    
    (641
    )Compensation costs for stock options granted
    
    
    651
    
    
    
    180
    
    
    
    Changes in:Trade receivables
    
    
    40
    
    
    
    (225
    )
    
    
    (295
    )Inventories
    
    
    (200
    )
    
    
    (1
    )
    
    
    (41
    )Due from related party
    
    
    637
    
    
    
    (431
    )
    
    
    (246
    )Insurance Claims
    
    
    277
    
    
    
    (762
    )
    
    
    Accounts payable
    
    
    827
    
    
    
    761
    
    
    
    415Accrued liabilities
    
    
    (25
    )
    
    
    1,424
    
    
    
    116Unearned revenue
    
    
    7
    
    
    
    (112
    )
    
    
    284Due to related party
    
    
    (893
    )
    
    
    774
    
    
    
    119Other liabilities
    
    
    (154
    )
    
    
    154
    
    
    
    Net Cash from Operating Activities
    
    
    1,078
    
    
    
    5,724
    
    
    
    1,246Cash Flows from Investing Activities:Vessel acquisitions
    
    
    
    
    
    
    (11,213
    )
    
    
    (17,060
    )Restricted cash
    
    
    
    
    
    
    400
    
    
    
    (400
    )Net Cash used in Investing Activities
    
    
    
    
    
    
    (10,813
    )
    
    
    (17,460
    )Cash Flows from Financing Activities:Net movement in bank overdraft
    
    
    2,000
    
    
    
    (37
    )
    
    
    37Proceeds from long-term debt
    
    
    2,330
    
    
    
    10,700
    
    
    
    11,000Loans from shareholders
    
    
    
    
    
    
    4,216
    
    
    
    3,675Payments of long-term debt
    
    
    (7,500
    )
    
    
    (7,850
    )
    
    
    (850
    )Payments of loans from shareholders
    
    
    (750
    )
    
    
    (4,416
    )
    
    
    (568
    )Issuance of common stock, net (note 13)
    
    
    
    
    
    
    5,901
    
    
    
    5Shareholders contributions
    
    
    
    
    
    
    105
    
    
    
    2,966Shareholders advance
    
    
    
    
    
    
    (600
    )
    
    
    600Deferred financing costs
    
    
    (71
    )
    
    
    (106
    )
    
    
    (190
    )Net Cash (used in) provided by Financing Activities
    
    
    (3,991
    )
    
    
    7,913
    
    
    
    16,675Net (decrease) increase in cash in hand and at bank
    
    
    (2,913
    )
    
    
    2,824
    
    
    
    461Cash in hand and at bank, Beginning of Period
    
    
    3,285
    
    
    
    461
    
    
    
    Cash in hand and at bank, End of Period
    
    
    372
    
    
    
    3,285
    
    
    
    461Supplemental Cash Flow Information:Cash paid for interest
    
    
    758
    
    
    
    588
    
    
    
    77Non-cash shareholder distributions
    
    
    25
    
    
    
    19
    
    
    
    55
  F-4




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##### Table of Contents



FREESEAS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AdditionalPreferred
    
    
    Preferred
    
    
    Common
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Deferred StockShares
    
    
    Shares $
    
    
    Shares
    
    
    Shares $
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    TotalIssuance of shares
    
    
    
    
    
    
    
    
    
    
    4,500,000
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Contributions from
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,966
    
    
    
    
    
    
    
    
    
    
    
    2,966Distributions to
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    
    
    
    
    (55
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470
    
    
    
    
    
    
    
    470Balance December
31, 2004
    
    
    
    
    
    
    
    
    
    
    4,500,000
    
    
    
    5
    
    
    
    2,911
    
    
    
    470
    
    
    
    
    
    
    
    3,386Issuance of shares,
net (note 13)
    
    
    
    
    
    
    
    
    
    
    1,790,100
    
    
    
    1
    
    
    
    5,900
    
    
    
    
    
    
    
    
    
    
    
    5,901Contributions from
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Distributions to
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    (19
    )Issuance of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    (165
    )
    
    
    180Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    152Balance December 31,
2005
    
    
    
    
    
    
    
    
    
    
    6,290,100
    
    
    
    6
    
    
    
    9,242
    
    
    
    622
    
    
    
    (165
    )
    
    
    9,705Issuance of
shares, net (note 13)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions to
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (25
    )Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    
    165
    
    
    
    651Net (loss)/income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,324
    )
    
    
    
    
    
    
    (3,324
    )Balance December 31,
2006
    
    
    
    
    
    
    
    
    
    
    6,290,100
    
    
    
    6
    
    
    
    9,703
    
    
    
    (2,702
    )
    
    
    
    
    
    
    7,007
  F-5




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation and General Information
    Company
    2. Significant Accounting Policies
 Principles
of Consolidation:
  Use of Estimates:
 F-6




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Foreign Currency Translation:
 Trade Receivables:
 Inventories:
 Insurance Claims:
 Vessels Cost:
 Vessels Depreciation:
 Impairment of Long-lived Assets:
 Accounting for Special Survey and Dry-docking Costs:
 Financing Costs:
 F-7




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Accounting for Revenue and Expenses:
   Unearned Revenue:
 Profit Sharing Arrangements:
 Repairs and Maintenance:
 Stock-Based Compensation
   F-8




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  For the year endedDecember 31, 2005Net income available to common
shareholders, as reportedAs reported
    
    
    152Add: Stock-based employee compensation
expense included in reported net income
    
    
    180Deduct: Total stock compensation
expense determined under the fair value
based method
    
    
    (1,075
    )Net income available to common
shareholders, pro forma
    
    
    (743
    )Basic earnings (loss) per share  as
reported
    
    $
    0.03Basic earnings (loss) per share  pro
forma
    
    $
    (0.16
    )Diluted earnings (loss) per share  as
reported
    
    $
    0.03Diluted earnings (loss) per share 
pro forma
    
    $
    (0.16
    )
  For the year endedDecember 31, 2005Expected life of option (years) (1)
    
    
    5Risk-free interest rate (2)
    
    
    4.35
    %Expected volatility of the Companys stock (3)
    
    
    37.50
    %Expected dividend yield on Companys stock
    
    
    
 
 (1)
    
    The expected life of options (in years) is based on the expected exercise date of the
options.(2)
    
    Risk Free Rate is the yield on a U.S. Government Zero Coupon Bond with a maturity
equal to the term of the grant.(3)
    
    Expected volatility is calculated by monitoring the volatility of ten shipping
companies listed in NASDAQ for the last 30 months (Source: Bloombergs Financial Markets
Commodities News). Segment Reporting:
 F-9




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Comprehensive Income:
 Earnings per Share:
 Recent Accounting Developments:
     F-10




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   3. Fixed Assets
 AccumulatedVessel cost
    
    
    depreciation
    
    
    Net book valueAcquisition of vessels
    
    
    17,060
    
    
    
    
    
    
    
    17,060Depreciation
    
    
    
    
    
    
    (872
    )
    
    
    (872
    )December 31, 2004
    
    
    17,060
    
    
    
    (872
    )
    
    
    16,188Acquisition of vessels
    
    
    11,213
    
    
    
    
    
    
    
    11,213Depreciation
    
    
    
    
    
    
    (3,553
    )
    
    
    (3,553
    )December 31, 2005
    
    
    28,273
    
    
    
    (4,425
    )
    
    
    23,848Depreciation
    
    
    
    
    
    
    (4,479
    )
    
    
    (4,479
    )December 31, 2006
    
    
    28,273
    
    
    
    (8,904
    )
    
    
    19,369
  4. Deferred Charges
 Dry-docking
    
    
    Special survey cost
    
    
    Financing costs
    
    
    TotalAdditions
    
    
    340
    
    
    
    301
    
    
    
    190
    
    
    
    831Amortization
    
    
    (80
    )
    
    
    (29
    )
    
    
    (18
    )
    
    
    (127
    )December 31, 2004
    
    
    260
    
    
    
    272
    
    
    
    172
    
    
    
    704Additions
    
    
    299
    
    
    
    80
    
    
    
    106
    
    
    
    485Written-off
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    (50
    )Amortization
    
    
    (238
    )
    
    
    (117
    )
    
    
    (78
    )
    
    
    (433
    )December 31, 2005
    
    
    321
    
    
    
    235
    
    
    
    150
    
    
    
    706Additions
    
    
    715
    
    
    
    1,354
    
    
    
    71
    
    
    
    2,140Written-off
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    (32
    )Amortization
    
    
    (306
    )
    
    
    (136
    )
    
    
    (72
    )
    
    
    (514
    )December 31, 2006
    
    
    730
    
    
    
    1,453
    
    
    
    117
    
    
    
    2,300
 F-11




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  5. Accounts payable
  December 31, 2006
    
    
    December 31, 2005Suppliers
    
    
    1,820
    
    
    
    603Agents
    
    
    57
    
    
    
    545Insurers
    
    
    126
    
    
    
    28Total
    
    
    2,003
    
    
    
    1,176
 6. Accrued liabilities
  December 31, 2006
    
    
    December 31, 2005Accrued wages
    
    
    28
    
    
    
    83Accrued interest
    
    
    42
    
    
    
    23Accrued insurance and related
liabilities
    
    
    226
    
    
    
    649Accrued drydocking and special
survey costs
    
    
    865Accrued financial advisory costs
    
    
    155
    
    
    
    431Other accrued expenses
    
    
    199
    
    
    
    354Total
    
    
    1,515
    
    
    
    1,540
 7. Long-term debt
  December 31, 2006
    
    
    December 31, 2005Lender
    
    Current portion
    
    
    Long-term portion
    
    
    Total
    
    
    Current portion
    
    
    Long-term portion
    
    
    TotalFirst
Business Bank.,
(M/V Free
Fighter),(c)
    
    
    945
    
    
    
    1,385
    
    
    
    2,330
    
    
    
    
    
    
    
    
    
    
    
    Hollandsche Bank
 Unie N.V. (M/V
Free Destiny)
    
    
    225
    
    
    
    3,100
    
    
    
    3,325
    
    
    
    375
    
    
    
    3,325
    
    
    
    3,700Hollandsche Bank
 Unie N.V. (M/V
Free Envoy)
    
    
    2,175
    
    
    
    
    
    
    
    2,175
    
    
    
    2,125
    
    
    
    2,175
    
    
    
    4,300Egnatia Bank (M/V
Free Fighter)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    2,000
    
    
    
    5,000Total
    
    
    3,345
    
    
    
    4,485
    
    
    
    7,830
    
    
    
    5,500
    
    
    
    7,500
    
    
    
    13,000
 F-12




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Lender
    
    Vessel
    
    Repayment Terms (b)First Business Bank (c)
    
    M/V FREE FIGHTER (a)
    
    Twelve quarterly
installments of
US$315 each, the
first being due in
April 2007, and a
balloon payment of
US$1,020 payable
together with the
last installment.
Interest rate at
2.00% above LIBOR.Hollandsche Bank  Unie N.V.
    
    M/V FREE DESTINY (a)
    
    Eight quarterly
installments of
US$75 the first due
in December 2005,
one quarterly
installment of
US$100 in March
2008, two quarterly
installments of
US$500 and a
balloon payment of
US$2,000 due in
December 2008.
Interest rate at
1.95% above LIBOR.Hollandsche Bank  Unie N.V. (d)
    
    M/V FREE ENVOY(a)
    
    Twelve quarterly
installments of
US$425 each, the
first being due in
December 2004 and a
balloon payment of
US$900 in December
2007. Interest rate
at 1.95% above
LIBOR.Egnatia Bank
    
    M/V FREE FIGHTER (a)
    
    Four quarterly
installments of
US$750, six
quarterly
installments of
US$250 and a
balloon payment of
US$500. The loan
was fully repaid in
2006. Interest rate
at 1.875% above
LIBOR.
  
 Free Fighter
  F-13




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Year
    
    Amount2007
    
    
    3,3452008
    
    
    3,5532009
    
    
    4532010
    
    
    479Total
    
    
    7,830
 8. Shareholders loans
 AmountShareholders loans
    
    
    4,134Debt discount
    
    
    (459
    )Payment
    
    
    (568
    )Debt discount decrease
    
    
    55Debt discount amortization
    
    
    66December 31, 2004
    
    
    3,228New loan
    
    
    4,216Payment
    
    
    (4,416
    )Debt discount decrease
    
    
    19Debt discount amortization
    
    
    153December 31, 2005
    
    
    3,200Payment
    
    
    (750
    )Debt discount decrease
    
    
    25Debt discount amortization
    
    
    77December 31, 2006
    
    
    2,552
     F-14




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     Year
    
    Amount2007
    
    
    1,2182008
    
    
    1,334Total
    
    
    2,552
 9. Related party transactions
 Purchases of services
 1
   F-15




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Employment agreements
 
 Shareholders advance
  Shareholders options and warrants
  10. Earnings per share
 
 For the year ended
    
    
    For the year ended
    
    
    For the year endedDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Numerator:Net (loss)/income  basic and diluted
    
    
    (3,324
    )
    
    
    152
    
    
    
    470Basic earnings per share:Weighted average common shares outstanding
    
    
    6,290,100
    
    
    
    4,574,588
    
    
    
    4,500,000Diluted earnings per share:Weighted average common shares outstanding
    
    
    6,290,100
    
    
    
    4,574,588
    
    
    
    4.500.000Dilutive potential common shares
    
    
    
    
    
    
    20,825
    
    
    
    OptionsWarrants
    
    
    
    
    
    
    5,031
    
    
    
    Dilutive effect
    
    
    
    
    
    
    25,856
    
    
    
    Weighted average common shares-diluted
    
    
    6,290,100
    
    
    
    4,600,444
    
    
    
    4,500,000Basic (loss) earnings per common share
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10Diluted (loss) earnings per common share
    
    $
    (0.53
    )
    
    $
    0.03
    
    
    $
    0.10
 F-16




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   11. Commitments and contingencies
 Agreement with financial advisor
  Shares, warrants and options committed to HCFP Brenner Securities LLC
    Warrants
  F-17




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Loan guarantees
  12. Stock option plan
      F-18




---



##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Options
    
    
    WarrantsOptions
    
    
    Warrants
    
    
    Total
    
    
    Exercise price
    
    
    exercisable
    
    
    exercisable
    
    
    Total
    
    
    Exercise priceJanuary 1, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    750,000
    
    
    
    200,000
    
    
    
    950,000
    
    
    $
    5.00Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options
December
31, 2005
    
    
    750,000
    
    
    
    200,000
    
    
    
    950,000
    
    
    $
    5.00
    
    
    
    250,000
    
    
    
    200,000
    
    
    
    450,000
    
    
    $
    5,00December 31, 2006
    
    
    750,000
    
    
    
    200,000
    
    
    
    950,000
    
    
    $
    5.00
    
    
    
    250,000
    
    
    
    200,000
    
    
    
    450,000
    
    
    $
    5,00
  13. Shareholders Equity
 
      F-19




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   14. Taxes
   15. Financial instruments
  Interest rate risk:
 Concentration of credit risk:
 Fair value:
 F-20




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 16. Revenue from Voyages
  Operating revenuesCharterer
    
    December 31, 2006Oldendorff
    
    
    20
    %Seaside
    
    
    12
    %Cargill
    
    
    Under 10
    %Copenship
    
    
    Under 10
    %
  Operating revenuesDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Europe
    
    
    3,031
    
    
    
    4,412
    
    
    
    1,988South America
    
    
    1,803
    
    
    
    496
    
    
    
    436Asia
    
    
    4,758
    
    
    
    3,399
    
    
    
    Africa
    
    
    2,135
    
    
    
    2,019
    
    
    
    406Total
    
    
    11,727
    
    
    
    10,326
    
    
    
    2,830
 17. Subsequent events
 th
 Free Fighter Free Fighter
  Free Fighter
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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  
    
    Up to US$67 million to US$68 million in a senior loan from HSH Nordbank and
US$21.5 million in a junior loan from Bank of Tokyo Mitsubishi
for which we
received a commitment letter from both banks;
    
    Up to US$8.5 million in a non-amortizing, unsecured shareholder
loan;
    
    Up to US$4 million from HBU secured by our other assets for which we have received
a preliminary term sheet; and
    
    Up to an additional US$1 million from our expected available cash.
  F-22