Freeseas, Inc.
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As filed with the Securities and Exchange Commission on August 7, 2007
File No. 333-      
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
FREESEAS INC.
(Exact name of Registrant as specified in its charter)
 
         
Republic of the
Marshall Islands
  4412   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  Primary Standard Industrial
Classification Code Number
  (I.R.S. Employer
Identification No.)
 
89 Akti Miaouli & 4 Mavrokordatou Street, 185 38, Piraeus, Greece
011-30-210-452-8770
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
Broad and Cassel
Attention: A. Jeffry Robinson, P.A.
2 S. Biscayne Boulevard, 21st Floor
Miami, Florida 33131
Telephone: (305) 373-9400
Facsimile: (305) 995-6402
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
 
     
A. Jeffry Robinson, P.A.   Stephen P. Farrell, Esq.
Broad and Cassel
  Morgan, Lewis & Bockius LLP
2 S. Biscayne Boulevard, 21st Floor
  101 Park Avenue
Miami, Florida 33131
  New York, New York 10178
Telephone: (305) 373-9400
  Telephone: (212) 309-6000
Facsimile: (305) 995-6402   Facsimile: (212) 309-6001
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
CALCULATION OF REGISTRATION FEE
 
                     
      Proposed Maximum
     
Title of Each Class
    Aggregate Offering
    Amount of
of Securities to Be Registered     Price(1)     Registration Fee
Common Stock, par value US $.001 per share
    $ 60,000,000       $ 1,842  
                     
 
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act.
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION DATED AUGUST 7, 2007
 
PROSPECTUS
 
FREESEAS INC.
Shares of Common Stock
 
 
We are offering           shares of our common stock. Our common stock is currently quoted on the NASDAQ Capital Market under the symbol “FREE.” On, August 6, 2007, the closing price of our common stock was $8.30 per share.
 
We are applying to have our common stock and warrants listed on the NASDAQ Global Market upon completion of this offering.
 
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 12 to read about the risks you should consider before buying shares of our common stock.
 
 
 
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
 
                 
    Per Share     Total  
 
Public offering price
  $                $             
Underwriting discounts and commissions
  $                $             
Proceeds to us, before expenses
  $                $             
 
The underwriters have a 30-day option to purchase up to        additional shares of our common stock from us to cover any over-allotments, if any, at the offering price, less underwriting discounts and commissions.
 
The underwriters expect to deliver the shares to purchasers on or about          , 2007.
 
 
 
 
Credit Suisse
 
  Cantor Fitzgerald & Co.
 
  Oppenheimer & Co.
 
 
 
 
The date of this prospectus is          , 2007


 

 
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 EX-23.2 Consent of PricewaterhouseCoopers S.A.
 EX-23.3 Consent of Maritime Strategies International Ltd.
 
We have not authorized anyone to give any information or to make any representations other than those contained in this prospectus. Do not rely upon any information or representations made outside of this prospectus. This prospectus is not an offer to sell, and it is not soliciting an offer to buy (1) any securities other than shares of our common stock or (2) shares of our common stock in any circumstances in which our offer or solicitation is unlawful. The information contained in this prospectus may change after the date of this prospectus. Do not assume after the date of this prospectus that the information contained in this prospectus is still correct.


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ENFORCEABILITY OF CIVIL LIABILITIES
 
We are a Marshall Islands company and our executive offices are located outside of the United States of America in Piraeus, Greece. All except one of our directors, all of our officers and some of the experts named herein reside outside the United States of America. In addition, a substantial portion of our assets and the assets of our directors, officers and experts are located outside of the United States of America. As a result, you may have difficulty serving legal process within the United States of America upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States of America, judgments you may obtain in United States of America courts against us or these persons in any action, including actions based upon the civil liability provisions of United States of America federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Republic of the Marshall Islands or Greece would enter judgments in original actions brought in those courts predicated on United States of America federal or state securities laws.


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PROSPECTUS SUMMARY
 
This section summarizes some of the information and consolidated financial statements that appear later in this prospectus. As an investor or prospective investor, you should review carefully the risk factors and the more detailed information and financial statements that appear later in this prospectus. In this prospectus, references to “FreeSeas,” “Company,” “we,” “our,” “ours” and “us” refer to FreeSeas Inc. and its subsidiaries, unless otherwise stated or the context requires.
 
We use the term “deadweight tons,” or dwt, in describing the capacity of our drybulk carriers. Dwt, expressed in metric tons, each of which is equivalent to 1,000 kilograms, refers to the maximum weight of cargo and supplies that a vessel can carry. For the definition of certain shipping terms used in this prospectus, see the “Glossary of Shipping Terms” on page 117 of this prospectus. Drybulk carriers are categorized as Handysize, Handymax, Panamax and Capesize. The carrying capacity of a Handysize drybulk carrier ranges from 10,000 to 39,999 dwt and that of a Handymax drybulk carrier ranges from 40,000 to 59,999 dwt. By comparison, the carrying capacity of a Panamax drybulk carrier ranges from 60,000 to 79,999 dwt and the carrying capacity of a Capesize drybulk carrier is 80,000 dwt and above.
 
Unless otherwise indicated, information presented in this prospectus assumes that the underwriters will not exercise their option to purchase additional shares. All references to “$” and “dollars” in this prospectus refer to U.S. dollars.
 
Our Company
 
We are an international drybulk shipping company incorporated on April 23, 2004 under the laws of the Republic of the Marshall Islands with headquarters in Piraeus, Greece. We are currently focusing on the Handysize and Handymax sectors, which we believe will enable us to transport a wider variety of cargoes and pursue a greater number of chartering opportunities than if we owned larger vessels. We may, however, acquire larger drybulk vessels if market conditions warrant.
 
Our existing fleet consists of three Handysize vessels that carry a variety of drybulk commodities, including coal, grains, and iron ore which are referred to as “major bulks,” as well as bauxite, phosphate, fertilizers, steel products, sugar and rice, or “minor bulks.” In order to expand and renew our fleet, on May 1, 2007, we entered into memoranda of agreement to purchase the M/V Free Hero, a secondhand Handysize vessel that was delivered on July 3, 2007, and the M/V Free Jupiter, a 2002 built Handymax vessel, which we expect to be delivered in August or September 2007, from non-affiliated parties for a total purchase price of $72.25 million. We refer to these two vessels together with our existing vessels, the M/V Free Destiny and the M/V Free Envoy, as our fleet. As a result of the acquisition of the M/V Free Hero and the M/V Free Jupiter, we will increase the aggregate dwt of our fleet to approximately 123,000 dwt from 51,000 dwt, increase the book value of our fleet to $82.6 million from $10.3 million, and reduce the average age of our fleet to 16 years from 24 years. In accordance with standard shipping industry practice, we did not obtain from the sellers historical operating data for the vessels that we acquired, as that data was not material to our decision to purchase the vessels. Accordingly, we have not included any historical financial data relating to the results of operations of our vessels for any period before we acquired them in this prospectus.
 
We contract the management of our fleet to Free Bulkers, S.A., or Free Bulkers, a company owned by Ion G. Varouxakis, our chairman, chief executive officer and president. Free Bulkers will provide technical management of our fleet, accounting services and office space and has subcontracted the charter and post-charter management of our fleet to Safbulk Pty Ltd., or Safbulk, a company controlled by the Restis family. We believe that Safbulk has achieved a strong reputation in the international shipping industry for efficiency and reliability that should create new employment opportunities for us with a variety of well known charterers. While Safbulk is responsible for finding and arranging charters for our vessels, the final decision to charter our vessels remains with us.


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Our Fleet
 
The following table details our fleet:
 
                                 
          Year
    Vessel
      Purchase
  Delivery
Vessel Name
  dwt     Built    
Type
 
Employment
  Price   Date
 
Free Envoy
    26,318       1984     Handysize   1-year time charter through April 2008 at $17,000 per day   $9.50 million   September 2004
Free Destiny
    25,240       1982     Handysize   Spot — currently at $16,500 per day   $7.60 million   August 2004
Free Hero
    24,318       1995     Handysize   Balance of time charter through December 2008/February 2009 at $14,500 per day   $25.25 million(1)   July 2007
 
 
(1) The purchase price for the M/V Free Hero was specifically negotiated based on its particular attributes (i.e., based on factors including the vessel’s age, builder, configuration and condition).
 
We have agreed to purchase a 47,777-dwt Handymax vessel built in 2002, the M/V Free Jupiter, for $47.0 million. We currently expect to take delivery of the M/V Free Jupiter in August or September 2007. Upon delivery, the M/V Free Jupiter will be chartered on a three-year time charter through September 2010, at a rate of $32,000 per day for the first year of the charter, $28,000 per day for the second year, and $24,000 per day for the third year.
 
Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of how we intend to account for the purchase of the M/V Free Hero and M/V Free Jupiter.
 
Our Competitive Strengths
 
We believe that we possess the following competitive strengths:
 
  •  Experienced Management Team.  Our management team has significant experience in commercial, technical, operational and financial areas of our business and has developed relationships with leading charterers, ship brokers and financial institutions. Since 1997, Ion G. Varouxakis, our chairman, chief executive officer and president has served in various management roles for shipping companies in the drybulk sector. Dimitris Papadopoulos, who became our chief financial officer in May 2007, served from 1975 to 1991 as financial and administrative vice president in charge of, among other things, the shipping interests of the owners of Archirodon Group, Inc.
 
  •  Affiliation with Leading Shipping Group.  FS Holdings Limited, an entity controlled by the Restis family, recently acquired a 40.2% interest (including shares underlying warrants) in our company. The Restis family has been engaged in the international shipping industry for more than 40 years and their interests include ownership and operation of more than 60 vessels in several segments of the shipping industry, as well as cargo and chartering interests. The Restis family group is regarded as one of the largest independent ship-owning and management groups in the shipping industry. Our management believes that affiliation with and access to the resources of companies controlled by the Restis family commercially enhances the operations of our fleet, our ability to obtain employment for our vessels and obtain more favorable financing.
 
  •  Strong Customer Relationships.  Through Free Bulkers, our ship management company, and Safbulk, a Restis family controlled management company, we have established customer relationships with leading charterers around the world, such as major international industrial companies, commodity producers and traders and a number of chartering brokerage houses. Free Bulkers has subcontracted the charter and post-charter management of our fleet to Safbulk. We believe that the established customer base and


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  the reputation of our fleet managers will enable us to secure favorable employment for our vessels with well known charterers.
 
  •  Efficient Operations.  Through Free Bulkers, we believe that we have established a strong track record in the technical management of drybulk carriers, which has enabled us to maintain cost-efficient operations. We actively monitor and control vessel operating expenses while maintaining the high quality of our fleet through regular inspections, proactive maintenance programs, high standards of operations, and retaining and training qualified crew members.
 
Our Business Strategy
 
The following are highlights of our business strategy:
 
  •  Handysize and Handymax Focus.  Our fleet of drybulk carriers will consist of Handysize and Handymax vessels. Based on the relatively low number of drybulk newbuildings on order in these categories, we believe there will be continued high demand for such vessels. Handysize and Handymax vessels are typically shallow-drafted and equipped with onboard cranes. This makes Handysize and Handymax vessels more versatile and able to access a wider range of loading and discharging ports than larger ships, which are unable to service many ports due to their size or the local port infrastructure. Many countries in the Asia Pacific region, including China, as well as countries in Africa and South America, have shallow ports. We believe that our vessels, and any Handysize or Handymax vessels that we acquire, will enable us to transport a wider variety of cargoes and to pursue a greater number of chartering opportunities than if we owned larger drybulk vessels. Handysize and Handymax vessels have also historically achieved greater charter rate stability than larger drybulk vessels.
 
  •  Renew and Expand our Fleet.  We intend to continue growing our fleet in a disciplined manner through acquisition of well-maintained, secondhand vessels, preferably up to 15 years old. We perform technical review and financial analysis of each potential acquisition and only purchase vessels as market conditions and opportunities warrant. We are focused on purchasing such vessels, because we believe that secondhand vessels, when operated in a cost-efficient manner, should provide significant value given the prevailing charter rate environment and currently provide better returns as compared to newbuildings. Furthermore, as part of our fleet renewal, we will continue to sell vessels when we believe it is in the best interests of FreeSeas and our shareholders.
 
  •  Maintain Adequate Period Employment.  We intend to strategically deploy a substantial portion of our fleet under time charter employment and our remaining vessels under spot charter. We actively pursue time charter coverage to provide steady cash flow to cover a substantial portion of our fleet’s fixed costs. We intend to deploy part of our fleet through spot charters depending on our view of the direction of the markets and other tactical or strategic considerations. We believe this balanced employment strategy will provide us with more predictable operating cash flows and sufficient downside protection, while allowing us to participate in the potential upside of the spot charter market during periods of rising charter rates.
 
  •  Use of Flexible Financial Strategy.  We will use a combination of bank debt, cash flow and proceeds from equity offerings to fund our vessel acquisitions. We assess the level of debt we will incur in light of our ability to repay that debt based on the level of cash flow we expect to generate pursuant to our chartering strategy and our operating cost structure. Following this offering, we intend to reduce our ratio of debt to equity to 83.9%. We expect that the maintenance of a reasonable ratio of debt to equity will increase our ability to borrow funds to make additional vessel acquisitions while maintaining our ability to pay dividends to our shareholders.
 
Drybulk Shipping Industry Trends
 
The maritime shipping industry is fundamental to international trade with ocean-going vessels representing the most efficient and often the only method of transporting large volumes of many essential drybulk commodities,


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finished goods as well as crude oil and refined petroleum products between the continents and across the seas. It is a global industry whose performance is closely tied to the level of economic activity in the world.
 
Drybulk cargoes are used in many basic industries and in construction, and can be divided into major bulk commodities and minor bulk commodities. Major bulk commodities include iron ore, coal and grains. Minor bulk commodities include a wide variety of commodities, such as forest products, iron and steel products, fertilizers, agricultural products, non-ferrous ores, minerals and petcoke, cement, other construction materials and salt. Grains include wheat, coarse grains and soybeans.
 
According to Maritime Strategies International Ltd., or MSI, since the fourth quarter of 2002, the drybulk shipping industry has experienced the highest charter rates and vessel values in its modern history due to the favorable imbalance between the supply of drybulk carriers and demand for drybulk seaborne transportation. After reaching a peak in mid-2005, however, vessel values decreased during 2005 and the first half of 2006; since July 2006, the value of secondhand vessels has risen sharply approaching new historical record high levels in July 2007 as ship owners seek to increase the size of their fleets to benefit from the rise in trade.
 
With respect to drybulk shipping, factors that affect the supply of drybulk carriers and demand for transportation of drybulk cargo include:
 
Supply:
 
  •  The average delivery lag for a new vessel is about three years, limiting the number of new drybulk carriers that will enter the market in coming years. As of June 2007, newbuilding orders had been placed for an aggregate of more than 34% of the current global drybulk fleet, with deliveries expected during the next three to four years; and
 
  •  Port congestion worldwide as a result of increased shipping activity has increased the number of days vessels are waiting to load or discharge their cargo, effectively reducing the number of drybulk carriers that are available for hire at any particular time.
 
Demand:
 
  •  In general, the effects of the expansion of world trade and increasing global production and consumption have driven the strong demand for ships; and
 
  •  China has helped drive demand for drybulk carriers as its economy continues to grow at a remarkable level. This has resulted in growing iron ore imports and steel production.
 
We cannot offer assurances as to charter rates or vessel values in any period or that the industry trends described above will continue following the completion of this offering.
 
Our Fleet Manager
 
We contract the technical and commercial management of our vessels to Free Bulkers, S.A., a Marshall Islands corporation owned by Ion G. Varouxakis, our chairman, chief executive officer and president. Free Bulkers has a separate management contract with each of our ship-owning subsidiaries and provides a wide range of services at a fixed fee per vessel basis. These services include vessel operations, maintenance, regulatory compliance, crewing, supervising dry docking and repairs, arranging insurance for vessels, vessel supplying, advising on the purchase and sale of vessels, and performing certain accounting and other administrative services, including financial reporting and internal controls requirements. Free Bulkers has subcontracted the charter and post-charter management of our fleet to Safbulk. Safbulk is an entity affiliated with one of our principal shareholders, FS Holdings Limited, which is controlled by the Restis family. Safbulk has been chartering bulk carriers, ranging in size from 25,000 to 175,000 dwt, both owned by it (as many as 20 vessels) and owned by third parties (as many as 70 vessels), since 1965. We believe that the experience and reputation of Safbulk, and its long-standing relationships with charterers and charter brokers in all parts of the world should enhance the commercial operation of our fleet and our ability to obtain employment for our


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fleet. We believe that using Free Bulkers and Safbulk to perform these functions should provide us experienced technical and commercial management for our fleet and enable us to better manage our costs.
 
Our Dividend Policy
 
Declaration and payment of any dividend is subject to the discretion of our board of directors. The timing and amount of any dividend payments will be dependent upon our earnings, financial position, cash requirements and availability, fleet renewal and expansion, restrictions in our loan agreements and the provisions of Marshall Islands law affecting the payment of distributions to shareholders and other factors.
 
We may not have sufficient funds with which to pay dividends at all. Alternatively, even if we have sufficient funds available, our board of directors may determine to devote those funds to internal uses rather than to the payment of dividends. We refer you to the sections under the headings “Dividend Policy” and “Tax Considerations” included elsewhere in this prospectus. In addition, see “Risk Factors” for a discussion of the risks related to our ability to pay dividends.
 
Recent Developments
 
On April 27, 2007, we sold the M/V Free Fighter for $11,075,000 and repaid $2,330,000 on Advance A and $2,470,000 on Advance B of the loans with First Business Bank, using proceeds from the sale of that vessel to make these payments.
 
On May 1, 2007, we entered into memoranda of agreement pursuant to which we agreed to purchase four secondhand drybulk carriers, the M/V Free Hero, M/V Free Jupiter, M/V Free Iris and M/V Free Gentleman, from non-affiliated parties for a total purchase price of $114.0 million. In accordance with the memoranda of agreement, we provided deposits totaling $11.4 million to the respective sellers of the above four vessels. We obtained the funds for the deposits from a $5.5 million draw on the $14.0 million unsecured shareholder loan described below and $5.9 million from our cash on hand, primarily resulting from the sale of the M/V Free Fighter in April 2007. We anticipated financing the remaining $102.6 million of the purchase prices of the above vessels, due upon their respective deliveries, by utilizing the following: (i) up to $68.0 million in a senior secured loan from HSH Nordbank AG; (ii) up to $21.5 million in a junior loan from BTMU Capital Corporation, an affiliate of the Bank of Tokyo Mitsubishi; (iii) the remaining $8.5 million of the $14.0 million unsecured shareholder loan (which was drawn down on June 22, 2007 as discussed further below) (we refer to these three borrowing arrangements as our “Acquisition Debt Facilities”); (iv) cash on hand from operations and (v) an overdraft credit facility of $4 million available from Hollandsche Bank — Unie N.V.
 
We took delivery of the M/V Free Hero on July 3, 2007 and we paid the $22.7 million remaining balance, net of the deposit paid, of the $25.25 million purchase price using $20.4 million from the above described senior and junior financing sources and $2.3 million from cash on hand. The vessel is currently subject to a $14,500 per day time charter expiring in December 2008, with a charterer’s option for extension until February 2009. We expect to take delivery of the M/V Free Jupiter in August or September 2007. The purchase price for the M/V Free Jupiter is $47.0 million and we expect to utilize the above-described financing sources to pay the remaining $42.3 million balance of the purchase price due upon delivery.
 
Due to a dispute between third parties unrelated to us and the sellers of the M/V Free Gentleman and M/V Free Iris, which would have resulted in the vessels not being delivered as per the terms of their respective memoranda of agreement, we decided, in agreement with the sellers, to terminate those agreements on July 27, 2007, with immediate return of the full deposits for such vessels totaling $4.25 million. We intend to seek to replace the two undelivered vessels with alternative tonnage of similar profile and return characteristics in an effort to expand our fleet in the Handysize and/or Handymax segments. We intend to utilize our available cash and the remainder of our existing credit facilities as described above for any future near term acquisitions.
 
The $14.0 million loan from one of our principal shareholders was signed on May 7, 2007 and accrues interest on the outstanding principal balance at the annual rate of 12.0%, payable upon maturity of the loan. The loan is due at the earlier of (i) May 7, 2009, (ii) the date of a “Capital Event,” which is defined as any event in which we raise gross proceeds of not less than $40 million in an offering of our common stock or


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other equity securities or securities convertible into or exchangeable for our equity securities, or (iii) the date of acceleration of the amounts due under the note. Additionally, we agreed to issue to that shareholder, for every $1.0 million drawn under the loan, 50,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share. On May 8, 2007, we drew down $5.5 million from the shareholder loan in connection with the deposits to be posted under the memoranda of agreement for the acquisition of the vessels. On June 22, 2007, we drew down the remaining $8.5 million from the shareholder loan in anticipation of taking delivery of the M/V Free Gentleman, which delivery, however, was never completed as discussed above. We have issued the shareholder 700,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share in connection with the two draw downs described above.
 
New Credit Facility
 
Consistent with our strategy of making efficient use of leverage, we have negotiated an offer letter for a senior secured credit facility from Credit Suisse, the lead underwriter of this offering, in the aggregate amount of $87.0 million, consisting of a $48.7 million loan to refinance our Acquisition Debt Facilities and a $38.3 million facility for the purchase of additional vessels. The availability of this senior secured credit facility is contingent upon, among other things, execution of formal loan documents and credit committee approval. We intend to enter into this senior credit facility only if we successfully complete this offering.
 
We currently intend to use the proceeds of this offering in conjunction with the $48.7 million loan from Credit Suisse to refinance the Acquisition Debt Facilities. We also anticipate using the proceeds of this offering to repay any amount that may be outstanding at the time of completion of this offering under the $4.0 million overdraft facility from Hollandsche Bank — Unie N.V. and the $1.9 million outstanding balance under pre-existing shareholder loans used to finance the acquisition of our original three vessels. We currently intend to use any remaining proceeds from this offering for general corporate purposes, including additional vessel acquisitions.
 
Our Corporate History
 
We were incorporated on April 23, 2004 by Ion G. Varouxakis, our chairman, chief executive officer and president, and two other co-founding shareholders under the name “Adventure Holdings S.A.” pursuant to the laws of the Republic of the Marshall Islands to serve as the parent holding company of our ship-owning entities. On April 27, 2005, we changed our name to “FreeSeas Inc.”
 
On December 15, 2005, we completed a merger with Trinity Partners Acquisition Company Inc., a blank check company formed to serve as a vehicle to complete a business combination with an operating business. At the time of the merger we owned three drybulk carriers, the M/V Free Destiny, the M/V Free Envoy and the M/V Free Fighter. Under the terms of the merger, we were the surviving corporation. Each outstanding share of Trinity’s common stock and Class B common stock was converted into the right to receive an equal number of shares of our common stock, and each Trinity Class W warrant and Class Z warrant was converted into the right to receive an equal number of our Class W warrants and Class Z warrants.
 
Our common stock, Class W warrants and Class Z warrants began trading on the NASDAQ Capital Market on December 16, 2005 under the trading symbols FREE, FREEW and FREEZ, respectively. As a result of the merger, Trinity’s former securities, including the Trinity Class A Units and the Class B Units, ceased trading on the OTC Bulletin Board.
 
In January 2007, Mr. Varouxakis, through a Marshall Islands corporation wholly owned by him, purchased all of the shares of common stock owned by the two other co-founding shareholders. He simultaneously sold shares of common stock owned by him to FS Holdings Limited, an entity controlled by the Restis family, and to certain other entities. As a result of these transactions, Mr. Varouxakis now beneficially owns (including shares underlying options and warrants beneficially owned by him) approximately 34.5% of our outstanding common stock and FS Holdings Limited beneficially owns (including shares underlying warrants) approximately 40.2% of our outstanding common stock. Immediately following these transactions, our board of directors appointed Mr. Varouxakis chairman of the board and president, the two other co-founding shareholders and two other directors resigned from the board, and two new directors were appointed to fill the vacancies. See “Management” and “Related Party Transactions.”
 
Our executive offices are located at 89 Akti Miaouli & 4 Mavrokordatou Street, 185 38, Piraeus, Greece and our telephone number is 011-30-210-452-8770.


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The Offering
 
Common stock offered by us           shares.
 
Underwriters’ over-allotment option Up to           shares.
 
Common stock outstanding after this offering(1)

          shares.
 
Use of proceeds We estimate that we will receive net proceeds of approximately $      million from this offering assuming an offering price of $     per share of common stock, the last reported closing price of our common stock on          , 2007, after deducting underwriting discounts and commissions, and offering expenses, and assuming the underwriters’ over-allotment option is not exercised. Each $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and the estimated expenses payable by us. We intend to use the proceeds of this offering in conjunction with a $48.7 million loan from Credit Suisse to refinance Acquisition Debt Facilities that were used to acquire the M/V Free Hero, and will be used to acquire the M/V Free Jupiter and any additional vessels that we may acquire. Any amounts not so used will be applied to repay other existing indebtedness and for general corporate purposes, including the purchase of other vessels. See “Use of Proceeds.”
 
Dividend policy The declaration and payment of any dividend is subject to the discretion of our board of directors. See “Dividend Policy.”
 
NASDAQ Capital Market symbols Common stock — FREE
Class W warrants — FREEW
Class Z warrants — FREEZ
 
We are applying to have our common stock and warrants listed on the NASDAQ Global Market under the same symbols upon completion of this offering.
 
Risk factors Investing in our common stock involves substantial risk. You should carefully consider all the information in this prospectus prior to investing in our common stock. In particular, we urge you to consider carefully the factors set forth in the section of this prospectus entitled “Risk Factors” beginning on page 12. Some of these risk factors relate principally to the industry in which we operate and our business in general. Other risks relate to the securities market for and ownership of our common stock. Any of these risk factors could significantly and negatively affect our business, financial condition, operating results and common stock price.
 
 
(1) The number of shares of common stock outstanding after this offering excludes the following:
 
  A.  up to 250,000 shares reserved for issuance upon the exercise of stock options currently outstanding (of which, as of March 31, 2007, options to purchase 166,667 shares had vested), which have an exercise price of $5.00 per share and expire on December 16, 2010, and up to 1,250,000 shares


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  issuable upon exercise of stock options that may be granted in the future under our stock incentive plan;
 
  B.  4,572,500 shares of common stock reserved for issuance upon the exercise of outstanding warrants, as follows:
 
  •  200,000 Class A warrants held by our founding shareholders exercisable at $5.00 per share and expiring July 29, 2011;
 
  •  700,000 Class B warrants held by FS Holdings Limited exercisable at $5.00 per share of which 275,000 expire on May 8, 2012 and 425,000 expire on June 22, 2012;
 
  •  1,828,750 Class W warrants exercisable at $5.00 per share and expiring July 29, 2009; and
 
  •  1,843,750 Class Z warrants exercisable at $5.00 per share and expiring July 29, 2011.
 
  C.  410,000 shares of common stock reserved for issuance upon the exercise of the unit purchase option sold to the lead underwriter in the initial public offering of our predecessor, which unit purchase option expires July 29, 2009, as follows:
 
  •  25,000 shares of common stock included in the 12,500 Series A units purchasable upon exercise of the unit purchase option, at an exercise price of $17.325 per Series A unit;
 
  •  62,500 shares of common stock issuable upon exercise of 62,500 Class W warrants included in the 12,500 Series A units;
 
  •  62,500 shares of common stock issuable upon exercise of 62,500 Class Z warrants included in the 12,500 Series A units;
 
  •  130,000 shares of common stock included in the 65,000 Series B units purchasable upon exercise of the unit purchase option, at an exercise price of $16.665 per Series B unit;
 
  •  65,000 shares of common stock issuable upon exercise of 65,000 Class W warrants included in the 65,000 Series B units; and
 
  •  65,000 shares of common stock issuable upon exercise of 65,000 Class Z warrants included in the 65,000 Series B units.
 
  D.  shares that may be issued pursuant to the underwriters’ over-allotment option.
 
Assuming all outstanding stock options, all outstanding warrants and the unit purchase option sold to the lead underwriter in the initial public offering of our predecessor (and all warrants subject to such unit purchase option) were exercised for cash, we would receive proceeds (net of all fees, underwriting discounts and commissions) of $26,687,288.


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Summary Financial Information and Data
 
The following summary financial information and data were derived from our audited consolidated financial statements for the period from April 23, 2004 (date of inception) to December 31, 2004 and for the years ended December 31, 2005 and 2006, and our unaudited consolidated financial statements for the three months ended March 31, 2006 and 2007, included elsewhere in this prospectus. The information is only a summary and should be read in conjunction with our historical consolidated financial statements and related notes included in this prospectus and the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The historical data included below and elsewhere in this prospectus are not necessarily indicative of our future performance.
 
All amounts in the tables below are in thousands of U.S. dollars, except for share data, fleet data and average daily results.
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Statement of Operations Data:
                                       
Operating revenues
  $ 2,830     $ 10,326     $ 11,727     $ 2,444     $ 4,268  
Commissions
    (127 )     (553 )     (799 )     (165 )     (257 )
Voyage expenses
    (16 )     (55 )     (689 )     (637 )     (2 )
Vessel operating expenses (exclusive of depreciation and amortization expenses shown separately below)
    (786 )     (3,596 )     (4,483 )     (1,032 )     (1,414 )
Depreciation expense
    (872 )     (3,553 )     (4,479 )     (1,140 )     (812 )
Amortization of deferred dry docking and special survey costs
    (109 )     (355 )     (442 )     (110 )     (195 )
Management fees to a related party
    (180 )     (488 )     (540 )     (135 )     (135 )
Compensation costs
          (200 )     (651 )     (163 )     (25 )
General and administrative expenses
    (34 )     (321 )     (1,925 )     (432 )     (342 )
Finance costs
    (240 )     (1,076 )     (1,004 )     (245 )     (219 )
Interest income
    4       8       19       11        
Other
          15       (58 )     (51 )     46  
Net income (loss) for period
    470       152       (3,324 )     (1,655 )     913  
Earnings Per Share Data:
                                       
Net income (loss) per share:
                                       
Basic earnings (loss) per share
  $ 0.10     $ 0.03     $ (0.53 )   $ (0.26 )   $ 0.15  
Diluted earnings (loss) per share
  $ 0.10     $ 0.03     $ (0.53 )   $ (0.26 )   $ 0.15  
Weighted average number of shares:
                                       
Basic weighted average number of shares
    4,500,000       4,574,588       6,290,100       6,290,100       6,290,100  
Diluted weighted average number of shares
    4,500,000       4,600,444       6,290,100       6,290,100       6,290,100  
 


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    December 31,     March 31,  
    2004     2005     2006     2007  
 
Balance Sheet Data:
                               
Total current assets
  $ 1,443     $ 5,286     $ 1,417     $ 2,398  
Fixed assets, net
    16,188       23,848       19,369       18,557  
Total assets
    18,335       29,840       23,086       23,043  
Total current liabilities, including current portion of long-term debt
    4,971       10,231       10,260       8,564  
Long-term debt, including shareholder’s loans net of current portion
    9,978       9,750       5,819       6,540  
Total liabilities
    14,949       20,135       16,079       15,104  
Total shareholders’ equity
    3,386       9,705       7,007       7,939  
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
PERFORMANCE INDICATORS   2004     2005     2006     2006     2007  
 
EBITDA (1)
  $ 1,687     $ 5,128     $ 2,582     $ (171 )   $ 2,139  
Fleet Data:
                                       
Average number of vessels (2)
    0.67       2.55       3.00       3.00       3.00  
Ownership days (3)
    244       931       1,095       270       270  
Available days (4)
    244       931       1,005       270       270  
Operating days (5)
    244       893       941       270       258  
Fleet utilization (6)
    100 %     96 %     86 %     100 %     96 %
Average Daily Results:
                                       
Average TCE rate (7)
  $ 11,012     $ 10,882     $ 10,881     $ 6,081     $ 15,539  
Vessel operating expenses (8)
    3,221       3,863       4,094       3,822       5,237  
Management fees (9)
    738       524       493       500       500  
General and administrative expenses (10)
    139       345       2,046       1,600       1,326  
Total vessel operating expenses (11)
  $ 3,959     $ 4,387     $ 4,587     $ 4,322     $ 5,737  
 
 
(1) We consider EBITDA to represent net earnings before interest, taxes, depreciation and amortization. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by United States generally accepted accounting principles, or U.S. GAAP, and our calculation of EBITDA may not be comparable to that reported by other companies. EBITDA is included herein because it is an alternative measure of our liquidity, performance and indebtedness.
 
EBITDA reconciliation to net income:
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Net income (loss)
  $ 470     $ 152     $ (3,324 )   $ (1,655 )   $ 913  
Depreciation and amortization
    981       3,908       4,921       1,250       1,007  
Interest and finance cost
  $ 236     $ 1,068     $ 985     $ 234     $ 219  
                                         
EBITDA
  $ 1,687     $ 5,128     $ 2,582     $ (171 )   $ 2,139  
                                         
 
(2) Average number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our fleet during the period divided by the number of calendar days in the period.

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(3) Ownership days are the total number of days in a period during which the vessels in our fleet have been owned by us. Ownership days are an indicator of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during a period.
 
(4) Available days are the number of ownership days less the aggregate number of days that our vessels are off-hire due to major repairs, dry dockings or special or intermediate surveys. The shipping industry uses available days to measure the number of ownership days in a period during which vessels should be capable of generating revenues.
 
(5) Operating days are the number of available days less the aggregate number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues.
 
(6) We calculate fleet utilization by dividing the number of our fleet’s operating days during a period by the number of ownership days during the period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons such as scheduled repairs, vessel upgrades, or dry dockings or other surveys.
 
(7) Time charter equivalent, or TCE, is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE is consistent with industry standards and is determined by dividing operating revenues (net of voyage expenses) by operating days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract. TCE is a standard shipping industry performance measure used primarily to compare period-to-period changes in a shipping company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed between the periods:
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Operating revenues
  $ 2,830     $ 10,326     $ 11,727     $ 2,444     $ 4,268  
Voyage expenses and commissions
    (143 )     (608 )     (1,488 )     (802 )     (259 )
Net operating revenues
  $ 2,687     $ 9,718     $ 10,239     $ 1,642     $ 4,009  
Available days
    244       893       941       270       258  
Time charter equivalent rates
  $ 11,012     $ 10,882     $ 10,881     $ 6,081     $ 15,539  
 
(8) Average daily vessel operating expenses, which includes crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, is calculated by dividing vessel operating expenses by ownership days for the relevant time periods:
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Vessel operating expenses
  $ 786     $ 3,596     $ 4,483     $ 1,032     $ 1,414  
Ownership days
    244       931       1,095       270       270  
Daily vessel operating expense
  $ 3,221     $ 3,863     $ 4,094     $ 3,822     $ 5,237  
 
(9) Daily management fees are calculated by dividing total management fees by ownership days for the relevant time period.
 
(10) Average daily general and administrative expenses are calculated by dividing general and administrative expenses by operating days for the relevant period.
 
(11) Total vessel operating expenses, or TVOE, is a measurement of our total expenses associated with operating our vessels. TVOE is the sum of vessel operating expense and management fees. Daily TVOE is calculated by dividing TVOE by fleet ownership days for the relevant time period.


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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 prospectus actually occurs, our business, results of operations or financial condition could be materially and adversely affected.
 
Industry-Specific Risk Factors
 
The cyclical nature of the international shipping industry may lead to volatile changes in charter rates and vessel values, which may reduce our revenues and net income.
 
We are an independent shipping company that operates in the international drybulk shipping market. Our profitability is dependent upon the charter rates we are able to charge. The supply of and demand for shipping capacity strongly influences charter rates. The demand for shipping capacity is determined primarily by the demand for the type of commodities carried, the distance that those commodities must be moved by sea, and the demand for vessels of a particular size. The demand for commodities is affected by, among other things, world and regional economic and political conditions (including developments in international trade, fluctuations in industrial and agricultural production and armed conflicts), environmental concerns, weather patterns, port congestion, and changes in seaborne and other transportation costs. The size of the existing fleet per size category (i.e., Handysize, Handymax, Panamax or Capesize) in any particular drybulk market, the number of new vessel deliveries, the scrapping of older vessels and the number of vessels out of active service (i.e., laid-up, dry-docked, awaiting repairs or otherwise not available for hire), determines the supply of shipping capacity, which is measured by the amount of suitable tonnage available to carry cargo.
 
In addition to the prevailing and anticipated charter rates, factors that affect the supply and demand for shipping capacity include the rate of newbuilding, scrapping and laying-up, newbuilding prices, secondhand vessel values in relation to scrap prices, costs of bunkers and other operating costs, costs associated with classification society surveys, normal maintenance and insurance coverage, the efficiency and age profile of the existing fleet in the market, and government and industry regulation of maritime transportation practices, particularly environmental protection laws and regulations. These factors are outside of our control, and we cannot predict the nature, timing and degree of changes in industry conditions. Some of these factors may have a negative impact on our revenues and net income.
 
The market value of our vessels can fluctuate significantly. The market value of our vessels may increase or decrease depending on the following factors:
 
  •  economic and market conditions affecting the shipping industry in general;
 
  •  supply of drybulk vessels, including secondhand 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.
 
Because the market value of our vessels may fluctuate significantly, we may incur losses when we sell vessels, which may adversely affect our earnings. In addition, any determination that a vessel’s remaining useful life and earnings requires an impairment of its value on our financial statements could result in a charge against our earnings and a reduction in our shareholders’ equity. If for any reason we sell our vessels at a time when prices have fallen, the sale may be less than that vessel’s carrying amount on our financial statements, and we would incur a loss and a reduction in earnings.


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Charter rates, which in the international drybulk shipping industry approached historic highs in the second quarter of 2007, may decline as a result of increased capacity and slowing worldwide economic growth, thereby reducing our future profitability.
 
After reaching a peak in mid-2005, charter rates and vessel values decreased during the remainder of 2005 and the first half of 2006. Since July 2006, charter rates and the value of second-hand vessels have risen sharply, approaching historical record high levels in July 2007. We cannot give any assurance as to how long these rate levels may be maintained and, if they begin to decline, to what levels they might fall. We anticipate that the future demand for our drybulk carriers and drybulk charter rates will be dependent upon continued economic growth particularly in China and India and elsewhere in the world generally, seasonal and regional changes in demand, and changes to the capacity of the world fleet. Adverse industry, economic, political, social or other developments could also decrease the amount and/or profitability of our business and materially reduce our revenues and net income.
 
The nature, timing and degree of changes in industry conditions are unpredictable and outside of our control. Some of the factors that influence demand for vessel capacity include:
 
  •  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.
 
Some of the factors that influence the supply of vessel capacity include:
 
  •  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.
 
An oversupply of drybulk carrier capacity may lead to reductions in charter rates and our profitability.
 
The market supply of drybulk carriers, primarily Capesize and Panamax vessels, has been increasing, and the number of such drybulk carriers on order are near historic highs. Newbuildings were delivered in significant numbers starting at the beginning of 2006 and are expected to continue to be delivered in significant numbers through 2007. As of June 2007, newbuilding orders had been placed for an aggregate of more than 34% of the current global drybulk fleet, with deliveries expected during the next 36 to 48 months. An oversupply of drybulk carrier capacity may result in a reduction of our charter rates. If such a reduction occurs, when our vessels’ current charters expire or terminate, we may only be able to recharter our vessels at reduced or unprofitable rates or we may not be able to charter these vessels at all.
 
An economic slowdown in the Asia Pacific region or elsewhere could materially reduce the amount and/or profitability of our business.
 
A significant number of the port calls made by our vessels involve the loading or discharging of raw materials and semi-finished products in ports in the Asia Pacific region. As a result, a negative change in economic conditions in any Asia Pacific country, but particularly in China or India, may have an adverse effect on our business, financial position and results of operations, as well as our future prospects. In particular, in recent years, China has been one of the world’s fastest growing economies in terms of gross domestic product. We cannot assure you that such growth will be sustained or that the Chinese economy will not experience contraction in the future. Moreover, any slowdown in the economies of the United States, the European Union or certain other Asian countries may adversely effect economic growth in China and


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elsewhere. Our revenues and net income, as well as our future prospects, would likely be materially reduced by an economic downturn in any of these countries.
 
Changes in the economic and political environment in China and policies adopted by the government to regulate its economy may have a material adverse effect on our business, financial condition and results of operations.
 
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of payments position. Prior to 1978, the Chinese economy was a planned economy. Since 1978, increasing emphasis has been placed on the utilization of market forces in the development of the Chinese economy. There is an increasing level of freedom and autonomy in areas such as allocation of resources, production, pricing and management and a gradual shift in emphasis to a ”market economy” and enterprise reform. Although limited price reforms were undertaken, with the result that prices for certain commodities are principally determined by market forces, many of the reforms are experimental and may be subject to change or abolition. We cannot assure you that the Chinese government will continue to pursue a policy of economic reform. The level of imports to and exports from China could be adversely affected by changes to these economic reforms, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions, all of which could, adversely affect our business, operating results and financial condition.
 
Charter rates are subject to seasonal fluctuations, which may adversely affect our financial condition.
 
Our fleet consists of Handysize and, upon the delivery of the M/V Free Jupiter, Handymax drybulk carriers that operate in markets that have historically exhibited seasonal variations in demand and, as a result, in charter rates. This seasonality may result in quarter-to-quarter volatility in our operating results. The energy markets primarily affect the demand for coal, with increases during hot summer periods when air conditioning and refrigeration require more electricity and towards the end of the calendar year in anticipation of the forthcoming winter period. The demand for iron ore tends to decline in the summer months because many of the major steel users, such as automobile makers, reduce their level of production significantly during the summer holidays. Grain shipments are driven by the harvest within a climate zone. Because three of the five largest grain producers (the United States, Canada and the European Union) are located in the northern hemisphere and the other two (Argentina and Australia) are located in the southern hemisphere, harvests occur throughout the year and grains require drybulk shipping accordingly. As a result of these factors, the drybulk shipping industry is typically stronger in the fall and winter months. Therefore, we expect our revenues from our drybulk carriers to be typically weaker during the fiscal quarters ended June 30 and September 30 and, conversely, we expect our revenues from our drybulk carriers to be typically stronger in fiscal quarters ended December 31 and March 31. Seasonality in the drybulk industry could materially affect our operating results.
 
The operation of drybulk carriers has certain unique operational risks.
 
The operation of certain vessel types, such as drybulk carriers, has certain unique risks. With a drybulk carrier, the cargo itself and its interaction with the ship can be a risk factor. By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold), and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures may be more susceptible to breach to the sea. Hull breaches in drybulk carriers may lead to the flooding of the vessels holds. If a drybulk carrier suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessels bulkheads leading to the loss of a vessel. If we are unable to adequately maintain our vessels we may be unable to prevent these events. Any of these circumstances or events could negatively impact our business, financial condition, results of operations and ability to pay dividends. In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.


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We are subject to regulation and liability under environmental laws that could require significant expenditures and reduce our cash flows and net income.
 
Our business and the operation of our vessels are materially affected by government regulation in the form of international conventions and national, state and local laws and regulations in force in the jurisdictions in which the vessels operate, as well as in the country or countries of their registration. We are also required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our operations. Because such conventions, laws, regulations and permit requirements are often revised, we cannot predict the ultimate cost of complying with such conventions, laws, regulations or permit requirements, or the impact thereof on the resale prices or useful lives of our vessels. Additional conventions, laws and regulations may be adopted that could limit our ability to do business and thereby reduce our revenue or increase our cost of doing business, thereby materially decreasing our net income.
 
The operation of our vessels is affected by the requirements set forth in the International Safety Management, or ISM, Code. The ISM Code requires shipowners and bareboat charterers to develop and maintain an extensive “Safety Management System.” The system includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and dealing with emergencies. The failure of a shipowner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels, and/or may result in a denial of access to, or detention in, certain ports. Currently, Lloyd’s Register of Shipping has awarded ISM and International Ship and Port Facilities Security, or ISPS, certification to all of our vessels and to Free Bulkers, our ship management company. There can be no assurance, however, that such certification will be maintained indefinitely.
 
The European Union is considering legislation that will affect the operation of vessels and the liability of owners for oil pollution. It is difficult to predict what legislation, if any, may be promulgated by the European Union or any other country or authority.
 
We currently maintain, for each of our vessels, protection and indemnity insurance, which includes pollution liability coverage, in the amount of one billion dollars per incident. If the damages from a catastrophic incident exceeded our insurance coverage, the payment of these damages may materially decrease our net income.
 
The International Maritime Organization, or IMO, or other regulatory bodies may adopt further regulations in the future that could adversely affect the useful lives of our vessels as well as our ability to generate income from them. These requirements can also affect the resale value of our vessels.
 
The United States Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and clean-up of the environment from oil spills. OPA affects all owners and operators whose vessels trade in the United States of America or any of its territories and possessions or whose vessels operate in waters of the United States of America, which includes the territorial sea of the United States of America and its 200 nautical mile exclusive economic zone.
 
Under OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels, including bunkers (fuel).
 
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.
 
The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life at Sea Convention, or SOLAS. Our vessels are currently classed with Lloyd’s Register of Shipping and Korean Register of Shipping.


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A vessel must undergo annual surveys, intermediate surveys, dry dockings and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Our vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel is also required to be dry-docked every two to three years for inspection of the underwater parts of such vessel.
 
If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, dry docking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and uninsurable, thereby reducing our revenues and profitability. That could also cause us to be in violation of certain covenants in our loan agreements. In addition, the cost of maintaining our vessels’ classifications may be substantial at times and could result in reduced revenues.
 
Maritime claimants could arrest our vessels, which could interrupt our cash flow.
 
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lienholder may enforce its lien by arresting a vessel through foreclosure proceedings. The arresting or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of funds to have the arrest lifted.
 
In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner or managed by the same manager. Claimants could try to assert “sister ship” liability against one of our vessels for claims relating to another of our vessels or a vessel managed by our manager.
 
Governments could requisition our vessels during a period of war or emergency, resulting in loss of earnings.
 
A government could requisition for title or seize our vessels. Requisition for title occurs when a government takes control of a vessel and becomes the owner. A government could also requisition our vessels for hire, which occurs when a government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency. Government requisition of one or more of our vessels could reduce our revenues and net income.
 
World events outside our control such as terrorism and international and regional hostilities may negatively affect our ability to operate, thereby reducing our revenues and net income or our ability to obtain additional financing, thereby restricting the implementation of our business strategy.
 
Terrorist attacks such as those in New York on September 11, 2001, the bombings in Spain on March 11, 2004 and in London on July 7, 2005, and the continuing response of the United States and other countries to these attacks, as well as the threat of future terrorist attacks in the United States or elsewhere continue to cause uncertainty in the world financial markets and may adversely affect our business and operating results by increasing security costs and creating delays because of heightened security measures. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea.
 
Terrorist attacks and international and regional hostilities may also negatively impact our vessels or our customers directly. The continuing conflict in Iraq and Afghanistan may lead to additional acts of terrorism and armed conflict around the world, which may contribute to economic instability and could result in increased volatility of the financial markets in the United States of America and globally, an economic recession in the United States of America or the world and a corresponding reduction in our business and future prospects. Any of these occurrences could prevent us from obtaining additional financing on terms acceptable to us or at all and have a material adverse impact on our operating results, revenues and costs which would impair our implementation of our business strategy.


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Risks involved with operating ocean-going vessels could affect our business and reputation, which may reduce our revenues.
 
The operation of an ocean going vessel has inherent risks. These risks include the possibility of:
 
  •  crew strikes and/or boycotts;
 
  •  marine disaster;
 
  •  piracy;
 
  •  environmental accidents;
 
  •  cargo and property losses or damage; and
 
  •  business interruptions caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather conditions.
 
The involvement of any of our vessels in an environmental disaster may harm our reputation as a safe and reliable vessel operator. Any of these circumstances or events could increase our costs or lower our revenues.
 
Rising fuel prices may adversely affect our profits.
 
The cost of fuel is a significant factor in negotiating charter rates. As a result, an increase in the price of fuel beyond our expectations may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geo-political developments, supply and demand for oil, actions by members of OPEC and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns and regulations.
 
Company-Specific Risk Factors
 
We have a limited operating history and have cumulative deficits.
 
Our company was formed in April 2004, and we did not own or operate any vessels prior to June 2004. We therefore have a limited operating history and limited historical financial data on which to evaluate our operations or our ability to implement and achieve our business strategy. As of December 31, 2006 and March 31, 2007, we had cumulative deficits of $2,702,000 and $1,789,000, respectively, which reflects the impact of cumulative losses during 2006 and prior years. Although we achieved net income of $913,000 for the first quarter of 2007, there can be no assurances that we will achieve net income for the remainder of the year or that our net income will be sufficient to offset our cumulative deficit.
 
If we fail to manage our planned growth properly, we may not be able to successfully expand our market share.
 
We intend to continue to grow our fleet. Our growth will depend on:
 
  •  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 the required financing.
 
Growing any business by acquisition presents numerous risks, such as undisclosed liabilities and obligations and difficulty experienced in (1) obtaining additional qualified personnel, (2) managing relationships with customers and suppliers and (3) integrating newly acquired operations into existing infrastructures.


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We cannot give any assurance that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with the execution of those growth plans.
 
Our charterers may terminate or default on their charters, which could adversely affect our results of operations and cash flow.
 
Our charters may terminate earlier than the dates indicated in this prospectus. The terms of our charters vary as to which events or occurrences will cause a charter to terminate or give the charterer the option to terminate the charter, but these generally include a total or constructive total loss of the related vessel, the requisition for hire of the related vessel, or the failure of the related vessel to meet specified performance criteria. In addition, the ability of each of our charterers to perform its obligations under a charter will depend on a number of factors that are beyond our control. These factors may include general economic conditions, the condition of the drybulk shipping industry, the charter rates received for specific types of vessels, and various operating expenses. The costs and delays associated with the default by a charterer of a vessel may be considerable and may adversely affect our business, results of operations, cash flows and financial condition.
 
We cannot predict whether our charterers will, upon the expiration of their charters, recharter our vessels on favorable terms or at all. If our charterers decide not to re-charter our vessels, we may not be able to recharter them on terms similar to the terms of our current charters or at all. If we receive lower charter rates under replacement charters or are unable to recharter all of our vessels, our business, operating results and financial condition may be adversely affected.
 
Our earnings may be adversely affected if we do not successfully employ our vessels.
 
We intend to employ our vessels in fixed-rate period charters and spot charters. While current charter rates are high relative to historical rates, the charter market is volatile, and at times in the past charter rates for vessels have declined below operating costs of vessels. If our vessels become available for employment in the spot market or under new period charters during periods when charter rates have fallen, we may have to employ our vessels at depressed charter rates that would lead to reduced or volatile earnings. We cannot assure you that future charter rates will be at a level that will enable us to operate our vessels profitably or to repay our debt.
 
We will not be able to take advantage of favorable opportunities in the current spot market with respect to vessels employed on medium- to long-term time charters.
 
Following the delivery of the M/V Free Jupiter, three of the four vessels in our fleet will be employed under medium- to long-term time charters, with expiration dates ranging from April 2008 to September 2010. Although medium- and long-term time charters provide relatively steady streams of revenue, vessels committed to medium- and long-term charters may not be available for spot voyages during periods of increasing charter hire rates, when spot voyages might be more profitable.
 
We previously relied on spot charters and may spot-charter certain of our vessels in the future. The rates on spot charters are very competitive and volatile, which can result in decreased revenues if spot charter rates decline.
 
Our vessels have previously been spot chartered, which made our historical revenues subject to greater fluctuation. In the future, we may continue to spot charter certain of our vessels. The spot charter market is highly competitive and rates within this market are subject to volatile fluctuations, while longer-term period time charters provide income at pre-determined rates over more extended periods of time. If we decide to continue to spot charter certain of our vessels, there can be no assurance that we will be successful in keeping those vessels fully employed in these short-term markets or that future spot rates will be sufficient to enable those vessels to be operated profitably.


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If vessels that we acquire for our fleet are not delivered on time or delivered with significant defects, our business, results of operations and financial condition could be adversely affected.
 
We took delivery of the M/V Free Hero on July 3, 2007 and we expect to take delivery of the M/V Free Jupiter in August or September 2007. We had entered into memoranda of agreement to purchase two additional vessels, but these were cancelled by agreement with the sellers. See “Prospectus Summary — Recent Developments.” We intend to seek to replace these two undelivered vessels with alternative tonnage of similar profile and return characteristics. A prolonged delay in the delivery to us of the M/V Free Jupiter or of any replacement vessels we may identify, or the failure of the contract counterparty to deliver a vessel at all, could cause us to breach our obligations under a related time charter and could adversely affect our business, results of operations, financial condition and the ability to pay dividends. The delivery of any of these vessels with substantial defects could have similar consequences.
 
If we cannot complete the purchase of the M/V Free Jupiter and of any replacement vessels for the M/V Free Iris and M/V Free Gentleman, we may use the proceeds of this offering for general corporate purposes with which you may not agree.
 
Certain events may arise that could result in us not taking delivery of a vessel, such as seller’s default, a total loss of a vessel, a constructive total loss of a vessel, or substantial damage to a vessel prior to its delivery. If the sellers of the M/V Free Jupiter or of any replacement vessels for the M/V Free Iris or M/V Free Gentleman fail to deliver the vessels to us as agreed, or if we cancel a purchase agreement because a seller has not met its obligations, our management will have the discretion to apply the proceeds of this offering that we would have used to repay debt incurred for the purchase of those vessels to acquire other vessels or for general corporate purposes with which you may not agree. We will not escrow the proceeds from this offering and will not return the proceeds to you if we do not take delivery of one or more vessels. It may take a substantial period of time before we can locate and purchase other suitable vessels. During this period, the portion of the proceeds of this offering originally planned for the acquisition of the M/V Free Jupiter and for replacement vessels for the M/V Free Iris and M/V Free Gentleman may be invested in other instruments and therefore may not yield returns at rates comparable to those that vessels might have earned, which would have a material adverse effect on our business and results of operations.
 
We depend entirely on Free Bulkers and Safbulk Pty Ltd. to manage and charter our fleet.
 
Our executive management team consists of only two individuals, our chief executive officer and our chief financial officer. We currently contract the management of our fleet, including crewing, maintenance and repair, as well as our financial reporting and internal controls, to Free Bulkers, an affiliated company. Free Bulkers has entered into a sub-management agreement with Safbulk, a company controlled by the Restis family, for the commercial management of our fleet, including negotiating and obtaining charters, relations with charter brokers and performance of post-charter activities. We are dependent upon Free Bulkers for technical management of our fleet and upon Safbulk for our ability to attract charterers and charter brokers. The loss of either of their services or their failure to perform their obligations could reduce our revenues and net income and adversely affect our operations and business. Although we may have rights against Free Bulkers, if Free Bulkers defaults on its obligations to us, you may have no recourse against Free Bulkers. In addition, if Safbulk defaults on its obligations to Free Bulkers, we may have no recourse against Safbulk. Further, we expect that we will need approval from our lenders if we intend to replace Free Bulkers as our fleet manager.
 
Because our seafaring employees are covered by collective bargaining agreements, failure of industry groups to renew those agreements may disrupt our operations and adversely affect our earnings.
 
All of the seafarers employed on the vessels in our fleet are covered by collective bargaining agreements that set basic standards. We cannot assure you that these agreements will prevent labor interruptions. Any labor interruptions could disrupt our operations and harm our financial performance.


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If Free Bulkers is unable to perform under its vessel management agreements with us, our results of operations may be adversely affected.
 
As we expand our fleet, we will rely on Free Bulkers to recruit suitable additional seafarers and to meet other demands imposed on Free Bulkers. We cannot assure you that Free Bulkers will be able to meet these demands as we expand our fleet. If Free Bulkers’ crewing agents encounter business or financial difficulties, they may not be able to adequately staff our vessels. If Free Bulkers is unable to provide the commercial and technical management service for our vessels, our business, results of operations, cash flows and financial position and our ability to pay dividends may be materially adversely affected.
 
We, and one of our executive officers, have affiliations with Free Bulkers that could create conflicts of interest detrimental to us.
 
Our chairman, chief executive officer and president, Ion G. Varouxakis, is also the controlling shareholder and officer of Free Bulkers, which is our ship management company. These dual responsibilities of our officer and the relationships between the two companies could create conflicts of interest between Free Bulkers and us. Each of our operating subsidiaries has a nonexclusive management agreement with Free Bulkers. Free Bulkers has subcontracted the charter and post charter management of our fleet to Safbulk Pty Ltd. which is controlled by FS Holdings Limited, one of our principal shareholders. Although Free Bulkers currently serves as manager for vessels owned by us, neither Free Bulkers nor Safbulk is restricted from entering into management agreements with other competing shipping companies, and Safbulk provides management services to other international shipping companies, including the Restis group, which owns and operates vessels in the drybulk sector. Free Bulkers or Safbulk could also allocate charter and/or vessel purchase and sale opportunities to others. There can be no assurance that Free Bulkers or Safbulk would resolve any conflicts of interest in a manner beneficial to us.
 
Operational or financial problems experienced by Free Bulkers, our affiliate, may adversely impact us.
 
The ability of Free Bulkers to continue providing services for us will depend in part on Free Bulkers’ own financial strength. Circumstances beyond our control could impair Free Bulkers’ financial strength and, as a result, Free Bulkers’ ability to fulfill its obligations to us which could have a material adverse effect on us.
 
If Free Bulkers is unable to recruit suitable seafarers for our fleet or as we expand our fleet, our results of operations may be adversely affected.
 
We will rely on Free Bulkers to recruit suitable senior officers and crews as we expand our fleet. In addition, as we expand our fleet, we will have to rely on Free Bulkers to recruit suitable additional seafarers. We cannot assure you that Free Bulkers will be able to continue to hire suitable employees as we expand our fleet. If Free Bulkers’ crewing agents encounter business or financial difficulties, they may not be able to adequately staff our vessels. We expect that all or part of the seafarers who will be employed on the ships in our fleet will be covered by industry-wide collective bargaining agreements that set basic standards. We cannot assure you that these agreements will prevent labor interruptions. If Free Bulkers is unable to recruit suitable seafarers as we expand our fleet, our business, results of operations, cash flows and financial condition and our ability to pay dividends may be materially adversely affected.
 
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 employ our vessels in a highly competitive market that is capital intensive and highly fragmented. Competition arises primarily from other vessel owners, some of whom have substantially greater resources than we have. Competition for the transportation of drybulk cargoes can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and its managers to the charterers. Due in part to the highly fragmented market, competitors with greater resources could operate larger fleets through consolidations or acquisitions that may be able to offer better prices and fleets.


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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.
 
We have incurred secured debt under loan agreements for all of our vessels. See “See Business — Loans for Vessels.” If the market value of our fleet declines, we may not be in compliance with certain provisions of our existing loan agreements and we may not be able to refinance our debt or obtain additional financing. If we are unable to pledge additional collateral, our lenders could accelerate our debt and foreclose on our fleet.
 
Servicing debt may limit funds available for other purposes and inability to service debt may lead to acceleration of debt and foreclosure on our fleet.
 
To finance our original fleet of vessels, one of which was sold in April 2007, we incurred secured debt under loan agreements with Hollandsche Bank — Unie N.V. that are guaranteed by us and unsecured, non-interest-bearing shareholder loans. As of March 31, 2007, we had total debt consisting of loans from shareholders of $2.3 million and a ratio of bank debt to total capital of approximately 52.6%. The long-term debt requires quarterly payments of principal and interest and the shareholder loans require quarterly payments of principal. See “Business — Loans for Vessels.”
 
On May 1, 2007, we entered into memoranda of agreement pursuant to which we agreed to purchase two secondhand drybulk carriers, the M/V Free Hero and the M/V Free Jupiter, from non-affiliated parties for a total of approximately $72.25 million. We took delivery of the M/V Free Hero on July 3, 2007 and we expect to take delivery of the M/V Free Jupiter in August or September 2007. We intend to seek to replace the two undelivered vessels with alternative tonnage of similar profile and return characteristics in an effort to expand our fleet in the Handysize/Handymax segment. To finance the acquisition of these vessels, we have: obtained loan commitments from HSH Nordbank AG and BTMU Capital Corporation for an aggregate of $89.5 million in the form of a secured senior loan and a junior secured loan, as well as a $14.0 million unsecured loan from FS Holdings, one of our principal shareholders. We have also entered into a credit agreement with Hollandsche Bank — Unie N.V. increasing the amount available on an existing facility from $5.0 million to $9.0 million.
 
These borrowings will materially increase our long-term debt, our shareholder debt, and our ratio of debt to total capital.
 
If we are not able to repay a portion of our borrowings using the proceeds of this offering, we will be required to dedicate a significant portion of our cash flow from operations to pay the principal and interest on our debt. These requirements will increase as we draw additional funds available for the acquisition of new vessels. These payments will limit funds otherwise available for working capital, capital expenditures and other purposes. We will need to incur additional indebtedness as we further expand our fleet, which would increase our ratio of debt to equity. The need to service our debt may limit funds available for other purposes, including distributing cash to our shareholders, and our inability to service debt could lead to acceleration of our debt and foreclosure on our fleet.
 
We have received an offer letter contingent upon, among other things, the execution of formal loan agreements, for a senior secured credit facility from Credit Suisse, the lead underwriter of this offering, in the aggregate amount of $87.0 million, consisting of a $48.7 million loan to refinance our Acquisition Debt Facilities and a $38.3 million facility for the purchase of additional vessels. The repayment and interest terms contained in this offer letter are more favorable than those contained in our Acquisition Debt Facilities and would increase our cash flow and should result in funds available for vessel acquisitions and payment of dividends to our shareholders. We intend to enter into this senior credit facility only if we successfully complete this offering. We cannot assure you that we will enter into a formal agreement with Credit Suisse. See “Business — Loans for Vessels” for a description of this Credit Suisse offer letter.
 
Continued increase in interest rates would reduce funds available to purchase vessels and service debt.
 
The rise in interest rates since 2005 has caused our interest cost to increase and has had a material adverse effect on our net income. Any further interest rate increases could further reduce our revenues and net income. We have purchased, and may purchase in the future, vessels with loans that provide for periodic interest payments based on indices that fluctuate with changes in market interest rates. If interest rates increase significantly, it would increase our costs of financing our acquisition of vessels, which could decrease the


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number of additional vessels that we could acquire and adversely affect our financial condition and results of operations and may adversely affect our ability to service debt.
 
Our loan agreements and commitment letters contain covenants that may limit our liquidity and corporate activities.
 
Our loan agreements impose operating and financial restrictions on us. These restrictions may limit our ability to:
 
  •  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; and
 
  •  change the management of our vessels or terminate or materially amend the management and sell our vessels.
 
In addition, our credit facilities contain a number of financial covenants and general covenants that require us to, among other things, maintain minimum vessel values, minimum cash balances on deposit, minimum working capital and adequate insurance. Therefore, we may need to seek permission from our lenders in order to undertake certain corporate actions. Our lenders’ interests may be different from ours, and we cannot guarantee that we will be able to obtain our lenders’ permission when needed. This may prevent us from taking actions that are in our best interest.
 
We cannot assure you that we will pay dividends.
 
There can be no assurance that we will pay dividends. We may incur expenses or liabilities that would reduce or eliminate the cash available for distribution as dividends, including as a result of the risks described in this section of the prospectus. Our credit agreements may also prohibit our declaration and payment of dividends under some circumstances. For example, our offer letter for a senior secured credit facility from Credit Suisse, the lead underwriter of this offering, permits payments of dividends to our shareholders provided we are in compliance with certain loan covenants. See “Business — Loans for Vessels.” We may also enter into new financing or other agreements that will restrict our ability to pay dividends.
 
In addition, the declaration and payment of dividends will be subject at all times to the discretion of our board of directors. The timing and amount of dividends will depend on our earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in our credit agreements, the provisions of Marshall Islands law affecting the payment of dividends and other factors. Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent upon the payment of such dividends; but in case there is no surplus, dividends may be declared or paid out of net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year.
 
We are a holding company, and we will depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations or to make dividend payments.
 
We are a holding company and our subsidiaries, which are all wholly-owned by us either directly or indirectly, will conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our wholly-owned subsidiaries. As a result, our ability to make dividend payments depends on our subsidiaries and their ability to distribute funds to us. If we are unable to obtain funds from our subsidiaries, our board of directors may exercise its discretion not to pay dividends. We and our subsidiaries will be permitted to pay dividends under our senior secured term loan only for so long as we are in


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compliance with all applicable financial covenants, terms and conditions. In addition, we and our subsidiaries are subject to limitations on the payment of dividends under Marshall Islands laws discussed above.
 
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.
 
The actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the additional debt financing that we will require to acquire additional vessels or may significantly increase our costs of obtaining such financing. Our inability to obtain additional financing at all, or at a higher than anticipated cost, may materially impair our ability to implement our business strategy.
 
As we expand our business, we will need to upgrade our operational and financial systems, and add more staff. If we cannot upgrade these systems or recruit suitable additional employees, our performance may suffer.
 
Our current operating and financial systems may not be adequate if we expand the size of our fleet, and our attempt to improve those systems may be ineffective. In addition, if we expand our fleet, we will have to rely on Free Bulkers to recruit additional shoreside administrative and management personnel. We cannot assure you that Free Bulkers will be able to continue to hire suitable additional employees as we expand our fleet. If we cannot upgrade our operational and financial systems effectively or recruit suitable additional employees our performance may suffer and our ability to expand our business further will be restricted.
 
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.
 
We are required to comply with a variety of laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, new SEC regulations and the NASDAQ Capital Market rules. In particular, Section 404 of the Sarbanes-Oxley Act requires management’s annual review and evaluation of our internal control systems, and attestations as to the effectiveness of these systems by our independent public accounting firm. We anticipate that we will have to dedicate additional resources and accelerate progress on the required assessments in order to complete documenting and testing our internal control systems and procedures in the time to enable us to timely file our annual report on Form 20-F for the year ended December 31, 2007. If we determine that we will require additional employees to complete this process, we may have difficulty in identifying and employing individuals with the necessary knowledge and experience. During the course of testing, deficiencies may be identified that we may not be able to remediate to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to correct any deficiencies we identify, we may not obtain an unqualified attestation report from our independent public accounting firm, which will be required for the fiscal year ended December 31, 2008. Failure to achieve and maintain an effective internal control environment or obtain an unqualified report could have a material adverse effect on the market price of our stock.
 
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.
 
Our success depends to a significant extent upon the abilities and efforts of our existing management team. The loss of any of these individuals could adversely affect our business prospects and financial condition. We have entered into employment agreements with our chairman, chief executive officer and president, Ion G. Varouxakis, and our chief financial officer, Dimitris D. Papadopoulos. Our success will depend on retaining key members of our management team. Difficulty in hiring and retaining personnel could adversely affect our results of operations and ability to pay dividends. We do not maintain “key man” life insurance on any of our officers.


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Our vessels may suffer damage and may face unexpected dry-docking costs, which could reduce our cash flow and impair our financial condition.
 
If our vessels suffer damage, they may need to be repaired at a dry-docking facility. The costs of dry-dock repairs are unpredictable and can be substantial. We may have to pay dry-docking costs that our insurance does not cover. The loss of earnings while these vessels are being repaired and reconditioned, as well as the actual cost of these repairs, would decrease our earnings.
 
The loss of service of any vessels could have a material adverse effect on our earnings.
 
During the year ended December 31, 2006, we had three vessels in our fleet. In April 2007, we sold one of our vessels and we took delivery of another vessel, the M/V Free Hero, in July 2007. Although we have entered into memoranda of agreement to acquire an additional vessel, this acquisition is not expected to occur until August or September 2007. As a result, the loss of service of any of our vessels, especially our three current 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.
 
We took delivery of the M/V Free Hero on July 3, 2007 and we have entered into a memorandum of agreement to acquire an additional secondhand vessel. Although we inspect the secondhand vessels that we acquire prior to purchase, this inspection does not provide us with the same knowledge about their condition and cost of any required (or anticipated) repairs that we would have had if these vessels had been built for and operated exclusively by us. Generally, we do not receive the benefit of warranties on secondhand vessels.
 
In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Older vessels are typically less fuel efficient and more costly to maintain than more recently constructed vessels. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.
 
Governmental regulations or safety or other equipment standards related to the age of vessels may require expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives. If we sell vessels, it is not certain that the price for which we sell them will equal their carrying amount at that time.
 
The aging of our fleet may result in increased operating costs in the future, which could adversely affect our earnings.
 
In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Upon acquisition of the additional vessel that we have agreed to acquire, the average age of our drybulk carriers at the time of this offering will be approximately 16 years. Older vessels are typically less fuel-efficient and more costly to maintain than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers. Governmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations or the addition of new equipment, to our vessels and may restrict the type of activities in which our vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.
 
Unless we set aside reserves or are able to borrow funds for vessel replacement, at the end of a vessel’s useful life our revenue will decline, which would adversely affect our business, results of operations and financial condition.
 
Unless we maintain reserves or are able to borrow or raise funds for vessel replacement we will be unable to replace the vessels in our fleet upon the expiration of their useful lives, which we expect to range from 25 years to 30 years, depending on the type of vessel. Our cash flows and income are dependent on the


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revenues earned by the chartering of our vessels to customers. If we are unable to replace the vessels in our fleet upon the expiration of their useful lives, our business, results of operations, financial condition and ability to pay dividends will be materially and adversely affected. Any reserves set aside for vessel replacement may not be available for dividends.
 
Because we will generate all of our revenues in U.S. dollars but will incur a portion of our expenses in other currencies, exchange rate fluctuations could have an adverse impact on our results of operations.
 
We will generate all of our revenues in U.S. dollars but we expect that portions of our future expenses will be incurred in currencies other than the U.S. dollar. This difference could lead to fluctuations in net income due to changes in the value of the dollar relative to the other currencies, in particular the Euro. Expenses incurred in foreign currencies against which the dollar falls in value can increase, decreasing our revenues. For example, during 2006, the value of the dollar declined by approximately 11% as compared to the Euro and declined approximately 1.8% further during the first six months of 2007. Further declines in the value of the dollar could lead to higher expenses payable by us.
 
Investment in derivative instruments such as freight forward agreements could result in losses.
 
From time to time in the future, we may take positions in derivative instruments including freight forward agreements, or FFAs. FFAs and other derivative instruments may be used to hedge a vessel owner’s exposure to the charter market by providing for the sale of a contracted charter rate along a specified route and period of time. Upon settlement, if the contracted charter rate is less than the average of the rates, as reported by an identified index, for the specified route and time period, the seller of the FFA is required to pay the buyer an amount equal to the difference between the contracted rate and the settlement rate, multiplied by the number of days in the specified period. Conversely, if the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum. If we take positions in FFAs or other derivative instruments and do not correctly anticipate charter rate movements over the specified route and time period, we could suffer losses in the settling or termination of the FFA. This could adversely affect our results of operation and cash flow.
 
We may not have adequate insurance to compensate us adequately for damage to, or loss of, our vessels.
 
We procure hull and machinery insurance, protection and indemnity insurance, which includes environmental damage and pollution insurance and war risk insurance for our fleet. We do not maintain insurance against loss of hire, which covers business interruptions that result in the loss of use of a vessel. We can give no assurance that we are adequately insured against all other risks. We may not be able to obtain adequate insurance coverage for our fleet in the future. Our insurance policies contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs. Moreover, we cannot assure that the insurers will not default on any claims they are required to pay. If our insurance is not enough to cover claims that may arise, we may not be able to repair any damage to our vessels or replace any vessel that is lost or may have to use our own funds for those purposes, thereby reducing our funds available to implement our business strategy.
 
We may have to pay tax on United States source income, which would reduce our earnings.
 
Under the United States Internal Revenue Code of 1986, or the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the applicable Treasury Regulations recently promulgated thereunder.
 
We expect that we and each of our subsidiaries qualify for this statutory tax exemption and we will take this position for United States federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption after the


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offering and thereby become subject to United States federal income tax on our United States source income. For example, there is a risk that we could no longer qualify for exemption under Code section 883 for a particular taxable year if “qualified shareholders” with a 5% or greater interest in our stock, as defined by the regulations to Code section 883, do not own sufficient shares in our closely held block of stock to preclude “nonqualified shareholders,” as defined by those same regulations, from owning 50 percent or more of the total value of the class of stock of which our closely-held block is a part for more than half the number of days during the taxable year. See, “Tax Considerations — United States Federal Income Taxation of Our Company — Exemption of Operating Income from United States Federal Income Taxation,” for more information regarding this exemption. Due to the factual nature of the issues involved, we can give no assurances on our tax-exempt status or that of any of our subsidiaries.
 
If we or our subsidiaries are not entitled to exemption under Section 883 for any taxable year, we or our subsidiaries could be subject for those years to an effective 4% U.S. federal income tax on the shipping income these companies derive during the year that are attributable to the transport of cargoes to or from the United States. The imposition of this taxation would have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders.
 
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. holders.
 
A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
 
Based on our proposed method of operation, we do not believe that we will be a PFIC with respect to any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income. Accordingly, we believe that our time chartering activities does not constitute “passive income,” and the assets that we own and operate in connection with the production of that income do not constitute passive assets.
 
There is, however, no direct legal authority under the PFIC rules addressing our proposed method of operation. Accordingly, no assurance can be given that the U.S. Internal Revenue Service, or IRS, or a court of law will accept our position, and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations.
 
If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders will face adverse U.S. tax consequences. Under the PFIC rules, unless those shareholders make an election available under the Code (which election could itself have adverse consequences for such shareholders, as discussed below under “Tax Considerations — United States Federal Income Taxation of U.S. Holders”), such shareholders would be liable to pay United States federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the shareholder’s holding period of our common shares. See “Tax Considerations — United States Federal Income Taxation of U.S. Holders” for a more comprehensive discussion of the U.S. federal income tax consequences to U.S. shareholders if we are treated as a PFIC.


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Offering-Specific Risk Factors
 
There may not be a liquid market for our common stock, which may cause our common stock to trade at lower prices and make it difficult to sell your common stock.
 
Although we have made application to list our shares on the NASDAQ Global Market, until now our shares have traded on the NASDAQ Capital Market and the trading volume has been low. We cannot predict at this time how actively our shares will trade in the public market or whether the price of our shares in the public market will reflect our actual financial performance
 
The market price of our common stock has been and may in the future be subject to significant fluctuations.
 
The market price of our common stock has been and may in the future be subject to significant fluctuations as a result of many factors, some of which are beyond our control. Among the factors that have in the past and could in the future affect our stock price are:
 
  •  quarterly variations in our results of operations;
 
  •  changes in sales or earnings estimates or publication of research reports by analysts;
 
  •  speculation in the press or investment community about our business or the shipping industry generally;
 
  •  changes in market valuations of similar companies and stock market price and volume fluctuations generally;
 
  •  strategic actions by us or our competitors such as acquisitions or restructurings;
 
  •  regulatory developments;
 
  •  additions or departures of key personnel;
 
  •  general market conditions; and
 
  •  domestic and international economic, market and currency factors unrelated to our performance.
 
The stock markets in general, and the markets for drybulk shipping and shipping stocks in general, have experienced extreme volatility that has sometimes been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
 
You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.
 
If you purchase common stock in this offering, you will pay more for your shares of common stock than the amounts paid on average by our existing shareholders for their shares. As a result, you will incur immediate and substantial dilution of $      per share, representing the difference between the public offering price and our pro forma as adjusted net tangible book value per share as of          , 2007, after giving effect to this offering. In addition, purchasers of our common stock from us in this offering will have contributed approximately     % of the aggregate price paid by all purchasers of our common stock from us, but will own only approximately     % of the shares outstanding after this offering. For more information, please see “Dilution.”
 
If holders of our warrants exercise their right to purchase shares of our common stock, you will experience immediate dilution.
 
As of the date of this prospectus, we have outstanding 200,000 Class A warrants issued to our initial shareholders, and 700,000 Class B warrants issued to FS Holdings Limited in connection with our Acquisition Debt Facilities. Of our publicly traded classes of warrants, we have outstanding as of the date of this prospectus 1,828,750 Class W warrants and 1,843,750 Class Z warrants. Each of these warrants is exercisable to purchase one share of our common stock at an exercise price of $5.00 per share, and our Class A, Class W


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and Class Z warrants must be exercised for cash. Our Class A warrants expire July 29, 2011, our Class B warrants expire on May 8, 2012 as to 275,000 shares and on June 22, 2012 as to 425,000 shares, our Class W warrants expire July 29, 2009, and our Class Z warrants expire July 29, 2011. As a result, if holders of our warrants exercise their right to purchase shares of our common stock, we may issue up to 4,572,500 additional shares of our common stock at $5.00 per share, which will cause you immediate dilution.
 
In addition, we are obligated under the unit purchase option sold to the lead underwriter in the initial public offering of our predecessor to issue up to an additional 410,000 shares of common stock. See “Description of Capital Stock — Underwriter’s Unit Purchase Option.”
 
Upon the consummation of this offering, two of our principal shareholders may effectively control the outcome of matters on which our shareholders are entitled to vote, including the election of directors and other significant corporate actions.
 
Two of our principal shareholders, The Mida’s Touch S.A. and FS Holdings Limited, controlled by Mr. Varouxakis and members of the Restis family, respectively, currently own (not including shares of common stock subject to options and warrants) approximately 65.6% of our outstanding common stock. Upon consummation of this offering they will own approximately     % of our outstanding common stock. While our principal shareholders have no agreement, arrangement or understanding relating to the voting of their shares, they may effectively control the outcome of matters on which our shareholders are entitled to vote, including the election of directors and other significant corporate actions. The interests of these shareholders may be different from your interests.
 
Future sales of our stock could cause the market price of our common stock to decline.
 
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, may depress the market price for our common stock. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future. We have registered for resale an aggregate of 840,834 shares of common stock beneficially owned by certain of our shareholders, 3,672,500 shares of our common stock issuable upon the exercise of our Class W and Class Z warrants (including 151,250 shares of FreeSeas common stock issuable upon exercise of Class W and Class Z warrants owned by certain shareholders), and 410,000 shares issuable upon the exercise of a unit purchase option held by the lead underwriter in the initial public offering of our predecessor.
 
We may issue additional shares of our stock in the future and our shareholders may elect to sell large numbers of shares held by them from time to time. Our amended and restated articles of incorporation authorize us to issue up to 40,000,000 shares of common stock and 5,000,000 shares of preferred stock, of which           shares of common stock will be outstanding immediately after this offering, assuming that the underwriters do not exercise their over-allotment option.
 
Because the Republic of the Marshall Islands, where we are incorporated, does not have a well-developed body of corporate law, shareholders may have fewer rights and protections than under typical United States law, such as Delaware, and shareholders may have difficulty in protecting their interest with regard to actions taken by our Board of Directors.
 
Our corporate affairs are governed by amended and restated articles of incorporation and by-laws and by the Marshall Islands Business Corporations Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Stockholder rights may differ as well. For example, under Marshall Islands law, a copy of the notice of any meeting of the shareholders must be given not less than 15 days before the meeting, whereas in Delaware such notice must be given not less than 10 days before the meeting. Therefore, if immediate shareholder action is required, a meeting may not be able to be convened as quickly as it can be convened under Delaware law. Also, under Marshall Islands law, any action required to be taken by a meeting of shareholders may only be


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taken without a meeting if consent is in writing and is signed by all of the shareholders entitled to vote, whereas under Delaware law action may be taken by consent if approved by the number of shareholders that would be required to approve such action at a meeting. Therefore, under Marshall Islands law, it may be more difficult for a company to take certain actions without a meeting even if a majority of the shareholders approve of such action. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, public shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction. For more information with respect to how stockholder rights under Marshall Islands law compare with stockholder rights under Delaware law, please read “Marshall Islands Company Considerations.”
 
It may not be possible for investors to enforce U.S. judgments against us.
 
We, and all our subsidiaries, are or will be incorporated in jurisdictions outside the U.S. and substantially all of our assets and those of our subsidiaries and will be located outside the U.S. In addition, most of our directors and officers are or will be non-residents of the U.S., and all or a substantial portion of the assets of these non-residents are or will be located outside the U.S. As a result, it may be difficult or impossible for U.S. investors to serve process within the U.S. upon us, our subsidiaries, or our directors and officers, or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or where our or the assets of our subsidiaries are located would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws or would enforce, in original actions, liabilities against us or our subsidiaries based on those laws.
 
Anti-takeover provisions in our organizational documents, and under Marshall Islands corporate law, could make it difficult for our shareholders to replace or remove our current board of directors or have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common stock.
 
Several provisions of our amended and restated articles of incorporation and by-laws, and certain provisions of the Marshall Islands corporate law, could make it difficult for our shareholders to change the composition of our board of directors in any one year, preventing them from changing the composition of management. In addition, these provisions may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable. These provisions include:
 
  •  authorizing our board of directors to issue “blank check” preferred stock without shareholder approval;
 
  •  providing for a classified board of directors with staggered, three year terms;
 
  •  prohibiting cumulative voting in the election of directors;
 
  •  authorizing the removal of directors only for cause and only upon the affirmative vote of the holders of a two-thirds majority of the outstanding shares of our common shares, voting as a single class, entitled to vote for the directors;
 
  •  limiting the persons who may call special meetings of shareholders;
 
  •  establishing advance notice requirements for election to our board of directors or proposing matters that can be acted on by shareholders at shareholder meetings; and
 
  •  limiting our ability to enter into business combination transactions with certain shareholders.
 
These anti-takeover provisions could substantially impede the ability of public shareholders to benefit from a change in control and, as a result, may adversely affect the market price of our common shares and your ability to realize any potential change of control premium.


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. These forward-looking statements include information about possible or assumed future results of our operations or our performance. Words such as “expects,” “intends,” “plans,” “believes,” “anticipates,” “estimates,” and variations of such words and similar expressions are intended to identify the forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding:
 
  •  our future operating or financial results;
 
  •  future, pending or recent acquisitions, business strategy, areas of possible expansion, and expected capital spending or operating expenses;
 
  •  drybulk shipping industry trends, including charter rates and factors affecting vessel supply and demand;
 
  •  our financial condition and liquidity, including our ability to obtain additional financing in the future to fund capital expenditures, acquisitions and other general corporate activities;
 
  •  availability of crew, number of off-hire days, drydocking requirements and insurance costs;
 
  •  our expectations about the availability of vessels to purchase or the useful lives of our vessels;
 
  •  our ability to leverage to our advantage our manager’s relationships and reputations in the drybulk shipping industry;
 
  •  changes in seaborne and other transportation patterns;
 
  •  changes in governmental rules and regulations or actions taken by regulatory authorities;
 
  •  potential liability from future litigation;
 
  •  global and regional political conditions;
 
  •  acts of terrorism and other hostilities; and
 
  •  other factors discussed in the section titled “Risk Factors.”
 
We undertake no obligation to publicly update or revise any forward-looking statements contained in this prospectus, or the documents to which we refer you in this prospectus, to reflect any change in our expectations with respect to such statements or any change in events, conditions or circumstances on which any statement is based.


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PRICE RANGE OF COMMON STOCK
 
Our common stock began trading on the NASDAQ Capital Market on December 16, 2005 under the trading symbol “FREE” upon completion of our merger with Trinity Partners Acquisition Company Inc. Our Class W and Class Z warrants also are traded on the NASDAQ Capital Market under the symbols “FREEW” and “FREEZ,” respectively. We are applying to have our common stock and warrants listed on the NASDAQ Global Market under the same symbols upon completion of this offering.
 
The closing high and low sales prices of our common stock as reported by the NASDAQ Capital Market, for the periods indicated, are as follows:
 
                 
For the Period:
  Low     High  
 
Year ended December 31, 2005(1)
  $ 5.33     $ 5.40  
Quarterly for 2005:
               
Fourth quarter(1)
  $ 5.33     $ 5.40  
Year ended December 31, 2006
  $ 2.62     $ 5.45  
Quarterly for 2006:
               
First quarter
  $ 4.50     $ 5.45  
Second quarter
  $ 3.65     $ 4.85  
Third quarter
  $ 3.70     $ 5.07  
Fourth quarter
  $ 2.62     $ 4.90  
Quarterly for 2007:
               
First quarter
  $ 2.76     $ 5.15  
Second quarter
  $ 4.55     $ 7.63  
Third quarter (through August 6, 2007)
  $ 7.42     $ 9.35  
Monthly for 2007:
               
January
  $ 2.76     $ 5.11  
February
  $ 4.53     $ 4.77  
March
  $ 4.40     $ 5.15  
April
  $ 4.55     $ 4.99  
May
  $ 4.75     $ 6.45  
June
  $ 6.09     $ 7.63  
July
  $ 7.42     $ 9.35  
August (through August 6, 2007)
  $ 8.30     $ 8.47  
 
 
(1) Includes the high and low information from December 16, 2005, the date on which our securities began trading on the NASDAQ Capital Market. Prior to our merger with Trinity, Trinity’s securities traded on the OTC Bulletin Board.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds of approximately $      million from this offering, assuming that the underwriters’ over-allotment option is not exercised and after deducting underwriting discounts and commissions and offering expenses, based on $      per share, which was the closing price of our common stock on          , 2007.
 
On May 1, 2007, we entered into memoranda of agreement pursuant to which we agreed to purchase four secondhand drybulk carriers, the M/V Free Hero, M/V Free Jupiter, M/V Free Iris and M/V Free Gentleman, from non-affiliated parties for a total purchase price of $114.0 million. In accordance with the memoranda of agreement, we provided deposits totaling $11.4 million to the respective sellers of the above four vessels. We obtained the funds for the deposits from a $5.5 million draw on the $14.0 million unsecured shareholder loan described below and $5.9 million from our cash on hand, primarily resulting from the sale of the M/V Free Fighter in April 2007. We anticipated financing the remaining $102.6 million of the purchase prices of the above vessels, due upon their respective deliveries, by utilizing the following: (i) up to $68.0 million in a senior secured loan from HSH Nordbank AG; (ii) up to $21.5 million in a junior loan from BTMU Capital Corporation, an affiliate of the Bank of Tokyo Mitsubishi; (iii) the remaining $8.5 million of the $14.0 million unsecured shareholder loan (which was drawn down on June 22, 2007 as discussed further under “Business — Loans for Vessels”) (we refer to these three borrowing arrangements as our “Acquisition Debt Facilities”); (iv) cash on hand from operations and (v) an overdraft credit facility of $4 million available from Hollandsche Bank — Unie N.V.
 
We took delivery of the M/V Free Hero on July 3, 2007 and we paid the $22.7 million remaining balance, net of the deposit paid, of the $25.25 million purchase price using $20.4 million from the above described senior and junior financing sources and $2.3 million from cash on hand. We expect to take delivery of the M/V Free Jupiter in August or September 2007. The purchase price for the M/V Free Jupiter is $47.0 million and we expect to utilize the above-described financing sources to pay the remaining $42.3 million balance of the purchase price due upon delivery.
 
Due to a dispute between third parties unrelated to us and the sellers of the M/V Free Gentleman and M/V Free Iris, which would have resulted in the vessels not being delivered as per the terms of their respective memoranda of agreement, we decided, in agreement with the sellers, to terminate those agreements on July 27, 2007, with immediate return of the full deposits for such vessels totaling $4.25 million. We intend to seek to replace the two undelivered vessels with alternative tonnage of similar profile and return characteristics in an effort to expand our fleet in the Handysize and/or Handymax segments. We intend to utilize our available cash and the remainder of our existing credit facilities as described above for any future near term acquisitions.
 
We currently intend to use the proceeds of this offering in conjunction with a $48.7 million loan from Credit Suisse to refinance the Acquisition Debt Facilities. The availability of this senior secured credit facility is contingent upon, among other things, execution of formal loan documents and credit committee approval. We intend to enter into this senior credit facility only if we successfully complete this offering. We also anticipate using the proceeds of this offering to repay any amount that may be outstanding at the time of completion of this offering under the $4.0 million overdraft facility from Hollandsche Bank — Unie N.V. and the $1.9 million outstanding balance under pre-existing shareholder loans used to finance the acquisition of our original three vessels. We currently intend to use any remaining proceeds from this offering for general corporate purposes, including owners’ equity contributions for additional vessel acquisitions. See “Business — Loans for Vessels.”
 
If we do not purchase the M/V Free Jupiter, we may use the proceeds of this offering to purchase other vessels or for general corporate purposes. In particular, certain events may arise that could result in us not taking delivery of the M/V Free Jupiter, such as its total loss, a constructive total loss, or if it suffers substantial damage prior to its delivery.
 
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Business — Loans for Vessels” for more information about our Acquisition Debt Facilities and our other borrowings.


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DIVIDEND POLICY
 
Declaration and payment of any dividend is subject to the discretion of our board of directors. The timing and amount of dividend payments will be dependent upon our earnings, financial condition, cash requirements and availability, restrictions in our loan agreements, the provisions of applicable law affecting the payment of distributions to shareholders, and other factors. Our board of directors will specifically consider our available cash flow from operations during the previous quarter, less cash expenses for that quarter (primarily vessel operating expenses and interest expense) and any reserves our board of directors determines we should maintain for reinvestment in our business before declaring a quarterly dividend to our shareholders. These reserves may cover, among other things, dry docking, intermediate and special surveys, liabilities and other obligations, interest expense and debt amortization, acquisitions of additional assets and working capital. Further, we cannot assure you that, after the expiration or earlier termination of our charters, we will have any sources of income from which dividends may be paid.


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CAPITALIZATION
 
The following table sets forth our consolidated capitalization as of March 31, 2007:
 
  •  on a historical basis without any adjustment to reflect subsequent events;
 
  •  as adjusted to reflect certain changes in our debt outstanding as of July 31, 2007; and
 
  •  on an as further adjusted basis for the sale of          shares at an assumed offering price of $      per share, the last reported closing price of our common stock on          , 2007, net of underwriters’ discounts and commissions, offering expenses, and after receipt and application of net proceeds together with the new secured credit facility from Credit Suisse. See “Business — Loans for Vessels.”
 
Other than servicing the current portion of long-term-debt with quarterly payments totaling $500,000, and as set forth in the “As Adjusted” column, there have been no material changes in our capitalization between March 31, 2007 and the date of this prospectus. Current portion of long term debt” in the “As Adjusted” column represents the current portion of the existing debt as of March 31, 2007; in the “As Further Adjusted” column, part of the proceeds of the offering will be used to repay a portion of the debt outstanding as of March 31, 2007.
 
                         
                As Further
 
    Actual     As Adjusted     Adjusted(4)  
    (Unaudited; dollars in thousands)  
 
Debt:
                       
Shareholders’ loans, current portion(1)
  $ 2,324     $ 1,864 (1)        
Shareholders’ loans, net of current portion(1)
          14,000 (1)(2)        
Long-term debt, current portion
    3,260       8,715 (3)        
Long-term debt, net of current portion
    6,540       16,185 (3)        
                         
Total debt
  $ 12,124     $ 40,764          
Shareholders’ equity:
                       
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued
                   
Common stock, $0.001 par value; 40,000,000 shares authorized; 6,290,100 and           shares issued and outstanding, actual and as adjusted
    6       6          
Additional paid-in capital
    9,722       9,722          
Accumulated deficit
    (1,789 )     (1,789 )        
                         
Total shareholders’ equity
  $ 7,939     $ 7,939     $        
                         
Total capitalization
  $ 20,063     $ 48,703     $  
                         
 
 
(1) Shareholders’ loans are unsecured and unguaranteed as of July 31, 2007.
 
(2) Reflects the draws on May 8, 2007 of $5.5 million and on June 22, 2007 of $8.5 million of our $14.0 million loan from one of our principal shareholders outstanding as of July 31, 2007. See “Prospectus Summary — Recent Developments.”


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(3) Reflects our borrowings of $20.4 million under our senior and junior financing sources to pay the remaining balance of purchase price due upon delivery of the M/V Free Hero, the repayment of $4.8 million of debt related to the sale of the M/V Free Fighter and quarterly effected debt service of $0.5 million relative to the M/V Free Destiny and M/V Free Envoy as of July 31, 2007. See “Prospectus Summary — Recent Developments.”
 
(4) Each $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and the estimated expenses payable by us. Also assumes the underwriters do not exercise their over-allotment option. The as further adjusted information is illustrative only, and following the completion of this offering, our capitalization will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
 
As of March 31, 2007, we had $0.64 million in cash and cash equivalents and on an “as further adjusted” basis cash and cash equivalents are $      million excluding restricted cash.


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DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. Dilution results from the fact that the per-share offering price of the common stock is greater than the net tangible book value per share for the common stock outstanding before this offering.
 
At March 31, 2007, we had net tangible book value of $7.9 million, or $1.26 per share. After giving effect to the issuance of           shares of common stock as part of this offering at an offering price of $      per share, the pro forma net tangible book value at March 31, 2007 would have been $      million or $      per share. This represents an immediate appreciation in net tangible book value of $      per share to existing shareholders and an immediate dilution of net tangible book value of $      per share to new investors. The following table illustrates the pro forma per share dilution and appreciation at March 31, 2007:
 
         
Offering price per share in this offering
  $  
         
Net tangible book value per share as of March 31, 2007
  $ 1.26  
         
Increase in net tangible book value attributable to new investors in this offering
  $  
         
Pro forma net tangible book value per share after giving effect to this offering
  $  
         
Dilution per share to the new investors(1)
  $  
         
 
 
(1) Each $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) our as adjusted net tangible book value by $      million, or $      per share, and the dilution in net tangible book value per share to investors in this offering by $      per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and the estimated expenses payable by us. The information in the table above is illustrative only, and following the completion of this offering, our capitalization will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
 
Net tangible book value per share of our common stock is determined by dividing our tangible net worth, which consists of tangible assets less liabilities, by the number of shares of our common stock outstanding. Dilution is determined by subtracting the net tangible book value per share of common stock after this offering from the public offering price per share. Dilution per share to new investors would be $   if the underwriters exercise in full their over-allotment option.
 
The following table summarizes, on a pro forma basis as of March 31, 2007, the differences between the number of shares of common stock acquired from us, the total amount paid and the average price per share paid by the existing holders of shares of common stock and by the investors in this offering based upon the share price of $      per share as per the closing price on          , 2007.
 
                                         
    Pro Forma Shares
    Total
    Average
 
    Outstanding     Consideration     Price per
 
    Number     Percentage     Amount     Percentage     Share  
 
Existing shareholders
    6,290,100               9,722,105             $ 1.55  
New investors
                                       
Total
                                       
 
Each $1.00 increase (decrease) in the assumed public offering price of $      per share would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by $ million and $      million, respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. The information in the table above is illustrative only, and following the completion of this offering, will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.


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If the underwriters exercise their over-allotment option in full, the following will occur:
 
  •  the pro forma percentage of shares of our common stock held by existing stockholders will decrease to approximately     % of the total number of pro forma shares of our common stock outstanding after this offering; and
 
  •  the number of shares of our common stock held by new investors will increase to          , or approximately     % of the total number of shares of our common stock outstanding after this offering.
 
The information in the table above excludes:
 
A. up to 250,000 shares reserved for issuance upon the exercise of stock options currently outstanding (of which, as of March 31, 2007, options to purchase 166,667 shares had vested), which have an exercise price of $5.00 per share and expire on December 16, 2010, and up to 1,250,000 shares issuable upon the exercise of stock options that may be granted in the future under our stock incentive plan;
 
B. 4,572,500 shares of common stock reserved for issuance upon the exercise of outstanding warrants as follows:
 
  •  200,000 Class A warrants held by our initial shareholders exercisable at $5.00 per share and expiring July 29, 2011;
 
  •  700,000 Class B warrants held by FS Holdings Limited exercisable at $5.00 per share of which 275,000 expire on May 8, 2012 and 425,000 expire on June 22, 2012;
 
  •  1,828,750 Class W warrants exercisable at $5.00 per share and expiring July 29, 2009;
 
  •  1,843,750 Class Z warrants exercisable at $5.00 per share and expiring July 29, 2011; and
 
C. 410,000 shares of common stock reserved for issuance upon the exercise of the unit purchase option sold to the lead underwriter in the initial public offering of our predecessor, which unit purchase option expires July 29, 2009, as follows:
 
  •  25,000 shares of common stock included in the 12,500 Series A units purchasable upon exercise of the unit purchase option, at an exercise price of $17.325 per Series A unit;
 
  •  62,500 shares of common stock issuable upon exercise of 62,500 Class W warrants included in the 12,500 Series A units;
 
  •  62,500 shares of common stock issuable upon exercise of 62,500 Class Z warrants included in the 12,500 Series A units;
 
  •  130,000 shares of common stock included in the 65,000 Series B units purchasable upon exercise of the unit purchase option, at an exercise price of $16.665 per Series B unit;
 
  •  65,000 shares of common stock issuable upon exercise of 65,000 Class W warrants included in the 65,000 Series B units; and
 
  •  65,000 shares of common stock issuable upon exercise of 65,000 Class Z warrants included in the 65,000 Series B units; and
 
D. shares that may be issued pursuant to the underwriters’ over-allotment option.
 
Assuming all outstanding stock options, all outstanding warrants and the unit purchase option sold to the lead underwriter in the initial public offering of our predecessor (and all warrants subject to such unit purchase option) were exercised for cash, we would receive proceeds (net of all fees, underwriting discounts and commissions) of $26,687,288.


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To the extent that any options or warrants are exercised or new options or shares of common stock are issued under our 2005 stock incentive plan, there will be further dilution to investors in this offering.
 
The following table assumes the exercise of all options and warrants outstanding as of March 31, 2007:
 
                                         
                            Average
 
    Shares Purchased     Total Consideration     Price per
 
    Number     Percentage     Amount     Percentage     Share  
 
Existing shareholders
    6,290,100             $ 9,722,105             $ 1.55  
Shares subject to options and warrants(1)
    5,232,500             $ 26,687,288             $ 5.10  
New investors
                                       
Total
                                       
 
 
(1) Includes an aggregate of 700,000 warrants issued on May 8, 2007 and June 22, 2007.


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SELECTED HISTORICAL FINANCIAL INFORMATION
AND OTHER DATA
 
The following selected historical financial information and other data were derived from our audited consolidated financial statements for the years ended December 31, 2004 (from inception), 2005 and 2006 and our unaudited consolidated financial statements for the three months ended March 31, 2006 and 2007 included elsewhere in this prospectus. The information is only a summary and should be read in conjunction with our historical consolidated financial statements and related notes included in this prospectus and the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The historical data included below and elsewhere in this prospectus are not necessarily indicative of our future performance.
 
All amounts in the tables below are in thousands of U.S. dollars, except for share data, fleet data and average daily results.
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Statement of Operations Data:
                                       
Operating revenues
  $ 2,830     $ 10,326     $ 11,727     $ 2,444     $ 4,268  
Commissions
    (127 )     (553 )     (799 )     (165 )     (257 )
Voyage expenses
    (16 )     (55 )     (689 )     (637 )     (2 )
Vessel operating expenses (exclusive of depreciation and amortization expenses shown separately below)
    (786 )     (3,596 )     (4,483 )     (1,032 )     (1,414 )
Depreciation expense
    (872 )     (3,553 )     (4,479 )     (1,140 )     (812 )
Amortization of deferred dry docking and special survey costs
    (109 )     (355 )     (442 )     (110 )     (195 )
Management fees to a related party
    (180 )     (488 )     (540 )     (135 )     (135 )
Compensation costs
          (200 )     (651 )     (163 )     (25 )
General and administrative expenses
    (34 )     (321 )     (1,925 )     (432 )     (342 )
Finance costs
    (240 )     (1,076 )     (1,004 )     (245 )     (219 )
Interest income
    4       8       19       11        
Other
          15       (58 )     (51 )     46  
Net income (loss) for period
    470       152       (3,324 )     (1,655 )     913  
Earnings Per Share Data:
                                       
Net income (loss) per share:
                                       
Basic earnings (loss) per share
  $ 0.10     $ 0.03     $ (0.53 )   $ (0.26 )   $ 0.15  
Diluted earnings (loss) per share
  $ 0.10     $ 0.03     $ (0.53 )   $ (0.26 )   $ 0.15  
Weighted average number of shares:
                                       
Basic weighted average number of shares
    4,500,000       4,574,588       6,290,100       6,290,100       6,290,100  
Diluted weighted average number of shares
    4,500,000       4,600,444       6,290,100       6,290,100       6,290,100  
 


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    December 31,     March 31,        
    2004     2005     2006     2007        
 
Balance Sheet Data:
                                       
Total current assets
  $ 1,443     $ 5,286     $ 1,417     $ 2,398          
Fixed assets, net
    16,188       23,848       19,369       18,557          
Total assets
    18,335       29,840       23,086       23,043          
Total current liabilities, including current portion of long-term debt
    4,971       10,231       10,260       8,564          
Long-term debt, including shareholder’s loans, net of current portion
    9,978       9,750       5,819       6,540          
Total liabilities
    14,949       20,135       16,079       15,104          
Total shareholders’ equity
    3,386       9,705       7,007       7,939          
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
PERFORMANCE INDICATORS   2004     2005     2006     2006     2007  
 
EBITDA (1)
  $ 1,687     $ 5,128     $ 2,582     $ (171 )   $ 2,139  
Fleet Data:
                                       
Average number of vessels (2)
    0.67       2.55       3.00       3.00       3.00  
Ownership days (3)
    244       931       1,095       270       270  
Available days (4)
    244       931       1,005       270       270  
Operating days (5)
    244       893       941       270       258  
Fleet utilization (6)
    100 %     96 %     86 %     100 %     96 %
Average Daily Results:
                                       
Average TCE rate (7)
  $ 11,012     $ 10,882     $ 10,881     $ 6,081     $ 15,539  
Vessel operating expenses (8)
    3,221       3,863       4,094       3,822       5,237  
Management fees (9)
    738       524       493       500       500  
General and administrative expenses (10)
    139       345       2,046       1,600       1,326  
Total vessel operating expenses (11)
  $ 3,959     $ 4,387     $ 4,587     $ 4,322     $ 5,737  
 
 
(1) We consider EBITDA to represent net earnings before interest, taxes, depreciation and amortization. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by United States generally accepted accounting principles, or U.S. GAAP, and our calculation of EBITDA may not be comparable to that reported by other companies. EBITDA is included herein because it is an alternative measure of our liquidity, performance and indebtedness.
 
EBITDA reconciliation to net income:
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Net income (loss)
  $ 470     $ 152     $ (3,324 )   $ (1,655 )   $ 913  
Depreciation and amortization
    981       3,908       4,921       1,250       1,007  
Interest and finance cost
  $ 236     $ 1,068     $ 985     $ 234     $ 219  
                                         
EBITDA
  $ 1,687     $ 5,128     $ 2,582     $ (171 )   $ 2,139  
                                         
 
(2) Average number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our fleet during the period divided by the number of calendar days in the period.

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(3) Ownership days are the total number of days in a period during which the vessels in our fleet have been owned by us. Ownership days are an indicator of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during a period.
 
(4) Available days are the number of ownership days less the aggregate number of days that our vessels are off-hire due to major repairs, dry dockings or special or intermediate surveys. The shipping industry uses available days to measure the number of ownership days in a period during which vessels should be capable of generating revenues.
 
(5) Operating days are the number of available days less the aggregate number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues.
 
(6) We calculate fleet utilization by dividing the number of our fleet’s operating days during a period by the number of ownership days during the period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons such as scheduled repairs, vessel upgrades, or dry dockings or other surveys.
 
(7) Time charter equivalent, or TCE, is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE is consistent with industry standards and is determined by dividing operating revenues (net of voyage expenses) by operating days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract. TCE is a standard shipping industry performance measure used primarily to compare period-to-period changes in a shipping company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed between the periods:
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Operating revenues
  $ 2,830     $ 10,326     $ 11,727     $ 2,444     $ 4,268  
Voyage expenses and commissions
    (143 )     (608 )     (1,488 )     (802 )     (259 )
Net operating revenues
  $ 2,687     $ 9,718     $ 10,239     $ 1,642     $ 4,009  
Available days
    244       893       941       270       258  
Time charter equivalent rates
  $ 11,012     $ 10,882     $ 10,881     $ 6,081     $ 15,539  
 
(8) Average daily vessel operating expenses, which includes crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, is calculated by dividing vessel operating expenses by ownership days for the relevant time periods:
 
                                         
    From Inception
                         
    (April 23,
                         
    2004) to
    Year Ended
    Three Months Ended
 
    December 31,
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Vessel operating expenses
  $ 786     $ 3,596     $ 4,483     $ 1,032     $ 1,414  
Ownership days
    244       931       1,095       270       270  
Daily vessel operating expense
  $ 3,221     $ 3,863     $ 4,094     $ 3,822     $ 5,237  
 
(9) Daily management fees are calculated by dividing total management fees by ownership days for the relevant time period.
 
(10) Average daily general and administrative expenses are calculated by dividing general and administrative expenses by operating days for the relevant period.
 
(11) Total vessel operating expenses, or TVOE, is a measurement of our total expenses associated with operating our vessels. TVOE is the sum of vessel operating expense and management fees. Daily TVOE is calculated by dividing TVOE by fleet ownership days for the relevant time period.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis should be read in conjunction with our historical consolidated financial statements and accompanying notes included elsewhere in this prospectus. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus.
 
General
 
We are a shipping company that currently operates three vessels in the drybulk shipping market through our wholly owned subsidiaries. We were formed on April 23, 2004 under the name “Adventure Holdings S.A.” pursuant to the laws of the Republic of the Marshall Islands to serve as the parent holding company of the ship-owning entities. On April 27, 2005, we changed our name to “FreeSeas Inc.”
 
On December 15, 2005, we completed a merger with Trinity Partners Acquisition Company Inc., a blank check corporation organized under the laws of the State of Delaware. Under the terms of the merger, we were the surviving corporation. Each outstanding share of Trinity’s common stock and Class B common stock was converted into the right to receive an equal number of shares of our common stock, and each Trinity Class W warrant and Class Z warrant was converted into the right to receive an equal number of our Class W warrants and Class Z warrants.
 
Our common stock, Class W warrants and Class Z warrants began trading on the NASDAQ Capital Market on December 16, 2005 under the trading symbols FREE, FREEW and FREEZ, respectively. As a result of the merger, Trinity’s former securities, including the Trinity Class A Units and the Class B Units, ceased trading on the OTC Bulletin Board.
 
The operations of our vessels are managed by Free Bulkers, an affiliated Marshall Islands corporation. Free Bulkers provides us with a wide range of shipping services at a fee per vessel. These services include technical management, such as managing day-to-day vessel operations including supervising the crewing, supplying, maintaining and dry docking of vessels, commercial management regarding identifying suitable vessel charter opportunities, and certain accounting services. Free Bulkers has entered into an agreement with Safbulk, a company controlled by one of our affiliates, for the commercial management of our fleet.
 
Through the quarter ended March 31, 2007, our fleet consisted of three Handysize vessels that carried a variety of drybulk commodities, including coal, iron ore, and grains, or major bulks, as well as bauxite, phosphate, fertilizers and steel products, or minor bulks. We sold one of our vessels, the M/V Free Fighter, on April 27, 2007 for $11,075,000. As of the date of this prospectus, our fleet consisted of the following vessels:
 
             
Owner
 
Date of Incorporation
 
Name
 
Date of Acquisition
 
Adventure Two S.A. 
  February 5, 2004(1)    Free Destiny   August 3, 2004
Adventure Three S.A. 
  February 5, 2004(1)   Free Envoy   September 20, 2004
Adventure Six S.A. 
  April 30, 2007(2)   Free Hero   July 3, 2007
 
 
(1) These ship-owning entities were formed by our initial shareholders to acquire the vessels, and are now our wholly owned subsidiaries. See “Business — Our History.”
 
(2) This ship-owning entity is our wholly owned subsidiary.
 
Recent Developments
 
On April 27, 2007, we sold the M/V Free Fighter for $11,075,000 and repaid $2,330,000 on Advance A and $2,470,000 on Advance B of the loans with First Business Bank using proceeds from the sale of that vessel to make these payments.


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On May 1, 2007, we entered into memoranda of agreement pursuant to which we agreed to purchase four secondhand drybulk carriers, the M/V Free Hero, M/V Free Jupiter, M/V Free Iris and M/V Free Gentleman, from non-affiliated parties for a total purchase price of $114.0 million. In accordance with the memoranda of agreement, we provided deposits totaling $11.4 million to the respective sellers of the above four vessels. We obtained the funds for the deposits from a $5.5 million draw on the $14.0 million unsecured shareholder loan described below and $5.9 million from our cash on hand, primarily resulting from the sale of the M/V Free Fighter in April 2007. We anticipated financing the remaining $102.6 million of the purchase prices of the above vessels, due upon their respective deliveries, by utilizing the following: (i) up to $68.0 million in a senior secured loan from HSH Nordbank AG; (ii) up to $21.5 million in a junior loan from BTMU Capital Corporation, an affiliate of the Bank of Tokyo Mitsubishi; (iii) the remaining $8.5 million of the $14.0 million unsecured shareholder loan (which was drawn down on June 22, 2007 as discussed further below); (iv) cash on hand from operations and (v) an overdraft credit facility of $4 million available from Hollandsche Bank — Unie N.V.
 
We took delivery of the M/V Free Hero on July 3, 2007 and we paid the $22.7 million remaining balance, net of the deposit paid, of the $25.25 million purchase price using $20.4 million from the above described senior and junior financing sources and $2.3 million from cash on hand. The vessel is currently subject to a $14,500 per day time charter expiring in December 2008, with a charterer’s option for extension until February 2009. We expect to take delivery of the M/V Free Jupiter in August or September 2007. The purchase price for the M/V Free Jupiter is $47.0 million and we expect to utilize the above-described financing sources to pay the remaining $42.3 million balance of the purchase price due upon delivery.
 
The M/V Free Destiny and M/V Free Envoy have a combined carrying capacity of 51,000 dwt, a combined book value of $10.3 million, and an average age of 24 years. As a result of the acquisition of the M/V Free Hero and the M/V Free Jupiter, which we expect to be delivered in August or September 2007, we will increase the aggregate dwt of our fleet to approximately 123,000 dwt, increase the aggregate book value of our fleet to $82.6 million, and reduce the average age of our fleet to 16 years.
 
Due to a dispute between third parties unrelated to us and the sellers of the M/V Free Gentleman and M/V Free Iris, which would have resulted in the vessels not being delivered as per the terms of their respective memoranda of agreement, we decided, in agreement with the sellers, to terminate those agreements on July 27, 2007, with immediate return of the full deposits for such vessels totaling $4.25 million. We intend to seek to replace the two undelivered vessels with alternative tonnage of similar profile and return characteristics in an effort to expand our fleet in the Handysize/Handymax segment. We intend to utilize our available cash and the remainder of our existing credit facilities as described above for any future near term acquisitions.
 
The following table details the vessels acquired and to be acquired.
 
                                     
Name
 
Class
  DWT     Built    
Flag
  Purchase Price   Delivery Date  
Employment
 
Free Jupiter
  Handymax     47,777       2002     Marshall Islands   $47.00 million(1)   Aug/Sept 2007   3-year time charter through September 2010 at $32,000 per day for first year, $28,000 per day for second year, and $24,000 per day for third year
Free Hero
  Handysize     24,318       1995     Marshall Islands   $25.25 million(1)   Delivered
July 3, 2007
  Currently fixed to 2-year time charter through Dec 08/Feb 09 at $14,500 per day


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(1) The purchase price for each of the M/V Free Hero and the M/V Free Jupiter was specifically negotiated for each vessel based on its particular attributes (i.e., based on factors including the vessel’s age, builder, configuration and condition).
 
The $14.0 million loan from one of our principal shareholders was signed on May 7, 2007 and accrues interest on the outstanding principal balance at the annual rate of 12.0%, payable upon maturity of the loan. The loan is due at the earlier of (i) May 7, 2009, (ii) the date of a “Capital Event,” which is defined as any event in which we raise gross proceeds of not less than $40 million in an offering of our common stock or other equity securities or securities convertible into or exchangeable for our equity securities, or (iii) the date of acceleration of the amounts due under the note. Additionally, we agreed to issue to that shareholder, for every $1.0 million drawn under the loan, 50,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share. On May 8, 2007, we drew down $5.5 million from the shareholder loan in connection with the deposits to be posted under the memoranda of agreement for the acquisition of the vessels. On June 22, 2007, we drew down the remaining $8.5 million from the shareholder loan in anticipation of taking delivery of the M/V Free Gentleman, which delivery, however, was never completed as discussed above. We have issued the shareholder 700,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share in connection with the two draw downs described above.
 
Acquisition of Vessels
 
From time to time as opportunities arise, we intend to acquire additional secondhand drybulk carriers. We recently accepted delivery of the M/V Free Hero and are currently under contract to acquire the M/V Free Jupiter, as described above under “Recent Developments.” Vessels are generally acquired free of charter. The M/V Free Hero, was acquired subject to a novation, or assumption, of its existing charter, and the M/V Free Jupiter is being acquired free of charter. If no charter is in place when a vessel is acquired, we usually enter into a new charter contract. The shipping industry uses income days (also referred to as “voyage” or “operating” days) to measure the number of days in a period during which vessels actually generate revenues.
 
Consistent with shipping industry practice, we treat the acquisition of a vessel (whether acquired with or without a charter) as the acquisition of an asset rather than a business. When we acquire a vessel, we conduct, also consistent with shipping industry practice, an inspection of the physical condition of the vessel, unless practical considerations do not allow such an inspection. We also examine the vessel’s classification society records. We do not obtain any historical operating data for the vessel from the seller. We do not consider that information material to our decision on acquiring the vessel.
 
Most vessels are sold pursuant to a standard agreement that, among other things, provides the buyer with the right to inspect the vessel and the vessel’s classification society records. The standard agreement does not give the buyer the right to inspect the historical operating data of the vessel.
 
Prior to the delivery of a purchased vessel, the seller typically removes from the vessel all records and log books, including past financial records and accounts related to the vessel. Upon the change in ownership, the technical management agreement between the seller’s technical manager and the seller is automatically terminated and the vessel’s trading certificates are revoked by its flag state, in the event buyer determines to change the vessel’s flag state.
 
It is rare in the shipping industry for the last charterer of a vessel from a seller to continue as the first charterer of the vessel from the buyer. Where a vessel has been under a voyage charter, the seller delivers the vessel free of charter to the buyer. When a vessel is under time charter and the buyer wishes to assume that charter, the buyer cannot acquire the vessel without the charterer’s consent and an agreement between the buyer and the charterer for the buyer to assume the charter. The purchase of a vessel does not in itself transfer the charter because the charter is a separate service agreement between the former vessel owner and the charterer.


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When we acquire a vessel and want to assume or renegotiate a related time charter, we must take the following steps:
 
  •  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.
 
Our business comprises the following primary components:
 
  •  Employment and operation of our drybulk carriers; and
 
  •  Management of the financial, general and administrative elements involved in the ownership and operation of our drybulk vessels.
 
The employment and operation of our vessels involve the following activities:
 
  •  Vessel maintenance and repair;
 
  •  Planning and undergoing dry docking, special surveys and other major repairs;
 
  •  Organizing and undergoing regular classification society surveys;
 
  •  Crew selection and training;
 
  •  Vessel spares and stores supply;
 
  •  Vessel bunkering;
 
  •  Contingency response planning;
 
  •  Onboard safety procedures auditing;
 
  •  Accounting;
 
  •  Vessel insurance arrangement;
 
  •  Vessel chartering;
 
  •  Vessel hire management; and
 
  •  Vessel performance monitoring.
 
Important Factors Affecting Our Results of Operations
 
We believe that the important measures for analyzing trends in the results of our operations consist of the following:
 
  •  Ownership days.  We define ownership days as the total number of calendar days in a period during which each vessel in the fleet was owned by us. Ownership days are an indicator of the size of the fleet over a period and affect both the amount of revenues and the amount of expenses that we record during that period.


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  •  Available days.  We define available days as the number of ownership days net of off-hire days associated with scheduled dry dockings or special and/or intermediate surveys and the aggregate number of days that is spent positioning the vessels. The shipping industry uses available days to measure the number of days in a period during which vessels are actually able to generate revenues.
 
  •  Operating days.  Operating days are the number of available days in a period less the aggregate number of days that vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues.
 
  •  Fleet utilization.  We will calculate fleet utilization by dividing the number of operating days during a period by the number of ownership days during that period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for any reason including scheduled repairs, vessel upgrades, dry dockings or special or intermediate surveys.
 
  •  Off-hire.  The period a vessel is unable to perform the services for which it is required under a charter. Off-hire periods typically include days spent undergoing repairs and dry docking, whether or not scheduled.
 
  •  Time charter.  A time charter is a contract for the use of a vessel for a specific period of time during which the charterer pays substantially all of the voyage expenses, including port costs, canal charges and bunkers expenses. The vessel owner pays the vessel operating expenses, which include crew wages, insurance, technical maintenance costs, spares stores and supplies and commissions on gross voyage revenues. Time charter rates are usually fixed during the term of the charter. Prevailing time charter rates do fluctuate on a seasonal and year-to-year basis and may be substantially higher or lower from a prior time charter agreement when the subject vessel is seeking to renew the time charter agreement with the existing charterer or enter into a new time charter agreement with another charterer. Fluctuation in time charter rates are influenced by changes in spot charter rates.
 
  •  Voyage charter.  A voyage charter is an agreement to charter the vessel for an agreed per-ton amount of freight from specified loading port(s) to specified discharge ports. In contrast to a time charter, the vessel owner is required to pay substantially all of the voyage expenses, including port costs, canal charges and bunkers expenses, in addition to the vessel operating expenses.
 
  •  Time charter equivalent (TCE).  The time charter equivalent equals voyage revenues minus voyage expenses divided by the number of operating days during the relevant time period, including the trip to the loading port. TCE is a standard seaborne transportation industry performance measure used primarily to compare period-to-period changes in a seaborne transportation company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed during a specific period.
 
See “Selected Historical Financial Information and Other Data — Performance Indicators” for a quantitative analysis of how we are performing against these measures.
 
Revenues
 
Our revenues are driven primarily by the number of vessels in our fleet, the number of operating days during which our vessels generate revenues, and the amount of daily charter hire that our vessels earn under charters. These, in turn, are affected by a number of factors, including the following:
 
  •  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;


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  •  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.
 
A voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed-upon total amount. Under voyage charters, we pay voyage expenses such as port, canal and fuel costs. A time charter trip and a period time charter or period charter are generally contracts to charter a vessel for a fixed period of time at a set daily rate. Under time charters, the charterer pays voyage expenses. Under both types of charters, we pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs. We are also responsible for each vessel’s dry docking and intermediate and special survey costs.
 
Vessels operating on period time charters provide more predictable cash flows, but can yield lower profit margins than vessels operating in the spot charter market for single trips during periods characterized by favorable market conditions. We previously addressed this risk while also taking advantage of increases in profitability in the drybulk market generally by negotiating profit sharing arrangements in each of our period time charters, which provide for potential revenues above the fixed time charter rates. We may enter into profit-sharing arrangements in the future, if available. We have also addressed this risk by arranging a mix of spot and short-term period charters, and in the future may consider a mix of spot and medium- to long-term period charter business.
 
Vessels operating in the spot charter market generate revenues that are less predictable, but may enable us to capture increased profit margins during periods of improvements in drybulk rates. We would also be exposed to the risk of declining drybulk rates, however, which may have a materially adverse impact on our financial performance. If we fix vessels on period time charters and are not able to negotiate profit sharing arrangements, future spot market rates may be higher or lower than those rates at which we have period time chartered our vessels. We will evaluate our opportunities to employ our vessels on spot or period time charters, depending on whether we can obtain contract terms that satisfy our criteria.
 
A standard maritime industry performance measure is the “daily time charter equivalent” or “daily TCE.” Daily TCE revenues are voyage revenues minus voyage expenses divided by the number of operating days during the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage and that would otherwise be paid by a charterer under a time charter. We believe that the daily TCE neutralizes the variability created by unique costs associated with particular voyages or the employment of drybulk carriers on time charter or on the spot market and presents a more accurate representation of the revenues generated by our drybulk carriers. Our average daily TCE rate for 2004, 2005, and 2006 was $11,012, $10,882 and $10,881, respectively, and our average daily TCE rate for the first quarters of 2006 and 2007 were $6,081 and $15,539, respectively.
 
We negotiated a 25% profit-sharing arrangement in each of the time charters for the M/V Free Envoy through September 2005 and the M/V Free Destiny through October 2005 in which we received 25% of the net amount generated by the charterer over the base rate that the charterer paid to us. Payment to us of our share of the profits has occurred at the end of a voyage. Actual and final figures were computed, and any adjustments in the payments made, occurred within 30 days of vessel redelivery. During the periods ended December 31, 2004, 2005 and 2006, we earned $295,000, $769,800 and $0, respectively, from the profit sharing arrangements. The profit-sharing arrangements did not impose any monetary or non-monetary obligation upon us. We did not enter into any profit-sharing arrangements during fiscal 2006.
 
Vessel Operating Expenses
 
Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the costs of spares and consumable stores, tonnage taxes and other miscellaneous


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expenses. Our vessel operating expenses, which generally represent fixed costs, will increase if we increase the number of vessels in our fleet. Some of these expenses are beyond our control, such as insurance costs and the cost of spares.
 
Depreciation
 
During the period from April 23, 2004 (date of inception) to December 31, 2004 and the years ended December 31, 2005 and 2006, we depreciated our drybulk carriers on a straight-line basis over their estimated useful lives, which we currently estimate to be 27 years from the date of their initial delivery from the shipyard for financial statement purposes. Commencing during the three months ended March 31, 2007, we changed the estimate useful life for the M/V Free Fighter to 30 years. See “— Liquidity and Capital Resources” for a discussion of the factors affecting the actual useful lives of our drybulk carriers. Depreciation is based on cost less the estimated residual value. We capitalize the total costs associated with a dry docking and amortize these costs on a straight-line basis over the period before the next dry docking becomes due, which is typically 24 to 36 months. Regulations or incidents may change the estimated dates of future dry dockings.
 
Seasonality
 
Coal, iron ore and grains, which are the major bulks of the drybulk shipping industry, are somewhat seasonal in nature. The energy markets primarily affect the demand for coal, with increases during hot summer periods when air conditioning and refrigeration require more electricity and towards the end of the calendar year in anticipation of the forthcoming winter period. The demand for iron ore tends to decline in the summer months because many of the major steel users, such as automobile makers, reduce their level of production significantly during the summer holidays. Grains are completely seasonal as they are driven by the harvest within a climate zone. Because three of the five largest grain producers (the United States of America, Canada and the European Union) are located in the northern hemisphere and the other two (Argentina and Australia) are located in the southern hemisphere, harvests occur throughout the year and grains require drybulk shipping accordingly.
 
Principal Factors Affecting Our Business
 
The principal factors that affect our financial position, results of operations and cash flows include the following:
 
  •  Number of vessels owned and operated;
 
  •  Charter market rates, which approached new historical record high levels in May 2007, and periods of charter hire;
 
  •  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;
 
  •  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.


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Consolidated Statements of Income
 
(All amounts in tables in thousands of United States dollars, except for share data)
 
                 
    For the Three Months Ended  
    March 31,
    March 31,
 
    2007     2006  
 
Operating revenues
  $ 4,268     $ 2,444  
OPERATING EXPENSES:
               
Vessel operating expenses
    (1,414 )     (1,032 )
Voyage expense
    (2 )     (637 )
Depreciation expense
    (812 )     (1,140 )
Amortization of deferred dry docking and special survey costs
    (195 )     (110 )
Management fees to a related party
    (135 )     (135 )
Commissions
    (257 )     (165 )
Compensation costs
    (25 )     (163 )
General and administrative expenses
    (342 )     (432 )
                 
Income (loss) from operations
  $ 1,086     $ (1,370 )
OTHER INCOME (EXPENSE):
               
Finance costs
  $ (219 )   $ (245 )
Interest income
          11  
Other
    46       (51 )
                 
Other expense
  $ (173 )   $ (285 )
                 
Net income (loss)
  $ 913     $ (1,655 )
                 
 
Results of Operations
 
Three months ended March 31, 2007 as compared to three months ended March 31, 2006
 
REVENUES — Operating revenues for the three months ended March 31, 2007 were $4,268,000, an increase of $1,824,000 compared to $2,444,000 in operating revenues for the three months ended March 31, 2006. Revenues increased primarily as a result of increased charter rates achieved in the drybulk market during the three months ended March 31, 2007, reaching a daily TCE rate of $15,539 as compared to $6,081 during the period ended March 31, 2006.
 
OPERATING EXPENSES — Vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, totaled $1,414,000 in the three months ended March 31, 2007 as compared to $1,032,000 in the three months ended March 31, 2006. The comparative incremental expense of $382,000 includes approximately $230,000 associated with two unscheduled repairs during February 2007, causing expenses beyond normal operation and maintenance costs (i.e., main engine turbocharger of M/V Free Envoy; main generator of M/V Free Destiny) and approximately $90,000 for larger than normal lubricant and stores quantities on M/V Free Fighter for re-entering the market after undergoing dry docking and general survey (October through December 2006). Consequently, the daily vessel operating expenses per vessel, including the management fees paid to our affiliate, Free Bulkers, were $5,737 for the three months ended March 31, 2007, as compared to $4,322 for the three months ended March 31, 2006, an increase of 32.7%.
 
VOYAGE EXPENSES — Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra insurance and various expenses, were only $2,000 (expenses related to a cargo survey at owners’ expense) for the three months ended March 31, 2007 as compared to $637,000 for the three months ended March 31, 2006, since there were no voyage charters during the three months ended March 31, 2007.


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DEPRECIATION AND AMORTIZATION — For the three months ended March 31, 2007, depreciation expense totaled $812,000, as compared to $1,140,000 for the same period in 2006. The decrease in depreciation expense resulted primarily from the change of the estimated useful life of M/V Free Fighter to 30 years from 27 years, based on management’s re-evaluation of the useful life following the vessel’s regularly scheduled fifth special and docking surveys. For the three months ended March 31, 2007, amortization of dry dockings, special survey costs and amortization of financing costs totaled $212,000 as compared to $127,000 for the three months ended March 31, 2006. The increase in amortization expenses resulted primarily from the timing of dry docking and special survey costs for the M/V Free Fighter that were completed at the end of 2006.
 
MANAGEMENT FEES — Management fees for each of the three months ended March 31, 2007 and March 31, 2006 totaled $135,000. Management fees are paid to our affiliate, Free Bulkers, for the technical management of our vessels and for certain accounting services related to the vessels’ operations. Pursuant to the management agreements related to each of our current vessels, we pay Free Bulkers a monthly management fee of $15,000 per vessel. In addition, we reimburse at cost the travel and other personnel expenses of the Free Bulkers staff, including the per diem paid by Free Bulkers, when Free Bulkers’ employees are required to attend our vessels at port. These agreements have no specified termination date. We anticipate that Free Bulkers would manage any additional vessels that we may acquire in the future on comparable terms. We believe that the management fees paid to Free Bulkers are comparable to those charged by unaffiliated management companies.
 
COMMISSIONS AND GENERAL AND ADMINISTRATIVE EXPENSES — Commissions paid during the three months ended March 31, 2007 totaled $257,000, compared to $165,000 for the three months ended March 31, 2006. The commission fees represent commissions paid to Free Bulkers and unaffiliated third parties. Commissions paid to Free Bulkers equal 1.25% of freight or hire collected from the employment of our vessels. Free Bulkers has entered into a commercial sub-management agreement with Safbulk, an affiliate of FS Holdings Limited, one of our principal shareholders, pursuant to which Safbulk has agreed to perform charter and post charter management services for our fleet. Free Bulkers has agreed to pay Safbulk a fee equal to 1.25% of freight or hire collected from the employment of our vessels. The increase of $92,000 is directly related to the increase of operating revenues in the respective periods. General and administrative expenses, which included, among other things, international safety code compliance expenses, travel expenses and communications expenses, totaled $342,000 for the three months ended March 31, 2007 as compared to $432,000 for the three months ended March 31, 2006. Our general and administrative expenses decreased by 21% primarily due to our cost reduction efforts.
 
COMPENSATION COST — For the three months ended March 31, 2007, compensation cost totaled $25,000, as compared to $163,000 for three months ended March 31, 2006. Compensation costs reflect non-cash, equity based compensation of our executive officers. The decrease is primarily a result of the departure of two of our executive officers in January 2007.
 
FINANCING COSTS — Financing costs for the three months ended March 31, 2007 were $219,000 as compared to $245,000 for the three months ended March 31, 2006. Our financing costs represent the fees incurred and interest paid in connection with the bank loans for our vessels. The decrease in financing costs resulted primarily from reduction of outstanding debt due to the partial repayment of our bank loans.
 
NET (LOSS)/INCOME — Net income for the three months ended March 31, 2007 was $913,409 as compared to net loss of $1,655,000 for the three months ended March 31, 2006. The net income for the three months ended March 31, 2007 resulted primarily from increased charter rates, decreased general and administrative expenses, decreased depreciation and amortization expense due to our decision during the three months ended March 31, 2007 to change M/V Free Fighter’s estimated useful life from 27 to 30 years. Additionally, there was a decrease in compensation cost of $138,000 for the three months ended March 31, 2007 as compared to the same period in 2006.


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Year Ended December 31, 2006 (“fiscal 2006”) as compared to year ended December 31, 2005 (“fiscal 2005”)
 
Consolidated Statements of Income
 
(All amounts in tables in thousands of United States dollars, except for share data)
 
                 
    For the Year Ended
    For the Year Ended
 
    December 31, 2006     December 31, 2005  
 
OPERATING REVENUES
  $ 11,727     $ 10,326  
OPERATING EXPENSES :
               
Vessel operating expenses
    (4,483 )     (3,596 )
Voyage expenses
    (689 )     (55 )
Depreciation expense
    (4,479 )     (3,553 )
Amortization of deferred dry docking and special survey costs
    (442 )     (355 )
Management fees to a related party
    (540 )     (488 )
Commissions
    (799 )     (553 )
Compensation costs
    (651 )     (200 )
General and administrative expenses
    (1,925 )     (321 )
                 
(Loss) Income from operations
    (2,281 )     1,205  
OTHER INCOME (EXPENSE):
               
Finance costs
    (1,004 )     (1,076 )
Interest income
    19       8  
Other
    (58 )     15  
                 
Other expense
    (1,043 )     (1,053 )
Net (loss) income
    (3,324 )     152  
                 
Basic (loss) earnings per share
  $ (0.53 )   $ 0.03  
Diluted (loss) earnings per share
  $ (0.53 )   $ 0.03  
Basic weighted average number of shares
    6,290,100       4,574,588  
Diluted weighted average number of shares
    6,290,100       4,600,444  
 
REVENUES — Operating revenues for fiscal 2006 were $11,727,000, an increase of $1,401,000 from $10,326,000 in operating revenues for fiscal 2005. Included herein, revenues representing the profit-sharing portion of our charters were $0 for fiscal 2006 as compared to $769,800 in revenues representing the profit-sharing portion of our charters for fiscal 2005. We are no longer entering into profit-sharing arrangements with charterers. Revenues increased primarily as a result of an increase in voyage revenue relating to the M/V Free Fighter which was in service for 12 months in fiscal 2006 as compared to five months in fiscal 2005 offset by a decrease in operating revenue from the M/V Free Destiny resulting from a decrease in the number of days the vessel was available due to its dry docking.
 
VESSEL OPERATING EXPENSES — Vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, totaled $4,483,000 in fiscal 2006 as compared to $3,596,000 for fiscal 2005. The increase in vessel operating expenses primarily reflects the operation of the M/V Free Fighter for a full 12 months during fiscal 2006 as compared to five months during fiscal 2005. The daily vessel operating expenses, including the management fees paid to our affiliate, Free Bulkers, per vessel were $4,587 for fiscal 2006, an increase of 4.5% as compared to $4,387 for fiscal 2005.
 
VOYAGE EXPENSES — Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra insurance and various expenses, were $689,000 for fiscal year 2006 as compared to $55,000 in fiscal 2005. Voyage expenses increased primarily as a result of a voyage carried out by the M/V Free Fighter during the first and second quarter of 2006.


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DEPRECIATION AND AMORTIZATION — For fiscal 2006, depreciation expense totaled $4,479,000, as compared to $3,553,000 for fiscal 2005. The increase in depreciation expense resulted primarily from the depreciation of the M/V Free Fighter for a full year. For fiscal 2006 amortization of dry dockings and special survey costs totaled $442,000 as compared to $355,000 in fiscal 2005. The increase in amortization expenses resulted primarily from the dry docking of the M/V Free Envoy in June 2006.
 
MANAGEMENT FEES — Management fees for fiscal 2006 totaled $540,000, an increase of $52,000 from the management fees of $488,000 in fiscal 2005. The management fees increased as a result of the operation of the M/V Free Fighter for 12 months in fiscal 2006 as compared to five months in fiscal 2005. Management fees are paid to our affiliate, Free Bulkers, for the management of our vessels. Pursuant to the management agreements related to each of our current vessels, we pay Free Bulkers a monthly management fee of $15,000 per vessel. We have also agreed to pay Free Bulkers a fee equal to 1.25% of freight or hire collected from the employment of our vessels and a 1% commission on the purchase price of any new vessels acquired or the sales price of any vessel sold by us with the assistance of Free Bulkers. Free Bulkers has entered into a sub-management agreement with Safbulk, an affiliate of FS Holdings, one of our principal shareholders, pursuant to which Safbulk has agreed to perform charter and post charter management services for our fleet. Free Bulkers has agreed to pay Safbulk 1.25% of freight or hire collected from the employment of our vessels. In addition, we reimburse at cost the travel and other personnel expenses of the Free Bulkers staff, including the per diem paid by Free Bulkers to its staff, when they are required to attend our vessels at port. These agreements have no specified termination date. We anticipate that Free Bulkers would manage any additional vessels that we may acquire in the future on comparable terms. We believe that the management fees paid to Free Bulkers are comparable to those charged by unaffiliated management companies.
 
COMMISSIONS AND GENERAL AND ADMINISTRATIVE EXPENSES — Commissions paid during fiscal 2006 totaled $799,000, compared to the fiscal 2005 total of $553,000. The commission fees paid in fiscal 2006 and 2005 represented commissions paid to Free Bulkers and unaffiliated third parties. Our commissions paid increase primarily as a result of increased operations of the M/V Free Fighter, which we acquired in June 2005. General and administrative expenses, which included, among other things, international safety code compliance expenses, travel expenses and communications expenses, totaled $1,925,000 in fiscal 2006 as compared to $321,000 in fiscal 2005. Our general and administrative expenses increased primarily as a result of an increase in salaries, legal fees, accounting and auditing fees, director and officer insurance costs and other fees and expenses relating to being a public company for the full fiscal year as compared to 15 days in fiscal 2005 as well as the write off as bad debt of certain charter hire due in 2005 relating to certain profit-sharing arrangements and not yet collected and the write-off of approximately $234,000 in fiscal 2006 relating to expenses and legal and advisory fees incurred in connection with a convertible debt offering that was not consummated.
 
COMPENSATION COST — For fiscal 2006, compensation cost totaled $651,000, as compared to $200,000 for fiscal 2005. The compensation cost for fiscal 2005 reflected $20,000 of cash compensation due, but not paid as of December 31, 2005, to our executive officers under their employment agreements from the agreements’ effective date, December 15, 2005, through the end of 2005. The remaining $180,000 reflects non-cash, stock-based compensation awarded to our executive officers pursuant to their employment agreements. Compensation costs for fiscal 2006 reflect equity based compensation to our executive officers. The significant increase is primarily a result of the adoption of Statement of Financial Accounting Standards No. 123R for the recognition of stock-based compensation.
 
FINANCING COSTS — Our financing costs for fiscal 2006 were $1,004,000 as compared to $1,076,000 for fiscal 2005. Our financing costs represent the fees incurred and interest paid in connection with the bank loans for our vessels. The decrease resulted primarily from the partial repayment of our bank loans.
 
NET (LOSS)/INCOME — Net loss for fiscal 2006 was $3,324,000 as compared to net income of $152,000 for fiscal 2005. The net loss for fiscal 2006 resulted primarily from decreases in charter revenue earned during the first six months of fiscal 2006, increases in voyage operating expenses and depreciation resulting from the operation of the M/V Free Fighter for a full 12 months in 2006 as compared to five months in 2005 and the


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increase in general and administrative expenses resulting from operating as a public company for a full 12 months in 2006 as compared to 15 days in 2005.
 
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”)
 
Consolidated Statements of Income
 
(All amounts in tables in thousands of United States dollars, except for share data)
 
                 
          For the Period from
 
    For the Year
    Date of Inception
 
    Ended
    (April 23, 2004) to
 
    December 31,
    December 31,
 
    2005     2004  
 
OPERATING REVENUES
    10,326       2,830  
OPERATING EXPENSES:
               
Vessel operating expenses
    (3,596 )     (786 )
Voyage expenses
    (55 )     (16 )
Depreciation expense
    (3,553 )     (872 )
Amortization of deferred dry docking and special survey costs
    (355 )     (109 )
Management fees to a related party
    (488 )     (180 )
Commissions
    (553 )     (127 )
Compensation costs
    (200 )      
General and administrative expenses
    (321 )     (34 )
                 
(Loss) Income from operations
    1,205       706  
OTHER INCOME (EXPENSE):
               
Finance costs
    (1,076 )     (240 )
Interest income
    8       4  
Other
    15          
                 
Other expense
    (1,053 )     (236 )
                 
Net (loss) income
    152       470  
                 
Basic (loss) earnings per share
  $ 0.03     $ 0.10  
Diluted (loss) earnings per share
  $ 0.03     $ 0.10  
Basic weighted average number of shares
    4,574,588       4,500,000  
Diluted weighted average number of shares
    4,600,444       4,500,000  
 
REVENUES — Operating revenues for fiscal 2005 were $10,326,000, an increase of $7,496,000 or 265% from $2,830,000 in operating revenues for fiscal 2004. Included herein, revenues representing the profit-sharing portion of our charters were $769,800 for fiscal 2005, an increase of 161%, from the $295,000 in revenues representing the profit sharing portion of our charters for fiscal 2004. The increase in operating revenues and revenues representing the profit-sharing portion of our charters is primarily a result of the operations of the M/V Free Destiny and the M/V Free Envoy for the entire 2005 year and the addition of the M/V Free Fighter to our fleet in mid-2005.
 
VESSEL OPERATING EXPENSES — Vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, totaled $3,596,000 in fiscal 2005 as compared to $786,000 for fiscal 2004. The daily vessel operating expenses, including the management fees paid to our affiliate, Free Bulkers, per vessel were $4,387 for fiscal 2005, an increase of 10.8% over the $3,959 daily vessel operating expenses for fiscal 2004. The increase in vessel operating expenses primarily reflects the operation of the M/V Free Destiny and the M/V Free Envoy for a full 12 months in fiscal 2005 as compared to four and three months in fiscal 2004, respectively. This increase also reflects the start-up costs,


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such as expenses relating to the upgrade of the vessel’s engines, generators and safety equipment, associated with the purchase of and subsequent improvement consistent with our standards, of the M/V Free Fighter.
 
VOYAGE EXPENSES — Voyage expenses, which include bunkers, cargo expense, port expenses, port agency fees, tugs, extra insurance and various expenses, were $55,000 for fiscal 2005 as compared to $16,000 in fiscal 2004. Voyage expenses increased primarily as a result of the operation of the M/V Free Destiny and M/V Free Envoy for a full 12 months in 2005 as compared to four and three months in 2004, respectively, and the addition of the M/V Free Fighter in 2005.
 
DEPRECIATION AND AMORTIZATION — For fiscal 2005, depreciation expense totaled $3,553,000, as compared to $872,000 for fiscal 2004. The increase in depreciation expense resulted primarily from our vessels being in service for a full 12 months in fiscal 2005 as compared to four and three months, for the M/V Free Destiny and the M/V Free Envoy, respectively, in fiscal 2004 and the addition of a third vessel to our fleet. The increase was partially offset by an increase in the residual value of each vessel from $150 per ton to $250 per ton beginning on July 1, 2005. For fiscal 2005 amortization of dry dockings and special survey costs totaled $355,000, an increase of 226% from $109,000 in fiscal 2004. The increase in amortization expense resulted primarily from vessels being in service for additional days and the addition of a third vessel to our fleet.
 
MANAGEMENT FEES — Management fees for fiscal 2005 totaled $488,000, an increase of $308,000 from the management fees of $180,000 in fiscal 2004. Management fees are paid to our affiliate, Free Bulkers, for the management of our vessels. Pursuant to the management agreements related to each of our current vessels, we pay Free Bulkers a monthly management fee of $15,000 per vessel. We have also agreed to pay Free Bulkers a fee equal to 1.25% of freight or hire collected from the employment of our vessels and a 1% commission on the gross purchase price of any new vessels acquired or the sales price of any vessel sold by us with the assistance of Free Bulkers. Free Bulkers has entered into a sub-management agreement with Safbulk, an affiliate of FS Holdings, one of our principal shareholders, pursuant to which Safbulk has agreed to perform charter and post charter management services for our fleet. Free Bulkers has agreed to pay Safbulk 1.25% of freight or hire collected from the employment of our vessels. In addition, we reimburse at cost the travel and other personnel expenses of the Free Bulkers staff, including the per diem paid by Free Bulkers to its staff, when they are required to attend our vessels at port. These agreements have no specified termination date. We anticipate that Free Bulkers would manage any additional vessels that we may acquire in the future on comparable terms. We believe that the management fees paid to Free Bulkers are comparable to those charged by unaffiliated management companies. Free Bulkers has entered into an agreement with Safbulk, an affiliate of one of our principal shareholders, and has subcontracted to Safbulk the commercial management of our vessels. Free Bulkers is responsible for paying Safbulk’s corresponding fees.
 
COMMISSIONS AND GENERAL AND ADMINISTRATIVE EXPENSES — Commissions paid during fiscal 2005 totaled $553,000, an increase of $426,000 from the fiscal 2004 total of $127,000. The commission fees in 2005 represented commissions paid to unaffiliated third parties and to Free Bulkers. The commission fees paid in fiscal 2004 were chartering commissions paid to unaffiliated third parties in connection with the chartering of our vessels. Our commissions paid increased primarily as a result of the increase in our charter revenue, which reflected that our vessels were in service additional days and that we acquired a third vessel for our fleet. General and administrative expenses, which included, among other things, safety code compliance expenses, travel expenses and communications expenses, totaled $321,000 in fiscal 2005 as compared to $34,000 in fiscal 2004. Our general and administrative expenses increased primarily as a result of the increase in our legal, accounting and investor relations expenses associated with our becoming a publicly traded company.
 
COMPENSATION COST — For fiscal 2005, compensation cost totaled $200,000, as compared to $0 for fiscal 2004. The compensation cost reflects $20,000 of cash compensation due, but not yet paid, to our executive officers under their employment agreements from the agreements’ effective date, December 15, 2005, through the end of 2005. The remaining $180,000 reflects non-cash, stock-based compensation awarded to our executive officers pursuant to their employment agreements.


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Prior to the closing of the merger with Trinity in December 2005, we did not have any employees. Free Bulkers, as our ship manager, was responsible for performing all services relating to the operations of our vessels.
 
FINANCING COSTS — Our financing costs for fiscal 2005, were $1,076,000, as compared to $240,000 for fiscal 2004. Our financing costs represent the fees incurred and interest paid in connection with the bank loans for our vessels. The increase in financing costs resulted primarily from the payment of interest for 12 months on the loans on the M/V Free Destiny and the M/V Free Envoy, as compared to payment of interest for only four and three months, respectively, in fiscal 2004, the additional financing cost associated with the loan obtained to purchase the M/V Free Fighter in fiscal 2005, and the financing cost associated with the refinancing of the original loan on the M/V Free Destiny.
 
NET INCOME — Net income for fiscal 2005 was $152,000 as compared to $470,000 for fiscal 2004. Net income decreased primarily as a result of the additional expenses involved in operating two of our vessels for a full 12 months in fiscal 2005 as compared to three and four months, respectively, in fiscal 2004 as well as the addition of a new vessel in fiscal 2005. The increase in expenses was partially offset by an increase in revenue resulting from an increase in the number of available days in fiscal 2005.
 
Liquidity and Capital Resources
 
Our principal sources of funds have been equity provided by our shareholders, operating cash flows and long-term borrowings. Our principal use of funds has been capital expenditures to acquire and maintain our fleet, comply with international shipping standards and environmental laws and regulations, fund working capital requirements and make principal repayments on outstanding loan facilities. We expect to rely upon operating cash flows, long-term borrowings, and the working capital available to us, as well as possible future equity financings, to implement our growth plan. In addition, to the extent that the options and warrants currently issued are subsequently exercised, the proceeds from these exercises would provide us with additional funds.
 
Based on current market conditions, we believe that our current cash balance as well as operating cash flows will be sufficient to meet our liquidity needs for our existing vessels for the next 18 months, as well as the additional vessel we are currently under contract to purchase (as described above under “— Recent Developments”).
 
On April 27, 2007, we sold the M/V Free Fighter for $11,075,000 and repaid $2,330,000 on Advance A and $2,470,000 on Advance B of the loans with First Business Bank using proceeds from the sale of that vessel to make these payments.
 
On May 1, 2007, we entered into memoranda of agreement pursuant to which we agreed to purchase four secondhand drybulk carriers, the M/V Free Hero, M/V Free Jupiter, M/V Free Iris and M/V Free Gentleman, from non-affiliated parties for a total purchase price of $114.0 million. In accordance with the memoranda of agreement, we provided deposits totaling $11.4 million to the respective sellers of the above four vessels. We obtained the funds for the deposits from a $5.5 million draw on the $14.0 million unsecured shareholder loan described below and $5.9 million from our cash on hand, primarily resulting from the sale of the M/V Free Fighter in April 2007. We anticipated financing the remaining $102.6 million of the purchase prices of the above vessels, due upon their respective deliveries, by utilizing the following: (i) up to $68.0 million in a senior secured loan from HSH Nordbank AG; (ii) up to $21.5 million in a junior loan from BTMU Capital Corporation, an affiliate of the Bank of Tokyo Mitsubishi; (iii) the remaining $8.5 million of the $14.0 million unsecured shareholder loan (which was drawn down on June 22, 2007 as discussed further below); (iv) cash on hand from operations and (v) an overdraft credit facility of $4 million available from Hollandsche Bank — Unie N.V.
 
We took delivery of the M/V Free Hero on July 3, 2007 and we paid the $22.7 million remaining balance, net of the deposit paid, of the $25.25 million purchase price using $20.4 million from the above described senior and junior financing sources and $2.3 million from cash on hand. The vessel is currently subject to a $14,500 per day time charter expiring in December 2008, with a charterer’s option for extension


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until February 2009. We expect to take delivery of the M/V Free Jupiter in August or September 2007. The purchase price for the M/V Free Jupiter is $47.0 million and we expect to utilize the above-described financing sources to pay the remaining $42.3 million balance of the purchase price due upon delivery.
 
Due to a dispute between third parties unrelated to us and the sellers of the M/V Free Gentleman and M/V Free Iris, which would have resulted in the vessels not being delivered as per the terms of their respective memoranda of agreement, we decided, in agreement with the sellers, to terminate those agreements on July 27, 2007, with immediate return of the full deposits for such vessels totaling $4.25 million. We intend to seek to replace the two undelivered vessels with alternative tonnage of similar profile and return characteristics in an effort to expand our fleet in the Handysize/Handymax segment. We intend to utilize our available cash and the remainder of our existing credit facilities as described above for any future near term acquisitions.
 
The $14.0 million loan from one of our principal shareholders was signed on May 7, 2007 and accrues interest on the outstanding principal balance at the annual rate of 12.0%, payable upon maturity of the loan. The loan is due at the earlier of (i) May 7, 2009, (ii) the date of a “Capital Event,” which is defined as any event in which we raise gross proceeds of not less than $40 million in an offering of our common stock or other equity securities or securities convertible into or exchangeable for our equity securities, or (iii) the date of acceleration of the amounts due under the note. Additionally, we agreed to issue to that shareholder, for every $1.0 million drawn under the loan, 50,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share. On May 8, 2007, we drew down $5.5 million from the shareholder loan in connection with the deposits to be posted under the memoranda of agreement for the acquisition of the vessels. On June 22, 2007, we drew down the remaining $8.5 million from the shareholder loan in anticipation of taking delivery of the M/V Free Gentleman, which delivery, however, was never completed as discussed above. We have issued the shareholder 700,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share in connection with the two draw downs described above.
 
We have obtained an offer letter for a senior secured credit facility from Credit Suisse, the lead underwriter of this offering, in the aggregate amount of $87.0 million, consisting of a $48.7 million loan to refinance our Acquisition Debt Facilities and a $38.3 million facility for the purchase of additional vessels. The availability of this facility is contingent upon, among other things, the execution of formal loan documents and credit committee approval. We intend to enter into this senior credit facility only if we successfully complete this offering. See “Use of Proceeds” and “Business — Loans for Vessels.”
 
If we do acquire additional vessels in the future beyond the near-term acquisitions we seek to complete, then we will rely on funds drawn from our existing or new debt facilities, our working capital, proceeds from possible future equity offerings, and revenues from operations to meet our liquidity needs going forward.
 
The M/V Free Destiny, the M/V Free Envoy and the M/V Free Fighter, the three Handysize drybulk carriers we owned during fiscal 2006, were 24, 22, and 24 years old, respectively. For financial statement purposes, we used an estimated useful life of 27 years for each vessel. However, economics, rather than a set number of years, determines the actual useful life of a vessel. As a vessel ages, the maintenance costs rise particularly with respect to the cost of surveys. So long as the revenue generated by the vessel sufficiently exceeds its maintenance costs, the vessel will remain in use. If the revenue generated or expected future revenue does not sufficiently exceed the maintenance costs, or if the maintenance costs exceed the revenue generated or expected future revenue, then the vessel owner usually sells the vessel for scrap.
 
The next special survey of the M/V Free Destiny is scheduled to occur in the third quarter of 2007, when the vessel will be 25 years old. The next special survey of the M/V Free Envoy is scheduled to occur at the end of August 2008, when the vessel is 24 years old. If those special surveys do not require us to make extensive capital outlays to keep the vessels operating, then the M/V Free Destiny and M/V Free Envoy should continue in use for approximately two and one-half years after their respective special surveys. The M/V Free Fighter underwent her regularly scheduled fifth special and docking surveys in November and December 2006. Based on the fifth special and docking surveys, conducted during the three months ended March 31, 2007, the estimated useful life of the M/V Free Fighter was changed to 30 years.


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Our business is capital intensive and our future success will depend on our ability to maintain a high-quality fleet through the timely acquisition of additional vessels and the possible sale of selected vessels. These acquisitions will be principally subject to management’s expectation of future market conditions as well as our ability to acquire drybulk carriers on favorable terms.
 
Cash Flows
 
OPERATING ACTIVITIES — Net cash from operating activities totaled $1,078,000 during fiscal 2006 as compared to $5,724,000 in fiscal 2005 and $1,246,000 in fiscal 2004. The decrease in net cash from operating activities resulted primarily from a decrease in charter revenue during the first quarter of 2006 resulting from a weaker charter market and the M/V Free Fighter being out of service for its special survey and an increase in drydocking and special survey cost and general and administrative expenses resulting from being a public reporting company. Net cash from operating activities increased by $1,291,000 for the three months ended March 31, 2007 compared to the three months ended March 31, 2006. This increase is primarily the result of an increase in net income.
 
INVESTING ACTIVITIES — We did not use any cash in investing activities during fiscal 2006, as compared to $10,813,000 for fiscal 2005 and $17,460,000 for fiscal 2004. We used cash in investing activities during fiscal 2005 and fiscal 2004 to purchase vessels. We did not use any cash in investing activities during the three months ended March 31, 2007 and 2006, respectively.
 
FINANCING ACTIVITIES — Net cash used in financing activities in fiscal 2006 was $3,991,000, which primarily reflects payments of $8,250,000 of long-term debt offset by the proceeds of borrowings and the movement of a bank overdraft of $4,330,000. Net cash provided by financing activities in fiscal 2005 was $7,913,000, which primarily reflects borrowings of $14,916,000 from unaffiliated banks and shareholders and $5,901,000 from the issuance of common stock offset by the repayment of $12,266,000 of borrowings. Net cash provided by financing activities in fiscal 2004 was $16,675,000, which primarily reflects borrowings of $14,675,000 from unaffiliated banks and shareholders, $2,966,000 in shareholder contributions and $600,000 in shareholder advances offset by the repayment of $1,418,000 of borrowings. Net cash used in financing activities during the three months ended March 31, 2007 was $280,000 compared to $2,008,000 for the three months ended March 31, 2006. The net cash used in financing activities during the three months ended March 31, 2007 includes $2,000,000 in short term debt payments, $500,000 in long term debt payments and quarterly $250,000 payments against shareholders’ loans. In January 2007, we drew down Advance B of $2,470,000 from our loan with First Business Bank. Both Advance A and Advance B of the respective loans were subsequently fully repaid on April 27, 2007 from the proceeds of the sale of the M/V Free Fighter.
 
Capital Requirements
 
On May 1, 2007, we, through our wholly owned subsidiaries, entered into memoranda of agreement to acquire the M/V Free Hero and the M/V Free Jupiter. We took delivery of the M/V Free Hero on July 3, 2007 and we expect to take delivery of the M/V Free Jupiter in August or September 2007.
 
These vessels will be acquired for a total price of $72.25 million from non-affiliated parties. The acquisition of the vessels will be financed through a combination of bank debt available for this purpose, a shareholder loan and our available cash on hand. Please see “— Recent Developments,” “— Liquidity and Capital Resources” and “Business — Loans for Vessels” for more information about these pending acquisitions and the related financing.
 
Long-Term Debt
 
Our subsidiaries have obtained financing from unaffiliated lenders for their vessels.
 
Adventure Two owns the M/V Free Destiny subject to a mortgage securing a loan in the original principal amount of $3,700,000 from Hollandsche Bank — Unie N.V. The loan bears interest at 1.95% above LIBOR, matures in 2008, and is payable in eight quarterly installments of $75,000 each beginning December 27, 2005, followed by one quarterly installment of $100,000, two quarterly installments of $500,000 each, and a balloon


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payment of $2,000,000 in 2008. The loan is secured by a first preferred mortgage on the vessel, our guarantee of $500,000 of the principal amount plus interest and costs, joint and several liability of Adventure Three, and pledges of (1) the rights and earnings under time charter contracts present or future, (2) rights under insurance policies and (3) goods and documents of title that may come into the bank’s possession for the benefit of Adventure Two.
 
Adventure Three owns the M/V Free Envoy subject to a mortgage securing a loan in the original principal amount of $6,000,000 from Hollandsche Bank — Unie N.V. The loan was amended in September 2005, pursuant to which the interest was reduced to 1.95% above LIBOR. The loan matures in December 2007, and is payable in 12 quarterly installments of $425,000 each commencing December 2005 with a balloon payment of $900,000 at final maturity. The loan is secured by a first preferred mortgage on the vessel, our guarantee of $500,000 of the principal amount plus interest and costs and pledges of (1) the rights and earnings under time charter contracts present or future, (2) rights under insurance policies and (3) goods and documents of title that may come into the bank’s possession for the benefit of Adventure Three. In June 2006, we borrowed an additional $2,000,000 from Hollandsche Bank — Unie N.V., which amounts were also secured by the M/V Free Envoy and were used to pay principal and interest due to Egnatia Bank, S.A. under its loan to Adventure Four. On January 12, 2007, the additional $2,000,000 borrowed from Hollandsche Bank — Unie N.V. was paid off from the proceeds of a loan from First Business Bank, S.A. to Adventure Four described below.
 
Adventure Four owned the M/V Free Fighter subject to a mortgage securing a loan in the original principal amount of $4,800,000 from First Business Bank. The loan bared interest at the rate of LIBOR plus 2% and was payable in twelve quarterly installments of $315,000 each, with the first payment due in April 2007, and a balloon payment of $1,020,000 payable along with the last installment. This loan was secured by the vessel, an assignment of income from the vessel, our corporate guarantee and a letter of undertaking from Free Bulkers. The loan from First Business Bank was repaid in April 2007 in connection with the sale of the M/V Free Fighter.
 
Each of the loan agreements also includes affirmative and negative covenants of Adventure Two, Adventure Three and Adventure Four, as applicable, such as maintenance of operating accounts, minimum cash deposits and minimum market values. Adventure Two, Adventure Three and Adventure Four are further restricted under their respective loan agreements from incurring additional indebtedness, changing the vessels’ flags and distributing earnings without the prior written consent of the lenders.
 
We also had outstanding, as of March 31, 2007, two interest-free loans from our former principal shareholders with an aggregate principal balance, net of discount which results from accounting for the loans at their fair value, of $2,324,000, the proceeds of which were used to acquire our vessels. These loans were modified in April 2005 and October 2005 to provide for a repayment schedule for each loan of eight equal quarterly installments of $125,000 each in 2006 and 2007, commencing on March 31, 2006, with balloon payments of the balance due on each loan on January 1, 2008. Additionally, the amended terms provide that the loans will become immediately due and payable in the event that we raise additional capital of at least $12,500,000. We currently intend to use a portion of the net proceeds of this offering to repay the remaining principal balance of these loans. Before these modifications, the loans were repayable from time to time based on our available cash flow, and matured on the earlier of the sale date of the applicable vessel or December 31, 2006. On January 5, 2007, the shareholder loans due to one of our former shareholders were sold to The Mida’s Touch, S.A., a company controlled by Ion G. Varouxakis, our chairman, chief executive officer and president and one of our principal shareholders, for the principal amount then outstanding. The Mida’s Touch subsequently sold a portion of this loan to FS Holdings Limited, also one of our principal shareholders.
 
We have financed a portion of the purchase price of the M/V Free Hero, and intend to finance the M/V Free Jupiter and any vessels that we may acquire to replace the M/V Free Iris and M/V Free Gentleman. In this regard, with respect to our initial agreement to purchase the M/V Free Hero, M/V Free Jupiter, M/V Free Iris and M/V Free Gentleman, we received a loan commitment from HSH Nordbank AG and BTMU Capital Corporation with respect to senior and junior loan facilities of approximately $89,500,000. HSH Nordbank AG has indicated that these facilities will be available upon similar terms to acquire suitable replacement vessels for the M/V Free Iris and the M/V Free Gentleman. We have also amended our existing


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credit agreement with Hollandsche Bank — Unie N.V. to provide for an additional $4,000,000 overdraft facility. We have also obtained a $14,000,000 principal amount non-amortizing, unsecured loan from FS Holdings Limited, one of our principal shareholders. See “Business — Loans for Vessels.”
 
We have obtained an offer letter for a senior secured credit facility from Credit Suisse, the lead underwriter of this offering, in the aggregate amount of $87.0 million, consisting of a $48.7 million loan to refinance our Acquisition Debt Facilities and a $38.3 million facility for the purchase of additional vessels. The availability of this facility is contingent upon, among other things, the execution of formal loan documents and credit committee approval. We intend to enter into this senior credit facility only if we successfully complete this offering. See “Use of Proceeds” and “Business — Loans for Vessels.”
 
Quantitative and Qualitative Disclosure of Market Risk
 
Interest Rate Fluctuation
 
The international drybulk industry is a capital-intensive industry, requiring significant amounts of investment. Much of this investment is provided in the form of long-term debt. Our debt usually contains interest rates that fluctuate with LIBOR. Increasing interest rates could adversely impact future earnings.
 
Our interest expense is affected by changes in the general level of interest rates. As an indication of the extent of our sensitivity to interest rate changes, an increase of 100 basis points would have decreased our net income and cash flows in the 2006 fiscal year by approximately $102,041 based upon our debt level during the period in 2006 during which we had debt outstanding.
 
The following table sets forth the sensitivity of the loan on the M/V Free Destiny in U.S. dollars to a 100-basis-point increase in LIBOR during 2007 and 2008 on the same basis.
 
         
Year
  Amount  
 
2007
  $ 32,536  
2008
  $ 26,516  
 
The following table sets forth the sensitivity of the loan on the M/V Free Envoy in U.S. dollars to a 100-basis-point increase in LIBOR during 2007 on the same basis.
 
         
Year
  Amount  
 
2007
  $ 15,269  
 
Please see “— Liquidity and Capital Resources” and “Business — Loans for Vessels” for a description of these loans.
 
Foreign Exchange Rate Risk
 
We generate all of our revenues in U.S. dollars, but incur approximately 11% of our expenses in currencies other than U.S. dollars. For accounting purposes, expenses incurred in Euros are converted into U.S. dollars at the exchange rate prevailing on the date of each transaction. At December 31, 2004, 2005, and 2006, approximately 20%, 38% and 31%, respectively, of our outstanding accounts payable was denominated in currencies other than the U.S. dollar (mainly in the Euro). As an indication of the extent of our sensitivity to foreign exchange rate changes, an increase of 10% in the value of other currencies against the dollar would have decreased our net income and cash flows in the current year by approximately $5,000 based upon the accounts payable we had denominated in currencies other than the U.S. dollar during fiscal 2006.
 
Off-Balance Sheet Arrangements
 
We do not have off-balance sheet arrangements.


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Contractual Obligations and Contingencies
 
Significant existing contractual obligations and contingencies consist of the obligations of our vessel-owning subsidiaries as borrowers of loans to finance the purchase of our vessels. The following table describes the repayment schedules for our long-term financial obligations outstanding as of December 31, 2006:
 
                                         
    M/V
    M/V
    M/V
    Related
       
Year Ended December 31,
  Free Destiny(1)     Free Envoy(1)     Free Fighter(1),(2)     Parties(3)     Total  
 
2007
  $ 462,519     $ 2,286,462     $ 1,269,579     $ 1,250,000     $ 5,268,560  
2008
    3,293,572             1,522,648       1,367,000       6,183,220  
2009
                1,391,201             1,391,201  
2010
                1,337,998             1,337,998  
                                         
TOTAL
  $ 3,756,091     $ 2,286,462     $ 5,521,426     $ 2,617,000     $ 14,180,979  
                                         
 
 
(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 Destiny and the M/V Free Envoy and LIBOR plus 2.0% for the M/V Free Fighter. The amounts payable reflected on the table include principal and interest calculated assuming LIBOR is equal to 5.35%.
 
(2) We sold this vessel during the second quarter of 2007. The vessel was delivered to the purchaser on April 27, 2007, at which time the loans were repaid in full.
 
(3) Repayment schedule reflects payments with respect to two loans from our former principal corporate shareholders. See “— Long Term Debt.”
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
 
Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies that involve a high degree of judgment and the methods of their application. For a description of all of our significant accounting policies, see Note 2 to our consolidated financial statements.
 
Impairment of long-lived assets.  We evaluate the carrying amounts and periods over which long-lived assets are depreciated to determine if events or changes in circumstances have occurred that would require modification to their carrying values or useful lives. In evaluating useful lives and carrying values of long-lived assets, we review certain indicators of potential impairment, such as undiscounted projected operating cash flows, vessel sales and purchases, business plans and overall market conditions. We determine undiscounted projected net operating cash flows for each vessel and compare it to the vessel carrying value. In the event that impairment occurred, we would determine the fair value of the related asset and we record a charge to operations calculated by comparing the asset’s carrying value to the estimated fair market value. We estimate fair market value primarily through the use of third-party valuations performed on an individual vessel basis.
 
Depreciation.  We record the value of our vessels at their cost (which includes acquisition costs directly attributable to the vessel and expenditures made to prepare the vessel for its initial voyage) less accumulated depreciation. We depreciate each of our vessels on a straight-line basis over its estimated useful life, which during fiscal 2006 was estimated to be 27 years from date of initial delivery from the shipyard for all of our vessels. We believe that a 27-year depreciable life is consistent with that of other shipping companies. During


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the three months ended March 31, 2007, we changed the estimated useful life for the M/V Free Fighter to 30 years. Depreciation is based on cost less the estimated residual scrap value. Furthermore, we estimate the residual values of our vessels to be $250 per lightweight ton, as of December 31, 2006, which we believe is common in the shipping industry. Prior to July 1, 2005, we had estimated the residual value of our vessels to be $150 per lightweight ton. An increase in the useful life of the vessel or in the residual value would have the effect of decreasing the annual depreciation charge and extending it into later periods. A decrease in the useful life of the vessel or in the residual value would have the effect of increasing the annual depreciation charge. See “Liquidity and Capital Resources” for a discussion of the factors affecting the actual useful lives of our vessels. However, when regulations place limitations on the ability of a vessel to trade on a worldwide basis, the vessel’s useful life is adjusted to end at the date such regulations become effective.
 
Deferred dry-dock and special survey costs.  Our vessels are required to be dry-docked approximately twice in any 60-month period for major repairs and maintenance that cannot be performed while the vessels are operating. The vessels are required to undergo special surveys every 60 months that occasionally coincide with dry-docking due dates, in which case the procedures are combined in a cost-efficient manner. We follow the deferral method of accounting for special survey and dry-docking costs, whereby actual costs incurred are deferred and amortized on a straight line basis over the period through the date the next dry-docking or special survey becomes due. If a special survey or dry-docking is performed prior to the scheduled date, the remaining unamortized balances are immediately written off.
 
Costs capitalized as part of the dry dock include all work required by the vessel’s classification societies, which may consist of actual costs incurred at the dry-dock yard, including but not limited to, dry-dock dues and general services for vessel preparation, coating of water ballast tanks, cargo holds, steelworks, piping works and valves, machinery work and electrical work.
 
All work that may be carried out during dry-dock time for routine maintenance according to our planned maintenance program and not required by the vessel’s classification societies are not capitalized but expensed as incurred. Unamortized dry-docking costs of vessels that are sold are written off and included in the calculation of resulting gain or loss in the year of the vessel’s sale.
 
Accounting for revenues and expenses.  Revenues and expenses resulting from each time charter are accounted for on an accrual basis. Time charter revenues are recognized on a straight-line basis over the rental periods of such signed charter agreements, as service is performed, except for loss generating time charters, in which case the loss is recognized in the period when such loss is determined. Time charter revenues received in advance are recorded as a liability until charter service is rendered.
 
Vessel operating expenses are accounted for on an incurred basis. Certain vessel operating expenses payable by us are estimated and accrued at period end.
 
We generally enter into profit-sharing arrangements with charterers, whereby we may receive additional income equal to an agreed upon percentage of net earnings earned by the charterer, where those earnings are over the base rate of hire, to be settled periodically, during the term of the charter agreement. Revenues generated from profit-sharing arrangements are recognized based on the amounts settled for a respective period.
 
Insurance Claims.  Insurance claims comprise claims submitted and/or claims in the process of compilation or submission (claims pending) relating to hull and machinery or protection and indemnity insurance coverage. The insurance claim recoveries receivable are recorded, net of any deductible amounts, at the time when the fixed asset suffers the insured damages and the damage is quantified by the insurance adjuster’s preliminary report or when crew medical expenses are incurred and management believes that recovery of an insurance claim is probable. The non-recoverable amounts are classified as operating expenses in our statement of operations. Probability of recovery of a receivable is determined on the basis of the nature of the loss or damage covered by the policy, the history of recoverability of such claims in the past and the receipt of the adjuster’s preliminary report on the quantification of the loss. We pay the vendors involved in remedying the insured damage, submits claim documentation and upon collection offsets the receivable. The classification of insurance claims (if any) into current and non-current assets is based on management’s expectations as to their collection dates.


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New Accounting Policy
 
Effective January 1, 2007, we have adopted Financial Accounting Standards Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we determine whether the benefits of our tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. The provisions of FIN 48 also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.
 
Recent Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that the adoption of SFAS No. 157 will have on our future consolidated financial statements.


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THE INTERNATIONAL DRYBULK SHIPPING INDUSTRY
 
The information and data in this section relating to the international drybulk shipping industry has been provided by Maritime Strategies International Ltd., or MSI, and is taken from MSI databases and other sources available in the public domain. MSI has advised us that it accurately describes the international drybulk shipping industry, subject to the availability and reliability of the data supporting the statistical and graphical information presented. MSI’s methodologies for collecting information and data, and therefore the information discussed in this section, may differ from those of other sources, and does not reflect all or even necessarily a comprehensive set of the actual transactions occurring in the drybulk shipping industry.
 
Introduction
 
The global shipping industry provides seaborne transportation for related industries on an international scale. Generally it is divided into the following sectors: (i) “bulk” shipping, which consists of drybulk vessels for the movement of commodities such as coal and iron ore and tankers which carry both crude oil and refined products in liquid bulk; (ii) containerships, which carry intermediate or manufactured goods in standardized boxes and (iii) specialized vessels, such as gas carriers, refrigerated cargo ships and car carriers which service a particular niche trade.
 
The demand for these different sectors varies, but generally is related to global economic growth and trading patterns between sources of demand and supply for the industry that they serve. In recent years all sectors of shipping have witnessed increases in demand as a result of rapid industrialization of Asian economies, particularly China. This has lead to a large increase in the trade of both bulk commodities and finished/semi-finished exports. Between 2001-2006 global trade in seaborne oil (including both crude and refined products) has increased by a compound annual growth rate (CAGR) of 5%, trade in drybulk grew with a CAGR of 6% and containerized trade by a CAGR of 13%.
 
GROWTH IN BULK AND CONTAINERIZED TRADE
 
GRPAPH
 
Source:  MSI
 
Note: Containerized trade includes primary port-to-port and transshipment. Drybulk includes iron ore, coal, grain and minor bulks.


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At the same time strong global economic growth has seen a continued rise in the trading volumes of specialized trade, as shown below:
 
GROWTH IN SPECIALIZED TRADE
 
                                                                         
Global Trade
        1999     2000     2001     2002     2003     2004     2005     2006  
 
Chemicals (MnT)
            101.2       107.6       112.5       117.5       122.2       125.4       134.9       144.4  
      Growth       9 %     6 %     5 %     5 %     4 %     3 %     8 %     7 %
LPG (MnT)
            61.06       61.86       61.26       62.39       66.53       68.68       71.28       74.30  
      Growth       2 %     1 %     –1 %     2 %     7 %     3 %     4 %     4 %
Refrigerated (MnT)
            21.72       22.86       23.39       23.59       24.79       25.83       26.33       26.90  
      Growth       N/A       5 %     2 %     1 %     5 %     4 %     2 %     2 %
New Cars (Mn Units)
            8.15       8.57       8.19       8.81       9.21       10.16       10.41       11.48  
      Growth       2 %     5 %     –4 %     8 %     5 %     10 %     2 %     10 %
 
Source:  MSI
 
Drybulk Carrier Employment Demand
 
The international drybulk shipping industry provides seaborne transportation of drybulk commodities for related industries. The most important of these commodities are iron ore, coal and grains which together account for 75% of total trade. Other key cargoes, commonly referred to as minor bulks, include agricultural products (e.g. fertilizers), steel products, forest products, metals, cement and a wide range of other minerals. Shipping companies provide seaborne transportation to customers that include power utilities, steelmakers, grain houses, commodity traders and government agencies. In recent years there has been a substantial increase in the use of commodities transported in drybulk. In 2006, the amount of cargo transported by the industry was estimated to have exceeded 2.4 billion metric tons — an increase of over 8% over the previous year and almost 40% since 2000.
 
The amount of cargo transported in drybulk carriers is governed by demand for the various commodities, which is affected by international economic activity, regional imbalances between domestic production and consumption, commodity prices and inventories. In addition to the volume of cargo, drybulk carrier demand is driven by the average distance required to transport it from commodity-producing locations to commodity-consuming destinations. Demand can be expressed in “ton-miles”, measured as the product of (a) the amount of cargo transported and (b) the distance over which it is transported.
 
The mile component is generally the most variable element of ton-mile demand. Seaborne trading distances for commodities are determined principally by the location of production and their efficient distribution for processing and consumption. For instance, a ton of ore carried from Brazil to China generates roughly 2 to 3 times the demand for sea transport as the same amount of ore shipped from Australia. Trading patterns are sensitive both to major geopolitical events and to small shifts, imbalances and disruptions in all stages of production and processing through to end-use. Seaborne transportation distances are also influenced by infrastructural factors, such as the availability of canal shortcuts’ and capacity at ports and inland distribution. The following chart outlines seaborne trade in drybulk commodities from 1980 to 2006.


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SEABORNE DRYBULK TRADE
 
GRAPH
 
Source:  MSI
 
Seaborne drybulk trade has grown by a compound annual rate of 4% per annum since 1980, but in the last 5 years growth has risen to over 6% per annum. The acceleration in trade in recent years has been driven primarily by China, whose economic growth averaged 10.3% per annum from 2003-2006. China’s entry into the World Trade Organization in 2001 caused a large increase in investment funds flowing into the country as foreign manufacturers sought to benefit from lower wage costs and the future prospects of a large consumer market. China’s growth helped foster a wider rebound in the other Asian economies, particularly Japan, Korea and Taiwan. As a result there has been substantial growth of drybulk trade to and from the Pacific region, for a number of key commodities.
 
Steel industry related trades, mainly iron ore, metallurgical coal, finished steel and intermediate steel products, account for about 50% of the seaborne drybulk trade. The table below shows the main drybulk commodities and the main segments of the drybulk carrier fleet they are transported by.
 
PRINCIPAL DRYBULK TRADE AND VESSELS CARRIED BY
 
                     
    Seaborne Trade 2006
    Percent of Seaborne
    Typical Drybulk Carrier
Commodity
  (Million Tonnes)     Drybulk Trade     Carried By;
 
Iron ore
    728.9       30 %   Capesize, Panamax
Meturlurgical Coal
    211.3       9 %   Capesize, Panamax
Thermal Coal
    579.3       24 %   Capesize, Panamax
Grains & soybeans
    306.3       13 %   Panamax, Handymax, Handysize
Minor Bulks
    582.3       24 %   Handymax, Handysize
Total
    2408.1       100 %    
 
Source:  MSI


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Steel & Iron Ore
 
Chinese growth has been very steel-intensive, driven by construction and underpinned by large government infrastructure projects. Chinese production of crude steel has increased by a compound annual rate of 23% per annum from 2000 to 2006 to 430 million tons. The strength of Chinese steel consumption has also contributed to an export-led revival in other steel producing nations such as Japan and Korea.
 
STEEL PRODUCTION (MILLION METRIC TONNES)
 
                                                                 
                                              Compound
 
                                              Annual
 
                                              Growth
 
    2000     2001     2002     2003     2004     2005     2006     2001-2006  
 
North America
    135.4       119.9       122.9       126.2       134       128       132       1.9 %
Western Europe
    163.4       158.5       158.7       161       169.1       165       173       1.8 %
Former Soviet Union
    98.49       99.62       101.1       106.2       113.1       113       119       3.7 %
China
    127.2       150.9       182.2       222.4       280.5       356       430       23.3 %
Japan
    106.4       102.9       107.7       110.5       112.7       112       116       2.5 %
Other Asia
    98.2       100.2       104.9       109.5       116.8       122       131       5.5 %
Rest of the World
    118.6       118.5       126.3       134       142.4       142       150       4.9 %
Total
    848       850       904       970       1069       1139       1252       8.0 %
 
Source:  IISI/MSI
 
Although China has vast domestic reserves of both iron ore and coking (or metallurgical) coal, its domestic reserves of iron ore are poor in quality (i.e. low in iron content) and are normally mixed with high quality imported ore. As a result, the rapid development of steel production has had a significant impact on Chinese iron ore imports, which have grown by a compound annual rate of nearly 30% per annum over the last 6 years.
 
IRON ORE IMPORTS (MILLION METRIC TONNES)
 
                                                                 
                                              Compound Annual
 
    2000     2001     2002     2003     2004     2005     2006(e)     Growth 2000-2006  
 
Western Europe
    151       131       136       135       150       140       148       –0.2 %
China
    70       92       111       148       208       275       326       29.2 %
Japan
    131       125       132       132       135       132       134       0.4 %
Other Asia
    74       79       78       79       80       85       86       2.5 %
Rest of the World
    75       64       71       82       80       80       99       4.7 %
Total
    502       492       528       577       653       713       794       8.0 %
 
Source:  UNCTAD/MSI
 
Australia and Brazil together account for nearly two thirds of global iron ore exports. Although both Australia and Brazil have seen strong demand from China, Australia continues to benefit the most, accounting for 40% of total Chinese iron ore imports in 2006. However, although Brazilian iron ore exports to China account for a smaller percentage of the total (23% in 2006), the contribution to ton-mile demand has been greater due to the greater distances between origin and destination. In 2006 Brazil’s exports to China grew by 40% to 76 million metric tons, or MnT, while Australia’s only grew by 13%, hence there was a larger increase in ton mile demand than the individual Chinese import number would suggest. India is another major exporter of iron ore, accounting for 23% of Chinese imports in 2006. Unlike Australia and Brazil who tend to export primarily in the larger Capesize vessels, much of India’s exports are in the smaller Panamax and Handymax vessel sizes.


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IRON ORE EXPORTS (MILLION METRIC TONNES)
 
                                                                 
                                              Compound Annual
 
    2000     2001     2002     2003     2004     2005     2006(e)     Growth 2000-2006  
 
Australia
    165       175       174       197       221       239       248       7.0 %
Brazil
    160       156       170       184       201       223       262       8.6 %
India
    33       41       55       57       63       81       90       18.2 %
Africa
    33       34       35       34       36       38       27       –3.0 %
Rest of the World
    115       102       110       123       123       135       167       6.4 %
Total
    506       507       544       595       644       717       794       7.8 %
 
Source:  UNCTAD/MSI
 
Coal
 
Asia’s rapid industrial development has also contributed to strong demand for coal, which accounted for 37% of the total growth of seaborne bulk trade between 2000 and 2006. Coal is usually divided into two categories: thermal coal (or steam coal), used in power stations, and metallurgical coal (coking coal) used as an input by the steel industry.
 
Expansion in air-conditioned office and factory space, along with industrial use, has raised demand for electricity, of which nearly half is generated from coal-fired plants, thus increasing demand for thermal coal. In addition, Japan’s domestic nuclear power generating industry has suffered from safety problems in recent years, resulting in the temporary closure of a number of nuclear power reactors and leading to increased demand for oil, gas and coal-fired power generation. Furthermore the high cost of oil and gas has lead to increasing development of coal fired electricity plants across the world, especially in Asia. Thermal coal represents the majority of the total coal trade (73% in 2006) and by itself accounted for 31% of the growth of total seaborne drybulk trade between 2000 and 2006.
 
Metallurgical, or coking coal, accounted for 9% of seaborne trade in 2006. Future prospects are heavily tied to the steel industry. It is used within the blast furnace to impart its carbon into the iron, giving the final steel product more strength and flexibility. Because coking coal is of higher quality than thermal coal (i.e. more carbon and less impurities), its price is higher and its trade more volatile.
 
COAL IMPORTS (MILLION METRIC TONNES)
 
                                                                 
                                              Compound Annual
 
    2000     2001     2002     2003     2004     2005     2006     Growth 2000-2006  
 
Western Europe
    184       198       190       206       221       218       233       4.0 %
Japan
    145       156       159       166       179       181       177       3.3 %
Other Asia
    21       25       39       45       57       66       80       24.8 %
Rest of the World
    256       273       278       305       317       348       371       6.4 %
Total
    606       653       666       722       774       812       861       6.0 %
 
Source:  McCloskey’s/MSI
 
Australia is the world’s dominant exporter of coal, accounting for 27% of global exports in 2006. However, Indonesia has increased its exports in recent years, becoming a good source for business for Panamax and Handymax vessels. Growth in Indonesian exports has been very strong with a compound annual growth of 20.8% between 2000 and 2006.


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COAL EXPORTS (MILLION METRIC TONNES)
 
                                                                 
                                              Compound Annual
 
    2000     2001     2002     2003     2004     2005     2006     Growth 2000-2006  
 
North America
    84       73       60       64       70       73       72       –2.5 %
Colombia
    36       38       35       44       51       55       58       8.6 %
South Africa
    70       69       70       70       68       74       68       –0.6 %
China
    55       91       86       91       81       72       63       2.4 %
Indonesia
    57       66       73       89       105       129       176       20.8 %
Australia
    187       194       204       215       228       233       236       4.0 %
Poland
    21       22       22       20       19       19       15       –5.0 %
Rest of World
    97       100       114       130       153       158       172       10.0 %
Total
    606       653       666       722       774       812       861       6.0 %
 
Source:  MSI/McCloskey’s
 
Grains
 
Wheat and coarse grains are primarily used for direct human consumption or as feed for livestock. International trade in grains fluctuates considerably, as price volatility, government interventionism and weather conditions strongly impact trade volumes. In 2006, adverse weather impacted wheat and corn harvests in many of the world’s major growing regions and production fell roughly 2% from 2005, causing world exports to fall an estimated 3%. However, soy bean trade has risen rapidly in recent years as demand for animal feed and vegetable oil has increased. Despite the recent declines in trade volumes, demand growth for wheat and course grains is fundamentally linked in the long term to population growth and rising per capita income. With Asia experiencing rapid economic growth and increasing standards of living, it is expected that meat consumption will increase, leading to rising demand for animal feed.
 
WHEAT AND COARSE GRAIN IMPORTS
 
                                                                 
                                              Compound Annual
 
    2000     2001     2002     2003     2004     2005     2006(e)     Growth 2000-2006  
 
Latin America
    41       38       37       37       38       44       45       1.5 %
Europe/Former Soviet Union
    21       26       32       31       19       18       19       –1.1 %
Africa
    39       39       40       35       44       45       40       0.2 %
Middle East
    28       28       26       23       27       30       27       –1.1 %
Japan
    26       26       26       26       25       25       25       –0.9 %
Other Asia
    34       34       35       35       34       36       36       0.9 %
Rest of World
    15       19       17       17       24       16       21       5.7 %
Total
    204       210       212       202       211       214       212       0.6 %
 
Source:  USDA/MSI
 
International trade in grains is dominated by 4 key exporting regions: (i) North America, (ii) Latin America, (iii) Oceania and (iv) Europe, including the Former Soviet Union, which together account for over 90% of global exports. Large importers are typically North Africa (Egypt), the Middle East, and more recently, India.


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WHEAT AND COARSE GRAIN EXPORTS
 
                                                                 
                                              Compound Annual
 
    2000     2001     2002     2003     2004     2005     2006(e)     Growth 2000-2006  
 
North America
    104       99       80       105       98       108       108       0.6 %
Latin America
    30       26       24       29       30       28       34       2.2 %
Europe/Former Soviet Union
    37       47       67       30       47       54       49       4.8 %
Oceania
    22       22       13       25       19       22       13       –8.5 %
Rest of World
    15       19       29       24       18       11       13       –2.6 %
Total
    209       213       215       213       213       223       217       0.7 %
 
Source:  USDA/MSI
 
Minor Bulks
 
Trade in minor bulks constituted approximately 24% of total seaborne trade for drybulk carriers in 2006. The table below shows that compound annual growth for all minor bulks was 4.2%, but those related to the steel and construction industries have grown even faster. Steel scrap trade has grown the fastest as scrap is the key input for steel makers using the ’electric arc furnace’ means of production. The trade for these minor bulks is geographically widespread but the Middle East has been a key importer of construction inputs in recent years.
 
SEABORNE TRADE IN SELECTED MINOR BULKS
 
                                                                 
                                              Compound Annual
 
    2000     2001     2002     2003     2004     2005     2006(e)     Growth 2000-2006  
 
Steel Scrap
    35       35       40       49       56       58       63       10.0 %
Steel Products
    184       193       205       211       234       238       256       5.7 %
Cement
    46       46       45       47       60       62       65       6.0 %
Bauxite
    53       51       55       63       67       70       76       6.2 %
Total Minor Bulks
    456       454       463       487       534       565       582       4.2 %
 
Source:  MSI
 
Drybulk Carrier Supply
 
The supply of drybulk shipping capacity is measured by the amount of suitable deadweight tons available to transport cargo. This depends on the aggregate tons of the existing world fleet, deliveries of newbuildings, scrapping of older vessels, and the number of vessels undergoing maintenance, repairs, inspection, or otherwise unavailable for use. The decision to order newbuildings or scrap older vessels is influenced by many factors, including prevailing and expected charter rates, newbuilding and scrap prices, and availability of delivery dates and government and industry regulation of seaborne transportation practices.
 
Port and inland infrastructure developments in key load and discharge areas (particularly for iron ore and coal) have struggled to keep pace with strong growth in seaborne trade of drybulk commodities from 2003 to 2006. This has resulted in escalating port congestion and increased the time spent by vessels waiting to berth. As the time required to complete a single vessel voyage has increased, the number of vessels required has also risen, contributing to higher freight rates.
 
Newbuildings
 
In general, it takes from 18 to 36 months from the date of placing a newbuilding contract to the date a shipowner takes delivery of the vessel. During the last three to four years, the high levels of vessel orders have resulted in an average delivery lag of about three years and in some instances even longer. Vessels are constructed at shipyards of varying size and technical sophistication. Bulk carriers are generally considered to


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be the least technically sophisticated vessels (although there are many clear exceptions to this rule) and as such tend to be those where the shipyards can extract the smallest margin for their construction.
 
As of June 2007, the total drybulk orderbook stood at 124.6 million tons representing 34% of the existing fleet. The existing orderbook is expected to be delivered over the next 3-4 years.
 
Scrapping
 
Scrapping is a function of the freight market and the size of the fleet which is “over-aged”, usually considered to include vessels 25 years or older. The scrap age of a vessel also depends on its size, as the scrap age of smaller vessels like Handysize and Handymax carriers tends to be higher than the scrap age of larger vessels like Capesize carriers. At times of high freight rates, scrapping is typically decreased since shipowners prefer to extend the useful life of their vessels. Scrapping is carried out by teams of breakers with blow-torches, oxy-acetylene steel cutters and other tools once the vessel has been purposefully beached. The graph below shows that in recent years the average age at which vessels are scrapped has increased dramatically. It also shows that smaller vessels tend to have considerably longer useful lives.
 
AVERAGE AGE OF VESSELS SCRAPPED
 
graph
 
Source:  LR Fairplay/MSI
 
Freight Rates and Vessel Earnings
 
Freight is the primary source of revenue to a shipping company. Freight is paid when a customer charters a vessel for a specified period of time or to carry a specific cargo. The freight rate of transporting drybulk commodities can be volatile and is related to demand for and supply of drybulk carriers. The charter market is highly competitive as shipping companies compete on the offered freight rate, the location, technical specification and quality of the vessel and the reputation of the vessel’s manager. Typically, the contractual agreement between the shipping company and the customer, known as charterparty, is based on standard industry terms.
 
A vessel is usually chartered under a voyage charter or a time charter. A voyage charter is a contract to carry a specific cargo between two ports for an agreed rate per ton of cargo carried. Under voyage charters, the shipowner pays voyage expenses such as port, canal and fuel costs. A time charter is a contract to charter


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a vessel for an agreed period of time at a set daily rate. Under time charters, the charterer pays for the voyage expenses and decides what ports the vessel should go. A spot charter is a voyage charter or a time charter that is fixed for just one trip. A period charter is a longer term time charter. A vessel can also carry cargoes on behalf of its own owner, like in the case of a steel mill, or, in case its owner has secured a cargo transportation contract (“Contract or Affreightment”, or, “COA”).
 
The costs of running a drybulk carrier are typically broken down into “operating” and “capital” costs. Operating costs are concerned with the day-to-day operations of the vessel — typically crewing, lubes and stores, repair and maintenance, insurance and administration. Under voyage charters, the shipowner pays all operating costs, whereas under time charters the charterer pays for some or all of these costs. Capital costs are the repayments on the mortgage, loan, or other financial structure under which the vessel was purchased. These are entirely borne by the shipowner. The average operating and capital cost “floor” tends to influence freight rates in the industry — all other things being equal, a higher cost floor will lead to higher freight rates. As purchase prices of drybulk carriers have increased in recent years, so have capital costs and hence the cost floor for freight rates.
 
Vessel Values
 
Newbuilding Prices
 
The price of newbuildings is linked to the level of demand for and supply of shipyard space, the cost of steel and labor and other factors. Since a shipyard can generally build most types of ships, the price for drybulk carriers is influenced by the orderbook of all ship types. High newbuilding ordering activity in a particular sector is typically driven by high freight rates in that sector.
 
Prices for the construction of new vessels have increased in recent years and have been sustained by an environment of high freight rates in all shipping sectors which has spurred ordering of all ship types, limiting the availability of shipyard berths and pushing up the prices of drybulk carriers. An increase in the number of tankers ordered in the second quarter, was responsible for the initial rebound of new building prices in 2006. Also, an increase in drybulk freight rates resulted in a large increase in orders for drybulk vessels.
 
DRYBULK CARRIER NEWBUILDING PRICES
 
graph
 
Source:  MSI


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Sale & Purchase Market
 
The second hand, or sale and purchase, market for drybulk carriers has witnessed a large rise in prices of secondhand drybulk carriers in the last few years as shipowners seek to increase the size of their fleets to benefit from the rise in trade. Prices tend to follow the direction of the freight market and are also heavily influenced by newbuilding price developments.
 
SECONDHAND MARKET LIQUIDITY
 
graph
 
Source:  LR Fairplay/MSI
 
DRYBULK CARRIER 5 YEAR OLD PRICES
 
graph
 
Source:  MSI


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Scrap Prices
 
The scrap value of a vessel depends on the local steel price, the quality and the amount of steel recoverable from the vessel (“lightweight displacement tons”, or, “LDT”). Since the beginning of 2004, the scrap price per ton has fluctuated between $300 and $400 per ton of steel.
 
DRYBULK CARRIER SCRAP PRICES
 
graph
 
Source:  MSI
 
SECTORAL ANALYSIS
 
While there is no standard definition, drybulk carriers are commonly categorized into the following size sectors:
 
DRYBULK CARRIER SEGMENTS: FLEET AND ORDERBOOK
 
                                                         
          Fleet     Orderbook  
Segment
  Size Range (Dwt)     Total     Share (%)     Total (Mn Dwt)     Share (%)     Mn Dwt     % of Fleet  
 
Handysize
    10,000 to 39,999       2562       42%       69.2       19%       10.3       15%  
Handymax
    40,000 to 59,999       1399       23%       67.4       18%       26.8       40%  
Panamax
    60,000 to 79,999       1312       21%       93.7       25%       9.5       10%  
Capesize
    80,000 and above       887       14%       139.1       38%       78.0       56%  
 
 
Total
    10,000 and above       6160       100%       369.4       100%       124.6       34%  
 
Source:  LR Fairplay/MSI
 
The table above provides information concerning the number of vessels and deadweight capacity of the Handysize and Handymax sectors, the sectors in which we operate.
 

The Handymax Sector
 
The Handymax sector is the smallest sector of the drybulk carrier fleet, accounting for 18% of fleet deadweight capacity as of June 1, 2007. This sector, along with the Handysize sector, has the greatest diversity


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in cargoes and routes. The size and design (vessels are usually equipped with their own cranes, and are referred to as “geared”) of Handymax vessels makes them extremely versatile and able to access smaller ports where size restrictions or inadequate load and discharge facilities would exclude larger vessels.
 
Trading patterns and cargoes for Handymax and Handysize vessels are highly diversified. Typical cargoes include wheat and coarse grains, agricultural bulk commodities such as sugar and rice, fertilizers, minor ores and minerals, steel products and scrap, forest products, and semi-processed commodities such as coke and cement. In addition, Handymax vessels are employed on a limited number of low-volume short-haul iron ore and coal trades, as well as those where port size or infrastructure constraints require smaller, geared vessels.
 
Handymax fleet ownership is highly fragmented, with 467 different owner operators of the 1,399 vessels in the world Handymax fleet: an average of just 3 vessels per company. As of June 1, 2007, 22 companies controlled 10 ships or more (at an average of 17 ships per company), amounting to only 27% of the fleet. Another 50 companies owned 5 to 9 ships (at an average of 6.7 ships per company) or 24% of the fleet. Two hundred seven companies control 1 vessel each, accounting collectively for 15% of the fleet. The top 10 owners controlled 17% of the fleet, while 26% was controlled by the top 20 owners.
 
The chart below outlines the Handymax fleet by year of build, including scheduled new deliveries. The chart indicates that at June 1, 2007, approximately 5% of the fleet’s existing deadweight capacity was accounted for by vessels built before 1980, and these may be considered likely candidates for scrapping in the near future. Vessels built since 2000 constituted 44% of the existing fleet. The average age of the fleet at June 1, 2007 was 11.7 years.
 
The orderbook at the beginning of June 2007 amounted to 26.8 million dwt or 40% of the existing fleet.
 
HANDYMAX FLEET BY YEAR OF BUILD AND SCHEDULED DELIVERIES
 
(PERFORMANCE GRAPH)
 
Source: LR Fairplay/MSI
 
Handymax earnings increased sharply during the second half of 2003, in line with the larger bulk carrier sectors, and reached record peaks in 2004, with average spot earnings for modern 45,000 dwt vessels exceeding $38,000 per day in March 2004. During the second half of 2004, the Handymax freight market underwent a revival, with earnings briefly surpassing $32,000 per day once again in late November to early December 2004. Rates then trended lower in 2005 before a rebound in March 2006 to May 2007 when average spot earnings reached a record $39,000 per day.


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HANDYMAX (45,000 DWT) AVERAGE SPOT RATES
 
(PERFORMANCE GRAPH)
 
Source: MSI
 
The Handysize Sector
 
The Handysize sector is the largest sector of the drybulk carrier fleet by number of vessels, accounting for 42% of the total fleet. However, in terms of deadweight capacity, it is only marginally larger than the Handymax fleet with 19% of total capacity. Like Handymax vessels, they are fitted with cranes which, along with their shallow drafts, make them extremely versatile and able to access smaller ports with less sophisticated onshore facilities. As a result, trading patterns and cargoes for these types of vessel are highly diversified.
 
Handysize vessels are generally older than Handymax. The latter have begun to replace the former as new developments in ship design have enabled larger vessels to be constructed with similar drafts. Increasingly, the industry is moving towards building larger vessels to benefit from economies of scale. However this does not mean that smaller vessels have become obsolete, for they are less likely to have to travel part-laden and are often able to generate substantial returns.
 
Like the Handymax sector, Handysize fleet ownership is highly fragmented. Eight hundred ninety nine different shipowners control 2,562 vessels: an average of just 2.8 vessels per company. As of June 1, 2007, 38 companies controlled 10 ships or more (at an average of 20.7 ships per company), amounting to 32% of the fleet. Another 78 companies owned 5 to 9 ships (at an average of 6.3 ships per company) or 20% of the fleet. Four hundred seventy five companies control 1 vessel each, collectively accounting for 18% of the fleet.


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The chart below outlines the Handysize fleet by year of build, including scheduled new deliveries. The chart indicates that at June 1, 2007, approximately 27% of the fleet’s existing dwt capacity was accounted for by vessels built before 1980, which may be considered likely candidates for scrapping in the near future. Vessels built since 2000 constitute 16% of the existing fleet. The average age of the fleet at June 1, 2007 was 21.2 years.
 
The orderbook at the beginning of June 2007 amounted to 10.3 million dwt or 15% of the existing fleet.
 
HANDYSIZE FLEET BY YEAR OF BUILD AND SCHEDULED DELIVERIES
 
(PERFORMANCE GRAPH)
 
Source: LR Fairplay/MSI
 
Handysize earnings increased sharply in the second half of 2003 in line with the larger bulk carrier sectors. The 18 month time charter peaked in Feb 2004 at $22,000 per day before declining rapidly to a low of $13,000 in June of that year. During the second half of 2004, rates rebounded and 12 month time charter rates in the Handysize sector peaked again in December 2004 at $21,800 per day. Rates then trended lower in 2005 until a recent rebound has brought rates to a new high of $26,000 per day in June 2007.


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HANDYSIZE ONE YEAR TC RATES
 
(PERFORMANCE GRAPH)
 
Source: MSI


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BUSINESS
 
Overview
 
We own our vessels through separate wholly owned subsidiaries incorporated in the Marshall Islands. The operations of the vessels are managed by Free Bulkers, an affiliated Marshall Islands corporation incorporated on September 9, 2003. Free Bulkers provides us with a wide range of shipping services at a fee per vessel. These services include technical management, such as managing day-to-day vessel operations including supervising the crewing, supplying, maintaining and dry-docking of vessels, commercial management regarding identifying suitable vessel charter opportunities, and certain accounting services.
 
The M/V Free Destiny and M/V Free Envoy have a combined carrying capacity of 51,000 dwt, a combined book value of $10.3 million, and an average age of 24 years. As a result of the acquisition of the M/V Free Hero and the M/V Free Jupiter, which we expect to be delivered in August or September 2007, we will increase the aggregate dwt of our fleet to approximately 123,000 dwt, increase the aggregate book value of our fleet to $82.6 million, and reduce the average age of our fleet to 16 years.
 
Our Fleet
 
The following table summarizes certain information about the vessels in our combined fleet and related employment details:
 
                         
        Year
  Vessel
      Purchase
  Delivery
Vessel Name
  dwt   Built  
Type
 
Employment
  Price   Date
 
Free Envoy
  26,318   1984   Handysize   1-year time charter through April 2008 at $17,000 per day   $9.50 million   September 2004
Free Destiny
  25,240   1982   Handysize   Spot — currently at $16,500 per day   $7.60 million   August 2004
Free Hero
  24,318   1995   Handysize   Balance of time charter through December 2008/February 2009 at $14,500 per day   $25.25 million(1)   July 2007
 
 
(1) The purchase price for the M/V Free Hero was specifically negotiated based on its particular attributes (i.e., based on factors including the vessel’s age, builder, configuration and condition).
 
We have agreed to purchase a 47,777-dwt Handymax vessel built in 2002, the M/V Free Jupiter, for $47.0 million. We currently expect to take delivery of the M/V Free Jupiter in August or September 2007. Upon delivery, the M/V Free Jupiter will be chartered on a three-year time charter through September 2010, at a rate of $32,000 per day for the first year of the charter, $28,000 per day for the second year, and $24,000 per day for the third year.
 
On May 1, 2007, we entered into memoranda of agreement pursuant to which we agreed to purchase four secondhand drybulk carriers, the M/V Free Hero, M/V Free Jupiter, M/V Free Iris and M/V Free Gentleman, from non-affiliated parties for a total purchase price of $114.0 million. In accordance with the memoranda of agreement, we provided deposits totaling $11.4 million to the respective sellers of the above four vessels. We obtained the funds for the deposits from a $5.5 million draw on the $14.0 million unsecured shareholder loan described below and $5.9 million from our cash on hand, primarily resulting from the sale of the M/V Free Fighter in April 2007. We anticipated financing the remaining $102.6 million of the purchase prices of the above vessels, due upon their respective deliveries, by utilizing the following: (i) up to $68.0 million in a senior secured loan from HSH Nordbank AG; (ii) up to $21.5 million in a junior loan from BTMU Capital Corporation, an affiliate of the Bank of Tokyo Mitsubishi; (iii) the remaining $8.5 million of the $14.0 million unsecured shareholder loan (which was drawn down on June 22, 2007 as discussed further below) (we refer to


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these three borrowing arrangements as our “Acquisition Debt Facilities”); (iv) cash on hand from operations and (v) an overdraft credit facility of $4 million available from Hollandsche Bank — Unie N.V.
 
We took delivery of the M/V Free Hero on July 3, 2007 and we paid the $22.7 million remaining balance, net of the deposit paid, of the $25.25 million purchase price using $20.4 million from the above described senior and junior financing sources and $2.3 million from cash on hand. The vessel is currently subject to a $14,500 per day time charter expiring in December 2008, with a charterer’s option for extension until February 2009. We expect to take delivery of the M/V Free Jupiter in August or September 2007. The purchase price for the M/V Free Jupiter is $47.0 million and we expect to utilize the above-described financing sources to pay the remaining $42.3 million balance of the purchase price due upon delivery. Upon delivery, the M/V Free Jupiter will be chartered on a three-year time charter through September 2010, at a rate of $32,000 per day for the first year of the charter, $28,000 per day for the second year, and $24,000 per day for the third year.
 
Due to a dispute between third parties unrelated to us and the sellers of the M/V Free Gentleman and M/V Free Iris, which would have resulted in the vessels not being delivered as per the terms of their respective memoranda of agreement, we decided, in agreement with the sellers, to terminate those agreements on July 27, 2007, with immediate return of the full deposits for such vessels totaling $4.25 million. We intend to seek to replace the two undelivered vessels with alternative tonnage of similar profile and return characteristics in an effort to expand our fleet in the Handysize/Handymax segment. We intend to utilize our available cash and the remainder of our existing credit facilities as described above for any future near term acquisitions.
 
The $14.0 million loan from one of our principal shareholders was signed on May 7, 2007 and accrues interest on the outstanding principal balance at the annual rate of 12.0%, payable upon maturity of the loan. The loan is due at the earlier of (i) May 7, 2009, (ii) the date of a “Capital Event,” which is defined as any event in which we raise gross proceeds of not less than $40 million in an offering of our common stock or other equity securities or securities convertible into or exchangeable for our equity securities, or (iii) the date of acceleration of the amounts due under the note. Additionally, we agreed to issue to that shareholder, for every $1.0 million drawn under the loan, 50,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share. On May 8, 2007, we drew down $5.5 million from the shareholder loan in connection with the deposits to be posted under the memoranda of agreement for the acquisition of the vessels. On June 22, 2007, we drew down the remaining $8.5 million from the shareholder loan in anticipation of taking delivery of the M/V Free Gentleman, which delivery, however, was never completed as discussed above. We have issued the shareholder 700,000 warrants to purchase shares of our common stock at an exercise price of $5.00 per share in connection with the two draw downs described above.
 
Consistent with our strategy of making efficient use of leverage, we have obtained an offer letter for a senior secured credit facility from Credit Suisse, the lead underwriter of this offering, in the aggregate amount of $87.0 million, consisting of a $48.7 million loan to refinance our Acquisition Debt Facilities and a $38.3 million facility for the purchase of additional vessels. The availability of this facility is contingent upon, among other things, the execution of formal loan documents and credit committee approval. We intend to only enter into this senior credit facility if we successfully complete this offering. See “Use of Proceeds” and “— Loans for Vessels.”
 
Competitive Strengths
 
We believe that we possess the following competitive strengths:
 
  •  Experienced Management Team.  Our management team has significant experience in commercial, technical, operational and financial areas of our business and has developed relationships with leading charterers, ship brokers and financial institutions. Since 1997, Ion G. Varouxakis, our chairman, chief executive officer and president, has served in various management roles for shipping companies in the drybulk sector. Dimitris Papadopoulos, who became our chief financial officer in May 2007, served from 1975 to 1991 as financial and administrative vice president in charge of, amongst other things, the shipping interests of the owners of Archirodon Group, Inc.


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  •  Affiliation with Leading Shipping Group.  FS Ho