Exhibit 99.1

FREESEAS INC.

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

FREESEAS INC.

 

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to the Company. SFAS No. 160 requires, among other items, that a non-controlling interest be included in the consolidated statement of financial position within equity separate from the Company’s equity; consolidated net income to be reported at amounts inclusive of both the Company’s and non-controlling interest’s shares and, separately, the amounts of consolidated net income attributable to the Company and non-controlling interest all on the consolidated statement of income; and if a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. This Statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s year beginning January 1, 2009. The adoption of SFAS No. 160 did not have any impact on the Company’s consolidated financial statements. In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS No. 161 did not have any effect on the financial condition, results of operations or liquidity of the Company.

 

In April 2008, FASB issued FASB FSP No. 142-3 “Determination of the useful life of intangible assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. GAAP. This FSP is effective for FreeSeas for fiscal year beginning January 1, 2009. Early adoption was prohibited. The adoption of FSP No. 142-3 did not have any effect on the Company’s consolidated financial statements.

 

In May 2008, the FASB issued SFAS No. 165 “Subsequent events” which establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: a) The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements b) The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements c). The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Statement does not result in significant changes in the subsequent events that an entity reports — either through recognition or disclosure — in its financial statements. This Statement introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company has adopted SFAS No. 165 for the financial period ended June 30, 2009.

 

In June 2008, FASB issued EITF Issue No. 07-5 “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”) to provide guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. According to EITF 07-5 an instrument or embedded feature that is both indexed to an entity’s own stock and potentially

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

settled in shares may be exempt, if certain other criteria are met, from mark-to-market accounting of derivative financial instruments. EITF 07-5 addresses instruments with contingent and other adjustment features that may change the exercise price or notional amount or otherwise alter the payoff at settlement. The Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The guidance in this Issue shall be applied to outstanding instruments as of the beginning of the fiscal year in which this Issue is initially applied. The cumulative effect of the change in accounting principle shall be recognized as an adjustment to the opening balance of retained earnings for that fiscal year, presented separately. The adoption of EITF 07-5 did not have any impact on the Company’s financial position and results of operations.

 

In October 2008, the FASB issued the FSP No. 157-3, which clarifies the application of SFAS No. 157 “Fair Value Measurements” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. This FSP applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. The FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (“FASB Statement No. 154 “Accounting changes and Error Corrections,” paragraph 19). The disclosure provisions of SFAS No. 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The application of FSP No. 157-3 did not have a material effect on the Company’s consolidated financial statements.

 

In April 2009, the FASB issued FASB Staff Position FAS 157-4, Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly (“FSP 157-4”). FSP 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The FSP provides guidance for estimating fair value when the volume and level of market activity for an asset or liability have significantly decreased and determining whether a transaction was orderly. This FSP is applied prospectively and is effective for interim and annual periods ending after June 15, 2009. The adoption of this statement did not have any impact on the Company’s financial condition or results of operations.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 requires an entity to provide the annual disclosures required by FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, in its interim consolidated financial statements. This FSP is applied prospectively and is effective for interim and annual periods ending after June 15, 2009. The adoption of this statement did not have any impact on the Company’s financial condition or results of operations.

 

In June 2009, the FASB issued FASB Statement No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS 166 will be effective for transfers of financial assets in fiscal years beginning after November 15, 2009, and in interim periods within those fiscal years with earlier adoption prohibited. The Company does not anticipate that the adoption of SFAS 166 will have any effect on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R). The Board’s objective in issuing this Statement is to improve financial reporting by enterprises involved with

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

variable interest entities. The Board undertook this project to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not anticipate that the adoption of SFAS 167 will have any effect on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued FASB Statement No. 168, “The FASB Accounting Standards Codification ^tm and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162”. The objective of this Statement is to replace Statement 162 and to establish the FASB Accounting Standards Codification ^tm (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Statement will be effective for the Company for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The Company does not anticipate the adoption of SFAS 168 will have any impact on the Company’s financial position or results of operations.

 

3.  Related Party Transactions

 

Purchases of services

 

All vessels listed in Note 1 receive management services from Free Bulkers, pursuant to ship management agreements between each of the ship-owning companies and Free Bulkers. Each agreement provides for a monthly technical management fee of $15 (on the basis that the $/Euro exchange rate is 1.30 or lower; if on the first business day of each month the $/Euro exchange rate exceeds 1.30, then the management fee payable will be increased for the month in question, so that the amount payable in $ will be the equivalent in Euro based on 1.30 $/Euro exchange rate). FreeSeas also pays Free Bulkers a fee equal to 1.25% of the gross freight or hire from the employment of FreeSeas’ vessels and a 1% commission on the gross purchase price of any new vessel acquired or the gross sale price of any vessel sold by FreeSeas with the assistance of Free Bulkers. FreeSeas also reimburses, 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 FreeSeas’ vessels at port. FreeSeas believes that it pays Free Bulkers industry standard fees for these services. In turn, Free Bulkers has entered into an agreement with Safbulk Pty Ltd., a company controlled by one of the Group’s affiliates, for the outsourcing of the Company’s commercial management of the fleet. Free Bulkers is entitled to a termination fee if the agreement is terminated upon a “change of control” as defined in the agreement. Such termination fee would currently amount to approximately $85,000.

 

Effective January 1, 2008, the Company began to pay an annual fee of $500 to Free Bulkers as compensation for services related to FreeSeas’ accounting and financial reporting obligations and implementation of Sarbanes-Oxley internal control over financial reporting procedures. On October 1, 2008, the Company entered into an amended and restated services agreement. In connection, with the amendment of the

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

services agreement, Free Bulkers is also now responsible for executing and supervising all of the Company’s operations based on the strategy devised by the board of directors and subject to the approval of the Company’s board of directors. Free Bulkers is responsible, among other things, for general administrative, office and support services necessary for the Company’s operations and the Company’s fleet, including technical and clerical personnel, communication, accounting, and data processing services; advising the Company’s board of directors when opportunities arise to purchase, including through newbuildings, or to sell any vessels; and negotiating all borrowings, deposits and lending arrangements for us. The annual fee for the services provided under the amended services agreement was agreed to $1,200 (on the basis that the $/Euro exchange rate is 1.35 or lower; if on the last business day of each month the $/Euro exchange rate exceeds 1.35, then the management fee payable for the following month will be increased, so that the amount payable in $ will be the equivalent in Euro based on 1.35 $/Euro exchange rate), including the $500 mentioned above.

 

Fees and expenses charged by Free Bulkers are included in the accompanying condensed consolidated statements of income in “Management fees to a related party” and “General and administrative expenses”. The total amounts charged for the six-month periods ended June 30, 2009 and 2008 amounted to $1,446 ($838 of management fees and $608 of accounting fees) and $1,032 ($782 of management fees and $250 of accounting fees), respectively.

 

The balance due from Free Bulkers as of June 30, 2009 and December 31, 2008 was $1,948 and $1,634, respectively. Amounts charged by related parties for office space during the six months periods ended June 30, 2009 and 2008 were $75 and $91, respectively.

 

The loan of $26,250 which has been used to partly finance the acquisition of the M/V Free Impala in April 2008, which as of June 30, 2009 has an outstanding balance of $23,250, has been granted by First Business Bank (FBB) in which one of the Company’s major shareholders holds a substantial interest. Interest charged under the loan facility for the six month period ended June 30, 2009 and June 30, 2008, amounts to $294 and $262, respectively and is included in the interest and finance cost in the accompanying condensed consolidated statements of income.

 

Mr. Constantinos Varouxakis, the brother of Mr. Ion Varouxakis, the Company’s chairman, chief executive officer and president, is associated with a ship-brokering company named Navar Inc. Free Bulkers and Safbulk use such brokering company, from time to time, as one of the shipping brokers for the Company’s fleet. During the six-month period ended June 30, 2009 and 2008, Navar Inc. charged the Company commissions of $21 and $0, respectively, which are included in “Voyage expenses” in the accompanying condensed consolidated statements of income. The balance due to Navar Inc. as of June 30, 2009 and December 31, 2008 was $21 and $12, respectively.

 

 

 

During the six months ended June 30, 2009, there were no vessel acquisitions. During the six months ended June 30, 2008 the Company purchased the M/V Free Knight on March 19, 2008, for a cash purchase price of $39,250 and related purchase costs of $400, and the M.V Free Impala on April 2, 2008, for a cash purchase of $37,500 and related costs of $420. Both vessels were purchased from parties affiliated to F.S. HOLDINGS LIMITED, one of our major shareholders. As of June 30, 2008, advances of $6,520 were made to the sellers of the M/V Free Lady which was acquired in July 2008.

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

All of the Company’s vessels have been provided as collateral to secure the bank loans discussed in Note 7 below.

 

Depreciation.   Effective April 1, 2009, and following management’s reassessment of the useful lives of the Company’s assets, the vessels’ useful life was increased from 27 to 28 years. Management’s estimate was based on the current vessels’ operating condition, as well as the conditions prevailing in the market for same type of vessels. The effect of this change in accounting estimate, which did not require retrospective adoption as per SFAS No. 154 “Accounting Changes and Error Corrections” was to increase net income for the six-month periods ended June 30, 2009 by $313 or $0.01 per share.

 

 

The Company estimates the fair values of any below or above market time charters assumed when a vessel is acquired. The difference between market and assumed below or above market charter value is discounted using the weighted average cost of capital method and is recorded as deferred revenue or a back-log asset and amortized, on a straight line basis, to revenue over the remaining life of the assumed time charter. The back log asset relating to the acquisition of the Free Maverick which was acquired in September 2008 was fully amortized during the six — month period ended June 30, 2009. There were no back-log assets during the same period of 2008.

 

 

The Company is exposed to interest rate fluctuations associated with its variable rate borrowings and its objective is to manage the impact of such fluctuations on earnings and cash flows of its borrowings. In this respect, the Company uses interest rate swaps to manage net exposure to interest rate fluctuations related to its borrowings and to lower its overall borrowing costs.

 

During the second half of 2007, in conjunction with the $68,000 HSH Nordbank senior loan, the Company entered into two interest rate swap agreements that did not qualify for hedge accounting. As such, the fair value of these agreements and changes therein were recognized in the balance sheets and statements of income, respectively. On April 14, 2008, upon completion of the refinancing of the HSH Nordbank loan, the aforesaid interest rate swap contracts were assumed by Credit Suisse, the refinancing bank, through the execution of novation agreements.

 

Under the terms of the two swap agreements, the Company makes quarterly payments to the counterparty based on decreasing notional amounts, standing at $10,500 and $5,600 as of June 30, 2009 at fixed rates of 5.07% and 5.55% respectively, and the counterparty makes quarterly floating-rate payments at LIBOR to the Company based on the same decreasing notional amounts. The swaps mature in September 2015 and July 2015, respectively. There were no further interest rate swaps agreements concluded in 2009 and 2008.

 

The changes in fair value of the Company’s two interest rate swaps resulted in an unrealized gain of $460 and an unrealized loss of $(54) for the six-month periods ended June 30, 2009, and 2008, respectively, which is separately reflected in the accompanying condensed consolidated statements of income.

 

Effective January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157 clarifies the definition of fair value, prescribes methods of measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. In accordance with FSP No. 157-2, the Company deferred the adoption of SFAS No. 157 for its nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. The adoption of the remaining provisions of SFAS No. 157 did not have a material impact on the Company’s fair value measurements.

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

The Company’s derivative financial instruments are valued using pricing models that are used to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. The Company’s derivatives trade in liquid markets, and as such, model inputs can generally be verified and do not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy. The Company classifies the derivative financial instruments within Level 2 of the fair value hierarchy.

 

 

As of June 30, 2009, the Company’s bank debt is analyzed as follows:

 

 

The Company and its subsidiaries have obtained financing from affiliated and unaffiliated lenders for its vessels. On March 20, 2009, the Company entered into a term sheet with Hollandsche Bank-Unie N.V. (“HBU”), pursuant to which HBU agreed to refinance the balloon payment due on August 1, 2009 on overdraft facility IV, amounting to $27,100, with a new 3.5 year facility which is payable as follows: 13 quarterly installments of $600 beginning on August 1, 2009 and one balloon payment of $19,300 on November 1, 2012. The new facility will bear interest at the rate of 3.00% above LIBOR, increased by a “liquidity premium” to be determined following the signing of the restated agreement. The existing conditional HBU overdraft facility III amounting to $3,000 was terminated upon the refinancing of the balloon payment in August 2009. Effective September 15, 2009, the Company entered into an amended and restated agreement with HBU based on the term sheet signed on March 20, 2009, amending the loan-to-value ratio introduced in the term sheet and incorporating the modified interest coverage and debt service coverage ratios introduced in the waiver letter obtained on July 17, 2009, as discussed in Note 10 a. (ii).

 

All the Company’s credit facilities bear interest at LIBOR plus a margin, ranging from 2.00% to 4.25%, and are secured by mortgages on the financed vessels and assignments of vessels’ earnings and insurance coverage proceeds. They also include affirmative and negative financial covenants of the borrowers, including maintenance of operating accounts, minimum cash deposits, average cash balances to be maintained with the lending banks and minimum ratios for the fair values of the collateral vessels compared to the outstanding loan balances. Each borrower is restricted under its respective loan agreement from incurring additional indebtedness, changing the vessels’ flag without the lender’s consent or distributing earnings.

 

The weighted average interest rate for the six month periods ended June 30, 2009 and 2008 was 2.3% and 3.0%, respectively. Interest expense incurred under the above loan agreements amounted to $1,795 and $1,930 for the six month periods ended June 30, 2009 and 2008, respectively, and is included in Interest and finance costs in the accompanying unaudited condensed consolidated statements of income.

 

The Company’s loan agreements contain various financial covenants as follows:

 

a) Credit Suisse loan agreement: i) the Company should maintain minimum cash balance of $375 for each of the Company’s vessels covered by the loan agreement; ii) the aggregate fair market value of the financed vessels must not be less than 135% of the outstanding loan balance.

 

b) FBB loan agreement: i) the Company should maintain on average corporate liquidity at least $3,000, the free cash balance as of June 30, 2009 being $2,091; ii) the leverage ratio of the corporate

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

guarantor should not at any time exceed 68%; iii) the ratio of EBITDA to net interest expense must not be less than 3; iv) the fair market value of the financed vessel must not be less than 130% of the outstanding loan balance.

 

c) HBU loan agreement: i) the interest coverage ratio should not be less than 2.5; ii) the debt service coverage ratio should not be less than 1.10; iii) the gearing ratio should not exceed 2.5; iv) the outstanding loan balance should not be more than 70% of the fair market value of the financed vessels.

 

In the event of non compliance with the covenants prescribed in the loan agreements, including due to a sharp decline in the market value of the Company’s vessels, such non-compliance would constitute a potential event of default in the absence of available additional assets or cash to secure the Company’s debt and bring the Company into compliance with the debt covenants, and could result in the lenders requiring immediate payment of the loans.

 

As of December 31, 2008, March 31, 2009 and June 30, 2009, the Company was not in compliance with certain original loan covenants and has obtained the following waivers:

 

On March 17, 2009, FBB agreed to waive any breach of the 130% value to loan covenant for the mortgaged vessel and any breach of the Company’s ratio of total liabilities to total assets from January 1, 2009 until January 1, 2010. Further, FBB has confirmed that no event of default had occurred as of December 31, 2008. Effective as January 1, 2009, the interest payable increased from 1.375% above LIBOR to 2.00% above LIBOR. In May 2009, the Company initiated discussions with FBB in order to extent the waiver related to the value to loan covenant up to July 1, 2010 which were concluded on July 17, 2009 as discussed in Note 10(a)(i).

 

On March 20, 2009, based on the term sheet discussed above, HBU agreed to waive any breach of the 70% loan-to value-ratio in the Company’s existing credit agreements during the period from October 1, 2008 through July 1, 2010. A new value-to-loan covenant ratio was introduced to the existing credit agreement, as well as to the new $27,100 facility discussed above and is as follows: (i) 100% as per July 1, 2010, (ii) 110% as per July 1, 2011, (iii) 120% as per July 1, 2012 and (iv) 125% as per December 31, 2012. In addition, commencing March 1, 2009, interest due on the continuing term loan and overdraft facilities increased from 1.30% above LIBOR to 2.25% above LIBOR. In May 2009, the Company initiated discussions with HBU in order to obtain waiver for the covenants related with the interest coverage ratio and debt service coverage ratio which, according to management estimates, is not probable of being achieved in the twelve-month period following the balance sheet date. These discussions were concluded on July 17, 2009 when the Company obtained a waiver amending the terms of these covenants for a period up to and including 31 December 2010 as discussed in Note 10(a) (i).

 

On March 23, 2009, Credit Suisse agreed to waive any breach of the 135% value-to-loan covenant from October 1, 2008 until March 31, 2010. In consideration of the waiver, the Company agreed to a prepayment of $5,000 on July 31, 2009. In addition, from March 23, 2009 until March 31, 2010, the interest payable on the loan shall increase to 2.25% above LIBOR from 1.25% above LIBOR.

 

Based on the waivers and waiver renewals discussed above and in Note 10 (a) (i), all of the debt continues to be classified as long-term, except for the principal payments falling due in the next 12 months and the $10,890 with Credit Suisse, which has been recorded as current to reflect the difference between the collateral vessels’ market value and value-to-loan covenant requirements in effect in the second quarter of 2010.

 

 

The prevailing and anticipated charter rates and vessel values may not be sufficient to bring the Company into compliance with certain of its debt covenants in the future, upon expiration of the waivers received from the Company’s lenders. Management is in continuous contact with the lending banks and believes that the Company will cure any event of non-compliance in a timely manner. In addition, management expects that the lenders would not declare an event of default, therefore not demand immediate repayment of the bank debt, provided that the Company pays loan principal installments and accumulated or accrued interest as they fall due under the existing bank debt. Cash being generated from operations is expected to be sufficient for this purpose. There can be no assurance however that once the waivers discussed above expire, and in the event of non — compliance with such debt covenants in the future years, the lenders will further extend the waiver period.

 

 

Various claims, suits, and complaints, including those involving government regulations and product liability, arise in the ordinary course of the shipping business. In addition, losses may arise from disputes with charterers, agents, insurance and other claims with suppliers relating to the operations of the Company’s vessels. Currently, management is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying condensed consolidated financial statements. The Company accrues for the cost of environmental liabilities when management becomes aware that a liability is probable and is able to reasonably estimate the probable exposure. Currently, management is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying condensed consolidated financial statements. The Company’s protection and indemnity (P&I) insurance coverage for pollution is $1 billion per vessel per incident.

 

On September 21, 2007, the vessel M/V Free Jupiter ran aground off the coast of the Philippines. The Company worked in consultation with insurance brokers and the salvage company, SMIT Singapore PTE Ltd., to address the incident. Operations to re-float the vessel were completed under a Lloyd’s Open Form agreement with the salvage company. This agreement is a standard agreement used internationally for such purposes and imposes obligations on the salvage company to conduct its operations in a manner that will preserve the vessel’s cargo and that will not cause damage to the environment. The vessel was returned to service in February 2008. On February 9, 2009, the Company entered into an agreement with the Salvors and hull and machinery insurers pursuant to which a settlement in the amount of $9,500 has been agreed to as the compensation amount under the Lloyd’s Open Form services in connection with the salvage operation. Of the $9,500 settlement amount, the hull and machinery underwriters have agreed to pay $8,500 (and already disbursed $8,310) and the remaining $1,000 balance represents the amount which is expected to be recovered upon completion of the average adjustment and apportionment between insurers. As at June 30, 2009, the outstanding balance of the specific claim receivable amounted to $9,489. The Company believes that the amount of the claim will be received in full.

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

On April 07, 2009, the vessel M/V Free Impala suffered from engine breakdown at Honolulu. Total cost of repairs performed and other costs incurred amounting to $362 are claimable from hull and machinery underwriters. The expenses relating with this incident have been submitted to adjusters’ surveyor and surveyor report is expected in the following months. As at June 30, 2009, the balance of the specific claim receivable amounts to $362. The Company believes that the amount of the claim will be received in full.

 

 

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of the dilutive common shares outstanding does not include the 12,500 Series A and 65,000 Series B Unit options, for 150,000 shares and 260,000 shares respectively, as their exercise price was greater than the average market price and 170,000 options for common shares under the Company’s stock compensation plan of which 140,000 are vested as of June 30, 2009.

 

The components of the denominator for the calculation of basic earnings per share and diluted earnings per share are as follows:

 

 

At June 30, 2009, 550,000 options and 2,591,271 warrants remained unexercised, the effect of which was anti-dilutive for EPS purposes. In the event all of the Company’s outstanding options and warrants were exercised, these would result to $16,814 proceeds for the Company.

 

10.  Subsequent Events:

 

The Company has evaluated subsequent events through October 20, 2009, at which date financial statements were available to be issued.

 

 

(i). On July 17, 2009 the Company agreed with the lending banks the extension and/or change of certain financial covenants as follows:

 

HBU Bank:   HBU waived current interest coverage ratio and debt service ratio covenants until January 1, 2011 as discussed in Note 7. These will be calculated on a 12 month rolling basis and during the waived period, ‘Interest Cover ratio’ will be defined as EBITD/Net financing charges (instead of EBIT/Net financial charges) and is to be at least 3.75 up to and including July 1, 2010; thereafter the ratio to be at least 3.00 up to and including December 31, 2010; and “Debt Service ratio” should not be

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

less than 1.00. The aforementioned ratios will be reexamined for the year 2011 based on the prevailing market conditions at that time.

 

FBB bank:   FBB extended the waivers provided to the Company as discussed in Note 7 up to July 1, 2010

 

(ii). Effective September 15, 2009 the Company and HBU, based on the term sheet discussed in Note 7 above, amended and restated the credit agreement dated August 12, 2008, with a new 3.5 year facility which is payable as follows: 13 quarterly installments of $600 beginning on August 1, 2009 and one balloon payment of $19,300 on November 1, 2012. The new facility bears interest at the rate of 4.25% above LIBOR. In addition the new value-to-loan covenant ratio introduced by the term sheet discussed in Note 7 , was further amended as follows: (i) 70% from September 15, 2009 until and including June 30, 2010, (ii) 100% from July 1, 2010 until and including June 30, 2011, (iii) 110% from July 1, 2011 until and including June 30, 2012, (iv) 120% from July 1, 2012 until and including December 30, 2012, and v) 125% from December 31, 2012 onwards. Moreover, based on the amended and restated agreement an amount equal to 10% of any capital market proceeds received by the Company (with a maximum of $3,000 over the lifetime of the facilities) shall be applied in prepayment of the HBU Facilities. Additionally, the Company shall procure that at the end of each financial year a prepayment shall be made in an aggregate amount equal to: (i) 75% of excess cash, in the event that the value-to-loan ratio is less than or equal to 70%, (ii) 50% of excess cash, in the event that the value-to-loan ratio is less than or equal to 100%, (iii) 25% of excess cash, in the event that the value-to-loan ratio is less than 110% or (iv) no prepayment shall be made, in the event that the value-to-loan ratio is equal to or greater than 110%.

 

 

On July 28, 2009, the Company completed the registered offering of 10,041,151 shares of common stock at $1.80 per share, which includes 1,309,715 shares issued pursuant to the underwriter’s over-allotment option. The offering resulted in net proceeds of approximately $16.7 million, after deducting underwriting fees and estimated offering expenses. Proceeds from the offering were used primarily for the acquisition of the drybulk vessel discussed in Note 10 e., as well as for the repayment of debt and general working capital purposes. The shares were sold under the Company’s previously filed shelf registration statement, which was declared effective by the Securities and Exchange Commission on May 14, 2008.

 

 

On July 29, 2009, the Company extended the expiration date and reduced the exercise price for its 786,265 outstanding Class W warrants currently listed under the ticker FREEW. The expiration date of the Class W warrants is extended to December 31, 2009 and the exercise price per share is reduced to $2.50. The original expiration date of the Class W warrants was July 29, 2009 and the original exercise price per share was $5.00. Each Class W warrant entitles the holder to purchase one share of FreeSeas’ common stock. All other terms of the Class W warrants remain unchanged.

 

 

On March 28, 2005, the Company executed a definitive agreement, which contemplated the merger of Trinity Partners Acquisition Company Inc. (“Trinity”), a blank check company formed to serve as a vehicle to complete a business combination with an operating business, into FreeSeas (the “Transaction”). In connection with Trinity’s initial public offering Trinity had entered into an agreement with HCFP Brenner Securities LLC (“HCFP”) pursuant to which HCFP was engaged to act as Trinity’s non-exclusive investment banker in connection with a business combination and would receive 7,500 shares of the Trinity’s common stock and

 

FREESEAS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

 

15,000 Class Z warrants to purchase Trinity’s common stock at an exercise price $5.00 per share. On December 15, 2005, Trinity was merged with and into the Company and the Company has assumed Trinity’s obligation to HCFP by providing a purchase option to HCFP. Under that purchase option, HCFP had the right to purchase up to 12,500 Series A Units at a price of $17.325 per unit and up to 65,000 Series B Units at a price of $16.665 per unit. Each Series A Unit consisted of two shares of FreeSeas’ common stock, five Class W warrants and five Class Z warrants. Each Series B Unit consisted of two shares of FreeSeas’ common stock, one Class W warrant and one Class Z warrant. The exercise price of the warrants included in the units was $5.50 per share. The purchase option expired on July 29, 2009 without being exercised.

 

 

On August 5, 2009, the Company agreed to purchase a Handysize vessel from an unaffiliated third party for approximately $11,000. The Company financed the acquisition using cash on hand which was raised as part of the follow on equity offering discussed in Note 10 b. With the acquisition of the new vessel, to be named the M/V Free Neptune, the Company’s fleet increased from nine to ten vessels. The vessel is a 30,838 dwt Handysize vessel built in 1996 in Japan, and was delivered to the Company on August 25, 2009.

 

 

On September 17, 2009, the Annual Meeting of Shareholders approved an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 40,000,000 to 250,000,000 shares, par value $0.001 per share.

 

 

On September 17 2009, each of the Company’s vessel-owning subsidiaries amended its management agreement with Free Bulkers to increase the monthly technical management fee to $16.5 (on the basis that the $/Euro exchange rate is 1.30 or lower; if on the first business day of each month the $/Euro exchange rate exceeds 1.30, then the management fee payable will be increased for the month in question, so that the amount payable in $ will be the equivalent in Euro based on 1.30 $/Euro exchange rate) plus a fee of $0.4 per day for superintendant attendance.

 

On September 17, 2009, FreeSeas amended its services agreement with Free Bulkers pursuant to which the annual fee of $1,200 was increased to $1,422.

 

The foregoing amendments became effective on October 1, 2009.

 

Exhibit 99.2

 

FreeSeas Inc. is a Republic of the Marshall Islands company that is referred to in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, together with its subsidiaries, as “FreeSeas,” “we,” “us,” or “our.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes thereto, which are included elsewhere in this report.

 

The historical consolidated financial results of FreeSeas described below are presented in United States dollars.

 

Overview

 

We are an international drybulk shipping company incorporated under the laws of the Republic of the Marshall Islands with headquarters in Piraeus, Greece. Our existing fleet consists of eight Handysize vessels and two Handymax vessels that carry a variety of drybulk commodities, including iron ore, grain and coal, which are referred to as “major bulks,” as well as bauxite, phosphate, fertilizers, steel products, cement, sugar and rice, or “minor bulks.” As of October 21, 2009, the aggregate dwt of our fleet is approximately 300,000 dwt and the average age of our fleet is approximately 14 years.

 

We are currently focusing on the Handysize and Handymax sectors, which we believe are more versatile in the types of cargoes that they can carry and trade routes they can follow, and offer less volatile returns than larger vessel classes. We may, however, acquire larger drybulk vessels if appropriate opportunities present themselves.

 

We have contracted the management of our fleet to Free Bulkers, S.A. (“FreeBulkers”) a company owned by Ion G. Varouxakis, our chairman, chief executive officer and president. Free Bulkers provides 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. (“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.

 

 

Recent Developments

 

Increase in Authorized Common Stock

 

Our shareholders approved at our Annual Meeting of Shareholders held on September 17, 2009, an amendment to our Amended and Restated Articles of Incorporation increasing the number of authorized shares of common stock from 40,000,000 to 250,000,000 shares.

 

Amendment and Restatement of HBU Credit Agreement

 

Effective September 15, 2009, we entered into an amended and restated credit agreement with Hollandsche Bank-Unie N.V. (“HBU”), which replaces our 2008 credit agreement with HBU. Under the amended and restated credit agreement, we have obtained a new 3.5 year facility, the principal of which is payable in 13 quarterly installments of $600,000 beginning on August 1, 2009 and one balloon payment of $19,300,000 on November 1, 2012. This new facility bears interest at the rate of 4.25% above LIBOR. In addition, the amended and restated credit agreement further amends the value to loan covenant ratio previously agreed to in March 2009 (see “ — Long-Term Debt”) as follows: (i) 70% from September 15, 2009 through June 30, 2010, (ii) 100% from July 1, 2010 through June 30, 2011, (iii) 110% from July 1, 2011 through June 30, 2012, (iv) 120% from July 1, 2012 through December 30, 2012, and (v) 125% from December 31, 2012 onwards. We

will be required to use 10% of the proceeds of any capital raise, including this offering, to prepay any amounts outstanding (up to a maximum of $3,000,000 over the life of the facilities). Additionally, at the end of each fiscal year, we are is required to make a prepayment in an aggregate amount equal to: (i) 75% of excess cash, if the value to loan ratio is less than or equal to 70%, (ii) 50% of excess cash, if the value to loan ratio is less than or equal to 100%, (iii) 25% of excess cash, if the value to loan ratio is less than 110%, or (iv) zero, if the value to loan ratio is equal to or greater than 110%

 

Acquisition of M/V Free Neptune

 

In August 2009, we purchased and took delivery of a Handysize vessel from an unaffiliated third party for approximately $11 million. We financed the acquisition using a portion of the net proceeds of our public offering in July 2009. With the acquisition of the M/V Free Neptune , our fleet increases from nine to 10 vessels. The M/V Free Neptune is a 30,838 dwt Handysize vessel built in 1996 in Japan. The M/V Free Neptune has been fixed for a spot time charter trip of approximately 30-35 days through November 2009 at a daily rate of $20,000.

 

Public Offering

 

In July 2009, we completed a public offering of 10,041,151 shares of our common stock at $1.80 per share, including 1,309,715 shares sold upon exercise of the underwriter’s overallotment option. The offering resulted in net proceeds of approximately $16.7 million, after deducting underwriting fees and estimated offering expenses. Of these net proceeds, approximately $11 million was used for the acquisition of the M/V Free Neptune and approximately $1.7 million was used to prepay a portion of our debt outstanding to HBU, with the remaining balance used for general working capital purposes.

 

Extension of Class W Warrants

 

In July 2009, we extended the expiration date and reduced the exercise price of our 786,265 outstanding Class W warrants currently listed on the NASDAQ Global Market under the symbol “FREEW.” The expiration date of the Class W warrants has been extended to December 31, 2009 from July 29, 2009, and the exercise price per share has been reduced to $2.50 per share from $5.00 per share. Each Class W warrant entitles the holder to purchase one share of our common stock. All other terms of the Class W warrants remain unchanged.

 

Expiration of Purchase Option to IPO Underwriter

 

As part of our 2005 merger with Trinity Partners Acquisition Company Inc. (“Trinity”), we assumed Trinity’s obligations under a purchase option sold to HCFP Brenner (“HCFP”), the underwriter of Trinity’s initial public offering. Under that purchase option, HCFP had the right to purchase up to 12,500 Series A Units at a price of $17.325 per unit and up to 65,000 Series B Units at a price of $16.665 per unit. Each Series A Unit consisted of two shares of our common stock, five Class W warrants and five Class Z warrants. Each Series B Unit consisted of two shares of our common stock, one Class W warrant and one Class Z warrant. The exercise price of the warrants included in the units was $5.50 per share. The purchase option expired unexercised on July 29, 2009.

 

Loan Covenant Waivers

 

In July 2009, certain of our lenders agreed to extend or modify certain of the financial covenants in our credit agreements. First Business Bank S.A. (“FBB”), agreed to extend the previously provided waivers of the vessel value to debt ratio covenant and the parent company leverage ratio covenant from January 1, 2010 to July 1, 2010. In connection with this extension, we agreed to an increase in the interest rate on the loan by 0.75%. HBU agreed to modify our interest coverage and debt service coverage ratios requirements. For 2009 and 2010, the interest coverage ratio will defined as EBITD/net financing charges and is to be at least 3.75 until July 1, 2010 and at least 3.00 through December 31, 2010. During this period, the debt service coverage ratio must be at least 1.00 through December 31, 2010. The foregoing ratios for 2011 will be determined

based on the prevailing market conditions. See “— Long-Term Debt — Loan Agreement Covenants and Waivers.”

 

Employment and Charter Rates

 

The BDI fell 94% from a peak of 11,793 in May 2008 to a low of 663 in December 2008. It subsequently rose to a high of 4,291 on June 3, 2009 and then declined to 2,163 on September 24, 2009. It was 2,728 as of October 16, 2009. The Baltic Handysize Index fell 92% from a peak of 3,407 in May 2008 to a low of 270 in January 2009. It has since risen to 961 as of October 16, 2009. The steep decline in charter rates is due to various factors, including the lack of trade financing for purchases of commodities carried by sea, which has resulted in a significant decline in cargo shipments, and the excess supply of iron ore in China, which has resulted in falling iron ore prices and increased stockpiles in Chinese ports.

 

As of June 30, 2009, we had six vessels trading in the spot market that are currently exposed to the downturn in the drybulk charter rates. Should drybulk charter rates continue to decline or remain at their current low level, our charter revenue with respect to these vessels will remain low as well. Most of our vessels have employment in the first quarter and the second quarter of 2009 and, while we expect that charter rates will gradually recover as economic activity improves during the course of the year, those vessels that are redelivered earlier in the year are expected to receive lower charter rates.

 

On March 23, 2009, in order to secure cash flow for a longer period, we announced that we agreed to extend the charter of the M/V Free Goddess , which had been scheduled to expire over the next few months. The charter was extended until January/February 2010 on the following terms: a lump-sum amount of $500,000 was paid by the charterer on February 15, 2009 as an upfront non-refundable performance guarantee; charter rate of $8,000 per day to September 15, 2009, with an additional 50% profit sharing for any amounts earned by our charterers in excess of $10,000 per day; and charter rate of $10,500 per day starting September 15, 2009 (until January/February 2010), with an additional 50% profit sharing for amounts earned by our charterers in excess of $12,500 per day.

 

The M/V Free Destiny , the M/V Free Envoy , the M/V Free Hero , the M/V Free Knight , the M/V Free Maverick and the M/V Free Impala are being successively chartered in the spot market.

 

Historically high levels of scrapping have been taking place since October 2008 among older vessels as a result of the adverse rate environment, in particular with respect to smaller size Handysize vessels, the segment in which we operate. It may take some time until the elimination of excess tonnage supply manifests itself in the form of higher charter rates.

 

A prolonged period of extremely low charter rates may lead owners to face difficulties in meeting their cash flow obligations, and they may seek to find mutual accommodations with charterers in which charterers may pay lower charter rates over a longer period of time. Depending on their overall financial condition, some weaker owners may not be able to service their debt obligations, which may cause them to cease operations or seek protection from creditors.

 

Change in Auditors

 

In May 2009, our Audit Committee approved, and the full Board of Directors ratified, the appointment of Ernst & Young (Hellas) Certified Auditors Accountants S.A. (“E&Y”), as our independent registered public accounting firm for the fiscal year ending December 31, 2009, replacing PricewaterhouseCoopers, S.A., or PWC. The decision to change auditors is not a result of any disagreements with PWC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. PWC’s report on our financial statements for the years ended December 31, 2008 and 2007 did not contain an adverse opinion or a disclaimer of opinion nor was such report qualified or modified as to uncertainty, audit scope or accounting principles. The appointment of E&Y as our auditors for the 2009 fiscal year was ratified by our shareholders at our annual meeting held on September 17, 2009.

Dividends on Common Stock

 

In 2008 we paid quarterly cash dividends to our shareholders of $0.175 per share in February and May, $0.20 per share in August and $0.075 per share in November, however, due to prevailing economic conditions, our board of directors determined in 2009 to suspend payment of cash dividends. In addition, the waivers of covenant defaults that we received from our lenders restrict our ability to pay dividends.

 

Series A Preferred Shares

 

We have entered into a shareholders rights agreement with American Stock Transfer & Trust Company, LLC effective January 14, 2009 and declared a dividend of one purchase right, or a right, to purchase one one-thousandth of our Series A Participating Preferred Stock, par value $0.001 per share, for each outstanding share of our common stock. The dividend was paid on January 23, 2009 to our shareholders of record on that date. Each right entitles the registered holder, upon the occurrence of certain events, to purchase from us one one-thousandth of a share of preferred stock at an exercise price of $18.00, subject to adjustment. The rights become exercisable under certain circumstances set forth in the shareholders rights agreement.

 

Acquisition of Vessels

 

From time to time, as opportunities arise and depending on the availability of financing, we intend to acquire additional secondhand drybulk carriers. On August 5, 2009 we agreed to purchase the M/V Free Neptune from an unaffiliated third party for approximately $11,000,000. The vessel acquired was free of charter and on September 1, 2009 was fixed for a spot time charter trip of approximately 30 days at a daily rate of $15,000. On September, 29 2009, the M/V Free Neptune has been fixed for a new spot time charter trip of approximately 30-35 days at a daily rate of $20,000. When a vessel is acquired free of charter, we 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.

 

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 the buyer determines to change the vessel’s flag state.

 

When 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.

 

When we acquire a vessel and want to assume or renegotiate a related time charter, we must take the following steps:

 

 

 

Our business comprises the following primary components:

 

 

The employment and operation of our vessels involve the following activities:

 

 

Important Measures for Analyzing Results of Operations

 

We believe that the important measures for analyzing trends in the results of our operations consist of the following:

 

 

 

Revenues

 

Our revenues were driven primarily by the number of vessels we operate, 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:

 

 

 

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, voyage expenses such as port, canal and fuel costs are paid by the vessel owner. A trip time charter is a short-term time charter for a voyage between load port(s) and discharge port(s) under which the charterer pays fixed daily hire rate on a semi-monthly basis for use of the vessel. A period time charter is charter for a vessel for a fixed period of time at a set daily rate. Under trip time charters and time charters, the charterer pays voyage expenses. Under all three types of charters, the vessel owners pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs. The vessel owners 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.

 

Vessels operating in the spot charter market generate revenues that are less predictable, but can yield increased profit margins during periods of improvements in drybulk rates. Spot charters also expose vessel owners to the risk of declining drybulk rates and rising fuel costs. Our vessels were chartered on period time charters as well as in the spot market during the six months ended June 30, 2009.

 

A standard maritime industry performance measure is the “time charter equivalent” or “TCE.” TCE rates are defined as our time charter revenues less voyage expenses during a period divided by the number of our available days during the period, which is consistent with industry standards. Voyage expenses include port charges, bunker (fuel oil and diesel oil) expenses, canal charges and commissions. Our average TCE rate for financial year 2008 and the six months ended June 30, 2009 was $25,719 and $17,441, respectively.

 

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 expenses. Vessel operating expenses generally represent costs of a fixed nature.

 

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:

 

 

 

 

 

 

 

 

 

 

 

Results of Operations

 

Six Months Ended June 30, 2009 as Compared to Six Months Ended June 30, 2008

 

REVENUES  — Operating revenues for the six months ended June 30, 2009 were $29,923,000 compared to $23,755,000 generated during the comparable period in 2008. The increase of $6,168,000 is primarily attributable to an increase in the average number of vessels in our fleet to nine in the six months ended June 30, 2009 compared to six in the same period in 2008.

 

OPERATING EXPENSES  — Vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, totaled $7,401,000 in the six months ended June 30, 2009 as compared to $7,381,000 in the six months ended June 30, 2008. This small increase of $20,000 in vessel operating expenses, despite the considerable increase of the average number of vessels owned to nine during the six-month period ended June 30, 2009 as compared to six during the six-month period ended June 30, 2008, is a result of our monitoring of vessel operating expenses and the more efficient operation of our vessels resulting from repairs completed in 2008 to bring the newly purchased vessels to our operational standards.

Consequently, the total daily vessel operating expenses per vessel owned, including management fees, were $5,057 for the six months ended June 30, 2009 as compared to $7,421 for the comparable period in 2008, a decrease of 31.9%.

 

VOYAGE EXPENSES AND COMMISSIONS  — Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra insurance and various expenses, were $638,000 for the six months ended June 30, 2009, as compared to $255,000 for the six months ended June 30, 2008. Six of our vessels were chartered in the spot market during the six months ended June 30, 2009. The variation in voyage expenses reflects mainly the bunkers delivery — redelivery transactions which expired during the six-month period of 2009.

 

For the six months ended June 30, 2009, commissions charged amounted to $1,589,000 as compared to $1,160,000 for the six months ended June 30, 2008. The commission fees represent commissions paid to Free Bulkers and unaffiliated third parties. Commissions paid to Free Bulkers equal 1.25% of gross hire or freight for vessels chartered through Safbulk commencing with the charters secured by it for the M/V Free Envoy and the M/V Free Destiny in March 2007. This agreement is for an initial one-year term and renews automatically until terminated by either party, with or without cause, upon one month’s notice. The increase of $429,000 over the six months ended June 30, 2009 as compared to the same period in 2008 relate directly to the increase in charter revenues in the respective period.

 

DEPRECIATION AND AMORTIZATION  — For the six-month period ended June 30, 2009, depreciation expense totaled $8,086,000 as compared to $5,040,000 for the same period in 2008. The increase in depreciation expense resulted from the growth of our fleet from an average of six to an average of nine vessels and the related investment in fixed assets. This increase in depreciation expense has been mitigated by the change of our depreciation policy as described below. For the six-month period ended June 30, 2009, amortization of dry-dockings and special survey costs totaled $774,000, an increase of $500,000 over the expenses reported in the comparable period of 2008. During the period ended June 30, 2008, we amortized only three vessels’ scheduled dry-dockings and special surveys. However, during the period ended June 30, 2009, we amortized five vessels’ scheduled dry-docking and special surveys. As a result, amortization of deferred dry-dockings and special survey costs increased for the period ended June 30, 2009.

 

Effective April 1, 2009, and following our reassessment of the useful lives of our assets, our vessels’ useful life was increased from 27 to 28 years. Our estimate was based on the current vessels’ operating condition and the conditions prevailing in the market for same type of vessels. The effect of this change in accounting estimate, which did not require retrospective adoption as per SFAS No. 154 “Accounting Changes and Error Corrections,” was to increase net income for the six-month period ended June 30, 2009 by $313,000 or $0.01 per share.

 

For the six-month periods ended June 30, 2009 and June 30, 2008, back-log asset’s amortization expense amounted to $907,000 and $0, respectively, and is included in voyage revenue.

 

MANAGEMENT FEES  — Management fees for the six months ended June 30, 2009 totaled $838,000, as compared to $1,032,000, which included $782,000 of management fees and $250,000 for accounting services, for the comparable period in 2008. The increase in management fees from $782,000 to $838,000 resulted from the fees charged in connection with the increased number of vessels under the technical management by our affiliate, Free Bulkers. Pursuant to the management agreements related to each of our current vessels, we pay Free Bulkers a monthly management fee equal to $15,000 per vessel (based on the rate of $1.30 per Euro) from the date of the relevant purchase memorandum of agreement. In September 2009 we amended these management agreements with Free Bulkers to increase the monthly technical management fee to $16,500 (based on $1.30 per Euro) plus a fee of $400 per day for superintendant attendance. In addition, we reimburse at cost the travel and other personnel expenses of the Free Bulkers staff, including the per diem charged by Free Bulkers, when Free Bulkers’ employees are required to attend our vessels at port, both prior to and after taking delivery. 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 charged by Free Bulkers are comparable to those charged by unaffiliated management companies.

GENERAL AND ADMINISTRATIVE EXPENSES  — General and administrative expenses, which include, among other things, management remuneration, legal, audit, audit related expense, international safety code compliance expenses, travel expenses, communications expenses, accounting and financial reporting fess, totaled $1,773,000 for the six months ended June 30, 2009 as compared to $1,306,000 for the six months ended June 30, 2008. The difference was primarily due to the change of the classification of accounting and financial reporting fees account from “management fees” to “general and administrative expenses” account.

 

STOCK-BASED COMPENSATION EXPENSE  — For the six months ended June 30, 2009, compensation cost totaled $6,000 as compared to $54,000 for the six months ended June 30, 2008. Compensation costs reflect non-cash, equity-based compensation of our executive officers valued by the Black Scholes fair value method as of the date such options were granted. As of June 30, 2009, there was $19,000 of total unrecognized compensation cost related to non-vested option-based compensation arrangements granted under our stock option plan. The cost is expected to be recognized over a weighted-average period of 1.48 years. No options vested during the period ended June 30, 2009.

 

FINANCING COSTS  — Financing costs amounted to $2,446,000 in the six months ended June 30, 2009, compared to $2,520,000 in the six months ended June 30, 2008. The decrease of $74,000 is mainly the result of the decreased interest rates during 2009. Our financing costs represent primarily the interest incurred, the amortized financing fees in connection with the bank loans used for the acquisition of our vessels, and the interest differential paid under the interest rate swap contracts.

 

The amortization of financing costs for the six-month period ended June 30, 2009 totaled $220,000 or an increase of $120,000 over the amortized expenses reported in the comparable period of 2008. The increase was mainly due to the amortized portion of the finance costs related to the HBU overdraft facility IV.

 

NET INCOME  — Net income for the six months ended June 30, 2009 was $6,757,000 as compared to $4,470,000 for the six months ended June 30, 2008. The substantial increase in net income for the six-month period resulted primarily from increased revenues due to the increased number of operating vessels.

Liquidity and Capital Resources

 

We have historically financed our capital requirements from equity provided by our shareholders, operating cash flows and long-term borrowings. We have primarily used our funds for capital expenditures to acquire and maintain our fleet, comply with international shipping standards and environmental laws and regulations, fund working capital requirements, make principal repayments on outstanding loan facilities, and payment of dividends. We expect to continue to rely upon operating cash flows, long-term borrowings, and the working capital available to us, as well as possible future equity financings, to fund our future operations and possible growth. In addition, to the extent that the options and warrants currently issued are subsequently exercised, the proceeds from those exercises would provide us with additional funds.

 

Because of the recent global economic downturn that has affected the international drybulk industry we may not be able to obtain financing either from new credit facilities or the equity markets. Therefore, in the first quarter of 2009, our board of directors suspended the payment of dividends, so as to retain cash from operations to fund our working capital needs, to service our debt and to fund possible vessel acquisitions depending on market conditions and opportunities. We believe that this suspension will enhance our future flexibility by permitting cash flow that would have been devoted to dividends to be used for opportunities that may arise in the current marketplace.

 

The drybulk carriers we owned had an average age of approximately 14 years as of June 30, 2009. Effective April 1, 2009, and following our reassessment of the useful lives of our assets, the vessels’ useful life was increased from 27 to 28 years. Our estimate was based on the current vessels’ operating condition and the conditions prevailing in the market for same type of vessels. The effect of this change in accounting estimate, which did not require retrospective adoption as per SFAS No. 154 “Accounting Changes and Error Corrections” was to increase net income for the six-month periods ended June 30, 2009 by $313 or $0.01 per share. 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 M/V Free Destiny , which is 26.7 years old, underwent its scheduled dry-dock and special survey in October/November 2007 and its next intermediate dry-docking is scheduled for the third quarter 2010. The M/V Free Envoy , which is 25.1 years old, completed its special survey dry-docking on June 30, 2008 and its next intermediate dry-docking is scheduled for 2011. If future dry-docking surveys do not require us to make extensive capital outlays to keep the vessels profitably operating, we will continue the operation of M/V Free Destiny and the M/V Free Envoy and will extend their estimated useful lives; otherwise, it is likely that these vessels will be disposed of and replaced by younger vessels.

 

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. Such 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 and secure partial financing at appropriate terms.

 

As of June 30, 2009, we are of the opinion that our working capital is sufficient for our present requirements.

 

Cash Flows

 

Six Months Ended June 30, 2009 as Compared to Six Months Ended June 30, 2008

 

OPERATING ACTIVITIES  — Net cash from operating activities increased by $8,139,000 from $12,851,000 for the six months ended June 30, 2009, as compared to $4,712,000 of net cash used for operating activities in the six months ended June 30, 2008. This is attributable to the increased revenues due to the increased number of available days.

INVESTING ACTIVITIES  — We have not been engaged into any major investing activities during the six months ended June 30, 2009 as compared to $84,090,000 for the six months ended June 30, 2008 associated with the acquisition of the M/V Free Knight on March 19, 2008 for the purchase price of $39,250,000, exclusive of commissions and pre-purchase expenses, with the acquisition of the M/V Free Impala on April 2, 2008 for the purchase price of $37,500,000, exclusive of commissions and pre-purchase expenses and with the advance of $6,520,000 paid for the acquisition of the M/V Free Lady on July 7, 2008 for a purchase price of $65,200,000.

 

FINANCING ACTIVITIES  — The cash used in financing activities during the six months ended June 30, 2009 was $14,138,000 as compared to cash provided by $37,440,000 from financing activities for the six months ended June 30, 2008, a net decrease of $51,578,000 attributable mainly to the proceeds from the HBU rollover eight-year loan facility and the proceeds from the FBB loan facility we utilized for the purchase of the M/V Free Knight and the purchase of the M/V Free Impala respectively.

 

Long-Term Debt

 

We and our subsidiaries have obtained financing from affiliated and unaffiliated lenders for our vessels.

HBU Credit Facility

 

On August 12, 2008, we amended our existing 2008 credit facility with HBU, and were granted a new credit facility of $34,600,000 from HBU in addition to the then-outstanding facility of $32,125,000. The breakdown of the facility amount of $66,725,000 is as follows: (i) the pre-existing overdraft facility I in the outstanding amount of $2,500,000, which amount was reduced to $0 as December 2008; (ii) an unused overdraft facility II in the amount of $1,375,000, the availability of which will be reduced quarterly by $125,000 beginning three months after the first draw down date; (iii) an overdraft facility III in the amount of $3,000,000 which can be drawn down when the overdraft facility IV has been repaid and, except for earlier alteration the limit of the overdraft facility III, will be reduced to zero on April 1, 2016; (iv) an overdraft facility IV in the amount of $34,600,000, which has been used to finance a portion of the purchase price of the M/V Free Maverick ; and (v) the then-outstanding amount of $25,250,000 of the rollover eight-year loan facility, the original principal amount of which was $27,000,000. The $27,000,000 was drawn on March 18, 2008 to finance a portion of the purchase price of the M/V Free Knight.

 

On March 20, 2009, we entered into a term sheet with HBU, pursuant to which HBU agreed to refinance the balloon payment due on August 1, 2009 on overdraft facility IV amounting to $27,100,000 with a new 3.5 year facility which is payable in 13 quarterly installments of $600,000 beginning on August 1, 2009 and one balloon payment of $19,300,000 on November 1, 2012. Pursuant to this term sheet, the facility would bear interest at the rate of 3.00% above LIBOR, increased by a “liquidity premium” to be determined following the signing of the restated agreement. The existing conditional HBU overdraft facility III amounting to $3,000,000 was terminated upon the refinancing of the balloon payment in August 2009. Based on this term sheet, HBU agreed to waive any breach of the 70% loan to value ratio in our existing credit agreements during the period from October 1, 2008 through July 1, 2010. A new value to loan covenant ratio was introduced to the existing credit agreement, as well as to the new $27,100,000 facility and is as follows: (i) 100% as per July 1, 2010, (ii) 110% as per July 1, 2011, (iii) 120% as per July 1, 2012, (iv) 125% as per December 31, 2012. In addition, commencing March 1, 2009, interest due on the continuing term loan and overdraft facilities increased. In May 2009, we initiated discussions with HBU in order to obtain a waiver for the covenant breaches related with the interest coverage ratio and debt service coverage ratio, which according to management estimates, it is probable would not be met in the 12-month period following the balance sheet date. These discussions were concluded on July 17, 2009 when we obtained a waiver amending the terms of these covenants for a period up to and including December 31, 2010. (see “Loan Agreement Covenants and Waivers” below).

 

As of June 30, 2009, the outstanding loan balances under the amended HBU facility totaled $19,250,000 for the M/V Free Knight , $27,100,000 for the M/V Free Maverick and $0 for the M/V Free Destiny . The remaining undrawn availability as of June 30, 2009 totaled $875,000.

 

Effective September 15, 2009, we entered into an amended and restated credit agreement and related agreements with HBU based on the term sheet discussed above, amending the loan to value ratio introduced in the term sheet and incorporating the modified interest coverage and debt service coverage ratios introduced in the waiver letter obtained on July 17, 2009 discussed below under “Loan Agreement Covenants and Waivers.” The facility, as amended and restated, bears interest at the rate of 4.25% above LIBOR, which includes the “liquidity premium” described above.

 

Credit Suisse Credit Facility

 

During 2008, Credit Suisse provided us with a $91,000,000 rollover loan facility in two tranches; (i) Tranche A of $48,700,000, which amount was reduced by $5,000,000 on July 31, 2009, for the refinancing of the M/V Free Hero , the M/V Free Goddess and the M/V Free Jupiter.   This facility replaced previous financings of $68,000,000 received from HSH Nordbank under a senior loan and from BTMU Capital Corporation under a $21,500,000 junior loan; and (ii) Tranche B of $42,300,000, which amount shall be reduced on July 31, 2009, for partly financing the acquisition of the M/V Free Lady acquired on July 7, 2008. On March 23, 2009, in connection with the waiver of certain loan covenants, Credit Suisse increased the interest rate from March 23, 2009 to March 31, 2010 to 2.25% above LIBOR.

FBB Credit Facility

 

During 2008, we obtained a loan of $26,250,000 from FBB, to partially finance the acquisition of the M/V Free Impala . As of June 30, 2009, this facility had an outstanding balance of $23,250,000. On March 17, 2009, in connection with the waiver of certain loan covenants, FBB increased the interest rate to 2.00% above LIBOR and restricted our ability to pay dividends through the end of the waiver period.

 

As of June 30, 2009, our total indebtedness was $146,850,000.

 

All of the above credit facilities bear interest at LIBOR plus a margin, ranging from 2.00% to 4.25%, and are secured by mortgages on the financed vessels and assignments of vessels’ earnings and insurance coverage proceeds. They also include affirmative and negative financial covenants of the borrowers, including maintenance of operating accounts, minimum cash deposits, minimum market values and minimum charter rates. Each borrower is restricted under its respective loan agreement from incurring additional indebtedness or changing the vessels’ flags without the lender’s consent, and distributing earnings only in case of default under any credit agreement.

 

Loan Agreement Covenants and Waivers

 

Our loan agreements contain various financial covenants as follows:

 

HBU Credit Facility

 

The HBU facility required (i) the interest coverage ratio should not be less than 2.5; (ii) the debt service coverage ratio should not be less than 1.10; (iii) the gearing ratio should not exceed 2.5; and (iv) the outstanding loan balance should not be more than 70% of the fair market value of the financed vessels.

 

On July 17, 2009, we agreed with HBU to an extension and modification of the above-mentioned financial covenants. Current interest coverage ratio and debt service ratio covenants have been waived until January 1, 2011. Pursuant to the amended and restated facility agreement we signed effective September 15, 2009, the “Interest Cover Ratio” will be defined as EBITD/net financing charges (instead of EBIT/net financial charges) and is to be at least 3.75 up to and including July 1, 2010; thereafter, the ratio must be at least 3.00 up to and including December 31, 2010. The “Debt Service Ratio” should not be less than 1.00. These ratios will be calculated on a 12-month rolling basis during the waiver period. The aforementioned ratios will be reexamined for the year 2011 based on the prevailing market conditions at that time. In addition, the new value to loan covenant ratio, as ultimately agreed to in the amended and restated facility agreement, is as follows: (i) 70% from September 15, 2009 until and including June 30, 2010, (ii) 100% from July 1, 2010 until and including June 30, 2011, (iii) 110% from July 1, 2011 until and including June 30, 2012, (iv) 120% from July 1, 2012 until and including December 30, 2012, and (v) 125% from December 31, 2012 and thereafter. In addition, pursuant to the amended and restated facility agreement, an amount equal to 10% of any capital market proceeds received by us (with a maximum of $3,000,000 over the lifetime of the facility) shall be applied to prepay the HBU facility. We may also required to make additional prepayments if, based on our financial statements for the fiscal year-end:

 

 

Credit Suisse Credit Facility

 

Under our Credit Suisse facility, we must maintain minimum cash balance of $375,000 for each of our vessels covered by the loan agreement; and the aggregate fair market value of the financed vessels must not be less than 135% of the outstanding loan balance.

 

FBB Credit Facility

 

Under our FBB facility, we must maintain on average corporate liquidity of at least $3,000,000; free cash balance as of June 30, 2009 being $2,091,000. In addition, the leverage ratio of FreeSeas, the corporate guarantor, should not at any time exceed 68%; the ratio of EBITDA to net interest expense must not be less than 3; and the fair market value of the financed vessel must not be less than 130% of the outstanding loan balance.

 

If we are not in compliance with the covenants in our loan agreements such as the ones identified above, including due to a sharp decline in the market value of our vessels, we may be at risk of default under our loan agreements. If we default, our lender would have the option of accelerating our loan, meaning that we could be required to immediately pay the amount due on our loan including accrued interest. If we were unable to pay the accelerated indebtedness due, or to refinance under our loan agreements, our lenders may foreclose on their liens, in which case we would lose vessels in our fleet.

 

We may need to seek permission from our lenders in order to engage in some corporate actions that would otherwise put us at risk of default. Any declines in the market value of our vessels and in the drybulk charter market may increase our risk of default under the covenants described above. Our lenders’ interests may be different from ours and we may not be able to obtain our lenders’ permission or waivers when needed. This may limit our ability to continue to conduct our operations, pay dividends to you, finance our future operations, make acquisitions or pursue business opportunities.

 

Waivers Received as of June 30, 2009

 

As of June 30, 2009, we obtained the following waivers:

 

On March 17, 2009, FBB agreed to waive any breach of the 130% value to loan covenant for the mortgaged vessel and any breach of the leverage ratio by the corporate guarantor from January 1, 2009 until January 1, 2010. Further, FBB has confirmed that no event of default had occurred as of December 31, 2008. Effective as January 1, 2009, the interest rate increased. In May 2009, we initiated discussions with FBB in order to further extend the waiver related to the value to loan covenant until July 1, 2010; this request was approved on July 17, 2009, as described below.

 

On March 23, 2009, Credit Suisse agreed to waive any breach of the 135% value to loan covenant from October 1, 2008 until March 31, 2010 and reduce the minimum charter rate requirements. In consideration of the waiver, we agreed to a prepayment of $5,000,000 on July 31, 2009. In addition, from March 23, 2009 until March 31, 2010, the interest rate on the loan shall increase, the amounts available under Tranche A and B will be reduced on July 31, 2009 and we are restricted from paying dividends.

 

Waivers Received Subsequent to June 30, 2009

 

On July 17, 2009, we obtained from HBU and FBB extensions and further modifications of certain financial covenants as follows:

 

 

Scheduled Debt Repayments

 

The table below presents the repayment schedule of the outstanding debt under the above credit facilities as of June 30, 2009 and subsequently. The table reflects all changes to the original debt repayment schedule resulting from the waivers received from our lenders. Based on the waivers and waiver renewals received above, all of the debt continues to be classified as long-term, except for the principal payments falling due in the next 12 months and the $10,890,000 with Credit Suisse which has been recorded as current portion to reflect the difference between today’s vessel market value and value to loan covenant requirement coming into effect in the second quarter of 2010. These waivers expire between April 2010 and July 2010; there can be no assurance they will be extended, if necessary.

 

 

 

The above table does not include our share of the monthly rental expenses for our offices of approximately Euro 10,000. The rental agreement expires on November 11, 2011.

 

In September 2009, we amended our services agreement with Free Bulkers to increase the annual fee from $1,200,000 to $1,422,000 (based on $1.35 per Euro). Effective October 1, 2009, we will pay an annual fee of $1,422,000.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements. These forward-looking statements include information about possible or assumed future results of our operations and our performance. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future and other statements other than statements of historical fact. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements may include, for example, statements about our:

 

 

The forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws and/or if and when management knows or has a reasonable basis on which to conclude that previously disclosed projections are no longer reasonably attainable.

Exhibit 99.3

AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FREESEAS INC. (THE “CORPORATION”)

PURSUANT TO SECTION 90 OF
THE MARSHALL ISLANDS BUSINESS CORPORATION ACT

     I, Ion G. Varouxakis, the President and Chief Executive Officer of the Corporation, for the purpose of amending the Articles of Incorporation of the Corporation, hereby certify:

1.		The name of the Corporation is: FreeSeas Inc.
2.		The Articles of Incorporation were filed with the Registrar of Corporations as of the 23rd day of April, 2004 and were amended and restated in their entirety as of the 27th day of April, 2005.
3.		The Paragraph D of the Articles of Incorporation is deleted in its entirety and replaced with the following:

	“D.		The aggregate number of shares of capital stock that the Corporation shall have the authority to issue is two hundred fifty-five million (255,000,000) consisting of the following:
			(1) The Corporation is authorized to issue two hundred fifty million (250,000,000) registered shares of common stock with a par value of US $0.001 per share.
			(2) The Corporation is authorized, without further vote or action by the shareholders, to issue five million (5,000,000) registered shares of preferred stock with a par value of US $0.001 per share. The Board of Directors of the Corporation shall have the authority to establish such series of preferred stock and with such designations, preferences and relative participating, optional or special rights and qualifications, limitations or restrictions as shall be stated in the resolutions providing for the issue of such shares of preferred stock.”

4.		All of the other provisions of the Amended and Restated Articles of Incorporation shall remain unchanged.
5.		This Amendment to the Amended and Restated Articles of Incorporation was approved by a majority of the shareholders of the Corporation at an annual meeting of the shareholders of the Corporation held on September 17, 2009.

      IN WITNESS WHEREOF , I have executed this Amendment to the Amended and Restated Articles of Incorporation on behalf of the Corporation on this 17th day of September, 2009.

SS.:

On this _____ day of September, 2009, before me personally came Ion G. Varouxakis known to me to be the individual described in and who executed the foregoing instrument and he duly acknowledged to me that the execution thereof was his act and deed.

		Notary Public
(Seal)
		Print Name of Notary
		Serial Number, if any

My Commission Expires:

Exhibit 99.4

Register Number: 9146819

hereinafter called the Vessel, on the following terms and conditions:

Definitions

“Banking days” are days on which banks are open both in the country of the currency stipulated for the Purchase price in Clause 1 and in the place of closing stipulated in Clause 8 .

“In writing” or “written” means a letter handed over from the Sellers to the Buyers or vice versa, a registered letter, telex, telefax or other modern form of written communication.

“Classification Society” or “Class” means the Society referred to in line 4 .

1. Purchase Price USD 11,000,000.00 (United States Dollars Eleven) cash on delivery less 3% total commission (1% Intermodal Shipbrokers, 1% Compass Maritime Services, 1% Falcon Maritime)

2.

Deposit

As security for the correct fulfillment of this Agreement the Buyers shall pay a deposit of 10% (ten per cent) of the Purchase Price within 3 (three) banking days from the date of signing of this Agreement by fax/email, which to be signed promptly after Agreement of main terms by fax or email. The Buyers are to countersign a telefax copy of the MOA within one (1) working day of receipt of same signed on behalf of Sellers. This deposit shall be plces with Sellers nominated bank, Union Bank of California, Los Angeles.
and held by them in a joint account for the Sellers and the Buyers, to be released in accordance with joint written instructions of the Sellers and the Buyers. Interest, if any, to be credited to the Buyers. Any fee charged for holding the said deposit shall be borne equally by the Sellers and the Buyers

3.

Payment

The said The deposit shall be released and the balance Purchase Price shall be paid in full free of bank changes to Union Bank of California, Los Angeles
1980 Saturn Street
Monterey Park, CA 91755

Beneficiary Bank Routing #(ABA):		122000496
Beneficiary Bank Name:		Union Bank of California — Los Angeles
Beneficiary Account Number:		2131288876
Beneficiary Account Name:		Salvatore LaMonica, Esq., Chapter 7 Trustee of the Estate of Yucatan Marine Ltd.

On delivery of the Vessel, but not later than 3 banking days after the Vessel is in every respect physically ready for delivery in accordance with the terms and conditions of this Agreement and Notice of Readiness has been given in accordance with Clause 5 .

4.		Inspections
a)*		The Buyers have inspected and accepted the Vessels’ classifications records. The Buyers have waived their rights to physically inspect the vessel. also inspected the Vessel at/in       on      and have accepted the Vessel following this inspection and the Thus this sale is outright and definite, subject only to the terms and conditions of this Agreement.
b)*		The Buyers shall have the right to inspect the Vessel’s classification records and declare whether same are accepted or not within The Sellers shall provide for inspection of the Vessel at/in The Buyers shall undertake the inspection without undue delay to the Vessel. Should the Buyers cause undue delay they shall compensate the Sellers for the losses thereby incurred. The Buyers shall inspect the Vessel without opening up and without cost to the Sellers. During the inspection, the Vessel’s dock and engine log books shall be made available for examination by the Buyers. If the Vessel is accepted after such inspection the sale shall become outright and definite, subject only to the terms and conditions of this Agreement, provided the Sellers receive written notice of acceptance from the Buyers within 72 hours after completion of such inspection. Should notice of acceptance of the Vessel’s classification records and of the Vessel not be received by the Sellers as aforesaid, the deposit together with interest earned shall be released immediately to the Buyers whereafter this Agreement shall be null and void.
*		4a) and 4b) are alternatives; delete whichever is not applicable. In the absence of deletions, alternative 4a) to apply.
5.		Notices, time and place of delivery
a)		The Sellers shall keep the Buyers well informed of the Vessel’s itinerary and shall provide the Buyers with 10 days approximate notice and 3, 2, 1 days of definite notice of the estimated time of arrival at the intended place of drydocking/underwater inspection/delivery.When the Vessel is at the place of delivery and in every respect physically ready for delivery in accordance with this Agreement, the Sellers shall give the Buyers a written Notice of Readiness for delivery.
b)		The Vessel shall be delivered and taken over safely afloat at a safe and fully accessible berth or anchorage at/in USG in the Sellers’ option. Expected time of delivery: August 17 th - 31 st 2009 in Sellers option.
		Date of cancelling (see Clauses 5C ), 6b) (iii) and 14 ): August 31 st 2009 in Buyers option.
c)		If the Sellers anticipate that, notwithstanding the exercise of due diligence by them, the Vessel will not be ready for delivery by the cancelling date they may notify the Buyers in writing stating the date when they anticipate that the Vessel will be ready for delivery and propose a new cancelling date. Upon receipt of such notification the Buyers shall have the option of either canceling this Agreement in accordance with Clause 14 within 7 running days of receipt of this notice or of accepting the new date as the new cancelling date. If the Buyers have not declared the option within 7 running days of receipt of the Sellers’ notification or if the Buyers accept the new date, the date proposed in the Sellers notification shall be deemed to be the new cancelling date and shall be substituted for the cancelling date stipulated in line 61 .
		If this Agreement is maintained with the new cancelling date all other terms and conditions hereof including those contained in Clauses 5 a) and 5 c) shall remain unaltered and in full force and effect. Cancellation or failure to cancel shall be entirely without prejudice to any claim for damages the Buyers may have under Clause 14 for the Vessel not being ready by the original cancelling date.

d)		Should the Vessel become an actual, constructive or compromised total loss before delivery the deposit together with interest earned shall be released immediately to the Buyers whereafter this Agreement shall be null and void.
6.		Drydocking/Divers Inspection — See Clause 17
a)**		The Sellers shall place the Vessel in drydock at the port of delivery for inspection by the Classification Society of the Vessel’s underwater parts below the deepest load line, the extent of the inspection being in accordance with the Classification Society’s rules. If the rudder, propeller, bottom or other underwater parts below the deepest load line are found broken, damaged or defective so as to affect the Vessel’s class, such defects shall be made good at the Sellers’ expense to the satisfaction of the Classification Society without condition/recommendation.*
b)**		(i) The Vessel is to be delivered without drydocking. However, the Buyers shall have the right at their expense to arrange for an underwater inspection by a diver approved by the Classification Society prior to the delivery of the Vessel. The Sellers shall at their cost make the Vessel available for such inspection. The extent of the inspection and the conditions under which it is performed shall be to the satisfaction of the Classification Society. If the conditions at the port of delivery are unsuitable for such inspection, the Sellers shall make the Vessel available at a suitable alternative place near to the delivery port. (ii) If the rudder, propeller, bottom or other underwater parts below the deepest load line are found broken, damaged or defective so as to affect the Vessel’s class, then unless repairs can be carried out afloat to the satisfaction of the Classification Society, the Sellers shall arrange for the Vessel to be drydocked at their expense for inspection by the Classification Society of the Vessel’s underwater parts below the deepest load line, the extent of the inspection being in accordance with the Classification Society’s rules. If the rudder, propeller, bottom or other underwater parts below the deepest load line are found broken, damaged or defective so as to affect the Vessel’s class, such defects shall be made good by the Sellers at their expense to the satisfaction of the Classification Society without condition/recommendation.* In such event the Sellers are to pay also for the cost of the underwater inspection and the Classification Society’s attendance. (iii) If the Vessel is to be drydocked pursuant to Clause 6b) (ii) and no suitable dry-docking facilities are available at the port of delivery, the Sellers shall take the Vessel to a port where suitable drydocking facilities are available, whether within or outside the delivery range as per Clause 5b) . Once drydocking has taken place, the Sellers shall deliver the Vessel at a port within the delivery range as per Clause 5b) which shall, for the purpose of this Clause, become the new port of delivery. In such event the cancelling date provided for in Clause5b) shall be extended by the additional time required for the drydocking and extra cleaning, but limited to a maximum of 14 running days.
a)		If the Vessel is drydocked pursuant to Clause 6a) or 6b) above. (i) the Classification Society may require survey of the tailshaft system, the extent of the survey being to the satisfaction of the Classification surveyor. If such survey is not required by the Classification Society, the Buyers shall have the right to require the tailshaft to be drawn and surveyed by the Classification Society, the extent of the survey being in accordance with the Classification Society’s rules for tailshaft survey and consistent with the current stage of the Vessel’s survey cycle. The Buyers shall declare whether they require the tailshaft to be drawn and surveyed not later than by the completion of the inspection by the Classification Society. The drawing and refitting of the tailshaft shall be arranged by the Sellers. Should any parts of the tailshaft system be condemned or found defective so as to affect the Vessel’s class, these parts shall be renewed or made good at the Seller’s expense to the satisfaction of the Classification Society without condition/recommendation*. (ii) the expenses relating to the survey of the tailshaft system shall be borne by the Buyers unless the Classification Society requires such survey to be carried out, in which case the Sellers shall pay these expenses. The Sellers shall also pay the expenses if the Buyers require the survey and parts of the system are condemned or found defective or broken so as to affect the Vessel’s class*. (iii) the expenses in connection with putting the Vessel in and taking her out of drydock, including the drydock dues and the Classification Society’s fees shall be paid by the Sellers if the Classification Society issues any condition/recommendation* as a result of the survey or if it requires survey of the tailshaft system. In all other cases the Buyers

		shall pay the aforesaid expenses dues and fees. (iv) the Buyers’ representative shall have the right to be present in the drydock, but without interfering with the work or decisions of the Classification surveyor. (v) the Buyers shall have the right to have the underwater parts of the Vessel cleaned and painted a their risk and expense without interfering with the Sellers’ or the Classification surveyor’s work, if any, and without affecting the Vessel’s timely delivery. If however, the Buyers’ work in drydock is still in progress when the Sellers have completed the work which the Sellers are required to do, the additional docking time needed to complete the Buyers’ work shall be for the Buyers’ risk and expense. In the event that the Buyers’ work requires such additional time, the Sellers may upon completion of the Sellers’ work tender Notice of Readiness for delivery whilst the Vessel is still in drydock and the Buyers shall be obliged to take delivery in accordance with Clause 3 whether the Vessel is in drydock or not and irrespective of Clause 5b) .
*		Notes, if any, in the surveyor’s report which are accepted by the Classification Society without condition/recommendation are not be taken into account.
**		6a) and 6b) are alternatives, delete whichever is not applicable. In the absence of deletions, alternative 6a) to apply.
7.		Spares/bunkers, etc.

The Sellers shall deliver to Vessel to the Buyers with everything belonging to her on board. There are not spares or any other items ashore or on order. and on
shore All spare parts and spare equipment including spare tail-end shaft(s) and/or spare propeller(s)/propeller blade(s), if any, belonging to the Vessel at the time of inspection used or unused, whether on board or not shall become the Buyers’ property, but spares on order are to be
excluded. Forwarding charges, if any, shall be for the Buyers account. The Sellers are not required to replace spare parts including spare tail-end shaft(s) and spare propeller(s)/propeller blade(s) which are taken out of spare and used as replacement prior to delivery, but the replaced items shall be the property of the Buyers. The radio installation and navigational equipment shall be included in the sale without extra payment if they are property of the Sellers. Unused stores and provisions shall be included in the sale and be taken over by the Buyers without extra payment.

The Sellers have the right to take ashore crockery, plates, cutlery, linen and other articles bearing the Sellers’ flag or name, provided they replace same with similar unmarked items. Library, forms, etc., exclusively for use in the Sellers’ vessel(s), shall be excluded without compensation. Captain’s, Officers’ and Crew’s personal belongings including the slop chest are to be excluded from the sale as well as the following additional items (including items on hire). There are no hired equipments on board except for Oxygen / Freon / Acatylon bottles.

The Buyers shall take over the remaining bunkers and unused lubricating oils in storage tanks and sealed drums and pay TBA $/MT IFO, TBA $/MT MDO and Sellers contract price at the port of delivery for Lubricating oils . the current nol market price (excluding barging expenses) at the port and date of delivery of the Vessel.

Payment under this Clause shall be made at the same time and place and in the same currency as the Purchase Price.

8.

Documentation

The place of closing: Sellers’ nominated place of closing.

Within 5 running days after deposit is lodged the Buyers will make known to Sellers the Documentation required by the intended Flag requirements. Such documents to be agreed in the form of an Addendum which will be incorporated in the MOA.

In exchange for payment of the Purchase Price the Sellers shall furnish the Buyers with delivery documents, namely:

a)		Legal Bill of Sale in a form recordable in (the country which the Buyers are to register the Vessel), warranting that the Vessel is free from all encumbrances, mortgages and maritime liens or any other debts or claims whatsoever, duly notarially attested and legalized by the consul of such country or other competent authority.
b)		Current Certificate of Ownership leased by the competent authorities of the flag state of the Vessel.

c)		Confirmation of Class issued within 72 hours prior to delivery.
d)		Current Certificate issued by the competent authorities stating that the Vessel is free from registered encumbrances.
e)		Certificate of Deletion of the Vessel from the Vessel’s registry or other official evidence of deletion appropriate to the Vessel’s registry at the time of delivery or, in the event that the registry does not on a matter of practice lease each documentation immediately, a written undertaking by the Sellers to affect deletion from the Vessel’s registry forthwith and furnish a Certificate or other official evidence of deletion to the Byers promptly and latest within 4 (four) weeks after the Purchase Price has been paid and the Vessel has been delivered.
f)		Any such additional documents as may reasonably be required by the competent authorities for the purpose of registering the Vessel, provided the Buyers notify the Sellers of any such documents as soon as possible after the date of this Agreement.

At the time of delivery the Buyers and Sellers shall sign and deliver to each other a Protocol of Delivery and Acceptance confirming the date and time of delivery of the Vessel from the Sellers to the Buyers.

At the time of delivery the Sellers shall hand to the Buyers the classification certificate(s) as well as all plans etc., which are on board the Vessel. Other certificates which are on board the Vessel shall also be handed over to the Buyers unless the Sellers are required to retain same, in which case the Buyers to have the right to take copies. Other technical documentation which may be in the Sellers’ possession shall be promptly forwarded to the Buyers at their expense, if they so request. The Sellers may keep the Vessel’s log books but the Buyers to have the right to take copies of same.

9.

Encumbrances

The Sellers warrant that the Vessel, at the time of delivery, is free from all charters, encumbrances, mortgages, taxes and maritime or other liens or any other debts or claims. whatsoever. The Sellers hereby undertake
to indemnify the Buyers against all consequences of claims made against the Vessel which have been incurred prior to time of delivery.

10.

Taxes, etc.

Any taxes, fees and expenses in connection with the purchase and registration under the Buyers’ flag shall be for the Buyers’ account, whereas similar charges in connection with the closing of the Sellers’ register shall be for the Sellers’ account.

11.

Condition on delivery

The Vessel with everything belonging to her shall be at the Sellers’ risk and expense until she is delivered to the Buyers, but subject to the terms and conditions of this Agreement she shall be delivered and taken over “as is”/ “where is”. as she was the time of inspection, fair wear and tear excepted.

However, the Vessel shall be delivered with her class maintained without condition/recommendation* (except recommendation on Vvessels propeller per latest NK class printout provided by the Sellers), notations, conditions of class and free of average damage affecting the Vessel’s class, and with her classification certificates. and
national certificates, as well as all other certificates the Vessel had at the time of inspection, valid and unextended without condition/recommendation* by Class or the relevant authorities at the time of delivery.

The Vessel to be delivered with survey due September 2009.

“inspection” in this Clause 11, shall mean the Buyers’ inspection according to Clause 4a ) or 4b ), if applicable, or the Buyers’ inspection prior to the signing of this Agreement. If the Vessel is taken over without inspection, the date of this Agreement shall be the relevant date.

*		Notes, if any, in the surveyor’s report which are accepted by the Classification Society without condition/recommendation are not to be taken into account.
12.		Name/markings

Upon delivery the Buyers undertake to change the name of the Vessel and alter funnel markings.

13.

Buyers’ default

Should the deposit not be paid in accordance with Clause 2 the Sellers have the right to cancel this Agreement, and they shall be entitled to claim compensation for their losses and for all expenses incurred together with interest.

Should the Purchase Price not be paid in accordance with Clause 3 , the Sellers have the right to cancel the Agreement, in which case the deposit together with interest earned shall be released to the Sellers. If the deposit does not cover their loss, the Sellers shall be entitled to claim further compensation for their losses and for all expenses incurred together with interest.

14.

Sellers’ default

Should the Sellers fail to give Notice of Readiness in accordance with Clause 5a) or fail to be ready to validly complete a legal transfer by the date stipulated in line 61 the Buyers shall have the option of cancelling this Agreement provided always that the Sellers shall be granted a maximum of 3 banking days after Notice of Readiness has been given to make arrangements for the documentation set out in Clause 8 . If after Notice of Readiness has been given but before the Buyers have taken delivery, the Vessel ceases to be physically ready for delivery and is not made physically ready again in every respect by the date stipulated in line 61 and new Notice of Readiness given, the Buyers shall retain their option to cancel. In the event that the Buyers elect to cancel this Agreement the deposit together with interest earned shall be released to them immediately.
Should the Sellers fail to give Notice of Readiness by the date stipulated in line 61 or fail to be ready to validly complete a legal transfer as aforesaid they shall make due compensation to the Buyers for their loss and for all expenses together with interest if their failure is due to proven negligence and whether or not the Buyers cancel this Agreement.

15.

Buyers’ representatives

After this Memorandum of Agreement has been signed by both parties and the ten per cent (10%) deposit has been lodged, the Buyers
have the right to place two four representatives on board the Vessel at their sole risk and expense upon arrival at ___on or about ___.

These representatives are on board fro the purpose of familiarisation and in the capacity of observers only, and they shall not interfere in any respect with the operation of the Vessel. The Buyers and their representatives shall sign the Sellers’ letter of indemnity prior to their embarkation.

16.		Arbitration
a)*		This Agreement shall be governed by and construed in accordance with English law and any dispute arising out of this Agreement shall be referred to arbitration in London in accordance with the Arbitration Acts 1950 and 1979 or any statutory modification or re-enactment thereof for the time being in force, one arbitrator being appointed by each party. On the receipt by one party of the nomination in writing of the other party’s arbitrator, that party shall appoint their arbitrator within fourteen days, failing which the decision of the single arbitrator appointed shall apply. If two arbitrators properly appointed shall not agree they shall appoint an umpire whose decision shall be final.
b)*		This Agreement shall be governed by and construed in accordance with Title 9 / Title 11 of the United States Code and the Law of the State of New York and should any dispute arise out of this Agreement, the matter in dispute shall be referred to three persons of new York, one to be appointed by such of the parties, hereto, and the third by the two so chosen; their decision or that of any two of them shall be final, and for purpose of enforcing any award, the Agreement may be made a rule of the Court. The proceedings shall be conducted in accordance with the rules of the Society of Maritime Arbitrators, Inc., New York.
c)*		Any dispute arising out of this Agreement shall be referred to authorities at ___ subject to the procedures applicable there. The laws of ___shall govern this Agreement.
*		[16a), 16b) and 16c) are alternatives; delete whichever is not applicable. In the absence of deletions, alternative 16a) to apply.]

Clause 17. No Drydocking. However, the buyers have the right to carry out an inspection of the vessel’s underwater parts with divers prior to the delivery of the vessel. When the buyers choose to exercise this right, then the buyers shall arrange at their expense, inspection of the underwater parts by a class approved diver in the presence of a representative of both the Buyers and the Sellers, together with a class surveyor, who is to be to be arranged by the Sellers.

The extent of the inspection and the conditions under which it is performed shall be to the satisfaction of the classification society. If the conditions at the place of delivery are unsuitable for such inspection, then the Sellers shall make the vessel available at a suitable alternative place nearby, at their own expense. Should such movement delay the vessel beyond the cancelling date, then same shall be extended to allow for this inspection.

If any damage is found to the vessel’s underwater parts, which in the opinion of the class surveyor affects the vessel’s clean class, then:

(a) If class requires immediate drydocking of the vessel, then the drydocking clause 6(b) of the NSF 93 to be fully re-instated in the MOA and the vessel is to be dry docked accordingly at the Sellers’ expense. The Buyers shall then have the right to carry out their own works at their risk and expense and without causing any delays to the Sellers’ work and not to interfere with same. The Buyers have the right to attend the dry docking without interfering with the Sellers’ or the class surveyors’ work.

(b) In the case of a class recommendation calling for repair of such defects at a later stage or at the next class scheduled drydocking, then the Sellers shall pay the buyers a mutually agreed lump sum compensation figure covering the cost of such works. If a figure cannot be mutually agreed then Buyers and Sellers to both obtain a quotation for the repairs from a first class shipyard near to the delivery port and the compensation is to be the average of these 2 quotations.

Clause 18. The sale of the vessel as contemplated by this MOA is subject to the approval of the United States Bankruptcy Court for the Southern District of New York (the “Court”) in connection with the bankruptcy action filed by Yucatan Marine, Ltd., Case No. 09-14014. Seller acknowledges and agrees it will hold the sum of USD $1.1 million as a deposit (the “Deposit”) in escrow pending (i) the satisfaction of all conditions set forth herein, and (ii) the approval by the Court of the sale of the Vessel upon the terms set forth in this MOA. If the Court rejects the sale of the Vessel upon the terms set forth in this MOA, or Court approval is not received within 10 days after the date of execution of this MOA as set forth on the signature page hereto (the “Termination Date”), the Seller agrees to return the Deposit, including all interest accrued thereon, to the Buyer not later than the business day following the date of such rejection or the Termination Date, as the case may be, by wire transfer of funds to and account designated by Buyer.

Clause 19. Sellers obligations of this Agreement are subject to the approval of the bankruptcy court.

For the Sellers:		For the Buyers:
/s/ illegible		/s/ Ion G. Varouxakis
Name: illegible		Name:		Ion G. Varouxakis
Title:   DLA Piper LLP (US)		Title:		Attorney-in-fact
As Agent and Counsel for Salvadore		Date: 5 August 2009.
LaMonica Chapter 7 Trustee for Yucatan
Marine Ltd.
Date: August 5, 2009

Exhibit 99.5

		CLIFFORD CHANCE LLP ADVOCATEN SOLICITORS NOTARIS BELASTINGADVISEURS

EXECUTION VERSION

AMENDMENT AND RESTATEMENT AGREEMENT

dated
1 SEPTEMBER 2009

ADVENTURE TWO S.A.
ADVENTURE THREE S.A.
ADVENTURE SEVEN S.A.
ADVENTURE ELEVEN S.A.
AS BORROWERS AND CO-DEBTORS

and
FREESEAS INC.
AS PARENT AND GUARANTOR

with
NEW HBU II N.V.
as Lender

RELATING TO A USD 27,000,000 ROLLOVER LOAN
AGREEMENT DATED 9 APRIL 2008 AS SUPPLEMENTED
AND/OR AMENDED BY A USD 66,725,000 CREDIT
AGREEMENT DATED 12 AUGUST 2008

CONTENTS

Clause				Page
1.		Definitions And Interpretation			3
2.		Restatement Of The Original Facility Agreement			4
3.		Representations			4
4.		Continuity And Further Assurance			4
5.		Co-Debtos			5
6.		Fees, Costs And Expenses			5
7.		Miscellaneous			6
8.		Governing Law			6
Schedule 1		The Obligors			7
Part I		Term Borrowers			7
Part Ii		Overdraft Facility Borrowers			7
Part Iii		Co-Debtors			7
Schedule 2		Conditions Precedent			7
Schedule 3		Restated Agreement			11
Signatures					12

THIS AGREEMENT is dated 1 September 2009 and made between:

(1)		FREESEAS INC. , a company incorporated under the laws of the Marshall Islands (the “ Parent ” and the “ Guarantor ”);
(2)		THE SUBSIDIARIES OF THE PARENT listed in Schedule 1 ( The Parties ), Part I hereto as term borrowers (the “ Term Borrowers ” and each a “ Term Borrower ”);
(3)		THE SUBSIDIARIES OF THE PARENT listed in Schedule 1 ( The Parties ), Part II hereto as overdraft facility borrowers (the “ Overdraft Facility Borrowers ” and each an “ Overdraft Facility Borrower ”);
(4)		THE SUBSIDIARIES OF THE PARENT listed in Schedule 1 ( The Parties ), Part III hereto as joint and several borrowers (the “ Joint and Several Borrowers ” and each a “ Joint and Several Borrower ”); and
(5)		NEW HBU II N.V. (as legal successor to Hollandsche Bank-Unie N.V. pursuant to the deed of demerger ( akte van splitsing ) dated 6 August 2008), having its registered office in Rotterdam, The Netherlands as lender (the “ Lender ”).

IT IS AGREED as follows:

1.		DEFINITIONS AND INTERPRETATION
1.1		Definitions
		In this Agreement:
		“ Co-Debtor ” has the meaning given to that term in the Restated Agreement.
		“ Effective Date ” means 15 September 2009 provided that on or prior to such date the Lender has confirmed to the Borrowers that it has received each of the documents and evidence listed in Schedule 2 ( Conditions Precedent ) in a form and substance satisfactory to the Lender.
		“ Obligor ” has the meaning given to that term in the Restated Agreement.
		“ Original Facility Agreement ” means the USD 27,000,000 rollover loan agreement dated 9 April 2008 between Adventure Two S.A., Adventure Three S.A. and Adventure Seven S.A. as borrowers and Hollandsche Bank-Unie N.V. as lender as supplemented and/or amended by the USD 66,725,000 credit agreement dated 12 August 2008 between Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure Eleven S.A. as borrowers and Hollandsche Bank-Unie N.V. as lender.
		“ Restated Agreement ” means the Original Facility Agreement, as amended and restated by this Agreement, the terms of which are set out in Schedule 3 ( Restated Agreement ).
1.2		Incorporation of defined terms

1.2.1

Unless a contrary indication appears, a term defined in the Restated Agreement has the same meaning in this Agreement.

1.2.2

The principles of construction set out in the Original Facility Agreement shall have effect as if set out in this Agreement.

1.3		Clauses
		In this Agreement any reference to a “Clause” or a “Schedule” is, unless the context otherwise requires, a reference to a Clause or a Schedule to this Agreement.

1.4		Third party rights
		Except where any Finance Document expressly provides otherwise:

1.5		Designation
		Each of the Obligors and the Lender designates this Agreement as a Finance Document.
2.		RESTATEMENT OF THE ORIGINAL FACILITY AGREEMENT
		With effect from the Effective Date the Original Facility Agreement shall be amended and restated so that it shall be read and construed for all purposes as set out in Schedule 3 ( Restated Agreement ).
3.		REPRESENTATIONS
		The representations and warranties included in Clause 19 ( Representations ) of the Restated Agreement are deemed to be made by each Obligor (by reference to the facts and circumstances then existing) on:

	(i)		the date of this Agreement; and
	(ii)		the Effective Date.

4.		CONTINUITY AND FURTHER ASSURANCE
4.1		Continuing obligations
		The provisions of the Original Facility Agreement and the other Finance Documents shall, save as amended by this Agreement, continue in full force and effect.
4.2		Further assurance
		Each Obligor shall, at the reasonable request of the Lender and at their own expense, do all such acts and things necessary or desirable to give effect to the amendments effected or to be effected pursuant to this Agreement.

4.3

Security Documents

4.4		Guarantees
		Each of the Co-Debtors hereby confirms that:

	(a)		the guarantee granted by it pursuant to the Original Facility Agreement shall remain unaffected; and
	(b)		the obligations guaranteed by it will be the obligations defined in the Original Facility Agreement as those obligations have been amended and restated pursuant to this Agreement.

5.		CO-DEBTOS
5.1		With effect from the Effective Date, the Co-Debtors become Co-Debtors for the purpose of the Restated Agreement.
5.2		Each Co-Debtor undertakes, upon becoming a Co-Debtor to perform all the obligations expressed to be undertaken under the Restated Agreement by a Co-Debtor and agrees that it shall be bound by the Restated Agreement as if it had been an original party to the Restated Agreement as a Co-Debtor.
6.		FEES, COSTS AND EXPENSES
6.1		Fees
		Whether or not Facility B has been utilised, the Borrowers shall on the Effective Date pay (or procure the payment) to the Lender an upfront and waiver fee in an amount equal to USD 250,000 to the bank account specified to the Borrowers by the Lender.

6.2		Transaction expenses
		Each Borrower shall within three Business Days of demand, pay the Lender the amount of all reasonable, documented costs and expenses (including legal fees) reasonably incurred by any of them in connection with the negotiation, preparation, printing and execution of this Agreement and any other documents referred to in this Agreement.
6.3		Enforcement costs
		Each Borrower shall, within three Business Days of demand, pay to the Lender the amount of all reasonable documented costs and expenses (including legal fees) incurred by the Lender in connection with the enforcement of, or the preservation of any rights under, this Agreement.
6.4		Stamp taxes
		Each Borrower shall pay and, within three Business Days of demand, indemnify the Lender against any cost, loss or liability that the Lender incurs in relation to all stamp duty, registration and other similar Taxes payable in respect of this Agreement.
7.		MISCELLANEOUS
7.1		Incorporation of terms
		The provisions of Clause 29 ( Notices ), Clause 31 ( Partial Invalidity ), Clause 32 ( Remedies and waivers ) and Clause 36 ( Enforcement ) of the Restated Agreement shall be incorporated into this Agreement as if set out in full in this Agreement and as if references in those clauses to “this Agreement” or “the Finance Documents” are references to this Agreement.
7.2		Counterparts
		This Agreement may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement.
8.		GOVERNING LAW
		This Agreement is governed by Dutch law.

This Agreement has been entered into on the date stated at the beginning of this Agreement.