##### 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
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
  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
 93 Akti Miaouli, 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
    
    
    2ITEM 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
    
    
    15ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    26ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    26ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    37ITEM 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
    
    
    53Mortgage dated October 24, 2005Deed of Assignment dated October 24, 2005Loan Agreement dated June 9, 2005Mortgage dated June 14, 2005Deed of Assignment dated June 14, 2005Ammendment to Credit AgreementAmendment to Credit AgreementAmendment Number One to Loan AgreementGuarantee dated March 3, 2006Section 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFOCode of Business Conduct and Ethics




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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.
   -1-




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PART
 
 ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
  ITEM 3.
    
    KEY INFORMATION2
 A. Selected Consolidated Financial Data
  From Inception(April 23, 2004)
    
    Year Endedto December 31, 2004
    
    December 31, 2005Statement of Operations Data:Operating revenues
    
    $
    2,830,000
    
    
    $
    10,326,000Income from operations
    
    
    706,000
    
    
    
    1,205,000Other expense
    
    
    (236,000
    )
    
    
    (1,053,000
    )Net income
    
    $
    470,000
    
    
    $
    152,000Earnings Per Share data:Net income per share:Basic earnings per share
    
    $
    0.10
    
    
    $
    0.03Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.03Weighted average number of shares:Basic weighted average number of share
    
    
    4,500,000
    
    
    
    4,574,588Diluted weighted average number of shares
    
    
    4,500,000
    
    
    
    4,600,444
 December 31, 2004
    
    December 31, 2005Selected Balance Sheet Data:Cash in hand and at bank
    
    $
    461,000
    
    
    $
    3,285,000Net working capital deficiency
    
    
    (3,528,000
    )
    
    
    (4,945,000
    )Total assets
    
    
    18,335,000
    
    
    
    29,840,000Long-term debt
    
    
    10,150,000
    
    
    
    13,000,000Shareholders loan and advance
    
    
    3,828,000
    
    
    
    3,200,000Total stockholders equity
    
    
    3,386,000
    
    
    
    9,705,000
 B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  -2-




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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.
 There may not be an active market for our shares, which may cause our shares to trade at lower
prices and make it difficult to sell your shares.
  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.
 Our principals, either directly or indirectly, control approximately 71% 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.
  -3-




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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.
  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;
 -4-




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
    
    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.
  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;
 -5-




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
    
    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.
 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.
  -6-




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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.
   -7-




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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.
   -8-




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We depend entirely on Free Bulkers to manage and charter our fleet.
  We, and 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 short operating history and cannot assure you that we will continue to operate
profitably in the future.
  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;
 -9-




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
    
    enhancing our customer base;
    
    managing our expansion; and
    
    obtaining required financing.
  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.
  -10-




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Servicing debt may limit funds available for other purposes.
   Free Fighter
  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.
  -11-




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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.
  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 weakneses 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.
  -12-




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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 .
  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.
  Purchasing and operating previously owned, or secondhand, vessels may result in increased
operating costs and vessels off-hire, which could adversely affect our earnings.
  -13-




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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.
  -14-




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ITEM 4.
    
    INFORMATION ON THE COMPANY
 Our History and Development
   ®
 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
    
    June 15, 2005
 
 (1)
    
    George D. Gourdomichalis, Ion G. Varouxakis and Efstathios D. Gourdomichalis, each
of which is a director, officer and beneficial owner of FreeSeas, formed each of these companies
for the purpose of acquiring one ship per company. Each of these companies is now our wholly owned
subsidiary, as explained more fully below.  -15-




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Free Champion . Free Destiny Free Envoy
   -16-




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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
  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.
    
    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.
    
    Compete in Handysize Market.We compete in the handysize segment of the
drybulk carrier market, which we believe is less volatile than other market segments
because the number of new ships under construction for this segment is significantly
lower than other segments (as of the date of filing of this annual
report, 6% of the
total available ships for the handysize segment are under construction as compared to 21% for the
handymax/supramax and panamax segments and 27% for the capsize segment). This segment is
also characterized by having older vessels (27% of the handysize fleet is 25 years or older as
compared to 1.3% for the capsize, 3.9% for the panamax and 5% for the handymax/supramax
segments).
    
    Profitable Operations to Date. Since our inception, our principals have
operated vessels profitably by carefully selecting secondhand vessels, competitively
commissioning and actively supervising cost-efficient shipyards to perform repair,
reconditioning and systems upgrading work, together with a proactive preventive
maintenance program both ashore and at sea, and employing professional, well-trained
masters, officers and crews. We believe that this combination allows us to minimize
off-hire periods, effectively manage insurance costs, and control overall operating
expenses.
 -17-




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Business Strategy
  Vessel Employment
 Free Destiny Free Envoy Free Envoy Free Fighter Free Fighter
   -18-




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Customers
  Management of the Fleet
    -19-




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Crewing and Employees
  Loans for Vessels
  Free
Destiny
 Free Envoy Free
Envoy
 Free Fighter
  -20-




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Competition
   Seasonality
  -21-




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Environmental and Other Regulations
    International Maritime Organization (IMO)
    -22-




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The U.S. Oil Pollution Act of 1990
       -23-




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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
    -24-




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Risk of Loss and Liability Insurance
 General
  Hull and Machinery Insurance
   Protection and Indemnity Insurance
  -25-




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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;
 -26-




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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 and $1,076,000 for the period from April 23, 2004 (date of
inception) to December 31, 2004 and for the year ended December 31, 2005,
respectively; and
    
    Fluctuations in foreign exchange rates.
 Acquisition of Vessels
       -27-




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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;
 -28-




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
    
    Vessel surveying; and
    
    Vessel performance monitoring.
 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;
 -29-




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
    
    The levels of supply and demand in the drybulk carrier
transportation market; and
    
    Other factors affecting charter rates for drybulk carriers.
     Free
Envoy Free Destiny
 -30-




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Vessel Operating Expenses
  Depreciation
  Results of Operations
 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 Free Destiny Free Envoy Free Fighter
 Vessel Operating Expenses Free
Destiny Free Envoy Free Fighter
 Management Fees
 -31-




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Free Destiny Free Envoy Free Fighter
 Commissions and General and Administrative Expenses
 Compensation
Cost
  Depreciation and Amortization Free Destiny Free Envoy
 Financing Costs Free Destiny Free
Envoy, Free
Fighter
 -32-




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Free
Destiny
 Net Income
 Liquidity and Capital Resources
   Free Destiny Free Envoy Free Fighter,
 Free Destiny Free Envoy Free Fighter Free Destiny, Free Envoy Free Fighter
  -33-




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Cash Flows
  Free
Fighter Free Envoy
  Free Destiny Free Envoy Free
Fighter
 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)
    
    Total2006
    
    $
    540,602
    
    
    $
    1,920,988
    
    
    $
    3,262,506
    
    
    $
    1,000,000
    
    
    $
    6,724,0962007
    
    
    449,875
    
    
    
    2,266,875
    
    
    
    1,113,750
    
    
    
    1,000,000
    
    
    
    4,830,5002008
    
    
    3,250,500
    
    
    
    
    
    
    
    1,030,625
    
    
    
    1,366,000
    
    
    
    5,647,125TOTAL
    
    $
    4,240,977
    
    
    $
    4,187,863
    
    
    $
    5,406,881
    
    
    $
    3,366,000
    
    
    $
    17,201,721
 
 (1)
    
    The interest payable on each of the outstanding loans is equal to
LIBOR plus 1.95% with respect to the loans on the M/V Free Destinyand the M/V Free Envoy and LIBOR
plus 1.875%. The amounts payable reflected on the table include principal and interest calculated
assuming LIBOR is equal to 5%.(2)
    
    Repayment schedule reflects change in payment terms made in April 2005 and October
2005. -34-




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Critical Accounting Policies
   Impairment of long-lived assets
 Depreciation
 -35-




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Deferred dry-dock and special survey costs
   Accounting for revenues and expenses
   -36-




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
   Name
    
    Age
    
    Position
    
    Director ClassGeorge D. Gourdomichalis(1)
    
    
    39
    
    
    Chairman, Director and
President
    
    CIon G. Varouxakis
    
    
    35
    
    
    Director, Chief Executive
Officer and Secretary
    
    CEfstathios D. Gourdomichalis(1)
    
    
    34
    
    
    Director, Chief Financial
Officer and Treasurer
    
    CProfessor Dimitrios Germidis
    
    
    68
    
    
    Director
    
    AGeorge I. Margaronis
    
    
    39
    
    
    Director
    
    BMatthew W. McCleery
    
    
    36
    
    
    Director
    
    AFocko H. Nauta
    
    
    48
    
    
    Director
    
    B
 
 (1)
    
    George D. Gourdomichalis and Efstathios D. Gourdomichalis are brothers. George D. Gourdomichalis
 Ion G. Varouxakis
 -37-




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Efstathios D. Gourdomichalis
 Professor Dimitrios Germidis
 George I. Margaronis
 Matthew W. McCleery
 Focko H. Nauta
 -38-




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B. Compensation
  BonusCompensation
    
    Received in
    
    OptionsName
    
    Received(1)
    
    2005(1)
    
    Granted in 2005George D. Gourdomichalis
Director, Chairman and President
    
    $
    6,667
    
    
    $
    0
    
    
    
    300,000
    (2)Ion G. Varouxakis
Director and Chief Executive
Officer
    
    $
    6,667
    
    
    $
    0
    
    
    
    250,000
    (2)Efstathios D. Gourdomichalis
Director and Chief Financial
Officer
    
    $
    6,667
    
    
    $
    0
    
    
    
    200,000
    (2)Professor Dimitrios Germidis
Director
    
    $
    1,583
    
    
    $
    0
    
    
    
    0George I. Margaronis
Director
    
    $
    1,583
    
    
    $
    0
    
    
    
    0Matthew W. McCleery
Director
    
    $
    1,583
    
    
    $
    0
    
    
    
    0Focko H. Nauta
Director
    
    $
    1,583
    
    
    $
    0
    
    
    
    0
 
 (1)
    
    Reflects compensation accrued by us for the period commencing December 15, 2005, the
date of our merger with Trinity, through December 31, 2005. We entered into employment agreements with
each of George D. Gourdomichalis, Ion G. Varouxakis and Efstathios D. Gourdomichalis, each dated as
of December 15, 2005. Each employment agreement provides for a salary of $150,000 per year and a
bonus as may be determined from time to time by our board of directors. Prior to entering into the
employment agreements, Messrs. G. Gourdomichalis. I. Varouxakis and E. Gourdomichalis did not
receive a salary from us. Each non-employee director is entitled to receive $20,000 per year, plus
$750 per meeting attended.(2)
    
    The options have been granted pursuant to the terms of our Amended and Restated 2005 Stock
Incentive Plan and vest in three equal annual installments beginning on December 16, 2005. The
options are exercisable for $5.00 per share and expire on December 16, 2010. C. Board Practices
    -39-




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D. Employees
  E. Share Ownership
   Percentage ofNumber of Shares of
    
    Shares of CommonCommon Stock
    
    Stock BeneficiallyName
    
    Beneficially Owned
    
    Owned(1)Ion G. Varouxakis
    
    
    1,837,500
    (2)
    
    
    28.57
    %George D. Gourdomichalis
    
    
    1,629,417
    (3)
    
    
    25.27
    %Efstathios D. Gourdomichalis
    
    
    1,483,083
    (4)
    
    
    23.12
    %Professor Dimitrios Germidis
    
    
    0
    
    
    
    *George I. Margaronis
    
    
    0
    
    
    
    *Matthew W. McCleery
    
    
    0
    
    
    
    *Focko H. Nauta
    
    
    0
    
    
    
    *All directors and officers
as a group (seven persons)
    
    
    4,950,001
    
    
    
    73.52
    %
 
 *
    
    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 based on 6,282,600 shares of our common stock outstanding on the date hereof.(2)
    
    Reflects 1,687,500 shares of common stock and 66,667 shares of common
stock issuable upon the exercise of warrants issued to The Midas Touch S.A., a company wholly
owned by Ion G. Varouxakis; and 83,333 shares of common stock issuable upon exercise of immediately
exercisable options granted to Mr. Varouxakis under his employment agreement with us. Mr.
Varouxakis has been granted a total of 250,000 options, 1/3 of which vested on December 16, 2005,
1/3 of which vests on December 16, 2006 and remaining 1/3 of which vests on December 16, 2007. The
options are exercisable at a price of $5.00 per share and expire on December 16, 2010. -40-




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##### Table of Contents



(3)
    
    Reflects 1,462,750 shares of common stock and 66,667 shares of common
stock issuable upon the exercise of warrants issued to Alastor Investments S.A., a company wholly
owned by Alastor Foundation, a foundation of which George D. Gourdomichalis, is the sole
beneficiary; and 100,000 shares of common stock issuable upon exercise of immediately exercisable
options granted to Mr. Gourdomichalis under his employment agreement with us. Mr. Gourdomichalis
has been granted a total of 300,000 options, 1/3 of which vested on December 16, 2005, 1/3 of which
vests on December 16, 2006 and the remaining 1/3 of which vests on December 16, 2007. The options
are exercisable at a price of $5.00 per share and expire on December 16, 2010.(4)
    
    Reflects 1,349,750 shares of common stock and 66,666 shares of common
stock issuable upon the exercise of warrants issued to N.Y. Holdings S.A., a company wholly owned
by Efstathios D. Gourdomichalis and 66,667 shares of common stock issuable upon exercise of
immediately exercisable options granted to Mr. Gourdomichalis under his employment agreement with
us. Mr. Gourdomichalis has been granted a total of 200,000 options, 1/3 of which vested on December
16, 2005, 1/3 of which vests on December 16, 2006 and the remaining 1/3 of which vests on December
16, 2007. The options are exercisable at a price of $5.00 per share and expire on December 16,
2010. 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
    
    
    1,837,500
    (2)
    
    
    28.57
    %George D. Gourdomichalis
    
    
    1,629,417
    (3)
    
    
    25.27
    %Efstathios D. Gourdomichalis
    
    
    1,483,083
    (4)
    
    
    23.12
    %Hummingbird Management, LLC
(5)
    
    
    809,382
    
    
    
    12.9
    %
 
 (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 based on 6,282,600 shares of our common stock outstanding on the date hereof.(2)
    
    Reflects 1,687,500 shares of common stock and 66,667 shares of common
stock issuable upon the exercise of warrants issued to The Midas Touch S.A., a company wholly
owned by Ion G. Varouxakis; and 83,333 shares of common stock issuable upon exercise of immediately
exercisable options granted to Mr. Varouxakis under his employment agreement with us. Mr.
Varouxakis has been granted a total of 250,000 options, 1/3 of which vested on December 16, 2005,
1/3 of which vests on December 16, 2006 and the remaining 1/3 of which vests on December 16, 2007.
The options are exercisable at a price of $5.00 per share and expire on December 31, 2010.(3)
    
    Reflects 1,462,750 shares of common stock and 66,667 shares of common
stock issuable upon the exercise of warrants issued to Alastor Investments S.A., a company wholly
owned by Alastor Foundation, a foundation of which George D. Gourdomichalis, is the sole
beneficiary; and 100,000 shares of common stock issuable upon exercise of immediately exercisable
options granted to Mr. Gourdomichalis under his employment agreement with us. Mr. Gourdomichalis
has been granted a total of 300,000 options, 1/3 of which vested on December 16, 2005, 1/3 of which
vests on December 16, 2006 and the remaining 1/3 of which vests on December 16, 2007. The options
are exercisable at a price of $5.00 per share and expire on December 16, 2010.(4)
    
    Reflects 1,349,750 shares of common stock and 66,666 shares of common
stock issuable upon the exercise of warrants issued to N.Y. Holdings S.A., a company wholly owned
by Efstathios D. Gourdomichalis and 66,667 shares of common stock issuable upon exercise of
immediately exercisable options granted to Mr. Gourdomichalis under his employment agreement with
us. Mr. Gourdomichalis has been granted a total of 200,000 options, 1/3 of which vested on -42-




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##### Table of Contents



December 16, 2005, 1/3 of which vests on December 16, 2006 and the remaining 1/3 of which vests on
December 16, 2007. The options are exercisable at a price of $5.00 per share and expire on December
16, 2010.(5)
    
    Based solely on information contained in a Schedule 13D/A filed with
the Securities and Exchange Commission on March 7, 2006. Hummingbird Management, LLC (f/k/a
Morningside Value Investors, LLC) (Hummingbird), acts as investment manager to The Hummingbird
Value Fund, L.P. (HVF), to The Hummingbird Microcap Value Fund, L.P. (the Microcap Fund), and
to The 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) 54,250 shares of our
common stock issuable upon the exercise of warrants held by the HVF, and (b) 54,250 shares of our
common stock issuable upon the exercise of warrants held by the Microcap Fund.     B. Related Party Transactions
  Free Destiny Free Envoy
 -43-




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##### 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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®
 For the Quarters Ended:
    
    Common Stock
    
    Class W Warrants
    
    Class Z WarrantHigh
    
    Low
    
    High
    
    Low
    
    High
    
    LowDecember 31, 2005 (1)
    
    $
    5.50
    
    
    $
    5.33
    
    
    $
    0.95
    
    
    $
    0.85
    
    
    $
    1.13
    
    
    $
    0.98March 31, 2006
    
    
    5.52
    
    
    
    3.80
    
    
    
    0.90
    
    
    
    0.49
    
    
    
    1.20
    
    
    
    0.60
 
 (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 WarrantHigh
    
    Low
    
    High
    
    Low
    
    High
    
    LowDecember 31, 2005 (1)
    
    $
    5.50
    
    
    $
    5.33
    
    
    $
    0.95
    
    
    $
    0.85
    
    
    $
    1.13
    
    
    $
    0.98January 31, 2006
    
    
    5.52
    
    
    
    5.14
    
    
    
    0.95
    
    
    
    0.85
    
    
    
    1.20
    
    
    
    0.82February 28, 2006
    
    
    5.18
    
    
    
    3.80
    
    
    
    0.80
    
    
    
    0.60
    
    
    
    0.86
    
    
    
    0.70March 31, 2006
    
    
    4.90
    
    
    
    4.50
    
    
    
    0.62
    
    
    
    0.55
    
    
    
    0.72
    
    
    
    0.60April 30, 2006
    
    
    4.85
    
    
    
    4.48
    
    
    
    0.58
    
    
    
    0.50
    
    
    
    0.62
    
    
    
    0.50May 31, 2006
    
    
    4.65
    
    
    
    4.35
    
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.68
    
    
    
    0.50
 
 (1)
    
    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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C. Material Contracts
 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
  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.
 Free Destiny Free Destiny
  -46-




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##### Table of Contents



Loan Agreement dated June 9, 2005 between Adventure Four. S.A. and Egnatia Bank, S.A. 
Mortgage dated June 14, 2005 by Adventure Four S.A. in favor of Egnatia Bank, S.A.  Deed of
Assignment dated June 14, 2005 between Adventure Four S.A. and Egnatia Bank, S.A.
 Free Fighter
  Short-Term Loan Agreement in Euros and Optional Currencies dated July 8, 2004 between
Adventure Three S.A. and Hollandsche Bank-Unie N.V.
  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
 -47-




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##### Table of Contents



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
   Free Destiny
 Year
    
    Amount2006
    
    $
    38,0562007
    
    $
    16,0562008
    
    $
    3,924
 -49-




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##### Table of Contents



Free Envoy
 Year
    
    Amount2006
    
    $
    32,5582007
    
    $
    15,244
 Free Fighter
 Year
    
    Amount2006
    
    $
    35,4842007
    
    $
    32,4512008
    
    $
    26,364
  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
  2005Audit Fees
    
    $
    200,000Audit-related Fees
    
    $
    92,000
  .
 
 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 Changes in 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 George D. Gourdomichalis and FreeSeas Inc.(1)4.2
    
    
    Form of Employment Agreement between Ion G. Varouxakis and FreeSeas Inc.(1)4.3
    
    
    Form of Employment Agreement between Efstathios D. Gourdomichalis and FreeSeas Inc.(1)4.4
    
    
    2005 Stock Incentive Plan(1)4.5
    
    
    Credit Agreement dated June 24, 2004 between Adventure Three S.A. and Hollandsche Bank-Unie
N.V.(1)4.6
    
    
    Mortgage dated September 29, 2004 by Adventure Three S.A. in favor of Hollandsche Bank-Unie
N.V.(1)
 -53-




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4.7
    
    
    Deed of Assignment dated September 29, 2004 between Adventure Three S.A. and Hollandsche
Bank-Unie N.V.(1)4.8
    
    
    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)4.9
    
    
    Standard Ship Management Agreement dated July 1, 2004 between Free Bulkers S.A. and Adventure
Two S.A.(1)4.10
    
    
    Standard Ship Management Agreement dated July 1, 2004 between Free Bulkers S.A. and Adventure
Three S.A.(1)4.11
    
    
    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)4.12
    
    
    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 Destiny"(1)4.13
    
    
    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)4.14
    
    
    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)4.15
    
    
    Standard Ship Management Agreement dated April 15, 2005 between Free Bulkers S.A. and
Adventure Four S.A.(1)4.16
    
    
    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)4.17
    
    
    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)4.18
    
    
    Credit Agreement dated September 23, 2005 between Adventure Two S.A. and Hollandsche
Bank-Unie N.V.(1)4.19
    
    
    Credit Agreement dated September 23, 2005 between Adventure Three S.A. and Hollandsche
Bank-Unie N.V.(1)4.20
    
    
    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)4.21
    
    
    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)4.22
    
    
    Mortgage dated October 24, 2005 by Adventure Two S.A. in favor of Hollandsche Bank-Unie N.V.
 -54-




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4.23
    
    
    Deed of Assignment dated October 24, 2005 between Adventure Two S.A. and Hollandsche
Bank-Unie N.V.4.24
    
    
    Loan Agreement dated June 9, 2005 between Adventure Four S.A. and Egnatia Bank, S.A.4.25
    
    
    Mortgage dated June 14, 2005 by Adventure Four S.A. in favor of Egnatia Bank, S.A.4.26
    
    
    Deed of Assignment dated June 14, 2005 between Adventure Four S.A. and Egnatia Bank, S.A.4.27
    
    
    Amendment dated January 23, 2006 to Credit Agreement dated September 23, 2005 between
Adventure Two S.A. and Hollandsche Bank-Unie N.V.4.28
    
    
    Amendment dated January 23, 2006 to Credit Agreement dated September 23, 2005 between
Adventure Three S.A. and Hollandsche Bank-Unie N.V.4.29
    
    
    Addendum Number One dated March 3, 2006 to Loan Agreement dated June 9, 2005 between
Adventure Four S.A. and Egnatia Bank, S.A.4.30
    
    
    Guarantee dated March 3, 2006 between FreeSeas Inc. and Egnatia Bank, S.A.8.1
    
    
    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
 
 (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. -55-




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##### Table of Contents



SIGNATURES
  FREESEAS INC.By:

/s/ Ion G. VarouxakisName:
    Ion G. VarouxakisTitle:
    Chief Executive Officer  -56-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Stockholders of
FreeSeas Inc.
     
 F-1




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##### Table of Contents



FREESEAS INC.
CONSOLIDATED BALANCE SHEETS  (Expressed in thousands of United States Dollars except for share data)
 December 31,Notes
    
    2004
    
    2005ASSETSCURRENT ASSETSCash in hand and at bank
    
    
    
    
    
    
    461
    
    
    
    3,285Restricted cash
    
    
    
    
    
    
    400
    
    
    
    Trade receivables, net
    
    
    
    
    
    
    295
    
    
    
    520Inventories
    
    
    
    
    
    
    41
    
    
    
    42Insurance claims
    
    
    
    
    
    
    
    
    
    
    762Due from related party
    
    
    9
    
    
    
    246
    
    
    
    677Total current assets
    
    
    
    
    
    
    1,443
    
    
    
    5,286Fixed assets, net
    
    
    3
    
    
    
    16,188
    
    
    
    23,848Deferred charges, net
    
    
    4
    
    
    
    704
    
    
    
    706Total assets
    
    
    
    
    
    
    18,335
    
    
    
    29,840LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Bank overdraft
    
    
    
    
    
    
    37
    
    
    
    Accounts payable
    
    
    5
    
    
    
    415
    
    
    
    1,176Accrued liabilities
    
    
    6
    
    
    
    116
    
    
    
    1,540Unearned revenue
    
    
    
    
    
    
    284
    
    
    
    172Shareholders advance
    
    
    
    
    
    
    600
    
    
    
    Shareholders loans, current portion
    
    
    8
    
    
    
    
    
    
    
    950Due to related party
    
    
    9
    
    
    
    119
    
    
    
    893Long-term debt, current portion
    
    
    7
    
    
    
    3,400
    
    
    
    5,500Total current liabilities
    
    
    
    
    
    
    4,971
    
    
    
    10,231Long-term debt, net of current portion
    
    
    7
    
    
    
    6,750
    
    
    
    7,500Shareholders loans
    
    
    8
    
    
    
    3,228
    
    
    
    2,250Other liabilities
    
    
    
    
    
    
    
    
    
    
    154Total long-term liabilities
    
    
    
    
    
    
    9,978
    
    
    
    9,904Total Liabilities
    
    
    
    
    
    
    14,949
    
    
    
    20,135Commitments and contingencies
    
    
    11SHAREHOLDERS EQUITYPreferred shares (5,000,000 authorized
with par value $0.001, nil issued and
outstanding as at 2004 and 2005)
    
    
    13
    
    
    
    
    
    
    
    Common shares (40,000,000 authorized with
par value $0.001, 4,500,000 and 6,282,600
shares issued and outstanding as at 2004
and 2005, respectively)
    
    
    
    
    
    
    5
    
    
    
    6Additional paid-in capital
    
    
    
    
    
    
    2,911
    
    
    
    9,242Retained earnings
    
    
    
    
    
    
    470
    
    
    
    622Deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    (165
    )Total shareholders equity
    
    
    
    
    
    
    3,386
    
    
    
    9,705Total liabilities and shareholders equity
    
    
    
    
    
    
    18,335
    
    
    
    29,840
 F-2




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##### Table of Contents



FREESEAS INC.
CONSOLIDATED STATEMENTS OF INCOME  (Expressed in thousands of United States Dollars except for share data)
 For the Period fromDate of Inception(April 23, 2004) to
    
    For the year endedDecember 31, 2004
    
    December 31, 2005OPERATING REVENUES
    
    
    2,830
    
    
    
    10,326OPERATING EXPENSES:Vessel operating expenses
    
    
    (786
    )
    
    
    (3,596
    )Voyage expenses
    
    
    (16
    )
    
    
    (55
    )Depreciation expense
    
    
    (872
    )
    
    
    (3,553
    )Amortization of deferred dry-docking and
special survey costs
    
    
    (109
    )
    
    
    (355
    )Management fees to a related party
    
    
    (180
    )
    
    
    (488
    )Commissions
    
    
    (127
    )
    
    
    (553
    )Compensation costs
    
    
    
    
    
    
    (200
    )General and administrative expenses
    
    
    (34
    )
    
    
    (321
    )Income from operations
    
    
    706
    
    
    
    1,205OTHER INCOME (EXPENSE):Finance costs
    
    
    (240
    )
    
    
    (1,076
    )Interest income
    
    
    4
    
    
    
    23Other expense
    
    
    (236
    )
    
    
    (1,053
    )Net income
    
    
    470
    
    
    
    152Basic earnings per share
    
    $
    0.10
    
    
    $
    0.03Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.03Basic weighted average number of shares
    
    
    4,500,000
    
    
    
    4,574,588Diluted weighted average number of shares
    
    
    4,500,000
    
    
    
    4,600,444
 F-3




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##### Table of Contents



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




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##### Table of Contents



FREESEAS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  (Expressed in thousands of United States Dollars except for share data)
 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)
    
    
    
    
    
    
    
    
    
    
    1,782,600
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    6,282,600
    
    
    
    6
    
    
    
    9,242
    
    
    
    622
    
    
    
    (165
    )
    
    
    9,705
 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:
 Foreign Currency Translation:
 F-6




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Trade Receivables:
 Inventories:
 Insurance Claims:
 Vessels Cost:
 Vessels Depreciation:
 Impairment of Long-lived Assets:
 F-7




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Accounting for Special Survey and Dry-docking Costs:
 Financing Costs:
 Accounting for Revenue and Expenses:
   Unearned Revenue:
 Profit Sharing Arrangements:
 Repairs and Maintenance:
 Stock-Based Compensation Statement of Financial Accounting
Standards
 F-8




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  For the Periodfrom Date ofInception (April23, 2004) to
    
    For the year endedDecember 31, 2004
    
    December 31, 2005Net income available to common shareholders,
as reportedAs reported
    
    
    470
    
    
    
    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
    
    
    470
    
    
    
    (743
    )Basic earnings per share  as reported
    
    $
    0.10
    
    
    $
    0.03Basic earnings (loss) per share  pro forma
    
    $
    0.10
    
    
    $
    (0.16
    )Diluted earnings per share  as reported
    
    $
    0.10
    
    
    $
    0.03Diluted earnings (loss) per share  pro forma
    
    $
    0.10
    
    
    $
    (0.16
    )
 
 For the Period fromDate of Inception(April 23, 2004) to
    
    For the year endedDecember 31, 2004
    
    December 31, 2005Expected life of option (years)
    
    
    
    
    
    
    5Risk-free interest rate
    
    
    
    
    
    
    4.35
    %Expected volatility of the
Companys stock
    
    
    
    
    
    
    37.50
    %Expected dividend yield on
Companys stock
    
    
    
    
    
    
    
 Segment Reporting:
 Comprehensive Income:
 F-9




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##### Table of Contents



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




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     F-11




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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
    )
    
    
    23,848
   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
    
    
    
    706
  F-12




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 5.
    
    Accounts payable
  December 31, 2004
    
    December 31, 2005Suppliers
    
    
    281
    
    
    
    603Agents
    
    
    117
    
    
    
    545Insurers
    
    
    17
    
    
    
    28415
    
    
    
    1,176
 6.
    
    Accrued liabilities
  December 31, 2004
    
    December 31, 2005Accrued wages
    
    
    34
    
    
    
    83Accrued interest
    
    
    62
    
    
    
    23Accrued insurance and related
liabilities
    
    
    
    
    
    
    649Accrued financial advisory costs
    
    
    
    
    
    
    431Other accrued expenses
    
    
    20
    
    
    
    354116
    
    
    
    1,540
    F-13




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 7.
    
    Long-term debt
  December 31, 2004
    
    December 31, 2005Lender
    
    Current portion
    
    Long-term portion
    
    Total
    
    Current portion
    
    Long-term portion
    
    TotalCorner Banca S.A.
    
    
    1,700
    
    
    
    2,875
    
    
    
    4,575
    
    
    
    
    
    
    
    
    
    
    
    Hollandsche Bank 
Unie N.V.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375
    
    
    
    3,325
    
    
    
    3,700Hollandsche Bank 
Unie N.V.
    
    
    1,700
    
    
    
    3,875
    
    
    
    5,575
    
    
    
    2,125
    
    
    
    2,175
    
    
    
    4,300Egnatia Bank
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    2,000
    
    
    
    5,000Total
    
    
    3,400
    
    
    
    6,750
    
    
    
    10,150
    
    
    
    5,500
    
    
    
    7,500
    
    
    
    13,000
  Lender
    
    Vessel
    
    Repayment termsCorner Banca S.A.
    
    M/V FREE DESTINY
    
    Seven quarterly
installments of US$425,
and six quarterly
installments of US$267.Interest rate at 1.75%
above LIBOR.Hollandsche Bank  Unie
N.V.
    
    M/V FREE ENVOY
    
    Eleven quarterly
installments of US$425
and a balloon payment of
US$900.Interest rate at 2% above
LIBOR.
 F-14




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Lender
    
    Vessel
    
    Repayment termsHollandsche Bank  Unie N.V.
    
    M/V FREE DESTINY
    
    Eight quarterly installments of
US$75, one quarterly installment of US$100, two quarterly
installments of US$500 and a balloon payment of US$2,000.Interest rate at 1.95% above LIBOR.Hollandsche Bank  Unie N.V.
    
    M/V FREE ENVOY
    
    Eight quarterly installments of
US$425 and a balloon payment of US$900.Interest rate 1.95% above LIBOR.Egnatia Bank
    
    M/V FREE FIGHTER
    
    Four quarterly installments of
US$750, six quarterly installments of US$250 and a balloon payment of US$500.Interest rate at 1.875% above LIBOR.
     F-15




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Year
    
    December 31, 20052006
    
    
    5,5002007
    
    
    3,4002008
    
    
    4,100Total
    
    
    13,000
 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
    
    
    3,200
     F-16




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     Year
    
    Amount2006
    
    
    1,0002007
    
    
    1,0002008
    
    
    1,366Total
    
    
    3,366
 9.
    
    Related party transactions
 Purchases of services
 1
  F-17




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Due to related party
  December 31, 2004
    
    December 31, 2005Due to related party
    
    
    119
    
    
    
    893
 Due from related party
   December 31, 2004
    
    December 31, 2005Due from related party
    
    
    246
    
    
    
    677
 Employment agreements
   Shareholders advance
  Shareholders
options and warrants
  10.
    
    Earnings per share
  F-18




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  For the Period fromDate of Inception(April 23, 2004) to
    
    For the year endedDecember 31, 2004
    
    December 31, 2005Net income
    
    
    470
    
    
    
    152Basic earnings per share:Weighted average common
shares outstanding
    
    
    4,500,000
    
    
    
    4,574,588Diluted earnings per share:Weighted average common
shares outstanding
    
    
    4,500,000
    
    
    
    4,574,588Options
    
    
    
    
    
    
    20,825Warrants
    
    
    
    
    
    
    5,031Weighted average common
shares  diluted
    
    
    4,500,000
    
    
    
    4,600,444Basic earnings per common
share
    
    $
    0.10
    
    
    $
    0.03Diluted earnings per common
share
    
    $
    0.10
    
    
    $
    0.03
  11.
    
    Commitments and contingencies
 Agreement with financial advisor
 Shares, warrants and options committed to HCFP Brenner Securities LLC
 F-19




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Warrants
  Loan guarantees
  12.
    
    Stock option plan
  F-20




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       Weighted average
    
    
    
    
    
    Weighted averageOptions
    
    exercise price
    
    Options exercisable
    
    exercise priceJanuary 1, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    950,000
    
    
    $
    5.00Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options  December
31, 2005
    
    
    950,000
    
    
    $
    5.00
    
    
    
    450,000
    
    
    $
    5.00
   F-21




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  13.
    
    Shareholders Equity
       14.
    
    Taxes
   F-22




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  15.
    
    Financial instruments
  Interest rate risk:
 Concentration of credit risk:
 Fair value:
 16.
    
    Revenue from Voyages
  F-23




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##### Table of Contents



FREESEAS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Operating revenuesDecember 31, 2004
    
    December 31, 2005Europe
    
    
    1,988
    
    
    
    4,412South America
    
    
    436
    
    
    
    496Asia
    
    
    
    
    
    
    3,399Africa
    
    
    406
    
    
    
    2,0192,830
    
    
    
    10,326
 17.
    
    Subsequent events
   F-24