FreeSeas Inc.
Filed
Pursuant to Rule 424(b)(4)
Registration
Nos. 333-145203
and 333-146920
PROSPECTUS
FREESEAS
INC.
11,000,000
Shares of Common Stock
We are offering
11,000,000 shares of our common stock. Our common stock is
currently quoted on the NASDAQ Capital Market under the symbol
FREE. On October 24, 2007, the closing price of
our common stock was $9.30 per share. We have applied to have
our common stock and warrants listed on the NASDAQ Global Market
upon completion of this offering.
Investing in our
common stock involves a high degree of risk. See Risk
Factors beginning on page 13 to read about the risks
you should consider before buying shares of our common
stock.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per
Share
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Total
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Public offering price
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$
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8.25
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$
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90,750,000
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Underwriting discounts and commissions
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$
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0.5775
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$
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6,352,500
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Proceeds to us, before expenses
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$
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7.6725
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$
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84,397,500
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The underwriters
have a
30-day
option to purchase up to 1,650,000 additional shares of our
common stock from us to cover any over-allotments, if any, at
the offering price, less underwriting discounts and commissions.
The underwriters
expect to deliver the shares to purchasers on or about
October 30, 2007.
The date of this
prospectus is October 25, 2007
TABLE OF
CONTENTS
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Page
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ii
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123
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124
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F-1
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We have not authorized anyone to give any information or to
make any representations other than those contained in this
prospectus. Do not rely upon any information or representations
made outside of this prospectus. This prospectus is not an offer
to sell, and it is not soliciting an offer to buy (1) any
securities other than shares of our common stock or
(2) shares of our common stock in any circumstances in
which our offer or solicitation is unlawful. The information
contained in this prospectus may change after the date of this
prospectus. Do not assume after the date of this prospectus that
the information contained in this prospectus is still
correct.
i
ENFORCEABILITY
OF CIVIL LIABILITIES
We are a Marshall Islands company and our executive offices are
located outside of the United States of America in Piraeus,
Greece. All except one of our directors, all of our officers and
some of the experts named herein reside outside the United
States of America. In addition, a substantial portion of our
assets and the assets of our directors, officers and experts are
located outside of the United States of America. As a result,
you may have difficulty serving legal process within the United
States of America upon us or any of these persons. You may also
have difficulty enforcing, both in and outside the United States
of America, judgments you may obtain in United States of America
courts against us or these persons in any action, including
actions based upon the civil liability provisions of United
States of America federal or state securities laws. Furthermore,
there is substantial doubt that the courts of the Republic of
the Marshall Islands or Greece would enter judgments in original
actions brought in those courts predicated on United States of
America federal or state securities laws.
ii
This section summarizes some of the information and
consolidated financial statements that appear later in this
prospectus. As an investor or prospective investor, you should
review carefully the risk factors and the more detailed
information and financial statements that appear later in this
prospectus. In this prospectus, references to
FreeSeas, Company, we,
our, ours and us refer to
FreeSeas Inc. and its subsidiaries, unless otherwise stated or
the context requires.
We use the term deadweight tons, or dwt, in
describing the capacity of our drybulk carriers. Dwt, expressed
in metric tons, each of which is equivalent to 1,000 kilograms,
refers to the maximum weight of cargo and supplies that a vessel
can carry. For the definition of certain shipping terms used in
this prospectus, see the Glossary of Shipping Terms
on page 124 of this prospectus. Drybulk carriers are
categorized as Handysize, Handymax, Panamax and Capesize. The
carrying capacity of a Handysize drybulk carrier ranges from
10,000 to 39,999 dwt and that of a Handymax drybulk carrier
ranges from 40,000 to 59,999 dwt. By comparison, the carrying
capacity of a Panamax drybulk carrier ranges from 60,000 to
79,999 dwt and the carrying capacity of a Capesize drybulk
carrier is 80,000 dwt and above.
Unless otherwise indicated, information presented in this
prospectus assumes that the underwriters will not exercise their
option to purchase additional shares. All references to
$ and dollars in this prospectus refer
to U.S. dollars.
Our
Company
We are an international drybulk shipping company incorporated on
April 23, 2004 under the laws of the Republic of the
Marshall Islands with headquarters in Piraeus, Greece. We are
currently focusing on the Handysize and Handymax sectors, which
we believe will enable us to transport a wider variety of
cargoes and pursue a greater number of chartering opportunities
than if we owned larger vessels. We may, however, acquire larger
drybulk vessels if market conditions warrant.
Our existing fleet consists of three Handysize vessels and one
Handymax vessel that carry a variety of drybulk commodities,
including coal, grains, and iron ore which are referred to as
major bulks, as well as bauxite, phosphate,
fertilizers, steel products, sugar and rice, or minor
bulks. In order to expand and renew our fleet, on
May 1, 2007, we entered into memoranda of agreement to
purchase from unaffiliated parties the M/V Free Hero, a
1995-built secondhand Handysize vessel that was delivered on
July 3, 2007, and the M/V Free Jupiter, a 2002-built
secondhand Handymax vessel that was delivered on
September 5, 2007, for a total purchase price of
$72.25 million. On August 20, 2007, we entered into
another memorandum of agreement to purchase from an unaffiliated
third party the
M/V Free
Goddess, a 1995-built secondhand Handysize vessel that we
expect to be delivered prior to the closing of this offering for
a total purchase price of $25.20 million. We refer to the
M/V Free Goddess together with our existing vessels, the
M/V Free Destiny, the M/V Free Envoy, the M/V
Free Hero and the
M/V Free
Jupiter, as our fleet.
As a result of the acquisition of the M/V Free Hero, the
M/V Free Jupiter and upon the acquisition of the M/V
Free Goddess, we will increase the aggregate dwt of our
fleet to approximately 146,000 dwt, increase the book value of
our fleet to approximately $107.8 million, and reduce the
average age of our fleet to approximately 16 years.
We contract the management of our fleet to Free Bulkers, S.A.,
or Free Bulkers, a company owned by Ion G. Varouxakis, our
chairman, chief executive officer and president. Free Bulkers
will provide technical management of our fleet, accounting
services and office space and has subcontracted the charter and
post-charter management of our fleet to Safbulk Pty Ltd., or
Safbulk, a company controlled by the Restis family. We believe
that Safbulk has achieved a strong reputation in the
international shipping industry for efficiency and reliability
that should create new employment opportunities for us with a
variety of well known charterers. While Safbulk is responsible
for finding and arranging charters for our vessels, the final
decision to charter our vessels remains with us.
1
Following the completion of this offering, we intend to
distribute a portion of our available cash from operations as
quarterly cash dividends to our shareholders in February, May,
August and November of each year. We currently expect that we
will pay a dividend in February 2008 of $0.175 per share for the
2007 fiscal year followed by a quarterly dividend of $0.175 per
share in each of the following three quarters. See
Forward-Looking Statements.
Our
Fleet
The following table details the vessels in our fleet:
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Year
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Vessel
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Purchase
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Delivery
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Vessel Name
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Dwt
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Built
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Type
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Employment
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Price
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Date
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Owned
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Free Envoy
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26,318
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1984
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Handysize
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One-year time charter through April 2008 at $17,000 per day
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$9.50 million
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September 20, 2004
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Free Destiny
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25,240
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1982
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Handysize
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70-day time charter at $28,000 per day
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$7.60 million
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August 3, 2004
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Free Hero
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24,318
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1995
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Handysize
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Balance of time charter through December 2008/February 2009 at
$14,500 per day
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$25.25 million
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July 3, 2007
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Free Jupiter
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47,777
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2002
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Handymax
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Initial one-trip time charter with approximately seven days
remaining at $43,000 per day followed by an unscheduled
dry-docking to complete repairs; thereafter to be delivered to a
new charterer under a three-year time charter at $32,000 per day
for first year, $28,000 per day for second year, and $24,000 per
day for third year
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$47.00 million
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September 5, 2007
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Acquisition Pending
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Free Goddess
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22,051
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1995
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Handysize
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Two-month time charter at $13,000 per day; thereafter a two-year
time charter at $19,250 per day
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$25.20 million
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Expected late October 2007
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One of our vessels, the M/V Free Jupiter, ran aground off
the coast of the Philippines on September 21, 2007.
Operations to re-float the vessel have been completed. The M/V
Free Jupiter was employed under a one-trip time charter
with approximately seven days remaining at the time of the
grounding incident. We currently anticipate that this time
charter will resume upon completion of temporary repairs.
Following completion of this time charter, the vessel will
undergo an unscheduled dry-docking to complete permanent
repairs. The vessel will be out of service during this
dry-docking, which will delay the commencement of its subsequent
three-year time charter. Based on information available to us at
the present time, we currently estimate that the vessel will be
out of service until approximately the end of November 2007,
although the repair period could be longer. We have notified the
charterer of the delay and it has agreed to an extension of the
charter cancellation date until November 30, 2007. If the
vessels repairs require longer to complete, we have
advised the charterer that we will request a further extension
from it. We expect that the vessels insurance will cover
the vessels repairs and related expenses, less applicable
deductibles. We do not have insurance for loss of hire that will
cover this incident, so we will experience a loss of income
during the period that the vessel is out of service.
2
Our
Competitive Strengths
We believe that we possess the following competitive strengths:
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Experienced Management Team. Our management
team has significant experience in commercial, technical,
operational and financial areas of our business and has
developed relationships with leading charterers, ship brokers
and financial institutions. Since 1997, Ion G. Varouxakis, our
chairman, chief executive officer and president has served in
various management roles for shipping companies in the drybulk
sector. Dimitris Papadopoulos, who became our chief financial
officer in May 2007, served from 1975 to 1991 as financial and
administrative vice president in charge of, among other things,
the shipping interests of the owners of Archirodon Group, Inc.
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Affiliation with Leading Shipping Group. In
January 2007, FS Holdings Limited, an entity controlled by the
Restis family, acquired a 37.4% interest (including shares
underlying warrants) in our company. The Restis family has been
engaged in the international shipping industry for more than
40 years and their interests include ownership and
operation of more than 60 vessels in several segments of
the shipping industry, as well as cargo and chartering
interests. The Restis family group is regarded as one of the
largest independent ship-owning and management groups in the
shipping industry. Our management believes that affiliation with
and access to the resources of companies controlled by the
Restis family commercially enhances the operations of our fleet,
our ability to obtain employment for our vessels and our ability
to obtain more favorable financing.
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Strong Customer Relationships. Through Free
Bulkers, our ship management company, and Safbulk, a Restis
family controlled management company, we have established
customer relationships with leading charterers around the world,
such as major international industrial companies, commodity
producers and traders and a number of chartering brokerage
houses. Free Bulkers has subcontracted the charter and
post-charter management of our fleet to Safbulk. We believe that
the established customer base and the reputation of our fleet
managers will enable us to secure favorable employment for our
vessels with well known charterers.
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Strong Balance Sheet with a Moderate Level of
Indebtedness. We will repay a significant portion
of our indebtedness with the proceeds of this offering and
$48.7 million of borrowings under the credit facility we
expect to enter into with Credit Suisse. This will strengthen
our balance sheet and leave us with approximately
$41.9 million in cash to fund our operations and to acquire
additional vessels. Our financial resources and borrowing
capacity will thus position us to take advantage of acquisition
opportunities as they arise.
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Stable Cash Flow from Well-Established and Reputable
Charterers. A majority of the vessels in our
fleet will be initially employed on time charters to
well-established and reputable charterers. We believe these time
charters will provide us with steady cash flow and high vessel
utilization rates while limiting our exposure to freight rate
volatility.
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Efficient Operations. Through Free Bulkers, we
believe that we have established a strong track record in the
technical management of drybulk carriers, which has enabled us
to maintain cost-efficient operations. We actively monitor and
control vessel operating expenses while maintaining the high
quality of our fleet through regular inspections, proactive
maintenance programs, high standards of operations, and
retaining and training qualified crew members.
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Our
Business Strategy
The following are highlights of our business strategy:
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Leveraging our Strategic Relationships. Free
Bulkers, Safbulk, the Restis family and their affiliates have
extensive experience and relationships in the ship brokerage and
financial industries as well as directly with industrial
charterers and commodity traders. We plan to use these
relationships to identify chartering and acquisition
opportunities and make available to us sources of additional
financing, make contacts, and gain market intelligence.
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3
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Handysize and Handymax Focus. Our fleet of
drybulk carriers will consist of Handysize and Handymax vessels.
Based on the relatively low number of drybulk newbuildings on
order in these categories, we believe there will be continued
high demand for such vessels. Handysize and Handymax vessels are
typically shallow-drafted and equipped with onboard cranes. This
makes Handysize and Handymax vessels more versatile and able to
access a wider range of loading and discharging ports than
larger ships, which are unable to service many ports due to
their size or the local port infrastructure. Many countries in
the Asia Pacific region, including China, as well as countries
in Africa and South America, have shallow ports. We believe that
our vessels, and any Handysize or Handymax vessels that we
acquire, will enable us to transport a wider variety of cargoes
and to pursue a greater number of chartering opportunities than
if we owned larger drybulk vessels. Handysize and Handymax
vessels have also historically achieved greater charter rate
stability than larger drybulk vessels.
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Renew and Expand our Fleet. We intend to
continue growing our fleet in a disciplined manner through
acquisition of well-maintained, secondhand vessels, preferably
up to 15 years old. We perform technical review and
financial analysis of each potential acquisition and only
purchase vessels as market conditions and opportunities warrant.
We are focused on purchasing such vessels, because we believe
that secondhand vessels, when operated in a cost-efficient
manner, should provide significant value given the prevailing
charter rate environment and currently provide better returns as
compared to newbuildings. Furthermore, as part of our fleet
renewal, we will continue to sell vessels when we believe it is
in the best interests of FreeSeas and our shareholders.
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Maintain Balanced Time Charter Employment. We
intend to strategically deploy a substantial portion of our
fleet under time charter employment and our remaining vessels
under spot charter. We actively pursue time charter coverage to
provide steady cash flow to cover a substantial portion of our
fleets fixed costs. We intend to deploy part of our fleet
through spot charters depending on our view of the direction of
the markets and other tactical or strategic considerations. We
believe this balanced employment strategy will provide us with
more predictable operating cash flows and sufficient downside
protection, while allowing us to participate in the potential
upside of the spot charter market during periods of rising
charter rates.
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Use of Flexible Financial Strategy. We will
use a combination of bank debt, cash flow and proceeds from
equity offerings to fund our vessel acquisitions. We assess the
level of debt we will incur in light of our ability to repay
that debt based on the level of cash flow we expect to generate
pursuant to our chartering strategy and our operating cost
structure. Following this offering, we intend to reduce our
ratio of debt to total capitalization to between approximately
35% and 40%. We expect that the maintenance of a reasonable
ratio of debt to total capitalization will increase our ability
to borrow funds to make additional vessel acquisitions while
maintaining our ability to pay dividends to our shareholders.
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Pay Quarterly Dividends. Following the
completion of this offering, we intend to distribute a portion
of our available cash from operations as quarterly cash
dividends to our shareholders in February, May, August and
November of each year. We currently expect that we will pay a
dividend in February 2008 of $0.175 per share for the 2007
fiscal year followed by a quarterly dividend of $0.175 per share
in each of the following three quarters, assuming we complete
this offering. See Forward-Looking Statements.
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Our
Dividend Policy
Following the completion of this offering, we intend to
distribute a portion of our available cash from operations as
quarterly cash dividends to our shareholders in February, May,
August and November of each year. We currently expect that we
will pay a dividend in February 2008 of $0.175 per share for the
2007 fiscal year followed by a quarterly dividend of $0.175 per
share in each of the following three quarters, assuming we
complete this offering. Declaration and payment of any dividend
is subject to the discretion of our board of directors. The
timing and amount of dividend payments will be dependent upon
our earnings, financial position, cash requirements and
availability, fleet renewal and expansion, and restrictions in
our loan
4
agreements, as well as the provisions of Marshall Islands law
affecting the payment of distributions to shareholders and other
factors.
We may not have sufficient funds with which to pay dividends at
all or at the anticipated frequency or amount set forth in this
prospectus. Alternatively, even if we have sufficient funds
available, our board of directors may determine to devote those
funds to internal uses rather than to the payment of dividends.
We refer you to the disclosures under the headings
Forward-Looking Statements, Dividend
Policy and Tax Considerations included
elsewhere in this prospectus. In addition, see Risk
Factors for a discussion of certain risks related to our
ability to pay dividends.
Drybulk
Shipping Industry Trends
The maritime shipping industry is fundamental to international
trade with ocean-going vessels representing the most efficient
and often the only method of transporting large volumes of many
essential drybulk commodities, finished goods as well as crude
oil and refined petroleum products between the continents and
across the seas. It is a global industry whose performance is
closely tied to the level of economic activity in the world.
Drybulk cargoes are used in many basic industries and in
construction, and can be divided into major bulk commodities and
minor bulk commodities. Major bulk commodities include iron ore,
coal and grains. Minor bulk commodities include a wide variety
of commodities, such as forest products, iron and steel
products, fertilizers, agricultural products, non-ferrous ores,
minerals and petcoke, cement, other construction materials and
salt. Grains include wheat, coarse grains and soybeans.
According to Maritime Strategies International Ltd., or MSI,
since the fourth quarter of 2002, the drybulk shipping industry
has experienced the highest charter rates and vessel values in
its modern history due to the favorable imbalance between the
supply of drybulk carriers and demand for drybulk seaborne
transportation. After reaching a peak in mid-2005, however,
vessel values decreased during 2005 and the first half of 2006;
since July 2006, the value of secondhand vessels has risen
sharply approaching new historical record high levels in August
2007 as ship owners seek to increase the size of their fleets to
benefit from the rise in trade.
With respect to drybulk shipping, factors that affect the supply
of drybulk carriers and demand for transportation of drybulk
cargo include:
Supply:
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The average delivery lag for a new vessel is about three years,
limiting the number of new drybulk carriers that will enter the
market in coming years. As of June 2007, newbuilding orders had
been placed for an aggregate of more than 34% of the current
global drybulk fleet, with deliveries expected during the next
three to four years; and
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Port congestion worldwide as a result of increased shipping
activity has increased the number of days vessels are waiting to
load or discharge their cargo, effectively reducing the number
of drybulk carriers that are available for hire at any
particular time.
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Demand:
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In general, the effects of the expansion of world trade and
increasing global production and consumption have driven the
strong demand for ships; and
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China has helped drive demand for drybulk carriers as its
economy continues to grow at a remarkable level. This has
resulted in growing iron ore imports and steel production.
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We cannot offer assurances as to charter rates or vessel values
in any period or that the industry trends described above will
continue following the completion of this offering.
5
Our Fleet
Manager
We contract the technical and commercial management of our
vessels to Free Bulkers, a Marshall Islands corporation owned by
Ion G. Varouxakis, our chairman, chief executive officer and
president. Free Bulkers has a separate management contract with
each of our ship-owning subsidiaries and provides a wide range
of services at a fixed fee per vessel basis. These services
include vessel operations, maintenance, regulatory compliance,
crewing, supervising dry-docking and repairs, arranging
insurance for vessels, vessel supplying, advising on the
purchase and sale of vessels, and performing certain accounting
and other administrative services, including financial reporting
and internal controls requirements. Free Bulkers has
subcontracted the charter and post-charter management of our
fleet to Safbulk. Safbulk is an entity affiliated with one of
our principal shareholders, FS Holdings Limited, which is
controlled by the Restis family. Safbulk has been chartering
bulk carriers, ranging in size from 25,000 to 175,000 dwt, both
owned by it (as many as 20 vessels) and owned by third
parties (as many as 70 vessels), since 1965. We believe
that the experience and reputation of Safbulk, and its
long-standing relationships with charterers and charter brokers
in all parts of the world should enhance the commercial
operation of our fleet and our ability to obtain employment for
our fleet. We believe that using Free Bulkers and Safbulk to
perform these functions should provide us experienced technical
and commercial management for our fleet and enable us to better
manage our costs.
New
Credit Facility
Consistent with our strategy of making efficient use of
leverage, we have negotiated an offer letter for a senior
secured credit facility from Credit Suisse, the lead underwriter
of this offering, in the aggregate amount of $87.0 million,
consisting of a $48.7 million loan to finance or refinance,
as appropriate, up to 50% of the purchase price of the M/V
Free Hero, the M/V Free Jupiter and the M/V
Free Goddess and a $38.3 million facility to finance
up to 75% of the purchase price of additional vessels. Upon each
drawdown of the $38.3 million facility the aggregate amount
outstanding under the total $87.0 million facility may not
exceed 60% of the aggregate market value of the M/V Free
Hero, the M/V Free Jupiter, the M/V Free
Goddess and any additional vessels financed under the
facility. The availability of this senior secured credit
facility is contingent upon the execution of formal loan
documents. We intend to enter into this senior credit facility
only if we successfully complete this offering.
We currently intend to use the proceeds of this offering in
conjunction with the $48.7 million loan from Credit Suisse
to refinance a portion of our existing indebtedness and for
other corporate purposes, including future acquisitions.
Our
Corporate History
We were incorporated on April 23, 2004 by Ion G.
Varouxakis, our chairman, chief executive officer and president,
and two other co-founding shareholders under the name
Adventure Holdings S.A. pursuant to the laws of the
Republic of the Marshall Islands to serve as the parent holding
company of our ship-owning entities. On April 27, 2005, we
changed our name to FreeSeas Inc.
On December 15, 2005, we completed a merger with Trinity
Partners Acquisition Company Inc., a blank check company formed
to serve as a vehicle to complete a business combination with an
operating business. At the time of the merger we owned three
drybulk carriers, the M/V Free Destiny, the M/V Free
Envoy and the M/V Free Fighter. Under the terms of
the merger, we were the surviving corporation. Each outstanding
share of Trinitys common stock and Class B common
stock was converted into the right to receive an equal number of
shares of our common stock, and each Trinity Class W
warrant and Class Z warrant was converted into the right to
receive an equal number of our Class W warrants and
Class Z warrants.
Our common stock, Class W warrants and Class Z
warrants began trading on the NASDAQ Capital Market on
December 16, 2005 under the trading symbols FREE, FREEW and
FREEZ, respectively. As a result of the merger, Trinitys
former securities, including the Trinity Class A Units and
the Class B Units, ceased trading on the OTC
Bulletin Board.
6
In January 2007, Mr. Varouxakis purchased all of the shares
of common stock owned by the two other co-founding shareholders.
He simultaneously sold shares of common stock owned by him to FS
Holdings Limited, an entity controlled by the Restis family, and
to certain other investors. As a result of these transactions,
Mr. Varouxakis now beneficially owns (including shares
underlying options and warrants beneficially owned by him)
approximately 29.8% of our outstanding common stock and FS
Holdings Limited beneficially owns (including shares underlying
warrants) approximately 35.1% of our outstanding common stock.
Immediately following these transactions, our board of directors
appointed Mr. Varouxakis chairman of the board and
president, the two other co-founding shareholders and one other
director resigned from the board, and two new directors were
appointed to fill the vacancies. See Management and
Related Party Transactions.
As of October 23, 2007, we have received an aggregate of
$5,039,655 in gross proceeds, which resulted in net proceeds of
$4,787,672 after deducting fees due to a financial advisor, from
exercises of the Class W and Class Z warrants. We
issued 1,007,931 shares of common stock in accordance with
the terms of these warrants in connection with the exercises.
These exercises occurred following our registration in August
2007 of the shares underlying these warrants.
Our executive offices are located at 89 Akti Miaouli &
4 Mavrokordatou Street, 185 38, Piraeus, Greece and our
telephone number is
011-30-210-452-8770.
7
The
Offering
|
|
|
Common stock offered by us |
|
11,000,000 shares. |
|
Underwriters over-allotment option |
|
Up to 1,650,000 shares. |
|
Common stock outstanding after this offering(1)
|
|
18,298,031 shares. |
|
Use of proceeds |
|
We estimate that we will receive net proceeds of approximately
$83,197,500 from this offering, based on the offering price of
$8.25 per share, after deducting underwriting discounts and
commissions, and offering expenses, and assuming the
underwriters over-allotment option is not exercised. |
|
|
|
We intend to use the proceeds of this offering in conjunction
with $48.7 million of borrowings under the credit facility
we expect to enter into with Credit Suisse to refinance a
portion of our existing indebtedness and for other purposes. See
Use of Proceeds. |
|
Dividend policy |
|
Following the closing of this offering, we intend to distribute
a portion of our available cash from operations as quarterly
cash dividends to our shareholders in February, May, August and
November of each year. We currently expect that we will pay a
dividend in February 2008 of $0.175 per share for the 2007
fiscal year followed by a quarterly dividend of $0.175 per share
in each of the following three quarters, assuming we complete
this offering. The declaration and payment of any dividend is
subject to the discretion of our board of directors. See
Dividend Policy. |
|
NASDAQ Capital Market symbols |
|
Common stock FREE |
|
|
Class W warrants FREEW |
|
|
Class Z warrants FREEZ |
|
|
|
We have applied to have our common stock and warrants listed on
the NASDAQ Global Market under the same symbols upon completion
of this offering. We believe that upon the completion of this
offering, we will satisfy the listing requirements of the NASDAQ
Global Market for our common stock and warrants. We can provide
no assurances, however, as to the time or likelihood of such
approval. |
|
Risk factors |
|
Investing in our common stock involves substantial risk. You
should carefully consider all the information in this prospectus
prior to investing in our common stock. In particular, we urge
you to consider carefully the factors set forth in the section
of this prospectus entitled Risk Factors beginning
on page 13. Some of these risk factors relate principally
to the industry in which we operate and our business in general.
Other risks relate to the securities market for and ownership of
our common stock. Any of these risk factors could significantly
and negatively affect our business, financial condition,
operating results and common stock price. |
|
|
|
(1) |
|
The number of shares of common stock outstanding after this
offering is based on 7,298,031 shares of our common stock
outstanding on October 23, 2007 and excludes the following: |
|
|
|
|
A.
|
up to 250,000 shares reserved for issuance upon the
exercise of stock options currently outstanding (of which, as of
June 30, 2007, options to purchase 166,667 shares had
vested), which have an
|
8
exercise price of $5.00 per share and expire on
December 16, 2010, and up to 1,250,000 shares issuable
upon exercise of stock options that may be granted in the future
under our stock incentive plan;
|
|
|
|
B.
|
3,564,569 shares of common stock reserved for issuance upon
the exercise of outstanding warrants, as follows:
|
|
|
|
|
|
200,000 Class A warrants held by our founding shareholders
exercisable at $5.00 per share and expiring July 29, 2011;
|
|
|
|
700,000 Class B warrants held by FS Holdings Limited
exercisable at $5.00 per share of which 275,000 expire on
May 8, 2012 and 425,000 expire on June 22, 2012;
|
|
|
|
996,974 Class W warrants exercisable at $5.00 per share and
expiring July 29, 2009; and
|
|
|
|
1,667,595 Class Z warrants exercisable at $5.00 per share
and expiring July 29, 2011;
|
|
|
|
|
C.
|
410,000 shares of common stock reserved for issuance upon
the exercise of the unit purchase option sold to the lead
underwriter in the initial public offering of our predecessor,
which unit purchase option expires July 29, 2009, as
follows:
|
|
|
|
|
|
25,000 shares of common stock included in the 12,500
Series A units purchasable upon exercise of the unit
purchase option, at an exercise price of $17.325 per
Series A unit;
|
|
|
|
62,500 shares of common stock issuable for $5.50 per
share upon exercise of 62,500 Class W warrants included in
the 12,500 Series A units;
|
|
|
|
62,500 shares of common stock issuable for $5.50 per
share upon exercise of 62,500 Class Z warrants included in
the 12,500 Series A units;
|
|
|
|
130,000 shares of common stock included in the 65,000
Series B units purchasable upon exercise of the unit
purchase option, at an exercise price of $16.665 per
Series B unit;
|
|
|
|
65,000 shares of common stock issuable for $5.50 per
share upon exercise of 65,000 Class W warrants included in
the 65,000 Series B units;
|
|
|
|
65,000 shares of common stock issuable for $5.50 per
share upon exercise of 65,000 Class Z warrants included in
the 65,000 Series B units; and
|
|
|
|
|
D.
|
shares that may be issued pursuant to the underwriters
over-allotment option.
|
Assuming all outstanding stock options, all outstanding warrants
and the unit purchase option sold to the lead underwriter in the
initial public offering of our predecessor (and all warrants
subject to such unit purchase option) were exercised for cash,
we would receive gross proceeds of $21,775,133.
9
Summary
Financial Information and Data
The following summary financial information and data were
derived from our audited consolidated financial statements for
the period from April 23, 2004 (date of inception) to
December 31, 2004 and for the years ended December 31,
2005 and 2006, and our unaudited condensed consolidated
financial statements for the three and six months ended
June 30, 2006 and 2007, included elsewhere in this
prospectus. The information is only a summary and should be read
in conjunction with our historical consolidated financial
statements and related notes included in this prospectus and the
section of this prospectus titled Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The historical data included below and
elsewhere in this prospectus are not necessarily indicative of
our future performance.
All amounts in the tables below are in thousands of
U.S. dollars, except for share data, fleet data and average
daily results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
3,562
|
|
|
$
|
2,986
|
|
|
$
|
7,830
|
|
|
$
|
5,430
|
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
Commissions
|
|
|
(225
|
)
|
|
|
(185
|
)
|
|
|
(482
|
)
|
|
|
(349
|
)
|
|
|
(799
|
)
|
|
|
(553
|
)
|
|
|
(127
|
)
|
Voyage expenses
|
|
|
(37
|
)
|
|
|
(49
|
)
|
|
|
(39
|
)
|
|
|
(686
|
)
|
|
|
(689
|
)
|
|
|
(55
|
)
|
|
|
(16
|
)
|
Vessel operating expenses (exclusive of depreciation and
amortization expenses shown separately below)
|
|
|
(899
|
)
|
|
|
(1,033
|
)
|
|
|
(2,313
|
)
|
|
|
(2,065
|
)
|
|
|
(4,483
|
)
|
|
|
(3,596
|
)
|
|
|
(786
|
)
|
Depreciation expense
|
|
|
(655
|
)
|
|
|
(1,081
|
)
|
|
|
(1,467
|
)
|
|
|
(2,221
|
)
|
|
|
(4,479
|
)
|
|
|
(3,553
|
)
|
|
|
(872
|
)
|
Amortization of deferred dry-docking and special survey costs
|
|
|
(123
|
)
|
|
|
(112
|
)
|
|
|
(318
|
)
|
|
|
(222
|
)
|
|
|
(442
|
)
|
|
|
(355
|
)
|
|
|
(109
|
)
|
Management fees to a related party
|
|
|
(225
|
)
|
|
|
(135
|
)
|
|
|
(360
|
)
|
|
|
(270
|
)
|
|
|
(540
|
)
|
|
|
(488
|
)
|
|
|
(180
|
)
|
Stock-based compensation expense
|
|
|
(25
|
)
|
|
|
(216
|
)
|
|
|
(50
|
)
|
|
|
(379
|
)
|
|
|
(651
|
)
|
|
|
(200
|
)
|
|
|
|
|
General and administrative expenses
|
|
|
(640
|
)
|
|
|
(390
|
)
|
|
|
(982
|
)
|
|
|
(822
|
)
|
|
|
(1,925
|
)
|
|
|
(321
|
)
|
|
|
(34
|
)
|
Gain on sale of vessel
|
|
|
1,369
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs
|
|
|
(414
|
)
|
|
|
(265
|
)
|
|
|
(633
|
)
|
|
|
(511
|
)
|
|
|
(1,004
|
)
|
|
|
(1,076
|
)
|
|
|
(240
|
)
|
Interest income
|
|
|
39
|
|
|
|
2
|
|
|
|
39
|
|
|
|
13
|
|
|
|
19
|
|
|
|
8
|
|
|
|
4
|
|
Other
|
|
|
(17
|
)
|
|
|
(125
|
)
|
|
|
29
|
|
|
|
(176
|
)
|
|
|
(58
|
)
|
|
|
15
|
|
|
|
|
|
Net income (loss) for period
|
|
|
1,710
|
|
|
|
(603
|
)
|
|
|
2,623
|
|
|
|
(2,258
|
)
|
|
|
(3,324
|
)
|
|
|
152
|
|
|
|
470
|
|
Earnings Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.27
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.36
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Diluted earnings (loss) per share
|
|
$
|
0.25
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.36
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
|
|
4,500,000
|
|
Diluted weighted average number of shares
|
|
|
6,921,050
|
|
|
|
6,290,100
|
|
|
|
6,476,315
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
4,600,444
|
|
|
|
4,500,000
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
9,106
|
|
|
$
|
1,417
|
|
|
$
|
5,286
|
|
|
$
|
1,443
|
|
Fixed assets, net
|
|
|
10,268
|
|
|
|
19,369
|
|
|
|
23,848
|
|
|
|
16,188
|
|
Total assets
|
|
|
32,804
|
|
|
|
23,086
|
|
|
|
29,840
|
|
|
|
18,335
|
|
Total current liabilities, including current portion of
long-term debt
|
|
|
6,572
|
|
|
|
10,260
|
|
|
|
10,231
|
|
|
|
4,971
|
|
Long-term debt, including shareholders loans net of
current portion
|
|
|
14,693
|
|
|
|
5,819
|
|
|
|
9,750
|
|
|
|
9,978
|
|
Total liabilities
|
|
|
21,265
|
|
|
|
16,079
|
|
|
|
20,135
|
|
|
|
14,949
|
|
Total shareholders equity
|
|
|
11,539
|
|
|
|
7,007
|
|
|
|
9,705
|
|
|
|
3,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
PERFORMANCE INDICATORS
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
EBITDA (1)
|
|
$
|
2,863
|
|
|
$
|
853
|
|
|
$
|
5,002
|
|
|
$
|
683
|
|
|
$
|
2,582
|
|
|
$
|
5,128
|
|
|
$
|
1,687
|
|
Fleet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of vessels (2)
|
|
|
2.29
|
|
|
|
3.00
|
|
|
|
2.64
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
2.55
|
|
|
|
0.67
|
|
Ownership days (3)
|
|
|
208
|
|
|
|
273
|
|
|
|
478
|
|
|
|
543
|
|
|
|
1,095
|
|
|
|
931
|
|
|
|
244
|
|
Available days (4)
|
|
|
208
|
|
|
|
253
|
|
|
|
478
|
|
|
|
523
|
|
|
|
1,005
|
|
|
|
931
|
|
|
|
244
|
|
Operating days (5)
|
|
|
203
|
|
|
|
250
|
|
|
|
461
|
|
|
|
490
|
|
|
|
941
|
|
|
|
893
|
|
|
|
244
|
|
Fleet utilization (6)
|
|
|
97.6
|
%
|
|
|
91.6
|
%
|
|
|
96.4
|
%
|
|
|
90.2
|
%
|
|
|
85.9
|
%
|
|
|
95.9
|
%
|
|
|
100.0
|
%
|
Average Daily Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average TCE rate (7)
|
|
$
|
16,256
|
|
|
$
|
11,008
|
|
|
$
|
15,856
|
|
|
$
|
8,969
|
|
|
$
|
10,881
|
|
|
$
|
10,882
|
|
|
$
|
11,012
|
|
Vessel operating expenses (8)
|
|
|
4,322
|
|
|
|
3,784
|
|
|
|
4,839
|
|
|
|
3,803
|
|
|
|
4,094
|
|
|
|
3,863
|
|
|
|
3,221
|
|
Management fees (9)
|
|
|
505
|
|
|
|
495
|
|
|
|
502
|
|
|
|
497
|
|
|
|
493
|
|
|
|
524
|
|
|
|
738
|
|
Total vessel operating expenses (10)
|
|
$
|
4,827
|
|
|
$
|
4,278
|
|
|
$
|
5,341
|
|
|
$
|
4,300
|
|
|
$
|
4,587
|
|
|
$
|
4,387
|
|
|
$
|
3,959
|
|
|
|
|
(1) |
|
We consider EBITDA to represent net earnings before interest,
taxes, depreciation and amortization. Under the laws of the
Marshall Islands, we are not subject to tax on international
shipping income. However, we are subject to registration and
tonnage taxes, which have been included in vessel operating
expenses. Accordingly, no adjustment for taxes has been made for
purposes of calculating EBITDA. EBITDA does not represent and
should not be considered as an alternative to net income or cash
flow from operations, as determined by United States generally
accepted accounting principles, or U.S. GAAP, and our
calculation of EBITDA may not be comparable to that reported by
other companies. EBITDA is included herein because it is an
alternative measure of our liquidity, performance and
indebtedness. |
|
|
|
EBITDA reconciliation to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss)
|
|
$
|
1,710
|
|
|
$
|
(603
|
)
|
|
$
|
2,623
|
|
|
$
|
(2,258
|
)
|
|
$
|
(3,324
|
)
|
|
$
|
152
|
|
|
$
|
470
|
|
Depreciation and amortization
|
|
|
778
|
|
|
|
1,193
|
|
|
|
1,785
|
|
|
|
2,443
|
|
|
|
4,921
|
|
|
|
3,908
|
|
|
|
981
|
|
Interest and finance cost
|
|
$
|
375
|
|
|
$
|
263
|
|
|
$
|
594
|
|
|
$
|
498
|
|
|
$
|
985
|
|
|
$
|
1,068
|
|
|
$
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
2,863
|
|
|
$
|
853
|
|
|
$
|
5,002
|
|
|
$
|
683
|
|
|
$
|
2,582
|
|
|
$
|
5,128
|
|
|
$
|
1,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
(2) |
|
Average number of vessels is the number of vessels that
constituted our fleet for the relevant period, as measured by
the sum of the number of days each vessel was a part of our
fleet during the period divided by the number of calendar days
in the period. |
|
(3) |
|
Ownership days are the total number of days in a period during
which the vessels in our fleet have been owned by us. Ownership
days are an indicator of the size of our fleet over a period and
affect both the amount of revenues and the amount of expenses
that we record during a period. |
|
(4) |
|
Available days are the number of ownership days less the
aggregate number of days that our vessels are off-hire due to
major repairs, dry-dockings or special or intermediate surveys.
The shipping industry uses available days to measure the number
of ownership days in a period during which vessels should be
capable of generating revenues. |
|
(5) |
|
Operating days are the number of available days less the
aggregate number of days that our vessels are off-hire due to
any reason, including unforeseen circumstances. The shipping
industry uses operating days to measure the aggregate number of
days in a period during which vessels actually generate revenues. |
|
(6) |
|
We calculate fleet utilization by dividing the number of our
fleets operating days during a period by the number of
ownership days during the period. The shipping industry uses
fleet utilization to measure a companys efficiency in
finding suitable employment for its vessels and minimizing the
amount of days that its vessels are off-hire for reasons such as
scheduled repairs, vessel upgrades, or dry-dockings or other
surveys. |
|
(7) |
|
Time charter equivalent, or TCE, is a measure of the average
daily revenue performance of a vessel on a per voyage basis. Our
method of calculating TCE is consistent with industry standards
and is determined by dividing operating revenues (net of voyage
expenses) by operating days for the relevant time period. Voyage
expenses primarily consist of port, canal and fuel costs that
are unique to a particular voyage, which would otherwise be paid
by the charterer under a time charter contract. TCE is a
standard shipping industry performance measure used primarily to
compare period-to-period changes in a shipping companys
performance despite changes in the mix of charter types (i.e.,
spot charters, time charters and bareboat charters) under which
the vessels may be employed between the periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
3,562
|
|
|
$
|
2,986
|
|
|
$
|
7,830
|
|
|
$
|
5,430
|
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
Voyage expenses and commissions
|
|
|
(262
|
)
|
|
|
(234
|
)
|
|
|
(521
|
)
|
|
|
(1,035
|
)
|
|
|
(1,488
|
)
|
|
|
(608
|
)
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
3,300
|
|
|
$
|
2,752
|
|
|
$
|
7,309
|
|
|
$
|
4,395
|
|
|
$
|
10,239
|
|
|
$
|
9,718
|
|
|
$
|
2,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating days
|
|
|
203
|
|
|
|
250
|
|
|
|
461
|
|
|
|
490
|
|
|
|
941
|
|
|
|
893
|
|
|
|
244
|
|
Time charter equivalent rates
|
|
$
|
16,256
|
|
|
$
|
11,008
|
|
|
$
|
15,856
|
|
|
$
|
8,969
|
|
|
$
|
10,881
|
|
|
$
|
10,882
|
|
|
$
|
11,012
|
|
|
|
|
(8) |
|
Average daily vessel operating expenses, which includes crew
costs, provisions, deck and engine stores, lubricating oil,
insurance, maintenance and repairs, is calculated by dividing
vessel operating expenses by ownership days for the relevant
time periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses
|
|
$
|
899
|
|
|
$
|
1,033
|
|
|
$
|
2,313
|
|
|
$
|
2,065
|
|
|
$
|
4,483
|
|
|
$
|
3,596
|
|
|
$
|
786
|
|
Ownership days
|
|
|
208
|
|
|
|
273
|
|
|
|
478
|
|
|
|
543
|
|
|
|
1,095
|
|
|
|
931
|
|
|
|
244
|
|
Daily vessel operating expense
|
|
$
|
4,322
|
|
|
$
|
3,784
|
|
|
$
|
4,839
|
|
|
$
|
3,803
|
|
|
$
|
4,094
|
|
|
$
|
3,863
|
|
|
$
|
3,221
|
|
|
|
|
(9) |
|
Daily management fees are calculated by dividing total
management fees paid on ships owned by ownership days for the
relevant time period. |
|
(10) |
|
Total vessel operating expenses, or TVOE, is a measurement of
our total expenses associated with operating our vessels. TVOE
is the sum of daily vessel operating expense and daily
management fees. Daily TVOE is calculated by dividing TVOE by
fleet ownership days for the relevant time period. |
12
Our business faces certain risks. The risks described below
may not be the only risks we face. Additional risks that we do
not yet know of or that we currently think are immaterial may
also impair our business. If any of the events or circumstances
described as risks below or elsewhere in this prospectus
actually occurs, our business, results of operations or
financial condition could be materially and adversely
affected.
Industry-Specific
Risk Factors
The
cyclical nature of the international shipping industry may lead
to volatile changes in charter rates and vessel values, which
may reduce our revenues and net income.
We are an independent shipping company that operates in the
international drybulk shipping market. Our profitability is
dependent upon the charter rates we are able to charge. The
supply of and demand for shipping capacity strongly influences
charter rates. The demand for shipping capacity is determined
primarily by the demand for the type of commodities carried, the
distance that those commodities must be moved by sea, and the
demand for vessels of a particular size. The demand for
commodities is affected by, among other things, world and
regional economic and political conditions (including
developments in international trade, fluctuations in industrial
and agricultural production and armed conflicts), environmental
concerns, weather patterns, port congestion, and changes in
seaborne and other transportation costs. The size of the
existing fleet per size category (i.e., Handysize, Handymax,
Panamax or Capesize) in any particular drybulk market, the
number of new vessel deliveries, the scrapping of older vessels
and the number of vessels out of active service (i.e.,
laid-up,
dry-docked, awaiting repairs or otherwise not available for
hire), determines the supply of shipping capacity, which is
measured by the amount of suitable tonnage available to carry
cargo.
In addition to the prevailing and anticipated charter rates,
factors that affect the supply and demand for shipping capacity
include the rate of newbuilding, scrapping and
laying-up,
newbuilding prices, secondhand vessel values in relation to
scrap prices, costs of bunkers and other operating costs, costs
associated with classification society surveys, normal
maintenance and insurance coverage, the efficiency and age
profile of the existing fleet in the market, and government and
industry regulation of maritime transportation practices,
particularly environmental protection laws and regulations.
These factors are outside of our control, and we cannot predict
the nature, timing and degree of changes in industry conditions.
Some of these factors may have a negative impact on our revenues
and net income.
The market value of our vessels can fluctuate significantly. The
market value of our vessels may increase or decrease depending
on the following factors:
|
|
|
|
|
economic and market conditions affecting the shipping industry
in general;
|
|
|
|
supply of drybulk vessels, including secondhand vessels;
|
|
|
|
demand for drybulk vessels;
|
|
|
|
types and sizes of vessels;
|
|
|
|
other modes of transportation;
|
|
|
|
cost of newbuildings;
|
|
|
|
new regulatory requirements from governments or self-regulated
organizations; and
|
|
|
|
prevailing level of charter rates.
|
Because the market value of our vessels may fluctuate
significantly, we may incur losses when we sell vessels, which
may adversely affect our earnings. In addition, any
determination that a vessels remaining useful life and
earnings requires an impairment of its value on our financial
statements could result in a charge against our earnings and a
reduction in our shareholders equity. If for any reason we
sell our vessels at a time when prices have fallen, the sale may
be less than that vessels carrying amount on our financial
statements, and we would incur a loss and a reduction in
earnings.
13
Charter
rates, which in the international drybulk shipping industry
approached historic highs in the second quarter of 2007, may
decline as a result of increased capacity and slowing worldwide
economic growth, thereby reducing our future
profitability.
After reaching a peak in mid-2005, charter rates and vessel
values decreased during the remainder of 2005 and the first half
of 2006. Since July 2006, charter rates and the value of
secondhand vessels have risen sharply, approaching historical
record high levels in August 2007. We cannot give any assurance
as to how long these rate levels may be maintained and, if they
begin to decline, to what levels they might fall. We anticipate
that the future demand for our drybulk carriers and drybulk
charter rates will be dependent upon continued economic growth
particularly in China and India and elsewhere in the world
generally, seasonal and regional changes in demand, and changes
to the capacity of the world fleet. Adverse industry, economic,
political, social or other developments could also decrease the
amount
and/or
profitability of our business and materially reduce our revenues
and net income.
The nature, timing and degree of changes in industry conditions
are unpredictable and outside of our control. Some of the
factors that influence demand for vessel capacity include:
|
|
|
|
|
supply and demand for drybulk commodities;
|
|
|
|
global and regional economic conditions;
|
|
|
|
the distance drybulk commodities are to be moved by sea; and
|
|
|
|
changes in seaborne and other transportation patterns.
|
Some of the factors that influence the supply of vessel capacity
include:
|
|
|
|
|
the number of newbuilding deliveries;
|
|
|
|
the scrapping rate of older vessels;
|
|
|
|
changes in environmental and other regulations that may limit
the useful life of vessels;
|
|
|
|
the number of vessels that are
laid-up; and
|
|
|
|
changes in global drybulk commodity production.
|
An
oversupply of drybulk carrier capacity may lead to reductions in
charter rates and our profitability.
The market supply of drybulk carriers, primarily Capesize and
Panamax vessels, has been increasing, and the number of such
drybulk carriers on order are near historic highs. Newbuildings
were delivered in significant numbers starting at the beginning
of 2006 and are expected to continue to be delivered in
significant numbers through 2007. As of June 2007, newbuilding
orders had been placed for an aggregate of more than 34% of the
current global drybulk fleet, with deliveries expected during
the next three to four years. An oversupply of drybulk carrier
capacity may result in a reduction of our charter rates. If such
a reduction occurs, when our vessels current charters
expire or terminate, we may only be able to recharter our
vessels at reduced or unprofitable rates or we may not be able
to charter these vessels at all.
An
economic slowdown in the Asia Pacific region or elsewhere could
materially reduce the amount
and/or
profitability of our business.
A significant number of the port calls made by our vessels
involve the loading or discharging of raw materials and
semi-finished products in ports in the Asia Pacific region. As a
result, a negative change in economic conditions in any Asia
Pacific country, but particularly in China or India, may have an
adverse effect on our business, financial position and results
of operations, as well as our future prospects. In particular,
in recent years, China has been one of the worlds fastest
growing economies in terms of gross domestic product. We cannot
assure you that such growth will be sustained or that the
Chinese economy will not experience contraction in the future.
Moreover, any slowdown in the economies of the United States,
the European Union or certain other Asian countries may
adversely effect economic growth in China and
14
elsewhere. Our revenues and net income, as well as our future
prospects, would likely be materially reduced by an economic
downturn in any of these countries.
Changes
in the economic and political environment in China and policies
adopted by the government to regulate its economy may have a
material adverse effect on our business, financial condition and
results of operations.
The Chinese economy differs from the economies of most countries
belonging to the Organization for Economic Cooperation and
Development, or OECD, in such respects as structure, government
involvement, level of development, growth rate, capital
reinvestment, allocation of resources, rate of inflation and
balance of payments position. Prior to 1978, the Chinese economy
was a planned economy. Since 1978, increasing emphasis has been
placed on the utilization of market forces in the development of
the Chinese economy. There is an increasing level of freedom and
autonomy in areas such as allocation of resources, production,
pricing and management and a gradual shift in emphasis to a
market economy and enterprise reform. Although
limited price reforms were undertaken, with the result that
prices for certain commodities are principally determined by
market forces, many of the reforms are experimental and may be
subject to change or abolition. We cannot assure you that the
Chinese government will continue to pursue a policy of economic
reform. The level of imports to and exports from China could be
adversely affected by changes to these economic reforms, as well
as by changes in political, economic and social conditions or
other relevant policies of the Chinese government, such as
changes in laws, regulations or export and import restrictions,
all of which could, adversely affect our business, financial
condition and operating results.
Charter
rates are subject to seasonal fluctuations, which may adversely
affect our operating results.
Our fleet consists of Handysize and Handymax drybulk carriers
that operate in markets that have historically exhibited
seasonal variations in demand and, as a result, in charter
rates. This seasonality may result in quarter-to-quarter
volatility in our operating results. The energy markets
primarily affect the demand for coal, with increases during hot
summer periods when air conditioning and refrigeration require
more electricity and towards the end of the calendar year in
anticipation of the forthcoming winter period. Grain shipments
are driven by the harvest within a climate zone. Because three
of the five largest grain producers (the United States, Canada
and the European Union) are located in the northern hemisphere
and the other two (Argentina and Australia) are located in the
southern hemisphere, harvests occur throughout the year and
grains require drybulk shipping accordingly. As a result of
these and other factors, the drybulk shipping industry is
typically stronger in the fall and winter months. Therefore, we
expect our revenues from our drybulk carriers to be typically
weaker during the fiscal quarters ended June 30 and September 30
and, conversely, we expect our revenues from our drybulk
carriers to be typically stronger in fiscal quarters ended
December 31 and March 31. Seasonality in the drybulk
industry could materially affect our operating results.
The
operation of drybulk carriers has certain unique operational
risks.
The operation of certain vessel types, such as drybulk carriers,
has certain unique risks. With a drybulk carrier, the cargo
itself and its interaction with the ship can be a risk factor.
By their nature, drybulk cargoes are often heavy, dense, easily
shifted, and react badly to water exposure. In addition, drybulk
carriers are often subjected to battering treatment during
unloading operations with grabs, jackhammers (to pry encrusted
cargoes out of the hold), and small bulldozers. This treatment
may cause damage to the vessel. Vessels damaged due to treatment
during unloading procedures may be more susceptible to breach to
the sea. Hull breaches in drybulk carriers may lead to the
flooding of the vessels holds. If a drybulk carrier
suffers flooding in its forward holds, the bulk cargo may become
so dense and waterlogged that its pressure may buckle the
vessels bulkheads leading to the loss of a vessel. If we
are unable to adequately maintain our vessels we may be unable
to prevent these events. Any of these circumstances or events
could negatively impact our business, financial condition,
results of operations and ability to pay dividends. In addition,
the loss of any of our vessels could harm our reputation as a
safe and reliable vessel owner and operator.
15
We are
subject to regulation and liability under environmental laws
that could require significant expenditures and reduce our cash
flows and net income.
Our business and the operation of our vessels are materially
affected by government regulation in the form of international
conventions and national, state and local laws and regulations
in force in the jurisdictions in which the vessels operate, as
well as in the country or countries of their registration. We
are also required by various governmental and quasi-governmental
agencies to obtain certain permits, licenses and certificates
with respect to our operations. Because such conventions, laws,
regulations and permit requirements are often revised, we cannot
predict the ultimate cost of complying with such conventions,
laws, regulations or permit requirements, or the impact thereof
on the resale prices or useful lives of our vessels. Additional
conventions, laws and regulations may be adopted that could
limit our ability to do business and thereby reduce our revenue
or increase our cost of doing business, thereby materially
decreasing our net income.
The operation of our vessels is affected by the requirements set
forth in the International Safety Management, or ISM, Code. The
ISM Code requires shipowners and bareboat charterers to develop
and maintain an extensive Safety Management System.
The system includes the adoption of a safety and environmental
protection policy setting forth instructions and procedures for
safe operation and dealing with emergencies. The failure of a
shipowner or bareboat charterer to comply with the ISM Code may
subject such party to increased liability, may decrease
available insurance coverage for the affected vessels,
and/or may
result in a denial of access to, or detention in, certain ports.
Currently, Lloyds Register of Shipping has awarded ISM and
International Ship and Port Facilities Security, or ISPS,
certification to all of our vessels and to Free Bulkers, our
ship management company. There can be no assurance, however,
that such certification will be maintained indefinitely.
The European Union is considering legislation that will affect
the operation of vessels and the liability of owners for oil
pollution. It is difficult to predict what legislation, if any,
may be promulgated by the European Union or any other country or
authority.
We currently maintain, for each of our vessels, protection and
indemnity insurance, which includes pollution liability
coverage, in the amount of one billion dollars per incident. If
the damages from a catastrophic incident exceeded our insurance
coverage, the payment of these damages may materially decrease
our net income.
The International Maritime Organization, or IMO, or other
regulatory bodies may adopt further regulations in the future
that could adversely affect the useful lives of our vessels as
well as our ability to generate income from them. These
requirements can also affect the resale value of our vessels.
The United States Oil Pollution Act of 1990, or OPA, established
an extensive regulatory and liability regime for the protection
and clean-up
of the environment from oil spills. OPA affects all owners and
operators whose vessels trade in the United States of America or
any of its territories and possessions or whose vessels operate
in waters of the United States of America, which includes the
territorial sea of the United States of America and its 200
nautical mile exclusive economic zone.
Under OPA, vessel owners, operators and bareboat charterers are
responsible parties and are jointly, severally and
strictly liable (unless the spill results solely from the act or
omission of a third party, an act of God or an act of war) for
all containment and
clean-up
costs and other damages arising from discharges or threatened
discharges of oil from their vessels, including bunkers (fuel).
If any
of our vessels fail to maintain their class certification and/or
fail any annual survey, intermediate survey, dry-docking or
special survey, that vessel would be unable to carry cargo,
thereby reducing our revenues and profitability and violating
certain loan covenants of our third-party
indebtedness.
The hull and machinery of every commercial vessel must be
classed by a classification society authorized by its country of
registry. The classification society certifies that a vessel is
safe and seaworthy in accordance with the applicable rules and
regulations of the country of registry of the vessel and the
Safety of Life at Sea Convention, or SOLAS. Our vessels are
currently classed with Lloyds Register of Shipping, Korean
Register of Shipping, Nippon Kaiji Kyokai, and Germanischer
Lloyd.
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A vessel must undergo annual surveys, intermediate surveys,
dry-dockings and special surveys. In lieu of a special survey, a
vessels machinery may be on a continuous survey cycle,
under which the machinery would be surveyed periodically over a
five-year period. Our vessels are on special survey cycles for
hull inspection and continuous survey cycles for machinery
inspection. Every vessel is also required to be dry-docked every
two to three years for inspection of the underwater parts of
such vessel.
If any vessel does not maintain its class
and/or fails
any annual survey, intermediate survey, dry-docking or special
survey, the vessel will be unable to carry cargo between ports
and will be unemployable and uninsurable, thereby reducing our
revenues and profitability. That could also cause us to be in
violation of certain covenants in our loan agreements. In
addition, the cost of maintaining our vessels
classifications may be substantial at times and could result in
reduced revenues.
Maritime
claimants could arrest our vessels, which could interrupt our
cash flow.
Crew members, suppliers of goods and services to a vessel,
shippers of cargo and other parties may be entitled to a
maritime lien against a vessel for unsatisfied debts, claims or
damages. In many jurisdictions, a maritime lienholder may
enforce its lien by arresting a vessel through foreclosure
proceedings. The arresting or attachment of one or more of our
vessels could interrupt our cash flow and require us to pay
large sums of funds to have the arrest lifted.
In addition, in some jurisdictions, such as South Africa, under
the sister ship theory of liability, a claimant may
arrest both the vessel which is subject to the claimants
maritime lien and any associated vessel, which is
any vessel owned or controlled by the same owner or managed by
the same manager. Claimants could try to assert sister
ship liability against one of our vessels for claims
relating to another of our vessels or a vessel managed by our
manager.
Governments
could requisition our vessels during a period of war or
emergency, resulting in loss of earnings.
A government could requisition for title or seize our vessels.
Requisition for title occurs when a government takes control of
a vessel and becomes the owner. A government could also
requisition our vessels for hire, which occurs when a government
takes control of a vessel and effectively becomes the charterer
at dictated charter rates. Generally, requisitions occur during
a period of war or emergency. Government requisition of one or
more of our vessels could reduce our revenues and net income.
World
events outside our control such as terrorism and international
and regional hostilities may negatively affect our ability to
operate, thereby reducing our revenues and net income or our
ability to obtain additional financing, thereby restricting the
implementation of our business strategy.
Terrorist attacks such as those in New York on
September 11, 2001, the bombings in Spain on March 11,
2004 and in London on July 7, 2005, and the continuing
response of the United States and other countries to these
attacks, as well as the threat of future terrorist attacks in
the United States or elsewhere continue to cause uncertainty in
the world financial markets and may adversely affect our
business and operating results by increasing security costs and
creating delays because of heightened security measures. In the
past, political conflicts have also resulted in attacks on
vessels, mining of waterways and other efforts to disrupt
international shipping, particularly in the Arabian Gulf region.
Acts of terrorism and piracy have also affected vessels trading
in regions such as the South China Sea.
Terrorist attacks and international and regional hostilities may
also negatively impact our vessels or our customers directly.
The continuing conflict in Iraq and Afghanistan may lead to
additional acts of terrorism and armed conflict around the
world, which may contribute to economic instability and could
result in increased volatility of the financial markets in the
United States of America and globally, an economic recession in
the United States of America or the world and a corresponding
reduction in our business and future prospects. Any of these
occurrences could prevent us from obtaining additional financing
on terms acceptable to us or at all and have a material adverse
impact on our operating results, revenues and costs which would
impair our implementation of our business strategy.
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Risks
involved with operating ocean-going vessels could affect our
business and reputation, which may reduce our
revenues.
The operation of an ocean-going vessel has inherent risks. These
risks include the possibility of:
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crew strikes
and/or
boycotts;
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marine disaster;
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piracy;
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environmental accidents;
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cargo and property losses or damage; and
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business interruptions caused by mechanical failure, human
error, war, terrorism, political action in various countries,
labor strikes or adverse weather conditions.
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The involvement of any of our vessels in an environmental
disaster may harm our reputation as a safe and reliable vessel
operator. Any of these circumstances or events could increase
our costs or lower our revenues.
Rising
fuel prices may adversely affect our profits.
The cost of fuel is a significant factor in negotiating charter
rates. As a result, an increase in the price of fuel beyond our
expectations may adversely affect our profitability. The price
and supply of fuel is unpredictable and fluctuates based on
events outside our control, including geo-political
developments, supply and demand for oil, actions by members of
OPEC and other oil and gas producers, war and unrest in oil
producing countries and regions, regional production patterns
and environmental concerns and regulations.
Company-Specific
Risk Factors
We
have a limited operating history and have cumulative
deficits.
Our company was formed in April 2004, and we did not own or
operate any vessels prior to June 2004. We therefore have a
limited operating history and limited historical financial data
on which to evaluate our operations or our ability to implement
and achieve our business strategy. As of December 31, 2006
and June 30, 2007, we had cumulative deficits of $2,702,000
and $79,000, respectively, which reflects the impact of
cumulative losses during 2006 and prior years. Although we
achieved net income of $2,623,000 for the six months ended
June 30, 2007, there can be no assurances that we will
achieve net income for the remainder of the year or that our net
income will be sufficient to offset our cumulative deficit.
If we
fail to manage our planned growth properly, we may not be able
to successfully expand our market share.
We intend to continue to grow our fleet. Our growth will depend
on:
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locating and acquiring suitable vessels;
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identifying and consummating acquisitions or joint ventures;
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integrating any acquired vessel successfully with our existing
operations;
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enhancing our customer base;
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managing our expansion; and
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obtaining the required financing.
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Growing any business by acquisition presents numerous risks,
such as undisclosed liabilities and obligations and difficulty
experienced in (1) obtaining additional qualified
personnel, (2) managing relationships with customers and
suppliers and (3) integrating newly acquired operations
into existing infrastructures.
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We cannot give any assurance that we will be successful in
executing our growth plans or that we will not incur significant
expenses and losses in connection with the execution of those
growth plans.
The
recent grounding of the M/V Free Jupiter will negatively impact
our financial condition, results of operations and ability to
pay dividends.
On September 21, 2007, the M/V Free Jupiter ran
aground off the coast of the Philippines. See
Summary Our Company and
Business Vessel Employment for more
information about this event. The M/V Free Jupiter
sustained damage and will be undergoing repairs until
approximately November 30, 2007, although there can be no
assurances the repairs may not require longer to complete. While
we believe that our hull and machinery insurance and our
P&I insurance should cover the repair of the vessel and
liability claims from the current charterer, subject to
deductibles of at least $75,000 in the aggregate, we do not
currently have loss of hire or business interruption insurance,
and accordingly, we will suffer a loss of revenues for the
period that the vessel is off-hire while she was aground and
during repairs. In addition, our protection and indemnity
insurance would not cover claims made by our charterers for
damages that they may incur as a result of the delays caused by
the incident, although our insurance may cover our fees and
expenses incurred in defending claims for damages brought by our
charterers. Furthermore, we are scheduled to deliver the
M/V Free
Jupiter to its subsequent charterer by November 30,
2007 for a three-year time charter. If the vessels repairs
take longer to complete, we will request a further extension
from the charterer. There can be no assurances a further
extension will be granted. If a further extension is not
granted, we may face claims that our insurance would not cover.
We may also face increased insurance premiums as a result of the
grounding incident. As a result, this grounding incident and its
consequences will negatively impact our financial condition,
results of operations and ability to pay dividends.
Our
charterers may terminate or default on their charters, which
could adversely affect our results of operations and cash
flow.
Our charters may terminate earlier than the dates indicated in
this prospectus. The terms of our charters vary as to which
events or occurrences will cause a charter to terminate or give
the charterer the option to terminate the charter, but these
generally include a total or constructive total loss of the
related vessel, the requisition for hire of the related vessel,
or the failure of the related vessel to meet specified
performance criteria. In addition, if we fail to deliver a
vessel within the time specified in its charter, the charterer
may have the right to terminate the charter. Please see
Summary Our Company and
Business Vessel Employment for
information regarding a potential delay in the delivery of the
M/V Free Jupiter to its charterer.
The ability of each of our charterers to perform its obligations
under a charter will depend on a number of factors that are
beyond our control. These factors may include general economic
conditions, the condition of the drybulk shipping industry, the
charter rates received for specific types of vessels, and
various operating expenses. The costs and delays associated with
the termination of a charter or the default by a charterer of a
vessel may be considerable and may adversely affect our
business, results of operations, cash flows and financial
condition.
We cannot predict whether our charterers will, upon the
expiration of their charters, recharter our vessels on favorable
terms or at all. If our charterers decide not to recharter our
vessels, we may not be able to recharter them on terms similar
to the terms of our current charters or at all. If we receive
lower charter rates under replacement charters or are unable to
recharter all of our vessels, our business, operating results
and financial condition may be adversely affected.
Our
earnings may be adversely affected if we do not successfully
employ our vessels.
We intend to employ our vessels in fixed-rate period charters
and spot charters. While current charter rates are high relative
to historical rates, the charter market is volatile, and at
times in the past charter rates for vessels have declined below
operating costs of vessels. If our vessels become available for
employment in the spot market or under new period charters
during periods when charter rates have fallen, we may have to
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employ our vessels at depressed charter rates that would lead to
reduced or volatile earnings. We cannot assure you that future
charter rates will be at a level that will enable us to operate
our vessels profitably or to repay our debt.
We
will not be able to take advantage of favorable opportunities in
the current spot market with respect to vessels employed on
medium- to long-term time charters.
Following the delivery of the M/V Free Goddess, four of
the five vessels in our fleet will be employed under medium- to
long-term time charters (following the expiration of the M/V
Free Jupiters initial time charter and unscheduled
dry-docking and the M/V Free Goddess two-month time
charter), with expiration dates ranging from April 2008 to
September 2010. Although medium- and long-term time charters
provide relatively steady streams of revenue, vessels committed
to medium- and long-term charters may not be available for spot
voyages during periods of increasing charter hire rates, when
spot voyages might be more profitable.
We
previously relied on spot charters and may spot charter certain
of our vessels in the future. The rates on spot charters are
very competitive and volatile, which can result in decreased
revenues if spot charter rates decline.
Our vessels have previously been spot chartered, which made our
historical revenues subject to greater fluctuation. In the
future, we may continue to spot charter certain of our vessels.
The spot charter market is highly competitive and rates within
this market are subject to volatile fluctuations, while
longer-term period time charters provide income at
pre-determined rates over more extended periods of time. If we
decide to continue to spot charter certain of our vessels, there
can be no assurance that we will be successful in keeping those
vessels fully employed in these short-term markets or that
future spot rates will be sufficient to enable those vessels to
be operated profitably.
If
vessels that we acquire for our fleet are not delivered on time
or delivered with significant defects, our business, results of
operations, financial condition and ability to pay dividends
could be adversely affected.
We took delivery of the M/V Free Hero on July 3,
2007 and of the M/V Free Jupiter on September 5,
2007. We expect to take delivery of the M/V Free Goddess
in late October 2007. A prolonged delay in the delivery to us of
the M/V Free Goddess or of any additional vessels we may
contract to purchase, or the failure of the contract
counterparty to deliver a vessel at all, could cause us to
breach our obligations under a related time charter and could
adversely affect our business, results of operations, financial
condition and the ability to pay dividends. The delivery of any
of these vessels with substantial defects could have similar
consequences.
If we
cannot complete the purchase of the M/V Free Goddess or other
vessels we may use the proceeds of this offering for general
corporate purposes with which you may not agree.
Certain events may arise that could result in us not taking
delivery of the M/V Free Goddess or any other vessel we
may contract to purchase, such as sellers default, a total
loss of a vessel, a constructive total loss of a vessel, or
substantial damage to a vessel prior to its delivery. If the
sellers of the M/V Free Goddess or any other vessels fail
to deliver the vessels to us as agreed, or if we cancel a
purchase agreement because a seller has not met its obligations,
our management will have the discretion to apply the proceeds of
this offering that we would have used to repay debt incurred for
the purchase of those vessels to acquire other vessels or for
general corporate purposes with which you may not agree. We will
not escrow the proceeds from this offering and will not return
the proceeds to you if we do not take delivery of the M/V
Free Goddess or any other vessel we may contract to
purchase. It may take a substantial period of time before we can
locate and purchase other suitable vessels. During this period,
the portion of the proceeds of this offering originally planned
for the acquisition of the M/V Free Goddess or other
vessels may be invested in other instruments and therefore may
not yield returns at rates comparable to those that vessels
might have earned, which would have a material adverse effect on
our business and results of operations.
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We
depend entirely on Free Bulkers and Safbulk to manage and
charter our fleet.
Our executive management team consists of only two individuals,
our chief executive officer and our chief financial officer. We
currently contract the management of our fleet, including
crewing, maintenance and repair, as well as our financial
reporting and internal controls, to Free Bulkers, an affiliated
company. Free Bulkers has entered into a sub-management
agreement with Safbulk, a company controlled by the Restis
family, for the commercial management of our fleet, including
negotiating and obtaining charters, relations with charter
brokers and performance of post-charter activities. We are
dependent upon Free Bulkers for technical management of our
fleet and upon Safbulk for our ability to attract charterers and
charter brokers. The loss of either of their services or their
failure to perform their obligations could reduce our revenues
and net income and adversely affect our operations and business.
Generally, Free Bulkers is not liable to us for any losses or
damages, if any, that may result from its management of our
fleet unless Free Bulkers or its employees act with negligence
or gross negligence or commit a willful default with respect to
one of our vessels. Pursuant to its agreement with us, Free
Bulkers liability for such acts, except in certain limited
circumstances, may not exceed ten times the annual management
fee payable by the applicable subsidiary to Free Bulkers.
Although we may have rights against Free Bulkers, if Free
Bulkers defaults on its obligations to us, you may have no
recourse against Free Bulkers. In addition, if Safbulk defaults
on its obligations to Free Bulkers, we may have no recourse
against Safbulk. Further, we expect that we will need approval
from our lenders if we intend to replace Free Bulkers as our
fleet manager.
Because
our seafaring employees are covered by collective bargaining
agreements, failure of industry groups to renew those agreements
may disrupt our operations and adversely affect our
earnings.
All of the seafarers employed on the vessels in our fleet are
covered by collective bargaining agreements that set basic
standards. We cannot assure you that these agreements will
prevent labor interruptions. Any labor interruptions could
disrupt our operations and harm our financial performance.
If
Free Bulkers is unable to perform under its vessel management
agreements with us, our results of operations may be adversely
affected.
As we expand our fleet, we will rely on Free Bulkers to recruit
suitable additional seafarers and to meet other demands imposed
on Free Bulkers. We cannot assure you that Free Bulkers will be
able to meet these demands as we expand our fleet. If Free
Bulkers crewing agents encounter business or financial
difficulties, they may not be able to adequately staff our
vessels. If Free Bulkers is unable to provide the commercial and
technical management service for our vessels, our business,
results of operations, cash flows and financial position and our
ability to pay dividends may be adversely affected.
We,
and one of our executive officers, have affiliations with Free
Bulkers that could create conflicts of interest detrimental to
us.
Our chairman, chief executive officer and president, Ion G.
Varouxakis, is also the controlling shareholder and officer of
Free Bulkers, which is our ship management company. These dual
responsibilities of our officer and the relationships between
the two companies could create conflicts of interest between
Free Bulkers and us. Each of our operating subsidiaries has a
nonexclusive management agreement with Free Bulkers. Free
Bulkers has subcontracted the charter and post-charter
management of our fleet to Safbulk, which is controlled by FS
Holdings Limited, one of our principal shareholders. Although
Free Bulkers currently serves as manager for vessels owned by
us, neither Free Bulkers nor Safbulk is restricted from entering
into management agreements with other competing shipping
companies, and Safbulk provides management services to other
international shipping companies, including the Restis group,
which owns and operates vessels in the drybulk sector. Free
Bulkers or Safbulk could also allocate charter
and/or
vessel purchase and sale opportunities to others. There can be
no assurance that Free Bulkers or Safbulk would resolve any
conflicts of interest in a manner beneficial to us.
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Operational
or financial problems experienced by Free Bulkers, our
affiliate, may adversely impact us.
The ability of Free Bulkers to continue providing services for
us will depend in part on Free Bulkers own financial
strength. Circumstances beyond our control could impair Free
Bulkers financial strength and, as a result, Free
Bulkers ability to fulfill its obligations to us which
could have a material adverse effect on us.
If
Free Bulkers is unable to recruit suitable seafarers for our
fleet or as we expand our fleet, our results of operations may
be adversely affected.
We will rely on Free Bulkers to recruit suitable senior officers
and crews as we expand our fleet. In addition, as we expand our
fleet, we will have to rely on Free Bulkers to recruit suitable
additional seafarers. We cannot assure you that Free Bulkers
will be able to continue to hire suitable employees as we expand
our fleet. If Free Bulkers crewing agents encounter
business or financial difficulties, they may not be able to
adequately staff our vessels. We expect that all or part of the
seafarers who will be employed on the ships in our fleet will be
covered by industry-wide collective bargaining agreements that
set basic standards. We cannot assure you that these agreements
will prevent labor interruptions. If Free Bulkers is unable to
recruit suitable seafarers as we expand our fleet, our business,
results of operations, cash flows and financial condition and
our ability to pay dividends may be materially adversely
affected.
In the
highly competitive international drybulk shipping industry, we
may not be able to compete for charters with new entrants or
established companies with greater resources.
We employ our vessels in a highly competitive market that is
capital intensive and highly fragmented. Competition arises
primarily from other vessel owners, some of whom have
substantially greater resources than we have. Competition for
the transportation of drybulk cargoes can be intense and depends
on price, location, size, age, condition and the acceptability
of the vessel and its managers to the charterers. Due in part to
the highly fragmented market, competitors with greater resources
could operate larger fleets through consolidations or
acquisitions that may be able to offer better prices and fleets.
A
decline in the market value of our vessels could lead to a
default under our loan agreements and the loss of our
vessels.
We have incurred secured debt under loan agreements for all of
our vessels. See See Business Loans for
Vessels. If the market value of our fleet declines, we may
not be in compliance with certain provisions of our existing
loan agreements and we may not be able to refinance our debt or
obtain additional financing. If we are unable to pledge
additional collateral, our lenders could accelerate our debt and
foreclose on our fleet.
Servicing
debt may limit funds available for other purposes and inability
to service debt may lead to acceleration of debt and foreclosure
on our fleet.
To finance our original fleet of vessels, one of which was sold
in April 2007, we incurred secured debt under loan agreements
with Hollandsche Bank Unie N.V. that are guaranteed
by us and unsecured, non-interest-bearing shareholder loans. As
of June 30, 2007, we had total debt consisting of loans
from shareholders of $15.9 million and a ratio of bank debt
to total capital of approximately 39%. The long-term debt
requires quarterly payments of principal and interest and the
shareholder loans require quarterly payments of principal. See
Business Loans for Vessels.
On May 1, 2007, we entered into memoranda of agreement
pursuant to which we agreed to purchase two secondhand drybulk
carriers, the M/V Free Hero and the M/V Free
Jupiter, from non-affiliated parties for a total of
approximately $72.25 million. On August 20, 2007, we
entered into a memorandum of agreement to purchase the M/V
Free Goddess, a secondhand Handysize vessel for a total
purchase price of $25.2 million. We took delivery of the
M/V Free
Hero on July 3, 2007 and of the M/V Free Jupiter
on September 5, 2007 and we expect to take delivery of
the M/V
Free Goddess in October 2007. To finance the acquisition
of these vessels and other vessels we may acquire, we have
obtained loan commitments from HSH Nordbank AG and BTMU Capital
Corporation for an aggregate of $89.5 million in the form
of a secured senior loan and a junior secured loan, as well as a
$14.0 million unsecured loan from FS Holdings Limited, one
of our principal shareholders. We have also entered into a
credit agreement with Hollandsche Bank Unie N.V.
increasing the
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amount available on an existing facility from $5.0 million
to $9.0 million. Our ability to borrow any undrawn portion
of the aggregate $89.5 million commitment amount under the
HSH Nordbank AG and BTMU Capital Corporation loans will
terminate on January 15, 2008.
The drawings under these facilities have materially increased
our long-term debt, our shareholder debt, and our ratio of debt
to total capital.
If we are not able to repay a portion of our borrowings using
the proceeds of this offering, we will be required to dedicate a
significant portion of our cash flow from operations to pay the
principal and interest on our debt. These requirements will
increase as we draw additional funds available for the
acquisition of new vessels. These payments will limit funds
otherwise available for working capital, capital expenditures
and other purposes. We will need to incur additional
indebtedness as we further expand our fleet, which would
increase our ratio of debt to equity. The need to service our
debt may limit funds available for other purposes, including
distributing cash to our shareholders, and our inability to
service debt could lead to acceleration of our debt and
foreclosure on our fleet.
We have negotiated an offer letter contingent upon, among other
things, the execution of formal loan agreements, for a senior
secured credit facility from Credit Suisse, the lead underwriter
of this offering, in the aggregate amount of $87.0 million,
consisting of a $48.7 million loan to finance or refinance,
as appropriate, up to 50% of the purchase price of the M/V
Free Hero, the M/V Free Jupiter and the M/V
Free Goddess and a $38.3 million facility to finance up
to 75% of the purchase price of additional vessels. The
repayment and interest terms contained in this offer letter are
more favorable than those contained in our debt facilities that
were used to acquire the M/V Free Hero and the M/V
Free Jupiter, and will be used to acquire the M/V Free
Goddess and would increase our cash flow and should result
in funds available for vessel acquisitions and payment of
dividends to our shareholders. We intend to enter into this
senior credit facility only if we successfully complete this
offering. We cannot assure you that we will enter into a formal
agreement with Credit Suisse. See Business
Loans for Vessels for a description of this Credit Suisse
offer letter.
Continued
increase in interest rates would reduce funds available to
purchase vessels and service debt.
The rise in interest rates since 2005 has caused our interest
cost to increase and has had a material adverse effect on our
net income. Any further interest rate increases could further
reduce our revenues and net income. We have purchased, and may
purchase in the future, vessels with loans that provide for
periodic interest payments based on indices that fluctuate with
changes in market interest rates. If interest rates increase
significantly, it would increase our costs of financing our
acquisition of vessels, which could decrease the number of
additional vessels that we could acquire and adversely affect
our financial condition and results of operations and may
adversely affect our ability to service debt.
Our
loan agreements and commitment letters contain covenants that
may limit our liquidity and corporate activities.
Our loan agreements impose operating and financial restrictions
on us. These restrictions may limit our ability to:
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incur additional indebtedness;
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create liens on our assets;
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sell capital stock of our subsidiaries;
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make investments;
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engage in mergers or acquisitions;
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pay dividends;
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make capital expenditures; and
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change the management of our vessels or terminate or materially
amend the management agreements and sell our vessels.
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In addition, our credit facilities contain a number of financial
covenants and general covenants that require us to, among other
things, maintain minimum vessel values, minimum cash balances on
deposit, minimum working capital and adequate insurance.
Therefore, we may need to seek permission from our lenders in
order to undertake certain corporate actions. Our lenders
interests may be different from ours, and we cannot guarantee
that we will be able to obtain our lenders permission when
needed. This may prevent us from taking actions that are in our
best interest.
We
cannot assure you that we will pay dividends.
There can be no assurance that dividends will be paid in the
anticipated amounts and frequency set forth in this prospectus
or at all. Following the closing of this offering, we intend to
declare and distribute a portion of our available cash from
operations as quarterly cash dividends to our shareholders in
February, May, August and November of each year. We currently
expect, assuming we complete this offering, that we will pay in
February 2008 a dividend of $0.175 per share for the 2007 fiscal
year followed by a quarterly dividend of $0.175 per share in
each of the following three quarters as described in
Dividend Policy. However, we may incur other
expenses or liabilities that would reduce or eliminate the cash
available for distribution as dividends, including as a result
of the risks described in this section of the prospectus. Our
credit agreements may also prohibit our declaration and payment
of dividends under some circumstances. For example, our offer
letter for a senior secured credit facility from Credit Suisse,
the lead underwriter of this offering, permits payments of
dividends to our shareholders provided we are in compliance with
certain loan covenants. See Business Loans for
Vessels. We may also enter into new financing or other
agreements that will restrict our ability to pay dividends.
In addition, the declaration and payment of dividends will be
subject at all times to the discretion of our board of
directors. The timing and amount of dividends will depend on our
earnings, financial condition, cash requirements and
availability, fleet renewal and expansion, restrictions in our
credit agreements, the provisions of Marshall Islands law
affecting the payment of dividends and other factors. Marshall
Islands law generally prohibits the payment of dividends other
than from surplus or while a company is insolvent or would be
rendered insolvent upon the payment of such dividends; but in
case there is no surplus, dividends may be declared or paid out
of net profits for the fiscal year in which the dividend is
declared and for the preceding fiscal year.
We are
a holding company, and we will depend on the ability of our
subsidiaries to distribute funds to us in order to satisfy our
financial obligations or to make dividend
payments.
We are a holding company and our subsidiaries, which are all
wholly-owned by us either directly or indirectly, will conduct
all of our operations and own all of our operating assets. We
have no significant assets other than the equity interests in
our wholly-owned subsidiaries. As a result, our ability to make
dividend payments depends on our subsidiaries and their ability
to distribute funds to us. If we are unable to obtain funds from
our subsidiaries, our board of directors may exercise its
discretion not to pay dividends. We and our subsidiaries will be
permitted to pay dividends under our senior secured term loan
only for so long as we are in compliance with all applicable
financial covenants, terms and conditions. In addition, we and
our subsidiaries are subject to limitations on the payment of
dividends under Marshall Islands laws discussed above.
The
performance of our existing charters and the creditworthiness of
our charterers may hinder our ability to implement our business
strategy by making additional debt financing unavailable or
available only at higher than anticipated cost.
The actual or perceived credit quality of our charterers, and
any defaults by them, may materially affect our ability to
obtain the additional debt financing that we will require to
acquire additional vessels or may significantly increase our
costs of obtaining such financing. Our inability to obtain
additional financing at all, or at a higher than anticipated
cost, may materially impair our ability to implement our
business strategy.
24
As we
expand our business, we will need to upgrade our operational and
financial systems, and add more staff. If we cannot upgrade
these systems or recruit suitable additional employees, our
performance may suffer.
Our current operating and financial systems may not be adequate
if we expand the size of our fleet, and our attempt to improve
those systems may be ineffective. In addition, if we expand our
fleet, we will have to rely on Free Bulkers to recruit
additional shoreside administrative and management personnel. We
cannot assure you that Free Bulkers will be able to continue to
hire suitable additional employees as we expand our fleet. If we
cannot upgrade our operational and financial systems effectively
or recruit suitable additional employees our performance may
suffer and our ability to expand our business further will be
restricted.
We
will be required to evaluate our controls, as required by
Section 404 of the Sarbanes-Oxley Act of 2002, which will
require substantial resources. If these evaluations result in
the identification of material weaknesses, we may be adversely
affected until these weaknesses can be corrected.
We are required to comply with a variety of laws, regulations
and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 (which we
refer to as the Sarbanes-Oxley Act), SEC regulations and the
NASDAQ Stock Market rules. In particular, Section 404 of
the Sarbanes-Oxley Act requires managements annual review
and evaluation of our internal control systems, and attestations
as to the effectiveness of these systems by our independent
public accounting firm. We anticipate that we will have to
dedicate additional resources and accelerate progress on the
required assessments in order to complete documenting and
testing our internal control systems and procedures in the time
to enable us to timely file our annual report on
Form 20-F
for the year ended December 31, 2007. If we determine that
we will require additional employees to complete this process,
we may have difficulty in identifying and employing individuals
with the necessary knowledge and experience. During the course
of testing, deficiencies may be identified that we may not be
able to remediate to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of
Section 404. If we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to ensure that
we can conclude on an ongoing basis that we have effective
internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. In addition, if we
fail to correct any deficiencies we identify, we may not obtain
an unqualified attestation report from our independent public
accounting firm, which will be required for the fiscal year
ended December 31, 2008. Failure to achieve and maintain an
effective internal control environment or obtain an unqualified
report could have a material adverse effect on the market price
of our common stock.
We may
be unable to attract and retain key management personnel and
other employees in the shipping industry, which may reduce the
effectiveness of our management and lower our results of
operations.
Our success depends to a significant extent upon the abilities
and efforts of our existing management team. The loss of any of
these individuals could adversely affect our business prospects
and financial condition. We have entered into employment
agreements with our chairman, chief executive officer and
president, Ion G. Varouxakis, and our chief financial officer,
Dimitris D. Papadopoulos. Our success will depend on retaining
key members of our management team. Difficulty in hiring and
retaining personnel could adversely affect our results of
operations and ability to pay dividends. We do not maintain
key man life insurance on any of our officers.
Our
vessels may suffer damage and may face unexpected dry-docking
costs, which could reduce our cash flow and impair our financial
condition.
If our vessels suffer damage, they may need to be repaired at a
dry-docking facility. The costs of dry-dock repairs are
unpredictable and can be substantial. We may have to pay
dry-docking costs that our insurance does not cover. The loss of
earnings while these vessels are being repaired and
reconditioned, as well as the actual cost of these repairs,
would decrease our earnings.
25
Since
our fleet is currently small, the loss of service of any vessels
could have a material adverse effect on our
earnings.
During the year ended December 31, 2006, we had three
vessels in our fleet. In April 2007, we sold one of our vessels
and we took delivery of two other vessels, the M/V Free
Hero and the M/V Free Jupiter, in July 2007 and
September 2007, respectively. Although we have entered into a
memorandum of agreement to acquire an additional vessel, this
acquisition is not expected to occur until late October 2007.
Please also see Summary Our Company and
Business Vessel Employment for
information regarding the M/V Free Jupiters
anticipated off-hire period due to a grounding incident. We do
not currently maintain insurance for loss of hire. Since our
fleet is currently small, the loss of service of any of our
vessels, especially our four current vessels, could have a
material adverse effect on our earnings.
Purchasing
and operating previously owned, or secondhand, vessels may
result in increased operating costs and vessels off-hire, which
could adversely affect our earnings.
We took delivery of two secondhand vessels, the M/V Free
Hero and the M/V Free Jupiter, on July 3, 2007
and September 5, 2007, respectively, and we have entered
into a memorandum of agreement to acquire an additional
secondhand vessel, the M/V Free Goddess. Although we
inspect the secondhand vessels that we acquire prior to
purchase, this inspection does not provide us with the same
knowledge about their condition and cost of any required (or
anticipated) repairs that we would have had if these vessels had
been built for and operated exclusively by us. Generally, we do
not receive the benefit of warranties on secondhand vessels.
In general, the costs to maintain a vessel in good operating
condition increase with the age of the vessel. Upon acquisition
of the M/V Free Goddess, the average age of our drybulk
carriers at the time of this offering will be approximately
16 years. Older vessels are typically less fuel efficient
and more costly to maintain than more recently constructed
vessels. Cargo insurance rates increase with the age of a
vessel, making older vessels less desirable to charterers.
Governmental regulations or safety or other equipment standards
related to the age of vessels may require expenditures for
alterations, or the addition of new equipment, to our vessels
and may restrict the type of activities in which the vessels may
engage. We cannot assure you that, as our vessels age, market
conditions will justify those expenditures or enable us to
operate our vessels profitably during the remainder of their
useful lives. If we sell vessels, it is not certain that the
price for which we sell them will equal their carrying amount at
that time.
Unless
we set aside reserves or are able to borrow funds for vessel
replacement, at the end of a vessels useful life our
revenue will decline, which would adversely affect our business,
results of operations and financial condition.
Unless we maintain reserves or are able to borrow or raise funds
for vessel replacement we will be unable to replace the vessels
in our fleet upon the expiration of their useful lives, which we
expect to range from 25 years to 30 years, depending
on the type of vessel. Our cash flows and income are dependent
on the revenues earned by the chartering of our vessels to
customers. If we are unable to replace the vessels in our fleet
upon the expiration of their useful lives, our business, results
of operations, financial condition and ability to pay dividends
will be materially and adversely affected. Any reserves set
aside for vessel replacement may not be available for dividends.
Because
we will generate all of our revenues in U.S. dollars but will
incur a portion of our expenses in other currencies, exchange
rate fluctuations could have an adverse impact on our results of
operations.
We will generate all of our revenues in U.S. dollars, but
we expect that portions of our future expenses will be incurred
in currencies other than the U.S. dollar. This difference
could lead to fluctuations in net income due to changes in the
value of the dollar relative to the other currencies, in
particular the Euro. Expenses incurred in foreign currencies
against which the dollar falls in value can increase, decreasing
our revenues. For example, during 2006, the value of the dollar
declined by approximately 11% as compared to
26
the Euro and declined approximately 1.8% further during the
first six months of 2007. Further declines in the value of the
dollar could lead to higher expenses payable by us.
Investment
in derivative instruments such as freight forward agreements
could result in losses.
From time to time in the future, we may take positions in
derivative instruments including freight forward agreements, or
FFAs. FFAs and other derivative instruments may be used to hedge
a vessel owners exposure to the charter market by
providing for the sale of a contracted charter rate along a
specified route and period of time. Upon settlement, if the
contracted charter rate is less than the average of the rates,
as reported by an identified index, for the specified route and
time period, the seller of the FFA is required to pay the buyer
an amount equal to the difference between the contracted rate
and the settlement rate, multiplied by the number of days in the
specified period. Conversely, if the contracted rate is greater
than the settlement rate, the buyer is required to pay the
seller the settlement sum. If we take positions in FFAs or other
derivative instruments and do not correctly anticipate charter
rate movements over the specified route and time period, we
could suffer losses in the settling or termination of the FFA.
This could adversely affect our results of operation and cash
flow.
We may
not have adequate insurance to compensate us adequately for
damage to, or loss of, our vessels.
We procure hull and machinery insurance, protection and
indemnity insurance, which includes environmental damage and
pollution insurance and war risk insurance for our fleet. We
currently do not maintain insurance against loss of hire, which
covers business interruptions that result in the loss of use of
a vessel. We can give no assurance that we are adequately
insured against all other risks. We may not be able to obtain
adequate insurance coverage for our fleet in the future. Our
insurance policies contain deductibles for which we will be
responsible and limitations and exclusions which may increase
our costs. Moreover, we cannot assure that the insurers will not
default on any claims they are required to pay. If our insurance
is not enough to cover claims that may arise, we may not be able
to repair any damage to our vessels or replace any vessel that
is lost or may have to use our own funds for those purposes,
thereby reducing our funds available to implement our business
strategy.
We may
have to pay tax on United States source income, which would
reduce our earnings.
Under the United States Internal Revenue Code of 1986, or the
Code, 50% of the gross shipping income of a vessel owning or
chartering corporation, such as ourselves and our subsidiaries,
that is attributable to transportation that begins or ends, but
that does not both begin and end, in the United States may be
subject to a 4% United States federal income tax without
allowance for deduction, unless that corporation qualifies for
exemption from tax under Section 883 of the Code and the
applicable Treasury Regulations recently promulgated thereunder.
We expect that we and each of our subsidiaries will qualify for
this statutory tax exemption for 2008 and subsequent years.
However, there are factual circumstances beyond our control that
could cause us to fail to qualify for this tax exemption and
thereby be subject to United States federal income tax on our
United States source income. For example, we would fail to
qualify for exemption under Section 883 of the Code for a
particular tax year if shareholders, each of whom owned,
actually or under applicable constructive ownership rules, a 5%
or greater interest in the vote and value of the outstanding
shares of our stock, owned in the aggregate 50% or more of the
vote and value of the outstanding shares of our stock, and
qualified shareholders as defined by the regulations
to Section 883 do not own, directly or under applicable
constructive ownership rules, sufficient shares in our
closely-held block of stock to preclude the shares in the
closely-held block that are not so owned from representing 50%
or more of the value of our stock for more than half of the
number of days during the taxable year. Establishing such
ownership by qualified shareholders will depend upon the status
of our direct and indirect individual shareholders as residents
of qualifying jurisdictions and whether they own shares through
bearer share arrangements and will require compliance with
ownership certification procedures by individual shareholders
that are residents of qualifying jurisdictions and by each
intermediary or other person in the chain of ownership between
us and such individuals. See, Tax
Considerations United States Federal Income Tax
Consequences United States Federal Income Taxation
27
of Our Company Exemption of Operating Income from
United States Federal Income Taxation, for more
information regarding this exemption. Due to the factual nature
of the issues involved, we can give no assurances on our
tax-exempt status or that of any of our subsidiaries.
It is not clear whether we will be entitled to the benefits of
Section 883 for 2006 and 2007. We do not anticipate, however,
that a material amount of United States federal tax would be
owed in the event that we do not qualify for the benefits of
Section 883 for such years.
If we or our subsidiaries are not entitled to exemption under
Section 883 for any taxable year, we or our subsidiaries
could be subject for those years to an effective 4%
U.S. federal income tax on the shipping income these
companies derive during the year that are attributable to the
transport of cargoes to or from the United States. The
imposition of this taxation would have a negative effect on our
business and would result in decreased earnings available for
distribution to our shareholders.
U.S.
tax authorities could treat us as a passive foreign
investment company, which could have adverse U.S. federal
income tax consequences to U.S. holders.
A foreign corporation will be treated as a passive foreign
investment company, or PFIC, for U.S. federal income
tax purposes if either (1) at least 75% of its gross income
for any taxable year consists of certain types of passive
income or (2) at least 50% of the average value of
the corporations assets produce or are held for the
production of those types of passive income. For
purposes of these tests, passive income includes
dividends, interest, and gains from the sale or exchange of
investment property and rents and royalties other than rents and
royalties which are received from unrelated parties in
connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of
services does not constitute passive income.
U.S. shareholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect
to the income derived by the PFIC, the distributions they
receive from the PFIC and the gain, if any, they derive from the
sale or other disposition of their shares in the PFIC.
Based on our proposed method of operation, we do not believe
that we will be a PFIC with respect to any taxable year. In this
regard, we intend to treat the gross income we derive or are
deemed to derive from our time chartering activities as services
income, rather than rental income. Accordingly, we believe that
our time chartering activities does not constitute passive
income, and the assets that we own and operate in
connection with the production of that income do not constitute
passive assets.
There is, however, no direct legal authority under the PFIC
rules addressing our proposed method of operation. Accordingly,
no assurance can be given that the U.S. Internal Revenue
Service, or IRS, or a court of law will accept our position, and
there is a risk that the IRS or a court of law could determine
that we are a PFIC. Moreover, no assurance can be given that we
would not constitute a PFIC for any future taxable year if there
were to be changes in the nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any
taxable year, our U.S. shareholders will face adverse
U.S. tax consequences. Under the PFIC rules, unless those
shareholders make an election available under the Code (which
election could itself have adverse consequences for such
shareholders, as discussed below under Tax
Considerations United States Federal Income Taxation
of U.S. Holders), such shareholders would be liable
to pay United States federal income tax at the then prevailing
income tax rates on ordinary income plus interest upon excess
distributions and upon any gain from the disposition of our
common shares, as if the excess distribution or gain had been
recognized ratably over the shareholders holding period of
our common shares. See Tax Considerations
United States Federal Income Tax Consequences United
States Federal Income Taxation of U.S. Holders for a
more comprehensive discussion of the U.S. federal income
tax consequences to U.S. shareholders if we are treated as
a PFIC.
Legislation
has been proposed in the United States which would prevent
dividends on our shares from qualifying for certain preferential
rates for U.S. federal income tax purposes.
Qualified dividend income derived by noncorporate
shareholders that are subject to U.S. federal income tax is
currently subject to U.S. federal income taxation at
reduced rates. We expect that under current law, so
28
long as our shares are traded on the NASDAQ Capital Market or
the NASDAQ Global Market and we do not and have not qualified as
a passive foreign investment company for
U.S. federal income tax purposes, distributions treated as
dividends for U.S. tax purposes on our shares will
potentially be eligible (that is, eligible if certain conditions
relating to the shareholder are satisfied) for treatment as
qualified dividend income. Proposed legislation in the United
States would, however, if enacted, make it unlikely that such
distributions on our shares would be eligible for such
treatment. As of the date hereof, no assurance can be given
regarding whether or not such legislation will be enacted.
Offering-Specific
Risk Factors
There
may not be a liquid market for our common stock, which may cause
our common stock to trade at lower prices and make it difficult
to sell your common stock.
Although we have made application to list our shares on the
NASDAQ Global Market, until now our shares have traded on the
NASDAQ Capital Market and the trading volume has been low. We
cannot predict at this time how actively our shares will trade
in the public market or whether the price of our shares in the
public market will reflect our actual financial performance.
The
market price of our common stock has been and may in the future
be subject to significant fluctuations.
The market price of our common stock has been and may in the
future be subject to significant fluctuations as a result of
many factors, some of which are beyond our control. Among the
factors that have in the past and could in the future affect our
stock price are:
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quarterly variations in our results of operations;
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changes in sales or earnings estimates or publication of
research reports by analysts;
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speculation in the press or investment community about our
business or the shipping industry generally;
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changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
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strategic actions by us or our competitors such as acquisitions
or restructurings;
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regulatory developments;
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additions or departures of key personnel;
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general market conditions; and
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domestic and international economic, market and currency factors
unrelated to our performance.
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The stock markets in general, and the markets for drybulk
shipping and shipping stocks in general, have experienced
extreme volatility that has sometimes been unrelated to the
operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of
our common stock.
You
will experience immediate and substantial dilution as a result
of this offering and may experience additional dilution in the
future.
If you purchase common stock in this offering, you will pay more
for your shares of common stock than the amounts paid on average
by our existing shareholders for their shares. As a result, you
will incur immediate and substantial dilution of $2.81 per
share, representing the difference between the public offering
price and our pro forma as adjusted net tangible book value per
share as of June 30, 2007, after giving effect to this
offering and the exercise of Class W and Class Z warrants
through October 23, 2007. In addition, purchasers of our
common stock from us in this offering will have contributed
approximately 85% of the aggregate price paid by all purchasers
of our common stock from us, but will own only approximately 60%
of the shares outstanding after this offering. For more
information, please see Dilution.
29
If
holders of our warrants exercise their right to purchase shares
of our common stock, you will experience immediate
dilution.
As of October 23, 2007, we have outstanding 200,000
Class A warrants issued to our initial shareholders, and
700,000 Class B warrants issued to FS Holdings Limited. Of
our publicly traded classes of warrants, we have outstanding as
of October 23, 2007 996,974 Class W warrants and
1,667,595 Class Z warrants. Each of these warrants is
exercisable to purchase one share of our common stock at an
exercise price of $5.00 per share, and our Class A,
Class W and Class Z warrants must be exercised for
cash. Our Class A warrants expire July 29, 2011, our
Class B warrants expire on May 8, 2012 as to
275,000 shares and on June 22, 2012 as to
425,000 shares, our Class W warrants expire
July 29, 2009, and our Class Z warrants expire
July 29, 2011. As a result, if holders of our warrants
exercise their right to purchase shares of our common stock, we
may issue up to 3,564,569 additional shares of our common stock
at $5.00 per share, which will cause you immediate dilution.
In addition, we are obligated under the unit purchase option
sold to the lead underwriter in the initial public offering of
our predecessor to issue up to an additional 410,000 shares
of common stock. See Description of Capital
Stock Underwriters Unit Purchase Option.
Upon
the consummation of this offering, two of our principal
shareholders may effectively control the outcome of matters on
which our shareholders are entitled to vote, including the
election of directors and other significant corporate
actions.
Two of our principal shareholders, The Midas Touch S.A.
and FS Holdings Limited, controlled by Mr. Varouxakis and
members of the Restis family, respectively, currently own (not
including shares of common stock subject to options and
warrants) approximately 61.4% of our outstanding common stock.
Upon consummation of this offering they will own approximately
26.3% of our outstanding common stock. While our principal
shareholders have no agreement, arrangement or understanding
relating to the voting of their shares, they may effectively
control the outcome of matters on which our shareholders are
entitled to vote, including the election of directors and other
significant corporate actions. The interests of these
shareholders may be different from your interests.
Future
sales of our stock could cause the market price of our common
stock to decline.
Sales of a substantial number of shares of our common stock in
the public market, or the perception that these sales could
occur, may depress the market price for our common stock. These
sales could also impair our ability to raise additional capital
through the sale of our equity securities in the future. We have
registered for resale an aggregate of 840,834 shares of
common stock beneficially owned by certain of our shareholders,
3,672,500 shares of our common stock issuable upon the
exercise of our Class W and Class Z warrants
(including 151,250 shares of FreeSeas common stock issuable
upon exercise of Class W and Class Z warrants owned by
certain shareholders), and 410,000 shares issuable upon the
exercise of a unit purchase option held by the lead underwriter
in the initial public offering of our predecessor.
We may issue additional shares of our stock in the future and
our shareholders may elect to sell large numbers of shares held
by them from time to time. Our amended and restated articles of
incorporation authorize us to issue up to 40,000,000 shares
of common stock and 5,000,000 shares of preferred stock, of
which 18,298,031 shares of common stock will be outstanding
immediately after this offering, assuming that the underwriters
do not exercise their over-allotment option. See
Prospectus Summary The Offering with
respect to the calculation of the number of shares outstanding
immediately following this offering.
Because
the Republic of the Marshall Islands, where we are incorporated,
does not have a well-developed body of corporate law,
shareholders may have fewer rights and protections than under
typical United States law, such as Delaware, and
shareholders may have difficulty in protecting their interest
with regard to actions taken by our Board of
Directors.
Our corporate affairs are governed by amended and restated
articles of incorporation and by-laws and by the Marshall
Islands Business Corporations Act, or BCA. The provisions of the
BCA resemble provisions of the corporation laws of a number of
states in the United States. However, there have been few
judicial cases in
30
the Republic of the Marshall Islands interpreting the BCA. The
rights and fiduciary responsibilities of directors under the law
of the Republic of the Marshall Islands are not as clearly
established as the rights and fiduciary responsibilities of
directors under statutes or judicial precedent in existence in
certain U.S. jurisdictions. Stockholder rights may differ
as well. For example, under Marshall Islands law, a copy of the
notice of any meeting of the shareholders must be given not less
than 15 days before the meeting, whereas in Delaware such
notice must be given not less than 10 days before the
meeting. Therefore, if immediate shareholder action is required,
a meeting may not be able to be convened as quickly as it can be
convened under Delaware law. Also, under Marshall Islands law,
any action required to be taken by a meeting of shareholders may
only be taken without a meeting if consent is in writing and is
signed by all of the shareholders entitled to vote, whereas
under Delaware law action may be taken by consent if approved by
the number of shareholders that would be required to approve
such action at a meeting. Therefore, under Marshall Islands law,
it may be more difficult for a company to take certain actions
without a meeting even if a majority of the shareholders approve
of such action. While the BCA does specifically incorporate the
non-statutory law, or judicial case law, of the State of
Delaware and other states with substantially similar legislative
provisions, public shareholders may have more difficulty in
protecting their interests in the face of actions by the
management, directors or controlling shareholders than would
shareholders of a corporation incorporated in a
U.S. jurisdiction. For more information with respect to how
stockholder rights under Marshall Islands law compare with
stockholder rights under Delaware law, please read
Marshall Islands Company Considerations.
It may
not be possible for investors to enforce U.S. judgments against
us.
We, and all our subsidiaries, are or will be incorporated in
jurisdictions outside the U.S. and substantially all of our
assets and those of our subsidiaries and will be located outside
the U.S. In addition, most of our directors and officers
are or will be non-residents of the U.S., and all or a
substantial portion of the assets of these non-residents are or
will be located outside the U.S. As a result, it may be
difficult or impossible for U.S. investors to serve process
within the U.S. upon us, our subsidiaries, or our directors
and officers, or to enforce a judgment against us for civil
liabilities in U.S. courts. In addition, you should not
assume that courts in the countries in which we or our
subsidiaries are incorporated or where our or the assets of our
subsidiaries are located would enforce judgments of
U.S. courts obtained in actions against us or our
subsidiaries based upon the civil liability provisions of
applicable U.S. federal and state securities laws or would
enforce, in original actions, liabilities against us or our
subsidiaries based on those laws.
Anti-takeover
provisions in our organizational documents, and under Marshall
Islands corporate law, could make it difficult for our
shareholders to replace or remove our current board of directors
or have the effect of discouraging, delaying or preventing a
merger or acquisition, which could adversely affect the market
price of our common stock.
Several provisions of our amended and restated articles of
incorporation and by-laws, and certain provisions of the
Marshall Islands corporate law, could make it difficult for our
shareholders to change the composition of our board of directors
in any one year, preventing them from changing the composition
of management. In addition, these provisions may discourage,
delay or prevent a merger or acquisition that shareholders may
consider favorable. These provisions include:
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|
authorizing our board of directors to issue blank
check preferred stock without shareholder approval;
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|
providing for a classified board of directors with staggered,
three year terms;
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|
prohibiting cumulative voting in the election of directors;
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|
authorizing the removal of directors only for cause and only
upon the affirmative vote of the holders of a two-thirds
majority of the outstanding shares of our common shares, voting
as a single class, entitled to vote for the directors;
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limiting the persons who may call special meetings of
shareholders;
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|
|
establishing advance notice requirements for election to our
board of directors or proposing matters that can be acted on by
shareholders at shareholder meetings; and
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31
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|
limiting our ability to enter into business combination
transactions with certain shareholders.
|
These anti-takeover provisions could substantially impede the
ability of public shareholders to benefit from a change in
control and, as a result, may adversely affect the market price
of our common shares and your ability to realize any potential
change of control premium.
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements. These
forward-looking statements include information about possible or
assumed future results of our operations or our performance.
Words such as expects, intends,
plans, believes,
anticipates, estimates, and variations
of such words and similar expressions are intended to identify
the forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations
will prove to have been correct. These statements involve known
and unknown risks and are based upon a number of assumptions and
estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond our
control. Actual results may differ materially from those
expressed or implied by such forward-looking statements.
Forward-looking statements include, but are not limited to,
statements regarding:
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our future operating or financial results;
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|
future, pending or recent acquisitions, business strategy, areas
of possible expansion, and expected capital spending or
operating expenses;
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drybulk shipping industry trends, including charter rates and
factors affecting vessel supply and demand;
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our financial condition and liquidity, including our ability to
obtain additional financing in the future to fund capital
expenditures, acquisitions and other general corporate
activities;
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our ability to pay dividends in the future;
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availability of crew, number of off-hire days, dry-docking
requirements and insurance costs;
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our expectations about the availability of vessels to purchase
or the useful lives of our vessels;
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our ability to leverage to our advantage our managers
relationships and reputations in the drybulk shipping industry;
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changes in seaborne and other transportation patterns;
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changes in governmental rules and regulations or actions taken
by regulatory authorities;
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potential liability from future litigation and incidents
involving our vessels;
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global and regional political conditions;
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|
acts of terrorism and other hostilities; and
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|
|
other factors discussed in the section titled Risk
Factors.
|
We undertake no obligation to publicly update or revise any
forward-looking statements contained in this prospectus, or the
documents to which we refer you in this prospectus, to reflect
any change in our expectations with respect to such statements
or any change in events, conditions or circumstances on which
any statement is based.
32
PRICE
RANGE OF COMMON STOCK
Our common stock began trading on the NASDAQ Capital Market on
December 16, 2005 under the trading symbol FREE
upon completion of our merger with Trinity Partners Acquisition
Company Inc. Our Class W and Class Z warrants also are
traded on the NASDAQ Capital Market under the symbols
FREEW and FREEZ, respectively. We have
applied to have our common stock and warrants listed on the
NASDAQ Global Market under the same symbols upon completion of
this offering.
The closing high and low sales prices of our common stock as
reported by the NASDAQ Capital Market, for the periods
indicated, are as follows:
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For the Period:
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Low
|
|
|
High
|
|
|
Year ended December 31, 2005(1)
|
|
$
|
5.33
|
|
|
$
|
5.40
|
|
Quarterly for 2005:
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|
|
|
|
|
|
|
|
Fourth quarter(1)
|
|
$
|
5.33
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|
|
$
|
5.40
|
|
Year ended December 31, 2006
|
|
$
|
2.62
|
|
|
$
|
5.45
|
|
Quarterly for 2006:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
4.50
|
|
|
$
|
5.45
|
|
Second quarter
|
|
$
|
3.65
|
|
|
$
|
4.85
|
|
Third quarter
|
|
$
|
3.70
|
|
|
$
|
5.07
|
|
Fourth quarter
|
|
$
|
2.62
|
|
|
$
|
4.90
|
|
Quarterly for 2007:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
2.76
|
|
|
$
|
5.15
|
|
Second quarter
|
|
$
|
4.55
|
|
|
$
|
7.63
|
|
Third quarter
|
|
$
|
6.77
|
|
|
$
|
9.35
|
|
Fourth quarter (through October 23, 2007)
|
|
$
|
7.52
|
|
|
$
|
10.24
|
|
Monthly for 2007:
|
|
|
|
|
|
|
|
|
January
|
|
$
|
2.76
|
|
|
$
|
5.11
|
|
February
|
|
$
|
4.53
|
|
|
$
|
4.77
|
|
March
|
|
$
|
4.40
|
|
|
$
|
5.15
|
|
April
|
|
$
|
4.55
|
|
|
$
|
5.00
|
|
May
|
|
$
|
4.75
|
|
|
$
|
6.45
|
|
June
|
|
$
|
6.09
|
|
|
$
|
7.63
|
|
July
|
|
$
|
7.42
|
|
|
$
|
9.35
|
|
August
|
|
$
|
6.77
|
|
|
$
|
8.65
|
|
September
|
|
$
|
7.14
|
|
|
$
|
7.84
|
|
October (through October 23, 2007)
|
|
$
|
7.52
|
|
|
$
|
10.24
|
|
|
|
|
(1) |
|
Includes the high and low information from December 16,
2005, the date on which our securities began trading on the
NASDAQ Capital Market. Prior to our merger with Trinity,
Trinitys securities traded on the OTC Bulletin Board. |
33
Following the closing of this offering, we intend to pay
quarterly cash dividends to our shareholders equal to a portion
of our available cash from operations during the previous
quarter after expenses and reserves for scheduled dry-dockings,
intermediate and special surveys and other purposes as our board
of directors may determine from time to time are required, and
after taking into account any other cash needs. We expect that
we will pay a dividend in February 2008 of $0.175 per share for
the 2007 fiscal year followed by a quarterly dividend of $0.175
per share in each of the subsequent three quarters following the
closing of the offering at the annual rate of $0.70 per share
(or the pro rata portion thereof if the dividend period is less
than a full quarter), assuming we complete this offering.
We cannot assure you that we will pay dividends. We may not have
sufficient funds with which to pay dividends at all or at the
anticipated frequency or amount set forth in this prospectus.
Declaration and payment of any dividend is subject to the
discretion of our board of directors. The timing and amount of
dividend payments will be dependent upon our earnings, financial
position, cash requirements and availability, fleet renewal and
expansion, and restrictions in our loan agreements, as well as
the provisions of Marshall Islands law affecting the payment of
distributions to shareholders and other factors. Our board of
directors will specifically consider our available cash flow
from operations during the previous quarter, less cash expenses
for that quarter (primarily vessel operating expenses and
interest expense) and any reserves our board of directors
determines we should maintain for reinvestment in our business
before declaring a quarterly dividend to our shareholders. These
reserves may cover, among other things, dry-docking,
intermediate and special surveys, liabilities and other
obligations, interest expense and debt amortization,
acquisitions of additional assets and working capital. Further,
we cannot assure you that, after the expiration or earlier
termination of our charters, we will have any sources of income
from which dividends may be paid. We refer you to the
disclosures under the headings Forward-Looking
Statements and Tax Considerations included
elsewhere in this prospectus. In addition, see Risk
Factors for a discussion of certain risks related to our
ability to pay dividends.
34
We estimate that we will receive net proceeds of approximately
$83,197,500 from this offering, assuming that the
underwriters over-allotment option is not exercised and
after deducting underwriting discounts and commissions and
offering expenses.
We expect to enter into an $87.0 million credit agreement
with Credit Suisse following completion of this offering as
described further under Business Loans for
Vessels. We intend to use the net proceeds of this
offering and a $48.7 million draw under the Credit Suisse
credit agreement to refinance an aggregate of $71.5 million
of our existing indebtedness and for other purposes.
We intend to use the remaining proceeds for general corporate
purposes, including future vessel acquisitions.
As of the date of this prospectus, we intend to use the net
proceeds of this offering and the amount drawn under the Credit
Suisse credit agreement to pay the following:
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|
|
|
|
$14.0 million outstanding as of June 30, 2007 under a
$14.0 million unsecured shareholder loan which bears
interest at an annual rate of 12% and has a maturity date of the
earlier of (i) May 7, 2009, (ii) the date of a
Capital Event, which is defined as any event in
which we raise gross proceeds of not less than $40 million
in an offering of our common stock or other equity securities or
securities convertible into or exchangeable for our equity
securities, or (iii) the date of acceleration of the
amounts due under the loan;
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|
|
|
$42.7 million of our $68.0 million senior secured loan
from HSH Nordbank A.G. which has a maturity date of
August 31, 2015 and bears interest at an annual rate of
LIBOR plus 1.5%, which amount was drawn subsequent to
June 30, 2007;
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|
|
|
$12.9 million of our $21.5 million junior loan from
BTMU Capital Corporation which has a maturity date of
August 31, 2010 and bears interest at a annual rate of
LIBOR plus 2.75%, which amount was drawn subsequent to
June 30, 2007;
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|
|
|
$1.9 million as of June 30, 2007 under preexisting
interest-free shareholder loans used to finance the acquisition
of our original three vessels which mature on the earlier of
January 1, 2008 or the date that we raise additional
capital of at least $12.5 million; and
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|
|
|
The unpaid portion of the purchase price of the M/V Free
Goddess or, if the purchase of the M/V Free Goddess
occurs prior to the closing of this offering, the
$20.8 million that will be drawn down under our senior and
junior loans to finance in part the purchase of this vessel.
|
If we do not purchase the M/V Free Goddess, we may use
the proceeds of this offering to purchase other vessels or for
general corporate purposes. In particular, certain events may
arise that could result in us not taking delivery of the M/V
Free Goddess, such as its total loss, a constructive
total loss, or if it suffers substantial damage prior to its
delivery.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources and Business Loans for
Vessels for more information about our Acquisition Debt
Facilities and our other borrowings.
35
The following table sets forth our consolidated capitalization
as of June 30, 2007:
|
|
|
|
|
on a historical basis without any adjustment to reflect
subsequent events;
|
|
|
|
as adjusted to reflect certain changes in our debt outstanding,
and the exercise of 831,776 Class W warrants and 176,155 Class Z
warrants, as of October 23, 2007, but without giving effect
to the payment of $250,000 due on September 30, 2007 on our
shareholders loan, which payment due date has been
extended; and
|
|
|
|
on an as further adjusted basis for the sale of
11,000,000 shares at an offering price of $8.25 per
share net of underwriters discounts and commissions,
offering expenses, and after receipt and application of net
proceeds together with the new secured credit facility from
Credit Suisse that we intend to enter into following the
completion of this offering. See Business
Loans for Vessels.
|
Other than as set forth in the As Adjusted column,
there have been no material changes in our capitalization
between June 30, 2007 and the date of this prospectus.
Current portion of long-term debt in the As Adjusted
column represents the current portion of the existing debt as of
June 30, 2007; in the As Further Adjusted
column, part of the proceeds of the offering will be used to
repay a portion of the debt outstanding as of June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Further
|
|
|
|
Historical
|
|
|
As Adjusted
|
|
|
Adjusted
|
|
|
|
(Unaudited; dollars in thousands)
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders loans, current portion(1)
|
|
$
|
1,864
|
|
|
$
|
1,864
|
|
|
$
|
0
|
|
Shareholders loans, net of current portion(1)(2)
|
|
|
12,193
|
|
|
|
12,193
|
|
|
|
0
|
|
Long-term debt, current portion
|
|
|
2,000
|
|
|
|
7,530
|
(3)
|
|
|
5,750
|
(6)
|
Long-term debt, net of current portion
|
|
|
2,500
|
|
|
|
52,070
|
(3)
|
|
|
46,950
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
18,557
|
|
|
$
|
73,657
|
|
|
$
|
52,700
|
(6)
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 40,000,000 shares
authorized; 6,290,100 and 6,908,905 shares issued and
outstanding, actual and as adjusted
|
|
|
6
|
|
|
|
7
|
(4)
|
|
|
18
|
(7)
|
Additional paid-in capital
|
|
|
11,612
|
|
|
|
16,398
|
(5)
|
|
|
99,585
|
(8)
|
Accumulated deficit
|
|
|
(79
|
)
|
|
|
(79
|
)
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
11,539
|
|
|
$
|
16,326
|
|
|
$
|
99,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
30,096
|
|
|
$
|
89,983
|
|
|
$
|
152,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shareholders loans are unsecured and unguaranteed as of
October 23, 2007. |
(2) |
|
Reflects the $14.0 million outstanding balance of the loan
from FS Holdings net of the discount relating to the 700,000
warrants issued to FS Holdings in connection with this loan. See
Note 9 to the condensed consolidated financial statements
included elsewhere in this prospectus. |
(3) |
|
Reflects our borrowings of $55.6 million under our senior
and junior financing sources used to pay the
remaining
balance of the purchase price of each of the M/V Free
Hero and the M/V Free Jupiter and the remaining
$4.0 million outstanding as of October 23, 2007 on the
loans relating to the M/V Free Envoy and the M/V Free
Destiny. |
(4) |
|
Reflects an increase of $1,000 in common stock resulting from
the issuance of 1,007,931 shares upon exercise of Class W
and Class Z warrants. |
(5) |
|
Reflects the addition of $4.78 million of net proceeds
received in connection with the exercise of Class W and Class Z
warrants. |
(6) |
|
Reflects the repayment of the shareholders loans and the
outstanding borrowings under our senior and junior loans used to
finance in part the purchase price of the M/V Free Hero
and the M/V Free Jupiter with the net |
36
|
|
|
|
|
proceeds of this offering and with
a draw down of $48.7 million under the facility that we
expect to enter into with Credit Suisse, of which
$3.75 million would be current. In addition, the amount
includes $4 million outstanding as of October 23, 2007
on the loans relating to the M/V Free Destiny and the M/V
Free Envoy, of which $2.0 million is current. Does
not reflect the drawdown, and repayment of, $20.8 million
under our senior and junior loans, which we anticipate will be
necessary in connection with the purchase of the M/V Free
Goddess prior to the closing of this offering. See Use
of Proceeds.
|
|
|
|
(7)
|
|
Reflects an increase of $11,000 in
common stock resulting from the issuance of 11,000,000 shares in
this offering.
|
(8)
|
|
Reflects the addition of
$4.78 million of net proceeds received in connection with
the exercise of Class W and Class Z warrants and of
$83.18 million of net proceeds from this offering.
|
As of June 30, 2007, our actual cash and cash equivalents
totaled $7.7 million, and on an as further
adjusted basis, cash and cash equivalents would total
$41.9 million, including restricted cash of $1.1 million.
Our cash on an as further adjusted basis also
assumes that we have paid the remaining purchase price of
$22.7 million for the M/V Free Goddess. If we
purchase the M/V Free Goddess after we close this
offering, we will use the net proceeds of this offering and a
draw under the credit facility we expect to enter into with
Credit Suisse to fund the remaining purchase price. If we
purchase the M/V Free Goddess before we close this
offering, we will borrow $20.8 million from our existing
facilities and use our available cash to pay the
$1.9 million balance. We expect to subsequently refinance
the $20.8 million borrowed once we complete this offering.
See Use of Proceeds.
37
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the public offering
price per share of our common stock and the pro forma net
tangible book value per share of our common stock after this
offering. Dilution results from the fact that the per-share
offering price of the common stock is greater than the net
tangible book value per share for the common stock outstanding
before this offering.
At June 30, 2007, we had net tangible book value of
$11,539,000, or $1.83 per share. As of October 23,
2007, we have received an aggregate of $5,039,655 in gross
proceeds, which resulted in net proceeds of $4,787,672 after
deducting fees due to a financial advisor, from exercises of
Class W and Class Z warrants. We issued
1,007,931 shares of common stock in accordance with the
terms of these warrants in connection with the exercises. As a
result of such exercises and without giving effect to any other
changes in our total tangible asset and total liabilities, at
June 30, 2007, we had an adjusted net tangible book value
of $16,326,672, or $2.24 per share. After giving effect to the
issuance of 11,000,000 shares of common stock in this
offering at an offering price of $8.25 per share, the pro
forma net tangible book value and adjusted net tangible book
value at June 30, 2007 would have been $94,736,500 and
$99,524,172, respectively, or $5.48 per share and $5.44 per
share, respectively. This represents an immediate appreciation
in net tangible book value and adjusted net tangible book value
at June 30, 2007 of $3.64 per share and $3.20 per
share, respectively, to existing shareholders and an immediate
dilution of net tangible book value of $2.77 per share and $2.81
per share, respectively, to new investors. The following table
illustrates the pro forma per share dilution and appreciation at
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
2007
|
|
|
|
2007
|
|
|
As Adjusted(1)
|
|
|
Initial offering price per share in this offering
|
|
$
|
8.25
|
|
|
$
|
8.25
|
|
|
|
|
|
|
|
|
|
|
Net tangible book value per share
|
|
$
|
1.83
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
Increase in net tangible book value per share attributable to
new investors in this offering
|
|
$
|
3.64
|
|
|
$
|
3.20
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after giving effect
to this offering
|
|
$
|
5.48
|
|
|
$
|
5.44
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to the new investors
|
|
$
|
2.77
|
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the dilution and appreciation as of June 30, 2007
after giving effect to the exercise of 831,776 Class W warrants
and 176,155 Class Z warrants through October 23, 2007. |
Net tangible book value per share of our common stock is
determined by dividing our tangible net worth, which consists of
tangible assets less liabilities, by the number of shares of our
common stock outstanding. Dilution is determined by subtracting
the net tangible book value per share of common stock after this
offering from the public offering price per share. Dilution per
share to new investors would be $2.63 if the underwriters
exercise in full their over-allotment option.
38
The following table summarizes, on a pro forma basis as of
June 30, 2007, and as adjusted to give effect to the
exercise of 831,776 Class W warrants and 176,155 Class Z
warrants through October 23, 2007, the differences between
the number of shares of common stock acquired from us, the total
amount paid and the average price per share paid by the existing
holders of shares of common stock and by the investors in this
offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Shares
|
|
|
Total
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Consideration
|
|
|
Price per
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Share
|
|
|
Existing shareholders
|
|
|
6,290,100
|
|
|
|
34
|
%
|
|
$
|
11,539,000
|
|
|
|
11
|
%
|
|
$
|
1.83
|
|
Shareholders exercising warrants through October 23, 2007
|
|
|
1,007,931
|
|
|
|
6
|
%
|
|
$
|
5,039,655
|
(1)
|
|
|
5
|
%
|
|
$
|
5.00
|
|
New investors
|
|
|
11,000,000
|
|
|
|
60
|
%
|
|
$
|
90,750,000
|
|
|
|
84
|
%
|
|
$
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,298,031
|
|
|
|
100
|
%
|
|
$
|
107,328,655
|
|
|
|
100
|
%
|
|
$
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross proceeds received from the exercise of Class W and Class Z
warrants. |
If the underwriters exercise their over-allotment option in
full, the following will occur:
|
|
|
|
|
the pro forma percentage of shares of our common stock held by
existing shareholders and shareholders exercising warrants
between June 30, 2007 and October 23, 2007 will
decrease to approximately 37% of the total number of pro forma
shares of our common stock outstanding after this
offering; and
|
|
|
|
the number of shares of our common stock held by new investors
will increase to 12,650,000, or approximately 63% of the total
number of shares of our common stock outstanding after this
offering.
|
The information in the table above excludes (as of
October 23, 2007):
A. up to 250,000 shares reserved for issuance upon the
exercise of stock options currently outstanding (of which, as of
June 30, 2007, options to purchase 166,667 shares had
vested), which have an exercise price of $5.00 per share and
expire on December 16, 2010, and up to
1,250,000 shares issuable upon the exercise of stock
options that may be granted in the future under our stock
incentive plan;
B. 3,564,569 shares of common stock reserved for
issuance upon the exercise of outstanding warrants as follows:
|
|
|
|
|
200,000 Class A warrants held by our initial shareholders
exercisable at $5.00 per share and expiring July 29, 2011;
|
|
|
|
700,000 Class B warrants held by FS Holdings Limited
exercisable at $5.00 per share of which 275,000 expire on
May 8, 2012 and 425,000 expire on June 22, 2012;
|
|
|
|
996,974 Class W warrants exercisable at $5.00 per share and
expiring July 29, 2009;
|
|
|
|
1,667,595 Class Z warrants exercisable at $5.00 per share
and expiring July 29, 2011;
|
C. 410,000 shares of common stock reserved for
issuance upon the exercise of the unit purchase option sold to
the lead underwriter in the initial public offering of our
predecessor, which unit purchase option expires July 29,
2009, as follows:
|
|
|
|
|
25,000 shares of common stock included in the 12,500
Series A units purchasable upon exercise of the unit
purchase option, at an exercise price of $17.325 per
Series A unit;
|
|
|
|
62,500 shares of common stock issuable for $5.50 per
share upon exercise of 62,500 Class W warrants included in
the 12,500 Series A units;
|
|
|
|
62,500 shares of common stock issuable for $5.50 per
share upon exercise of 62,500 Class Z warrants included in
the 12,500 Series A units;
|
39
|
|
|
|
|
130,000 shares of common stock included in the 65,000
Series B units purchasable upon exercise of the unit
purchase option, at an exercise price of $16.665 per
Series B unit;
|
|
|
|
65,000 shares of common stock issuable for $5.50 per
share upon exercise of 65,000 Class W warrants included in
the 65,000 Series B units;
|
|
|
|
65,000 shares of common stock issuable for $5.50 per
share upon exercise of 65,000 Class Z warrants included in
the 65,000 Series B units; and
|
D. shares that may be issued pursuant to the
underwriters over-allotment option.
To the extent that any options or warrants are exercised or new
options or shares of common stock are issued under our amended
and restated 2005 stock incentive plan, there will be further
dilution to investors in this offering.
The following table assumes the exercise of all options and
warrants outstanding as of October 23, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price per
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Share
|
|
|
Existing shareholders(1)
|
|
|
6,290,100
|
|
|
|
28
|
%
|
|
$
|
11,539,000
|
|
|
|
9
|
%
|
|
$
|
1.83
|
|
Shareholders exercising warrants through October 23, 2007
|
|
|
1,007,931
|
|
|
|
5
|
%
|
|
$
|
5,039,655
|
(2)
|
|
|
4
|
%
|
|
$
|
5.00
|
|
Shares subject to options and warrants(3)
|
|
|
4,224,569
|
|
|
|
19
|
%
|
|
$
|
21,775,133
|
|
|
|
17
|
%
|
|
$
|
5.15
|
|
New investors
|
|
|
11,000,000
|
|
|
|
48
|
%
|
|
$
|
90,750,000
|
|
|
|
70
|
%
|
|
$
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,522,600
|
|
|
|
100
|
%
|
|
$
|
129,103,788
|
|
|
|
100
|
%
|
|
$
|
5.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excluding shares subject to options and warrants. |
|
(2) |
|
Gross proceeds received from the exercise of Class W and Class Z
warrants. |
|
(3) |
|
Includes an aggregate of 700,000 warrants issued on May 8,
2007 and June 22, 2007. |
40
SELECTED
HISTORICAL FINANCIAL INFORMATION
AND OTHER DATA
The following selected historical financial information and
other data were derived from our audited consolidated financial
statements for the years ended December 31, 2004 (from
inception), 2005 and 2006 and our unaudited condensed
consolidated financial statements for the three and six months
ended June 30, 2006 and 2007 included elsewhere in this
prospectus. The information is only a summary and should be read
in conjunction with our historical consolidated financial
statements and related notes included in this prospectus and the
section of this prospectus titled Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The historical data included below and
elsewhere in this prospectus are not necessarily indicative of
our future performance.
All amounts in the tables below are in thousands of
U.S. dollars, except for share data, fleet data and average
daily results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
3,562
|
|
|
$
|
2,986
|
|
|
$
|
7,830
|
|
|
$
|
5,430
|
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
Commissions
|
|
|
(225
|
)
|
|
|
(185
|
)
|
|
|
(482
|
)
|
|
|
(349
|
)
|
|
|
(799
|
)
|
|
|
(553
|
)
|
|
|
(127
|
)
|
Voyage expenses
|
|
|
(37
|
)
|
|
|
(49
|
)
|
|
|
(39
|
)
|
|
|
(686
|
)
|
|
|
(689
|
)
|
|
|
(55
|
)
|
|
|
(16
|
)
|
Vessel operating expenses (exclusive of depreciation and
amortization expenses shown separately below)
|
|
|
(899
|
)
|
|
|
(1,033
|
)
|
|
|
(2,313
|
)
|
|
|
(2,065
|
)
|
|
|
(4,483
|
)
|
|
|
(3,596
|
)
|
|
|
(786
|
)
|
Depreciation expense
|
|
|
(655
|
)
|
|
|
(1,081
|
)
|
|
|
(1,467
|
)
|
|
|
(2,221
|
)
|
|
|
(4,479
|
)
|
|
|
(3,553
|
)
|
|
|
(872
|
)
|
Amortization of deferred dry-docking and special survey costs
|
|
|
(123
|
)
|
|
|
(112
|
)
|
|
|
(318
|
)
|
|
|
(222
|
)
|
|
|
(442
|
)
|
|
|
(355
|
)
|
|
|
(109
|
)
|
Management fees to a related party
|
|
|
(225
|
)
|
|
|
(135
|
)
|
|
|
(360
|
)
|
|
|
(270
|
)
|
|
|
(540
|
)
|
|
|
(488
|
)
|
|
|
(180
|
)
|
Stock-based compensation expense
|
|
|
(25
|
)
|
|
|
(216
|
)
|
|
|
(50
|
)
|
|
|
(379
|
)
|
|
|
(651
|
)
|
|
|
(200
|
)
|
|
|
|
|
General and administrative expenses
|
|
|
(640
|
)
|
|
|
(390
|
)
|
|
|
(982
|
)
|
|
|
(822
|
)
|
|
|
(1,925
|
)
|
|
|
(321
|
)
|
|
|
(34
|
)
|
Gain on sale of vessel
|
|
|
1,369
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs
|
|
|
(414
|
)
|
|
|
(265
|
)
|
|
|
(633
|
)
|
|
|
(511
|
)
|
|
|
(1,004
|
)
|
|
|
(1,076
|
)
|
|
|
(240
|
)
|
Interest income
|
|
|
39
|
|
|
|
2
|
|
|
|
39
|
|
|
|
13
|
|
|
|
19
|
|
|
|
8
|
|
|
|
4
|
|
Other
|
|
|
(17
|
)
|
|
|
(125
|
)
|
|
|
29
|
|
|
|
(176
|
)
|
|
|
(58
|
)
|
|
|
15
|
|
|
|
|
|
Net income (loss) for period
|
|
|
1,710
|
|
|
|
(603
|
)
|
|
|
2,623
|
|
|
|
(2,258
|
)
|
|
|
(3,324
|
)
|
|
|
152
|
|
|
|
470
|
|
Earnings Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.27
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.36
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Diluted earnings (loss) per share
|
|
$
|
0.25
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.36
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
|
|
4,500,000
|
|
Diluted weighted average number of shares
|
|
|
6,921,050
|
|
|
|
6,290,100
|
|
|
|
6,476,315
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
4,600,444
|
|
|
|
4,500,000
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
9,106
|
|
|
$
|
1,417
|
|
|
$
|
5,286
|
|
|
$
|
1,443
|
|
|
|
|
|
Fixed assets, net
|
|
|
10,268
|
|
|
|
19,369
|
|
|
|
23,848
|
|
|
|
16,188
|
|
|
|
|
|
Total assets
|
|
|
32,804
|
|
|
|
23,086
|
|
|
|
29,840
|
|
|
|
18,335
|
|
|
|
|
|
Total current liabilities, including current portion of
long-term debt
|
|
|
6,572
|
|
|
|
10,260
|
|
|
|
10,231
|
|
|
|
4,971
|
|
|
|
|
|
Long-term debt, including shareholders loans, net of
current portion
|
|
|
14,693
|
|
|
|
5,819
|
|
|
|
9,750
|
|
|
|
9,978
|
|
|
|
|
|
Total liabilities
|
|
|
21,265
|
|
|
|
16,079
|
|
|
|
20,135
|
|
|
|
14,949
|
|
|
|
|
|
Total shareholders equity
|
|
|
11,539
|
|
|
|
7,007
|
|
|
|
9,705
|
|
|
|
3,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
PERFORMANCE INDICATORS
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
EBITDA (1)
|
|
$
|
2,863
|
|
|
$
|
853
|
|
|
$
|
5,002
|
|
|
$
|
683
|
|
|
$
|
2,582
|
|
|
$
|
5,128
|
|
|
$
|
1,687
|
|
Fleet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of vessels (2)
|
|
|
2.29
|
|
|
|
3.00
|
|
|
|
2.64
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
2.55
|
|
|
|
0.67
|
|
Ownership days (3)
|
|
|
208
|
|
|
|
273
|
|
|
|
478
|
|
|
|
543
|
|
|
|
1,095
|
|
|
|
931
|
|
|
|
244
|
|
Available days (4)
|
|
|
208
|
|
|
|
253
|
|
|
|
478
|
|
|
|
523
|
|
|
|
1,005
|
|
|
|
931
|
|
|
|
244
|
|
Operating days (5)
|
|
|
203
|
|
|
|
250
|
|
|
|
461
|
|
|
|
490
|
|
|
|
941
|
|
|
|
893
|
|
|
|
244
|
|
Fleet utilization (6)
|
|
|
97.6
|
%
|
|
|
91.6
|
%
|
|
|
96.4
|
%
|
|
|
90.2
|
%
|
|
|
85.9
|
%
|
|
|
95.9
|
%
|
|
|
100.0
|
%
|
Average Daily Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average TCE rate (7)
|
|
$
|
16,256
|
|
|
$
|
11,008
|
|
|
$
|
15,856
|
|
|
$
|
8,969
|
|
|
$
|
10,881
|
|
|
$
|
10,882
|
|
|
$
|
11,012
|
|
Vessel operating expenses (8)
|
|
|
4,322
|
|
|
|
3,784
|
|
|
|
4,839
|
|
|
|
3,803
|
|
|
|
4,094
|
|
|
|
3,863
|
|
|
|
3,221
|
|
Management fees (9)
|
|
|
505
|
|
|
|
495
|
|
|
|
502
|
|
|
|
497
|
|
|
|
493
|
|
|
|
524
|
|
|
|
738
|
|
Total vessel operating expenses (10)
|
|
$
|
4,827
|
|
|
$
|
4,278
|
|
|
$
|
5,341
|
|
|
$
|
4,300
|
|
|
$
|
4,587
|
|
|
$
|
4,387
|
|
|
$
|
3,959
|
|
|
|
|
(1) |
|
We consider EBITDA to represent net earnings before interest,
taxes, depreciation and amortization. Under the laws of the
Marshall Islands, we are not subject to tax on international
shipping income. However, we are subject to registration and
tonnage taxes, which have been included in vessel operating
expenses. Accordingly, no adjustment for taxes has been made for
purposes of calculating EBITDA. EBITDA does not represent and
should not be considered as an alternative to net income or cash
flow from operations, as determined by United States generally
accepted accounting principles, or U.S. GAAP, and our
calculation of EBITDA may not be comparable to that reported by
other companies. EBITDA is included herein because it is an
alternative measure of our liquidity, performance and
indebtedness. |
42
|
|
|
|
|
EBITDA reconciliation to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss)
|
|
$
|
1,710
|
|
|
$
|
(603
|
)
|
|
$
|
2,623
|
|
|
$
|
(2,258
|
)
|
|
$
|
(3,324
|
)
|
|
$
|
152
|
|
|
$
|
470
|
|
Depreciation and amortization
|
|
|
778
|
|
|
|
1,193
|
|
|
|
1,785
|
|
|
|
2,443
|
|
|
|
4,921
|
|
|
|
3,908
|
|
|
|
981
|
|
Interest and finance cost
|
|
|
375
|
|
|
|
263
|
|
|
|
594
|
|
|
|
498
|
|
|
|
985
|
|
|
|
1,068
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
2,863
|
|
|
$
|
853
|
|
|
$
|
5,002
|
|
|
$
|
683
|
|
|
$
|
2,582
|
|
|
$
|
5,128
|
|
|
$
|
1,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Average number of vessels is the number of vessels that
constituted our fleet for the relevant period, as measured by
the sum of the number of days each vessel was a part of our
fleet during the period divided by the number of calendar days
in the period. |
|
(3) |
|
Ownership days are the total number of days in a period during
which the vessels in our fleet have been owned by us. Ownership
days are an indicator of the size of our fleet over a period and
affect both the amount of revenues and the amount of expenses
that we record during a period. |
|
(4) |
|
Available days are the number of ownership days less the
aggregate number of days that our vessels are off-hire due to
major repairs, dry-dockings or special or intermediate surveys.
The shipping industry uses available days to measure the number
of ownership days in a period during which vessels should be
capable of generating revenues. |
|
(5) |
|
Operating days are the number of available days less the
aggregate number of days that our vessels are off-hire due to
any reason, including unforeseen circumstances. The shipping
industry uses operating days to measure the aggregate number of
days in a period during which vessels actually generate revenues. |
|
(6) |
|
We calculate fleet utilization by dividing the number of our
fleets operating days during a period by the number of
ownership days during the period. The shipping industry uses
fleet utilization to measure a companys efficiency in
finding suitable employment for its vessels and minimizing the
amount of days that its vessels are off-hire for reasons such as
scheduled repairs, vessel upgrades, or dry-dockings or other
surveys. |
|
(7) |
|
Time charter equivalent, or TCE, is a measure of the average
daily revenue performance of a vessel on a per voyage basis. Our
method of calculating TCE is consistent with industry standards
and is determined by dividing operating revenues (net of voyage
expenses) by operating days for the relevant time period. Voyage
expenses primarily consist of port, canal and fuel costs that
are unique to a particular voyage, which would otherwise be paid
by the charterer under a time charter contract. TCE is a
standard shipping industry performance measure used primarily to
compare period-to-period changes in a shipping companys
performance despite changes in the mix of charter types (i.e.,
spot charters, time charters and bareboat charters) under which
the vessels may be employed between the periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating revenues
|
|
$
|
3,562
|
|
|
$
|
2,986
|
|
|
$
|
7,830
|
|
|
$
|
5,430
|
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
Voyage expenses and commissions
|
|
|
(262
|
)
|
|
|
(234
|
)
|
|
|
(521
|
)
|
|
|
(1,035
|
)
|
|
|
(1,488
|
)
|
|
|
(608
|
)
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
3,300
|
|
|
$
|
2,752
|
|
|
$
|
7,309
|
|
|
$
|
4,395
|
|
|
$
|
10,239
|
|
|
$
|
9,718
|
|
|
$
|
2,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating days
|
|
|
203
|
|
|
|
250
|
|
|
|
461
|
|
|
|
490
|
|
|
|
941
|
|
|
|
893
|
|
|
|
244
|
|
Time charter equivalent rates
|
|
$
|
16,256
|
|
|
$
|
11,008
|
|
|
$
|
15,856
|
|
|
$
|
8,969
|
|
|
$
|
10,881
|
|
|
$
|
10,882
|
|
|
$
|
11,012
|
|
|
|
|
(8) |
|
Average daily vessel operating expenses, which includes crew
costs, provisions, deck and engine stores, lubricating oil,
insurance, maintenance and repairs, is calculated by dividing
vessel operating expenses by ownership days for the relevant
time periods: |
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23,
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
2004) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Vessel operating expenses
|
|
$
|
899
|
|
|
$
|
1,033
|
|
|
$
|
2,313
|
|
|
$
|
2,065
|
|
|
$
|
4,483
|
|
|
$
|
3,596
|
|
|
$
|
786
|
|
Ownership days
|
|
|
208
|
|
|
|
273
|
|
|
|
478
|
|
|
|
543
|
|
|
|
1,095
|
|
|
|
931
|
|
|
|
244
|
|
Daily vessel operating expense
|
|
$
|
4,322
|
|
|
$
|
3,784
|
|
|
$
|
4,839
|
|
|
$
|
3,803
|
|
|
$
|
4,094
|
|
|
$
|
3,863
|
|
|
$
|
3,221
|
|
|
|
|
(9) |
|
Daily management fees are calculated by dividing total
management fees paid on ships owned by ownership days for the
relevant time period. |
|
(10) |
|
Total vessel operating expenses, or TVOE, is a measurement of
our total expenses associated with operating our vessels. TVOE
is the sum of daily vessel operating expense and daily
management fees. Daily TVOE is calculated by dividing TVOE by
fleet ownership days for the relevant time period. |
44
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following managements discussion and analysis should
be read in conjunction with our historical consolidated
financial statements and accompanying notes included elsewhere
in this prospectus. This discussion contains forward-looking
statements that reflect our current views with respect to future
events and financial performance. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of various factors, such as those set
forth in the section entitled Risk Factors and
elsewhere in this prospectus.
General
We are a shipping company that currently operates four vessels
in the drybulk shipping market through our wholly owned
subsidiaries. We were formed on April 23, 2004 under the
name Adventure Holdings S.A. pursuant to the laws of
the Republic of the Marshall Islands to serve as the parent
holding company of the ship-owning entities. On April 27,
2005, we changed our name to FreeSeas Inc.
On December 15, 2005, we completed a merger with Trinity
Partners Acquisition Company Inc., a blank check corporation
organized under the laws of the State of Delaware. Under the
terms of the merger, we were the surviving corporation. Each
outstanding share of Trinitys common stock and
Class B common stock was converted into the right to
receive an equal number of shares of our common stock, and each
Trinity Class W warrant and Class Z warrant was
converted into the right to receive an equal number of our
Class W warrants and Class Z warrants.
Our common stock, Class W warrants and Class Z
warrants began trading on the NASDAQ Capital Market on
December 16, 2005 under the trading symbols FREE, FREEW and
FREEZ, respectively. As a result of the merger, Trinitys
former securities, including the Trinity Class A Units and
the Class B Units, ceased trading on the OTC
Bulletin Board.
The operations of our vessels are managed by Free Bulkers, an
affiliated Marshall Islands corporation. Free Bulkers provides
us with a wide range of shipping services. These services
include, at a monthly fee per vessel, the required technical
management, such as managing day-to-day vessel operations
including supervising the crewing, supplying, maintaining and
dry-docking of vessels. Also for a fee, Free Bulkers covers the
commercial management of our fleet, such as identifying suitable
vessel charter opportunities, which are provided by Safbulk Pty,
Ltd., a company controlled by one of our affiliates, under a
subcontract agreement from Free Bulkers. In addition, Free
Bulkers provides us with all the necessary accounting services
and, effective July 1, 2007, all the necessary financial
reporting services for a fixed quarterly fee.
During the six-month period ended June 30, 2007, our fleet
consisted of three Handysize vessels that carried a variety of
drybulk commodities, including coal, iron ore, and grains, or
major bulks, as well as bauxite, phosphate, fertilizers and
steel products, or minor bulks. We sold one of the three
vessels, the M/V Free Fighter, on April 27, 2007 for
gross proceeds of $11,075,000, and net proceeds of $10,606,000
after deducting selling costs. Therefore, as of June 30,
2007, our fleet consisted of two Handysize vessels, the M/V
Free Destiny built in 1982 with a carrying capacity of
25,240 dwt and the M/V Free Envoy built in 1984 with a
carrying capacity of 26,318 dwt.
Subsequent to the quarter ended June 30, 2007, we acquired
the M/V Free Hero built in 1995 with a carrying capacity
of 24,318 dwt, and the M/V Free Jupiter built in 2002
with a carrying capacity of 47,777 dwt, for $25,250,000 and
$47,000,0000, respectively. In addition, we entered into a
memorandum of agreement to acquire the M/V Free Goddess
built in 1995 with a carrying capacity of 22,051 dwt for
$25,200,000. See Note 16 to our interim financial
statements for additional details on the acquisition, of the M/V
Free Hero, the M/V Free Jupiter and the M/V
Free Goddess.
45
The following table details the vessels owned or to be acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
Delivery
|
|
|
Name
|
|
Class
|
|
Dwt
|
|
|
Built
|
|
|
Flag
|
|
Price
|
|
Date
|
|
Employment
|
|
Free Envoy
|
|
Handysize
|
|
|
26,318
|
|
|
|
1984
|
|
|
Marshall Islands
|
|
$9.50 million
|
|
September 20, 2004
|
|
One-year time charter through April 2008 at $17,000 per day
|
Free Destiny
|
|
Handysize
|
|
|
25,240
|
|
|
|
1982
|
|
|
Marshall Islands
|
|
$7.60 million
|
|
August 3, 2004
|
|
70-day time charter at $28,000 per day
|
Free Hero
|
|
Handysize
|
|
|
24,318
|
|
|
|
1995
|
|
|
Marshall Islands
|
|
$25.25 million
|
|
July 3, 2007
|
|
Balance of time charter through December 2008/February 2009 at
$14,500 per day
|
Free Jupiter
|
|
Handymax
|
|
|
47,777
|
|
|
|
2002
|
|
|
Marshall Islands
|
|
$47.00 million
|
|
September 5, 2007
|
|
Initial one-trip time charter with approximately seven days
remaining at $43,000 per day followed by an unscheduled
dry-docking to complete repairs; thereafter to be delivered to a
new charterer under a three-year time charter at $32,000 per day
for the first year, $28,000 per day for the second year, and
$24,000 per day for the third year
|
Free Goddess
|
|
Handysize
|
|
|
22,051
|
|
|
|
1995
|
|
|
Marshall Islands
|
|
$25.20 million
|
|
Expected late
October 2007
|
|
Two-month time charter at $13,000 per day; thereafter a two-year
time charter at $19,250 per day
|
Acquisition
of Vessels
From time to time as opportunities arise, we intend to acquire
additional secondhand drybulk carriers. We recently accepted
delivery of the M/V Free Hero and the M/V Free
Jupiter, and are currently under contract to acquire the M/V
Free Goddess, as described in Note 16 to our interim
financial statements.Vessels are generally acquired free of
charter. The M/V Free Hero was acquired subject to a
novation, or assumption, of its existing charter, and the M/V
Free Jupiter was acquired free of charter. If no charter
is in place when a vessel is acquired, we usually enter into a
new charter contract. The shipping industry uses income days
(also referred to as voyage or operating
days) to measure the number of days in a period during which
vessels actually generate revenues.
Consistent with shipping industry practice, we treat the
acquisition of a vessel (whether acquired with or without a
charter) as the acquisition of an asset rather than a business.
When we acquire a vessel, we conduct, also consistent with
shipping industry practice, an inspection of the physical
condition of the vessel, unless practical considerations do not
allow such an inspection. We also examine the vessels
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 sellers technical manager and the
seller is automatically terminated and the vessels trading
certificates are revoked by its flag state, in the event the
buyer determines to change the vessels flag state.
46
It is rare in the shipping industry for the last charterer of a
vessel from a seller to continue as the first charterer of the
vessel from the buyer. Where a vessel has been under a voyage
charter, the seller delivers the vessel free of charter to the
buyer. When a vessel is under time charter and the buyer wishes
to assume that charter, the buyer cannot acquire the vessel
without the charterers 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:
|
|
|
|
|
Obtain the charterers consent to us as the new owner;
|
|
|
|
Obtain the charterers consent to a new technical manager;
|
|
|
|
Obtain the charterers consent to a new flag for the
vessel, if applicable;
|
|
|
|
Arrange for a new crew for the vessel;
|
|
|
|
Replace all hired equipment on board the vessel, such as gas
cylinders and communication equipment;
|
|
|
|
Negotiate and enter into new insurance contracts for the vessel
through our own insurance brokers;
|
|
|
|
Register the vessel under a flag state and perform the related
inspections in order to obtain new trading certificates from the
flag state, if we change the flag state;
|
|
|
|
Implement a new planned maintenance program for the vessel; and
|
|
|
|
Ensure that the new technical manager obtains new certificates
of compliance with the safety and vessel security regulations of
the flag state.
|
Our business comprises the following primary components:
|
|
|
|
|
Employment and operation of our drybulk carriers; and
|
|
|
|
Management of the financial, general and administrative elements
involved in the ownership and operation of our drybulk vessels.
|
The employment and operation of our vessels involve the
following activities:
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|
|
|
|
Vessel maintenance and repair;
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|
|
|
Planning and undergoing dry-docking, special surveys and other
major repairs;
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|
Organizing and undergoing regular classification society surveys;
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Crew selection and training;
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|
|
Vessel spares and stores supply;
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|
|
Vessel bunkering;
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|
|
|
Contingency response planning;
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|
|
Onboard safety procedures auditing;
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|
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Accounting;
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|
|
Vessel insurance arrangements;
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|
|
Vessel chartering;
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|
Vessel hire management; and
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|
Vessel performance monitoring.
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47
Important
Measures for Analyzing Our Results of Operations
We believe that the important measures for analyzing trends in
the results of our operations consist of the following:
|
|
|
|
|
Ownership days. We define ownership days as
the total number of calendar days in a period during which each
vessel in the fleet was owned by us. Ownership days are an
indicator of the size of the fleet over a period and affect both
the amount of revenues and the amount of expenses that we record
during that period.
|
|
|
|
Available days. We define available days as
the number of ownership days less the aggregate number of days
that our vessels are off-hire due to major repairs, dry-dockings
or special or intermediate surveys. The shipping industry uses
available days to measure the number of ownership days in a
period during which vessels are actually capable of generating
revenues.
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|
|
|
Operating days. Operating days are the number
of available days in a period less the aggregate number of days
that vessels are off-hire due to any reason, including
unforeseen circumstances. The shipping industry uses operating
days to measure the aggregate number of days in a period during
which vessels actually generate revenues.
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|
|
|
Fleet utilization. We calculate fleet
utilization by dividing the number of operating days during a
period by the number of ownership days during that period. The
shipping industry uses fleet utilization to measure a
companys efficiency in finding suitable employment for its
vessels and minimizing the amount of days that its vessels are
off-hire for any reason including scheduled repairs, vessel
upgrades, dry-dockings or special or intermediate surveys.
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|
|
|
Off-hire. The period a vessel is unable to
perform the services for which it is required under a charter.
Off-hire periods typically include days spent undergoing repairs
and dry-docking, whether or not scheduled.
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|
|
|
Time charter. A time charter is a contract for
the use of a vessel for a specific period of time during which
the charterer pays substantially all of the voyage expenses,
including port costs, canal charges and bunkers expenses. The
vessel owner pays the vessel operating expenses, which include
crew wages, insurance, technical maintenance costs, spares,
stores and supplies and commissions on gross voyage revenues.
Time charter rates are usually fixed during the term of the
charter. Prevailing time charter rates do fluctuate on a
seasonal and year-to-year basis and may be substantially higher
or lower from a prior time charter agreement when the subject
vessel is seeking to renew the time charter agreement with the
existing charterer or enter into a new time charter agreement
with another charterer. Fluctuations in time charter rates are
influenced by changes in spot charter rates.
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|
|
|
Voyage charter. A voyage charter is an
agreement to charter the vessel for an agreed per-ton amount of
freight from specified loading port(s) to specified discharge
port(s). In contrast to a time charter, the vessel owner is
required to pay substantially all of the voyage expenses,
including port costs, canal charges and bunkers expenses, in
addition to the vessel operating expenses.
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|
|
|
Time charter equivalent (TCE). The time
charter equivalent equals voyage revenues minus voyage expenses
divided by the number of operating days during the relevant time
period, including the trip to the loading port. TCE is a
standard seaborne transportation industry performance measure
used primarily to compare period-to-period changes in a seaborne
transportation companys performance despite changes in the
mix of charter types (i.e., spot charters, time charters and
bareboat charters) under which the vessels may be employed
during a specific period.
|
|
|
|
EBITDA. We consider EBITDA to represent net
earnings before interest, taxes, depreciation and amortization.
Under the laws of the Marshall Islands, we are not subject to
tax on international shipping income. However, we are subject to
registration and tonnage taxes, which have been included in
vessel operating expenses. Accordingly, no adjustment for taxes
has been made for purposes of calculating EBITDA. EBITDA does
not represent and should not be considered as an alternative to
net income or cash flow from operations, as determined by United
States generally accepted accounting principles, or
|
48
|
|
|
|
|
U.S. GAAP, and our calculation of EBITDA may not be
comparable to that reported by other companies. EBITDA is
included herein because it is an alternative measure of our
liquidity performance and indebtedness.
|
See Selected Historical Financial Information and Other
Data Performance Indicators for a quantitative
analysis of how we are performing against these measures.
Revenues
Our revenues are driven primarily by the number of vessels in
our fleet, the number of operating days during which our vessels
generate revenues, and the amount of daily charter hire that our
vessels earn under charters. These, in turn, are affected by a
number of factors, including the following:
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|
|
|
|
Our ability to acquire additional vessels;
|
|
|
|
The nature and duration of our charters;
|
|
|
|
Our decisions regarding vessel acquisitions and sales;
|
|
|
|
The amount of time that we spend repositioning our vessels;
|
|
|
|
The amount of time that our vessels spend in dry-dock undergoing
repairs;
|
|
|
|
Maintenance and upgrade work;
|
|
|
|
The age, condition and specifications of our vessels;
|
|
|
|
The levels of supply and demand in the drybulk carrier
transportation market; and
|
|
|
|
Other factors affecting charter rates for drybulk carriers.
|
A voyage charter is generally a contract to carry a specific
cargo from a load port to a discharge port for an
agreed-upon
total amount. Under voyage charters, we pay voyage expenses such
as port, canal and fuel costs. A time charter trip and a period
time charter or period charter are generally contracts to
charter a vessel for a fixed period of time at a set daily rate.
Under time charters, the charterer pays voyage expenses. Under
both types of charters, we pay for vessel operating expenses,
which include crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs. We are also
responsible for each vessels dry-docking and intermediate
and special survey costs.
Vessels operating on period time charters provide more
predictable cash flows, but can yield lower profit margins than
vessels operating in the spot charter market for single trips
during periods characterized by favorable market conditions. We
previously addressed this risk while also taking advantage of
increases in profitability in the drybulk market generally by
negotiating profit sharing arrangements in each of our period
time charters, which provide for potential revenues above the
fixed time charter rates. We may enter into profit-sharing
arrangements in the future, if available. We have also addressed
this risk by arranging a mix of spot and short-term period
charters, and in the future may consider a mix of spot and
medium- to long-term period charter business.
Vessels operating in the spot charter market generate revenues
that are less predictable, but may enable us to capture
increased profit margins during periods of improvements in
drybulk rates. We would also be exposed to the risk of declining
drybulk rates, however, which may have a materially adverse
impact on our financial performance. If we fix vessels on period
time charters and are not able to negotiate profit sharing
arrangements, future spot market rates may be higher or lower
than those rates at which we have period time chartered our
vessels. We will evaluate our opportunities to employ our
vessels on spot or period time charters, depending on whether we
can obtain contract terms that satisfy our criteria.
A standard maritime industry performance measure is the
daily time charter equivalent or daily
TCE. Daily TCE revenues are voyage revenues minus voyage
expenses divided by the number of operating days during the
relevant time period. Voyage expenses primarily consist of port,
canal and fuel costs that are unique to a particular voyage and
that would otherwise be paid by a charterer under a time
charter. We believe that
49
the daily TCE neutralizes the variability created by unique
costs associated with particular voyages or the employment of
drybulk carriers on time charter or on the spot market and
presents a more accurate representation of the revenues
generated by our drybulk carriers. Our average daily TCE rates
for 2004, 2005, and 2006 were $11,012, $10,882 and $10,881,
respectively, and our average daily TCE rates for the first six
months of 2006 and 2007 were $8,969 and $15,856, respectively.
We negotiated a 25% profit-sharing arrangement in each of the
time charters for the M/V Free Envoy through September
2005 and the M/V Free Destiny through October 2005 in
which we received 25% of the net amount generated by the
charterer over the base rate that the charterer paid to us.
Payment to us of our share of the profits has occurred at the
end of a voyage. Actual and final figures were computed, and any
adjustments in the payments made, occurred within 30 days
of vessel redelivery. During the periods ended December 31,
2004, 2005 and 2006, we earned $295,000, $769,800 and $0,
respectively, from the profit sharing arrangements. The
profit-sharing arrangements did not impose any monetary or
non-monetary obligation upon us. We did not enter into any
profit-sharing arrangements during fiscal 2006.
Vessel
Operating Expenses
Vessel operating expenses include crew wages and related costs,
the cost of insurance, expenses relating to repairs and
maintenance, the costs of spares and consumable stores, tonnage
taxes and other miscellaneous expenses. Our vessel operating
expenses, which generally represent fixed costs, will increase
if we increase the number of vessels in our fleet. Some of these
expenses are beyond our control, such as insurance costs and the
cost of spares.
One of our vessels, the M/V Free Jupiter, will be
undergoing an unscheduled dry-docking for repairs necessitated
by a grounding incident off the coast of the Philippines on
September 21, 2007. Operations to re-float the vessel have
been completed and it is currently anticipated that the M/V
Free Jupiter will complete its current one-trip time
charter and undergo the unscheduled dry-docking for repairs. The
vessel will be out of service during this dry-docking. Based on
information available to us at the present time, we currently
estimate that the vessel will be out of service until
approximately the end of November 2007, although we can
provide no assurances that the repair period may not be longer.
We expect that the vessels insurance will cover the
vessels repairs and related expenses, less applicable
deductibles.
Depreciation
During the period from April 23, 2004 (date of inception)
to December 31, 2004 and the years ended December 31,
2005 and 2006, we depreciated our drybulk carriers on a
straight-line basis over their estimated useful lives, which we
currently estimate to be 27 years from the date of their
initial delivery from the shipyard for financial statement
purposes. Commencing during the three months ended
March 31, 2007, we changed the estimated useful life for
the M/V Free Fighter to 30 years. See
Liquidity and Capital Resources for a
discussion of the factors affecting the actual useful lives of
our drybulk carriers. Depreciation is based on cost less the
estimated residual value. We capitalize the total costs
associated with a dry-docking and amortize these costs on a
straight-line basis over the period before the next dry-docking
becomes due, which is typically 24 to 36 months.
Regulations or incidents may change the estimated dates of
future dry-dockings.
Seasonality
Coal, iron ore and grains, which are the major bulks of the
drybulk shipping industry, are somewhat seasonal in nature. The
energy markets primarily affect the demand for coal, with
increases during hot summer periods when air conditioning and
refrigeration require more electricity and towards the end of
the calendar year in anticipation of the forthcoming winter
period. The demand for iron ore tends to decline in the summer
months because many of the major steel users, such as automobile
makers, reduce their level of production significantly during
the summer holidays. Grains are completely seasonal as they are
driven by the harvest within a climate zone. Because three of
the five largest grain producers (the United States of America,
Canada and the European Union) are located in the northern
hemisphere and the other two (Argentina and Australia)
50
are located in the southern hemisphere, harvests occur
throughout the year and grains require drybulk shipping
accordingly.
Principal
Factors Affecting Our Business
The principal factors that affect our financial position,
results of operations and cash flows include the following:
|
|
|
|
|
Number of vessels owned and operated;
|
|
|
|
Charter market rates, which approached new historical record
high levels in May 2007, and periods of charter hire;
|
|
|
|
Vessel operating expenses and voyage costs, which are incurred
in both U.S. Dollars and other currencies, primarily Euros;
|
|
|
|
Cost of dry-docking and special surveys;
|
|
|
|
Depreciation expenses, which are a function of the cost, any
significant post-acquisition improvements, estimated useful
lives and estimated residual scrap values of our vessels;
|
|
|
|
Financing costs related to the indebtedness incurred by us,
which totaled $240,000, $1,076,000 and $1,004,000 for the years
ended December 31, 2004, 2005 and 2006,
respectively; and
|
|
|
|
Fluctuations in foreign exchange rates.
|
Consolidated
Statements of Income
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For three months ended
|
|
|
For six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
OPERATING REVENUES
|
|
$
|
3,562
|
|
|
$
|
2,986
|
|
|
$
|
7,830
|
|
|
$
|
5,430
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses
|
|
|
(899
|
)
|
|
|
(1,033
|
)
|
|
|
(2,313
|
)
|
|
|
(2,065
|
)
|
Voyage expenses
|
|
|
(37
|
)
|
|
|
(49
|
)
|
|
|
(39
|
)
|
|
|
(686
|
)
|
Depreciation expense
|
|
|
(655
|
)
|
|
|
(1,081
|
)
|
|
|
(1,467
|
)
|
|
|
(2,221
|
)
|
Amortization of deferred charges
|
|
|
(123
|
)
|
|
|
(112
|
)
|
|
|
(318
|
)
|
|
|
(222
|
)
|
Management fees to a related party
|
|
|
(225
|
)
|
|
|
(135
|
)
|
|
|
(360
|
)
|
|
|
(270
|
)
|
Commissions
|
|
|
(225
|
)
|
|
|
(185
|
)
|
|
|
(482
|
)
|
|
|
(349
|
)
|
Stock-based compensation expense
|
|
|
(25
|
)
|
|
|
(216
|
)
|
|
|
(50
|
)
|
|
|
(379
|
)
|
General and administrative expenses
|
|
|
(640
|
)
|
|
|
(390
|
)
|
|
|
(982
|
)
|
|
|
(822
|
)
|
Gain on sale of vessel
|
|
|
1,369
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
2,102
|
|
|
$
|
(215
|
)
|
|
$
|
3,188
|
|
|
$
|
(1,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs
|
|
$
|
(414
|
)
|
|
$
|
(265
|
)
|
|
$
|
(633
|
)
|
|
$
|
(511
|
)
|
Interest income
|
|
|
39
|
|
|
|
2
|
|
|
|
39
|
|
|
|
13
|
|
Other
|
|
|
(17
|
)
|
|
|
(125
|
)
|
|
|
29
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)
|
|
$
|
(392
|
)
|
|
$
|
(388
|
)
|
|
$
|
(565
|
)
|
|
$
|
(674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,710
|
|
|
$
|
(603
|
)
|
|
$
|
2,623
|
|
|
$
|
(2,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Results
of Operations
Three
and six months ended June 30, 2007 as compared to the three
and six months ended June 30, 2006
REVENUES Operating revenues for three months
ended June 30, 2007 were $3,562,000, an increase of
$576,000 for the comparable period in 2006. For the six months
ended June 30, 2007 operating revenues were $7,830,000, an
increase of $2,400,000 compared to $5,430,000 in operating
revenues for the six months ended June 30, 2006. Revenues
increased primarily as a result of improved time charter rates
despite a reduction of 65 operating days resulting from the sale
of the M/V Free Fighter.
OPERATING EXPENSES Vessel operating expenses,
which include crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs, totaled
$899,000 and $2,313,000 in the three and six months ended
June 30, 2007, respectively, as compared to $1,033,000 and
$2,065,000 in the three and six months ended June 30, 2006,
respectively. The decrease of $134,000 in vessel operating
expenses during the three months ended June 30, 2007 as
compared to the comparable period in 2006, results primarily
from the sale of the M/V Free Fighter on April 27,
2007. The comparative incremental expense of $248,000 for the
six months ended June 30, 2007 includes approximately
$230,000 associated with two unscheduled repairs during February
2007, causing expenses beyond normal operation and maintenance
costs (i.e., main engine turbocharger of the M/V Free
Envoy; main generator of the M/V Free Destiny) and
approximately $90,000 for larger than normal lubricant and
stores quantities on the M/V Free Fighter for re-entering
the market after undergoing dry-docking and general survey
(October through December 2006) offset by a decrease of
$134,000 in vessel operating expenses resulting from the sale of
the M/V Free Fighter on April 27, 2007.
Consequently, the daily vessel operating expenses per vessel
owned, including the management fees paid to our affiliate, Free
Bulkers, were $4,827 and $5,341 for the three and six months
ended June 30, 2007, respectively, as compared to $4,278
and $4,300 for the comparable periods in 2006 an increase of
12.8% and 24.2% for the three and six month periods,
respectively.
VOYAGE EXPENSES Voyage expenses, which
include bunkers, cargo expenses, port expenses, port agency
fees, tugs, extra insurance and various expenses, were $37,000
and $39,000 (expenses related to a cargo survey at owners
expense) for the three and six months ended June 30, 2007,
respectively, as compared to $49,000 and $686,000 for the three
and six months ended June 30, 2006, respectively. The
decrease in voyage expenses was because there were no voyage
charters during the six months ended June 30, 2007.
DEPRECIATION AND AMORTIZATION For the three
and six months ended June 30, 2007, depreciation expense
totaled $655,000 and $1,467,000, respectively, as compared to
$1,081,000 and $2,221,000, respectively, for the same period in
2006. The decrease in depreciation expense resulted primarily
from the change of the estimated useful life of the M/V Free
Fighter to 30 years from 27 years, based on
managements re-evaluation of the useful life following the
vessels regularly scheduled fifth special survey and
docking, as well as the subsequent sale of the M/V Free
Fighter on April 27, 2007. For the three months ended
June 30, 2007, amortization of dry-dockings, special survey
costs and amortization of financing costs totaled $123,000, and
increase of $11,000 from the expense report in the comparable
period in 2006. For the six months ended June 30, 2007,
amortization of dry-dockings, special survey costs and
amortization of financing costs totaled $318,000 as compared to
$222,000 for the six months ended June 30, 2006. The
increase in amortization expenses resulted primarily from
financing costs related to the availability of the credit
facilities secured for the purchase of the new vessels discussed
in Note 16 to our financial statements.
MANAGEMENT FEES Management fees for each of
the three and six months ended June 30, 2007 totaled
$225,000 and $360,000, respectively, as compared to $135,000 and
$270,000, respectively, for the comparable periods in 2006. The
increase resulted primarily from the fees paid in connection
with the potential acquisition of the new four vessels starting
on the date of the memoranda of agreement. Management fees are
paid to our affiliate, Free Bulkers, for the technical
management of our vessels and for certain accounting services
related to the vessels operations. Pursuant to the
management agreements related to each of our current vessels, we
pay Free Bulkers a monthly management fee of $15,000 per vessel
commencing from the date of the relevant purchase memorandum of
agreement. In addition, we reimburse at cost the travel and
other personnel expenses of the Free Bulkers staff, including
the per diem paid by Free Bulkers, when
52
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 paid to Free Bulkers are comparable to those
charged by unaffiliated management companies.
COMMISSIONS AND GENERAL AND ADMINISTRATIVE
EXPENSES For the three months ended
June 30, 2007, commissions paid amounted to $225,000 as
compared to $185,000 for the three months ended June 30,
2006. Commissions paid during the six months ended June 30,
2007 totaled $482,000, compared to $349,000 for the six months
ended June 30, 2006. The commission fees represent
commissions paid to Free Bulkers and unaffiliated third parties.
Commissions paid to Free Bulkers equal 1.25% of freight or hire
collected from the employment of our vessels. Free Bulkers has
entered into a commercial sub-management agreement with Safbulk,
an affiliate of FS Holdings Limited, one of our principal
shareholders, pursuant to which Safbulk has agreed to perform
charter and post charter management services for our fleet. Free
Bulkers has agreed to pay Safbulk a fee equal to 1.25% of
freight or hire collected from the employment of our vessels.
The increase of $40,000 and $133,000 for the three and six
months ended June 30, 2007, respectively, as compared to
the same periods in 2006 relate directly to the increase of
operating revenues in the respective periods. General and
administrative expenses, which included, among other things,
international safety code compliance expenses, travel expenses
and communications expenses, totaled $640,000 and $982,000 for
the three and six months ended June 30, 2007, respectively,
as compared to $390,000 and $822,000 for the three and six
months ended June 30, 2006, respectively. Our general and
administrative expenses increased by $250,000 and $160,000
during the three and six months ended June 30, 2007
primarily because of an accrual of $483,000 for audit and legal
fees relating to our SEC filings in 2007. If our general and
administrative expenses were adjusted for such cost accrual, our
general and administrative expenses would have been $157,000 and
$499,000 for the three and six months ended June 30, 2007,
respectively, as compared to $390,000 and $822,000 for the
comparable periods in 2006. The decrease in general and
administrative expenses, after adjusting for the cost accrual
described above, is the result of the departure of two of our
executive officers in January 2007.
STOCK-BASED COMPENSATION EXPENSE For the
three and six months ended June 30, 2007, compensation cost
totaled $25,000 and $50,000, respectively, as compared to
$216,000 and $379,000 for the three and six months ended
June 30, 2006, respectively. Compensation costs reflect
non-cash, equity based compensation of our executive officers.
The decrease is primarily a result of the departure of two of
our executive officers in January 2007.
FINANCING COSTS For the three months ended
June 30, 2007 financing costs were $414,000, an increase of
$149,000 from the $265,000 in the three month period ended
June 30, 2007. Financing costs for the six months ended
June 30, 2007 were $633,000 as compared to $511,000 for the
six months ended June 30, 2006. Our financing costs
represent the fees incurred and interest paid in connection with
the bank loans for our vessels. The increase in financing costs
resulted primarily from financing costs incurred to secure the
financing sources related to the acquisition of new vessels.
NET (LOSS)/INCOME Net income for the three
and six months ended June 30, 2007 was $1,710,000 and
$2,623,000, respectively, as compared to net loss of $603,000
and $2,258,000 for the three and six months ended June 30,
2006, respectively. The net income for the three and six months
ended June 30, 2007 resulted primarily from the recognition
of a gain $1,369,000 from the sale of the M/V Free
Fighter, increased revenues due to increased charter rates,
and decreased depreciation and amortization expense due to a
change in the estimated useful live of the M/V Free
Fighter. Additionally, there was a decrease in compensation
expense of $191,000 and $329,000 for the three and six months
ended June 30, 2007, respectively, as compared to the same
periods in 2006.
53
Year
Ended December 31, 2006 (fiscal 2006) as
compared to year ended December 31, 2005
(fiscal 2005)
Consolidated
Statements of Income
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
OPERATING REVENUES
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
OPERATING EXPENSES :
|
|
|
|
|
|
|
|
|
Vessel operating expenses
|
|
|
(4,483
|
)
|
|
|
(3,596
|
)
|
Voyage expenses
|
|
|
(689
|
)
|
|
|
(55
|
)
|
Depreciation expense
|
|
|
(4,479
|
)
|
|
|
(3,553
|
)
|
Amortization of deferred dry-docking and special survey costs
|
|
|
(442
|
)
|
|
|
(355
|
)
|
Management fees to a related party
|
|
|
(540
|
)
|
|
|
(488
|
)
|
Commissions
|
|
|
(799
|
)
|
|
|
(553
|
)
|
Compensation costs
|
|
|
(651
|
)
|
|
|
(200
|
)
|
General and administrative expenses
|
|
|
(1,925
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) Income from operations
|
|
|
(2,281
|
)
|
|
|
1,205
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Finance costs
|
|
|
(1,004
|
)
|
|
|
(1,076
|
)
|
Interest income
|
|
|
19
|
|
|
|
8
|
|
Other
|
|
|
(58
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(1,043
|
)
|
|
|
(1,053
|
)
|
Net (loss) income
|
|
$
|
(3,324
|
)
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
Basic weighted average number of shares
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
Diluted weighted average number of shares
|
|
|
6,290,100
|
|
|
|
4,600,444
|
|
REVENUES Operating revenues for fiscal 2006
were $11,727,000, an increase of $1,401,000 from $10,326,000 in
operating revenues for fiscal 2005. Included herein, revenues
representing the profit-sharing portion of our charters were $0
for fiscal 2006 as compared to $769,800 in revenues representing
the profit-sharing portion of our charters for fiscal 2005. We
are no longer entering into profit-sharing arrangements with
charterers. Revenues increased primarily as a result of an
increase in voyage revenue relating to the M/V Free Fighter
which was in service for 12 months in fiscal 2006 as
compared to five months in fiscal 2005 offset by a decrease in
operating revenue from the M/V Free Destiny resulting
from a decrease in the number of days the vessel was available
due to its dry-docking.
VESSEL OPERATING EXPENSES Vessel operating
expenses, which include crew costs, provisions, deck and engine
stores, lubricating oil, insurance, maintenance and repairs,
totaled $4,483,000 in fiscal 2006 as compared to $3,596,000 for
fiscal 2005. The increase in vessel operating expenses primarily
reflects the operation of the M/V Free Fighter for a full
12 months during fiscal 2006 as compared to five months
during fiscal 2005. The daily vessel operating expenses,
including the management fees paid to our affiliate, Free
Bulkers, per vessel were $4,587 for fiscal 2006, an increase of
4.5% as compared to $4,387 for fiscal 2005.
VOYAGE EXPENSES Voyage expenses, which
include bunkers, cargo expenses, port expenses, port agency
fees, tugs, extra insurance and various expenses, were $689,000
for fiscal year 2006 as compared to $55,000 in fiscal 2005.
Voyage expenses increased primarily as a result of a voyage
carried out by the M/V Free Fighter during the first and
second quarter of 2006.
54
DEPRECIATION AND AMORTIZATION For fiscal
2006, depreciation expense totaled $4,479,000, as compared to
$3,553,000 for fiscal 2005. The increase in depreciation expense
resulted primarily from the depreciation of the M/V Free
Fighter for a full year. For fiscal 2006 amortization of
dry-dockings and special survey costs totaled $442,000 as
compared to $355,000 in fiscal 2005. The increase in
amortization expenses resulted primarily from the dry-docking of
the M/V Free Envoy in June 2006.
MANAGEMENT FEES Management fees for fiscal
2006 totaled $540,000, an increase of $52,000 from the
management fees of $488,000 in fiscal 2005. The management fees
increased as a result of the operation of the M/V Free
Fighter for 12 months in fiscal 2006 as compared to
five months in fiscal 2005. Management fees are paid to our
affiliate, Free Bulkers, for the management of our vessels.
Pursuant to the management agreements related to each of our
current vessels, we pay Free Bulkers a monthly management fee of
$15,000 per vessel. We have also agreed to pay Free Bulkers a
fee equal to 1.25% of freight or hire collected from the
employment of our vessels and a 1% commission on the purchase
price of any new vessels acquired or the sales price of any
vessel sold by us with the assistance of Free Bulkers. Free
Bulkers has entered into a sub-management agreement with
Safbulk, an affiliate of FS Holdings, one of our principal
shareholders, pursuant to which Safbulk has agreed to perform
charter and post charter management services for our fleet. Free
Bulkers has agreed to pay Safbulk 1.25% of freight or hire
collected from the employment of our vessels. In addition, we
reimburse at cost the travel and other personnel expenses of the
Free Bulkers staff, including the per diem paid by Free Bulkers
to its staff, when they are required to attend our vessels at
port. These agreements have no specified termination date. We
anticipate that Free Bulkers would manage any additional vessels
that we may acquire in the future on comparable terms. We
believe that the management fees paid to Free Bulkers are
comparable to those charged by unaffiliated management companies.
COMMISSIONS AND GENERAL AND ADMINISTRATIVE
EXPENSES Commissions paid during fiscal 2006
totaled $799,000, compared to the fiscal 2005 total of $553,000.
The commission fees paid in fiscal 2006 and 2005 represented
commissions paid to Free Bulkers and unaffiliated third parties.
Our commissions paid increase primarily as a result of increased
operations of the M/V Free Fighter, which we acquired in
June 2005. General and administrative expenses, which included,
among other things, international safety code compliance
expenses, travel expenses and communications expenses, totaled
$1,925,000 in fiscal 2006 as compared to $321,000 in fiscal
2005. Our general and administrative expenses increased
primarily as a result of an increase in salaries, legal fees,
accounting and auditing fees, director and officer insurance
costs and other fees and expenses relating to being a public
company for the full fiscal year as compared to 15 days in
fiscal 2005 as well as the write off as bad debt of certain
charter hire due in 2005 relating to certain profit-sharing
arrangements and not yet collected and the write-off of
approximately $234,000 in fiscal 2006 relating to expenses and
legal and advisory fees incurred in connection with a
convertible debt offering that was not consummated.
COMPENSATION COST For fiscal 2006,
compensation cost totaled $651,000, as compared to $200,000 for
fiscal 2005. The compensation cost for fiscal 2005 reflected
$20,000 of cash compensation due, but not paid as of
December 31, 2005, to our executive officers under their
employment agreements from the agreements effective date,
December 15, 2005, through the end of 2005. The remaining
$180,000 reflects non-cash, stock-based compensation awarded to
our executive officers pursuant to their employment agreements.
Compensation costs for fiscal 2006 reflect equity based
compensation to our executive officers. The significant increase
is primarily a result of the adoption of Statement of Financial
Accounting Standards No. 123R for the recognition of
stock-based compensation.
FINANCING COSTS Our financing costs for
fiscal 2006 were $1,004,000 as compared to $1,076,000 for fiscal
2005. Our financing costs represent the fees incurred and
interest paid in connection with the bank loans for our vessels.
The decrease resulted primarily from the partial repayment of
our bank loans.
NET (LOSS)/INCOME Net loss for fiscal 2006
was $3,324,000 as compared to net income of $152,000 for fiscal
2005. The net loss for fiscal 2006 resulted primarily from
decreases in charter revenue earned during the first six months
of fiscal 2006, increases in voyage operating expenses and
depreciation resulting from the operation of the M/V Free
Fighter for a full 12 months in 2006 as compared to
five months in 2005 and the increase in general and
administrative expenses resulting from operating as a public
company for a full 12 months in 2006 as compared to
15 days in 2005.
55
Year
Ended December 31, 2005 (fiscal 2005) as
compared to the period from April 23, 2004
(date of inception) to December 31, 2004
(fiscal 2004)
Consolidated
Statements of Income
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from
|
|
|
|
For the Year
|
|
|
Date of Inception
|
|
|
|
Ended
|
|
|
(April 23, 2004) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
OPERATING REVENUES
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Vessel operating expenses
|
|
|
(3,596
|
)
|
|
|
(786
|
)
|
Voyage expenses
|
|
|
(55
|
)
|
|
|
(16
|
)
|
Depreciation expense
|
|
|
(3,553
|
)
|
|
|
(872
|
)
|
Amortization of deferred dry-docking and special survey costs
|
|
|
(355
|
)
|
|
|
(109
|
)
|
Management fees to a related party
|
|
|
(488
|
)
|
|
|
(180
|
)
|
Commissions
|
|
|
(553
|
)
|
|
|
(127
|
)
|
Compensation costs
|
|
|
(200
|
)
|
|
|
|
|
General and administrative expenses
|
|
|
(321
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,205
|
|
|
|
706
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Finance costs
|
|
|
(1,076
|
)
|
|
|
(240
|
)
|
Interest income
|
|
|
8
|
|
|
|
4
|
|
Other
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(1,053
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
152
|
|
|
$
|
470
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Diluted (loss) earnings per share
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Basic weighted average number of shares
|
|
|
4,574,588
|
|
|
|
4,500,000
|
|
Diluted weighted average number of shares
|
|
|
4,600,444
|
|
|
|
4,500,000
|
|
REVENUES Operating revenues for fiscal 2005
were $10,326,000, an increase of $7,496,000 or 265% from
$2,830,000 in operating revenues for fiscal 2004. Included
herein, revenues representing the profit-sharing portion of our
charters were $769,800 for fiscal 2005, an increase of 161%,
from the $295,000 in revenues representing the profit sharing
portion of our charters for fiscal 2004. The increase in
operating revenues and revenues representing the profit-sharing
portion of our charters is primarily a result of the operations
of the M/V
Free Destiny and the M/V Free Envoy for the entire
2005 year and the addition of the M/V Free Fighter
to our fleet in mid-2005.
VESSEL OPERATING EXPENSES Vessel operating
expenses, which include crew costs, provisions, deck and engine
stores, lubricating oil, insurance, maintenance and repairs,
totaled $3,596,000 in fiscal 2005 as compared to $786,000 for
fiscal 2004. The daily vessel operating expenses, including the
management fees paid to our affiliate, Free Bulkers, per vessel
were $4,387 for fiscal 2005, an increase of 10.8% over the
$3,959 daily vessel operating expenses for fiscal 2004. The
increase in vessel operating expenses primarily reflects the
operation of the M/V Free Destiny and the M/V Free
Envoy for a full 12 months in fiscal 2005 as compared
to four and three months in fiscal 2004, respectively. This
increase also reflects the
start-up
costs, such as expenses relating to the upgrade of the
vessels engines, generators and safety equipment,
associated with the purchase of and subsequent improvement
consistent with our standards, of the M/V Free Fighter.
56
VOYAGE EXPENSES Voyage expenses, which
include bunkers, cargo expense, port expenses, port agency fees,
tugs, extra insurance and various expenses, were $55,000 for
fiscal 2005 as compared to $16,000 in fiscal 2004. Voyage
expenses increased primarily as a result of the operation of the
M/V Free Destiny and M/V Free Envoy for a full
12 months in 2005 as compared to four and three months in
2004, respectively, and the addition of the M/V Free Fighter
in 2005.
DEPRECIATION AND AMORTIZATION For fiscal
2005, depreciation expense totaled $3,553,000, as compared to
$872,000 for fiscal 2004. The increase in depreciation expense
resulted primarily from our vessels being in service for a full
12 months in fiscal 2005 as compared to four and three
months, for the M/V Free Destiny and the M/V Free
Envoy, respectively, in fiscal 2004 and the addition of a
third vessel to our fleet. The increase was partially offset by
an increase in the residual value of each vessel from $150 per
ton to $250 per ton beginning on July 1, 2005. For fiscal
2005 amortization of dry-dockings and special survey costs
totaled $355,000, an increase of 226% from $109,000 in fiscal
2004. The increase in amortization expense resulted primarily
from vessels being in service for additional days and the
addition of a third vessel to our fleet.
MANAGEMENT FEES Management fees for fiscal
2005 totaled $488,000, an increase of $308,000 from the
management fees of $180,000 in fiscal 2004. Management fees are
paid to our affiliate, Free Bulkers, for the management of our
vessels. Pursuant to the management agreements related to each
of our current vessels, we pay Free Bulkers a monthly management
fee of $15,000 per vessel. We have also agreed to pay Free
Bulkers a fee equal to 1.25% of freight or hire collected from
the employment of our vessels and a 1% commission on the gross
purchase price of any new vessels acquired or the sales price of
any vessel sold by us with the assistance of Free Bulkers. Free
Bulkers has entered into a sub-management agreement with
Safbulk, an affiliate of FS Holdings, one of our principal
shareholders, pursuant to which Safbulk has agreed to perform
charter and post charter management services for our fleet. Free
Bulkers has agreed to pay Safbulk 1.25% of freight or hire
collected from the employment of our vessels. In addition, we
reimburse at cost the travel and other personnel expenses of the
Free Bulkers staff, including the per diem paid by Free Bulkers
to its staff, when they are required to attend our vessels at
port. These agreements have no specified termination date. We
anticipate that Free Bulkers would manage any additional vessels
that we may acquire in the future on comparable terms. We
believe that the management fees paid to Free Bulkers are
comparable to those charged by unaffiliated management
companies. Free Bulkers has entered into an agreement with
Safbulk, an affiliate of one of our principal shareholders, and
has subcontracted to Safbulk the commercial management of our
vessels. Free Bulkers is responsible for paying Safbulks
corresponding fees.
COMMISSIONS AND GENERAL AND ADMINISTRATIVE
EXPENSES Commissions paid during fiscal 2005
totaled $553,000, an increase of $426,000 from the fiscal 2004
total of $127,000. The commission fees in 2005 represented
commissions paid to unaffiliated third parties and to Free
Bulkers. The commission fees paid in fiscal 2004 were chartering
commissions paid to unaffiliated third parties in connection
with the chartering of our vessels. Our commissions paid
increased primarily as a result of the increase in our charter
revenue, which reflected that our vessels were in service
additional days and that we acquired a third vessel for our
fleet. General and administrative expenses, which included,
among other things, safety code compliance expenses, travel
expenses and communications expenses, totaled $321,000 in fiscal
2005 as compared to $34,000 in fiscal 2004. Our general and
administrative expenses increased primarily as a result of the
increase in our legal, accounting and investor relations
expenses associated with our becoming a publicly traded company.
COMPENSATION COST For fiscal 2005,
compensation cost totaled $200,000, as compared to $0 for fiscal
2004. The compensation cost reflects $20,000 of cash
compensation due, but not yet paid, to our executive officers
under their employment agreements from the agreements
effective date, December 15, 2005, through the end of 2005.
The remaining $180,000 reflects non-cash, stock-based
compensation awarded to our executive officers pursuant to their
employment agreements.
Prior to the closing of the merger with Trinity in December
2005, we did not have any employees. Free Bulkers, as our ship
manager, was responsible for performing all services relating to
the operations of our vessels.
57
FINANCING COSTS Our financing costs for
fiscal 2005, were $1,076,000, as compared to $240,000 for fiscal
2004. Our financing costs represent the fees incurred and
interest paid in connection with the bank loans for our vessels.
The increase in financing costs resulted primarily from the
payment of interest for 12 months on the loans on the M/V
Free Destiny and the M/V Free Envoy, as compared
to payment of interest for only four and three months,
respectively, in fiscal 2004, the additional financing cost
associated with the loan obtained to purchase the M/V Free
Fighter in fiscal 2005, and the financing cost associated
with the refinancing of the original loan on the M/V Free
Destiny.
NET INCOME Net income for fiscal 2005 was
$152,000 as compared to $470,000 for fiscal 2004. Net income
decreased primarily as a result of the additional expenses
involved in operating two of our vessels for a full
12 months in fiscal 2005 as compared to three and four
months, respectively, in fiscal 2004 as well as the addition of
a new vessel in fiscal 2005. The increase in expenses was
partially offset by an increase in revenue resulting from an
increase in the number of available days in fiscal 2005.
Liquidity
and Capital Resources
Our principal sources of funds have been equity provided by our
shareholders, operating cash flows and long-term borrowings. Our
principal use of funds has been capital expenditures to acquire
and maintain our fleet, comply with international shipping
standards and environmental laws and regulations, fund working
capital requirements and make principal repayments on
outstanding loan facilities. We expect to rely upon operating
cash flows, long-term borrowings, and the working capital
available to us, as well as possible future equity financings,
to implement our growth plan. In addition, to the extent that
the options and warrants currently issued are subsequently
exercised, the proceeds from those exercises would provide us
with additional funds.
Based on current market conditions, we believe that our current
cash balance as well as operating cash flows will be sufficient
to meet our liquidity needs for our existing vessels for the
next 18 months, as well as the additional vessel we are
currently under contract to purchase (as described in
Note 16 to our interim financial statements).
On April 27, 2007, we sold the M/V Free Fighter for
gross proceeds of $11,075,000 and from the $10,606,000 in net
proceeds we repaid $4,485,000 outstanding under loans with First
Business Bank.
On May 1, 2007, we entered into memoranda of agreement
pursuant to which we agreed to purchase four secondhand drybulk
carriers from non-affiliated parties for a total purchase price
of $114,000,000. In accordance with the memoranda of agreement,
we made deposits to the respective sellers of the above four
vessels. We obtained the funds for the deposits from a draw down
of the $14,000,000 unsecured shareholder loan as of
June 30, 2007 described below in Long-Term
Debt and from our cash on hand, primarily from the
proceeds of the sale of the M/V Free Fighter in April
2007. The acquisition of two of these vessels was subsequently
cancelled on July 27, 2007 and the related deposits were
refunded to us. The M/V Free Hero and the M/V Free
Jupiter were purchased on July 3, 2007 and
September 5, 2007, respectively, for the purchase prices of
$25,250,000 and $47,000,000, respectively, as per the terms of
their respective agreements. In substitution of the cancelled
vessels, we have identified a new vessel, the M/V Free
Goddess, of similar tonnage and expected return
characteristics as the cancelled vessels. On August 20,
2007, we entered into a memorandum of agreement with another
unrelated party pursuant to which we will purchase the M/V
Free Goddess for the purchase price of $25,200,000, with
expected delivery during October 2007. On August 25, 2007,
we provided the seller with a deposit of $2,520,000.
We took delivery of the M/V Free Hero and the M/V Free
Jupiter on July 3, 2007 and September 5, 2007,
respectively, and paid the remaining balance of the respective
purchase prices, net of the deposit paid, from cash on hand from
operations and funds obtained from the following credit
facilities available to us: (i) a $68,000,000 senior
secured loan from HSH Nordbank AG; (ii) a $21,500,000
junior loan from BTMU Capital Corporation, an affiliate of the
Bank of Tokyo Mitsubishi; (iii) the remaining
$8,500,000 of the $14,000,000 unsecured shareholder loan
(which was drawn down on June 22, 2007 as discussed further
below); and (iv) an overdraft credit facility of $4,000,000
available from Hollandsche Bank Unie N.V. See
Note 16 to our interim financial statements for detailed
information regarding the amounts used from each source.
58
We intend to pay the remaining balance of the purchase price of
the M/V Free Goddess, net of deposits, by utilizing
$20,473,000 available under the existing facilities described
above and $2,207,000 from available cash from operations.
If we do acquire additional vessels in the future beyond the
near-term acquisitions we seek to complete, then we will rely on
funds drawn from our existing or new debt facilities, our
working capital, proceeds from possible future equity offerings,
and revenues from operations to meet our liquidity needs going
forward.
The M/V Free Destiny, the M/V Free Envoy and the
M/V Free Fighter, the three Handysize drybulk carriers we
owned during fiscal 2006, were 24, 22, and 24 years old,
respectively. For financial statement purposes, we used an
estimated useful life of 27 years for each vessel. However,
economics, rather than a set number of years, determines the
actual useful life of a vessel. As a vessel ages, the
maintenance costs rise particularly with respect to the cost of
surveys. So long as the revenue generated by the vessel
sufficiently exceeds its maintenance costs, the vessel will
remain in use. If the revenue generated or expected future
revenue does not sufficiently exceed the maintenance costs, or
if the maintenance costs exceed the revenue generated or
expected future revenue, then the vessel owner usually sells the
vessel for scrap.
The M/V Free Destiny, which is 25 years old, is
currently undergoing its scheduled dry-dock and special survey.
The next special survey of the M/V Free Envoy is
scheduled to occur at the end of August 2008, when the vessel
will be 24 years old. If those special surveys do not
require us to make extensive capital outlays to keep the vessels
operating, then the M/V Free Destiny and the M/V Free
Envoy should continue in use for approximately another two
and one-half years, after their respective special
surveys. The M/V Free Fighter underwent her regularly
scheduled fifth special survey and dry-docking in November and
December 2006. Based on the fifth special survey and
dry-docking, during the six months ended June 30, 2007, the
estimated useful life of the M/V Free Fighter was changed
to 30 years.
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 managements expectation of future market
conditions as well as our ability to acquire drybulk carriers on
favorable terms.
Cash
Flows
OPERATING ACTIVITIES Net cash from operating
activities totaled $1,078,000 during fiscal 2006 as compared to
$5,724,000 in fiscal 2005 and $1,246,000 in fiscal 2004. The
decrease in net cash from operating activities from fiscal 2005
to fiscal 2006 resulted primarily from a decrease in charter
revenue during the first quarter of 2006 resulting from a weaker
charter market and the M/V Free Fighter being out of
service for its special survey and an increase in dry-docking
and special survey cost and general and administrative expenses
resulting from being a public reporting company. Net cash from
operating activities increased by $2,195,000 for the six months
ended June 30, 2007 compared to the six months ended
June 30, 2006. This increase is primarily the result of an
increase in charter revenues.
INVESTING ACTIVITIES We did not use any cash
in investing activities during fiscal 2006, as compared to
$10,813,000 for fiscal 2005 and $17,460,000 for fiscal 2004. We
used cash in investing activities during fiscal 2005 and fiscal
2004 to purchase vessels. We used $794,000 of cash in investing
activities during the six months ended June 30, 2007 as
compared to no cash used in investing activities during the
comparable period in 2006. The increase was primarily a result
of the deposits placed for the purchases of the M/V Free Hero
and the M/V Free Jupiter, and the anticipated
purchases of two additional vessels that were subsequently
cancelled (see Note 16 to our interim financial statements)
which was offset by the proceeds received from the sale of the
M/V Free Fighter.
FINANCING ACTIVITIES Net cash used in
financing activities in fiscal 2006 was $3,991,000, which
primarily reflects payments of $8,250,000 of long-term debt
offset by the proceeds of borrowings and the movement of a bank
overdraft of $4,330,000. Net cash provided by financing
activities in fiscal 2005 was $7,913,000, which primarily
reflects borrowings of $14,916,000 from unaffiliated banks and
shareholders and $5,901,000 from the issuance of common stock
offset by the repayment of $12,266,000 of borrowings. Net
59
cash provided by financing activities in fiscal 2004 was
$16,675,000, which primarily reflects borrowings of $14,675,000
from unaffiliated banks and shareholders, $2,966,000 in
shareholder contributions and $600,000 in shareholder advances
offset by the repayment of $1,418,000 of borrowings. Net cash
from financing activities during the six months ended
June 30, 2007 was $6,190,000 as compared to net cash used
in financing activities of $2,420,000 for the six months ended
June 30, 2006. The net cash from financing activities
during the six months ended June 30, 2007 includes
$14,000,000 of proceeds from a shareholder loan, $2,470,000 in
proceeds from the draw down of a loan with First Business Bank
offset by the payments of $2,000,000 of short term debt,
$5,800,000 of long term debt, $750,000 of shareholders
loans and $1,730,000 of deferred financing cost incurred in
connection with securing the availability of financing sources
for the acquisition of new vessels.
Capital
Requirements
On May 1, 2007, we, through our wholly owned subsidiaries,
entered into memoranda of agreement to acquire the M/V Free
Hero and the M/V Free Jupiter. We took delivery of
the M/V Free Hero and the M/V Free Jupiter on
July 3, 2007 and September 5, 2007, respectively.
On August 20, 2007, we entered into a memorandum of
agreement pursuant to which we agreed to purchase a secondhand
drybulk carrier, the M/V Free Goddess, from an
unaffiliated third party for a purchase price of $25,200,000. We
expect to take delivery of the M/V Free Goddess in late
October 2007.
The M/V Free Hero and the M/V Free Jupiter were
acquired for a total price of $72,250,000 from non-affiliated
parties. The M/V Free Goddess will be acquired for a
total price of $25,200,000 from non-affiliated parties. The
acquisition of the M/V Free Hero and the M/V Free
Jupiter was, and the acquisition of the M/V Free Goddess
will be, financed through a combination of bank debt
available for this purpose, a shareholder loan and our available
cash on hand as previously discussed. Please see
Liquidity and Capital Resources and
Business Loans for Vessels for more
information about these pending acquisitions and the related
financing.
Long-Term
Debt
Our subsidiaries have obtained financing from unaffiliated
lenders for their vessels.
Adventure Two owns the M/V Free Destiny subject to a
mortgage securing a loan in the original principal amount of
$3,700,000 from Hollandsche Bank Unie N.V. The loan
bears interest at 1.95% above LIBOR, matures in 2008, and is
payable in eight quarterly installments of $75,000 each
beginning December 27, 2005, followed by one quarterly
installment of $100,000, two quarterly installments of $500,000
each, and a balloon payment of $2,000,000 in 2008. The loan is
secured by a first preferred mortgage on the vessel, our
guarantee of $500,000 of the principal amount plus interest and
costs, joint and several liability of Adventure Three, and
pledges of (1) the rights and earnings under time charter
contracts present or future, (2) rights under insurance
policies and (3) goods and documents of title that may come
into the banks possession for the benefit of Adventure Two.
Adventure Three owns the M/V Free Envoy subject to a
mortgage securing a loan in the original principal amount of
$6,000,000 from Hollandsche Bank Unie N.V. The loan
was amended in September 2005, pursuant to which the interest
was reduced to 1.95% above LIBOR. The loan matures in December
2007, and is payable in 12 quarterly installments of $425,000
each commencing December 2005 with a balloon payment of $900,000
at final maturity. The loan is secured by a first preferred
mortgage on the vessel, our guarantee of $500,000 of the
principal amount plus interest and costs and pledges of
(1) the rights and earnings under time charter contracts
present or future, (2) rights under insurance policies and
(3) goods and documents of title that may come into the
banks possession for the benefit of Adventure Three. In
June 2006, we borrowed an additional $2,000,000 from Hollandsche
Bank Unie, which amounts were also secured by the
M/V Free Envoy and were used to pay principal and
interest due to Egnatia Bank, S.A. under its loan to Adventure
Four. On January 12, 2007, the additional $2,000,000
borrowed from Hollandsche Bank Unie was paid off
from the proceeds of a loan.
60
Adventure Four owned the M/V Free Fighter subject to a
mortgage securing a loan in the original principal amount of
$4,800,000 from First Business Bank, the outstanding amount of
$4,485,000 of which was repaid in April 2007 in connection with
the sale of the M/V Free Fighter.
Each of the loan agreements also includes affirmative and
negative covenants of the subsidiaries, such as maintenance of
operating accounts, minimum cash deposits and minimum market
values. Each subsidiary is restricted under its respective loan
agreement from incurring additional indebtedness, changing the
vessels flags and distributing earnings without the prior
written consent of the lenders.
We also had outstanding, as of June 30, 2007, two
interest-free loans from our former principal shareholders with
an aggregate principal balance, net of discount which results
from accounting for the loans at their fair value, of
$1,864,000, the proceeds of which were used in previous years to
acquire our vessels. These loans were modified in April 2005 and
October 2005 to provide for a repayment schedule for each loan
of eight equal quarterly installments of $125,000 each in 2006
and 2007, commencing on March 31, 2006, with a balloon
payment of the balance due on each loan on January 1, 2008.
Additionally, the amended terms provide that the loans will
become immediately due and payable in the event that we raise
additional capital of at least $12,500,000. Before these
modifications, the loans were repayable from time to time based
on our available cash flow, and matured on the earlier of the
sale date of the applicable vessel or December 31, 2006. On
January 5, 2007, the shareholder loans due to one of our
former shareholders were sold to The Midas Touch, S.A., a
company controlled by Ion G. Varouxakis, our chairman,
chief executive officer and president and one of our principal
shareholders, for the principal amount then outstanding. The
Midas Touch subsequently sold a portion of this loan to FS
Holdings Limited, also one of our principal shareholders.
We have financed a portion of the purchase price of the M/V
Free Hero and the M/V Free Jupiter, and intend to
partially finance the M/V Free Goddess and any vessels
that we may acquire in the near future. In this regard, with
respect to our initial agreement to purchase four secondhand
drybulk carriers in May 2007, we received a loan commitment from
HSH Nordbank AG and BTMU Capital Corporation with respect to
senior and junior loan facilities of approximately $89,500,000.
HSH Nordbank AG has agreed to make these facilities available to
acquire suitable replacement vessels for two of the cancelled
vessels originally contracted for purchase in May 2007, and in
fact did so in connection with the pending purchase of the
M/V Free
Goddess. Our ability to borrow any undrawn portion of the
aggregate $89,500,000 commitment amount under the HSH Nordbank
AG and BTMU Capital Corporation loans will terminate on
January 15, 2008. We have also amended our existing credit
agreement with Hollandsche Bank Unie N.V. to provide
for an additional $4,000,000 overdraft facility. As of
June 30, 2007, we had also obtained a $14,000,000 principal
amount
non-amortizing,
unsecured loan from FS Holdings Limited, one of our principal
shareholders.
We have notified HSH Nordbank AG, the agent and the senior
lender for the loan facility to acquire the M/V Free
Jupiter, of the grounding incident on September 21,
2007 involving the M/V Free Jupiter and the successful
re-floating of the vessel. HSH Nordbank AG has requested further
updates as the repairs progress, which we have provided and will
continue to provide. As of the date of this prospectus, we have
remained current on all payments due under our HSH Nordbank AG
and BTMU Capital Corporation facilities related to the
acquisition of this vessel and we believe that we remain in
compliance with all of our loan covenants.
HSH Nordbank AG Loan. On June 27, 2007,
we, through our subsidiaries, Adventure Five S.A., Adventure Six
S.A., Adventure Seven S.A. and Adventure Eight S.A, entered into
a senior loan agreement with HSH Nordbank AG that provides for
borrowings of up $68,000,000 for the purpose of financing part
of the cost of the M/V Free Hero, the M/V Free Jupiter
and two other specified secondhand drybulk carriers. The
aggregate amount of the loan may not exceed the lower of
(1) $67,000,000, (2) 59% of the aggregate market value
of certain specified ships and (3) such amount that when
added to the amount drawn down under the BTMU Capital
Corporation junior loan will not exceed $88,500,000. The amount
of the loan may be increased, depending on our aggregate charter
rates and other terms of our charters, so as not to exceed the
lower of (1) $68,000,000, (2) 59% of the aggregate
market value of certain specified ships and (3) such amount
that when added to the amount drawn down under the BTMU Capital
Corporation junior loan will not exceed $89,500,000. Our ability
to borrow any undrawn portion of the $68,000,000 commitment
amount under the loan will terminate on January 15, 2008.
The loan agreement provides for the payment of interest in
61
respect of one month, three month or six month interest periods.
Amounts drawn under the loan agreement generally bear interest
at an annual rate of LIBOR for the interest period plus 1.5% per
annum, provided that the margin decreases to 1.3% per annum
after the prepayment of the loan following a successful offering
(as defined in the loan agreement), and certain mandatory costs.
The loan is payable in 32 installments. Assuming the loan is
drawn down in full, the amount of each of the first to eighth
installments would be $3,125,000, the amount of each of the
ninth to twelfth installments would be $2,250,000, the amount of
each of the thirteenth to thirty-first installments would be
$1,000,000 and the amount of the final installment would be
between $14,000,000 and $15,000,000. The amount of the
installments will be proportionately reduced if we drawdown less
than the full amount available under the loan. The amount of the
installments will also be reduced following prepayment of a
portion of the loan following the offering. The loan agreement
provides for the mandatory prepayment of the BTMU Capital
Corporation junior loan and a portion of the HSH Nordbank AG
senior loan following the offering. Amounts drawn under the loan
agreement will be secured by, among other things, a first
priority mortgage on the applicable vessel, a corporate
guarantee and certain account pledges. The loan agreement also
requires that we enter into interest rate swaps or other
derivative transactions to ensure that a part of the loan is
hedged against interest rate fluctuations.
BTMU Capital Corporation Loan. On
June 27, 2007, we, through our subsidiaries, Adventure Five
S.A., Adventure Six S.A., Adventure Seven S.A and Adventure
Eight S.A, entered into a junior loan agreement with BTMU
Capital Corporation that provides for borrowings of up
$21,500,000 for the purpose of financing part of the cost of the
M/V Free Hero, the M/V Free Jupiter and two other
specified secondhand drybulk carriers. The aggregate amount of
the loan may not exceed the lower of (1) $21,500,000,
(2) 80% of the aggregate market value of certain specified
ships and (3) such amount that when added to the amount
drawn down under the HSH Nordbank AG senior loan will not exceed
$89,500,000. Our ability to borrow any undrawn portion of the
$21,500,000 commitment amount under the loan will terminate on
January 15, 2008. The loan agreement provides for the
payment of interest in respect of one month, three month or six
month interest periods. Amounts drawn under the loan agreement
generally bear interest at an annual rate of LIBOR for the
interest period plus 2.75% per annum, provided that the margin
increases to 3.50% per annum on June 27, 2008 and 4.25% per
annum on June 27, 2009. The loan is due no later than
June 27, 2010, provided, however, that the loan agreement
provides that we will prepay an amount of the loan from the
proceeds of the offering equal to the lower of (1) the
total amount of the loan outstanding and (2) the offering
proceeds. Amounts drawn under the loan agreement will be secured
by, among other things, a second priority mortgage on the
applicable vessel financed under the loan, a second priority
mortgage on each of the M/V Free Destiny and the M/V
Free Envoy, a corporate guarantee and certain second
priority account pledges.
FS Holdings Limited Loan. On May 7, 2007,
FS Holdings Limited, one of our principal shareholders, agreed
to loan us up to $14,000,000 pursuant to an unsecured promissory
note for the purpose of financing the acquisition of four new
vessels (including the M/V Free Hero). The loan has been
fully drawn. The note accrues interest on the then-outstanding
principal balance at the annual rate of 12.0%, payable upon
maturity of the loan. The loan is due at the earlier of
(i) May 7, 2009, (ii) the date of a Capital
Event, which is defined as any event in which we raise
gross proceeds of not less than $40,000,000 in an offering of
our common stock or other equity securities or securities
convertible into or exchangeable for our equity securities or
(iii) the date of acceleration due to default of the
amounts due under the note. The loan is prepayable by us, upon
30 days prior written notice to FS Holdings Limited,
in whole or in part, in increments of not less than $500,000.
Additionally, we have agreed to issue to FS Holdings Limited,
for every $1,000,000 drawn under the loan, 50,000 warrants to
purchase shares of our common stock at an exercise price of
$5.00 per share. Each warrant is exercisable to purchase one
share of our common stock. We have issued 700,000 warrants to
acquire shares of our common stock pursuant to this loan.
Hollandsche Bank Unie N.V. Credit
Facility. We have renegotiated our credit
agreement with Hollandsche Bank Unie N.V. to provide
for an additional $4,000,000 overdraft facility. Our borrowing
limit under this new portion of the overdraft facility will be
reduced to zero on June 1, 2008. The amended credit
agreement also provides that this $4,000,000 overdraft facility
will be repaid from the proceeds of a private placement or a
public offering of equity securities. The maturity date of the
facility may be extended in the discretion of the bank,
depending on our financial condition. The security for this
facility includes,
62
(i) mortgages on the M/V Free Destiny and the M/V
Free Envoy, (ii) pledges of rights and earnings
under time charter contracts, (iii) pledges of rights under
certain insurance policies and (iv) our $500,000 corporate
guarantee.
Quantitative
and Qualitative Disclosure of Market Risk
Interest
Rate Fluctuation
The international drybulk industry is a capital-intensive
industry, requiring significant amounts of investment. Much of
this investment is provided in the form of long-term debt. Our
debt usually contains interest rates that fluctuate with LIBOR.
Increasing interest rates could adversely impact future earnings.
Our interest expense is affected by changes in the general level
of interest rates. As an indication of the extent of our
sensitivity to interest rate changes, an increase of
100 basis points would have decreased our net income and
cash flows in the 2006 fiscal year by approximately $102,041
based upon our debt level during the period in 2006 during which
we had debt outstanding.
The following table sets forth the sensitivity of the loan on
the M/V Free Destiny in U.S. dollars to a
100-basis-point increase in LIBOR during 2007 and 2008 on the
same basis.
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
35,406
|
|
2008
|
|
$
|
24,686
|
|
The following table sets forth the sensitivity of the loan on
the M/V Free Envoy in U.S. dollars to a
100-basis-point increase in LIBOR during 2007 and 2008 on the
same basis.
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
32,269
|
|
2008
|
|
$
|
0
|
|
Please see Liquidity and Capital
Resources and Business Loans for
Vessels for a description of these loans.
Foreign
Exchange Rate Risk
We generate all of our revenues in U.S. dollars, but incur
approximately 11% of our expenses in currencies other than
U.S. dollars. For accounting purposes, expenses incurred in
Euros are converted into U.S. dollars at the exchange rate
prevailing on the date of each transaction. At December 31,
2004, 2005, and 2006, approximately 34.2%, 41.8% and 43.3%,
respectively, of our outstanding accounts payable was
denominated in currencies other than the U.S. dollar
(mainly in the Euro). As an indication of the extent of our
sensitivity to foreign exchange rate changes, an increase of 10%
in the value of other currencies against the dollar would have
decreased our net income and cash flows in the current year by
approximately $5,000 based upon the accounts payable we had
denominated in currencies other than the U.S. dollar during
fiscal 2006.
Off-Balance
Sheet Arrangements
We do not have off-balance sheet arrangements.
63
Contractual
Obligations and Commercial Commitments
The following table summarizes our contractual obligations as of
December 31, 2006 and the effect such obligations and
commitments are expected to have on our liquidity and cash flow
in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
(Dollars in thousands)
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
|
Long-term debt
|
|
$
|
10,382
|
|
|
$
|
4,563
|
|
|
$
|
5,819
|
|
|
$
|
|
|
|
$
|
|
|
Interest on variable rate debt
|
|
|
578
|
|
|
|
386
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
364
|
|
|
|
63
|
|
|
|
145
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
11,324
|
|
|
$
|
5,012
|
|
|
$
|
6,156
|
|
|
$
|
156
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies
The discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
generally accepted accounting principles in the United States of
America, or U.S. GAAP. The preparation of those financial
statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities, revenues
and expenses and related disclosure of contingent assets and
liabilities at the date of our financial statements. Actual
results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are those that reflect significant
judgments or uncertainties, and potentially result in materially
different results under different assumptions and conditions. We
have described below what we believe are our most critical
accounting policies that involve a high degree of judgment and
the methods of their application.
Impairment of long-lived assets. We evaluate
the carrying amounts and periods over which long-lived assets
are depreciated to determine if events or changes in
circumstances have occurred that would require modification to
their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, we review
certain indicators of potential impairment, such as undiscounted
projected operating cash flows, vessel sales and purchases,
business plans and overall market conditions. We determine
undiscounted projected net operating cash flows for each vessel
and compare it to the vessel carrying value. In the event that
impairment occurred, we would determine the fair value of the
related asset and we record a charge to operations calculated by
comparing the assets carrying value to the estimated fair
market value. We estimate fair market value primarily through
the use of third-party valuations performed on an individual
vessel basis.
Depreciation. We record the value of our
vessels at their cost (which includes acquisition costs directly
attributable to the vessel and expenditures made to prepare the
vessel for its initial voyage) less accumulated depreciation. We
depreciate each of our vessels on a straight-line basis over its
estimated useful life, which during fiscal 2006 was estimated to
be 27 years from date of initial delivery from the shipyard
for all of our vessels. We believe that a
27-year
depreciable life is consistent with that of other shipping
companies. During the six months ended June 30, 2007, we
changed the estimated useful life for the M/V Free Fighter
to 30 years. Depreciation is based on cost less the
estimated residual scrap value. Furthermore, we estimate the
residual values of our vessels to be $250 per lightweight ton,
as of December 31, 2006, which we believe is common in the
shipping industry. Prior to July 1, 2005, we had estimated
the residual value of our vessels to be $150 per lightweight
ton. An increase in the useful life of the vessel or in the
residual value would have the effect of decreasing the annual
depreciation charge and extending it into later periods. A
decrease in the useful life of the vessel or in the residual
value would have the effect of increasing the annual
depreciation charge. See Liquidity and Capital
Resources for a discussion of the factors affecting the
actual useful lives of our vessels. However, when regulations
place limitations on the ability of a vessel to trade on a
worldwide basis, the vessels useful life is adjusted to
end at the date such regulations become effective.
Deferred dry-dock and special survey
costs. Our vessels are required to be dry-docked
approximately twice in any
60-month
period for major repairs and maintenance that cannot be
performed while the vessels
64
are operating. The vessels are required to undergo special
surveys every 60 months that occasionally coincide with
dry-docking due dates, in which case the procedures are combined
in a cost-efficient manner. We follow the deferral method of
accounting for special survey and dry-docking costs, whereby
actual costs incurred are deferred and amortized on a straight
line basis over the period through the date the next dry-docking
or special survey becomes due. If a special survey or
dry-docking is performed prior to the scheduled date, the
remaining unamortized balances are immediately written off.
Costs capitalized as part of the dry-dock include all work
required by the vessels classification societies, which
may consist of actual costs incurred at the dry-dock yard,
including but not limited to, dry-dock dues and general services
for vessel preparation, coating of water ballast tanks, cargo
holds, steelworks, piping works and valves, machinery work and
electrical work.
All work that may be carried out during dry-dock time for
routine maintenance according to our planned maintenance program
and not required by the vessels classification societies
are not capitalized but expensed as incurred. Unamortized
dry-docking costs of vessels that are sold are written off and
included in the calculation of resulting gain or loss in the
year of the vessels sale.
Accounting for revenues and expenses. Revenues
and expenses resulting from each time charter are accounted for
on an accrual basis. Time charter revenues are recognized on a
straight-line basis over the rental periods of such signed
charter agreements, as service is performed, except for loss
generating time charters, in which case the loss is recognized
in the period when such loss is determined. Time charter
revenues received in advance are recorded as a liability until
charter service is rendered.
Vessel operating expenses are accounted for on an incurred
basis. Certain vessel operating expenses payable by us are
estimated and accrued at period end.
We generally enter into profit-sharing arrangements with
charterers, whereby we may receive additional income equal to an
agreed upon percentage of net earnings earned by the charterer,
where those earnings are over the base rate of hire, to be
settled periodically, during the term of the charter agreement.
Revenues generated from profit-sharing arrangements are
recognized based on the amounts settled for a respective period.
Insurance claims. Insurance claims comprise
claims submitted
and/or
claims in the process of compilation or submission (claims
pending) relating to hull and machinery or protection and
indemnity insurance coverage. The insurance claim recoveries
receivable are recorded, net of any deductible amounts, at the
time when the fixed asset suffers the insured damages and the
damage is quantified by the insurance adjusters
preliminary report or when crew medical expenses are incurred
and management believes that recovery of an insurance claim is
probable. The non-recoverable amounts are classified as
operating expenses in our statement of operations. Probability
of recovery of a receivable is determined on the basis of the
nature of the loss or damage covered by the policy, the history
of recoverability of such claims in the past and the receipt of
the adjusters preliminary report on the quantification of
the loss. We pay the vendors involved in remedying the insured
damage, submit claim documentation and upon collection offset
the receivable. The classification of insurance claims (if any)
into current and non-current assets is based on
managements expectations as to their collection dates.
New
Accounting Policy
Effective January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes.
FIN 48 clarifies the accounting for income taxes recognized
in financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 requires that we determine whether the benefits of
our tax positions are more likely than not of being sustained
upon audit based on the technical merits of the tax position.
The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods,
65
and disclosure. We did not have any unrecognized tax benefits
and there was no effect on the financial condition or results of
operations as a result of implementing FIN 48.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measures. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and
enhances disclosures about fair value measures required under
other accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair
value. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. We are currently
evaluating the impact that the adoption of
SFAS No. 157 will have on our future consolidated
financial statements.
66
THE
INTERNATIONAL DRYBULK SHIPPING INDUSTRY
The information and data in this section relating to the
international drybulk shipping industry has been provided by
Maritime Strategies International Ltd., or MSI, and is taken
from MSI databases and other sources available in the public
domain. MSI has advised us that it accurately describes the
international drybulk shipping industry, subject to the
availability and reliability of the data supporting the
statistical and graphical information presented. MSIs
methodologies for collecting information and data, and therefore
the information discussed in this section, may differ from those
of other sources, and does not reflect all or even necessarily a
comprehensive set of the actual transactions occurring in the
drybulk shipping industry.
Introduction
The global shipping industry provides seaborne transportation
for related industries on an international scale. Generally it
is divided into the following sectors: (i) bulk
shipping, which consists of drybulk vessels for the movement of
commodities such as coal and iron ore and tankers which carry
both crude oil and refined products in liquid bulk;
(ii) containerships, which carry intermediate or
manufactured goods in standardized boxes and
(iii) specialized vessels, such as gas carriers,
refrigerated cargo ships and car carriers which service a
particular niche trade.
The demand for these different sectors varies, but generally is
related to global economic growth and trading patterns between
sources of demand and supply for the industry that they serve.
In recent years all sectors of shipping have witnessed increases
in demand as a result of rapid industrialization of Asian
economies, particularly China. This has lead to a large increase
in the trade of both bulk commodities and finished/semi-finished
exports. Between
2001-2006
global trade in seaborne oil (including both crude and refined
products) has increased by a compound annual growth rate (CAGR)
of 5%, trade in drybulk grew with a CAGR of 6% and containerized
trade by a CAGR of 13%.
GROWTH
IN BULK AND CONTAINERIZED TRADE
Source: MSI
Note: Containerized trade includes primary port-to-port and
transshipment. Drybulk includes iron ore, coal, grain and minor
bulks.
67
At the same time strong global economic growth has seen a
continued rise in the trading volumes of specialized trade, as
shown below:
GROWTH
IN SPECIALIZED TRADE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Trade
|
|
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Chemicals (MnT)
|
|
|
|
|
|
|
101.2
|
|
|
|
107.6
|
|
|
|
112.5
|
|
|
|
117.5
|
|
|
|
122.2
|
|
|
|
125.4
|
|
|
|
134.9
|
|
|
|
144.4
|
|
|
|
|
Growth
|
|
|
|
9
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
8
|
%
|
|
|
7
|
%
|
LPG (MnT)
|
|
|
|
|
|
|
61.06
|
|
|
|
61.86
|
|
|
|
61.26
|
|
|
|
62.39
|
|
|
|
66.53
|
|
|
|
68.68
|
|
|
|
71.28
|
|
|
|
74.30
|
|
|
|
|
Growth
|
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
7
|
%
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Refrigerated (MnT)
|
|
|
|
|
|
|
21.72
|
|
|
|
22.86
|
|
|
|
23.39
|
|
|
|
23.59
|
|
|
|
24.79
|
|
|
|
25.83
|
|
|
|
26.33
|
|
|
|
26.90
|
|
|
|
|
Growth
|
|
|
|
N/A
|
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
New Cars (Mn Units)
|
|
|
|
|
|
|
8.15
|
|
|
|
8.57
|
|
|
|
8.19
|
|
|
|
8.81
|
|
|
|
9.21
|
|
|
|
10.16
|
|
|
|
10.41
|
|
|
|
11.48
|
|
|
|
|
Growth
|
|
|
|
2
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
8
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
|
|
2
|
%
|
|
|
10
|
%
|
Source: MSI
Drybulk
Carrier Employment Demand
The international drybulk shipping industry provides seaborne
transportation of drybulk commodities for related industries.
The most important of these commodities are iron ore, coal and
grains which together account for 75% of total trade. Other key
cargoes, commonly referred to as minor bulks, include
agricultural products (e.g. fertilizers), steel products, forest
products, metals, cement and a wide range of other minerals.
Shipping companies provide seaborne transportation to customers
that include power utilities, steelmakers, grain houses,
commodity traders and government agencies. In recent years there
has been a substantial increase in the use of commodities
transported in drybulk. In 2006, the amount of cargo transported
by the industry was estimated to have exceeded 2.4 billion
metric tons - an increase of over 8% over the previous year and
almost 40% since 2000.
The amount of cargo transported in drybulk carriers is governed
by demand for the various commodities, which is affected by
international economic activity, regional imbalances between
domestic production and consumption, commodity prices and
inventories. In addition to the volume of cargo, drybulk carrier
demand is driven by the average distance required to transport
it from commodity-producing locations to commodity-consuming
destinations. Demand can be expressed in
ton-miles,
measured as the product of (a) the amount of cargo
transported and (b) the distance over which it is
transported.
The mile component is generally the most variable element of
ton-mile
demand. Seaborne trading distances for commodities are
determined principally by the location of production and their
efficient distribution for processing and consumption. For
instance, a ton of ore carried from Brazil to China generates
roughly 2 to 3 times the demand for sea transport as the same
amount of ore shipped from Australia. Trading patterns are
sensitive both to major geopolitical events and to small shifts,
imbalances and disruptions in all stages of production and
processing through to end-use. Seaborne transportation distances
are also influenced by infrastructural factors, such as the
availability of canal shortcuts and capacity at ports and
inland distribution. The following chart outlines seaborne trade
in drybulk commodities from 1980 to 2006.
68
SEABORNE
DRYBULK TRADE
Source: MSI
Seaborne drybulk trade has grown by a compound annual rate of 4%
per annum since 1980, but in the last 5 years growth has
risen to over 6% per annum. The acceleration in trade in recent
years has been driven primarily by China, whose economic growth
averaged 10.3% per annum from
2003-2006.
Chinas entry into the World Trade Organization in 2001
caused a large increase in investment funds flowing into the
country as foreign manufacturers sought to benefit from lower
wage costs and the future prospects of a large consumer market.
Chinas growth helped foster a wider rebound in the other
Asian economies, particularly Japan, Korea and Taiwan. As a
result there has been substantial growth of drybulk trade to and
from the Pacific region, for a number of key commodities.
Steel industry related trades, mainly iron ore, metallurgical
coal, finished steel and intermediate steel products, account
for about 50% of the seaborne drybulk trade. The table below
shows the main drybulk commodities and the main segments of the
drybulk carrier fleet they are transported by.
PRINCIPAL
DRYBULK TRADE AND VESSELS CARRIED BY
|
|
|
|
|
|
|
|
|
|
|
|
|
Seaborne Trade 2006
|
|
|
Percent of Seaborne
|
|
|
Typical Drybulk Carrier
|
Commodity
|
|
(Million Tonnes)
|
|
|
Drybulk Trade
|
|
|
Carried By;
|
|
Iron ore
|
|
|
728.9
|
|
|
|
30
|
%
|
|
Capesize, Panamax
|
Meturlurgical Coal
|
|
|
211.3
|
|
|
|
9
|
%
|
|
Capesize, Panamax
|
Thermal Coal
|
|
|
579.3
|
|
|
|
24
|
%
|
|
Capesize, Panamax
|
Grains & soybeans
|
|
|
306.3
|
|
|
|
13
|
%
|
|
Panamax, Handymax, Handysize
|
Minor Bulks
|
|
|
582.3
|
|
|
|
24
|
%
|
|
Handymax, Handysize
|
Total
|
|
|
2408.1
|
|
|
|
100
|
%
|
|
|
Source: MSI
69
Steel &
Iron Ore
Chinese growth has been very steel-intensive, driven by
construction and underpinned by large government infrastructure
projects. Chinese production of crude steel has increased by a
compound annual rate of 23% per annum from 2000 to 2006 to
430 million tons. The strength of Chinese steel consumption
has also contributed to an export-led revival in other steel
producing nations such as Japan and Korea.
STEEL
PRODUCTION (MILLION METRIC TONNES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2001-2006
|
|
|
North America
|
|
|
135.4
|
|
|
|
119.9
|
|
|
|
122.9
|
|
|
|
126.2
|
|
|
|
134
|
|
|
|
128
|
|
|
|
132
|
|
|
|
1.9
|
%
|
Western Europe
|
|
|
163.4
|
|
|
|
158.5
|
|
|
|
158.7
|
|
|
|
161
|
|
|
|
169.1
|
|
|
|
165
|
|
|
|
173
|
|
|
|
1.8
|
%
|
Former Soviet Union
|
|
|
98.49
|
|
|
|
99.62
|
|
|
|
101.1
|
|
|
|
106.2
|
|
|
|
113.1
|
|
|
|
113
|
|
|
|
119
|
|
|
|
3.7
|
%
|
China
|
|
|
127.2
|
|
|
|
150.9
|
|
|
|
182.2
|
|
|
|
222.4
|
|
|
|
280.5
|
|
|
|
356
|
|
|
|
430
|
|
|
|
23.3
|
%
|
Japan
|
|
|
106.4
|
|
|
|
102.9
|
|
|
|
107.7
|
|
|
|
110.5
|
|
|
|
112.7
|
|
|
|
112
|
|
|
|
116
|
|
|
|
2.5
|
%
|
Other Asia
|
|
|
98.2
|
|
|
|
100.2
|
|
|
|
104.9
|
|
|
|
109.5
|
|
|
|
116.8
|
|
|
|
122
|
|
|
|
131
|
|
|
|
5.5
|
%
|
Rest of the World
|
|
|
118.6
|
|
|
|
118.5
|
|
|
|
126.3
|
|
|
|
134
|
|
|
|
142.4
|
|
|
|
142
|
|
|
|
150
|
|
|
|
4.9
|
%
|
Total
|
|
|
848
|
|
|
|
850
|
|
|
|
904
|
|
|
|
970
|
|
|
|
1069
|
|
|
|
1139
|
|
|
|
1252
|
|
|
|
8.0
|
%
|
Source: IISI/MSI
Although China has vast domestic reserves of both iron ore and
coking (or metallurgical) coal, its domestic reserves of iron
ore are poor in quality (i.e. low in iron content) and are
normally mixed with high quality imported ore. As a result, the
rapid development of steel production has had a significant
impact on Chinese iron ore imports, which have grown by a
compound annual rate of nearly 30% per annum over the last
6 years.
IRON
ORE IMPORTS (MILLION METRIC TONNES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(e)
|
|
|
Growth 2000-2006
|
|
|
Western Europe
|
|
|
151
|
|
|
|
131
|
|
|
|
136
|
|
|
|
135
|
|
|
|
150
|
|
|
|
140
|
|
|
|
148
|
|
|
|
0.2
|
%
|
China
|
|
|
70
|
|
|
|
92
|
|
|
|
111
|
|
|
|
148
|
|
|
|
208
|
|
|
|
275
|
|
|
|
326
|
|
|
|
29.2
|
%
|
Japan
|
|
|
131
|
|
|
|
125
|
|
|
|
132
|
|
|
|
132
|
|
|
|
135
|
|
|
|
132
|
|
|
|
134
|
|
|
|
0.4
|
%
|
Other Asia
|
|
|
74
|
|
|
|
79
|
|
|
|
78
|
|
|
|
79
|
|
|
|
80
|
|
|
|
85
|
|
|
|
86
|
|
|
|
2.5
|
%
|
Rest of the World
|
|
|
75
|
|
|
|
64
|
|
|
|
71
|
|
|
|
82
|
|
|
|
80
|
|
|
|
80
|
|
|
|
99
|
|
|
|
4.7
|
%
|
Total
|
|
|
502
|
|
|
|
492
|
|
|
|
528
|
|
|
|
577
|
|
|
|
653
|
|
|
|
713
|
|
|
|
794
|
|
|
|
8.0
|
%
|
Source: UNCTAD/MSI
Australia and Brazil together account for nearly two thirds of
global iron ore exports. Although both Australia and Brazil have
seen strong demand from China, Australia continues to benefit
the most, accounting for 40% of total Chinese iron ore imports
in 2006. However, although Brazilian iron ore exports to China
account for a smaller percentage of the total (23% in 2006), the
contribution to
ton-mile
demand has been greater due to the greater distances between
origin and destination. In 2006 Brazils exports to China
grew by 40% to 76 million metric tons, or MnT, while
Australias only grew by 13%, hence there was a larger
increase in ton mile demand than the individual Chinese import
number would suggest. India is another major exporter of iron
ore, accounting for 23% of Chinese imports in 2006. Unlike
Australia and Brazil who tend to export primarily in the larger
Capesize vessels, much of Indias exports are in the
smaller Panamax and Handymax vessel sizes.
70
IRON
ORE EXPORTS (MILLION METRIC TONNES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(e)
|
|
|
Growth 2000-2006
|
|
|
Australia
|
|
|
165
|
|
|
|
175
|
|
|
|
174
|
|
|
|
197
|
|
|
|
221
|
|
|
|
239
|
|
|
|
248
|
|
|
|
7.0
|
%
|
Brazil
|
|
|
160
|
|
|
|
156
|
|
|
|
170
|
|
|
|
184
|
|
|
|
201
|
|
|
|
223
|
|
|
|
262
|
|
|
|
8.6
|
%
|
India
|
|
|
33
|
|
|
|
41
|
|
|
|
55
|
|
|
|
57
|
|
|
|
63
|
|
|
|
81
|
|
|
|
90
|
|
|
|
18.2
|
%
|
Africa
|
|
|
33
|
|
|
|
34
|
|
|
|
35
|
|
|
|
34
|
|
|
|
36
|
|
|
|
38
|
|
|
|
27
|
|
|
|
3.0
|
%
|
Rest of the World
|
|
|
115
|
|
|
|
102
|
|
|
|
110
|
|
|
|
123
|
|
|
|
123
|
|
|
|
135
|
|
|
|
167
|
|
|
|
6.4
|
%
|
Total
|
|
|
506
|
|
|
|
507
|
|
|
|
544
|
|
|
|
595
|
|
|
|
644
|
|
|
|
717
|
|
|
|
794
|
|
|
|
7.8
|
%
|
Source: UNCTAD/MSI
Coal
Asias rapid industrial development has also contributed to
strong demand for coal, which accounted for 37% of the total
growth of seaborne bulk trade between 2000 and 2006. Coal is
usually divided into two categories: thermal coal (or steam
coal), used in power stations, and metallurgical coal (coking
coal) used as an input by the steel industry.
Expansion in air-conditioned office and factory space, along
with industrial use, has raised demand for electricity, of which
nearly half is generated from coal-fired plants, thus increasing
demand for thermal coal. In addition, Japans domestic
nuclear power generating industry has suffered from safety
problems in recent years, resulting in the temporary closure of
a number of nuclear power reactors and leading to increased
demand for oil, gas and coal-fired power generation. Furthermore
the high cost of oil and gas has lead to increasing development
of coal fired electricity plants across the world, especially in
Asia. Thermal coal represents the majority of the total coal
trade (73% in 2006) and by itself accounted for 31% of the
growth of total seaborne drybulk trade between 2000 and 2006.
Metallurgical, or coking coal, accounted for 9% of seaborne
trade in 2006. Future prospects are heavily tied to the steel
industry. It is used within the blast furnace to impart its
carbon into the iron, giving the final steel product more
strength and flexibility. Because coking coal is of higher
quality than thermal coal (i.e. more carbon and less
impurities), its price is higher and its trade more volatile.
COAL
IMPORTS (MILLION METRIC TONNES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Growth 2000-2006
|
|
|
Western Europe
|
|
|
184
|
|
|
|
198
|
|
|
|
190
|
|
|
|
206
|
|
|
|
221
|
|
|
|
218
|
|
|
|
233
|
|
|
|
4.0
|
%
|
Japan
|
|
|
145
|
|
|
|
156
|
|
|
|
159
|
|
|
|
166
|
|
|
|
179
|
|
|
|
181
|
|
|
|
177
|
|
|
|
3.3
|
%
|
Other Asia
|
|
|
21
|
|
|
|
25
|
|
|
|
39
|
|
|
|
45
|
|
|
|
57
|
|
|
|
66
|
|
|
|
80
|
|
|
|
24.8
|
%
|
Rest of the World
|
|
|
256
|
|
|
|
273
|
|
|
|
278
|
|
|
|
305
|
|
|
|
317
|
|
|
|
348
|
|
|
|
371
|
|
|
|
6.4
|
%
|
Total
|
|
|
606
|
|
|
|
653
|
|
|
|
666
|
|
|
|
722
|
|
|
|
774
|
|
|
|
812
|
|
|
|
861
|
|
|
|
6.0
|
%
|
Source: McCloskeys/MSI
Australia is the worlds dominant exporter of coal,
accounting for 27% of global exports in 2006. However, Indonesia
has increased its exports in recent years, becoming a good
source for business for Panamax and Handymax vessels. Growth in
Indonesian exports has been very strong with a compound annual
growth of 20.8% between 2000 and 2006.
71
COAL
EXPORTS (MILLION METRIC TONNES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Growth 2000-2006
|
|
|
North America
|
|
|
84
|
|
|
|
73
|
|
|
|
60
|
|
|
|
64
|
|
|
|
70
|
|
|
|
73
|
|
|
|
72
|
|
|
|
2.5
|
%
|
Colombia
|
|
|
36
|
|
|
|
38
|
|
|
|
35
|
|
|
|
44
|
|
|
|
51
|
|
|
|
55
|
|
|
|
58
|
|
|
|
8.6
|
%
|
South Africa
|
|
|
70
|
|
|
|
69
|
|
|
|
70
|
|
|
|
70
|
|
|
|
68
|
|
|
|
74
|
|
|
|
68
|
|
|
|
0.6
|
%
|
China
|
|
|
55
|
|
|
|
91
|
|
|
|
86
|
|
|
|
91
|
|
|
|
81
|
|
|
|
72
|
|
|
|
63
|
|
|
|
2.4
|
%
|
Indonesia
|
|
|
57
|
|
|
|
66
|
|
|
|
73
|
|
|
|
89
|
|
|
|
105
|
|
|
|
129
|
|
|
|
176
|
|
|
|
20.8
|
%
|
Australia
|
|
|
187
|
|
|
|
194
|
|
|
|
204
|
|
|
|
215
|
|
|
|
228
|
|
|
|
233
|
|
|
|
236
|
|
|
|
4.0
|
%
|
Poland
|
|
|
21
|
|
|
|
22
|
|
|
|
22
|
|
|
|
20
|
|
|
|
19
|
|
|
|
19
|
|
|
|
15
|
|
|
|
5.0
|
%
|
Rest of World
|
|
|
97
|
|
|
|
100
|
|
|
|
114
|
|
|
|
130
|
|
|
|
153
|
|
|
|
158
|
|
|
|
172
|
|
|
|
10.0
|
%
|
Total
|
|
|
606
|
|
|
|
653
|
|
|
|
666
|
|
|
|
722
|
|
|
|
774
|
|
|
|
812
|
|
|
|
861
|
|
|
|
6.0
|
%
|
Source: MSI/McCloskeys
Grains
Wheat and coarse grains are primarily used for direct human
consumption or as feed for livestock. International trade in
grains fluctuates considerably, as price volatility, government
interventionism and weather conditions strongly impact trade
volumes. In 2006, adverse weather impacted wheat and corn
harvests in many of the worlds major growing regions and
production fell roughly 2% from 2005, causing world exports to
fall an estimated 3%. However, soybean trade has risen rapidly
in recent years as demand for animal feed and vegetable oil has
increased. Despite the recent declines in trade volumes, demand
growth for wheat and course grains is fundamentally linked in
the long term to population growth and rising per capita income.
With Asia experiencing rapid economic growth and increasing
standards of living, it is expected that meat consumption will
increase, leading to rising demand for animal feed.
WHEAT
AND COARSE GRAIN IMPORTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(e)
|
|
|
Growth 2000-2006
|
|
|
Latin America
|
|
|
41
|
|
|
|
38
|
|
|
|
37
|
|
|
|
37
|
|
|
|
38
|
|
|
|
44
|
|
|
|
45
|
|
|
|
1.5
|
%
|
Europe/Former Soviet Union
|
|
|
21
|
|
|
|
26
|
|
|
|
32
|
|
|
|
31
|
|
|
|
19
|
|
|
|
18
|
|
|
|
19
|
|
|
|
1.1
|
%
|
Africa
|
|
|
39
|
|
|
|
39
|
|
|
|
40
|
|
|
|
35
|
|
|
|
44
|
|
|
|
45
|
|
|
|
40
|
|
|
|
0.2
|
%
|
Middle East
|
|
|
28
|
|
|
|
28
|
|
|
|
26
|
|
|
|
23
|
|
|
|
27
|
|
|
|
30
|
|
|
|
27
|
|
|
|
1.1
|
%
|
Japan
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
0.9
|
%
|
Other Asia
|
|
|
34
|
|
|
|
34
|
|
|
|
35
|
|
|
|
35
|
|
|
|
34
|
|
|
|
36
|
|
|
|
36
|
|
|
|
0.9
|
%
|
Rest of World
|
|
|
15
|
|
|
|
19
|
|
|
|
17
|
|
|
|
17
|
|
|
|
24
|
|
|
|
16
|
|
|
|
21
|
|
|
|
5.7
|
%
|
Total
|
|
|
204
|
|
|
|
210
|
|
|
|
212
|
|
|
|
202
|
|
|
|
211
|
|
|
|
214
|
|
|
|
212
|
|
|
|
0.6
|
%
|
Source: USDA/MSI
International trade in grains is dominated by 4 key exporting
regions: (i) North America, (ii) Latin America,
(iii) Oceania and (iv) Europe, including the Former
Soviet Union, which together account for over 90% of global
exports. Large importers are typically North Africa (Egypt), the
Middle East, and more recently, India.
72
WHEAT
AND COARSE GRAIN EXPORTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(e)
|
|
|
Growth 2000-2006
|
|
|
North America
|
|
|
104
|
|
|
|
99
|
|
|
|
80
|
|
|
|
105
|
|
|
|
98
|
|
|
|
108
|
|
|
|
108
|
|
|
|
0.6
|
%
|
Latin America
|
|
|
30
|
|
|
|
26
|
|
|
|
24
|
|
|
|
29
|
|
|
|
30
|
|
|
|
28
|
|
|
|
34
|
|
|
|
2.2
|
%
|
Europe/Former Soviet Union
|
|
|
37
|
|
|
|
47
|
|
|
|
67
|
|
|
|
30
|
|
|
|
47
|
|
|
|
54
|
|
|
|
49
|
|
|
|
4.8
|
%
|
Oceania
|
|
|
22
|
|
|
|
22
|
|
|
|
13
|
|
|
|
25
|
|
|
|
19
|
|
|
|
22
|
|
|
|
13
|
|
|
|
8.5
|
%
|
Rest of World
|
|
|
15
|
|
|
|
19
|
|
|
|
29
|
|
|
|
24
|
|
|
|
18
|
|
|
|
11
|
|
|
|
13
|
|
|
|
2.6
|
%
|
Total
|
|
|
209
|
|
|
|
213
|
|
|
|
215
|
|
|
|
213
|
|
|
|
213
|
|
|
|
223
|
|
|
|
217
|
|
|
|
0.7
|
%
|
Source: USDA/MSI
Minor
Bulks
Trade in minor bulks constituted approximately 24% of total
seaborne trade for drybulk carriers in 2006. The table below
shows that compound annual growth for all minor bulks was 4.2%,
but those related to the steel and construction industries have
grown even faster. Steel scrap trade has grown the fastest as
scrap is the key input for steel makers using the electric
arc furnace means of production. The trade for these minor
bulks is geographically widespread but the Middle East has been
a key importer of construction inputs in recent years.
SEABORNE
TRADE IN SELECTED MINOR BULKS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound Annual
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(e)
|
|
|
Growth 2000-2006
|
|
|
Steel Scrap
|
|
|
35
|
|
|
|
35
|
|
|
|
40
|
|
|
|
49
|
|
|
|
56
|
|
|
|
58
|
|
|
|
63
|
|
|
|
10.0
|
%
|
Steel Products
|
|
|
184
|
|
|
|
193
|
|
|
|
205
|
|
|
|
211
|
|
|
|
234
|
|
|
|
238
|
|
|
|
256
|
|
|
|
5.7
|
%
|
Cement
|
|
|
46
|
|
|
|
46
|
|
|
|
45
|
|
|
|
47
|
|
|
|
60
|
|
|
|
62
|
|
|
|
65
|
|
|
|
6.0
|
%
|
Bauxite
|
|
|
53
|
|
|
|
51
|
|
|
|
55
|
|
|
|
63
|
|
|
|
67
|
|
|
|
70
|
|
|
|
76
|
|
|
|
6.2
|
%
|
Total Minor Bulks
|
|
|
456
|
|
|
|
454
|
|
|
|
463
|
|
|
|
487
|
|
|
|
534
|
|
|
|
565
|
|
|
|
582
|
|
|
|
4.2
|
%
|
Source: MSI
Drybulk
Carrier Supply
The supply of drybulk shipping capacity is measured by the
amount of suitable deadweight tons available to transport cargo.
This depends on the aggregate tons of the existing world fleet,
deliveries of newbuildings, scrapping of older vessels, and the
number of vessels undergoing maintenance, repairs, inspection,
or otherwise unavailable for use. The decision to order
newbuildings or scrap older vessels is influenced by many
factors, including prevailing and expected charter rates,
newbuilding and scrap prices, and availability of delivery dates
and government and industry regulation of seaborne
transportation practices.
Port and inland infrastructure developments in key load and
discharge areas (particularly for iron ore and coal) have
struggled to keep pace with strong growth in seaborne trade of
drybulk commodities from 2003 to 2006. This has resulted in
escalating port congestion and increased the time spent by
vessels waiting to berth. As the time required to complete a
single vessel voyage has increased, the number of vessels
required has also risen, contributing to higher freight rates.
Newbuildings
In general, it takes from 18 to 36 months from the date of
placing a newbuilding contract to the date a shipowner takes
delivery of the vessel. During the last three to four years, the
high levels of vessel orders have resulted in an average
delivery lag of about three years and in some instances even
longer. Vessels are constructed at shipyards of varying size and
technical sophistication. Bulk carriers are generally considered
to
73
be the least technically sophisticated vessels (although there
are many clear exceptions to this rule) and as such tend to be
those where the shipyards can extract the smallest margin for
their construction.
As of June 2007, the total drybulk orderbook stood at
124.6 million tons representing 34% of the existing fleet.
The existing orderbook is expected to be delivered over the next
3-4 years.
Scrapping
Scrapping is a function of the freight market and the size of
the fleet which is over-aged, usually considered to
include vessels 25 years or older. The scrap age of a
vessel also depends on its size, as the scrap age of smaller
vessels like Handysize and Handymax carriers tends to be higher
than the scrap age of larger vessels like Capesize carriers. At
times of high freight rates, scrapping is typically decreased
since shipowners prefer to extend the useful life of their
vessels. Scrapping is carried out by teams of breakers with
blow-torches, oxy-acetylene steel cutters and other tools once
the vessel has been purposefully beached. The graph below shows
that in recent years the average age at which vessels are
scrapped has increased dramatically. It also shows that smaller
vessels tend to have considerably longer useful lives.
AVERAGE
AGE OF VESSELS SCRAPPED
Source: LR Fairplay/MSI
Freight
Rates and Vessel Earnings
Freight is the primary source of revenue to a shipping company.
Freight is paid when a customer charters a vessel for a
specified period of time or to carry a specific cargo. The
freight rate of transporting drybulk commodities can be volatile
and is related to demand for and supply of drybulk carriers. The
charter market is highly competitive as shipping companies
compete on the offered freight rate, the location, technical
specification and quality of the vessel and the reputation of
the vessels manager. Typically, the contractual agreement
between the shipping company and the customer, known as
charterparty, is based on standard industry terms.
A vessel is usually chartered under a voyage charter or a time
charter. A voyage charter is a contract to carry a specific
cargo between two ports for an agreed rate per ton of cargo
carried. Under voyage charters, the shipowner pays voyage
expenses such as port, canal and fuel costs. A time charter is a
contract to charter
74
a vessel for an agreed period of time at a set daily rate. Under
time charters, the charterer pays for the voyage expenses and
decides what ports the vessel should go. A spot charter is a
voyage charter or a time charter that is fixed for just one
trip. A period charter is a longer term time charter. A vessel
can also carry cargoes on behalf of its own owner, like in the
case of a steel mill, or, in case its owner has secured a cargo
transportation contract (Contract of Affreightment,
or, COA).
The costs of running a drybulk carrier are typically broken down
into operating and capital costs.
Operating costs are concerned with the day-to-day operations of
the vessel typically crewing, lubes and stores,
repair and maintenance, insurance and administration. Under
voyage charters, the shipowner pays all operating costs, whereas
under time charters the charterer pays for some or all of these
costs. Capital costs are the repayments on the mortgage, loan,
or other financial structure under which the vessel was
purchased. These are entirely borne by the shipowner. The
average operating and capital cost floor tends to
influence freight rates in the industry all other
things being equal, a higher cost floor will lead to higher
freight rates. As purchase prices of drybulk carriers have
increased in recent years, so have capital costs and hence the
cost floor for freight rates.
Vessel
Values
Newbuilding
Prices
The price of newbuildings is linked to the level of demand for
and supply of shipyard space, the cost of steel and labor and
other factors. Since a shipyard can generally build most types
of ships, the price for drybulk carriers is influenced by the
orderbook of all ship types. High newbuilding ordering activity
in a particular sector is typically driven by high freight rates
in that sector.
Prices for the construction of new vessels have increased in
recent years and have been sustained by an environment of high
freight rates in all shipping sectors which has spurred ordering
of all ship types, limiting the availability of shipyard berths
and pushing up the prices of drybulk carriers. An increase in
the number of tankers ordered in the second quarter, was
responsible for the initial rebound of new building prices in
2006. Also, a large improvement in drybulk freight rates
resulted in contracting in that sector. Since Q1 2006, capesize
newbuilding prices have risen 43% and rose 12% in Q2 2007 alone.
DRYBULK
CARRIER NEWBUILDING PRICES
Source: MSI
75
Sale &
Purchase Market
The second hand, or sale and purchase, market for drybulk
carriers has witnessed a large rise in prices of secondhand
drybulk carriers in the last few years as shipowners seek to
increase the size of their fleets to benefit from the rise in
trade. Prices tend to follow the direction of the freight market
and are also heavily influenced by newbuilding price
developments.
SECONDHAND
MARKET LIQUIDITY
Source: LR Fairplay/MSI
DRYBULK
CARRIER 5 YEAR OLD PRICES
Source: MSI
76
Scrap
Prices
The scrap value of a vessel depends on the local steel price,
the quality and the amount of steel recoverable from the vessel
(lightweight displacement tons, or,
LDT). Since the beginning of 2004, the scrap price
per ton has fluctuated between $300 and $400 per ton of steel.
DRYBULK
CARRIER SCRAP PRICES
Source: MSI
SECTORAL
ANALYSIS
While there is no standard definition, drybulk carriers are
commonly categorized into the following size sectors:
DRYBULK
CARRIER SEGMENTS: FLEET AND ORDERBOOK
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Fleet
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Orderbook
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Segment
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Size Range (Dwt)
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Total
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Share (%)
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Total (Mn Dwt)
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Share (%)
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Mn Dwt
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% of Fleet
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Handysize
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10,000 to 39,999
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2562
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42%
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69.2
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19%
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10.3
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15%
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Handymax
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40,000 to 59,999
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1399
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23%
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67.4
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18%
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26.8
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40%
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Panamax
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60,000 to 79,999
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1312
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21%
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93.7
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25%
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9.5
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10%
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Capesize
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80,000 and above
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887
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14%
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139.1
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38%
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78.0
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56%
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Total
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10,000 and above
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6160
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100%
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369.4
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100%
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124.6
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34%
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Source: LR Fairplay/MSI
The table above provides information concerning the number of
vessels and deadweight capacity of the Handysize and Handymax
sectors, the sectors in which we operate.
The
Handymax Sector
The Handymax sector is the smallest sector of the drybulk
carrier fleet, accounting for 18% of fleet deadweight capacity
as of June 1, 2007. This sector, along with the Handysize
sector, has the greatest diversity
77
in cargoes and routes. The size and design (vessels are usually
equipped with their own cranes, and are referred to as
geared) of Handymax vessels makes them extremely
versatile and able to access smaller ports where size
restrictions or inadequate load and discharge facilities would
exclude larger vessels.
Trading patterns and cargoes for Handymax and Handysize vessels
are highly diversified. Typical cargoes include wheat and coarse
grains, agricultural bulk commodities such as sugar and rice,
fertilizers, minor ores and minerals, steel products and scrap,
forest products, and semi-processed commodities such as coke and
cement. In addition, Handymax vessels are employed on a limited
number of low-volume short-haul iron ore and coal trades, as
well as those where port size or infrastructure constraints
require smaller, geared vessels.
Handymax fleet ownership is highly fragmented, with 467
different owner operators of the 1,399 vessels in the world
Handymax fleet: an average of just 3 vessels per company.
As of June 1, 2007, 22 companies controlled 10 ships
or more (at an average of 17 ships per company), amounting to
only 27% of the fleet. Another 50 companies owned 5 to 9
ships (at an average of 6.7 ships per company) or 24% of the
fleet. Two hundred seven companies control 1 vessel each,
accounting collectively for 15% of the fleet. The top 10 owners
controlled 17% of the fleet, while 26% was controlled by the top
20 owners.
The chart below outlines the Handymax fleet by year of build,
including scheduled new deliveries. The chart indicates that at
June 1, 2007, approximately 5% of the fleets existing
deadweight capacity was accounted for by vessels built before
1980, and these may be considered likely candidates for
scrapping in the near future. Vessels built since 2000
constituted 44% of the existing fleet. The average age of the
fleet at June 1, 2007 was 11.7 years.
The orderbook at the beginning of June 2007 amounted to
26.8 million dwt or 40% of the existing fleet.
HANDYMAX
FLEET BY YEAR OF BUILD AND SCHEDULED DELIVERIES
Source:
LR Fairplay/MSI
Handymax earnings increased sharply during the second half of
2003, in line with the larger bulk carrier sectors, and reached
record peaks in 2004, with average spot earnings for modern
45,000 dwt vessels exceeding $38,000 per day in March 2004.
During the second half of 2004, the Handymax freight market
underwent a revival, with earnings briefly surpassing $32,000
per day once again in late November to early December 2004.
Rates then trended lower in 2005 before a rebound in March 2006
to July 2007 when average spot earnings reached a record $41,000
per day.
78
HANDYMAX
(45,000 DWT) AVERAGE SPOT RATES
Source:
MSI
The
Handysize Sector
The Handysize sector is the largest sector of the drybulk
carrier fleet by number of vessels, accounting for 42% of the
total fleet. However, in terms of deadweight capacity, it is
only marginally larger than the Handymax fleet with 19% of total
capacity. Like Handymax vessels, they are fitted with cranes
which, along with their shallow drafts, make them extremely
versatile and able to access smaller ports with less
sophisticated onshore facilities. As a result, trading patterns
and cargoes for these types of vessel are highly diversified.
Handysize vessels are generally older than Handymax. The latter
have begun to replace the former as new developments in ship
design have enabled larger vessels to be constructed with
similar drafts. Increasingly, the industry is moving towards
building larger vessels to benefit from economies of scale.
However this does not mean that smaller vessels have become
obsolete, for they are less likely to have to travel part-laden
and are often able to generate substantial returns.
Like the Handymax sector, Handysize fleet ownership is highly
fragmented. Eight hundred ninety nine different shipowners
control 2,562 vessels: an average of just 2.8 vessels
per company. As of June 1, 2007, 38 companies
controlled 10 ships or more (at an average of 20.7 ships per
company), amounting to 32% of the fleet. Another
78 companies owned 5 to 9 ships (at an average of 6.3 ships
per company) or 20% of the fleet. Four hundred seventy-five
companies control 1 vessel each, collectively accounting
for 18% of the fleet.
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The chart below outlines the Handysize fleet by year of build,
including scheduled new deliveries. The chart indicates that at
June 1, 2007, approximately 27% of the fleets
existing dwt capacity was accounted for by vessels built before
1980, which may be considered likely candidates for scrapping in
the near future. Vessels built since 2000 constitute 16% of the
existing fleet. The average age of the fleet at June 1,
2007 was 21.2 years.
The orderbook at the beginning of June 2007 amounted to
10.3 million dwt or 15% of the existing fleet.
HANDYSIZE
FLEET BY YEAR OF BUILD AND SCHEDULED DELIVERIES
Source:
LR Fairplay/MSI
Handysize earnings increased sharply in the second half of 2003
in line with the larger bulk carrier sectors. The 18 month
time charter peaked in Feb 2004 at $22,000 per day before
declining rapidly to a low of $13,000 in June of that year.
During the second half of 2004, rates rebounded and
12 month time charter rates in the Handysize sector peaked
again in December 2004 at $21,800 per day. Rates then trended
lower in 2005 until a recent rebound has brought rates to a new
high of $28,250 per day in July 2007.
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HANDYSIZE
ONE YEAR TC RATES
Source:
MSI
81
Overview
We own our vessels through separate wholly owned subsidiaries
incorporated in the Marshall Islands. The operations of the
vessels are managed by Free Bulkers, S.A., or Free Bulkers, an
affiliated Marshall Islands corporation incorporated on
September 9, 2003. Free Bulkers provides us with a wide
range of shipping services at a fee per vessel. These services
include technical management, such as managing day-to-day vessel
operations including supervising the crewing, supplying,
maintaining and dry-docking of vessels, commercial management
regarding identifying suitable vessel charter opportunities, and
certain accounting services.
As of June 30, 2007, the M/V Free Destiny and M/V
Free Envoy had a combined carrying capacity of 51,000
dwt, a combined book value of $10.3 million, and an average
age of 24 years. As a result of the acquisition of the M/V
Free Hero, the M/V Free Jupiter and upon the
acquisition of the M/V Free Goddess, we will increase the
aggregate dwt of our fleet to approximately 146,000 dwt,
increase the book value of our fleet to approximately
$107.8 million, and reduce the average age of our fleet to
approximately 16 years.
Our
Fleet
The following table summarizes certain information about the
vessels in our fleet and related employment details:
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Year
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Vessel
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Purchase
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Delivery
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Vessel Name
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Dwt
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Built
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Type
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Employment
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Price
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Date
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Owned
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Free Envoy
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26,318
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1984
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Handysize
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One-year time charter through April 2008 at $17,000 per day
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$9.50 million
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September 20, 2004
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Free Destiny
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25,240
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1982
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Handysize
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70-day time charter at $28,000 per day
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$7.60 million
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August 3, 2004
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Free Hero
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24,318
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1995
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Handysize
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Balance of time charter through December 2008/February 2009 at
$14,500 per day
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$25.25 million
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July 3, 2007
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Free Jupiter
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47,777
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2002
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Handymax
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Initial one-trip time charter with approximately seven days
remaining at $43,000 per day followed by an unscheduled
dry-docking to complete repairs; thereafter to be delivered to a
new charterer under a three-year time charter at $32,000 per day
for first year, $28,000 per day for second year, and $24,000 per
day for third year
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$47.00 million
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September 5, 2007
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Acquisition Pending
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Free Goddess
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22,051
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1995
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Handysize
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Two-month time charter at $13,000 per day; thereafter a two-year
time charter at $19,250 per day
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$25.20 million
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Expected late October 2007
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82
Competitive
Strengths
We believe that we possess the following competitive strengths:
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Experienced Management Team. Our management
team has significant experience in commercial, technical,
operational and financial areas of our business and has
developed relationships with leading charterers, ship brokers
and financial institutions. Since 1997, Ion G. Varouxakis, our
chairman, chief executive officer and president, has served in
various management roles for shipping companies in the drybulk
sector. Dimitris Papadopoulos, who became our chief financial
officer in May 2007, served from 1975 to 1991 as financial and
administrative vice president in charge of, amongst other
things, the shipping interests of the owners of Archirodon
Group, Inc.
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Affiliation with Leading Shipping Group. In
January 2007, FS Holdings Limited, an entity controlled by the
Restis family, acquired a 37.4% interest (including shares
underlying warrants) in our company. The Restis family has been
engaged in the international shipping industry for more than
40 years and their interests include ownership and
operation of more than 60 vessels in several segments of
the shipping industry, as well as cargo and chartering
interests. The Restis family group is regarded as one of the
largest independent ship-owning and management groups in the
shipping industry. Our management believes that affiliation with
and access to the resources of companies controlled by the
Restis family commercially enhances the operations of our fleet,
our ability to obtain employment for our vessels and our ability
to obtain more favorable financing.
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Strong Customer Relationships. Through Free
Bulkers, our ship management company, and Safbulk Pty Ltd., or
Safbulk, a Restis family controlled management company, we have
established customer relationships with leading charterers
around the world, such as major international industrial
companies, commodity producers and traders and a number of
chartering brokerage houses. Free Bulkers has subcontracted the
charter and post-charter management of our fleet to Safbulk. We
believe that the established customer base and the reputation of
our fleet managers will enable us to secure favorable employment
for our vessels with well known charterers.
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Strong Balance Sheet with a Moderate Level of
Indebtedness. We will repay a significant portion
of our indebtedness with the proceeds of this offering and
$48.7 million of borrowings under the credit facility we
expect to enter into with Credit Suisse. This will strengthen
our balance sheet and leave us with $41.9 million in cash
to fund our operations and to acquire additional vessels. Our
financial resources and borrowing capacity will thus position us
to take advantage of acquisition opportunities as they arise.
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Stable Cash Flow from Well-Established and Reputable
Charterers. A majority of the vessels in our
fleet will be initially employed on time charters to
well-established and reputable charterers. We believe these time
charters will provide us with steady cash flow and high vessel
utilization rates while limiting our exposure to freight rate
volatility.
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Efficient Operations. Through Free Bulkers, we
believe that we have established a strong track record in the
technical management of drybulk carriers, which has enabled us
to maintain cost-efficient operations. We actively monitor and
control vessel operating expenses while maintaining the high
quality of our fleet through regular inspections, maintenance
programs, high standards of operations, and retaining and
training qualified crew members.
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Business
Strategy
The following are highlights of our business strategy:
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Leveraging our Strategic Relationships. Free
Bulkers, Safbulk, the Restis family and their affiliates have
extensive experience and relationships in the ship brokerage and
financial industries as well as directly with industrial
charterers and commodity traders. We plan to use these
relationships to identify chartering and acquisition
opportunities and make available to us sources of additional
financing, make contacts, and gain market intelligence.
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Handysize and Handymax Focus. Our fleet of
drybulk carriers will consist of Handysize and Handymax vessels.
Based on the relatively low number of drybulk newbuildings on
order in these
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categories, we believe there will be continued high demand for
such vessels. Handysize and Handymax vessels are typically
shallow-drafted and equipped with onboard cranes. This makes
Handysize and Handymax vessels more versatile and able to access
a wider range of loading and discharging ports than larger
ships, which are unable to service many ports due to their size
or the local port infrastructure. Many countries in the Asia
Pacific region, including China, as well as countries in Africa
and South America, have shallow ports. We believe that our
vessels, and any Handysize or Handymax vessels that we acquire,
will enable us to transport a wider variety of cargoes and to
pursue a greater number of chartering opportunities than if we
owned larger drybulk vessels. Handysize and Handymax vessels
have also historically achieved greater charter rate stability
than larger drybulk vessels.
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Renew and Expand our Fleet. We intend to
continue growing our fleet in a disciplined manner through
acquisition of well-maintained, secondhand vessels, preferably
up to 15 years old. We perform technical review and
financial analysis of each potential acquisition and only
purchase vessels as market conditions and opportunities dictate
and warrant. We are focused on purchasing such vessels, because
we believe that secondhand vessels, when operated in a
cost-efficient manner, should provide significant value given
the prevailing charter rate environment and currently provide
better returns as compared to newbuildings. Furthermore, as part
of our fleet renewal, we will continue to sell vessels when we
believe it is in the best interests of FreeSeas and our
shareholders.
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Maintain Balanced Time Charter Employment. We
intend to strategically deploy a substantial portion of our
fleet under period employment and our remaining vessels under
spot employment. We actively pursue time charter coverage to
provide adequate cash flow to cover our fleets fixed
costs, consisting of vessel operating expenses, management fees,
debt repayment and interest expense, general and administrative
expenses, and dry-docking costs for the upcoming
12-month
period. We look to deploy part of our fleet through spot
charter, depending on our view of the direction of the markets
and other tactical or strategic considerations. We believe this
balanced employment strategy will provide us with more
predictable operating cash flows and sufficient downside
protection, while allowing us to participate in the potential
upside of the spot market during periods of rising charter rates.
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Use of Flexible Financial Strategy. We will
use a combination of bank debt, cash flow and proceeds from
equity offerings to fund our vessel acquisitions. We assess the
level of debt we will incur in light of our ability to repay
that debt based on the level of cash flow we expect to generate
pursuant to our chartering strategy and our operating cost
structure. Following this offering, we intend to reduce our
ratio of debt to total capitalization to between approximately
35% and 40%. We expect that the maintenance of a reasonable
ratio of debt to total capitalization will increase our ability
to borrow funds to make additional vessel acquisitions while
maintaining our ability to pay dividends to our shareholders.
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Pay Quarterly Dividends. Following the
completion of this offering, we intend to distribute a portion
of our available cash from operations as quarterly cash
dividends to our shareholders in February, May, August and
November of each year. We currently expect that we will pay in
February 2008 a dividend of $0.175 per share for the 2007 fiscal
year followed by a quarterly dividend of $0.175 per share in
each of the following three quarters, assuming we complete this
offering. See Forward-Looking Statements.
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Vessel
Employment
We have employed and continue to employ our vessels in the spot
charter market, under period time charters and in drybulk
carrier pools. As of the date of this prospectus, the M/V
Free Destiny is employed under a 70-day time charter at
$28,000 per day, the M/V Free Envoy is chartered at a
gross rate of $17,000 per day, which charter will end in April
2008 and the M/V Free Hero is employed under the balance
of a time charter through December 2008/February 2009 at $14,500
per day.
On September 21, 2007, one of our vessels, the M/V Free
Jupiter, ran aground off the coast of the Philippines.
Operations to re-float the vessel have been completed. The M/V
Free Jupiter was employed under a one-trip time charter
with approximately seven days remaining at the time of the
grounding incident. We currently anticipate that this time
charter will resume upon completion of temporary repairs.
Following completion of this time charter, the vessel will
undergo an unscheduled dry-docking to complete permanent
repairs. The vessel will be out of service during this
dry-docking, which will delay the commencement of its
84
subsequent three-year time charter. Based on information
available to us at the present time, we currently estimate that
the vessel will be out of service until approximately the end of
November 2007, although the repair period could be longer. We
have notified the charterer of the delay and it has agreed to an
extension of the charter cancellation date until
November 30, 2007. If the vessels repairs require
longer to complete, we have advised the charterer that we will
request a further extension from it. We expect that the
vessels insurance will cover the vessels repairs and
related expenses, less applicable deductibles. We do not have
insurance for loss of hire that will cover this incident, so we
will experience a loss of income during the period that the
vessel is out of service.
Please see Our Fleet for information
about the employment of the M/V Free Goddess.
A spot time charter and a period time charter are each contracts
to charter a vessel for an agreed period of time at a set daily
rate. Under both types of charters, the charterer pays for
voyage expenses such as port, canal and fuel costs and we pay
for vessel operating expenses, which include crew costs,
provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs. We are also responsible for each
vessels intermediate dry-docking and special survey costs.
Lastly, vessels can be chartered under bareboat
contracts whereby the charterer is responsible for the
vessels maintenance and operations, as well as all voyage
expenses.
Vessels operating on period time charter provide more
predictable cash flows, but can yield lower profit margins than
vessels operating in the spot market during periods
characterized by favorable market conditions. Vessels operating
in the spot market generate revenues that are less predictable
but may enable us to increase profit margins during periods of
increasing drybulk charter rates. However, we would then be
exposed to the risk of declining drybulk charter rates, which
may be higher or lower than the rates at which we chartered our
vessels. We are constantly evaluating opportunities for period
time charters, but only expect to enter into additional period
time charters if we can obtain contract terms that satisfy our
criteria.
Although we have not previously done so, we may from time to
time utilize forward freight agreements that enable us to enter
into contractual obligations to sell the spot charter forward
and thereby reduce our exposure to a potential deterioration of
the charter market.
Customers
During the year ended December 31, 2006, we had contracts
with 18 charterers, and during the six months ended
June 30, 2007, we had contracts with eight charterers. Our
customer base is composed of well-known charterers, including
Cargill International S.A. and Oldendorff Carriers GMBH &
Co. KG. As of June 30, 2007, Seaside Navigation, Denmark
has been our most significant charterer based on total charter
revenue received by us. Each of the vessels currently in our
fleet is subject to a time charter. The
M/V Free
Goddess will be subject to a time charter.
Management
of the Fleet
We contract the technical and commercial management of our
vessels to Free Bulkers, a Marshall Islands corporation owned by
Ion G. Varouxakis, our chairman, chief executive officer and
president. Free Bulkers has a separate management contract with
each of our ship-owning subsidiaries and provides a wide range
of services at a fee per vessel. These services include vessel
operations, performing general vessel maintenance, ensuring
regulatory and classification society compliance, supervising
the maintenance and general efficiency of vessels, arranging our
hire of qualified officers and crew, arranging and supervising
dry-docking and repairs, arranging insurance for vessels,
purchasing stores, supplies, spares and new equipment for
vessels, appointing supervisors and technical consultants,
advising on the purchase and sale of vessels, and performing
certain accounting and other administrative services, including
financial reporting and internal controls requirements.
Free Bulkers has entered into a sub-management agreement with
Safbulk, an affiliate of FS Holdings Limited, one of our
principal shareholders. Safbulk and FS Holdings Limited are
controlled by the Restis family. Safbulk has agreed to perform
charter and post-charter management services for our fleet,
including obtaining and negotiating vessel employment and
related services, freight calculations, correspondence with
charterers, and employment of charter brokers. Free Bulkers has
agreed to pay to Safbulk 1.25% of gross hire or freight for
vessels chartered through Safbulk, commencing with the charters
secured by it for the M/V Free
85
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 months notice. We believe that the
reputation of Safbulk, and its long-standing relationships with
charterers and charter brokers, should enhance the commercial
operation of our fleet and our ability to obtain employment for
our fleet, while operational coordination is maintained by Free
Bulkers. We believe that using Free Bulkers and Safbulk to
perform these functions should provide us experienced technical
and commercial management for our fleet and enable us to better
manage our costs.
Our management, under the guidance of our board of directors,
manages our business as a holding company, including our own
administrative functions, and we monitor Free Bulkers
performance under the management agreements. Free Bulkers
currently manages only our vessels and we anticipate that Free
Bulkers may manage any additional vessels we may acquire in the
future. Safbulk performs management services to other
international shipping entities, including the Restis group of
companies. We believe that the strong commercial standing of
Safbulk and its long-standing ties with cargo interests greatly
enhances the commercial operation of our fleet, while ultimate
operational coordination is maintained by Free Bulkers.
Our agreement with Free Bulkers remains in effect indefinitely
unless, in each case, it is terminated by either party upon two
months advance notice. Pursuant to the management
agreements, we pay Free Bulkers a monthly (pro rata for the
calendar days) management fee of $15,000 per vessel, paid in
advance, from the date of signing the memorandum of agreement
for the purchase of the vessel until two months after delivery
of the vessel to its new owners pursuant to its subsequent sale.
We have also agreed to pay Free Bulkers a fee equal to 1.25% of
the freight or hire collected from the employment of our
vessels. Free Bulkers under its agreement with Safbulk is
responsible for paying Safbulk a fee equal to 1.25% of the
freight or hire collected from the employment of our vessels for
its services. In addition, we have agreed to pay Free Bulkers a
1% commission to be paid to Free Bulkers on the gross purchase
price of any new vessels acquired or the gross sales price of
any vessels we sell with the assistance of Free Bulkers. We also
reimburse, at cost, the travel and other personnel expenses of
the Free Bulkers staff, including the per diem paid by Free
Bulkers to its staff, when they are required to attend our
vessels at port.
Generally, Free Bulkers is not liable to us for any losses or
damages, if any, that may result from its management of our
fleet unless Free Bulkers or its employees act with negligence
or gross negligence or commit a willful default with respect to
one of our vessels. Pursuant to its agreement with us, Free
Bulkers liability for such acts, except in certain limited
circumstances, may not exceed ten times the annual management
fee payable by the applicable subsidiary to Free Bulkers.
We believe that we pay Free Bulkers industry standard fees for
these services. We are aware of three comparable structures of
affiliated drybulk vessel-owning companies and management
companies. All three of those arrangements have the same 1.25%
chartering/commercial fee and 1% commission on purchases or
sales of vessels by the affiliated vessel-owning companies as
does the arrangement between us and Free Bulkers. All three
arrangements have fixed monthly management fees in excess of the
fee we pay Free Bulkers.
Crewing
and Employees
Free Bulkers, our affiliate, employs approximately
15 people, all of whom are shore-based. In addition, Free
Bulkers is responsible for recruiting, either directly or
through a crewing agent, the senior officers and all other crew
members for our vessels. We currently employ two officers and no
other employees.
Loans for
Vessels
M/V
Free Destiny and M/V Free Envoy
Our subsidiaries have obtained financing from unaffiliated
lenders for our vessels.
Our subsidiary, Adventure Two S.A., owns the M/V Free Destiny
subject to a mortgage securing a loan in the original
principal amount of $3,700,000 from Hollandsche Bank
Unie N.V. The loan bears interest at 1.95% above LIBOR, matures
in 2008, and is payable in eight quarterly installments of
$75,000 each beginning December 27, 2005, followed by one
quarterly installment of $100,000, two quarterly installments of
$500,000 each, and a balloon payment of $2,000,000 in 2008. The
loan is secured by a first preferred mortgage on the vessel,
FreeSeas guarantee of $500,000 of the principal amount
plus interest and costs, joint
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and several liability of Adventure Three, and pledges of
(1) the rights and earnings under time charter contracts
present or future, (2) rights under insurance policies, and
(3) goods and documents of title that may come into the
banks possession for the benefit of Adventure Two.
Our subsidiary, Adventure Three S.A., owns the M/V Free Envoy
subject to a mortgage securing a loan in the original
principal amount of $6,000,000 from Hollandsche Bank
Unie N.V. The loan was amended in September 2005, pursuant to
which the interest was reduced to 1.95% above LIBOR. The loan
matures in December 2007, and is payable in 12 quarterly
installments of $425,000 each commencing December 2005 with a
balloon payment of $900,000 at final maturity. The loan is
secured by a first preferred mortgage on the vessel,
FreeSeas guarantee of $500,000 of the principal amount
plus interest and costs and pledges of (1) the rights and
earnings under time charter contracts present or future,
(2) rights under insurance policies, and (3) goods and
documents of title that may come into the banks possession
for the benefit of Adventure Three. In June 2006, we borrowed an
additional $2,000,000 from Hollandsche Bank Unie
N.V., which amount was also secured by the M/V Free Envoy
and was used to pay principal and interest due to Egnatia
Bank, S.A. under its loan to Adventure Four. On January 12,
2007, the additional $2,000,000 borrowed from Hollandsche
Bank Unie N.V. was paid off from the proceeds of a
loan from First Business Bank, S.A. to Adventure Four described
below.
Each of the loan agreements also includes affirmative and
negative covenants of Adventure Two and Adventure Three such as
the maintenance of operating accounts, minimum cash deposits and
minimum market values. Adventure Two and Adventure Three are
further restricted from incurring additional indebtedness,
changing the vessels flags and distributing earnings
without the prior written consent of the lenders.
We also had outstanding, as of June 30, 2007, two
interest-free loans from our former principal shareholders with
an aggregate principal balance, net of discount which results
from accounting for the loans at their fair value, of
$1.9 million, the proceeds of which were used to acquire
our vessels. These loans were modified in April 2005 and October
2005 to provide for a repayment schedule for each loan of eight
equal quarterly installments of $125,000 each in 2006 and 2007,
commencing on March 31, 2006, with balloon payments of the
balance due on each loan on January 1, 2008. Additionally,
the amended terms provide that the loans will become immediately
due and payable in the event that we raise additional capital of
at least $12,500,000. Before these modifications, the loans were
repayable from time to time based on our available cash flow,
and matured on the earlier of the sale date of the applicable
vessel or December 31, 2006. On January 5, 2007, the
shareholder loans due to one of our former shareholders were
sold to The Midas Touch, S.A., a company controlled by Ion
G. Varouxakis, our chairman, chief executive officer and
president and one of our principal shareholders, for the
principal amount then outstanding. The Midas Touch
subsequently sold a portion of this loan to FS Holdings Limited,
also one of our principal shareholders. We currently intend to
use a portion of the net proceeds of this offering to repay the
remaining principal balance of these loans.
M/V
Free Hero, M/V Free Jupiter and M/V Free Goddess
On May 1, 2007, we entered into memoranda of agreement
pursuant to which we agreed to purchase the M/V Free
Hero, the M/V Free Jupiter and two other secondhand
drybulk carriers. We took delivery of the
M/V Free
Hero on July 3, 2007 and of the M/V Free Jupiter
on September 5, 2007. Due to a dispute between third
parties unrelated to us and the sellers of the two remaining
undelivered drybulk carriers referred to above, which would have
resulted in the vessels not being delivered as per the terms of
their respective memoranda of agreement, we decided, in
agreement with the sellers, to terminate those agreements on
July 27, 2007. We are working to replace the two
undelivered vessels with alternative tonnage of similar profile
and return characteristics in an effort to expand our fleet in
the Handysize and/or Handymax segments. In this regard, on
August 20, 2007, we entered into a memorandum of agreement
to purchase the M/V Free Goddess which we expect to be
delivered in October 2007.
We have financed a portion of the purchase price of the M/V
Free Hero and the M/V Free Jupiter and we intend
to finance a portion of the purchase price of the M/V Free
Goddess and any future near term acquisitions. In this
regard, with respect to our initial agreement to purchase the
M/V Free Hero, the M/V Free Jupiter and two other
secondhand drybulk carriers, we received a loan commitment from
HSH Nordbank AG and BTMU Capital Corporation with respect to
senior and junior loan facilities of approximately $89,500,000.
HSH Nordbank AG has indicated that these facilities will be
available upon similar terms to
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acquire suitable replacement vessels, such as the M/V Free
Goddess, for the two cancelled secondhand drybulk carriers.
We have also amended our existing credit agreement with
Hollandsche Bank Unie N.V. to provide for an
additional $4,000,000 overdraft facility. We have also obtained
a $14,000,000 principal amount
non-amortizing,
unsecured loan from FS Holdings Limited, one of our principal
shareholders.
We have notified HSH Nordbank AG, the agent and the senior
lender for the loan facility to acquire the M/V Free
Jupiter, of the grounding incident on September 21,
2007 involving the M/V Free Jupiter and the successful
re-floating of the vessel. HSH Nordbank AG has requested further
updates as the repairs progress, which we have provided and will
continue to provide. As of the date of this prospectus, we have
remained current on all payments due under our HSH Nordbank AG
and BTMU Capital Corporation facilities related to the
acquisition of this vessel and we believe that we remain in
compliance with all of our loan covenants.
Descriptions of our credit facilities are set forth below:
HSH Nordbank AG Loan. On June 27, 2007,
we, through our subsidiaries, Adventure Five S.A., Adventure Six
S.A., Adventure Seven S.A. and Adventure Eight S.A, entered into
a senior loan agreement with HSH Nordbank AG that provides for
borrowings of up $68,000,000 for the purpose of financing part
of the cost of the M/V Free Hero, the M/V Free Jupiter
and two other specified secondhand drybulk carriers. The
aggregate amount of the loan may not exceed the lower of
(1) $67,000,000, (2) 59% of the aggregate market value
of certain specified ships and (3) such amount that when
added to the amount drawn down under the BTMU Capital
Corporation junior loan will not exceed $88,500,000. The amount
of the loan may be increased, depending on our aggregate charter
rates and other terms of our charters, so as not to exceed the
lower of (1) $68,000,000, (2) 59% of the aggregate
market value of certain specified ships and (3) such amount
that when added to the amount drawn down under the BTMU Capital
Corporation junior loan will not exceed $89,500,000. Our ability
to borrow any undrawn portion of the $68,000,000 commitment
amount under the loan will terminate on January 15, 2008.
The loan agreement provides for the payment of interest in
respect of one month, three month or six month interest periods.
Amounts drawn under the loan agreement generally bear interest
at an annual rate of LIBOR for the interest period plus 1.5% per
annum, provided that the margin decreases to 1.3% per annum
after the prepayment of the loan following a successful offering
(as defined in the loan agreement), and certain mandatory costs.
The loan is payable in 32 installments. Assuming the loan is
drawn down in full, the amount of each of the first to eighth
installments would be $3,125,000, the amount of each of the
ninth to twelfth installments would be $2,250,000, the amount of
each of the thirteenth to thirty-first installments would be
$1,000,000 and the amount of the final installment would be
between $14,000,000 and $15,000,000. The amount of the
installments will be proportionately reduced if we drawdown less
than the full amount available under the loan. The amount of the
installments will also be reduced following prepayment of a
portion of the loan following the offering. The loan agreement
provides for the mandatory prepayment of the BTMU Capital
Corporation junior loan and a portion of the HSH Nordbank AG
senior loan following the offering. Amounts drawn under the loan
agreement will be secured by, among other things, a first
priority mortgage on the applicable vessel, a corporate
guarantee and certain account pledges. The loan agreement also
requires that we enter into interest rate swaps or other
derivative transactions to ensure that a part of the loan is
hedged against interest rate fluctuations.
BTMU Capital Corporation Loan. On
June 27, 2007, we, through our subsidiaries, Adventure Five
S.A., Adventure Six S.A., Adventure Seven S.A and Adventure
Eight S.A, entered into a junior loan agreement with BTMU
Capital Corporation that provides for borrowings of up
$21,500,000 for the purpose of financing part of the cost of the
M/V Free Hero, the M/V Free Jupiter and two other
specified secondhand drybulk carriers. The aggregate amount of
the loan may not exceed the lower of (1) $21,500,000,
(2) 80% of the aggregate market value of certain specified
ships and (3) such amount when added to the amount drawn
down under the HSH Nordbank AG senior loan will not exceed
$89,500,000. Our ability to borrow any undrawn portion of the
$21,500,000 commitment amount under the loan will terminate on
January 15, 2008. The loan agreement provides for the
payment of interest in respect of one month, three month or six
month interest periods. Amounts drawn under the loan agreement
generally bear interest at an annual rate of LIBOR for the
interest period plus 2.75% per annum, provided that the margin
increases to 3.50% per annum on June 27, 2008 and 4.25% per
annum on June 27, 2009. The loan is due no later than
June 27, 2010, provided, however, that the loan agreement
provides that we will prepay an amount of the loan from the
proceeds of the offering equal to the lower of (1) the
total amount of the loan outstanding and (2) the offering
proceeds. Amounts drawn under
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the loan agreement will be secured by, among other things, a
second priority mortgage on the applicable vessel financed under
the loan, a second priority mortgage on each of the M/V Free
Destiny and the M/V Free Envoy, a corporate guarantee
and certain second priority account pledges.
FS Holdings Limited Loan. On May 7, 2007,
FS Holdings Limited, one of our principal shareholders, agreed
to loan us up to $14,000,000 pursuant to an unsecured promissory
note for the purpose of financing the acquisition of four new
vessels (including the M/V Free Hero). As of the date of
this prospectus, we have drawn down the entire amount available
under this loan. The note accrues interest on the
then-outstanding principal balance at the annual rate of 12.0%,
payable upon maturity of the loan. The loan is due at the
earlier of (i) May 7, 2009, (ii) the date of a
Capital Event, which is defined as any event in
which we raise gross proceeds of not less than $40,000,000 in an
offering of our common stock or other equity securities or
securities convertible into or exchangeable for our equity
securities or (iii) the date of acceleration due to a
default of the amounts due under the note. The loan is
prepayable by us, upon 30 days prior written notice
to FS Holdings Limited, in whole or in part, in increments of
not less than $500,000. Additionally, we have agreed to issue to
FS Holdings Limited, for every $1,000,000 drawn under the loan,
50,000 warrants to purchase shares of our common stock at an
exercise price of $5.00 per share. Each warrant is exercisable
to purchase one share of our common stock. We have issued
700,000 warrants to acquire shares of our common stock pursuant
to this loan.
Hollandsche Bank Unie N.V. Credit
Facility. We have renegotiated our credit
agreement with Hollandsche Bank Unie N.V. to provide
for an additional $4,000,000 overdraft facility. Our borrowing
limit under this new portion of the overdraft facility will be
reduced to zero on June 1, 2008. The amended credit
agreement also provides that this $4,000,000 overdraft facility
will be repaid from the proceeds of a private placement or a
public offering of equity securities. The maturity date of the
facility may be extended in the discretion of the bank,
depending on our financial condition. The security for this
facility includes, (i) mortgages on the M/V Free
Destiny and the M/V Free Envoy, (ii) pledges of
rights and earnings under time charter contracts,
(iii) pledges of rights under certain insurance policies
and (iv) our $500,000 corporate guarantee.
Credit Suisse Facility. We have negotiated an
offer letter for a senior secured credit facility from Credit
Suisse, the lead underwriter of this offering, in the aggregate
amount of $87.0 million, consisting of a $48.7 million
loan to finance or refinance, as appropriate, up to 50% of the
purchase price of the M/V Free Hero, the M/V Free
Jupiter and the M/V Free Goddess and a
$38.3 million facility to finance up to 75% of the purchase
price of additional vessels. Upon each drawdown under the
$38.3 million facility the aggregate amount outstanding
under the total $87.0 million facility may not exceed 60%
of the aggregate market value of the
M/V Free
Hero, the M/V Free Jupiter, the M/V Free
Goddess and any additional vessels financed under the
facility. The offer letter provides that HSH Nordbank AG may, at
our option, provide 50% of the facility amount. The availability
of this facility is contingent upon the execution of formal loan
documents. We intend to only enter into this senior credit
facility if we successfully complete this offering. See
Use of Proceeds.
The Credit Suisse offer letter relates to a secured revolving
term loan facility which matures eight years from the date of
the initial draw down. The maximum amount available under the
$48.7 million facility will be reduced by 32 quarterly
reductions of $1,250,000 plus a final reduction of $8,700,000 on
the final maturity date. The first reduction is due by the
earlier to occur of three months after the first drawdown or
January 31, 2008. Each advance under the $38.3 million
facility will be reduced quarterly based on a 18 year
repayment profile for vessels acquired with such facility
beginning three months after each respective drawdown. The
security for the facilities include a first preferred mortgage
on the M/V Free Hero, the M/V Free Jupiter and the
M/V Free Goddess as well as any additional vessels
purchased with the $38.3 million facility, first preferred
assignment of all earnings from such vessels and first preferred
assignment of insurances. The offer letter permits payments of
dividends to our shareholders provided we are in compliance with
certain loan covenants.
Competition
We operate in markets that are highly competitive and based
primarily on supply and demand. Ownership of drybulk carriers is
highly fragmented and is divided among approximately 1,400
drybulk carrier owners. We compete for charters on the basis of
price, vessel location, size, age and condition of the vessel,
as well as
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on our reputation. There are many drybulk shipping companies
which are publicly traded on the U.S. stock markets, such
as Euroseas Ltd., Dryships Inc., Diana Shipping Inc., Eagle Bulk
Shipping Inc. and Excel Maritime Carriers Ltd., which are
significantly larger than we are and have substantially more
capital, more and larger vessels, personnel, revenue and profits
and which are in competition with us. There is no assurance that
we can successfully compete with such companies for charters or
other business.
Free Bulkers arranges our charters (whether spot charters,
period time charters, bareboat charters or pools) through the
use of brokers, who negotiate the terms of the charters based on
market conditions. We compete with other owners of drybulk
carriers in the Capesize, Panamax, Handysize and Handymax
sectors. Charters for our vessels are negotiated by Free Bulkers
utilizing a worldwide network of shipbrokers. These shipbrokers
advise Free Bulkers on a continuous basis of the availability of
cargo for any particular vessel. There may be several
shipbrokers involved in any one charter. The negotiation for a
charter typically begins prior to the completion of the previous
charter in order to avoid any idle time. The terms of the
charter are based on industry standards.
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 required drybulk shipping accordingly.
Environmental
and Other Regulations
Government regulation significantly affects the ownership and
operation of our vessels. The vessels are subject to
international conventions and national, state and local laws and
regulations in force in the countries in which our vessels may
operate or are registered.
A variety of governmental and private entities subject our
vessels to both scheduled and unscheduled inspections. These
entities include the local port authorities (U.S. Coast
Guard, harbor master or equivalent), classification societies,
flag state administration (country of registry) and charterers.
Certain of these entities require us to obtain permits,
licenses, financial assurances and certificates for the
operation of our vessels. Failure to maintain necessary permits
or approvals could require us to incur substantial costs or
temporarily suspend operation of one or more of our vessels.
We believe that the heightened level of environmental and
quality concerns among insurance underwriters, regulators and
charterers is leading to greater inspection and safety
requirements on all vessels and may accelerate the scrapping of
older vessels throughout the industry. Increasing environmental
concerns have created a demand for vessels that conform to the
stricter environmental standards. We are required to maintain
operating standards for all of our vessels that will emphasize
operational safety, quality maintenance, continuous training of
its officers and crews and compliance with U.S. and
international regulations. We believe that the operation of our
vessels is in substantial compliance with applicable
environmental laws and regulations; however, because such laws
and regulations are frequently changed and may impose
increasingly stricter requirements, such future requirements may
limit our ability to do business, increase our operating costs,
force the early retirement of our vessels,
and/or
affect their resale value, all of which could have a material
adverse effect on our financial condition and results of
operations.
International
Maritime Organization
The United Nations International Maritime Organization, or IMO,
has negotiated international conventions that impose liability
for oil pollution in international waters and a signatorys
territorial waters. In September 1997, the IMO adopted
Annex VI to the International Convention for the Prevention
of Pollution from Ships
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to address air pollution from ships. It received the required
approval of fifteen states on May 2004 and Annex VI became
effective in May 2005. Annex VI sets limits on sulfur oxide
and nitrogen oxide emissions from ship exhausts and prohibits
deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on
the sulfur content of fuel oil and allows for special areas to
be established with more stringent controls on sulfur emissions.
Compliance with these requirements could require the
installation of expensive emission controls and could have an
adverse financial impact on the operation of our vessels. We
have developed a plan to comply with the Annex VI
regulations, and we believe we are in substantial compliance
with Annex VI. Additional or new conventions, laws and
regulations may be adopted that could adversely affect our
ability to operate our ships.
The operation of our vessels is also affected by the
requirements set forth in the IMOs Management Code for the
Safe Operation of Ships and Pollution Prevention, or ISM Code.
The ISM Code requires shipowners and bareboat charterers to
develop and maintain an extensive Safety Management
System that includes the adoption of a safety and
environmental protection policy setting forth instructions and
procedures for safe operation and describing procedures for
dealing with emergencies. The failure of a shipowner or
management company to comply with the ISM Code may subject such
party to increased liability, may decrease available insurance
coverage for the affected vessels, and may result in a denial of
access to, or detention in, certain ports. Currently, each of
our vessels is ISM Code-certified. However, there can be no
assurance that such certification will be maintained
indefinitely.
The
U.S. Oil Pollution Act of 1990
The United States Oil Pollution Act of 1990, or OPA, established
an extensive regulatory and liability regime for the protection
and clean-up
of the environment from oil spills. OPA affects all owners and
operators whose vessels trade in the United States, its
territories and possessions or whose vessels operate in waters
of the United States, which includes the United States
territorial sea and its 200 nautical mile exclusive economic
zone.
Under OPA, vessel owners, operators, charterers and management
companies are responsible parties and are jointly,
severally and strictly liable (unless the spill results solely
from the act or omission of a third party, an act of God or an
act of war) for all containment and removal costs and other
damages arising from discharges or threatened discharges of oil
from their vessels, including bunkers (fuel).
As a result of amendments to OPA that became effective in July
2006, the liability of responsible parties for drybulk vessels
is limited to the greater of $950 per gross ton or
$0.8 million (subject to possible adjustment for
inflation). These limits of liability do not apply if an
incident was directly caused by violation of applicable
U.S. federal safety, construction or operating regulations
or by a responsible partys gross negligence or willful
misconduct, or if the responsible party fails or refuses to
report the incident or to cooperate and assist in connection
with oil removal activities.
We currently maintain pollution liability coverage as part of
our protection and indemnity insurance for each of our vessels
in the amount of $1 billion per incident. If the damages
from a catastrophic pollution liability incident exceed our
insurance coverage, the payment of those damages may materially
decrease our net income.
OPA requires owners and operators of vessels to establish and
maintain with the United States Coast Guard evidence of
financial responsibility sufficient to meet their potential
liabilities under OPA. Current Coast Guard regulations require
evidence of financial responsibility in the amount of $900 per
gross ton for non-tank vessels, which includes an OPA limitation
on liability of $600 per gross ton and the
U.S. Comprehensive Environmental Response, Compensation,
and Liability Act liability limit of $300 per gross ton. We
expect the Coast Guard to increase the amounts of financial
responsibility to reflect the July 2006 increases in OPA
liability. Under the regulations, vessel owners and operators
may evidence their financial responsibility by showing proof of
insurance, surety bond, self-insurance, or guaranty. Upon
satisfactory demonstration of financial responsibility, a
Certificate of Financial Responsibility, or COFR, is issued by
the United States Coast Guard. This certificate must be carried
aboard the vessel to comply with these financial responsibility
regulations. We have complied with these financial
responsibility regulations by obtaining a COFR for each of
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our two vessels and carrying such COFRs on each of our vessels.
These COFRs are effective January 2007 through January 2010.
OPA specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents
occurring within their boundaries, and some states have enacted
legislation providing for unlimited liability for oil spills. In
some cases, states, which have enacted such legislation, have
not yet issued implementing regulations defining vessels
owners responsibilities under these laws. We currently
comply, and intend to continue to comply in the future, with all
applicable state regulations in the ports where our vessels call.
The
United States Clean Water Act
The U.S. Clean Water Act, or CWA, prohibits the discharge
of oil or hazardous substances in navigable waters and imposes
strict liability in the form of penalties for any unauthorized
discharges. The CWA also imposes substantial liability for the
costs of removal, remediation and damages and complements the
remedies available under the more recent OPA and CERCLA.
Currently, under U.S. Environmental Protection Agency, or
EPA, regulations that have been in place since 1978, vessels are
exempt from the requirement to obtain CWA permits for the
discharge in U.S. ports of ballast water and other
substances incidental to their normal operation. However, on
March 30, 2005, the United States District Court for the
Northern District of California ruled in Northwest
Environmental Advocate v. EPA, 2005 U.S. Dist.
LEXIS 5373, that EPA exceeded its authority in creating an
exemption for ballast water. On September 18, 2006, the
court issued an order invalidating the blanket exemption in
EPAs regulations for all discharges incidental to the
normal operation of a vessel as of September 30, 2008, and
directing EPA to develop a system for regulating all discharges
from vessels by that date. Under the courts ruling, owners
and operators of vessels visiting U.S. ports would be
required to comply with any CWA permitting program to be
developed by EPA or face penalties. Although EPA has appealed
this decision to the Ninth Circuit Court of Appeals, we cannot
predict the outcome of this litigation. If the District
Courts order is ultimately upheld, we will incur certain
costs to obtain CWA permits for our vessels and meet any
treatment requirements, although we do not expect that these
costs would be material.
Other
Environmental Initiatives
The European Union is considering legislation that will affect
the operation of vessels and the liability of owners for oil
pollution. It is difficult to predict what legislation, if any,
may be adopted by the European Union or any other country or
authority.
The U.S. National Invasive Species Act, or NISA, was
enacted in 1996 in response to growing reports of harmful
organisms being released into U.S. ports through ballast
water taken on by ships in foreign ports. The United States
Coast Guard adopted regulations under NISA, which became
effective in August 2004, that impose mandatory ballast water
management practices for all vessels equipped with ballast water
tanks entering U.S. waters. These requirements can be met
by performing mid-ocean ballast exchange, which is the exchange
of ballast water on the waters beyond the exclusive economic
zone from an area more than 200 miles from any shore, by
retaining ballast water on board the ship, or by using
environmentally sound alternative ballast water management
methods approved by the United States Coast Guard. (However,
mid-ocean ballast exchange is mandatory for ships heading to the
Great Lakes or Hudson Bay.) Mid-ocean ballast exchange is the
primary method for compliance with the United States Coast Guard
regulations, since holding ballast water can prevent ships from
performing cargo operations upon arrival in the United States,
and alternative methods are still under development. Vessels
that are unable to conduct mid-ocean ballast exchange due to
voyage or safety concerns may discharge minimum amounts of
ballast water (in areas other than the Great Lakes and the
Hudson River), provided that they comply with recordkeeping
requirements and document the reasons they could not follow the
required ballast water management requirements. The United
States Coast Guard is developing a proposal to establish ballast
water discharge standards, which could set maximum acceptable
discharge limits for various invasive species,
and/or lead
to requirements for active treatment of ballast water. A number
of bills relating to regulation of ballast water management have
been recently introduced in the U.S. Congress, but it is
difficult to predict which, if any, will be enacted into law.
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At the international level, the IMO adopted an International
Convention for the Control and Management of Ships Ballast
Water and Sediments, or the BWM Convention, in February 2004.
The BWM Conventions implementing regulations call for a
phased introduction of mandatory ballast water exchange
requirements (beginning in 2009), to be replaced in time with
mandatory concentration limits. The BWM Convention will not
enter into force until 12 months after it has been adopted
by 30 states, the combined merchant fleets of which
represent not less than 35% of the gross tonnage of the
worlds merchant shipping. As of August 31, 2007, the
BWM Convention has been adopted by ten states, representing
3.42% of the worlds tonnage.
Vessel
Security Regulations
Since the terrorist attacks of September 11, 2001, there
have been a variety of initiatives intended to enhance vessel
security. On November 25, 2002, the Maritime Transportation
Security Act of 2002, or MTSA, came into effect. To implement
certain portions of the MTSA, in July 2003, the U.S. Coast
Guard issued regulations requiring the implementation of certain
security requirements aboard vessels operating in waters subject
to the jurisdiction of the United States of America. Similarly,
in December 2002, amendments to SOLAS created a new chapter of
the convention dealing specifically with maritime security. The
new chapter went into effect in July 2004, and imposes various
detailed security obligations on vessels and port authorities,
most of which are contained in the newly created ISPS Code.
Among the various requirements are:
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on-board installation of automatic information systems, to
enhance vessel-to-vessel and vessel-to-shore communications;
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|
|
on-board installation of ship security alert systems;
|
|
|
|
the development of vessel security plans; and
|
|
|
|
compliance with flag state security certification requirements.
|
The U.S. Coast Guard regulations, intended to align with
international maritime security standards, exempt
non-U.S. vessels
from MTSA vessel security measures provided such vessels have on
board, by July 1, 2004, a valid International Ship Security
Certificate that attests to the vessels compliance with
SOLAS security requirements and the ISPS Code. Our vessels are
in compliance with the various security measures addressed by
the MTSA, SOLAS and the ISPS Code. We do not believe these
additional requirements will have a material financial impact on
our operations.
Inspection
by Classification Societies
The hull and machinery of every commercial vessel must be
classed by a classification society authorized by its country of
registry. The classification society certifies that a vessel is
safe and seaworthy in accordance with the applicable rules and
regulations of the country of registry of the vessel and SOLAS.
The M/V Free Destiny and the M/V Free Envoy are
currently classed with Lloyds Register of Shipping and
Korean Register of Shipping, respectively. The M/V Free Hero
and the M/V Free Jupiter are classed with Nippon
Kaiji Kyokai, the Japanese Classification Society. The M/V
Free Goddess is classed with Germanischer Lloyd, the
German Classification Society. ISM and ISPS certification have
been awarded to all of our vessels and Free Bulkers by
Lloyds Register of Shipping.
A vessel must undergo annual surveys, intermediate surveys,
dry-dockings and special surveys. In lieu of a special survey, a
vessels machinery may be on a continuous survey cycle,
under which the machinery would be surveyed periodically over a
five-year period. Our vessels are on special survey cycles for
hull inspection and continuous survey cycles for machinery
inspection. Every vessel is also required to be dry-docked every
two to three years for inspection of the underwater parts of
such vessel.
93
The table below lists the next dry-docking and special surveys
scheduled for our fleet, to the extent such dates are known as
of the date of this prospectus:
|
|
|
|
|
|
|
|
|
Vessel
|
|
Dry-Docking
|
|
|
Special Survey
|
|
|
Free Envoy
|
|
|
Third quarter 2008
|
|
|
|
Third quarter 2008
|
|
Free Destiny
|
|
|
Fourth quarter 2009
|
|
|
|
Fourth quarter 2009
|
|
Free Jupiter(1)
|
|
|
Second quarter 2010
|
|
|
|
Second quarter 2012
|
|
Free Hero
|
|
|
Third quarter 2008
|
|
|
|
Third quarter 2010
|
|
Free Goddess
|
|
|
First quarter 2008
|
|
|
|
Second quarter 2010
|
|
|
|
|
(1) |
|
The M/V Free Jupiter will undergo an unscheduled
dry-docking for repairs necessitated by a grounding incident off
the coast of the Philippines on September 21, 2007. We
expect that the vessels insurance will cover the
vessels repairs and related expenses, less applicable
deductibles. |
If any vessel does not maintain its class
and/or fails
any annual survey, intermediate survey, dry-docking or special
survey, the vessel will be unable to carry cargo between ports
and will be unemployable and uninsurable. That could cause us to
be in violation of certain covenants in our loan agreements.
At an owners application, the surveys required for class
renewal may be split according to an agreed schedule to extend
over the entire period of class. This process is referred to as
continuous class renewal.
All areas subject to survey as defined by the classification
society are required to be surveyed at least once per class
period, unless shorter intervals between surveys are prescribed
elsewhere. The period between two subsequent surveys of each
area must not exceed five years.
Most insurance underwriters make it a condition for insurance
coverage and lending that a vessel be certified as in
class by a classification society which is a member of the
International Association of Classification Societies. Our
vessels are certified as being in class by their
respective classification societies.
Risk of
Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as
mechanical failure, physical damage, collision, property loss,
cargo loss or damage and business interruption due to political
circumstances in foreign countries, hostilities and labor
strikes. In addition, there is always an inherent possibility of
marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating
vessels in international trade. OPA, which imposes virtually
unlimited liability upon owners, operators and bareboat
charterers of any vessel trading in the exclusive economic zone
of the United States of America for certain oil pollution
accidents in the United States of America, has made liability
insurance more expensive for ship owners and operators trading
in the United States of America market. While we believe that
our present insurance coverage is adequate, not all risks can be
insured, and there can be no guarantee that any specific claim
will be paid, or that we will always be able to obtain adequate
insurance coverage at reasonable rates.
Hull
and Machinery Insurance
We have obtained marine hull and machinery and war risk
insurance, which include the risk of actual or constructive
total loss, for all of our vessels. The vessels are each covered
up to at least fair market value or such higher amount as may be
required to meet the requirements of any outstanding
indebtedness on a particular vessel, with deductibles in amounts
of approximately $75,000 to $150,000.
We arrange, as necessary, increased value insurance for our
vessels. With the increased value insurance, in case of total
loss of the vessel, we can recover the sum insured under the
increased value policy in addition to the sum insured under the
hull and machinery policy. Increased value insurance also covers
excess liabilities which are not recoverable in full by the hull
and machinery policies by reason of under insurance.
Protection
and Indemnity Insurance
Protection and indemnity insurance is provided by mutual
protection and indemnity associations, or P&I associations,
which covers our third-party liabilities in connection with our
shipping activities. This includes
94
third-party liability and other related expenses of injury or
death of crew, passengers and other third parties, loss or
damage to cargo, claims arising from collisions with other
vessels, damage to other third-party property, pollution arising
from oil or other substances, and salvage, towing and other
related costs, including wreck removal. Protection and indemnity
insurance is a form of mutual indemnity insurance, extended by
protection and indemnity mutual associations, or
clubs.
Our current protection and indemnity insurance coverage for
pollution is $1 billion per vessel per incident. The 14
P&I associations that comprise the International Group
insure approximately 90% of the worlds commercial tonnage
and have entered into a pooling agreement to reinsure each
associations liabilities. The M/V Free Destiny and
the M/V Free Envoy are members of the American Mutual
Steamship Association. We have entered the M/V Free Hero
and the M/V Free Jupiter as members of the SKULD
Protection and Indemnity Society and we expect to enter the M/V
Free Goddess as a member of The Standard Club. Each
P&I association has capped its exposure to this pooling
agreement at $4.5 billion. As a member of a P&I
association, which is a member of the International Group, we
are subject to calls payable to the associations based on its
claim records as well as the claim records of all other members
of the individual associations and members of the pool of
P&I associations comprising the International Group.
Loss
of Hire Insurance
We intend to obtain loss of hire insurance for at least five of
our vessels for 2008 in amounts that we believe to be prudent to
cover normal risks in our operations. Loss of hire insurance
generally provides coverage against loss of charterhire that
results from the loss of use of a vessel. The insurance is
subject to various and significant deductibles, conditions and
coverage limitations that we will negotiate. After the initial
policy year, we will review annually whether maintaining this
insurance is cost effective. Our ability to obtain loss of hire
insurance is subject to market conditions and general
availability. We did not maintain insurance against the loss of
hire for any of our vessels at the time of the grounding of the
M/V Free Jupiter.
Procedures
in the Event of an Insured Event
Marine casualties are an inherent risk in the shipping industry.
If one of our vessels undergoes a marine casualty, we intend to
take prompt action in consultation with the appropriate
insurers, as described above, to ascertain the extent of any
damage to our vessel, its cargo, the crew, the vessels
ability to complete its charter and any environmental impact and
the appropriate steps to try to mitigate the impact of the
casualty on our financial condition and results of operations.
For example, on September 21, 2007, one of our vessels, the
M/V Free Jupiter, ran aground off the coast of the
Philippines. We have worked in consultation with our insurance
brokers and the salvage company, SMIT Singapore PTE Ltd., to
address the incident. Operations to re-float the vessel have
been completed under a Lloyds 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 vessels cargo and that will not cause damage
to the environment. The vessels hull has been
preliminarily inspected and the vessel has been moved to safe
waters for temporary repairs. Upon completion of these repairs,
the vessel will be inspected by its classification society and,
upon a satisfactory inspection, the vessel will complete its
current one-trip time charter, followed by a dry-docking to
complete permanent repairs. Based on information available to us
at the present time, we currently estimate that the vessel will
be out of service until approximately the end of November 2007,
although the repair period could be longer.
We expect that the vessels insurance will cover the cost
of the re-floating operations and the vessels repairs and
related expenses, less applicable deductibles. Our insurance
policies provide that payments will be made directly by the
insurers to the party entitled to receive payment. We do not
maintain insurance for loss of charterhire, nor would our
insurance cover any claims made by our charterers for damages
that they may incur in connection with the delays caused by the
grounding incident, although our insurance would cover our fees
and expenses incurred in defending any claims for damages
brought by our charterers. To date, neither charterer has made
or threatened such a claim, although we can provide no
assurances that they would not do so in the future.
95
Our
History
We were formed on April 23, 2004 under the name
Adventure Holdings S.A. pursuant to the laws of the
Republic of the Marshall Islands to serve as the parent holding
company of the ship-owning entities. On April 27, 2005, we
changed our name to FreeSeas Inc. Our executive
offices are located at 89 Akti Miaouli & 4
Mavrokordatou Street, 185 38, Piraeus, Greece and our telephone
number is
011-30-210-452-8770.
Our agent in the U.S. for service of process is Broad and
Cassel, which is located at 2 S. Biscayne Boulevard,
21st Floor, Miami, Florida 33131.
On December 15, 2005, we completed a merger with Trinity
Partners Acquisition Company Inc., a blank check company formed
to serve as a vehicle to complete a business combination with an
operating business. Under the terms of the merger, we were the
surviving corporation. Each outstanding share of Trinitys
common stock and Class B common stock was converted into
the right to receive an equal number of shares of our common
stock, and each Trinity Class W warrant and Class Z
warrant was converted into the right to receive an equal number
of our Class W warrants and Class Z warrants.
Our common stock, Class W warrants and Class Z
warrants began trading on the NASDAQ Capital Market on
December 16, 2005 under the trading symbols FREE, FREEW and
FREEZ, respectively. As a result of the merger, Trinitys
former securities, including the Trinity Class A Units and
the Class B Units, ceased trading on the OTC
Bulletin Board.
Ion G. Varouxakis and our two other co-founding shareholders
initially owned their respective interests in our company
indirectly through two companies, V Capital S.A. and another
entity incorporated under Marshall Islands law, each of which
was formed by their respective shareholders to participate in
the commercial shipping industry.
In February 2004, Mr. Varouxakis through V Capital and the
two other co-founding shareholders through their corporate
entity formed Adventure Two and Adventure Three under Marshall
Islands law for the purpose of owning and operating additional
drybulk carriers. In March 2004, Adventure Two and Adventure
Three entered into Memoranda of Agreement to acquire from
unaffiliated third parties the M/V Free Destiny and the
M/V Free Envoy, respectively.
Mr. Varouxakis and the two other co-founding shareholders
then determined to jointly form a single commercial shipping
holding company to operate in the drybulk shipping markets
through wholly owned subsidiaries. As is common practice in the
shipping industry, the principals decided to use a holding
company structure to permit consolidation, to isolate liability
exposure with respect to each vessel by having each vessel owned
by a different subsidiary, and to facilitate access to the
capital markets both in the United States and abroad. To
establish the holding company structure, on April 23, 2004
Mr. Varouxakis and the two other co-founding shareholders
formed Adventure Holdings S.A. under Marshall Islands law which
subsequently changed its name to FreeSeas Inc.
In January 2007, Mr. Varouxakis, through a Marshall Islands
corporation wholly owned by him, purchased all of the shares of
common stock owned by the two other co-founding shareholders. He
simultaneously sold shares of common stock owned by him to FS
Holdings Limited, an entity controlled by the Restis family, and
to certain other entities. All of these sales were for cash at a
price of $3.268 per share. As a result of these transactions,
Mr. Varouxakis now beneficially owns (including shares
underlying options and warrants beneficially owned by him)
approximately 29.8% of our outstanding common stock and FS
Holdings Limited beneficially owns (including shares underlying
warrants) approximately 35.1% of our outstanding common stock.
Immediately following these transactions, our board of directors
appointed Mr. Varouxakis chairman of the board and
president, the two other co-founding shareholders and one other
director resigned from the board, and two new directors were
appointed to fill the vacancies. See Management and
Related Party Transactions.
As of October 23, 2007, we have received an aggregate of
$4,787,672 of net proceeds from exercises of Class W and
Class Z warrants. We issued 1,007,931 shares of common
stock in accordance with the terms of these warrants in
connection with such exercises. These exercises occurred
following our registration in August 2007 of the shares
underlying these warrants.
96
Legal
Proceedings
We are not currently a party to any material lawsuit that, if
adversely determined, we believe would be reasonably likely to
have a material adverse effect on our financial position,
results of operations or liquidity.
Property
We do not at the present time own or lease any real property. To
date, we have been provided with office space by Free Bulkers.
Free Bulkers provided us with our office space at no rental cost
to us until February 5, 2007. On such date, and in
conjunction with moving into larger office space, we entered
into an agreement with Free Bulkers pursuant to which we agreed
to pay Free Bulkers one-half of the rents due from Free Bulkers
to the lessor of our current office space. As of June 30,
2007, the amount paid under such agreement equaled approximately
$32,200, or $5,367 per month (based on a historical
dollar-to-euro exchange rate of 1.339).
97
The following sets forth the name and position of each of our
directors and executive officers as of October 23, 2007.
The business address of each of our directors and executive
officers listed below is c/o FreeSeas Inc., 89 Akti Miaouli
& 4 Mavrokordatou Street, 185 38, Piraeus, Greece.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Director Class
|
|
Ion G. Varouxakis
|
|
|
36
|
|
|
Chairman of the Board of Directors, Chief Executive Officer and
President
|
|
C
|
Dimitris D. Papadopoulos
|
|
|
62
|
|
|
Chief Financial Officer
|
|
|
Kostas Koutsoubelis
|
|
|
52
|
|
|
Director, Vice President and Treasurer
|
|
A
|
Alexis Varouxakis
|
|
|
30
|
|
|
Secretary
|
|
|
Matthew W. McCleery
|
|
|
37
|
|
|
Director
|
|
A
|
Focko H. Nauta
|
|
|
49
|
|
|
Director
|
|
B
|
Dimitrios Panagiotopoulos
|
|
|
46
|
|
|
Director
|
|
C
|
Ion G. Varouxakis is one of our founders and is the
chairman of our board of directors. He also serves as our
president and chief executive officer. Prior to forming
FreeSeas, Mr. Varouxakis co-founded Free Bulkers in 2003.
From 2000 to 2003, Mr. Varouxakis was a managing director
of Free Ships S.A., a ship management company, and Free Holdings
S.A., a drybulk ship operating company. From 1997 to 2000,
Mr. Varouxakis was a director of Vernicos Maritime, a ship
management company managing a fleet of drybulk carriers.
Mr. Varouxakis holds a candidature degree in law from the
Catholic University of Saint Louis in Brussels and a bachelor of
science degree in economics from the London School of Economics
and Political Science. Mr. Varouxakis is an officer of the
reserves of the Hellenic Army. Mr. Varouxakis is the
brother of Alexis Varouxakis.
Dimitris D. Papadopoulos became our chief financial
officer in May 2007. Mr. Papadopoulos started his career
with Citigroup in New York from 1968 to 1970, in the European
credit division, and was later posted in Athens from 1970 to
1975, where he left as general manager of corporate finance to
join Archirodon Group Inc. There he served as financial and
administration vice president from 1975 to 1991, which included
the financial supervision of the Groups shipping division,
the Konkar Group. He served as chairman and chief executive
officer of the groups U.S. arm, Delphinance
Development Corp. from 1984 to 1991. In addition to its real
estate development, oil and gas development and venture capital
investments, Delphinance owned several U.S. contracting
companies engaged in both the public and private sectors, with
special expertise in harbor and marine works. In 1991, he
assumed the position of managing director of Dorian Bank, a
full-charter commercial and investment bank in Greece, where he
served until 1996. From 1996 until 1998 and from 2000 until
2001, he was a freelance business consultant. From 1998 to 1999,
he served as managing director of Porto Carras S.A., a resort
hotel in Northern Greece. Later, as executive vice president at
the Hellenic Investment Bank, from 1999 to 2000, he was
responsible for developing the banks new banking charter
formation, obtaining charter approval, and organizing, staffing
and commencing banking operations. From 2004 until
April 2007, Mr. Papadopoulos served as president of
Waterfront Developments S.A. As a Fullbright grantee,
Mr. Papadopoulos studied economics at Austin College, Texas
(B.A. and Whos Who amongst Students in American
Colleges and Universities 1968) and did
graduate studies at the University of Delaware. In 1974, he
received an executive business diploma from Cornell University,
Ithaca, N.Y.
Kostas Koutsoubelis joined our board of directors in 2007
and serves as our vice president and treasurer. In addition,
Mr. Koutsoubelis is the group financial director of the
Restis Group of Companies and also the chairman of Golden Energy
Marine Corp. Furthermore, he is a member of the board of
directors in First Business Bank, South African Marine Corp.
S.A. and Swissmarine Corporation Ltd. Before joining the Restis
Group, he served as head of shipping of Credit Lyonnais Greece.
After graduating from St. Louis University, St. Louis,
Missouri, he held various positions in Mobil Oil Hellas S.A. and
after his departure he joined International Reefer Services,
S.A., a major shipping company, as financial director. In the
past he has also served as director of Egnatia Securities S.A.,
a stock exchange company, and Egnatia Mutual Fund S.A. He
is
98
a governor in the Propeller Club Port of Piraeus and member of
the Board of the Association of Banking and Financial Executives
of Hellenic Shipping.
Alexis Varouxakis is our secretary. Mr. Varouxakis
holds a bachelor in science degree in economics from City
University, London, and a master in arts degree in art
management from City University, London. From 2001 to 2004, he
was involved in the entertainment industry and produced a number
of feature films, award winning short movies, and television
commercials. Between 2002 and 2004, Mr. Varouxakis was a
member of the board of directors of the New Producers Alliance,
UKs national membership and training organization for
producers and filmmakers. From 2005 to 2006, he was general
manager of Aello MCPY, a company specializing in the luxury
yacht charter business. In 2007, he joined Free Bulkers S.A. as
assistant operations manager. Mr. Varouxakis is the brother
of Ion Varouxakis.
Matthew W. McCleery has been one of our directors since
2005. He also is currently the president of Marine Money
International, a provider of maritime finance transactional
information and maritime company analyses. Mr. McCleery
joined Marine Money International in 1997 as managing editor and
was promoted to president in 1999. He is also currently managing
director of Marine Money Consulting Partners, the financial
advisory and consulting arm of Marine Money International that
provides shipowners with advisory services in capital raising,
debt financing and business combination transactions. He
assisted in the formation of Marine Money Consulting Partners in
2001. Mr. McCleery graduated from the University of
Connecticut School of Law, and was admitted to the Connecticut
bar, in 1997.
Focko H. Nauta has been one our directors since 2005.
Since September 2000, he has also been a director of FinShip SA,
a ship financing company. He assisted us in arranging debt
financing with Hollandsche-Bank Unie N.V. From 1997 through
1999, Mr. Nauta served as a managing director of Van
Ommeren Shipbroking, a London-based ship brokering company.
Prior to 1997, he was a general manager of a Fortis Bank branch.
Mr. Nauta holds a degree in law from Leiden University in
the Netherlands.
Dimitrios Panagiotopoulos joined our board of directors
in 2007. In addition, he is the head of shipping and corporate
banking of PROTON BANK, a Greek private bank, where he has
served since April 2004. From January 1997 to March 2004, he
served as deputy head of the Greek shipping desk of BNP Paribas
and before that for four years as senior officer of the shipping
department of Credit Lyonnais Greece. From 1990 to 1993, he was
working as chief accountant in Ionia Management, a Greek
shipping company. He holds a degree in economics from Athens
University and a masters of science in shipping, trade and
finance from City University of London. He served his obligatory
military duty as an officer of the Greek Special Forces and
today is a captain of the reserves of Hellenic Army.
Audit
Committee
We currently have an audit committee comprised of three
independent members of our board of directors. The audit
committee is responsible for reviewing our accounting controls
and engaging our outside auditors. The members of the audit
committee are Messrs. McCleery, Nauta and Panagiotopoulos.
Compensation
Committee
We currently have a compensation committee comprised of three
independent members of our board of directors. The compensation
committee is responsible for establishing our executive
officers compensation and benefits. The members of the
compensation committee are Messrs. McCleery, Nauta and
Panagiotopoulos.
Compensation
The total gross compensation paid in 2006 to our executive
officers and directors as a group was $546,333.
Amended
and Restated 2005 Stock Incentive Plan
Our Amended and Restated 2005 Stock Incentive Plan was
implemented for the purpose of furthering our long-term
stability, continuing growth and financial success by retaining
and attracting key employees, officers and directors through the
use of stock incentives. Our shareholders approved the plan on
December 19, 2006. Awards may be granted under the plan in
the form of incentive stock options, non-qualified stock
options, stock appreciation rights, dividend equivalent rights,
restricted stock, unrestricted stock, restricted stock units
99
and performance shares. Pursuant to the plan, we have reserved
1,500,000 shares of our common stock for awards.
All of our officers, directors and executive, managerial,
administrative and professional employees are eligible to
receive awards under the plan. Our board of directors has the
power and complete discretion, as provided in the plan, to
select which persons will receive awards and to determine for
each such person the terms, conditions and nature of the award,
and the number of shares to be allocated to each individual as
part of each award.
Employment
Agreements
We have entered into employment agreements with Ion G.
Varouxakis and Dimitris D. Papadopoulos.
Mr. Varouxakis agreement is for an initial term of
three years, with additional two-year renewal terms so long as
we do not give notice of termination at least 30 days
before the expiration of the current term.
Mr. Papadopoulos agreement is for an initial term of
two years, with additional one-year renewal terms so long as we
do not give notice of termination at least 90 days before
the expiration of the current term. The officers salaries
are subject to increases as may be approved by our board of
directors and they are entitled to receive performance or merit
bonuses as determined from time to time by our board or a
committee of the board and the reimbursement of expenses and
other employee benefits as may be implemented.
We may terminate these employment agreements for
cause at any time. Cause, as defined in
the agreements, means: (1) the willful breach or habitual
neglect by the officer of his job duties and responsibilities;
(2) material default or other material breach of an
employees obligations under his employment agreement or
fraud; or (3) conviction of any crime, excluding minor
traffic offenses. Each of these agreements terminates upon the
relevant officers death or after the officers
inability to perform his duties for a cumulative period of
90 days during any one year. The agreements do not provide
for payments upon a change in control of us.
100
The following table sets forth information regarding beneficial
ownership of our common stock as of October 23, 2007 by
each person or entity known by us to be the beneficial owner of
more than 5% of the outstanding shares of our common stock, each
of our officers and directors, and all of our officers and
directors as a group. All of our shareholders, including the
shareholders listed in this table, are entitled to one vote for
each share of stock held.
Unless otherwise indicated, we believe that all persons named in
the table have sole voting and investment power with respect to
all shares beneficially owned by them.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
Percent of Common
|
|
|
|
Number of Shares of
|
|
|
Common Stock
|
|
|
Stock Beneficially
|
|
|
|
Common Stock
|
|
|
Beneficially
|
|
|
Owned After
|
|
Name of Beneficial Owner
|
|
Beneficially Owned
|
|
|
Owned(1)
|
|
|
Offering(2)
|
|
|
Ion G. Varouxakis
|
|
|
2,248,031
|
(3)
|
|
|
29.8
|
%
|
|
|
12.1
|
%
|
Dimitris D. Papadopoulos
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
Matthew W. McCleery
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
Focko H. Nauta
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
Dimitrios Panagiotopoulos
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
Kostas Koutsoubelis
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
Alexis Varouxakis
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
All directors and officers as a group (seven persons)
|
|
|
2,248,031
|
|
|
|
29.8
|
%
|
|
|
12.1
|
%
|
FS Holdings Limited
|
|
|
2,808,782
|
(4)
|
|
|
35.1
|
%
|
|
|
14.8
|
%
|
Hummingbird Management, LLC(5)
|
|
|
467,296
|
|
|
|
6.7
|
%
|
|
|
2.5
|
%
|
|
|
|
(1) |
|
For purposes of computing the percentage of outstanding shares
of common stock held by each person named above, any shares that
the named person has the right to acquire within 60 days
under warrants or options are deemed to be outstanding for that
person, but are not deemed to be outstanding when computing the
percentage ownership of any other person. These percentages are
calculated on the basis of 7,298,031 outstanding shares of our
common stock. |
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(2) |
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Assumes underwriters do not exercise their over-allotment
option. For purposes of computing the percentage of outstanding
shares of common stock held by each person named above, any
shares that the named person has the right to acquire within
60 days under warrants or options are deemed to be
outstanding for that person, but are not deemed to be
outstanding when computing the percentage ownership of any other
person. These percentages are calculated on the basis of
18,298,031 outstanding shares of our common stock. |
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(3) |
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Reflects 2,014,697 shares owned by The Midas Touch
S.A., a Marshall Islands corporation wholly owned by
Mr. Varouxakis; 66,667 shares issuable upon the
exercise of immediately exercisable warrants issued to The
Midas Touch; and 166,667 shares that may be acquired
by Mr. Varouxakis pursuant to immediately exercisable stock
options. Does not include 40,000 shares owned by
V Estates S.A., which is controlled by the father of
Mr. Varouxakis, and 30,600 shares owned by the mother
of Mr. Varouxakis, as to which shares he disclaims
beneficial ownership. |
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(4) |
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Reflects 2,108,782 shares owned by FS Holdings Limited and
700,000 shares issuable upon the exercise of immediately
exercisable warrants owned by FS Holdings Limited. |
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(5) |
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Based solely on information contained in a Schedule 13D/A
filed with the Securities and Exchange Commission on
February 5, 2007. Hummingbird Management, LLC (f/k/a
Morningside Value Investors, LLC) (Hummingbird),
acts as investment manager to Hummingbird Value Fund, L.P.
(HVF), to Hummingbird Microcap Value Fund, L.P. (the
Microcap Fund), and to Hummingbird Concentrated
Fund, L.P. (the Concentrated Fund) and has the sole
investment discretion and voting authority with respect to the
investments
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101
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owned of record by each of HVF, Microcap Fund and Concentrated
Fund. Accordingly, Hummingbird may be deemed for purposes of
Rule 13d-3
of the Securities and Exchange Act of 1934, as amended, to be
the beneficial owner of the shares owned by HVF, Microcap Fund,
and Concentrated Fund. The managing member of Hummingbird is
Paul Sonkin. Mr. Sonkin is also the managing member of
Hummingbird Capital, LLC (f/k/a Morningside Capital, LLC)
(HC), the general partner of each of HVF and
Microcap Fund. The total number of shares of common stock owned
by Hummingbird includes (a) 47,050 shares of common
stock issuable upon the exercise of warrants held by the HVF,
and (b) 47,050 shares of common stock issuable upon
the exercise of warrants held by the Microcap Fund. |
RELATED
PARTY TRANSACTIONS
Each of our vessel-owning subsidiaries has entered into a
management contract with Free Bulkers, a company owned and
operated by Mr. Varouxakis. Pursuant to the management
contracts, Free Bulkers is responsible for all aspects of
technical management and maintenance for each of the vessels.
Pursuant to the management agreements, we pay Free Bulkers a
monthly (pro rata for the calendar days) technical management
fee of $15,000 per vessel, paid in advance, from the date of
signing the memorandum of agreement for the purchase of the
vessel until two months after delivery of the vessel to its new
owners pursuant to its subsequent sale. We have also agreed to
pay Free Bulkers a commercial management commission fee equal to
1.25% of the revenues collected from the employment of our
vessels. We have further agreed to pay Free Bulkers a 1%
commission on the gross purchase price of any new vessels
acquired or the gross sales price of any vessels we sell with
the assistance of Free Bulkers. We believe that we pay Free
Bulkers industry standard fees for these services. We anticipate
that Free Bulkers may manage any additional vessels we may
acquire in the future.
Free Bulkers has entered into a commercial sub-management
agreement with Safbulk, an affiliate of FS Holdings Limited, one
of our principal shareholders. Safbulk and FS Holdings Limited
are controlled by the Restis family. Safbulk has agreed to
perform charter and post-charter management services for our
fleet, including obtaining and negotiating vessel employment and
related services, freight calculations, correspondence with
charterers, and employment of charter brokers. Free Bulkers has
agreed to pay to Safbulk the 1.25% fee on hire or freight to be
received from us for our 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 months notice.
To date, we have been provided with office space by Free
Bulkers. Free Bulkers provided us with our office space at no
rental cost to us until February 5, 2007. On such date, and
in conjunction with moving into larger office space, we entered
into an agreement with Free Bulkers pursuant to which we agreed
to pay Free Bulkers one-half of the rents due from Free Bulkers
to the lessor of our current office space. As of June 30,
2007, the amount paid under such agreement equaled approximately
$32,200, or $5,367 per month (based on a historical exchange
rate of 1.00 to $1.339).
On February 5, 2007, we agreed to reimburse Free Bulkers
for the actual amounts it expended during the fiscal year ended
December 31, 2006 in connection with providing us with
certain consolidating accounting and financial reporting
services. Services provided to us by Free Bulkers related to the
consolidation of financial statements and other financial
reporting obligations. These services were paid as incurred and
recorded in our general and administrative expenses in fiscal
2006. In addition, we agreed to enter into a new service
agreement with Free Bulkers pursuant to which it will provide us
with additional accounting and financial reporting services at
cost during the fiscal year ending December 31, 2007
amounting to $62,500 per quarter (assuming an exchange rate of
1.00 to $1.37).
In September 2007, we entered into an additional agreement with
Free Bulkers pursuant to which Free Bulkers will provide to us
services related to our accounting and financial reporting
obligations, including our internal controls assessment and
reporting obligations. Free Bulkers fee for the foregoing
services is $300,000 per year payable quarterly. This agreement
is for an initial term of 12 months.
102
On May 7, 2007, FS Holdings Limited, an entity controlled
by the Restis family, agreed to loan us up to $14,000,000
pursuant to an unsecured promissory note for the purpose of
financing the acquisition of four new vessels. The loan has been
fully drawn. The note accrues interest on the then-outstanding
principal balance at the annual rate of 12.0%, payable upon
maturity of the loan. The loan is due at the earlier of
(i) May 7, 2009, (ii) the date of a Capital
Event, which is defined as any event in which we raise
gross proceeds of not less than $40,000,000 in an offering of
our common stock or other equity securities or securities
convertible into or exchangeable for our equity securities or
(iii) the date of acceleration due to a default of the
amounts due under the note. The loan is prepayable by us, upon
30 days prior written notice to FS Holdings Limited,
in whole or in part, in increments of not less than $500,000.
Additionally, we have agreed to issue to FS Holdings Limited,
for every $1,000,000 (or pro rata portion thereof) drawn under
the loan, 50,000 warrants to purchase shares of our common stock
at an exercise price of $5.00 per share. Each warrant is
exercisable to purchase one share of our common stock. We have
issued 700,000 warrants to acquire shares of our common stock
pursuant to this loan.
We also currently have outstanding two loans from our principal
shareholders with an aggregate principal balance, net of
discount which results from accounting for the loans at their
fair value, of $1,863,659 as of June 30, 2007. These loans
were made in August and September 2004 in connection with the
purchases of the M/V Free Destiny and the M/V Free
Envoy, respectively. The loans had principal balances at
origination of $1,579,447 and $2,554,737, respectively, and are
interest-free. In April 2005 and October 2005, the loans were
modified to provide for a repayment schedule for each loan of
eight equal quarterly installments of $125,000 each in 2006 and
2007, with balloon payments of the balance due on each loan on
January 1, 2008. Additionally, the amended terms provide
that the loans will become immediately due and payable in the
event that we raise additional capital of at least $12,500,000.
We currently intend to use a portion of the net proceeds of this
offering to repay the remaining principal balance of these
loans. Previously, the loans were repayable from time to time
based on our available cash flow, and matured on the earlier of
the sale date of the applicable vessel or December 31,
2006. As of June 30, 2007, these loans had an aggregate
carrying value of $1,865,843 and a principal balance of
$1,863,659. On January 5, 2007, the shareholder loans due
to one of our corporate shareholders were sold to The
Midas Touch, a corporation controlled by
Mr. Varouxakis for the principal amount outstanding. The
Midas Touch subsequently sold a portion of such loans to
FS Holdings Limited.
In January 2007, V Capital S.A., a Marshall Islands corporation
wholly owned by Ion G. Varouxakis, purchased from the two other
co-founding shareholders an aggregate of 2,812,250 shares
of our common stock for cash at a price of $3.268 per share and
pre-existing promissory notes in the aggregate principal amount
of $1,308,500 executed by us for consideration equal to the
principal amount of the notes. Simultaneously V Capital S.A.
sold 70,600 shares to Mr. Varouxakis family
members and 2,108,782 shares to FS Holdings Limited. V
Capital S.A. also sold 305,921 shares to an institutional
investor and sold 327,197 shares to The Midas Touch
S.A., another Marshall Islands corporation wholly owned by
Mr. Varouxakis. All of these sales were for cash at $3.268
per share. In addition, V Capital S.A. transferred $1,108,500 of
the principal amount of the shareholder loans to FS Holdings
Limited for consideration equal to the principal amount
transferred. As a result of these transactions,
Mr. Varouxakis now beneficially owns (including shares
underlying options and warrants beneficially owned by him)
2,248,031 shares of common stock, which is approximately
29.8% of our common stock as of October 23, 2007.
On August 14, 2007, we received a letter from counsel
representing two of our former executive officers alleging that
the registration statement on
Form F-3
filed by us with the SEC on August 3, 2007 misstated the
number of shares beneficially owned by the two executive
officers. The two former executive officers allege that they
continue to beneficially own 500,000 shares of common stock
underlying options granted to them in connection with their
prior employment with us. We have responded that we believe that
these options expired unexercised pursuant to our stock option
plan and we intend to vigorously defend this position.
Mr. Constantinos Varouxakis, the brother of Mr. Ion
Varouxakis, our chairman, chief executive officer and president,
is an employee of Aquavita International. Free Bulkers and
Safbulk use Aquavita International from time to time as one of
the shipping brokers for our fleet. Aquavita International
received commissions of approximately $30,000 and $0 during the
six months ended June 30, 2007 and 2006, respectively, for
such services.
103
SHARES
ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have
18,298,031 shares of common stock outstanding or
19,948,031 shares if the underwriters over-allotment
option is exercised in full. The 11,000,000 shares sold in
this offering, or 12,650,000 shares if the underwriters
over-allotment option is exercised in full, will be freely
transferable in the United States without restriction under the
Securities Act of 1933, as amended (the Securities
Act), except for any shares purchased by one of our
affiliates, which will be subject to the resale
limitations of Rule 144 under the Securities Act.
After the consummation of this offering, our existing
shareholders will continue to own 4,507,500 shares of
common stock which were acquired in private transactions not
involving a public offering and these shares are therefore
treated as restricted securities for purposes of
Rule 144. The restricted securities held by certain of
these existing shareholders, our officers, directors and certain
other parties will be subject to the underwriters
180-day
lock-up
agreement. Restricted securities may not be resold except in
compliance with the registration requirements of the Securities
Act or under an exemption from those registration requirements,
such as the exemptions provided by Rule 144,
Regulation S and other exemptions under the Securities Act.
Securities currently registered under our existing
Form F-1
resale registration statement may continue to be registered and
sold thereunder by some of our shareholders but may not be sold
by certain of our shareholders during the
180-day
lock-up
period with respect to those shareholders that have executed
lock-up
agreements.
In general, under Rule 144 as currently in effect, a person
or persons whose shares are aggregated, who owns shares that
were acquired from the issuer or an affiliate at least one year
ago, would be entitled to sell within any three-month period, a
number of shares that does not exceed the greater of (i) 1%
of the then outstanding shares of the applicable class of stock,
or (ii) an amount equal to the average weekly reported
volume of trading in shares of the applicable class of stock on
all national securities exchanges
and/or
reported through the automated quotation system of registered
securities associations during the four calendar weeks preceding
the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales in reliance on
Rule 144 are also subject to other requirements regarding
the manner of sale, notice and availability of current public
information about us. A person or persons whose shares are
aggregated, who is not deemed to have been one of our affiliates
at any time during the 90 days immediately preceding the
sale may sell restricted securities in reliance on
Rule 144(k) without regard to the limitations described
above, provided that two years have expired since the later of
the date on which the same restricted securities were acquired
from us or one of our affiliates. As defined in Rule 144,
an affiliate of an issuer is a person that directly,
or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, that same
issuer.
Our directors and officers and certain of our existing
affiliated shareholders, which own 4,123,479 shares during
the period beginning from the date of the prospectus and
continuing to and including the date 180 days after the
date of this prospectus, may not offer, sell, contract to sell
or otherwise dispose of any of our securities which are
substantially similar to our common stock or which are
convertible or exchangeable into securities which are
substantially similar to our common stock, without the prior
written consent of Credit Suisse Securities (USA) LLC.
As a result of these
lock-up
agreements and rules of the Securities Act, the restricted
shares will be available for sale in the public market, subject
to certain volume and other restrictions, as mentioned above, as
follows:
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Days After the Date
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Number of Shares
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of this Prospectus
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Eligible for Sale
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Comment
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Date of prospectus
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384,021
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Shares not locked up and eligible for sale freely or under
Rule 144
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180 days
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2,722,197
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Lock-up
released
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Prior to this offering, there has been a limited public market
for our common stock, and no prediction can be made as to the
effect, if any, that future sales or the availability of shares
for sale will have on the market price of our common stock
prevailing from time to time. Nevertheless, sales of substantial
amounts of our common stock in the public market, including
shares issued upon the exercise of options that may be granted
under any employee stock option plan or employee stock award
plan of ours, or the perception that those sales may occur,
could adversely affect prevailing market prices for our common
stock.
104
DESCRIPTION
OF CAPITAL STOCK
We have summarized below the material features of our capital
stock. This summary is not a complete discussion of our
organizational documents and other instruments that create the
rights of our shareholders. We urge you to carefully read those
documents and instruments. Please see Where You Can Find
Additional Information for information on how to obtain
copies of those documents and instruments.
FreeSeas authorized capital stock consists of
40,000,000 shares of common stock, par value, $.001 per
share, of which 7,298,031 shares are issued and outstanding
as of October 23, 2007, and 5,000,000 shares of blank
check preferred stock, par value, $.001 per share, none of which
are outstanding. All of FreeSeas shares of stock must be
in registered form.
Common
Stock
As of October 23, 2007, 7,298,031 shares of common
stock were outstanding out of 40,000,000 shares authorized
to be issued, which is 1,007,931 more shares outstanding than on
January 1, 2007. As of October 23, 2007,
4,224,569 shares of common stock were reserved for issuance
upon the exercise of various outstanding options and warrants.
Each outstanding share of common stock entitles the holder to
one vote on all matters submitted to a vote of shareholders.
Subject to preferences that may be applicable to shares of
preferred stock that may be issued in the future, holders of
shares of common stock are entitled to receive dividends, if
any, declared by our board of directors out of funds legally
available for dividends. Holders of common stock do not have
conversion, redemption or preemptive rights to subscribe to any
of our securities. All outstanding shares of common stock are
fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to the rights
of the holders of any shares of preferred stock that FreeSeas
may issue in the future.
Preferred
Stock
As of the date of this prospectus, we are authorized to issue up
to 5,000,000 shares of blank check preferred
stock. Our board of directors can determine the rights,
designations and preferences of the preferred stock, and
authorize the issuance of shares of preferred stock without any
further vote or action by our shareholders.
Other
Securities
Class A
Warrants
We have issued to our initial shareholders warrants to purchase
an aggregate of 200,000 shares of our common stock at an
exercise price of $5.00 per share. The exercise price of the
Class A warrants will be adjusted upon the occurrence of
certain corporate events such as stock dividends or splits. The
warrants will expire on July 29, 2011 and are not callable
or redeemable.
Class B
Warrants
We have issued to FS Holdings Limited, one of our principal
shareholders, 700,000 warrants to purchase shares of our common
stock at an exercise price of $5.00 per share. Each warrant is
exercisable to purchase one share of our common stock. The
warrants were issued in connection with a $14.0 million
loan provided to us by FS Holdings Limited, as of June 30,
2007, at a rate of 50,000 shares for each $1.0 million
drawn under the loan. As of the date of this prospectus, all of
the $14.0 million available had been drawn.
The warrants will expire on May 8, 2012 as to
275,000 shares and on June 22, 2012 as to
425,000 shares, and are not callable or redeemable. The
warrants may be exercised on a net issue exercise basis in lieu
of cash. The warrants provide for pro rata adjustment upon the
occurrence of certain corporate events such as stock dividends
or splits and provide for weighted average anti-dilution
protection if we issue additional common stock, options or
warrants, or securities exchangeable into any of them, at a
price less than the exercise price per share in effect at the
time of issuance of the additional securities. The warrant
holder has also been granted demand and piggyback registration
rights for the resale of the shares underlying the warrants.
105
Class W
Warrants and Class Z Warrants
Each Class W warrant entitles the holder to purchase one
share of our common stock at an exercise price of $5.00 per
share (except for Class W warrants issued upon the exercise of
the underwriters purchase option described below, which
have an exercise price of $5.50 per share), and expires on
July 29, 2009 or upon earlier redemption. Each Class Z
warrant entitles the holder to purchase one share of our common
stock at an exercise price of $5.00 per share (except for Class
Z warrants issued upon the exercise of the underwriters
purchase option described below, which have an exercise price of
$5.50 per share), and expires on July 29, 2011 or upon
earlier redemption (except for Class Z warrants issued upon the
exercise of the underwriters purchase option described
below, which expire on July 29, 2009 or upon earlier
redemption). The exercise price of the Class Z and
Class W warrants will be adjusted upon the occurrence of
certain corporate events such as stock dividends or splits. We
may redeem the outstanding Class W warrants
and/or
Class Z warrants in whole and not in part, at a price of
$.05 per warrant at any time after the warrants become
exercisable, upon a minimum of 30 days prior written
notice of redemption to the holders of record of the warrant, if
the last sale price of our common stock equals or exceeds $7.50
per share for a Class W warrant or $8.75 per share for a
Class Z warrant for any 20 trading days within a
30-trading-day period ending three business days before we send
the notice of redemption. Any Class W or Class Z
warrant either not exercised or tendered back to us by the end
of the date specified in the notice of call will be cancelled on
the books of the company and will have no further value except
for the $.05 call price.
As of October 23, 2007, we have received an aggregate of
$4,787,672 of net proceeds from exercises of Class W and
Class Z warrants. We issued 1,007,931 shares of common
stock in accordance with the terms of such warrants in
connection with such exercises. These exercises occurred
following our registration in August 2007 of the shares
underlying these warrants.
Underwriters
Unit Purchase Option
We have assumed Trinitys obligations under the unit
purchase option sold to HCFP/Brenner Securities LLC, or HCFP,
the lead underwriter in Trinitys initial public offering.
Under that purchase option, HCFP has 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 will consist of two shares of our common
stock, five Class W warrants and five Class Z
warrants. Each Series B Unit will consist of two shares of
our common stock, one Class W warrant and one Class Z
warrant. The purchase option expires on July 29, 2009.
Employee
Options
Pursuant to our Amended and Restated 2005 Stock Incentive Plan,
there are outstanding options to purchase a total of
250,000 shares of our common stock. The options vest at a
rate of
1/3
per year. As of June 30, 2007, options to purchase
166,667 shares had vested. The options entitle the holders
to purchase shares of our common stock at an exercise price of
$5.00 per share until December 16, 2010.
On August 14, 2007, we received a letter from counsel
representing two of our former executive officers alleging that
the registration statement on
Form F-3
filed by us with the SEC on August 3, 2007 misstated the
number of shares beneficially owned by the two executive
officers. The two former executive officers allege that they
continue to beneficially own 500,000 shares of common stock
underlying options granted to them in connection with their
prior employment with us. We have responded that we believe that
these options expired unexercised pursuant to our stock option
plan and we intend to vigorously defend this position.
Other
Matters
Our
Amended and Restated Articles of Incorporation and
By-laws
Our purpose, as stated in section 3.B. of our amended and
restated articles of incorporation, is to engage in any lawful
act or activity for which corporations may now or hereafter be
organized under the Marshall Islands Business Corporations Act,
or BCA. Our amended and restated articles of incorporation and
by-laws do not impose any limitations on the ownership rights of
our shareholders.
Under our by-laws, annual shareholders meetings will be
held at a time and place selected by our board of directors. The
meetings may be held in or outside of the Marshall Islands.
Special meetings may be called
106
by the board of directors, by our chairman or by our president.
Our board of directors may set a record date between 15 and
60 days before the date of any meeting to determine the
shareholders that will be eligible to receive notice and vote at
the meeting.
Directors
Our directors are elected by a plurality of the votes cast at a
meeting of the shareholders by the holders of shares entitled to
vote in the election. There is no provision for cumulative
voting. The board of directors has the authority to fix the
amounts that shall be payable to the members of our board of
directors for attendance at any meeting or for services rendered
to us. Our by-laws provide, generally, that the vote to
authorize a transaction by a director who has a financial
interest in such transaction, or is an officer or director of
the opposite party to the transaction, will be counted if, the
material facts of the relationship or interest have been
disclosed, and the transaction is approved by the appropriate
number of our disinterested directors or by our shareholders.
Anti-Takeover
Provisions of Amended and Restated Articles of Incorporation and
By-Laws
Several provisions of our amended and restated articles of
incorporation and by-laws may have anti-takeover effects. These
provisions are intended to avoid costly takeover battles, lessen
our vulnerability to a hostile change of control, and enhance
the ability of our board of directors to maximize shareholder
value in connection with any unsolicited offer to acquire
FreeSeas. These anti-takeover provisions, however, could also
discourage, delay or prevent (1) the merger or acquisition
of FreeSeas by means of a tender offer, a proxy contest or
otherwise, that a shareholder may consider in its best interest
and (2) the removal of incumbent directors and officers.
These provisions are summarized below.
Blank
Check Preferred Stock
Our board of directors has the authority, without any further
vote or action by our shareholders, to issue up to
5,000,000 shares of blank check preferred stock. Our board
of directors may issue shares of preferred stock on terms
calculated to discourage, delay or prevent a change of control
of FreeSeas or the removal of our management.
Classified
Board of Directors
Our directors serve staggered, three-year terms. Approximately
one-third of our directors are elected each year. The
classification of the directors could discourage a third party
from making a tender offer for our stock or attempting to obtain
control of FreeSeas. It could also delay shareholders who do not
agree with the policies of the board of directors from removing
a majority of the board of directors for two years.
Supermajority
Director Voting Requirement to Change Number of
Directors
Our board of directors may only change the size of the board by
a vote of not less than
662/3%
of the directors then in office. This provision makes it more
difficult to increase the number of directors in an attempt to
gain a majority of directors through the addition of more
directors.
Election
and Removal of Directors
Cumulative voting in the election of directors is not permitted.
Our amended and restated by-laws require parties other than the
board of directors to give advance written notice of nominations
for the election of directors. Our amended and restated articles
of incorporation provide that directors may be removed only for
cause and only upon the affirmative vote of either the holders
of at least
662/3%
of our issued and outstanding voting stock or by our board of
directors. They also require advance written notice of any
proposals by shareholders to remove a director. These provisions
may discourage, delay or prevent the removal of incumbent
directors
and/or
officers.
Limited
Actions by Shareholders
The BCA provides that any action required or permitted to be
taken by our shareholders must be done at an annual meeting or
special meeting of shareholders or by the unanimous written
consent of the shareholders. Our by-laws provide that only our
board of directors, the chairman or the president may call
special meetings
107
of shareholders. The BCA provides that the business that can be
transacted at a special meeting of shareholders must be related
to the purpose or purposes stated in the notice of the meeting.
Other
Supermajority Voting Requirements
Our shareholders can make, alter, amend or repeal our by-laws
only upon the affirmative vote of
662/3%
of the outstanding shares of capital stock entitled to vote
generally in the election of directors. The provisions of our
amended and restated articles of incorporation with respect to
directors and our by-laws can only be amended by the affirmative
vote of
662/3%
of the outstanding shares of capital stock entitled to vote
generally in the election of directors. Such supermajority
voting requirements make these provisions more difficult to
change and thus may discourage, delay or prevent the removal of
incumbent directors
and/or
officers.
REGISTRAR
AND TRANSFER AGENT
The registrar and transfer agent for our common stock is
American Stock Transfer & Trust Company.
108
MARSHALL
ISLANDS COMPANY CONSIDERATIONS
Our corporate affairs are governed by our amended and restated
articles of incorporation and amended and restated by-laws and
by the Business Corporations Act of the Republic of the Marshall
Islands, or BCA. The provisions of the BCA resemble provisions
of the corporation laws of a number of states in the United
States. For example, the BCA allows the adoption of various
anti-takeover measures such as shareholder rights
plans. While the BCA also provides that it is to be interpreted
according to the laws of the State of Delaware and other states
with substantially similar legislative provisions, there have
been few, if any, court cases interpreting the BCA in the
Marshall Islands and we can not predict whether Marshall Islands
courts would reach the same conclusions as U.S. courts.
Thus, you may have more difficulty in protecting your interests
in the face of actions by the management, directors or
controlling shareholders than would shareholders of a
corporation incorporated in a United States jurisdiction that
has developed a substantial body of case law. The following
table provides a comparison between the statutory provisions of
the BCA and the Delaware General Corporation Law relating to
shareholders rights.
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Marshall Islands
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Delaware
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Shareholders Meetings
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Held at a time and place as designated in the by- laws
May be held within or outside the Marshall Islands
Notice:
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May be held at such time or place as designated in the certificate of incorporation or the bylaws, or if not so designated, as determined by the board of directors
May be held within or outside Delaware
Notice:
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Whenever shareholders are required to take action at a meeting, written notice shall state the place, date and hour of the meeting and indicate that it is being issued by or at the direction of the person calling the meeting
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Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, and the means of remote communication, if any
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A copy of the notice of any meeting shall be given personally or sent by mail not less than 15 nor more than 60 days before the meeting
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Written notice shall be given not
less than 10 nor more than 60 days before the date of the
meeting
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Shareholders Voting Rights
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Any action required to be taken by meeting of
shareholders may be taken without meeting if consent is in
writing and is signed by all the shareholders entitled to
vote
Any person authorized to vote may authorize another
person to act for him by proxy
Unless otherwise provided in the articles of
incorporation, a majority of shares entitled to vote constitutes
a quorum. In no event shall a quorum consist of fewer than one
third of the shares entitled to vote at a meeting. Once a
quorum is present to organize a meeting, it is not broken by the
subsequent withdrawal of any shareholders
The articles of incorporation may provide for
cumulative voting in the election of directors
Any two or more domestic corporations may merge
into a single corporation if approved by the board and if
authorized by a majority vote of the holders of outstanding
shares at a stockholder meeting
Any sale, lease, exchange or other disposition of
all
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Stockholders may act by written consent to elect
directors
Any person authorized to vote may authorize another
person or persons to act for him by proxy
For non-stock corporations, certificate of
incorporation or bylaws may specify the number of members
necessary to constitute a quorum. In the absence of this,
one-third of the members shall constitute a quorum
For stock corporations, certificate of
incorporation or bylaws may specify the number of members
necessary to constitute a quorum but in no event shall a quorum
consist of less than one-third of the shares entitled to vote at
the meeting. In the absence of such specifications, a majority
of shares entitled to vote at the meeting shall constitute a
quorum
The certificate of incorporation may provide for
cumulative voting
Any two or more corporations existing under the
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Marshall Islands
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Delaware
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or substantially all the assets of a corporation, if not made
in the corporations usual or regular course of business,
once approved by the board, shall be authorized by the
affirmative vote of two-thirds of the shares of those entitled
to vote at a shareholder meeting
Any domestic corporation owning at least 90% of
the outstanding shares of each class of another domestic
corporation may merge such other corporation into itself without
the authorization of the shareholders of any corporation
Any mortgage, pledge of or creation of a security
interest in all or any part of the corporate property may be
authorized without the vote or consent of the shareholders,
unless otherwise provided for in the articles of incorporation
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laws of the state may merge into a single corporation pursuant
to a board resolution and upon the majority vote by stockholders
of each constituent corporation at an annual or special
meeting
Every corporation may at any meeting of the board
sell, lease or exchange all or substantially all of its property
and assets as its board deems expedient and for the best
interests of the corporation when so authorized by a resolution
adopted by the holders of a majority of the outstanding stock of
a corporation entitled to vote
Any corporation owning at least 90% of the
outstanding shares of each class of another corporation may
merge the other corporation into itself and assume all of its
obligations without the vote or consent of stockholders;
however, in case the parent corporation is not the surviving
corporation, the proposed merger shall be approved by a majority
of the outstanding stock of the parent corporation entitled to
vote at a duly called stockholder meeting
Any mortgage or pledge of a corporations
property and assets may be authorized without the vote or
consent of stockholders, except to the extent that the
certificate of incorporation otherwise provides
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Directors
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Board must consist of at least one member
Number of members can be changed by an amendment to the by-laws, by the shareholders, or by action of the board
If the board is authorized to change the number of directors, it can only do so by majority of the entire board and so long as no decrease in the number shall shorten the term of any incumbent director
Removal
Any or all of the directors may be removed for cause by vote of the shareholders
If the articles of incorporation or the by-laws so provide, any or all of the directors may be removed without cause by vote of the shareholders
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Board must consist of at least one member
Number of board members shall be fixed by the bylaws, unless the certificate of incorporation fixes the number of directors
If the number of directors is fixed by the certificate of incorporation, a change in the number shall be made only by an amendment of the certificate
Removal
Any or all of the directors may be removed, with or without cause, by the holders of a majority of the shares entitled to vote unless the certificate of incorporation otherwise provides
In the case of a classified board, stockholders may effect removal of any or all directors only for cause
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Dissenters Rights of Appraisal
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Shareholders have a right to dissent from a merger or sale of all or substantially all assets not made in the usual course of business, and receive payment of the fair value of their shares
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With limited exceptions, appraisal rights shall be available for the shares of any class or series of stock of a corporation in a merger or consolidation
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A holder of any adversely affected
shares who
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Marshall Islands
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Delaware
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does not vote on or consent in writing to an amendment to the
articles of incorporation has the right to dissent and to
receive payment for such shares if the amendment:
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Alters or abolishes any preferential right of any outstanding shares having preference; or
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Creates, alters or abolishes any provision or right in respect to the redemption of any outstanding shares; or
Alters or abolishes any preemptive right of such holder to acquire shares or other securities; or
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Excludes or limits the right of such
holder to vote on any matter, except as such right may be
limited by the voting rights given to new shares then being
authorized of any existing or new class
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Shareholders Derivative Actions
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An action may be brought in the right of a corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates or of a beneficial interest in such shares or certificates. It shall be made to appear that the plaintiff is such a holder at the time of bringing the action at the time of the transaction of which he complains, or that his shares or his interest
therein devolved upon him by operation of law
Complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort
Such action shall not be discontinued, compromised or settled, without the approval of the High Court of the Republic
Reasonable expenses including attorneys fees may be awarded if the action is successful
Corporation may require a plaintiff bringing a derivative suit to give security for reasonable expenses if the plaintiff owns less than 5% of any class of stock and the shares have a value of less than $50,000
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In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which he complains or such stockholders stock must have thereafter devolved upon such stockholder by operation of law
Other requirements regarding derivative suits have been created by judicial decision, including that a stockholder may not bring a derivative suit unless he or she first demands that the corporation sue on its own behalf and that demand is refused (unless it is shown that such demand would have been futile)
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The following is a discussion of the material Marshall Islands
and United States federal income tax consequences relevant to an
investment decision by a U.S. Holder, as defined below,
with respect to the common stock. This discussion does not
purport to deal with the tax consequences of owning common stock
to all categories of investors, some of which, such as dealers
in securities, investors whose functional currency is not the
United States dollar and investors that own, actually or under
applicable constructive ownership rules, 10% or more of the
voting power of our stock, may be subject to special rules. This
discussion deals only with holders who purchase common stock in
connection with this offering and hold the common stock as a
capital asset. You are encouraged to consult your own tax
advisors concerning the overall tax consequences arising in your
own particular situation under United States federal, state,
local or foreign law of the ownership of common stock.
Marshall
Islands Tax Consequences
We are incorporated in the Marshall Islands. Under current
Marshall Islands law, we are not subject to tax on income or
capital gains, and no Marshall Islands withholding tax will be
imposed upon payments of dividends by us to our stockholders
provided such stockholders are not residents of the Marshall
Islands.
United
States Federal Income Tax Consequences
The following are the material United States federal income tax
consequences to us of our activities and to U.S. Holders
and
Non-U.S. Holders,
each as defined below, of the ownership and disposition of our
common stock. The following discussion of United States federal
income tax matters is based on the United States Internal
Revenue Code of 1986, or the Code, judicial decisions,
administrative pronouncements, and existing and proposed
regulations issued by the United States Department of the
Treasury, all of which are subject to change, possibly with
retroactive effect. This discussion is based, in part, upon
Treasury Regulations promulgated under Section 883 of the
Code. The discussion below is based, in part, on the description
of our business as described in Business above and
assumes that we conduct our business as described in that
section. References in the following discussion to
we and us are to Euroseas and its
subsidiaries on a consolidated basis.
United
States Federal Income Taxation of Our Company
Taxation
of Operating Income: In General
Unless exempt from United States federal income taxation under
the rules discussed below, a foreign corporation is subject to
United States federal income taxation in respect of any income
that is derived from the use of vessels, from the hiring or
leasing of vessels for use on a time, voyage or bareboat charter
basis, from the participation in a shipping pool, partnership,
strategic alliance, joint operating agreement, code sharing
arrangements or other joint venture it directly or indirectly
owns or participates in that generates such income, or from the
performance of services directly related to those uses, which we
refer to as shipping income, to the extent that the
shipping income is derived from sources within the United
States. For these purposes, 50% of shipping income that is
attributable to transportation that begins or ends, but that
does not both begin and end, in the United States constitutes
income from sources within the United States, which we refer to
as
U.S.-source
shipping income.
Shipping income attributable to transportation that both begins
and ends in the United States is considered to be 100% from
sources within the United States. We are not permitted to engage
in transportation that produces income which is considered to be
100% from sources within the United States.
Shipping income attributable to transportation exclusively
between
non-U.S. ports
will be considered to be 100% derived from sources outside the
United States. Shipping income derived from sources outside the
United States will not be subject to any United States federal
income tax.
In the absence of exemption from tax under Section 883, our
gross U.S.-source
shipping income would be subject to a 4% tax imposed without
allowance for deductions as described below.
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Exemption
of Operating Income from United States Federal Income
Taxation
Under Section 883 of the Code, we will be exempt from
United States federal income taxation on our
U.S.-source
shipping income if:
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we are organized in a foreign country (our country of
organization) that grants an equivalent
exemption to corporations organized in the United States;
and
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either
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more than 50% of the value of our stock is owned, directly or
indirectly, by qualified stockholders, individuals
(i) who are residents of our country of
organization or of another foreign country that grants an
equivalent exemption to corporations organized in
the United States and (ii) who comply with certain
documentation requirements, which we refer to as the 50%
Ownership Test, or
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our stock is primarily and regularly traded on one or more
established securities markets in our country of organization,
in another country that grants an equivalent
exemption to United States corporations, or in the United
States, which we refer to as the Publicly-Traded
Test.
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The Republic of the Marshall Islands, the jurisdiction where we
and our shipowning subsidiaries are incorporated, grants
equivalent exemptions to United States corporations.
Therefore, we will be exempt from United States federal income
taxation with respect to our
U.S.-source
shipping income if we satisfy either the 50% Ownership Test or
the Publicly-Traded Test.
It is not clear whether we will be entitled to the benefits of
Section 883 for 2006 and 2007. We do not anticipate,
however, that a material amount of United States federal tax
would be owed in the event that we do not qualify for the
benefits of Section 883 for such years.
For 2008 and subsequent years, we anticipate that we will need
to satisfy the Publicly-Traded Test in order to qualify for
benefits under Section 883. Our ability to satisfy the
Publicly-Traded Test is discussed below.
The regulations provide, in pertinent part, that the stock of a
foreign corporation will be considered to be primarily
traded on an established securities market in a country if
the number of shares of each class of stock that are traded
during any taxable year on all established securities markets in
that country exceeds the number of shares in each such class
that are traded during that year on established securities
markets in any other single country. Our common stock, our sole
class of our issued and outstanding stock, is primarily
traded on the NASDAQ Capital Market.
Under the regulations, our stock will be considered to be
regularly traded if one or more classes of our stock
representing 50% or more of our outstanding shares, by total
combined voting power of all classes of stock entitled to vote
and total value, is listed on one or more established securities
markets which we refer to as the listing threshold. Our common
stock, our sole class of issued and outstanding stock, is listed
on the NASDAQ Capital Market and, accordingly, we will satisfy
the listing requirement.
It is further required that with respect to each class of stock
relied upon to meet the listing requirement: (i) such class
of the stock is traded on the market, other than in minimal
quantities, on at least 60 days during the taxable year or
1/6
of the days in a short taxable year; and (ii) the aggregate
number of shares of such class of stock traded on such market is
at least 10% of the average number of shares of such class of
stock outstanding during such year or as appropriately adjusted
in the case of a short taxable year. We believe we will satisfy
the trading frequency and trading volume tests. Even if this
were not the case, the regulations provide that the trading
frequency and trading volume tests will be deemed satisfied by a
class of stock if, as we expect to be the case with our common
stock, such class of stock is traded on an established market in
the United States and such class of stock is regularly quoted by
dealers making a market in such stock.
Notwithstanding the foregoing, the regulations provide, in
pertinent part, a class of stock will not be considered to be
regularly traded on an established securities market
for any taxable year in which 50% or more of the outstanding
shares of such class of stock are owned, actually or
constructively under specified stock attribution rules, on more
than half the days during the taxable year by persons who each
own 5% or more of such class of stock, which we refer to as the
5% Override Rule. The 5% Override Rule shall not
apply to us, however, if we can establish that our qualified
shareholders own sufficient shares in our closely-held block of
stock to preclude the shares in the closely-held block that are
not so owned from representing
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50% or more of the value of such class of stock for more than
half of the number of days during the taxable year, which we
refer to as the 5% Override Rule Exception.
Establishing such ownership by qualified shareholders will
depend upon the status of our direct and indirect individual
shareholders as residents of qualifying jurisdictions and
whether they own shares through bearer share arrangements and
will require compliance with ownership certification procedures
by individual shareholders that are residents of qualifying
jurisdictions and by each intermediary or other person in the
chain of ownership between us and such individuals.
For purposes of being able to determine the persons who own,
actually or constructively, 5% or more of a class our stock, or
5% Shareholders, the regulations permit us to rely
on Schedule 13G and Schedule 13D filings with the
Securities and Exchange Commission to identify persons who have
a 5% or more beneficial interest in a class of our stock. The
regulations further provide that an investment company which is
registered under the Investment Company Act of 1940, as amended,
will not be treated as a 5% Stockholder for such purposes.
There can be no assurance regarding whether we will be subject
to the 5% Override Rule for any year or whether in circumstances
where it would otherwise apply we will be able to qualify for
the 5% Override Rule Exception. For this and other reasons,
there can be no assurance that we or any of our subsidiaries
will qualify for the benefits of Section 883 of the Code
for any year.
Taxation
in Absence of Exemption
To the extent the benefits of Section 883 are unavailable,
our U.S. source shipping income, to the extent not
considered to be effectively connected with the
conduct of a U.S. trade or business, as described below,
would be subject to a 4% tax imposed by Section 887 of the
Code on a gross basis, without the benefit of deductions. Since
under the sourcing rules described above, no more than 50% of
our shipping income would be treated as being derived from
U.S. sources, the maximum effective rate of
U.S. federal income tax on our shipping income would never
exceed 2% under the 4% gross basis tax regime.
To the extent the benefits of the Section 883 exemption are
unavailable and our
U.S.-source
shipping income is considered to be effectively
connected with the conduct of a U.S. trade or
business, as described below, any such effectively
connected
U.S.-source
shipping income, net of applicable deductions, would be subject
to the U.S. federal corporate income tax currently imposed
at rates of up to 35%. In addition, we may be subject to the 30%
branch profits taxes on earnings effectively
connected with the conduct of such trade or business, as
determined after allowance for certain adjustments, and on
certain interest paid or deemed paid attributable to the conduct
of its U.S. trade or business.
Our
U.S.-source
shipping income would be considered effectively
connected with the conduct of a U.S. trade or
business only if:
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We have, or are considered to have, a fixed place of business in
the United States involved in the earning of shipping
income; and
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substantially all of our
U.S.-source
shipping income is attributable to regularly scheduled
transportation, such as the operation of a vessel that follows a
published schedule with repeated sailings at regular intervals
between the same points for voyages that begin or end in the
United States.
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We do not intend to have, or permit circumstances that would
result in having any vessel operating to the United States on a
regularly scheduled basis. Based on the foregoing and on the
expected mode of our shipping operations and other activities,
we believe that none of our
U.S.-source
shipping income will be effectively connected with
the conduct of a U.S. trade or business.
United
States Taxation of Gain on Sale of Vessels
Regardless of whether we qualify for exemption under
Section 883, we will not be subject to United States
federal income taxation with respect to gain realized on a sale
of a vessel, provided the sale is considered to occur outside of
the United States under United States federal income tax
principles. In general, a sale of a vessel will be considered to
occur outside of the United States for this purpose if title to
the vessel, and risk of loss with respect to the vessel, pass to
the buyer outside of the United States. It is expected that any
sale of a vessel by us will be considered to occur outside of
the United States.
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United
States Federal Income Taxation of U.S. Holders
As used herein, the term U.S. Holder means a
beneficial owner of common stock that is a United States citizen
or resident, United States corporation or other United States
entity taxable as a corporation, an estate the income of which
is subject to United States federal income taxation regardless
of its source, or a trust if a court within the United States is
able to exercise primary jurisdiction over the administration of
the trust and one or more United States persons have the
authority to control all substantial decisions of the trust.
If a partnership holds our common stock, the tax treatment of a
partner will generally depend upon the status of the partner and
upon the activities of the partnership. If you are a partner in
a partnership holding our common stock, you are encouraged to
consult your tax advisor.
Distributions
Subject to the discussion of passive foreign investment
companies below, any distributions made by us with respect to
our common stock to a U.S. Holder will generally constitute
dividends, which may be taxable as ordinary income or
qualified dividend income as described in more
detail below, to the extent of our current or accumulated
earnings and profits, as determined under United States federal
income tax principles. Distributions in excess of our earnings
and profits will be treated first as a nontaxable return of
capital to the extent of the U.S. Holders tax basis
in his common stock on a dollar-for-dollar basis and thereafter
as capital gain. Because we are not a United States corporation,
U.S. Holders that are corporations will not be entitled to
claim a dividends received deduction with respect to any
distributions they receive from us. Dividends paid with respect
to our common stock will generally be treated as passive
category income or, in the case of certain types of
U.S. Holders, general category income for purposes of
computing allowable foreign tax credits for United States
foreign tax credit purposes.
Dividends paid on our common stock to a U.S. Holder who is
an individual, trust or estate (a U.S. Individual
Holder) will generally be treated as qualified
dividend income that is taxable to such
U.S. Individual Holders at preferential tax rates (through
2010) provided that (1) we are not a passive foreign
investment company for the taxable year during which the
dividend is paid or the immediately preceding taxable year
(which we do not believe we are, have been or will be),
(2) our common stock is readily tradable on an established
securities market in the United States (such as the NASDAQ
Capital Market), and (3) the U.S. Individual Holder
has owned the common stock for more than 60 days in the
121-day
period beginning 60 days before the date on which the
common stock becomes ex-dividend. There is no assurance that any
dividends paid on our common stock will be eligible for these
preferential rates in the hands of a U.S. Individual
Holder. Legislation has been introduced that, if enacted in its
present form, would preclude our dividends from qualifying for
such preferential rates prospectively from the date of the
enactment. Any distributions treated as dividends paid by us
which are not eligible for these preferential rates will be
taxed as ordinary income to a U.S. Individual Holder.
Special rules may apply to any extraordinary
dividend generally, a dividend in an amount which is equal
to or in excess of ten percent of a stockholders adjusted
basis (or fair market value in certain circumstances) in a share
of our stock paid by us. If we pay an extraordinary
dividend on our stock that is treated as qualified
dividend income, then any loss derived by a
U.S. Individual Holder from the sale or exchange of such
stock will be treated as long-term capital loss to the extent of
such dividend.
Sale,
Exchange or Other Disposition of Common Stock
Assuming we do not constitute a passive foreign investment
company for any taxable year, a U.S. Holder generally will
recognize taxable gain or loss upon a sale, exchange or other
disposition of our common stock in an amount equal to the
difference between the amount realized by the U.S. Holder
from such sale, exchange or other disposition and the
U.S. Holders tax basis in such stock. Such gain or
loss will be treated as long-term capital gain or loss if the
U.S. Holders holding period is greater than one year
at the time of the sale, exchange or other disposition. Such
capital gain or loss will generally be treated as
U.S.- source
income or loss, as applicable, for U.S. foreign tax credit
purposes. A U.S. Holders ability to deduct capital
losses is subject to certain limitations.
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Passive
Foreign Investment Company Status and Significant Tax
Consequences
Special United States federal income tax rules apply to a
U.S. Holder that holds stock in a foreign corporation
classified as a passive foreign investment company for United
States federal income tax purposes. In general, we will be
treated as a passive foreign investment company with respect to
a U.S. Holder if, for any taxable year in which such holder
held our common stock, either:
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at least 75% of our gross income for such taxable year consists
of passive income (e.g., dividends, interest, capital gains and
rents derived other than in the active conduct of a rental
business); or
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at least 50% of the average value of the assets held by the
corporation during such taxable year produce, or are held for
the production of, passive income.
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For purposes of determining whether we are a passive foreign
investment company, we will be treated as earning and owning our
proportionate share of the income and assets, respectively, of
any of our subsidiary corporations in which we own at least 25%
of the value of the subsidiarys stock. Income earned, or
deemed earned, by us in connection with the performance of
services would not constitute passive income. By contrast,
rental income would generally constitute passive
income unless we were treated under specific rules as
deriving our rental income in the active conduct of a trade or
business.
Based on our current operations and future projections, we do
not believe that we are, nor do we expect to become, a passive
foreign investment company with respect to any taxable year.
Although there is no legal authority directly on point, and we
are not relying upon an opinion of counsel on this issue, our
belief is based principally on the position that, for purposes
of determining whether we are a passive foreign investment
company, the gross income we derive or are deemed to derive from
the time chartering and voyage chartering activities of our
wholly owned subsidiaries should constitute services income,
rather than rental income. Correspondingly, such income should
not constitute passive income, and the assets that we or our
wholly-owned subsidiaries own and operate in connection with the
production of such income, in particular, the vessels, should
not constitute passive assets for purposes of determining
whether we are a passive foreign investment company. We believe
there is substantial legal authority supporting our position
consisting of case law and Internal Revenue Service
pronouncements concerning the characterization of income derived
from time charters and voyage charters as services income for
other tax purposes. However, in the absence of any legal
authority specifically relating to the statutory provisions
governing passive foreign investment companies, the Internal
Revenue Service or a court could disagree with our position. In
addition, although we intend to conduct our affairs in a manner
to avoid being classified as a passive foreign investment
company with respect to any taxable year, we cannot assure you
that the nature of our operations will not change in the future.
As discussed more fully below, if we were to be treated as a
passive foreign investment company for any taxable year, a
U.S. Holder would be subject to different taxation rules
depending on whether the U.S. Holder makes an election to
treat us as a Qualified Electing Fund, which
election we refer to as a QEF election. As an
alternative to making a QEF election, provided that our common
shares are listed on the NASDAQ Capital Market and are treated
as regularly traded on such market for the year in
which the election is made, a U.S. Holder should be able to
make a mark-to-market election with respect to our
common stock, as discussed below.
Taxation
of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which
U.S. Holder we refer to as an Electing Holder,
the Electing Holder must report each year for United States
federal income tax purposes his pro rata share of our ordinary
earnings and our net capital gain, if any, for our taxable year
that ends with or within the taxable year of the Electing
Holder, regardless of whether or not distributions were received
from us by the Electing Holder. The Electing Holders
adjusted tax basis in the common stock will be increased to
reflect taxed but undistributed earnings and profits.
Distributions of earnings and profits that had been previously
taxed will result in a corresponding reduction in the adjusted
tax basis in the common stock and will not be taxed again once
distributed. An Electing Holder would generally recognize
capital gain or loss on the sale, exchange or other disposition
of our common stock. A U.S. Holder would make a QEF
election with respect to any year that our company is a passive
foreign investment company by filing IRS Form 8621 with his
United States federal income tax return. If we were aware that
we were to be treated as a passive foreign investment
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company for any taxable year, we would provide each
U.S. Holder with all necessary information in order to make
the QEF election described above.
Taxation
of U.S. Holders Making a Mark-to-Market
Election
Alternatively, if we were to be treated as a passive foreign
investment company for any taxable year and our common stock is
treated as marketable stock, a U.S. Holder
would be allowed to make a mark-to-market election
with respect to our common stock, provided the U.S. Holder
completes and files IRS Form 8621 in accordance with the
relevant instructions and related Treasury Regulations. Since
our stock is listed on the NASDAQ Capital Market, our common
stock will be treated as marketable stock for this
purpose, provided that our common stock is regularly traded on
such market in accordance with applicable Treasury regulations.
If that election is made, the U.S. Holder generally would
include as ordinary income in each taxable year the excess, if
any, of the fair market value of the common stock at the end of
the taxable year over such holders adjusted tax basis in
the common stock. The U.S. Holder would also be permitted
an ordinary loss in respect of the excess, if any, of the
U.S. Holders adjusted tax basis in the common stock
over its fair market value at the end of the taxable year, but
only to the extent of the net amount previously included in
income as a result of the mark-to-market election. A
U.S. Holders tax basis in his common stock would be
adjusted to reflect any such income or loss amount. Gain
realized on the sale, exchange or other disposition of our
common stock would be treated as ordinary income, and any loss
realized on the sale, exchange or other disposition of the
common stock would be treated as ordinary loss to the extent
that such loss does not exceed the net mark-to-market gains
previously included by the U.S. Holder.
Taxation
of U.S. Holders Not Making a Timely QEF or Mark-to-Market
Election
Finally, if we were to be treated as a passive foreign
investment company for any taxable year, a U.S. Holder who
does not make either a QEF election or a
mark-to-market election for that year, whom we refer
to as a Non-Electing Holder, would be subject to
special rules with respect to (1) any excess distribution
(i.e., the portion of any distributions received by the
Non-Electing Holder on our common stock in a taxable year in
excess of 125 percent of the average annual distributions
received by the Non-Electing Holder in the three preceding
taxable years, or, if shorter, the Non-Electing Holders
holding period for the common stock), and (2) any gain
realized on the sale, exchange or other disposition of our
common stock. Under these special rules:
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the excess distribution or gain would be allocated ratably over
the Non-Electing Holders aggregate holding period for the
common stock;
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the amount allocated to the current taxable year and any taxable
year before we became a passive foreign investment company would
be taxed as ordinary income; and
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the amount allocated to each of the other taxable years would be
subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year, and an interest
charge for the deemed deferral benefit would be imposed with
respect to the resulting tax attributable to each such other
taxable year.
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These penalties would not apply to a pension or profit sharing
trust or other tax-exempt organization that did not borrow funds
or otherwise utilize leverage in connection with its acquisition
of our common stock. If a Non-Electing Holder who is an
individual dies while owning our common stock, such
holders successor generally would not receive a
step-up in
tax basis with respect to such stock.
United
States Federal Income Taxation of
Non-U.S.
Holders
A beneficial owner of common stock that is not a
U.S. Holder is referred to herein as a
Non-U.S. Holder.
Dividends
on Common Stock
Non-U.S. Holders
generally will not be subject to United States federal income
tax or withholding tax on dividends received from us with
respect to our common stock, unless that income is effectively
connected with the
Non-U.S. Holders
conduct of a trade or business in the United States. If the
Non-U.S. Holder
is entitled
117
to the benefits of a United States income tax treaty with
respect to those dividends, that income is taxable only if it is
attributable to a permanent establishment maintained by the
Non-U.S. Holder
in the United States.
Sale,
Exchange or Other Disposition of Common Stock
Non-U.S. Holders
generally will not be subject to United States federal income
tax or withholding tax on any gain realized upon the sale,
exchange or other disposition of our common stock, unless:
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the gain is effectively connected with the
Non-U.S. Holders
conduct of a trade or business in the United States. If the
Non-U.S. Holder
is entitled to the benefits of an income tax treaty with respect
to that gain, that gain is taxable only if it is attributable to
a permanent establishment maintained by the
Non-U.S. Holder
in the United States; or
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the
Non-U.S. Holder
is an individual who is present in the United States for
183 days or more during the taxable year of disposition and
other conditions are met.
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If the
Non-U.S. Holder
is engaged in a United States trade or business for United
States federal income tax purposes, the income from the common
stock, including dividends and the gain from the sale, exchange
or other disposition of the stock that is effectively connected
with the conduct of that trade or business will generally be
subject to regular United States federal income tax in the same
manner as discussed in the previous section relating to the
taxation of U.S. Holders. In addition, if you are a
corporate
Non-U.S. Holder,
your earnings and profits that are attributable to the
effectively connected income, which are subject to certain
adjustments, may be subject to an additional branch profits tax
at a rate of 30%, or at a lower rate as may be specified by an
applicable income tax treaty.
Backup
Withholding and Information Reporting
In general, dividend payments, or other taxable distributions,
made within the United States to you will be subject to
information reporting requirements. Such payments will also be
subject to backup withholding tax if you are a non-corporate
U.S. Holder and you:
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fail to provide an accurate taxpayer identification number;
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are notified by the Internal Revenue Service that you have
failed to report all interest or dividends required to be shown
on your federal income tax returns; or
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in certain circumstances, fail to comply with applicable
certification requirements.
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Non-U.S. Holders
may be required to establish their exemption from information
reporting and backup withholding by certifying their status on
Internal Revenue Service
Form W-8BEN,
W-8ECI or
W-8IMY, as
applicable.
If you sell your stock to or through a United States office or
broker, the payment of the proceeds is subject to both United
States backup withholding and information reporting unless you
certify that you are a
non-U.S. person,
under penalties of perjury, or you otherwise establish an
exemption. If you sell your stock through a
non-United
States office of a
non-United
States broker and the sales proceeds are paid to you outside the
United States then information reporting and backup withholding
generally will not apply to that payment. However, United States
information reporting requirements, but not backup withholding,
will apply to a payment of sales proceeds, even if that payment
is made to you outside the United States, if you sell your stock
through a
non-United
States office of a broker that is a United States person or has
some other contacts with the United States.
Backup withholding tax is not an additional tax. Rather, you
generally may obtain a refund of any amounts withheld under
backup withholding rules that exceed your income tax liability
by filing a refund claim with the Internal Revenue Service.
We encourage each stockholder to consult with his, her or its
own tax advisor as to particular tax consequences to it of
holding and disposing of our shares, including the applicability
of any state, local or foreign tax laws and any proposed changes
in applicable law.
118
Under the terms and subject to the conditions contained in an
underwriting agreement dated October 24, 2007, we have
agreed to sell to the underwriters named below, for whom Credit
Suisse Securities (USA) LLC is acting as representative, the
following respective numbers of shares of common stock:
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Number
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Underwriter
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of Shares
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Credit Suisse Securities (USA) LLC(1)
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4,950,000
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Cantor Fitzgerald & Co.(2)
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4,730,000
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Oppenheimer & Co. Inc.(3)
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1,100,000
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DVB Capital Markets LLC(4)
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220,000
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Total
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11,000,000
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(1) |
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Eleven Madison Avenue, New York, New York 10010 |
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110 East 59th Street, New York, New York 10022 |
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125 Broad Street, New York, New York 10004 |
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609 Fifth Avenue, New York, New York 10017 |
The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults, then
the purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
We have granted to the underwriters a
30-day
option to purchase on a pro rata basis up to 1,650,000
additional shares at the initial public offering price less the
underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock
initially at the public offering price on the cover page of this
prospectus. The underwriters may allow a discount of $0.3465 per
share on sales to other broker/dealers. After the initial public
offering, the underwriters may change the public offering price
and concession and discount to broker/dealers.
The following table summarizes the per share and total
underwriting discounts and commissions that we will pay to the
underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters option to purchase
additional shares.
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Per Share
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Total
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Without
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With
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Without
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With
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Over-
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Over-
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Over-
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Over-
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Allotment
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Allotment
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Allotment
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Allotment
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Underwriting discounts and commissions
paid by us
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$
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0.5775
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$
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0.5775
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$
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6,352,500
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$
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7,305,375
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We estimate that our total expenses in connection with this
offering, excluding underwriting discounts and commissions, will
be approximately $1.2 million.
We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any shares of
our common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of
Credit Suisse Securities (USA) LLC for a period of 180 days
after the date of this prospectus. However, in the event that
either (1) during the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the
119
earnings results or the occurrence of the material news or
event, as applicable, unless Credit Suisse Securities (USA) LLC
waives, in writing, such an extension.
Our officers and directors have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares
of our common stock, enter into a transaction that would have
the same effect, or enter into any swap, hedge or other
arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of our common stock, whether
any of these transactions are to be settled by delivery of our
common stock or other securities, in cash or otherwise, or
publicly disclose the intention to make any offer, sale, pledge
or disposition, or to enter into any transaction, swap, hedge or
other arrangement, without, in each case, the prior written
consent of Credit Suisse Securities (USA) LLC for a period of
180 days after the date of this prospectus. However, in the
event that either (1) during the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC waives, in
writing, such an extension.
We have agreed to indemnify the underwriters against liabilities
under the Securities Act, or contribute to payments that the
underwriters may be required to make in that respect.
Our common stock is currently quoted on the NASDAQ Capital
Market under the symbol FREE and our Class W
and Class Z warrants are currently quoted on the NASDAQ
Capital Market under the symbols FREEW and
FREEZ, respectively. We have applied to list our
common stock, Class W warrants and Class Z warrants on
the NASDAQ Global Market under the symbols FREE,
FREEW and FREEZ, respectively. We
believe that upon the completion of this offering, we will
satisfy the listing requirements of the NASDAQ Global Market for
our common stock and warrants. We can provide no assurances,
however, as to the time or likelihood of such approval.
In connection with the offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids.
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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120
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NASDAQ Global Market or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the
web sites maintained by one or more of the underwriters
participating in this offering and one or more of the
underwriters participating in this offering may distribute
prospectuses electronically. The representatives may agree to
allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet
distributions on the same basis as other allocations.
The common stock is being offered for sale in those
jurisdictions in the United States and Europe.
Each of the underwriters has represented and agreed that it has
not offered, sold or delivered and will not offer, sell or
deliver any of the common stock directly or indirectly, or
distribute this prospectus or any other offering material
relating to the common stock, in or from any jurisdiction except
under circumstances that will result in compliance with the
applicable laws and regulations thereof and that will not impose
any obligations on us except as set forth in the underwriting
agreement.
In relation to each Member State of the European Economic Area
that has implemented the Prospectus Directive (each, a
Relevant Member State), each underwriter represents
and agrees that with effect from and including the date on which
the Prospectus Directive is implemented in that Relevant Member
State (the Relevant Implementation Date) it has not
made and will not make an offer of securities to the public in
that Relevant Member State prior to the publication of a
prospectus in relation to the securities which has been approved
by the competent authority in that Relevant Member State or,
where appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive, except
that it may, with effect from and including the Relevant
Implementation Date, make an offer of securities to the public
in that Relevant Member State at any time,
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000;
and (3) an annual net turnover of more than
50,000,000, as shown in its last annual or consolidated
accounts;
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to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the manager for any such
offer; or
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in any other circumstances which do not require the publication
by the issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive.
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For the purposes of this provision, the expression an
offer of securities to the public in relation to any
shares of our common stock in any Relevant Member State means
the communication in any form and by any means of sufficient
information on the terms of the offer and the common stock to be
offered so as to enable an investor to decide to purchase or
subscribe the common stock, as the same may be varied in that
Member State by any measure implementing the Prospectus
Directive in that Member State and the expression Prospectus
Directive means Directive 2003/71/EC and includes any relevant
implementing measure in each Relevant Member State.
Each of the underwriters also severally represents, warrants and
agrees as follows:
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it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of section 21 of FSMA) to persons who have professional
experience in matters relating to investments falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 or in circumstances in
which section 21 of FSMA does not apply to the
company; and
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it has complied with, and will comply with all applicable
provisions of FSMA with respect to anything done by it in
relation to the common stock in, from or otherwise involving the
United Kingdom.
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121
NOTICE
TO CANADIAN RESIDENTS
Resale
Restrictions
The distribution of our common stock in Canada is being made
only on a private placement basis exempt from the requirement
that we prepare and file a prospectus with the securities
regulatory authorities in each province where trades of our
common stock are made. Any resale of our common stock in Canada
must be made under applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require
resales to be made under available statutory exemptions or under
a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek
legal advice prior to any resale of our common stock.
Representations
of Purchasers
By purchasing shares of our common stock in Canada and accepting
a purchase confirmation, a purchaser is representing to us and
the dealer from whom the purchase confirmation is received that:
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the purchaser is entitled under applicable provincial securities
laws to purchase shares of our common stock without the benefit
of a prospectus qualified under those securities laws,
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where required by law, that the purchaser is purchasing as
principal and not as agent,
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the purchaser has reviewed the text above under
Resale Restrictions, and
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the purchaser acknowledges and consents to the provision of
specified information concerning its purchase of our common
stock to the regulatory authority that by law is entitled to
collect the information.
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Further details concerning the legal authority for this
information is available on request.
Rights of
Action Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who
purchase a security offered by this prospectus during the period
of distribution will have a statutory right of action for
damages, or while still the owner of our common stock, for
rescission against us in the event that this prospectus contains
a misrepresentation, without regard to whether the purchaser
relied on the misrepresentation. The right of action for damages
is exercisable not later than the earlier of 180 days from
the date the purchaser first had knowledge of the facts giving
rise to the cause of action and three years from the date on
which payment is made for shares of our common stock. The right
of action for rescission is exercisable not later than
180 days from the date on which payment is made for shares
of our common stock. If a purchaser elects to exercise the right
of action for rescission, the purchaser will have no right of
action for damages against us. In no case will the amount
recoverable in any action exceed the price at which our common
stock was offered to the purchaser and if the purchaser is shown
to have purchased the securities with knowledge of the
misrepresentation, we will have no liability. In the case of an
action for damages, we will not be liable for all or any portion
of the damages that are proven to not represent the depreciation
in value of our common stock as a result of the
misrepresentation relied upon. These rights are in addition to,
and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario
purchasers should refer to the complete text of the relevant
statutory provisions.
Enforcement
of Legal Rights
All of our directors and officers as well as the experts named
in this prospectus may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect
service of process within Canada upon us or those persons. All
or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against us or those
persons in Canada or to enforce a judgment obtained in Canadian
courts against us or those persons outside of Canada.
122
Taxation
and Eligibility for Investment
Canadian purchasers of our common stock should consult their own
legal and tax advisors with respect to the tax consequences of
an investment in our common stock in their particular
circumstances and about the eligibility of our common stock for
investment by the purchaser under relevant Canadian legislation.
The legality of the shares of FreeSeas being offered hereby is
being passed upon for FreeSeas by Reeder Simpson, P.C.,
special Marshall Islands counsel for FreeSeas. Broad and Cassel,
Miami, Florida, a general partnership including professional
associations, is acting as counsel to FreeSeas in connection
with United States securities laws. The underwriters have been
represented by Morgan, Lewis & Bockius LLP, New York,
New York.
The financial statements as of December 31 2006 and 2005 and for
each of the two years in the period ended December 31, 2006
and for the period from April 23, 2004 to December 31,
2004 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers S.A., an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The sections in this prospectus entitled Prospectus
Summary and The International Drybulk
Industry, have been reviewed by Maritime Strategies
International Ltd., or MSI, which has confirmed to us that they
accurately describe the international shipping market, subject
to the availability and reliability of the data supporting the
statistical and graphical information presented in this
prospectus, as indicated in the consent of MSI filed as an
exhibit to the registration statement on
Form F-1
under the Securities Act of which this prospectus is a part.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on
Form F-1
with the SEC in connection with this offering. This prospectus
does not contain all of the information set forth in the
registration statement, as permitted by the rules and
regulations of the SEC. Each statement made in this prospectus
concerning a document filed as an exhibit to the registration
statement is qualified by reference to that exhibit for a
complete statement of its provisions.
We also file annual and others reports and other information
with the SEC. You may read and copy any report or document we
file, and the registration statement, including the exhibits,
may be inspected at the SECs public reference room located
at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our SEC
filings are also available to the public from the SECs
website at
http://www.sec.gov.
Quotations for the prices of our common stock and warrants
currently appear on the NASDAQ Capital Market. Reports and other
information about us can be inspected at the offices of the
Financial Industry Regulatory Authority, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
As a foreign private issuer, we will be exempt from
the rules under the Securities and Exchange Act of 1934, as
amended (the Exchange Act), prescribing the
furnishing and content of proxy statements to shareholders, but,
will be required to furnish those proxy statements to
shareholders under NASDAQ rules. Those proxy statements are not
expected to conform to Schedule 14A of the proxy rules
promulgated under the Exchange Act. In addition, as a
foreign private issuer, we will be exempt from the
rules under the Exchange Act relating to short swing profit
reporting and liability.
123
GLOSSARY
OF SHIPPING TERMS
The following are definitions of certain terms that are commonly
used in the shipping industry and in this prospectus.
Annual survey. The inspection of a vessel
pursuant to international conventions, by a classification
society surveyor, on behalf of the flag state, that takes place
every year.
Available days. The number of ownership days
less the aggregate number of days that a vessel is off-hire due
to major repairs, dry-dockings or special
and/or
intermediate surveys. The shipping industry uses available days
to measure the number of days in a period during which vessels
are actually able to generate revenues.
Ballast. A substance, usually water, used to
improve the stability and control the draft of a ship.
Bareboat charter. A charter of a vessel under
which the shipowner is usually paid a fixed daily or monthly
rate for a certain period of time during which the charterer is
responsible for the vessel operating expenses and voyage
expenses of the vessel and for the management of the vessel,
including crewing. A bareboat charter is also known as a
demise charter or a time charter by
demise.
Bunkers. Heavy fuel oil and diesel oil used to
power a vessels engines, generators and boilers.
Calendar days. The total number of days in a
period during which each vessel in a fleet was in the
owners possession, including off-hire days associated with
major repairs, dry-dockings or special or intermediate surveys.
Calendar days are an indicator of the size of the fleet over a
period and affect both the amount of revenues and the amount of
expenses recorded during that period. (Also referred to as
owned days.)
Capesize. A drybulk carrier with a
cargo-carrying capacity exceeding 80,000 dwt. These vessels
generally operate along long-haul iron ore and coal trade
routes. Only the largest ports around the world possess the
infrastructure to accommodate vessels of this size.
Charter. The hire of a vessel for a specified
period of time or to carry cargo for a fixed fee from a loading
port to a discharging port. The contract for a charter is
commonly called a charterparty.
Charter rate. The amount of money agreed
between the charterer and the shipowner accrued on a daily or
monthly basis that is used to calculate the vessels hire.
Charterer. The party that hires a vessel
pursuant to a Charter.
Classification society. An independent society
that certifies that a vessel has been built and maintained
according to the societys rules for that type of vessel
and complies with the applicable rules and regulations of the
country of the vessels registry and the international
conventions of which that country is a member. A vessel that
receives its certification is referred to as being
in-class as of the date of issuance.
Clubs. Clubs are formed by ship-owners to
provide liability insurance protection against a large financial
loss by one member by contribution towards that loss by all
members. To a great extent, the risks are reinsured.
Deadweight ton or dwt. A unit of a
vessels capacity for cargo, fuel oil, stores and crew,
measured in metric tons of 1,000 kilograms. A vessels dwt
or total deadweight is the total weight the vessel can carry
when loaded to a particular load line.
Demurrage. The delaying of a ship caused by a
voyage charterers failure to take on or discharge its
cargo before the time of scheduled departure. The term is also
used to describe the payment owed by the voyage charterer for
such a delay.
Drybulk. Non-liquid cargoes of commodities
shipped in an unpackaged state, such as coal, iron ore and
grain, etc. that is loaded in bulk and not in bags, packages or
containers.
Drybulk carriers. Vessels designed and built
to carry large volume bulk cargo.
Dry-docking. The removal of a vessel from the
water for inspection
and/or
repair of those parts of a vessel which are below the water
line. During dry-dockings, which are required to be carried out
periodically, certain mandatory classification society
inspections are carried out and relevant certifications are
issued. Dry-dockings are generally required once every 30 to
60 months, one of which must be a Special Survey.
124
Fleet utilization. Calculated by dividing the
number of operating days during a period by the number of
ownership days during that period. The shipping industry uses
fleet utilization to measure a companys efficiency in
finding suitable employment for its vessels and minimizing the
amount of days that its vessels are off-hire for any reason
including scheduled repairs, vessel upgrades, dry-dockings or
special or intermediate surveys.
Freight. Hire paid under a voyage charter.
Such payments are usually made on a lump-sum basis upon loading
or discharging the cargo and are the product of the number of
cargo tons loaded or discharged times the cost per ton stated in
the charterparty to transport the cargo between these specific
ports.
Gross ton. A unit of volume measurement for
the total enclosed space within a vessel equal to 100 cubic feet
or 2.831 cubic meters used in arriving at calculation of gross
tonnage.
Handymax. Handymax vessels are drybulk vessels
that have a cargo carrying capacity of approximately 40,000 to
59,999 dwt. These vessels operate on a large number of
geographically dispersed global trade routes, carrying primarily
grains and minor bulks. Vessels below 60,000 dwt are usually
built with on-board cranes enabling them to load and discharge
cargo in countries and ports with limited infrastructure.
Handysize. Handysize vessels have a cargo
carrying capacity of approximately 10,000 to 39,999 dwt. These
vessels carry exclusively minor bulk cargo. Increasingly, these
vessels are operating on regional trading routes. Handysize
vessels are well suited for small ports with length and draft
restrictions that may lack the infrastructure for cargo loading
and unloading.
Hire. Money paid to the shipowner by a
charterer for the use of a vessel under charter. Such payments
are usually made during the course of the charter every 15 or
30 days in advance or in arrears by multiplying the daily
charter rate times the number of days and, under a time charter
only, subtracting any time the vessel was deemed to be off-hire.
Under a bareboat charter, such payments are usually made monthly
and are calculated on a 360 or 365 calendar year basis. Hire
paid under a voyage charter is also known as freight.
Hull. Shell or body of a ship.
IMO. International Maritime Organization, a
United Nations agency that issues international standards for
seaborne transportation.
Intermediate survey. The inspection of a
vessel by a classification society surveyor that takes place
between two and three years before and after each Special Survey
for such vessel pursuant to the rules of international
conventions and classification societies.
ISM Code. The International Management Code
for the Safe Operations and for Pollution Prevention, as adopted
by the International Maritime Organization.
Lightweight ton or lwt. The actual
weight of a vessel without cargo, fuel or stores. A
vessels lightweight is the physical weight of the vessel
and represents the amount of steel recoverable in the vessel.
The value of a vessel to a breaker is determined by multiplying
the vessels lightweight by the price of scrap steel.
Metric ton. A unit of weight equal to 1,000
kilograms.
Newbuilding. A new vessel under construction
or just completed.
Off-hire. The period a vessel is unable to
perform the services for which it is required under a charter.
Off-hire periods typically include days spent undergoing repairs
and dry-docking, whether or not scheduled.
OPA. The United States of America Oil
Pollution Act of 1990 (as amended).
Operating days. Operating days are the number
of available days in a period less the aggregate number of days
that our vessels are off-hire due to any reason, including
unforeseen circumstances. The shipping industry uses operating
days to measure the aggregate number of days in a period during
which vessels actually generate revenues.
Orderbook. The orderbook refers to the total
number of currently placed orders for the construction of
vessels or a specific type of vessel worldwide.
125
Ownership days. The total number of calendar
days in a period during which each vessel in a fleet was owned
by its owner. Ownership days are an indicator of the size of the
fleet over a period and affect both the amount of revenues and
the amount of expenses that are recorded during that period.
Panamax. Panamax vessels have a cargo carrying
capacity of approximately 60,000 to 79,999 dwt of maximum
length, depth and draft capable of passing fully loaded through
the Panama Canal. The ability of Panamax vessels to pass through
the Panama Canal makes them more versatile than larger vessels.
Panamax drybulk carriers carry coal, grains, and, to a lesser
extent, minor bulks, including steel products, forest products
and fertilizers.
Period charter. A period charter is an
industry term referring to both time and bareboat charters that
last for more than a single voyage.
Pools. Pooling arrangements that enable
participating vessels to combine their revenues. Vessels may be
employed either exclusively in spot charters or a combination of
spot and period charters. Pools are administered by the pool
manager who secures employment for the participating vessels.
The contract between a vessel in a shipping pool and the pool
manager is a period charter where the charter hire is based on
the vessels corresponding share of the income generated by
all the vessels that participate in the pool. The corresponding
share of every vessel in the pool is based on a pre-determined
formula rating the technical specifications of each vessel.
Pools have the size and scope to combine spot market voyages and
time charters with freight forward agreements for hedging
purposes to perform more efficient vessel scheduling thereby
increasing fleet utilization.
Protection and indemnity (or P&I)
insurance. Insurance obtained through mutual
associations (called Clubs). Clubs are formed by
shipowners to provide liability indemnification protection
against a large financial loss by one member by contribution
towards that loss by all members. To a great extent, the risks
are reinsured.
Scrapping. The disposal of old or damaged
vessel tonnage by way of sale as scrap metal.
Single-hull. A hull construction design in
which a vessel has only one hull.
SOLAS. The International Convention for the
Safety of Life at Sea 1974, as amended, adopted under the
auspices of the IMO.
Special survey. An extensive inspection of a
vessel by a classification society surveyor that takes place
every five years, as part of the recertification of the vessel
by a classification society. Special surveys require a vessel to
be dry-docked.
Spot charter. A charter under which a
shipowner is paid freight on the basis of moving cargo from a
loading port to a discharging port. The shipowner is responsible
for paying both vessel operating expenses and voyage expenses.
Typically, the charterer is responsible for any delay at the
loading or discharging ports.
Spot market. The market for immediate
chartering of a vessel, usually for single voyages.
TCE. Time charter equivalent, a standard
industry measure of the average daily revenue performance of a
vessel. The TCE rate achieved on a given voyage is expressed in
dollars per day and is generally calculated by subtracting
voyage expenses including bunkers and port charges, from voyage
revenues and dividing the net amount (time charter equivalent
revenues) by the operating days, including the trip to the
loading port. TCE is a standard seaborne transportation industry
performance measure used primarily to compare period-to-period
changes in a seaborne transportation companys performance
despite changes in the mix of charter types (i.e., spot
charters, time charters and bareboat charters) under which the
vessels may be employed during specific period.
Time charter. A time charter is a contract for
the use of a vessel for a specific period of time during which
the charterer pays substantially all of the voyage expenses,
including port costs, canal charges and bunkers expenses. The
vessel owner pays the vessel operating expenses, which include
crew wages, insurance, technical maintenance costs, spares,
stores and supplies and commissions on gross voyage revenues.
Time charter rates are usually fixed during the term of the
charter. Prevailing time charter rates fluctuate on a seasonal
and year-to-year basis and may be substantially higher or lower
from a prior time charter agreement when the subject vessel is
seeking to renew the time charter agreement with the existing
charterer or enter into
126
a new time charter agreement with another charterer. Fluctuation
in time charter rates are influenced by changes in spot charter
rates.
Ton. See Metric ton.
Time charter trip. A time charter trip is a
short-term time charter where the vessel performs a single
voyage between load port(s) and discharge port(s) and the
charterer pays a fixed daily hire rate usually on a semi-monthly
basis for use of the vessel. The difference between a time
charter trip and a voyage charter is only in the form of payment
for use of the vessel and the respective financial
responsibilities of the charterer and shipowner, as described
under Time charter and Voyage charter.
Vessel operating expenses. The costs of
operating a vessel that is incurred during a charter, primarily
consisting of crew wages and associated costs, insurance
premiums, management fees, lubricants and spare parts, and
repair and maintenance costs. Vessel operating expenses exclude
fuel costs, port expenses, agents fees, canal dues and
extra war risk insurance, as well as commissions, which are
included in voyage expenses. For a time charter, the
shipowner pays vessel operating expenses. For a bareboat
charter, the charterer pays vessel operating expenses.
Voyage charter. A voyage charter is an
agreement to charter the vessel for an agreed per-ton amount of
freight from specified loading port(s) to specified discharge
ports. In contrast to a time charter, the vessel owner is
required to pay substantially all of the voyage expenses,
including port costs, canal charges and bunkers expenses, in
addition to the vessel operating expenses.
Voyage days. The total number of available
days less the aggregate number of days that vessels are off-hire
due to any reason, including unforeseen circumstances other than
off-hire days associated with major repairs, dry-dockings or
special or intermediate surveys. The shipping industry uses
voyage days to measure the number of days in a period during
which vessels actually generate revenues.
Voyage expenses. Expenses incurred due to a
vessels traveling from a loading port to a discharging
port, such as fuel (bunker) cost, port expenses, agents
fees, canal dues and extra war risk insurance, as well as
commissions.
127
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
Condensed Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
Year End Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-15
|
|
|
|
|
F-16
|
|
|
|
|
F-17
|
|
|
|
|
F-18
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
F-1
FREESEAS
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,672
|
|
|
$
|
372
|
|
Trade receivables, net
|
|
|
425
|
|
|
|
278
|
|
Insurance claims
|
|
|
207
|
|
|
|
485
|
|
Due from related party
|
|
|
513
|
|
|
|
40
|
|
Inventories
|
|
|
165
|
|
|
|
242
|
|
Prepayments and other
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,106
|
|
|
|
1,417
|
|
|
|
|
|
|
|
|
|
|
Advances for acquisition of vessels
|
|
|
11,400
|
|
|
|
|
|
Fixed assets, net
|
|
|
10,268
|
|
|
|
19,369
|
|
Deferred charges, net
|
|
|
2,030
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
32,804
|
|
|
$
|
23,086
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,598
|
|
|
$
|
2,003
|
|
Accrued liabilities
|
|
|
866
|
|
|
|
1,515
|
|
Unearned revenue
|
|
|
244
|
|
|
|
179
|
|
Shareholders loans, current portion
|
|
|
1,864
|
|
|
|
1,218
|
|
Bank overdraft
|
|
|
|
|
|
|
2,000
|
|
Long-term debt, current portion
|
|
|
2,000
|
|
|
|
3,345
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,572
|
|
|
|
10,260
|
|
|
|
|
|
|
|
|
|
|
Shareholders loans, net of current portion
|
|
|
12,193
|
|
|
|
1,334
|
|
Long-term debt, net of current portion
|
|
|
2,500
|
|
|
|
4,485
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
14,693
|
|
|
|
5,819
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred shares (5,000,000 shares authorized with par
value $0.001, none issued and outstanding at June 30, 2007
and December 31, 2006)
|
|
|
|
|
|
|
|
|
Common shares (40,000,000 shares authorized with par value
$0.001, 6,290,100 issued and outstanding at June 30, 2007
and December 31, 2006)
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
11,612
|
|
|
|
9,703
|
|
Retained (deficit)
|
|
|
(79
|
)
|
|
|
(2,702
|
)
|
Total shareholders equity
|
|
|
11,539
|
|
|
|
7,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
32,804
|
|
|
$
|
23,086
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-2
FREESEAS
INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For three months ended
|
|
|
For six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
OPERATING REVENUES
|
|
$
|
3,562
|
|
|
$
|
2,986
|
|
|
$
|
7,830
|
|
|
$
|
5,430
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses
|
|
|
(899
|
)
|
|
|
(1,033
|
)
|
|
|
(2,313
|
)
|
|
|
(2,065
|
)
|
Voyage expenses
|
|
|
(37
|
)
|
|
|
(49
|
)
|
|
|
(39
|
)
|
|
|
(686
|
)
|
Depreciation expense
|
|
|
(655
|
)
|
|
|
(1,081
|
)
|
|
|
(1,467
|
)
|
|
|
(2,221
|
)
|
Amortization of deferred charges
|
|
|
(123
|
)
|
|
|
(112
|
)
|
|
|
(318
|
)
|
|
|
(222
|
)
|
Management fees to a related party
|
|
|
(225
|
)
|
|
|
(135
|
)
|
|
|
(360
|
)
|
|
|
(270
|
)
|
Commissions
|
|
|
(225
|
)
|
|
|
(185
|
)
|
|
|
(482
|
)
|
|
|
(349
|
)
|
Stock-based compensation expense
|
|
|
(25
|
)
|
|
|
(216
|
)
|
|
|
(50
|
)
|
|
|
(379
|
)
|
General and administrative expenses
|
|
|
(640
|
)
|
|
|
(390
|
)
|
|
|
(982
|
)
|
|
|
(822
|
)
|
Gain on sale of vessel
|
|
|
1,369
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
2,102
|
|
|
$
|
(215
|
)
|
|
$
|
3,188
|
|
|
$
|
(1,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs
|
|
$
|
(414
|
)
|
|
$
|
(265
|
)
|
|
$
|
(633
|
)
|
|
$
|
(511
|
)
|
Interest income
|
|
|
39
|
|
|
|
2
|
|
|
|
39
|
|
|
|
13
|
|
Other
|
|
|
(17
|
)
|
|
|
(125
|
)
|
|
|
29
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)
|
|
$
|
(392
|
)
|
|
$
|
(388
|
)
|
|
$
|
(565
|
)
|
|
$
|
(674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,710
|
|
|
$
|
(603
|
)
|
|
$
|
2,623
|
|
|
$
|
(2,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.27
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.25
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
Diluted weighted average number of shares
|
|
|
6,921,050
|
|
|
|
6,290,100
|
|
|
|
6,476,315
|
|
|
|
6,290,100
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-3
FREESEAS
INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All
amounts in tables in thousands of United States dollars, except
for share data)
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2007
|
|
|
June 30, 2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,623
|
|
|
$
|
(2,258
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,467
|
|
|
|
2,221
|
|
Amortization of deferred charges
|
|
|
397
|
|
|
|
258
|
|
Amortization of debt discount
|
|
|
114
|
|
|
|
40
|
|
Deferred charges
|
|
|
|
|
|
|
(481
|
)
|
Stock-based compensation expense
|
|
|
50
|
|
|
|
379
|
|
(Gain) on sale of vessel
|
|
|
(1,369
|
)
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(147
|
)
|
|
|
(387
|
)
|
Inventories
|
|
|
77
|
|
|
|
(30
|
)
|
Due from related party
|
|
|
(473
|
)
|
|
|
(89
|
)
|
Insurance claims
|
|
|
278
|
|
|
|
313
|
|
Accounts payable
|
|
|
(405
|
)
|
|
|
790
|
|
Unearned revenue
|
|
|
65
|
|
|
|
79
|
|
Accrued liabilities
|
|
|
(649
|
)
|
|
|
(597
|
)
|
Other liabilities
|
|
|
|
|
|
|
(154
|
)
|
Prepayments and other
|
|
|
(124
|
)
|
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash from (Used in) Operating Activities
|
|
$
|
1,904
|
|
|
$
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Advances for vessels acquisitions
|
|
|
(11,400
|
)
|
|
|
|
|
Cash from sale of vessel, net
|
|
|
10,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
$
|
(794
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net movement in bank overdraft
|
|
|
(2,000
|
)
|
|
|
2,000
|
|
Proceeds from long-term debt
|
|
|
2,470
|
|
|
|
|
|
Payments of long-term debt
|
|
|
(5,800
|
)
|
|
|
(4,170
|
)
|
Payments of shareholders loans
|
|
|
(750
|
)
|
|
|
(250
|
)
|
Proceeds from shareholder loan
|
|
|
14,000
|
|
|
|
|
|
Deferred financing cost
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash from (Used in) Financing Activities
|
|
$
|
6,190
|
|
|
$
|
(2,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash in hand and at bank
|
|
$
|
7,300
|
|
|
$
|
(2,711
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
372
|
|
|
|
3,285
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
7,672
|
|
|
$
|
574
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
229
|
|
|
$
|
430
|
|
Non-cash shareholder contributions
|
|
$
|
44
|
|
|
$
|
11
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-4
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
|
|
1.
|
Interim
Financial Statements
|
The unaudited condensed consolidated financial statements
include the accounts of FreeSeas Inc. required to be
consolidated in accordance with U.S. generally accepted
accounting principles. The unaudited condensed consolidated
financial statements have been prepared in accordance with the
accounting policies described in the Companys 2006 Annual
Report on
Form 20-F
and should be read in conjunction with the consolidated
financial statements and notes thereto.
The unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2007 and 2006
included herein have been prepared in accordance with
Article 10 of
Regulation S-X
of the U.S. Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in conformity with accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain only normal
reoccurring adjustments necessary to present fairly the
Companys financial position as of June 30, 2007, and
the results of its operations for the three and six months ended
June 30, 2007 and 2006, and the results of its cash flows
for the six months ended June 30, 2007 and 2006.
FreeSeas Inc., formerly known as Adventure Holdings S.A., was
incorporated in the Marshall Islands on April 23, 2004, for
the purpose of being the ultimate holding company of the
ship-owning companies Adventure Two S.A., Adventure Three S.A.,
Adventure Four S.A., Adventure Five S.A., Adventure Six S.A.,
Adventure Seven S.A. and Adventure Eight S.A. Hereinafter, the
consolidated companies referred to above will be referred to as
FreeSeas, the Group or the
Company.
During the six month period ended June 30, 2007, the Group
owned and operated three Handysize drybulk carriers, one of
which was sold on April 27, 2007. Free Bulkers S.A., a
Marshall Islands company (Free Bulkers), which
manages the vessels, is a company owned by the chief executive
officer of FreeSeas. The management company is excluded from the
Group.
FreeSeas consists of the companies listed below:
FreeSeas Inc.
Adventure Two S.A.
Adventure Three S.A.
Adventure Four S.A.
Adventure Five S.A.
Adventure Six S.A.
Adventure Seven S.A.
Adventure Eight S.A.
The two drybulk carriers that were owned at June 30, 2007,
the M/V Free Destiny and the M/V Free Envoy, owned
respectively by Adventure Two S.A. and Adventure Three S.A. were
purchased by these vessel-owning subsidiaries on August 3,
2004 and September 20, 2004, respectively, from unrelated
third parties. Adventure Four S.A., owner of the M/V Free
Fighter, sold that vessel on April 27, 2007.
The Company organized each of Adventure Five, S.A., Adventure
Six, S.A., Adventure Seven, S.A. and Adventure Eight, S.A. for
the purpose of purchasing additional vessels. Adventure Six,
S.A. and Adventure Seven, S.A. purchased the M/V Free
Hero and the M/V Free Jupiter on July 3, 2007
and September 5, 2007, respectively. Adventure Five, S.A.
has entered into a memorandum of agreement to purchase the M/V
Free Goddess, which the Company expects will be delivered
in October 2007. Adventure Seven, S.A. is available for the
purchase of an additional vessel in the future. See
Note 16 Subsequent Events.
F-5
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes. FIN 48 clarifies the accounting for income
taxes recognized in financial statements in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 requires that the Company determine
whether the benefits of the Companys tax positions are
more likely than not of being sustained upon audit based on the
technical merits of the tax position. The provisions of
FIN 48 also provide guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, and disclosure. The Company did not have any
unrecognized tax benefits and there was no effect on the
financial condition or results of operations as a result of
implementing FIN 48.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair
Value Measures. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and enhances
disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance
as to whether or not an instrument is carried at fair value.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the
impact that the adoption of SFAS No. 157 will have on
our future consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
Vessel Cost
|
|
|
depreciation
|
|
|
value
|
|
|
December 31, 2006
|
|
$
|
28,273
|
|
|
$
|
(8,904
|
)
|
|
$
|
19,369
|
|
Depreciation
|
|
|
|
|
|
|
(1,467
|
)
|
|
|
(1,467
|
)
|
Disposal of vessel
|
|
|
(11,213
|
)
|
|
|
3,579
|
|
|
|
(7,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
$
|
17,060
|
|
|
$
|
(6,792
|
)
|
|
$
|
10,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated useful life of the M/V Free Fighter was
changed to 30 years from 27 years. The change took
effect during the three months ended March 31, 2007. As a
result of this change, depreciation expense for the M/V Free
Fighter for the three and six months ended June 30,
2007 was reduced by approximately $292 and $382, respectively.
In addition, net income was increased by the same amount. Basic
earnings per share in the three and six month period ended
June 30, 2007 was also increased by $0.05 and $0.06,
respectively, as a result. The M/V Free Fighter was sold
on April 27, 2007 and the relative cost and accumulated
depreciation were reversed.
|
|
5.
|
Advances
for Acquisition of Vessels
|
As of June 30, 2007, advances were made for the acquisition
of four vessels in the amount of $11,400, $4,250 of which was
refunded to the Company after the cancellation of the purchase
of two vessels on July 27, 2007, as explained below in
Note 16 Subsequent Events.
F-6
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dry-docking costs
|
|
|
Special survey costs
|
|
|
Financing costs
|
|
|
Total
|
|
|
December 31, 2006
|
|
$
|
730
|
|
|
$
|
1,453
|
|
|
$
|
117
|
|
|
$
|
2,300
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
|
1,730
|
|
Written-off
|
|
|
(323
|
)
|
|
|
(1,234
|
)
|
|
|
(46
|
)
|
|
|
(1,603
|
)
|
Amortization
|
|
|
(168
|
)
|
|
|
(150
|
)
|
|
|
(79
|
)
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
$
|
239
|
|
|
$
|
69
|
|
|
$
|
1,722
|
|
|
$
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization of vessels dry-docking, special surveys
and financing costs was $185 and $131 and $397 and $258 for the
three and six months ended June 30, 2007 and 2006,
respectively. During both the three and six month period ending
June 30, 2007 the deferred financing fees incurred in
connection with the new credit facilities for new vessel
acquisitions, described below in Note 16
Subsequent Events, were $1,730. The unamortized balance of
deferred charges for the M/V Free Fighter was written off
in connection with the sale of that vessel and was included in
the gain from this transaction.
Accrued liabilities comprise the following amounts:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued wages
|
|
$
|
198
|
|
|
$
|
28
|
|
Accrued interest
|
|
|
124
|
|
|
|
42
|
|
Accrued insurance and related liabilities
|
|
|
227
|
|
|
|
226
|
|
Accrued dry-docking and special survey costs
|
|
|
|
|
|
|
865
|
|
Accrued financial advisory costs
|
|
|
243
|
|
|
|
155
|
|
Other accrued liabilities
|
|
|
74
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
866
|
|
|
$
|
1,515
|
|
|
|
|
|
|
|
|
|
|
In January 2007, the Company drew down Advance B of $2,470 of
the loan with First Business Bank to repay the overdraft
facility of $2,000 granted to Adventure Four S.A by Hollandsche
Bank Unie N.V. The remaining balance of $470 was
used to finance the special survey and dry-docking costs of the
M/V Free Fighter. On April 27, 2007, Adventure Four
S.A. sold the M/V Free Fighter for gross proceeds of
$11,075 and net proceeds of $10,606 after deducting selling
costs, which the Company partly used to repay the outstanding
loan with First Business Bank of $4,485.
In addition to the repayment of the loan from First Business
Bank, during the six months ended June 30, 2007 the Company
repaid a total of $1,315 of its long-term debt.
On May 7, 2007, the Company entered into a promissory note
in the principal amount of $14,000 in connection with an
unsecured loan from one of the Companys principal
shareholders, in order to partly finance the purchase of four
identified secondhand bulk carriers (see Note 2 above and
Note 16 Subsequent Events below). This
unsecured shareholder loan accrues interest on the outstanding
principal balance at the annual rate of 12.0%, payable upon
maturity of the loan. The loan is due at the earlier of
(i) May 7, 2009, (ii) the date of a Capital
Event, which is defined as any event in which we raise
gross proceeds of not less than $40,000 in an offering of the
Companys common stock or other equity securities or
securities convertible
F-7
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
into or exchangeable for the Companys equity securities,
or (iii) the date of acceleration due to a default of the
amounts due under the note. Pursuant to the terms of the loan,
the Company agreed to issue to the note holder 50,000 warrants
for every $1,000 drawn down under the loan. The warrants expire
five years from the date of issuance and have an exercise price
of $5.00 per share. On May 8, 2007, the Company drew down
$5,500 from the shareholder loan in connection with the deposits
to be posted under the memoranda of agreement entered into on
May 1, 2007 for the acquisition of four vessels. On
June 22, 2007, the Company drew down the remaining $8,500
from the shareholder loan in anticipation of taking delivery of
the first of the four vessels under the memoranda of agreement
entered into on May 1, 2007. See Note 16
Subsequent Events. As of June 30, 2007, the Company has
issued to the shareholder 700,000 warrants as described above in
connection with such draw downs.
The warrants described above qualify for equity classification
and are recorded in accordance with APB 14,
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants. Accordingly, the proceeds from draw
downs and corresponding warrant issuances are allocated to the
debt and the warrants based on their relative fair values as of
the date of draw down as determined by an independent valuator.
The $1,865 valued portion of the proceeds allocated to the
warrants is accounted for as additional paid-in capital. The
corresponding discount on the debt is amortized over the life of
the note, using the effective interest rate method, and
accounted for as interest expense. For both the three and six
months ended June 30, 2007, the amortization of the debt
discount amounted to $58. The warrants contain a provision
whereby shares of the Companys common stock can be
delivered in payment of the exercise price instead of cash.
|
|
10.
|
Related
Party Transactions
|
All the active vessels listed in Note 2 receive management
services from Free Bulkers, pursuant to a ship management
agreement between each of the ship-owning companies and Free
Bulkers. Each agreement calls for a monthly management fee of
$15 based on a thirty day month commencing on the date the
related memorandum of agreement is signed. FreeSeas also pays
Free Bulkers a fee equal to 1.25% of the gross freight or hire
collected from the employment of FreeSeas vessels and a 1%
commission to be paid to Free Bulkers on the gross purchase
price of any new vessels acquired or the gross sales price of
any vessels 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 Groups
affiliates, for the outsourcing of the commercial management of
the fleet.
The total management fee for the three and six months ended
June 30, 2007 and 2006 amounted to $225 and $135 and $360
and $270, respectively. The related expenses are separately
reflected in the accompanying condensed consolidated statements
of operations. According to the relative management agreements,
beginning on May 1, 2007, Free Bulkers charged
$15 monthly representing management fees for the four new
subsidiary companies which are described in Note 2.
The balance due from related parties was $513 and $40 at
June 30, 2007 and December 31, 2006, respectively.
On February 5, 2007, the Company entered into an agreement
with Free Bulkers pursuant to which the Company uses certain
office space. The annual expense under such agreement is $63
(based on an exchange rate of $1.37 to 1.00) for the first
eleven months. Thereafter the rent is adjusted on an annual
basis.
In September 2007, the Company entered into an additional
agreement with Free Bulkers pursuant to which Free Bulkers will
provide to the Company services related to its accounting and
financial reporting obligations, including the Companys
internal controls assessment and reporting obligations. Free
Bulkers fee for the foregoing services is $300 per
year payable quarterly. This agreement is for an initial term of
12 months.
F-8
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
Mr. Constantinos Varouxakis, the brother of Mr. Ion
Varouxakis, the Companys chief executive officer
(CEO) and president, is an employee of Aquavita
International. Free Bulkers and Safbulk use Aquavita
International from time to time as one of the shipping brokers
for the Companys fleet. Aquavita International received
commissions of approximately $0 and $0 and $30 and $0 for the
three and six month periods ended June 30, 2007 and 2006,
respectively.
The computation of basic earnings per share is based on the
weighted average number of common shares outstanding during the
period.
The components of the denominator for the calculation of basic
earnings per share and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,710
|
|
|
$
|
(603
|
)
|
|
$
|
2,623
|
|
|
$
|
(2,258
|
)
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
|
|
6,290,100
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
47,372
|
|
|
|
|
|
|
|
9,029
|
|
|
|
|
|
Warrants
|
|
|
583,578
|
|
|
|
|
|
|
|
177,186
|
|
|
|
|
|
Dilutive effect
|
|
|
630,950
|
|
|
|
|
|
|
|
186,215
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
6,921,050
|
|
|
|
|
|
|
|
6,476,315
|
|
|
|
|
|
Basic earnings/(loss) per common share
|
|
$
|
0.27
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.36
|
)
|
Diluted earnings/(loss) per common share
|
|
$
|
0.25
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.36
|
)
|
The 12,500 Series A Units and 65,000 Series B Units,
issuable upon exercise of the purchase option granted to HCFP
Brenner Securities LLC, the lead underwriter for the initial
public offering of the common stock of the Companys
predecessor (HCFP), for shares and warrants, were
excluded from computing the diluted earnings per share of the
Company for the three and six months ended June 30, 2006
because their effect was anti-dilutive as there was a net loss.
The impact of these instruments was anti-dilutive for the three
and six months ended June 30, 2007 as well because the
share price was lower than the exercise price of the warrants.
The outstanding options granted to the Companys executive
officers (see Note 13) as well as the Companys
Class A warrants, Class B warrants and publicly traded
warrants were dilutive for the three and six months ended
June 30, 2007 because the average market price of the
Companys common stock was greater than the exercise price
of the options and warrants.
F-9
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
|
|
12.
|
Commitments
and Contingencies
|
Agreement
with financial advisor
FreeSeas entered into an agreement with the financial advisor
whereby the terms of compensation required the Company to pay
$200 upon closing of the merger (the Transaction)
with Trinity Partners Acquisition Company Inc.
(December 15, 2005) and $400 payable in 20 equal monthly
installments commencing upon closing of the Transaction. The
Company has accrued the liability at its present value. In
addition, for a period of one year from the date of the closing
of the Transaction, the financial advisor will provide certain
financial and consulting services and advice for which the
Company will pay up to $400, payable in amounts equal to 5% of
each $1,000 received by the Company from the exercise of the
Companys warrants. The amounts outstanding at
June 30, 2007 and December 31, 2006 are $58 and $154,
respectively. The amounts are included in accrued liabilities in
the accompanying condensed consolidated balance sheets.
Office
space
On February 5, 2007, the Company entered into an agreement
with a related party pursuant to which the Company uses office
space. The annual expense under such agreement is $63 (based on
an exchange rate of $1.37 to 1.00), for the first eleven
months. The rent amount is adjustable annually thereafter based
on the Greek consumer price index.
|
|
13.
|
Stock-Based
Compensation
|
FreeSeas Amended and Restated 2005 Stock Incentive Plan
(the Plan) became effective on April 26, 2005,
and it was amended and restated on May 24, 2006. An
aggregate of 1,500,000 shares of the Companys common
stock were reserved for issuance under the Plan. In accordance
with the Plan, in April 2005, the Companys Board of
Directors granted 750,000 options, with an exercise price of
$5.00, to its executive officers, which were subject to signing
of the employment agreements and consummation of the Transaction
with Trinity. The employment agreements were signed and the
Transaction with Trinity consummated on December 15, 2005.
On December 16, 2005, the Board of Directors ratified,
adopted and approved the grant of options to the executive
officers. The options vest at a rate of
1/3
per year, with the initial
1/3
vesting upon signing the employment agreement, the second
1/3
vesting on the first anniversary of the employment agreement,
and the final
1/3
vesting on the second anniversary of the employment agreement.
The options expire on December 16, 2010.
Prior to January 1, 2006 the Company accounted for the Plan
under SFAS No. 123, Accounting for Stock-Based
Compensation and under APB Opinion No. 25 using the
intrinsic value method and using guidance in FIN 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, FIN 38,
Determining the Measurement Date for Stock Option,
Purchase, and Award Plans Involving Junior Stock, and
FIN 44, Accounting for Certain Transactions involving
Stock Compensation.
As of January 1, 2006, the Company is recognizing
stock-based compensation expense in accordance with
SFAS No. 123(R).
Further, in April 2005, FreeSeas Board of Directors
approved the issuance of Class A warrants to entities who
immediately prior to the closing of the Transaction owned 100%
of the outstanding FreeSeas common stock. The beneficial
owners of these entities are the executive officers of FreeSeas.
These warrants, the issuance of which was ratified, adopted and
approved by the Board on December 16, 2005, entitle the
holders to purchase an aggregate of 200,000 shares of the
Companys common stock at an exercise price of
$5.00 per share. These warrants were exercisable
immediately upon the closing of the Transaction on
December 15, 2005.
These warrants have been treated as similar to options and have
been accounted for by the Company under APB Opinion No. 25
and following the guidance in FIN 38 and FIN 44. Since
the warrants are exercisable
F-10
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
immediately upon issuance, these were considered to have been
fully vested on the date of grant and expensed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Options
|
|
|
Warrants
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Total
|
|
|
price
|
|
|
exercisable
|
|
|
exercisable
|
|
|
Total
|
|
|
price
|
|
|
December 31, 2006
|
|
|
750,000
|
|
|
|
200,000
|
|
|
|
950,000
|
|
|
$
|
5.00
|
|
|
|
500,000
|
|
|
|
200,000
|
|
|
|
700,000
|
|
|
$
|
5.00
|
|
Options forfeited
|
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
333,333
|
|
|
|
|
|
|
|
333,333
|
|
|
|
|
|
June 30, 2007
|
|
|
250,000
|
|
|
|
200,000
|
|
|
|
450,000
|
|
|
$
|
5.00
|
|
|
|
166,667
|
|
|
|
200,000
|
|
|
|
366,667
|
|
|
$
|
5.00
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to the Companys executive officers
have been adjusted for the exit of two officers. Options that
were vested but not exercised by April 5, 2007 were
forfeited and amount to 333,000, or two-thirds of the
exercisable options at June 30, 2007. Options that were not
vested were forfeited as of April 5, 2007 and amount to
166,000, or two-thirds of the options that were expected to vest
at December 16, 2007.
As of June 30, 2007, the remaining contractual life of the
options is 3.5 years and the total compensation costs
related to non-vested awards not yet recognized is $46 and will
be expensed in the second half of 2007. The Company did not
grant any stock options during 2006 or in the first six months
of 2007.
For the three and six month periods ended June 30, 2007 and
2006, total stock-based compensation expense was $25 and $216
and $50 and $379, respectively.
In January 2007, an entity controlled by the CEO, purchased an
aggregate of 2,812,500 shares of the Companys common
stock and pre-existing promissory notes issued by the Company to
the two other principal shareholders with an aggregate amount
outstanding of $1,309. The entity controlled by the CEO
simultaneously sold and transferred 70,600 shares to family
members and 2,108,782 shares to FS Holdings Limited, a
company controlled by members of the Restis family. Also, the
entity controlled by the CEO sold 305,921 shares to an
institutional investor. As a result of the transactions, the CEO
now beneficially owns 2,248,031 shares of common stock.
Immediately following the closing of these transactions, the
Companys Board of Directors appointed Mr. Varouxakis
Chairman of the Board and President and elected three new
independent directors. There was no impact to the total shares
outstanding as a result of this transaction.
The Company had 6,290,100 shares, 1,843,750 Class Z
warrants and 1,828,750 Class W warrants outstanding as of
June 30, 2007 and 2006, respectively.
Under the laws of the countries of the Groups
incorporation
and/or
vessels registration, the Group is not subject to tax on
international shipping income; however, they are subject to
registration and tonnage taxes, which have been included in
vessel operating expenses in the accompanying condensed
consolidated statements of operations.
Pursuant to the Internal Revenue Code of the United States (the
Code), U.S. source gross transportation income
is subject to certain income taxes (section 887), with
exemption from such tax allowed under certain conditions
(section 883). The Company believes that it qualifies for
said tax exemption and therefore, no tax obligation is recorded.
On May 1, 2007, the Company entered into memoranda of
agreement pursuant to which the Company agreed to purchase four
secondhand drybulk carriers from non-affiliated parties for a
total purchase price of $114,000. In accordance with the
memoranda of agreement, the Company made deposits totaling
$11,400 to the respective sellers of these vessels. The Company
obtained the funds for the above deposits from a $5,500 draw
F-11
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
down on the $14,000 unsecured shareholder loan described in
Note 9 and $5,900 from the Companys cash on hand,
primarily from the proceeds of the sale of the M/V Free
Fighter in April 2007. The acquisition of two of these
vessels was subsequently cancelled on July 27, 2007 and the
related deposits totaling $4,250 were refunded to the Company.
The M/V Free Hero and M/V Free Jupiter were
purchased on July 3, 2007 and September 5, 2007,
respectively, at purchase prices of $25,250 and $47,000,
respectively, as per the terms of their respective agreements.
The Company has identified a new vessel, the M/V Free
Goddess, of similar tonnage and return characteristics as
the cancelled vessels and on August 20, 2007 entered into a
memorandum of agreement with the seller, an unrelated party,
pursuant to which the Company will purchase this vessel for the
purchase price of $25,200, with expected delivery during October
2007. On August 25, 2007, the Company provided the seller
with a deposit of $2,520 in connection with the execution of the
memorandum of agreement for the M/V Free Goddess.
The Company financed $65,025 of the remaining purchase price of
the M/V Free Hero and the M/V Free Jupiter, and
anticipates financing the $22,680 of the remaining purchase
price of the M/V Free Goddess, by utilizing cash on hand
from operations and the following credit facilities available to
the Company: (i) $68,000 senior secured loan from HSH
Nordbank AG; (ii) $21,500 junior loan from BTMU Capital
Corporation, an affiliate of the Bank of Tokyo Mitsubishi;
(iii) the remaining $8,500 of the $14,000 unsecured
shareholder loan (which was drawn down on June 22, 2007 as
discussed in Note 9 above); and (iv) an overdraft
credit facility of $4,000 available from Hollandsche
Bank Unie N.V.
Upon delivery of the M/V Free Hero on July 3, 2007
and the M/V Free Jupiter on September 5, 2007,
respectively, the Company paid the $65,025 remaining balance of
their purchase prices, net of the deposits provided, drawing
$55,600 from the above described senior and junior financing
sources, the remaining $8,500 of the $14,000 unsecured
shareholder loan and $900 from cash on hand from operations. For
the purchase of the M/V Free Goddess, the Company intends
to utilize at least $20,787 from the remainder of its existing
credit facilities as described above plus $1,893 from available
cash from operations, leaving $13,113 of availability under the
credit facility which can be used in conjunction with new
financing and internally generated cash to acquire additional,
as yet unidentified, drybulk vessels in the future.
F-12
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
The following table details the vessels acquired or to be
acquired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Class
|
|
DWT
|
|
|
Built
|
|
|
Flag
|
|
Purchase Price
|
|
Delivery Date
|
|
Employment
|
|
Free Hero
|
|
Handysize
|
|
|
24,318
|
|
|
|
1995
|
|
|
Marshall Islands
|
|
$25,250
|
|
July 3, 2007
|
|
Two-year time charter through December 2008/February 2009 at
$14.5 per day
|
Free Jupiter
|
|
Handymax
|
|
|
47,777
|
|
|
|
2002
|
|
|
Marshall Islands
|
|
$47,000
|
|
September 5, 2007
|
|
30-day time
charter at $43,000 per day followed by an unscheduled
dry-docking for repairs; thereafter to be delivered to a new
charterer under a three-year time charter through October 2010
at $32 per day for the first year, $28 per day for the
second year, and $24 per day for the third year
|
Free Goddess
|
|
Handysize
|
|
|
22,051
|
|
|
|
1995
|
|
|
Marshall Islands
|
|
$25,200
|
|
Expected delivery October 2007
|
|
Two-month time charter through November 2007 at $13 per
day; thereafter a time charter for 22 to 25 months at
$19.25 per day
|
On August 3, 2007, the Company filed a Registration
Statement on
Form F-3
under the Securities Act of 1933, as amended, (the
Securities Act) registering the resale of:
(a) 3,672,500 shares of common stock issuable upon
exercise of Class W warrants (1,828,750) and Class Z
warrants (1,843,750), (b) 840,834 shares of common
stock currently owned by certain shareholders and 15,000
Class Z warrants currently owned by HCFP and
(c) 155,000 shares of common stock and 250,000
Class W and Class Z warrants (including
255,000 shares of FreeSeas common stock issuable upon
exercise of such warrants) included in the Series A units
and Series B units that may be purchased by HCFP. As of
September 26, 2007, a total of 511,805 Class W and Class Z
warrants had been exercised resulting in aggregate net proceeds
of $2,431 to the Company. The Company issued 511,805 shares
of common stock in accordance with the terms of such warrants in
connection with such exercises.
On August 7, 2007, the Company filed a Registration
Statement on
Form F-1
under the Securities Act in connection with a firm underwriting
public offering of the Companys common stock.
On August 14, 2007, the Company received a letter from
counsel representing two former executive officers of the
Company alleging that the
Form F-3
filed on August 3, 2007 misstated the number of shares
beneficially owned by the two executive officers. The two former
executive officers allege that they continue to beneficially own
500,000 shares of common stock underlying options granted
to them in connection with their employment with the Company.
The Company has responded that it believes that these options
expired unexercised pursuant to the Plan (see
Note 13 Stock-Based Compensation) and intends
to vigorously defend its position.
On August 28, 2007, the Company received a binding offer
for a senior secured credit facility from Credit Suisse in the
aggregate amount of $87,000, consisting of a $48,700 loan to
finance or refinance, as appropriate, up to 50% of the purchase
price of the M/V Free Hero, the M/V Free Jupiter,
and the M/V Free Goddess and a $38,300 facility for the
purchase of additional vessels.
F-13
FREESEAS
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
On September 21, 2007, one of the Companys vessels,
the M/V Free Jupiter, ran aground off the coast of the
Philippines. Operations to re-float the vessel have been
completed and the M/V Free Jupiter will complete its
current one-trip time charter and undergo an unscheduled
dry-docking for repairs. The Company expects that the
vessels insurance will cover the vessels repairs and
related expenses, less applicable deductibles. The vessel will
be out of service for a period of weeks following the
anticipated completion of its current one-trip time charter
while the repairs are completed. At the present time, we are not
able to accurately estimate the period the vessel will be out of
service or the impact the dry-docking will have on our results
of operations.
F-14
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and the Board of Directors of FreeSeas
Inc.:
We have audited the accompanying consolidated balance sheets of
FreeSeas Inc. and its subsidiaries as of December 31, 2006
and December 31, 2005, and the related consolidated
statements of income, stockholders equity and cash flows
for each of the two years in the period ended December 31,
2006, and for the period from April 23, 2004 to
December 31, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of FreeSeas Inc. and its subsidiaries at
December 31, 2006 and December 31, 2005, and the
results of their operations and their cash flows for each of the
two years in the period ended December 31, 2006, and for
the period from April 23, 2004 to December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America.
PricewaterhouseCoopers S.A.
Athens, Greece
May 17, 2007
F-15
FREESEAS
INC.
CONSOLIDATED BALANCE SHEETS
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Notes
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash in hand and at bank
|
|
|
|
|
|
|
372
|
|
|
|
3,285
|
|
Trade receivables, net
|
|
|
|
|
|
|
278
|
|
|
|
520
|
|
Inventories
|
|
|
|
|
|
|
242
|
|
|
|
42
|
|
Insurance claims
|
|
|
|
|
|
|
485
|
|
|
|
762
|
|
Due from related party
|
|
|
9
|
|
|
|
40
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,417
|
|
|
|
5,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
3
|
|
|
|
19,369
|
|
|
|
23,848
|
|
Deferred charges, net
|
|
|
4
|
|
|
|
2,300
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
23,086
|
|
|
|
29,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
Accounts payable
|
|
|
5
|
|
|
|
2,003
|
|
|
|
1,176
|
|
Accrued liabilities
|
|
|
6
|
|
|
|
1,515
|
|
|
|
1,540
|
|
Unearned revenue
|
|
|
|
|
|
|
179
|
|
|
|
172
|
|
Shareholders loans, current portion
|
|
|
8
|
|
|
|
1,218
|
|
|
|
950
|
|
Due to related parties
|
|
|
9
|
|
|
|
|
|
|
|
893
|
|
Long-term debt, current portion
|
|
|
7
|
|
|
|
3,345
|
|
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
10,260
|
|
|
|
10,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
7
|
|
|
|
4,485
|
|
|
|
7,500
|
|
Shareholders loans, net of current portion
|
|
|
8
|
|
|
|
1,334
|
|
|
|
2,250
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
|
|
|
|
5,819
|
|
|
|
9,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
|
|
|
16,079
|
|
|
|
20,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
11
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares (5,000,000 authorized with par value $0.001,
nil issued and outstanding as at 2006 and 2005)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Common shares (40,000,000 authorized with par value $0.001,
6,290,100 shares issued and outstanding as at 2006 and 2005)
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
|
|
|
|
9,703
|
|
|
|
9,242
|
|
Retained earnings / (deficit)
|
|
|
|
|
|
|
(2,702
|
)
|
|
|
622
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
|
|
7,007
|
|
|
|
9,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
|
|
|
|
|
23,086
|
|
|
|
29,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-16
FREESEAS INC.
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
|
|
|
|
Date of Inception
|
|
|
|
For the year ended
|
|
|
For the year ended
|
|
|
(April 23, 2004) to
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
OPERATING REVENUES
|
|
|
11,727
|
|
|
|
10,326
|
|
|
|
2,830
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses
|
|
|
(4,483
|
)
|
|
|
(3,596
|
)
|
|
|
(786
|
)
|
Voyage expenses
|
|
|
(689
|
)
|
|
|
(55
|
)
|
|
|
(16
|
)
|
Depreciation expense
|
|
|
(4,479
|
)
|
|
|
(3,553
|
)
|
|
|
(872
|
)
|
Amortization of deferred dry-docking and special survey costs
|
|
|
(442
|
)
|
|
|
(355
|
)
|
|
|
(109
|
)
|
Management fees to a related party
|
|
|
(540
|
)
|
|
|
(488
|
)
|
|
|
(180
|
)
|
Commissions
|
|
|
(799
|
)
|
|
|
(553
|
)
|
|
|
(127
|
)
|
Compensation costs
|
|
|
(651
|
)
|
|
|
(200
|
)
|
|
|
|
|
General and administrative expenses
|
|
|
(1,925
|
)
|
|
|
(321
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from operations
|
|
|
(2, 281
|
)
|
|
|
1,205
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Costs
|
|
|
(1,004
|
)
|
|
|
(1,076
|
)
|
|
|
(240
|
)
|
Interest income
|
|
|
19
|
|
|
|
8
|
|
|
|
4
|
|
Other
|
|
|
(58
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(1,043
|
)
|
|
|
(1,053
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(3,324
|
)
|
|
|
152
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Basic weighted average number of shares
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
|
|
4,500,000
|
|
Diluted weighted average number of shares
|
|
|
6,290,100
|
|
|
|
4,600,444
|
|
|
|
4,500,000
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-17
FREESEAS
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
|
|
|
|
Date of Inception
|
|
|
|
For the year ended
|
|
|
For the year ended
|
|
|
(April 23, 2004) to
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(3,324
|
)
|
|
|
152
|
|
|
|
470
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,479
|
|
|
|
3,553
|
|
|
|
872
|
|
Amortization of deferred charges
|
|
|
514
|
|
|
|
433
|
|
|
|
127
|
|
Amortization of debt discount
|
|
|
77
|
|
|
|
153
|
|
|
|
66
|
|
Provision for doubtful receivables
|
|
|
202
|
|
|
|
|
|
|
|
|
|
Write off of deferred finance costs
|
|
|
32
|
|
|
|
50
|
|
|
|
|
|
Dry-docking and special survey
|
|
|
(2,069
|
)
|
|
|
(379
|
)
|
|
|
(641
|
)
|
Compensation costs for stock options granted
|
|
|
651
|
|
|
|
180
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
40
|
|
|
|
(225
|
)
|
|
|
(295
|
)
|
Inventories
|
|
|
(200
|
)
|
|
|
(1
|
)
|
|
|
(41
|
)
|
Due from related party
|
|
|
637
|
|
|
|
(431
|
)
|
|
|
(246
|
)
|
Insurance Claims
|
|
|
277
|
|
|
|
(762
|
)
|
|
|
|
|
Accounts payable
|
|
|
827
|
|
|
|
761
|
|
|
|
415
|
|
Accrued liabilities
|
|
|
(25
|
)
|
|
|
1,424
|
|
|
|
116
|
|
Unearned revenue
|
|
|
7
|
|
|
|
(112
|
)
|
|
|
284
|
|
Due to related party
|
|
|
(893
|
)
|
|
|
774
|
|
|
|
119
|
|
Other liabilities
|
|
|
(154
|
)
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash from Operating Activities
|
|
|
1,078
|
|
|
|
5,724
|
|
|
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel acquisitions
|
|
|
|
|
|
|
(11,213
|
)
|
|
|
(17,060
|
)
|
Restricted cash
|
|
|
|
|
|
|
400
|
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash used in Investing Activities
|
|
|
|
|
|
|
(10,813
|
)
|
|
|
(17,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net movement in bank overdraft
|
|
|
2,000
|
|
|
|
(37
|
)
|
|
|
37
|
|
Proceeds from long-term debt
|
|
|
2,330
|
|
|
|
10,700
|
|
|
|
11,000
|
|
Loans from shareholders
|
|
|
|
|
|
|
4,216
|
|
|
|
3,675
|
|
Payments of long-term debt
|
|
|
(7,500
|
)
|
|
|
(7,850
|
)
|
|
|
(850
|
)
|
Payments of loans from shareholders
|
|
|
(750
|
)
|
|
|
(4,416
|
)
|
|
|
(568
|
)
|
Issuance of common stock, net (note 13)
|
|
|
|
|
|
|
5,901
|
|
|
|
5
|
|
Shareholders contributions
|
|
|
|
|
|
|
105
|
|
|
|
2,966
|
|
Shareholders advance
|
|
|
|
|
|
|
(600
|
)
|
|
|
600
|
|
Deferred financing costs
|
|
|
(71
|
)
|
|
|
(106
|
)
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used in) provided by Financing Activities
|
|
|
(3,991
|
)
|
|
|
7,913
|
|
|
|
16,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash in hand and at bank
|
|
|
(2,913
|
)
|
|
|
2,824
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash in hand and at bank, Beginning of Period
|
|
|
3,285
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash in hand and at bank, End of Period
|
|
|
372
|
|
|
|
3,285
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
758
|
|
|
|
588
|
|
|
|
77
|
|
Non-cash shareholder distributions
|
|
|
25
|
|
|
|
19
|
|
|
|
55
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-18
FREESEAS
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(All amounts in tables in thousands of United States dollars,
except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Deferred Stock
|
|
|
|
|
|
|
Shares
|
|
|
Shares $
|
|
|
Shares
|
|
|
Shares $
|
|
|
Capital
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
|
Issuance of shares
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Contributions from shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966
|
|
|
|
|
|
|
|
|
|
|
|
2,966
|
|
Distributions to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470
|
|
|
|
|
|
|
|
470
|
|
Balance December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
5
|
|
|
|
2,911
|
|
|
|
470
|
|
|
|
|
|
|
|
3,386
|
|
Issuance of shares, net (note 13)
|
|
|
|
|
|
|
|
|
|
|
1,790,100
|
|
|
|
1
|
|
|
|
5,900
|
|
|
|
|
|
|
|
|
|
|
|
5,901
|
|
Contributions from shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
Distributions to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
Issuance of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
180
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
152
|
|
Balance December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
6,290,100
|
|
|
|
6
|
|
|
|
9,242
|
|
|
|
622
|
|
|
|
(165
|
)
|
|
|
9,705
|
|
Issuance of shares, net (note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486
|
|
|
|
|
|
|
|
165
|
|
|
|
651
|
|
Net (loss)/income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,324
|
)
|
|
|
|
|
|
|
(3,324
|
)
|
Balance December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
6,290,100
|
|
|
|
6
|
|
|
|
9,703
|
|
|
|
(2,702
|
)
|
|
|
|
|
|
|
7,007
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-19
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
|
|
1.
|
Basis of
Presentation and General Information
|
FreeSeas Inc., formerly known as Adventure Holdings S.A., was
incorporated in the Marshall Islands on April 23, 2004, for
the purpose of being the ultimate holding company of the ship
owning companies Adventure Two S.A., Adventure Three S.A. and
Adventure Four S.A. Hereinafter, the consolidated companies
referred to above will be referred to as FreeSeas,
the Group or the Company.
FreeSeas owns and operates three Handysize dry bulk carriers.
Free Bulkers S.A., a Marshall Islands company, which manages the
vessels, is a company owned by common shareholders of FreeSeas.
The management company is excluded from the Group.
FreeSeas consists of the companies listed below as at
December 31, 2006:
Company
FreeSeas Inc.
Adventure Two S.A.
Adventure Three S.A.
Adventure Four S.A.
The 2004 financial statements reflect the results of the
operations of the Company from its inception. The three dry bulk
carriers were purchased by their vessel-owning subsidiaries on
August 4, 2004, September 29, 2004 and June 14,
2005, respectively, from unrelated third parties. The vessels
were acquired without existing charters.
On March 28, 2005, the Company executed a definitive
agreement, which contemplated the merger of Trinity Partners
Acquisition Company Inc. (Trinity) into FreeSeas
(the Transaction). On December 15, 2005,
Trinity shareholders approved the Transaction whereby Trinity
was merged into FreeSeas. Accordingly, the Company issued
1,786,000 shares of common stock in exchange for 100% of
the equity of Trinity. FreeSeas obtained $7,100 cash from
Trinity on issuance of shares. FreeSeas acquired all of the
assets and assumed all of the liabilities of Trinity as a result
of the Transaction. Accordingly this transaction was accounted
for as an issuance of stock for cash (see Note 13).
The Company generated net cash from operating activities of
$1,078 for the year ended Dec. 31, 2006. For the same year it
has a net loss of $3,324 primarily due to increased depreciation
charges of $4,479 and increased general and administrative
expenses of $1,925 incurred in conjunction with its first year
of operations as a publicly traded company. The negative working
capital of $8,843 as at Dec. 31, 2006 resulted primarily from
net reduction of long term debt of $5,170 (see
Note 7) and deferred charges of $2,069 (see
Note 4). Subsequent events (see Note 17) and
current freight rates in the drybulk market have contributed in
meeting the Companys current obligations. The directors
are confident that the Company will continue to operate and grow
without significant liquidity difficulties.
|
|
2.
|
Significant
Accounting Policies
|
Principles of Consolidation: The accompanying
consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (US GAAP). All significant
inter-company balances and transactions have been eliminated.
The consolidated financial statements represent a consolidation
of the entities within the legal structure of FreeSeas, as
listed above.
Where necessary, comparative figures have been reclassified to
conform with changes in presentation in the current year.
Use of Estimates: The preparation of
consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-20
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
Foreign Currency Translation: The functional
currency of the Group is the U.S. Dollar. Transactions
involving other currencies during the year are converted into
U.S. Dollars using the exchange rates in effect at the time
of the transactions. At the balance sheet date, monetary assets
and liabilities, which are denominated in other currencies, are
translated to reflect the current exchange rates. Resulting
gains or losses are separately reflected in the accompanying
consolidated statements of income.
Trade Receivables: The amount shown as Trade
Receivables at each balance sheet date includes estimated
recoveries from charterers for hire, freight and demurrage
billings, net of allowance for doubtful debts. An estimate is
made of the allowance for doubtful debts based on a review of
all outstanding amounts at year end, and an allowance is made
for any accounts which management believes are not recoverable.
Bad debts are written off in the year in which they are
identified.
Inventories: Inventories, which are comprised
of bunkers, lubricants, provisions and stores remaining on board
the vessels at year end, are valued at the lower of cost, as
determined on a
first-in,
first-out basis, or market.
Insurance Claims: Insurance claims comprise
claims submitted
and/or
claims in the process of compilation or submission (claims
pending) relating to Hull and Machinery or Protection and
Indemnity insurance coverage. They are recorded on the accrual
basis and represent the claimable expenses, net of deductibles,
incurred through December 31 of each year, which are expected to
be recovered from insurance companies. Any remaining costs to
complete the claims are included in accrued liabilities. The
classification of insurance claims (if any) into current and
non-current assets is based on managements expectations as
to their collection dates.
Vessels Cost: Vessels are stated at
cost, which consists of the contract purchase price and any
material expenses incurred upon acquisition (improvements and
delivery expenses) and during the period before they commence
operations. Subsequent expenditures for conversions and major
improvements are also capitalized when they appreciably extend
the life, increase the earning capacity or improve the
efficiency or safety of the vessels. Otherwise, these
expenditures are charged to expenses as incurred.
Vessels Depreciation: The cost of the
Groups vessels is depreciated on a straight-line basis
over the vessels remaining economic useful lives from the
acquisition date, after considering the estimated residual
value. Management estimates the useful life of the Groups
vessels to be 27 years from the date of construction.
Impairment of Long-lived Assets: The Group
reviews long-lived assets to be held and used or to be disposed
of for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable. If the future net undiscounted cash flows from the
assets are less than the carrying values of the asset, an
impairment loss is recorded equal to the difference between the
assets carrying value and its fair value. The review of
the carrying amount in connection with the estimated recoverable
amount for each of the Groups vessels, as of the year end,
indicated no impairment.
Accounting for Special Survey and Dry-docking
Costs: The Group follows the deferral method of
accounting for special survey and dry-docking costs, whereby
actual costs incurred are deferred and are amortized over a
period of five and two and a half years, respectively. If
special survey or dry-docking is performed prior to the
scheduled date, the remaining
un-amortized
balances are immediately written-off.
Financing Costs: Fees incurred for obtaining
new loans are deferred and amortized over the loans
respective repayment periods, using the effective interest rate
method. These charges are included in the balance sheet line
item Deferred Charges. Any unamortized balance of costs
relating to loans repaid or refinanced is expensed in the period
the repayment or refinancing is made, if the refinancing is
deemed to be a debt extinguishment under the provision of
EITF 96-19.
Accounting for Revenue and Expenses: Revenue
is recorded when services are rendered, the Company has a signed
charter agreement or other evidence of an arrangement, the price
is fixed or determinable, and collection is reasonably assured.
F-21
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
Voyage revenues for the transportation of cargo are recognized
ratably over the estimated relative transit time of each voyage
while the related voyage expenses are recognized as incurred. A
voyage is deemed to commence when a vessel is available for
loading and is deemed to end upon the completion of the
discharge of the current cargo. Estimated losses on voyages are
provided for in full at the time such losses become evident.
Under a voyage charter, the Group agrees to provide a vessel for
the transportation of specific goods between specific ports in
return for payment of an agreed upon freight rate per ton of
cargo.
Revenues from time chartering of vessels are accounted for as
operating leases and are thus recognized on a straight line
basis as the average revenue over the rental periods of such
charter agreements, as service is performed, except for loss
generating time charters, in which case the loss is recognized
in the period when such loss is determined. A time charter
involves placing a vessel at the charterers disposal for a
period of time during which the charterer uses the vessel in
return for the payment of a specified daily hire rate. Short
period charters for less than three months are referred to as
spot-charters. Charters extending three months to a year are
generally referred to as medium term charters. All other
charters are considered long term. Under time charters,
operating cost such as for crews, maintenance and insurance are
typically paid by the owner of the vessel.
Unearned Revenue: Unearned voyage revenue
primarily relates to cash received from charterers prior to it
being earned. These amounts are recognized as revenue over the
voyage or charter period.
Profit Sharing Arrangements: From time to
time, the Company has entered into profit sharing arrangements
with its charterers, whereby the Company may receive additional
income at an agreed percentage of net earnings earned by such
charterer, where those earnings are over the base rate of hire
and settled periodically, during the term of the charter
agreement. Revenues generated from the profit sharing
arrangements are recorded in the period they are earned. During
the years ended December 31, 2006, 2005 and 2004, the
Company earned $0, $776,335 and $295,000, respectively, from the
profit sharing arrangements.
Repairs and Maintenance: All repair and
maintenance expenses, including major overhauling and underwater
inspection expenses, are charged against income as incurred and
are included in vessel operating expenses in the accompanying
consolidated statements of income.
Stock-Based Compensation: On January 1,
2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004),
Share-based Payments, which requires the measurement
and recognition of compensation expense based on estimated fair
values for all share-based payment arrangements including
employee and director stock option and restricted stock awards.
SFAS No. 123R supersedes the accounting treatment the
Company had previously used to recognize expense for stock-
based compensation under Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees and the pro-forma disclosure
guidelines of SFAS No. 123, Accounting for
Stock-Based Compensation. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 107 relating to certain issues
surrounding the implementation of SFAS No. 123R. The
Company has applied the provision of SAB No. 107 in
its adoption of SFAS No. 123R.
At adoption date of SFAS No. 123R, the Company used
the modified prospective method as the transition method per
SFAS No. 123R guidance.
As a result of the adoption of SFAS No. 123R, the
Companys net income for the year ended December 31,
2006 was $651 lower than the amount that would have been
recognized under the Companys previous accounting method
for share-based compensation. In addition, the impact from
applying the provisions of SFAS No. 123R on basic and
diluted earnings per share for the year ended December 31,
2006 was $(0.14).
F-22
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123, as amended by
SFAS No. 148 for fiscal year 2005:
|
|
|
|
|
|
|
For the year ended
|
|
|
|
December 31, 2005
|
|
|
Net income available to common shareholders, as reported
|
|
|
|
|
As reported
|
|
|
152
|
|
Add: Stock-based employee compensation expense included in
reported net income
|
|
|
180
|
|
Deduct: Total stock compensation expense determined under the
fair value based method
|
|
|
(1,075
|
)
|
Net income available to common shareholders, pro forma
|
|
|
(743
|
)
|
Basic earnings (loss) per share as reported
|
|
$
|
0.03
|
|
Basic earnings (loss) per share pro forma
|
|
$
|
(0.16
|
)
|
Diluted earnings (loss) per share as reported
|
|
$
|
0.03
|
|
Diluted earnings (loss) per share pro forma
|
|
$
|
(0.16
|
)
|
The fair value of options granted is estimated as of the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
For the year ended
|
|
|
|
December 31, 2005
|
|
|
Expected life of option (years) (1)
|
|
|
5
|
|
Risk-free interest rate (2)
|
|
|
4.35
|
%
|
Expected volatility of the Companys stock (3)
|
|
|
37.50
|
%
|
Expected dividend yield on Companys stock
|
|
|
|
|
|
|
|
(1) |
|
The expected life of options (in years) is based on the expected
exercise date of the options. |
|
(2) |
|
Risk Free Rate is the yield on a U.S. Government Zero Coupon
Bond with a maturity equal to the term of the grant. |
|
(3) |
|
Expected volatility is calculated by monitoring the volatility
of ten shipping companies listed in NASDAQ for the last
30 months (Source: Bloombergs Financial Markets
Commodities News). |
Segment Reporting: The Group reports financial
information and evaluates its operations by total charter
revenues. The Group does not have discrete financial information
to evaluate the operating results for each such type of charter.
Although revenue can be identified for these types of charters,
management cannot and does not identify expenses, profitability
or other financial information for these charters. As a result,
management, including the chief operating decision makers,
reviews operating results solely by revenue per day and
operating results of the fleet and thus the Group has determined
that it operates under one reportable segment.
Comprehensive Income: SFAS No. 130,
Reporting Comprehensive Income, establishes
standards for the reporting and display of comprehensive income
and its components and requires restatement of all previously
reported information for comparative purposes. For the years
ended December 31, 2006 and 2005 and for the period from
April 23, 2004 through December 31, 2004,
comprehensive income was the same as net income.
Earnings per Share: Basic earnings per share
are computed by dividing net income by the weighted average
number of common shares outstanding during the periods
presented. Diluted earnings per share reflect the potential
dilution that would occur if securities or other contracts to
issue common stock were exercised. Dilution has been computed by
the treasury stock method whereby all of the Companys
dilutive securities (the warrants and options) are assumed to be
exercised and the proceeds used to repurchase common shares at
the weighted average market price of the Companys common
stock during the relevant periods. The
F-23
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
incremental shares (the difference between the number of shares
assumed issued and the number of shares assumed purchased) shall
be included in the denominator of the diluted earnings per share
computation.
Recent
Accounting Developments:
In March 2006, the Financial Accounting Standard Board
(FASB) issued SFAS No. 156
Accounting for Servicing of Financial Assets
an amendment of FASB Statement No. 140.
SFAS No. 156 amends SFAS No. 140 requiring
that all separately recognized servicing assets and servicing
liabilities be measured at fair value, if practicable.
SFAS No. 156 also permits, but does not require, the
subsequent measurement of servicing assets and servicing
liabilities. SFAS No. 156 is effective for the first
fiscal year that begins after September 15, 2006. The
adoption of this Accounting Standard is not expected to have a
material effect on the consolidated financial statements. This
statement will be effective for the Company for the fiscal year
beginning on January 1, 2007.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurement. SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in GAAP and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the
reporting entity has not yet released financial statements for
that fiscal year, including financial statements for an interim
period within that fiscal year. The provisions of
SFAS No. 157 should be applied prospectively as of the
beginning of the fiscal year in which it is initially applied
except for certain cases where it should be applied
retrospectively. The adoption of this Accounting Standard is not
expected to have a material effect on the consolidated financial
statements. This statement will be effective for the Company for
the fiscal year beginning on January 1, 2008.
In September 2006, the FASB issued SFAS No. 158
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans- an amendment of FASB Statements
No. 87, 88, 106 and 132(R). SFAS No. 158
improves financial reporting by requiring an employer to
recognize the overfunded and underfunded status of a defined
benefit retirement plan (other than multiemployer plan) as an
asset or liability in its statement of financial position and
recognize changes in the funded status in the year in which the
changes occur through comprehensive income of a business entity
or changes in unrestricted net assets of a not-for-profit
organization. This statement also improves financial reporting
by requiring an employer to measure the funded status of a plan
as of the date of its year-end statements of financial position,
with limited exceptions. This standard was effective for the
Company as of the fiscal year ended December 31, 2006 and
did not have a material effect on its consolidated financial
statements.
In September 2006, the SEC issued SAB No. 108,
Considering the Effect of Prior Year Misstatements when
Qualifying Misstatements in Current Year Financial
Statements. SAB No. 108 provides guidance on the
consideration of the effects of prior year misstatements in
qualifying current year misstatements for the purpose of
materiality assessment. SAB No. 108 establishes a dual
approach that requires quantification of financial statements
errors based on both the roll-over method and the iron curtain
method regarding the effects of each of the Companys
balance sheets and statement of operations and the related
financial statements disclosures. SAB No. 108 permits
existing public companies to record the cumulative effect of
initially applying this approach in the first year ending after
November 15, 2006, by recording the necessary correcting
adjustments to the carrying values of assets and liabilities as
of the beginning of that year with the offsetting adjustment s
recorded to the opening balance of retained earnings. The
adoption of SAB No. 108 did not have any effect on the
Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159
(SFAS 159) The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159
permits the entities to choose to measure many financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. This Statement
is expected to expand the use of fair value measurement, which
is consistent with the Boards long-term measurement
objectives for accounting for financial instruments.
SFAS No. 159 is effective as of the beginning
F-24
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
of an entitys first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year on or before November 15, 2007,
provided the entity also elects to apply the provisions of
SFAS No. 157, Fair Value Measurements. The
Company elected to not adopt early and does not expect the
adoption to have a material effect on the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
Vessel cost
|
|
|
depreciation
|
|
|
value
|
|
|
Acquisition of vessels
|
|
|
17,060
|
|
|
|
|
|
|
|
17,060
|
|
Depreciation
|
|
|
|
|
|
|
(872
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
17,060
|
|
|
|
(872
|
)
|
|
|
16,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of vessels
|
|
|
11,213
|
|
|
|
|
|
|
|
11,213
|
|
Depreciation
|
|
|
|
|
|
|
(3,553
|
)
|
|
|
(3,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
28,273
|
|
|
|
(4,425
|
)
|
|
|
23,848
|
|
Depreciation
|
|
|
|
|
|
|
(4,479
|
)
|
|
|
(4,479
|
)
|
December 31, 2006
|
|
|
28,273
|
|
|
|
(8,904
|
)
|
|
|
19,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2005, FreeSeas, through a newly formed subsidiary,
acquired a Handysize vessel originally built in 1982. The
purchase price of the vessel was $11,025. The vessel was
delivered charter-free. FreeSeas financed $7,000 of the purchase
price with a non-affiliated third party lender (Note 7). To
pay the balance of the purchase price and for working capital,
the shareholders of FreeSeas lent $4,216 to FreeSeas, which was
repaid from the funds that became available upon the
consummation of the transaction with Trinity in December 2005
(Note 1).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dry-docking
|
|
|
Special survey cost
|
|
|
Financing costs
|
|
|
Total
|
|
|
Additions
|
|
|
340
|
|
|
|
301
|
|
|
|
190
|
|
|
|
831
|
|
Amortization
|
|
|
(80
|
)
|
|
|
(29
|
)
|
|
|
(18
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
260
|
|
|
|
272
|
|
|
|
172
|
|
|
|
704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
299
|
|
|
|
80
|
|
|
|
106
|
|
|
|
485
|
|
Written-off
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
Amortization
|
|
|
(238
|
)
|
|
|
(117
|
)
|
|
|
(78
|
)
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
321
|
|
|
|
235
|
|
|
|
150
|
|
|
|
706
|
|
Additions
|
|
|
715
|
|
|
|
1,354
|
|
|
|
71
|
|
|
|
2,140
|
|
Written-off
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(32
|
)
|
Amortization
|
|
|
(306
|
)
|
|
|
(136
|
)
|
|
|
(72
|
)
|
|
|
(514
|
)
|
December 31, 2006
|
|
|
730
|
|
|
|
1,453
|
|
|
|
117
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, the loan with Egnatia Bank was fully repaid and the
unamortized balance of the related financing fees of $32 was
written off in Finance Costs in the accompanying Consolidated
Statement of Income (see Note 7).
F-25
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
Accounts payable are comprised of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Suppliers
|
|
|
1,820
|
|
|
|
603
|
|
Agents
|
|
|
57
|
|
|
|
545
|
|
Insurers
|
|
|
126
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,003
|
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities comprise the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accrued wages
|
|
|
28
|
|
|
|
83
|
|
Accrued interest
|
|
|
42
|
|
|
|
23
|
|
Accrued insurance and related liabilities
|
|
|
226
|
|
|
|
649
|
|
Accrued drydocking and special survey costs
|
|
|
865
|
|
|
|
|
|
Accrued financial advisory costs
|
|
|
155
|
|
|
|
431
|
|
Other accrued expenses
|
|
|
199
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,515
|
|
|
|
1,540
|
|
|
|
|
|
|
|
|
|
|
Long-term debt as of December 31, 2006 and
December 31, 2005 consists of the following bank loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Current
|
|
|
Long-term
|
|
|
|
|
|
Current
|
|
|
Long-term
|
|
|
|
|
Lender
|
|
portion
|
|
|
portion
|
|
|
Total
|
|
|
portion
|
|
|
portion
|
|
|
Total
|
|
|
First Business Bank., (M/V Free Fighter),(c)
|
|
|
945
|
|
|
|
1,385
|
|
|
|
2,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollandsche Bank Unie N.V. (M/V Free Destiny)
|
|
|
225
|
|
|
|
3,100
|
|
|
|
3,325
|
|
|
|
375
|
|
|
|
3,325
|
|
|
|
3,700
|
|
Hollandsche Bank Unie N.V. (M/V Free Envoy)
|
|
|
2,175
|
|
|
|
|
|
|
|
2,175
|
|
|
|
2,125
|
|
|
|
2,175
|
|
|
|
4,300
|
|
Egnatia Bank (M/V Free Fighter)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
2,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,345
|
|
|
|
4,485
|
|
|
|
7,830
|
|
|
|
5,500
|
|
|
|
7,500
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
The repayment terms of the loans outstanding as of
December 31, 2006 were as follows:
|
|
|
|
|
Lender
|
|
Vessel
|
|
Repayment Terms(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Business Bank(c)
|
|
M/V FREE FIGHTER(a)
|
|
Twelve quarterly installments of US$315 each, the first being
due in April 2007, and a balloon payment of US$1,020 payable
together with the last installment. Interest rate at 2.00% above
LIBOR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollandsche Bank Unie N.V.
|
|
M/V FREE DESTINY(a)
|
|
Eight quarterly installments of US$75 the first due in December
2005, one quarterly installment of US$100 in March 2008, two
quarterly installments of US$500 and a balloon payment of
US$2,000 due in December 2008. Interest rate at 1.95% above
LIBOR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollandsche Bank Unie N.V.(d)
|
|
M/V FREE ENVOY(a)
|
|
Twelve quarterly installments of US$425 each, the first being
due in December 2004 and a balloon payment of US$900 in December
2007. Interest rate at 1.95% above LIBOR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Egnatia Bank
|
|
M/V FREE FIGHTER(a)
|
|
Four quarterly installments of US$750, six quarterly
installments of US$250 and a balloon payment of US$500. The loan
was fully repaid in 2006. Interest rate at 1.875% above LIBOR.
|
|
|
|
a) |
|
The vessels indicated in the above table are collateralized
against the respective loans. |
|
b) |
|
The debt agreements also include positive and negative covenants
for the respective vessel-owning companies, the most significant
of which are the maintenance of operating accounts, minimum cash
deposits and minimum market values. The borrowers are further
restricted from incurring additional indebtedness, changing the
vessels flags and distributing earnings without the prior
consent of the lender. In September 2005, the Company refinanced
the loan related to the acquisition of Free Destiny. The
loan was refinanced with Hollandsche Bank Unie N.V.
for an amount of $3,700. The previous loan from Corner Banca
S.A. was repaid and treated as an extinguishment. |
|
c) |
|
The loan will be drawn in two advances as follows: Advance A of
$2,330 to repay the loan of Adventure Four S.A with Egnatia Bank
and Advance B of $2,470 (drawn down in January 2007, see
Subsequent Events, Note 17) to repay the overdraft
facility of $2,000 granted to Adventure Four S.A by Hollandsche
Bank Unie N.V. and the balance of $470 to finance
the special survey and drydocking costs of the
M/V Free
Fighter. As of December 31, 2006, the Company had drawn
only Advance A. |
|
d) |
|
In September 2005, the Company amended the loan related to the
acquisition of Free Envoy, pursuant to which the interest was
reduced to 1.95% above LIBOR. |
F-27
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
The annual repayments of the above loans at December 31,
2006 for the next four years are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
|
3,345
|
|
2008
|
|
|
3,553
|
|
2009
|
|
|
453
|
|
2010
|
|
|
479
|
|
|
|
|
|
|
Total
|
|
|
7,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Shareholders loans
|
|
|
4,134
|
|
Debt discount
|
|
|
(459
|
)
|
Payment
|
|
|
(568
|
)
|
Debt discount decrease
|
|
|
55
|
|
Debt discount amortization
|
|
|
66
|
|
|
|
|
|
|
December 31, 2004
|
|
|
3,228
|
|
|
|
|
|
|
New loan
|
|
|
4,216
|
|
Payment
|
|
|
(4,416
|
)
|
Debt discount decrease
|
|
|
19
|
|
Debt discount amortization
|
|
|
153
|
|
|
|
|
|
|
December 31, 2005
|
|
|
3,200
|
|
|
|
|
|
|
Payment
|
|
|
(750
|
)
|
Debt discount decrease
|
|
|
25
|
|
Debt discount amortization
|
|
|
77
|
|
|
|
|
|
|
December 31, 2006
|
|
|
2,552
|
|
|
|
|
|
|
This amount represents interest-free loans from shareholders
used in the partial financing of the acquisition of the vessels.
The long-term liability has been recorded at fair value, and the
resulting debt discount is accreted over the term of the loans
using the effective interest rate method. The short term portion
of the shareholder loans amounts to $1,250 and is shown in the
financial statement line Shareholders loans, current
portion.
The original loan amounts were $4,134, with a related debt
discount of $459. A repayment of $568 was effected at
December 31, 2004, with a corresponding decrease in the
debt discount of $55. The 2004 debt discount amortization was
$66. The remaining gross debt balance of $3,566 was outstanding
at December 31, 2004.
A repayment of $200 was effected in the first quarter of 2005
with a corresponding decrease in the debt discount of $19. The
2005 debt discount amortization was $153. The remaining gross
debt balance of $3,366 was outstanding at December 31,
2005. The implicit interest rates were 4.5% and 4.7% for the
year/periods ended December 31, 2005 and 2004, respectively.
Total repayments of $750 were effected in the first, third and
fourth quarters of 2006 with a corresponding decrease in the
debt discount of $25. The 2006 debt discount amortization was
$77. The remaining gross debt balance of $2,617 (remaining
unamortized debt discounts of $65) was outstanding at
December 31, 2006. The
F-28
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
implicit interest rates were 3.2%, 4.5% and 4.7% for the
year/periods ended December 31, 2006, 2005 and 2004,
respectively.
On April 25, 2005, the terms of these loans were amended.
The new terms called for the principal balance of the loans to
be repaid in eight equal quarterly installments of US $250
beginning in March 31, 2006 and ending December 3,
2007, and a balloon payment for the balance due January 1,
2008. Further, the amended terms required that after the
completion of the Transaction with Trinity and subject to the
Company raising additional capital of at least US $12,500, the
outstanding principal balance of the loans would become
immediately payable. As of December 31, 2005, the
conditions for immediate repayment have not been met.
The repayment of the loans required a portion of the imputed
interest to be treated as non-cash shareholder distribution. For
the amendment to the terms of the loans, the remaining discount
will be amortized over the revised repayment period.
To finance a portion of the purchase price of the new vessel and
for working capital requirements, all of the FreeSeas
shareholders existing prior to the Transaction with Trinity
loaned $4,216 to the Company during 2005, which is
interest-free, and which was to be repaid from the funds that
became available upon the consummation of the Transaction with
Trinity. These funds were repaid during December 2005. As the
loan was provided interest free, with no fixed or determinable
repayment date, management has imputed $105 of interest for the
year ending December 31, 2005 that has been treated as a
shareholder contribution, using a market interest rate.
The annual repayments of shareholders loans at December 31,
2006 are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
|
1,218
|
|
2008
|
|
|
1,334
|
|
|
|
|
|
|
Total
|
|
|
2,552
|
|
|
|
|
|
|
|
|
9.
|
Related
party transactions
|
Purchases
of services
All the active vessels listed in Note 1 receive management
services from Free Bulkers S.A., a Marshall Islands corporation
(Free Bulkers), pursuant to a ship-management
agreement between each of the ship-owning companies and Free
Bulkers. Each agreement calls for a monthly management fee of
$15 based on a thirty (30) day month. FreeSeas also pays
Free Bulkers a fee equal to
11/4%
of the gross freight or hire collected from the employment of
FreeSeas vessels and a 1% commission to be paid to Free
Bulkers on the gross purchase price of any new vessels acquired
or the gross sales price of any vessels 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.
The total management fee for the years ended December 31,
2006, 2005 and 2004 amounted to $540.0, $487.5 and $180.0
respectively. The related expenses are separately reflected in
the accompanying Consolidated Statements of Income.
As of December 31, 2006 the balance due from/due (to)
related parties was $40 receivable, and as of December 31,
2005 $677 receivable and $(893) payable, respectively.
Employment
agreements
During the period ended December 31, 2004, the executives
of the Company were not paid compensation. Upon consummation of
the Transaction (see note 13), FreeSeas entered into
employment agreements with three directors. The agreements are
for initial three-year terms, with additional two-year renewal
terms. Under
F-29
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
the agreements, each officers annual base salary is $150,
which is subject to increases as may be approved by
FreeSeas Board of Directors. Each officer is also entitled
to receive performance or merit bonuses as determined from time
to time by FreeSeas Board or a committee of the Board and
to reimbursement of expenses and other employee benefits as may
be implemented. The officers are each entitled to receive grants
of additional options to acquire shares of FreeSeas common
stock from time to time during the terms of their respective
employment as determined by FreeSeas Board of Directors.
Shareholders
advance
In 2004, FreeSeas shareholders advanced an interest free
amount of $600,000 to the Company to be used as a guarantee for
the loan outstanding to Hollandsche Bank Unie N.V.
This advance was repaid in full during 2005.
Shareholders
options and warrants
In April 2005, the Companys Board of Directors granted
750,000 options to its executive officers and approved the
issuance of 200,000 Class A warrants to entities
beneficially owned by its executive officers. See Note 12
for details.
The computation of basic earnings per share is based on the
weighted average number of common shares outstanding during the
year.
The components of the denominator for the calculation of basic
earnings per share and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income basic and diluted
|
|
|
(3,324
|
)
|
|
|
152
|
|
|
|
470
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
|
|
4,500,000
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
|
|
4.500.000
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
20,825
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
5,031
|
|
|
|
|
|
Dilutive effect
|
|
|
|
|
|
|
25,856
|
|
|
|
|
|
Weighted average common shares-diluted
|
|
|
6,290,100
|
|
|
|
4,600,444
|
|
|
|
4,500,000
|
|
Basic (loss) earnings per common share
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Diluted (loss) earnings per common share
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Potentially dilutive options to purchase 673,488 shares of
common stock for the year ended December 31, 2006 were not
included in the computation of diluted per share amounts because
they would have an anti-dilutive effect due to net loss.
The 12,500 Series A
and/or
65,000 Series B Units issuable upon exercise of the
purchase option granted to HCFP (see Note 11) for
shares and warrants are excluded from computing the diluted
earnings per share of the Company for the year ended
December 31, 2006 as their effects were anti-dilutive to
the Company since they were out of money.
F-30
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
|
|
11.
|
Commitments
and contingencies
|
Agreement
with financial advisor
FreeSeas entered into an agreement with the financial advisor
whereby the terms of compensation required the Company to pay
$200 upon closing of the Transaction (December 15,
2005) with Trinity and $400 payable in 20 equal monthly
installments commencing upon closing of the Transaction. The
Company has accrued the liability for its present value (see
Note 6). In addition, for a period of one year from the
date of the closing of the Transaction, the financial advisor
will provide certain financial and consulting services and
advice, for which the Company will pay up to $400, payable in
amounts equal to 5% of each $1,000 received by FreeSeas from the
exercise of FreeSeas warrants. The amount outstanding as of
December 31, 2006 is $154.
Shares,
warrants and options committed to HCFP Brenner Securities
LLC
In connection with Trinitys initial public offering
(IPO), HCFP Brenner Securities LLC
(HCFP) was engaged to act as Trinitys
non-exclusive investment banker in connection with its merger
and be paid a fee in connection therewith of $75, and receive
7,500 shares of common stock and five-year warrants to
purchase 15,000 shares of common stock at $5.00 per share.
Trinity paid HCFP $75 at the closing of the Transaction and
FreeSeas issued HCFP the shares and warrants referred to
previously in accordance with the terms of Transaction.
Upon the consummation of the Transaction at December 16,
2005, FreeSeas has assumed Trinitys obligations under a
purchase option sold to HCFP, the representative of the
underwriters in Trinitys IPO. Under that purchase option,
HCFP has the right to purchase up to 12,500 Series A Units
at a price of $17.325 per unit
and/or up to
65,000 Series B Units at a price of $16.665 per unit. Each
Series A Unit consists of two shares of FreeSeas
common stock, five Class W warrants and five Class Z
warrants. Each Series B Unit consists 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 is $5.50 per share. The purchase option
expires on July 29, 2009.
In addition, FreeSeas has assumed an obligation to pay HCFP a
fee equal to 5% of the Warrant Price for the solicitation of the
exercise of FreeSeas warrants by HCFP under certain
circumstances.
Warrants
In connection with Trinitys IPO, Trinity issued two
classes of warrants, Class W warrants and Class Z
warrants. Pursuant to the Transaction, the warrant holders
rights to purchase Trinity common stock have been converted into
rights to purchase FreeSeas common stock. Each Class W
warrant entitles the holder to purchase one share of
FreeSeas common stock at an exercise price of $5.00 per
share, on December 16, 2005. The Class W warrants will
expire on July 29, 2009, or earlier upon redemption. Each
Class Z warrant entitles the holder to purchase from
FreeSeas one share of common stock at an exercise price of $5.00
per share, commencing on December 16, 2005. The
Class Z warrants will expire on July 29, 2011, or
earlier upon redemption. FreeSeas may redeem the outstanding
Class W warrants
and/or
Class Z warrants in whole and not in part, at a price of
$0.05 per warrant at any time after the warrants become
exercisable, upon a minimum of 30 days prior written
notice of redemption, if, and only if, the last sale price of
FreeSeas common stock equals or exceeds $7.50 per share
for a Class W warrant or $8.75 per share for a Class Z
warrant for any 20 trading days within a 30-trading-day
period ending three business days before FreeSeas sends the
notice of redemption.
Loan
guarantees
In connection with the loans of Adventure Two and Adventure
Three FreeSeas has guaranteed $500 of the principal amount of
each loan and has further guaranteed the principal amount of the
loan of Adventure Four.
F-31
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
FreeSeas 2005 Stock Incentive Plan (the Plan)
became effective on April 26, 2005. An aggregate of
1,000,000 shares of the Companys common stock were
reserved for issuance under the Plan. In accordance with the
Plan, in April 2005, the Companys Board of Directors
granted 750,000 options, with an exercise price of $5.00, to its
executive officers, which was subject to signing of the
employment agreements and consummation of the Transaction with
Trinity. The employment agreements were signed and the
Transaction with Trinity consummated on December 15, 2005.
On December 16, 2005, the Board of Directors ratified,
adopted and approved the grant of options to the executive
officers. The options vest at a rate of
1/3
per year, with the initial
1/3
vesting upon signing the employment agreement, the second
1/3
vested on the first anniversary of the employment agreement, and
the final
1/3
vesting on the second anniversary of the employment agreement.
The options expire on December 16, 2010.
Prior to January 1, 2006 the Company accounted for the Plan
under Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for
Stock-Based Compensation and under APB Opinion No. 25
using the intrinsic value method and using guidance in
FIN 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, FIN 38,
Determining the Measurement Date for Stock Option,
Purchase, and Award Plans Involving Junior Stock, and
FIN 44, Accounting for Certain Transactions involving
Stock Compensation.
As of January 1, 2006, the Company is recognizing stock
based compensation expense in accordance with
SFAS No. 123(R).
Further, in April 2005, FreeSeas Board of Directors
approved the issuance of Class A warrants to entities who
immediately prior to the closing of the Transaction owned 100%
of the outstanding FreeSeas common stock. The beneficial
owners of these entities are the executive officers of FreeSeas.
The terms of the warrants provided that these warrants become
exercisable on the later of July 29, 2005, or consummation
of the Transaction. The warrants otherwise expire on
July 29, 2011 and are not callable. These warrants, the
issuance of which was ratified, adopted and approved by the
Board on December 16, 2005, entitle the holders to purchase
an aggregate of 200,000 shares of the Companys common
stock at an exercise price of $5.00 per share and expire on
July 29, 2011. These warrants were exercisable immediately
upon the closing of the Transaction.
These warrants have been treated as similar to options and have
been accounted for by the Company under APB Opinion No. 25
and following the guidance in FIN 38 and FIN 44. Since
the warrants are exercisable immediately upon issuance, these
are considered to have been fully vested on the date of grant.
For the year ended December 31, 2005, the Company has
recorded a total charge of $180,000 in its Consolidated
Statement of Income as Compensation Costs relating
to these options and warrants. Presented below is a table
reflecting the activity in the options (including the warrants
described above and referred hereto as Options) from
April 26, 2005 through December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Options
|
|
|
Warrants
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Total
|
|
|
price
|
|
|
exercisable
|
|
|
exercisable
|
|
|
Total
|
|
|
price
|
|
|
January 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
750,000
|
|
|
|
200,000
|
|
|
|
950,000
|
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
750,000
|
|
|
|
200,000
|
|
|
|
950,000
|
|
|
$
|
5.00
|
|
|
|
250,000
|
|
|
|
200,000
|
|
|
|
450,000
|
|
|
$
|
5,00
|
|
December 31, 2006
|
|
|
750,000
|
|
|
|
200,000
|
|
|
|
950,000
|
|
|
$
|
5.00
|
|
|
|
250,000
|
|
|
|
200,000
|
|
|
|
450,000
|
|
|
$
|
5,00
|
|
F-32
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
The weighted average fair value of the Companys options
granted during the year ended December 31, 2005, calculated
using the Black-Scholes option pricing model, was $2.31 per
share. During the years ended December 31, 2006 and 2005,
respectively 250,000 and 450,000 options have vested and are
exercisable. As of December 31, 2006, the remaining
contractual life of the options is four years and the total
compensation costs related to non-vested awards not yet
recognized is $94 and will be expensed in 2007. The Company did
not grant any stock options during 2006.
On April 27, 2005, the Company filed amended Articles of
Incorporation in the Marshall Islands, whereby the name of the
Company was changed from Adventure Holdings S.A. to FreeSeas
Inc. The authorized number of shares was increased to
45,000,000, of which 40,000,000 would be registered common stock
with a par value of US $.001 per share and 5,000,000 registered
blank check preferred stock with a par value of US $.001 per
share.
In conjunction with the above amendments, the Board authorized a
9,000 to 1 stock split, such that the 500 outstanding shares
held by the shareholders of record as of April 26, 2005
were split to 4,500,000 shares. Therefore, of the
40,000,000 shares of common stock authorized,
4,500,000 shares were issued and outstanding as of
December 31, 2004. None of the 5,000,000 shares of
preferred stock authorized were outstanding as of
December 31, 2004.
On March 28, 2005, the Company executed a definitive
agreement, which contemplated the merger of Trinity into
FreeSeas. On December 15, 2005, Trinity shareholders
approved the Transaction whereby Trinity was merged into
FreeSeas. Upon the consummation of this Transaction and in
accordance with the terms of the Transaction, Trinity shares,
warrants and options were exchanged for the right to receive an
equal number of FreeSeas shares, warrants and options.
Trinity had issued 100 shares of its common stock prior to
its IPO. At Trinitys IPO, 287,500 common stock and
1,495,000 common stock Class B were issued.
Therefore, the additional common stock of FreeSeas that was
issued to Trinity stockholders, in exchange for the Trinity
shares, at the consummation of the Transaction was
1,782,600 shares of FreeSeas common stock.
Trinity stockholders also received 1,828,750 Class W
warrants and 1,828,750 Class Z warrants of FreeSeas. Each
Class W warrant entitles the holder to purchase one share
of FreeSeas common stock at an exercise price of $5.00 per
share, commencing on December 16, 2005. The Class W
warrants will expire on July 29, 2009, or earlier upon
redemption. Each Class Z warrant entitles the holder to
purchase from FreeSeas one share of common stock at an exercise
price of $5.00 per share, commencing on December 16, 2005.
The Class Z warrants will expire on July 29, 2011, or
earlier upon redemption.
Trinity entered into an agreement with HCFP pursuant to which
HCFP was engaged to act as Trinitys non-exclusive
investment banker in connection with a business combination and
would receive 7,500 shares of the Trinitys common
stock and 15,000 Class Z warrants to purchase
Trinitys 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 Trinitys
obligation to HCFP. Further the Companys transfer agent
issued the respective shares and warrants on August 21,
2006.
The Company had 6,290,100 shares, 1,843,750 Class Z
warrants and 1,828,750 Class W warrants outstanding as of
December 31, 2005 and 2006, respectively.
Under the laws of the countries of the Groups
incorporation
and/or
vessels registration, the Group is not subject to tax on
international shipping income; however, they are subject to
registration and tonnage taxes, which have been included in
vessel operating expenses in the accompanying Consolidated
Statements of Income.
F-33
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
Pursuant to the Internal Revenue Code of the United States (the
Code), U.S. source income from the
international operations of ships is generally exempt from
U.S. tax if the company operating the ships meets certain
requirements. Among other things, in order to qualify for this
exemption, the company operating the ships must be incorporated
in a country that grants an equivalent exemption from income
taxes to U.S. corporations. All the Groups
ship-operating subsidiaries satisfy these initial criteria. In
addition, these companies must be more than 50% owned by
individuals who are residents, as defined, in the countries of
incorporation or another foreign country that grants an
equivalent exemption to U.S. corporations or, in the
alternative, the ship-owning companies must be beneficially
owned by a publicly traded company, which has a certain trading
volume. The Groups ship-operating subsidiaries also
currently satisfy the more than 50% beneficial ownership
requirement based on the trading volume of FreeSeas, but no
assurance can be given that this will remain so in the future,
since continued compliance with this rule is subject to factors
outside the Groups control.
|
|
15.
|
Financial
instruments
|
The principal financial assets of the Group consist of cash in
hand and at bank, trade receivables and due from related party.
The principal financial liabilities of the Group consist of bank
overdraft, long-term bank loans, accounts payable and accrued
liabilities paid directly by the Group.
Interest rate risk: The Groups interest
rates and long-term loan repayment terms are described in
Note 7.
Concentration of credit risk: Financial
instruments that potentially subject the Group to significant
concentrations of credit risk consist principally of cash and
trade receivables. Credit risk with respect to trade accounts
receivable is high due to the fact that the Groups total
income is derived from few charterers.
Fair value: The carrying amounts reflected in
the accompanying consolidated balance sheet of financial assets
and liabilities excluding long-term bank loans approximate their
respective fair values due to the short maturity of these
instruments. The fair values of long-term bank loans approximate
the recorded values, generally due to their variable interest
rates.
Revenue from significant customers (constituting more than 10%
of total revenue), are as follows:
|
|
|
|
|
Charterer
|
|
Operating revenues
|
|
|
|
December 31, 2006
|
|
|
Oldendorff
|
|
|
20
|
%
|
Seaside
|
|
|
12
|
%
|
Cargill
|
|
|
Under 10
|
%
|
Copenship
|
|
|
Under 10
|
%
|
The Group operates on a worldwide basis in one operating
segment the shipping transportation market. The
geographical analysis of revenue from voyages, based on point of
destination is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Europe
|
|
|
3,031
|
|
|
|
4,412
|
|
|
|
1,988
|
|
South America
|
|
|
1,803
|
|
|
|
496
|
|
|
|
436
|
|
Asia
|
|
|
4,758
|
|
|
|
3,399
|
|
|
|
|
|
Africa
|
|
|
2,135
|
|
|
|
2,019
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,727
|
|
|
|
10,326
|
|
|
|
2,830
|
|
F-34
FREESEAS
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in footnotes in thousands of United States dollars,
except for share data)
In January 2007, the Company drew down Advance B of $2,470 of
the loan with First Business Bank (Note 7). The total
repayment of the Advance A and Advance B of the respective loan
were made on
April 27th 2007
from the outcome of the sale of M/V Free Fighter.
On March 13, 2007, the Company entered into a memorandum of
agreement to sell the M/V Free Fighter for a contract
price of $11,075. The M/V Free Fighter was delivered to
the new owners on April 27th, 2007.
The Company changed the estimated useful life of its vessel the
M/V Free Fighter, to 30 years, based on
managements re-evaluation of its useful life.
On May 1, 2007, we entered into memoranda of agreement to
purchase four secondhand drybulk carriers from non-affiliated
parties for approximately US$114 million and placed a
deposit of US$11.4 million with the respective sellers. The
deposit was funded with the US$6 million available cash
form the sale of the Free Fighter and US$5.5 million
drawn down from the shareholder loan. If we choose not to
proceed with the acquisition, we will lose our deposit. Each
vessel will be purchased by a newly created wholly owned
subsidiary, which will be incorporated shortly before the
delivery of the respective vessel. The vessels are expected to
be delivered between June and August 2007.
In connection with the completion of the purchase of the four
vessels, the Company intends to finance the remaining balance of
the purchase price for the vessels, as follows:
Up to US$67 million to US$68 million in a
senior loan from HSH Nordbank and US$21.5 million in a
junior loan from Bank of Tokyo Mitsubishi for which we received
commitment letter from both banks;
Up to the US$8.5 million in a
non-amortizing,
unsecured shareholder loan;
Up to US$4 million from HBU secured by our
other assets for which we have received a preliminary term
sheet; and
Up to an additional US$1 million from our
expected available cash.
The loan from one of our principal shareholders accrues interest
on the outstanding principal balance at the annual rate of
12.0%, payable upon maturity of the loan. The loan is due at the
earlier of (i) May 7, 2009, (ii) the date of a
Capital Event, which is defined as any event in
which we raise gross proceeds of not less than $40,000 in an
offering of the Companys common stock or other equity
securities or securities convertible into or exchangeable for
our equity securities, or (iii) the date of acceleration of
the amounts due under the note. Additionally, the Company will
issue to shareholder, for every $1,000 drawn under the loan,
50,000 warrants to purchase shares of the Companys common
stock at an exercise price of $5.00 per share. On May 7,
2007, the Company drew down $5,500 from the shareholder loan in
connection with the deposits to be posted under the memoranda of
agreement for the acquisition of the vessels. The Company will
issue the shareholder 250,000 warrants to purchase shares of the
Companys common stock at an exercise price of $5.00 per
share in connection with such draw down.
F-35