fv1
As filed with the Securities and Exchange Commission on
October 22, 2009
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form F-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
FREESEAS INC.
(Exact name of Registrant as
specified in its charter)
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Republic of the Marshall Islands
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4412
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Not Applicable
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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89 Akti Miaouli & 4 Mavrokordatou Street
185 38, Piraeus, Greece
011-30-210-452-8770
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
Broad and Cassel
Attention: A. Jeffry Robinson, P.A.
2 S. Biscayne Boulevard, 21st Floor
Miami, Florida 33131
Telephone: (305) 373-9400
Facsimile: (305) 995-6402
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
With a copy to:
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A. Jeffry Robinson, Esq.
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Stephen P. Farrell, Esq.
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Broad and Cassel
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Morgan, Lewis & Bockius LLP
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2 S. Biscayne Blvd., 21st Floor
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101 Park Avenue
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Miami, Florida 33131
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New York, New York 10178
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Office: (305) 373-9400
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(212) 309-6000
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Fax: (305) 373-9443
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee
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Common Stock, par value U.S. $0.001 per share
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$15,000,000
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$837
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Preferred Share Purchase Rights(3)
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(1) |
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Includes shares of common stock, if any, that may be sold to
cover the exercise of an over-allotment option granted to the
underwriter. |
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(2) |
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457 under the Securities Act of 1933. |
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(3) |
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The preferred stock purchase rights are initially attached to
and trade with the shares of our common stock registered hereby.
Value attributed to such rights, if any, is reflected in the
market price of our common stock. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION,
OCTOBER 22, 2009
PRELIMINARY PROSPECTUS
FreeSeas Inc.
Shares of Common Stock
We are
offering shares
of common stock. Our common stock is currently quoted on the
NASDAQ Global Market under the symbol FREE. On
October 21, 2009, the last reported sale price of our
common stock was $1.62 per share.
Investing in our common stock involves a high degree of risk.
See Risk Factors beginning on page 12 to read
about the risks you should consider before buying shares of our
common stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds to us, before expenses
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$
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$
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The underwriter has a
30-day
option to purchase up
to
additional shares of our common stock from us to cover any
over-allotments, if any, at the offering price, less
underwriting discounts and commissions.
The underwriter expects to deliver the shares to purchasers on
or
about ,
2009.
DAHLMAN ROSE &
COMPANY
The date of this prospectus
is ,
2009
TABLE OF
CONTENTS
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.
We obtained statistical data, market data and other industry
data and forecasts used throughout this prospectus from publicly
available information. While we believe that the statistical
data, industry data, forecasts and market research are reliable,
we have not independently verified the data, and we do not make
any representation as to the accuracy of the information.
ENFORCEABILITY
OF CIVIL LIABILITIES
FreeSeas Inc. is a Marshall Islands company and our executive
offices are located outside of the United States in
Piraeus, Greece. All of our directors, officers and some of the
experts named in this prospectus reside outside the United
States. In addition, a substantial portion of our assets and the
assets of our directors, officers and experts are located
outside of the United States. As a result, you may have
difficulty serving legal process within the United States upon
us or any of these persons. You may also have difficulty
enforcing, both in and outside the United States, judgments you
may obtain in U.S. courts against us or these persons in
any action, including actions based upon the civil liability
provisions of U.S. federal or state securities laws.
Furthermore, there is substantial doubt that the courts of the
Marshall Islands or Greece would enter judgments in original
actions brought in those courts predicated on U.S. federal
or state securities laws.
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PROSPECTUS
SUMMARY
This summary highlights certain information appearing
elsewhere in this prospectus. For a more complete understanding
of this offering, you should read the entire prospectus
carefully, including the risk factors and the financial
statements.
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. Drybulk carriers are
generally categorized as Handysize, Handymax, Panamax and
Capesize. The carrying capacity of a Handysize drybulk carrier
typically ranges from 10,000 to 39,999 dwt and that of a
Handymax drybulk carrier typically ranges from 40,000 to 59,999
dwt. By comparison, the carrying capacity of a Panamax drybulk
carrier typically ranges from 60,000 to 79,999 dwt and the
carrying capacity of a Capesize drybulk carrier typically is
80,000 dwt and above.
Unless otherwise indicated, all references to $
and dollars in this prospectus are to
U.S. dollars and financial information presented in this
prospectus that is derived from financial statements
incorporated by reference is prepared in accordance with the
U.S. generally accepted accounting principles.
References in this prospectus to FreeSeas,
we, us or our company refer
to FreeSeas Inc. and our subsidiaries, but, if the context
otherwise requires, may refer only to FreeSeas Inc.
Our
Company
We are an international drybulk shipping company incorporated
under the laws of the Republic of the Marshall Islands with
headquarters in Piraeus, Greece. Our existing fleet consists of
eight Handysize vessels and two Handymax vessels that carry a
variety of drybulk commodities, including iron ore, grain and
coal, which are referred to as major bulks, as well
as bauxite, phosphate, fertilizers, steel products, cement,
sugar and rice, or minor bulks. As of
October 21, 2009, the aggregate dwt of our fleet was
approximately 300,000 dwt and the average age of our fleet was
approximately 14 years.
We are currently focusing on the Handysize and Handymax sectors,
which we believe are more versatile in the types of cargoes that
they can carry and trade routes they can follow, and offer less
volatile returns than larger vessel classes. We may, however,
acquire larger drybulk vessels if appropriate opportunities
present themselves.
We have contracted the management of our fleet to Free Bulkers,
S.A., or Free Bulkers, a company owned by Ion G. Varouxakis, our
chairman, chief executive officer and president. Free Bulkers
provides technical management of our fleet, accounting services
and office space and has subcontracted the charter and
post-charter management of our fleet to Safbulk Pty Ltd., or
Safbulk, a company controlled by the Restis family. We believe
that Safbulk has achieved a strong reputation in the
international shipping industry for efficiency and reliability
that should create new employment opportunities for us with a
variety of well known charterers. While Safbulk is responsible
for finding and arranging charters for our vessels, the final
decision to charter our vessels remains with us.
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Our
Fleet
The following table details the vessels in our fleet as of
October 21, 2009:
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Vessel Name
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Type
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Built
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Dwt
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Employment
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M/V Free Destiny
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Handysize
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1982
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25,240
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26 day trip time charter at $9,075 per day through November 2009
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M/V Free Envoy
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Handysize
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1984
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26,318
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30-35 day trip time charter at $8,000 per day through
November 2009
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M/V Free Goddess
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Handysize
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1995
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22,051
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Balance of time charter at $10,500 per day through
January/February 2010 (plus 50% profit sharing above $12,500 per
day)
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M/V Free Hero
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Handysize
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1995
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24,318
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40-50 day trip time charter at $13,500 per day through
November 2009
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M/V Free Impala
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Handysize
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1997
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24,111
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60 day trip time charter at $10,000 per day through
December 2009
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M/V Free Jupiter
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Handymax
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2002
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47,777
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Balance of time charter at $25,216 per day through February 2011
and $28,000 per day through March 2011
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M/V Free Knight
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Handysize
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1998
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24,111
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60-65 day trip time charter at $7,000 per day through
December 2009
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M/V Free Lady
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Handymax
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2003
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50,246
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Balance of time charter at $51,150 per day through May 2010
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M/V Free Maverick
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Handysize
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1998
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23,994
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60-65 day trip time charter at $9,000 or $11,000 per day
through December 2009
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M/V Free Neptune
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Handysize
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1996
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30,838
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30-35 day trip time charter at $20,000 per day through
November 2009
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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.
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Strong customer relationships. Through Free
Bulkers, our ship management company, and Safbulk, our
commercial manager, we have established and maintained 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 enable us to secure favorable employment for our
vessels with well-known charterers. In addition, in light of
current economic conditions, we have worked to maintain our
relationships with our customers by negotiating strategically
appropriate modifications to charters when determined to be in
our best long-term interests.
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Cost effective and 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, balanced maintenance
programs, high
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standards of operation, and retaining and training qualified
crew members. The cost structure of our vessel management
enables us to significantly increase the number of vessels we
operate without a significant increase in per vessel operating
expense.
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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, 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 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. Currently, our
fleet of drybulk carriers consists of Handysize and Handymax
vessels, although we may consider acquiring larger vessels if we
identify appropriate opportunities. Based on the relatively low
number of drybulk newbuildings on order in the Handysize and
Handymax 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, should 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
not more than 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. The recent upheaval
in the credit markets has led a number of shipowners which had
ordered newbuildings at the peak of the market to seek to sell
them prior to taking delivery because they lacked necessary
financing or their credit situation had deteriorated. We may
seek to take advantage of such opportunities, selectively, as
they arise. Furthermore, as part of our fleet renewal, we will
continue to sell vessels in order to renew our fleet 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 portion of our fleet under
period employment and our remaining vessels under spot
employment depending on market conditions. We 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
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 market during periods of rising charter rates.
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Use of flexible financial strategy. We have
used and intend to continue to use a conservative 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. As
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of June 30, 2009, our ratio of debt to total capitalization
was approximately 54%. We believe that the maintenance of a
reasonable ratio of debt to total capitalization will be
important to our ability to borrow funds to make additional
vessel acquisitions, and we have determined to suspend cash
dividends to our shareholders while we focus on reducing our
debt and expand our fleet.
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Recent
Developments
Increase
in Authorized Common Stock
Our shareholders approved at our Annual Meeting of Shareholders
held on September 17, 2009 an amendment to our Amended and
Restated Articles of Incorporation increasing the number of
authorized shares of common stock from 40,000,000 to
250,000,000 shares.
Amendment
and Restatement of HBU Credit Agreement
Effective September 15, 2009, we entered into an amended
and restated credit agreement with Hollandsche Bank-Unie N.V.,
or HBU, which replaces our 2008 credit agreement with HBU. Under
the amended and restated credit agreement, we have obtained a
new 3.5 year facility, which is payable in 13 quarterly
installments of $600,000 beginning on August 1, 2009 and
one balloon payment of $19,300,000 on November 1, 2012.
This new facility bears interest at the rate of 4.25% above
LIBOR. In addition, the amended and restated credit agreement
further amends the value to loan covenant ratio previously
agreed to in March 2009 (see Managements
Discussion and Analysis of Financial Condition and Results
of Operations Long-Term Debt) as follows:
(i) 70% from September 15, 2009 through June 30,
2010, (ii) 100% from July 1, 2010 through
June 30, 2011, (iii) 110% from July 1, 2011
through June 30, 2012, (iv) 120% from July 1,
2012 through December 30, 2012, and (v) 125% from
December 31, 2012 onwards. We will be required to use 10%
of the proceeds of any capital raise, including this offering,
to prepay any amounts outstanding (up to a maximum of $3,000,000
over the life of the facilities). Additionally, at the end of
each fiscal year, we are required to make a prepayment in an
aggregate amount equal to: (i) 75% of excess cash, if the
value to loan ratio is less than or equal to 70%, (ii) 50%
of excess cash, if the value to loan ratio is less than or equal
to 100%, (iii) 25% of excess cash, if the value to loan
ratio is less than 110%, or (iv) zero, if the value to loan
ratio is equal to or greater than 110%
Acquisition
of M/V Free Neptune
In August 2009, we purchased and took delivery of a Handysize
vessel from an unaffiliated third party for approximately
$11 million. We financed the acquisition using a portion of
the net proceeds of our public offering in July 2009. With the
acquisition of the M/V Free Neptune, our fleet increased
from nine to 10 vessels. The M/V Free Neptune is a
30,838 dwt Handysize vessel built in 1996 in Japan. The M/V
Free Neptune was fixed for a spot time charter trip of
approximately
30-35 days
through November 2009 at a daily rate of $20,000.
Public
Offering
In July 2009, we completed a public offering of
10,041,151 shares of our common stock at $1.80 per share,
including 1,309,715 shares sold upon exercise of the
underwriters overallotment option. The offering resulted
in net proceeds of approximately $16.7 million, after
deducting underwriting fees and estimated offering expenses. Of
these net proceeds, approximately $11 million was used for
the acquisition of the M/V Free Neptune and approximately
$1.7 million was used to prepay a portion of our debt
outstanding to HBU, with the remaining balance used for general
working capital purposes.
Extension
of Class W Warrants
In July 2009, we extended the expiration date and reduced the
exercise price of our 786,265 outstanding Class W warrants
currently listed on the NASDAQ Global Market under the symbol
FREEW. The expiration date of the Class W
warrants has been extended to December 31, 2009 from
July 29, 2009, and the exercise
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price per share has been reduced to $2.50 per share from $5.00
per share. Each Class W warrant entitles the holder to
purchase one share of our common stock. All other terms of the
Class W warrants remain unchanged.
Loan
Covenant Waivers
In July 2009, certain of our lenders agreed to extend or modify
certain of the financial covenants in our credit agreements.
First Business Bank S.A., or FBB, agreed to extend the
previously provided waivers of the vessel value to debt ratio
covenant and the parent company leverage ratio covenant from
January 1, 2010 to July 1, 2010. In connection with
this extension, we agreed to an increase in the interest rate on
the loan by 0.75%. HBU agreed to modify our interest coverage
and debt service coverage ratios requirements. For 2009 and
2010, the interest coverage ratio will defined as EBITD/net
financing charges and is to be at least 3.75 until July 1,
2010 and at least 3.00 through December 31, 2010. During
this period, the debt service coverage ratio must be at least
1.00 through December 31, 2010. The foregoing ratios for
2011 will be determined based on the prevailing market
conditions at that time. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Long-Term Debt Loan Agreement
Covenants and Waivers.
Our
Corporate History
We were incorporated 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 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., or Trinity, a blank check
company formed to serve as a vehicle to complete a business
combination with an operating business, in which we were the
surviving corporation. At the time of the merger we owned three
drybulk carriers. 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.
As of October 21, 2009, we had outstanding
31,212,480 shares of our common stock, 786,265 Class W
warrants, which expire on December 31, 2009 and 1,655,006
Class Z warrants, which expire on July 29, 2011.
Our common stock, Class W warrants and Class Z
warrants currently trade on the NASDAQ Global Market under the
trading symbols FREE, FREEW and
FREEZ, respectively.
Our
Executive Offices
Our executive offices are located at 89 Akti Miaouli &
4 Mavrokordatou Street, 185 38, Piraeus, Greece and our
telephone number is
011-30-210-452-8770.
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The
Offering
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Common stock offered by us(1) |
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shares. |
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Underwriters over-allotment option |
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Up
to shares. |
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Common stock outstanding after this offering(2) |
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shares. |
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Use of proceeds |
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We estimate that we will receive net proceeds of approximately
$ from this offering assuming an
offering price of $ per share of
common stock, which is the last reported closing price of our
common stock
on ,
2009 after deducting underwriting discounts and commissions, and
offering expenses, and assuming the underwriters
over-allotment option is not exercised. |
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We intend to use the proceeds of this offering for the purchase
of additional vessels, repayment of debt and general working
capital purposes. An amount equal to 10% of any capital market
proceeds received by us (with a maximum of $3 million over
the lifetime of the facilities) shall be applied in prepayment
of the HBU facilities. An amount of $1.7 million has
already been applied pursuant to our public offering dated
July 28, 2009. Each $1.00 increase (decrease) in the
assumed public offering public of
$ per share would increase
(decrease) the net proceeds to us from this offering by
$ million, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and the
estimated expenses payable by us. See Use of
Proceeds. |
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NASDAQ Global Market symbols |
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Common Stock FREE
Class W Warrants FREEW
Class Z Warrants FREEZ |
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Dividends |
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Because of restrictions in certain waivers we received from our
lenders and in light of prevailing economic conditions, our
board of directors determined in 2009 to suspend payment of cash
dividends. See Dividend Policy. |
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Risk factors |
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Investing in our common stock involves substantial risk. You
should carefully consider all the information in this prospectus
prior to investing in our common stock. In particular, we urge
you to consider carefully the factors set forth in the section
of this prospectus entitled Risk Factors beginning
on page 12. |
|
|
|
(1) |
|
Each share of our common stock includes one right that, under
certain circumstances, will entitle the holder to purchase from
us one one-thousandth of a share of our Series A
Participating Preferred Stock at an exercise price of $18.00,
subject to specified adjustment. |
|
(2) |
|
The number of shares of common stock outstanding after this
offering is based on 31,212,480 shares of our common stock
outstanding on October 21, 2009 and excludes the following: |
|
|
|
|
A.
|
Up to 170,000 shares reserved for issuance upon the
exercise of stock options currently outstanding (of which, as of
October 16, 2009, options to purchase 140,000 shares
had vested), which have an exercise price of $8.25 per share and
expire on December 2012, and up to 1,080,000 shares
issuable upon exercise of stock options that may be granted in
the future under our stock incentive plan;
|
6
|
|
|
|
B.
|
2,591,271 shares of common stock reserved for issuance upon
the exercise of outstanding warrants, as follows:
|
|
|
|
|
|
150,000 Class A warrants held by our founding shareholders
exercisable at $5.00 per share and expiring July 29, 2011;
|
|
|
|
786,265 Class W warrants exercisable at $2.50 per share and
expiring December 31, 2009; and
|
|
|
|
1,655,006 Class Z warrants exercisable at $5.00 per share
and expiring July 29, 2011; and
|
|
|
|
|
C.
|
shares that may be issued pursuant to the underwriters
over-allotment option.
|
Assuming all outstanding stock options and warrants were
exercised for cash, we would receive gross proceeds of
approximately $12.15 million.
7
SUMMARY
FINANCIAL INFORMATION AND DATA
The following summary financial information and data were
derived from our audited consolidated financial statements for
the years ended December 31, 2008, 2007, 2006, 2005 and
2004 and our unaudited condensed consolidated financial
statements for the six months ended June 30, 2009 and 2008.
The information is only a summary and should be read in
conjunction with our historical consolidated financial
statements and related notes incorporated by reference into 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, per share data and per
diem amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
Six Months Ended June 30,
|
|
Year Ended December 31,
|
|
|
|
to December 31,
|
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
29,923
|
|
|
$
|
23,755
|
|
|
$
|
66,689
|
|
|
$
|
20,147
|
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
Vessel operating expenses
|
|
|
(7,401
|
)
|
|
|
(7,381
|
)
|
|
|
(16,354
|
)
|
|
|
(6,001
|
)
|
|
|
(4,483
|
)
|
|
|
(3,596
|
)
|
|
|
(786
|
)
|
Voyage expenses
|
|
|
(638
|
)
|
|
|
(255
|
)
|
|
|
(527
|
)
|
|
|
(267
|
)
|
|
|
(689
|
)
|
|
|
(55
|
)
|
|
|
(16
|
)
|
Depreciation expense
|
|
|
(8,086
|
)
|
|
|
(5,040
|
)
|
|
|
(13,349
|
)
|
|
|
(4,435
|
)
|
|
|
(4,479
|
)
|
|
|
(3,553
|
)
|
|
|
(872
|
)
|
Amortization of deferred charges
|
|
|
(774
|
)
|
|
|
(274
|
)
|
|
|
(788
|
)
|
|
|
(757
|
)
|
|
|
(442
|
)
|
|
|
(355
|
)
|
|
|
(109
|
)
|
Management fees to a related party
|
|
|
(838
|
)
|
|
|
(1,032
|
)
|
|
|
(2,634
|
)
|
|
|
(875
|
)
|
|
|
(540
|
)
|
|
|
(488
|
)
|
|
|
(180
|
)
|
Commissions
|
|
|
(1,589
|
)
|
|
|
(1,160
|
)
|
|
|
(3,383
|
)
|
|
|
(1,095
|
)
|
|
|
(799
|
)
|
|
|
(553
|
)
|
|
|
(127
|
)
|
Stock-based compensation expense
|
|
|
(6
|
)
|
|
|
(54
|
)
|
|
|
(107
|
)
|
|
|
(96
|
)
|
|
|
(651
|
)
|
|
|
(200
|
)
|
|
|
|
|
General and administrative expenses
|
|
|
(1,773
|
)
|
|
|
(1,306
|
)
|
|
|
(2,756
|
)
|
|
|
(2,111
|
)
|
|
|
(1,925
|
)
|
|
|
(321
|
)
|
|
|
(34
|
)
|
Bad debts
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of vessel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
8,818
|
|
|
$
|
7,253
|
|
|
$
|
26,570
|
|
|
$
|
5,761
|
|
|
$
|
(2,281
|
)
|
|
$
|
1,205
|
|
|
$
|
706
|
|
Interest and finance costs
|
|
|
(2,446
|
)
|
|
|
(2,520
|
)
|
|
|
(6,209
|
)
|
|
|
(3,204
|
)
|
|
|
(1,004
|
)
|
|
|
(1,076
|
)
|
|
|
(240
|
)
|
Loss on debt extinguishment
|
|
|
|
|
|
|
(639
|
)
|
|
|
(639
|
)
|
|
|
(2,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in derivatives fair value
|
|
|
460
|
|
|
|
(54
|
)
|
|
|
(1,061
|
)
|
|
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
14
|
|
|
|
535
|
|
|
|
580
|
|
|
|
639
|
|
|
|
19
|
|
|
|
23
|
|
|
|
4
|
|
Other
|
|
|
(89
|
)
|
|
|
(105
|
)
|
|
|
(49
|
)
|
|
|
(33
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,757
|
|
|
$
|
4,470
|
|
|
$
|
19,192
|
|
|
$
|
(156
|
)
|
|
$
|
(3,324
|
)
|
|
$
|
152
|
|
|
$
|
470
|
|
Basic earnings (loss) per share
|
|
$
|
0.32
|
|
|
$
|
0.21
|
|
|
$
|
0.91
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Diluted earnings (loss) per share
|
|
$
|
0.32
|
|
|
$
|
0.20
|
|
|
$
|
0.91
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Basic weighted average number of shares
|
|
|
21,171,329
|
|
|
|
20,839,854
|
|
|
|
21,006,497
|
|
|
|
8,786,287
|
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
|
|
4,500,000
|
|
Diluted weighted average number of shares
|
|
|
21,171,329
|
|
|
|
21,851,940
|
|
|
|
21,051,963
|
|
|
|
8,786,287
|
|
|
|
6,290,100
|
|
|
|
4,600,444
|
|
|
|
4,500,000
|
|
Dividends per share
|
|
$
|
|
|
|
$
|
0.375
|
|
|
$
|
0.45
|
|
|
$
|
0.175
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
June 30,
|
|
December 31,
|
|
to December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets, including cash
|
|
$
|
19,381
|
|
|
$
|
27,184
|
|
|
$
|
81,440
|
|
|
$
|
1,417
|
|
|
$
|
5,286
|
|
|
$
|
1,443
|
|
Fixed assets, net
|
|
|
267,319
|
|
|
|
275,405
|
|
|
|
108,021
|
|
|
|
19,369
|
|
|
|
23,848
|
|
|
|
16,188
|
|
Total assets
|
|
|
291,350
|
|
|
|
307,861
|
|
|
|
191,972
|
|
|
|
23,086
|
|
|
|
29,840
|
|
|
|
18,335
|
|
Total current liabilities, including current portion of
long-term debt
|
|
|
47,284
|
|
|
|
50,768
|
|
|
|
34,097
|
|
|
|
10,260
|
|
|
|
10,231
|
|
|
|
4,971
|
|
Derivative financial instruments, net of current portion
|
|
|
817
|
|
|
|
1,337
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including shareholder loans net of current
portion
|
|
|
114,560
|
|
|
|
133,650
|
|
|
|
44,500
|
|
|
|
5,819
|
|
|
|
9,750
|
|
|
|
9,978
|
|
Total liabilities
|
|
|
163,733
|
|
|
|
187,006
|
|
|
|
79,346
|
|
|
|
16,079
|
|
|
|
20,135
|
|
|
|
14,949
|
|
Total shareholders equity
|
|
|
127,617
|
|
|
|
120,855
|
|
|
|
112,626
|
|
|
|
7,007
|
|
|
|
9,705
|
|
|
|
3,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
Six Months Ended June 30,
|
|
Year Ended December 31,
|
|
to December 31,
|
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
12,851
|
|
|
$
|
4,712
|
|
|
$
|
32,563
|
|
|
$
|
5,071
|
|
|
$
|
1,078
|
|
|
$
|
5,724
|
|
|
$
|
1,246
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(84,090
|
)
|
|
|
(182,539
|
)
|
|
|
(86,979
|
)
|
|
|
|
|
|
|
(10,813
|
)
|
|
|
(17,460
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(14,138
|
)
|
|
|
37,440
|
|
|
|
89,960
|
|
|
|
144,930
|
|
|
|
(3,991
|
)
|
|
|
7,913
|
|
|
|
16,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
Six Months Ended June,
|
|
Year Ended December 31,
|
|
to December 31,
|
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Performance Indicators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
17,589
|
|
|
$
|
12,462
|
|
|
$
|
40,658
|
|
|
$
|
8,350
|
|
|
$
|
2,582
|
|
|
$
|
5,113
|
|
|
$
|
1,687
|
|
Fleet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of vessels(2)
|
|
|
9.00
|
|
|
|
6.04
|
|
|
|
7.36
|
|
|
|
3.30
|
|
|
|
3.00
|
|
|
|
2.55
|
|
|
|
0.67
|
|
Ownership days(3)
|
|
|
1,629
|
|
|
|
1,100
|
|
|
|
2,688
|
|
|
|
1,206
|
|
|
|
1,095
|
|
|
|
931
|
|
|
|
244
|
|
Available days(4)
|
|
|
1,609
|
|
|
|
1,046
|
|
|
|
2,605
|
|
|
|
1,177
|
|
|
|
1,005
|
|
|
|
931
|
|
|
|
244
|
|
Operating days(5)
|
|
|
1,588
|
|
|
|
949
|
|
|
|
2,441
|
|
|
|
1,048
|
|
|
|
941
|
|
|
|
893
|
|
|
|
244
|
|
Fleet utilization(6)
|
|
|
97.5
|
%
|
|
|
86.3
|
%
|
|
|
90.8
|
%
|
|
|
86.9
|
%
|
|
|
86.0
|
%
|
|
|
96
|
%
|
|
|
100
|
%
|
Average Daily Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average TCE rate(7)
|
|
$
|
17,441
|
|
|
$
|
23,541
|
|
|
$
|
25,719
|
|
|
$
|
17,925
|
|
|
$
|
10,881
|
|
|
$
|
10,882
|
|
|
$
|
11,012
|
|
Vessel operating expenses(8)
|
|
|
4,543
|
|
|
|
6,710
|
|
|
|
6,084
|
|
|
|
4,976
|
|
|
|
4,094
|
|
|
|
3,863
|
|
|
|
3,221
|
|
Management fees(9)
|
|
|
514
|
|
|
|
711
|
|
|
|
727
|
|
|
|
726
|
|
|
|
493
|
|
|
|
524
|
|
|
|
738
|
|
General and administrative expenses(10)
|
|
|
1,117
|
|
|
|
1,415
|
|
|
|
1,129
|
|
|
|
2,014
|
|
|
|
2,046
|
|
|
|
359
|
|
|
|
139
|
|
Total vessel operating expenses(11)
|
|
|
5,057
|
|
|
|
7,421
|
|
|
|
6,811
|
|
|
|
5,702
|
|
|
|
4,587
|
|
|
|
4,387
|
|
|
|
3,959
|
|
9
|
|
|
(1) |
|
Adjusted EBITDA reconciliation to net income: |
|
|
|
Beginning in 2008, adjusted EBITDA represents net earnings
before interest, taxes, depreciation and amortization, change in
the fair value of derivatives and loss on debt extinguishment.
Prior to 2008, adjusted EBITDA represents net earnings before
taxes, depreciation and amortization, and changes in the fair
value of derivatives. In 2007, adjusted EBITDA excludes the loss
on debt extinguishment of $2,570. Adjusted 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 adjusted EBITDA may not
be comparable to that reported by other companies. Adjusted
EBITDA is included herein because it is an alternative measure
of our liquidity, performance and indebtedness. The following is
reconciliation of adjusted EBITDA to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
|
June,
|
|
|
Year Ended December 31,
|
|
|
|
|
|
to December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss)
|
|
$
|
6,757
|
|
|
$
|
4,470
|
|
|
$
|
19,192
|
|
|
$
|
(156
|
)
|
|
$
|
(3,324
|
)
|
|
$
|
152
|
|
|
$
|
470
|
|
Depreciation and amortization
|
|
|
8,860
|
|
|
|
5,314
|
|
|
|
14,137
|
|
|
|
5,192
|
|
|
|
4,921
|
|
|
|
3,908
|
|
|
|
981
|
|
Change in derivatives fair value
|
|
|
(460
|
)
|
|
|
54
|
|
|
|
1,061
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and finance cost, net of interest income
|
|
|
2,432
|
|
|
|
1,985
|
|
|
|
5,629
|
|
|
|
2,565
|
|
|
|
985
|
|
|
|
1,053
|
|
|
|
236
|
|
Loss on debt extinguishment
|
|
|
|
|
|
|
639
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
17,589
|
|
|
$
|
12,462
|
|
|
$
|
40,658
|
|
|
$
|
8,350
|
|
|
$
|
2,582
|
|
|
$
|
5,113
|
|
|
$
|
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 technical breakdowns and unforeseen
circumstances. The shipping industry uses operating days to
measure the aggregate number of days in a period during which
vessels are available to 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, vessels upgrades or dry-dockings or other
surveys. |
|
(7) |
|
Time charter equivalent, or TCE, is a non-GAAP 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 and commissions) by operating days for the
relevant 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 charter under a time
charter contract. TCE is a |
10
|
|
|
|
|
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 employed
between the periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
|
|
to December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
29,923
|
|
|
$
|
23,755
|
|
|
$
|
66,689
|
|
|
$
|
20,147
|
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
Voyage expenses and commissions
|
|
|
(2,227
|
)
|
|
|
(1,415
|
)
|
|
|
(3,910
|
)
|
|
|
(1,362
|
)
|
|
|
(1,488
|
)
|
|
|
(608
|
)
|
|
|
(143
|
)
|
Net operating revenues
|
|
|
27,696
|
|
|
|
22,340
|
|
|
|
62,779
|
|
|
|
18,785
|
|
|
|
10,239
|
|
|
|
9,718
|
|
|
|
2,687
|
|
Operating days
|
|
|
1,588
|
|
|
|
949
|
|
|
|
2,441
|
|
|
|
1,048
|
|
|
|
941
|
|
|
|
893
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time charter equivalent daily rate
|
|
$
|
17,441
|
|
|
$
|
23,541
|
|
|
$
|
25,719
|
|
|
$
|
17,925
|
|
|
$
|
10,881
|
|
|
$
|
10,882
|
|
|
$
|
11,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) |
|
Average daily vessel operating expenses, is calculated by
dividing vessel operating expenses, which includes crew wages
and costs, provisions, deck and engine stores, lubricating oil,
insurance, maintenance and repairs, by ownership days for the
relevant time periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
|
|
to December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Vessel operating expenses
|
|
$
|
7,401
|
|
|
$
|
7,381
|
|
|
$
|
16,354
|
|
|
$
|
6,001
|
|
|
$
|
4,483
|
|
|
$
|
3,596
|
|
|
|
786
|
|
Ownership days
|
|
|
1,629
|
|
|
|
1,100
|
|
|
|
2,688
|
|
|
|
1,206
|
|
|
|
1,095
|
|
|
|
931
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily vessel operating expenses
|
|
$
|
4,543
|
|
|
$
|
6,710
|
|
|
$
|
6,084
|
|
|
$
|
4,976
|
|
|
$
|
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) |
|
Average daily general and administrative expenses are calculated
by dividing general and administrative expenses by operating
days for the relevant period. |
|
(11) |
|
Total vessel operating expenses, or TVOE, is a measurement of
our total expenses associated with operating our vessels. TVOE
is the sum of daily vessel operating expense and daily
management fees. Daily TVOE is calculated by dividing TVOE by
fleet ownership days for the relevant time period. |
11
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should consider carefully all of the material risks
described below, together with the other information contained
in this prospectus before making a decision to invest in our
common stock.
Risk
Factors Relating to FreeSeas
Investment
in a company in the drybulk shipping industry involves a high
degree of risk.
The abrupt and dramatic downturn in the drybulk charter market,
from which we derive a large majority of our revenues, has
severely affected the drybulk shipping industry. The Baltic Dry
Index, or BDI, an index published by The Baltic Exchange of
shipping rates for 20 key drybulk routes, fell 94% from a peak
of 11,793 in May 2008 to a low of 663 in December 2008. It
subsequently rose to a high of 4,291 on June 3, 2009 and
then declined to 2,163 as of September 24, 2009. It was
2,728 as of October 16, 2009. The decline in charter rates
is due to various factors, including the lack of trade financing
for purchases of commodities carried by sea, which has resulted
in a significant decline in cargo shipments, and the excess
supply of iron ore in China, which has resulted in falling iron
ore prices and increased stockpiles in Chinese ports. There is
no certainty that the drybulk charter market will experience any
further recovery over the next several months and the market
could decline from its current level. These circumstances, which
result from the economic dislocation worldwide and the
disruption of the credit markets, have had a number of adverse
consequences for drybulk shipping, including, among other things:
|
|
|
|
|
a decrease in available financing for vessels;
|
|
|
|
a limited secondhand market for the sale of vessels;
|
|
|
|
a sharp decline in charter rates, particularly for vessels
employed in the spot market;
|
|
|
|
charterers seeking to renegotiate the rates for existing time
charters;
|
|
|
|
widespread loan covenant defaults in the drybulk shipping
industry due to the substantial decrease in vessel values; and
|
|
|
|
declaration of bankruptcy by some operators, charterers and
shipowners.
|
The
downturn in the drybulk carrier charter market may have an
adverse effect on our earnings, affect compliance with our loan
covenants, and require us to raise additional capital in order
to remain compliant with our loan covenants.
The decline in charter rates in the drybulk market affects the
values of our drybulk vessels, which follow the trends of
drybulk charter rates, and earnings on our charters, and
similarly, affects our cash flows and liquidity and our
compliance with the covenants contained in our loan agreements.
We have received waivers from each of our lenders with respect
to the breach of any loan covenants. If the current low charter
rates in the drybulk market continue beyond the periods covered
by such waivers, however, our earnings will be adversely
affected, as well the value of our fleet, with the result that
there is a probability we will not be in compliance with the
financial covenants in our various loan agreements. There can be
no assurances our lenders will be willing to provide further
waivers of covenant compliance or modifications to our
covenants. In such a situation, in order to remain viable, we
would have to continue to withhold payment of dividends, sell
vessels in our fleet
and/or seek
to raise additional capital in the equity markets. If we are
able to raise additional capital at a time when the charter
rates in the drybulk charter market are low, our shareholders
could be significantly diluted and our earnings per share could
be adversely affected. Even if we are able to raise additional
capital in the equity markets, there is no assurance we will
remain compliant with our loan covenants or receive any required
waivers from our banks.
12
The
cyclical nature of the international shipping industry has
caused us to alter our strategy on a
short-term
basis and place a significant number of our vessels in the spot
market. Although this strategy may yield higher revenues over
the long term, it also exposes us to the often volatile changes
in spot charter rates, 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.
Rates for time charters, which provide income at pre-determined
rates over more extended periods of time, declined significantly
over the last 12 months and have remained very low.
Although it is possible that time charter rates could continue
to decline, it is also possible that they may rise in coming
months. As a result, we have revised our strategy to
strategically place seven of our 10 vessels in the spot
market over the coming months as we evaluate the time charter
market and decide when the time is optimal to return the
majority of our vessels to time charters. If time charter rates
rise, this strategy could prove to yield higher returns for us;
however, if time charter and spot market rates decline, our
revenues may be reduced, possibly significantly. The spot market
is also vulnerable to significant short-term variations and is
very competitive, which could reduce our revenues and net
income, in particular, if charter rates decline. There can be no
assurance that we will be successful in keeping our vessels
fully employed in the spot market, or that future spot rates
will be sufficient to enable those vessels to be operated
profitably.
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 values of our vessels can fluctuate significantly.
The market values 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;
|
|
|
|
prevailing level of charter rates; and
|
|
|
|
availability of financing for purchases of vessels in the
secondhand market.
|
13
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.
When
our charters expire, we may not be able to replace such charters
promptly or with profitable charters, which may adversely affect
our earnings.
We will generally attempt to recharter our vessels at favorable
rates with reputable charterers. Seven of our vessels currently
operate in the spot market. If the drybulk shipping market is in
a period of depression when our vessels charters expire,
it is likely that we may be forced to re-charter them at
substantially reduced rates, if at all. If rates are
significantly lower or if we are unable to recharter our
vessels, our earnings may be adversely affected.
The
current historically low drybulk charter rates and drybulk
vessel values and any future declines in these rates and values
will affect our ability to comply with various covenants in our
loan agreements.
Our loan agreements require that we remain in compliance with
certain financial and other covenants. The current historically
low drybulk charter rates and drybulk vessel values have
adversely affected our ability to comply with these covenants.
Noncompliance with these covenants constitutes an event of
default under our credit facilities, which would, unless waived
by our lenders, provide our lenders with various remedies,
including the right to require us to post additional collateral,
enhance our equity and liquidity, increase our interest
payments, pay down our indebtedness to a level where we are in
compliance with our loan covenants, sell vessels in our fleet,
reclassify our indebtedness as current liabilities, accelerate
our indebtedness, and foreclose our lenders liens on our
vessels. The exercise of any of the remedies could materially
adversely impair our ability to continue to conduct our
business. In addition, if the fair value of our vessels
deteriorates significantly from their current levels, we may
have to record an impairment adjustment to our financial
statements, which would adversely affect our financial results
and further hinder our ability to raise capital. Moreover, our
lenders may require the payment of additional fees, require
prepayment of a portion of our indebtedness to them, accelerate
the amortization schedule for our indebtedness and increase the
interest rates they charge us on our outstanding indebtedness.
As of December 31, 2008, March 31, 2009 and June 30,
2009, we were not in full compliance with certain loan
covenants, but obtained the waivers from each of our lenders.
There can be no assurances, however, that once such waivers
expire our lenders will grant us any such waivers in the future
if at the time of such expiration we are still not in compliance
with certain loan covenants.
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 maintain insurance against loss of hire for seven of
our vessels, 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. We cannot assure that the insurers will not
default, or challenge, on any claims they are required to pay.
If our insurance is not enough to cover claims that may arise or
if our insurer denies a claim, 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.
14
Our
charterers may terminate or default on their charters, which
could adversely affect our results of operations and cash
flow.
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, hedging
arrangements, the ability of charterers to obtain letters of
credit from its customers, cash reserves, cash flow
considerations and various operating expenses. Many of these
factors impact the financial viability of our charterers. Given
the downturn in world markets and the factors described above,
it is possible that some of our charterers could declare
bankruptcy, and as a consequence, default on their obligations
to us.
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.
If we receive lower charter rates under replacement charters or
are unable to recharter all of our vessels, the amounts
available if any, to service debt
and/or to
pay dividends to our shareholders may be significantly reduced
or eliminated.
If we
do not successfully employ our vessels or if our charterers fail
to meet their obligations to us, our revenues, cash flows and
profitability, and our ability to comply with certain of our
loan covenants, would be adversely affected.
We currently employ seven vessels in the spot market, all with
charters scheduled to expire between November and December of
this year, by which time we will have to negotiate new
employment for these vessels in the currently depressed charter
market. If the current low rates in the charter market continue
through the rest of 2009 and into 2010, it will affect the
charter revenue we will receive from these vessels, which would
have an adverse effect on our revenues, cash flows and
profitability, as well as our ability to comply with our debt
covenants.
In addition, three of our vessels are employed on time charters
that expire between January 2010 and March 2011. The
ability and willingness of each of our charterers to perform
their obligations under their charters with us will depend on a
number of factors that are beyond our control. There can be no
assurance that some of our charterers would not fail to pay
charter hire or attempt to renegotiate charter rates. Should a
charterer fail to honor its obligations under its agreement with
us, it may be difficult for us to secure substitute employment
for the affected vessel, and any new charter arrangements we
secure in the spot market or on a time charter would likely be
at lower rates given the currently depressed charter rate
levels. If our charterers fail to meet their obligations to us,
we would experience material adverse effects on our revenues,
cash flows and profitability and our ability to comply with our
debt covenants and pay our debt service and other obligations.
We
currently rely, and in the future may continue to rely, on spot
charters to employ our vessels. The rates on spot charters are
very competitive and volatile, which can result in decreased
revenues if spot charter rates decline.
Seven of our 10 vessels operate in the spot market. 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 would 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.
15
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. If the market value of our fleet declines, we may
not be in compliance with certain covenants of our existing loan
agreements that relate to maintenance of asset values and, as a
result, we may not be able to refinance our debt or obtain
additional financing. As of December 31, 2008,
March 31, 2009 and June 30, 2009, we were not in full
compliance with certain loan covenants but obtained appropriate
waivers from each of our lenders. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Loan Agreement Covenants and
Waivers. There can be no assurances, however, that once
such waivers expire, that we will be in compliance with the
financial covenants or that our lenders will extend such waivers.
Our
loan agreements 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 are
currently in compliance with the terms of our loans only because
we have received waivers and/or amendments to our loan
agreements waiving our compliance with certain covenants for
certain periods of time. The waivers and/or amendments impose
additional operating and financial restrictions on us and modify
the terms of our existing loan agreements. Any extensions of
these waivers, if needed, could contain additional restrictions
and might not be granted at all.
Our loan agreements require that we maintain certain financial
and other covenants. The current low drybulk charter rates and
drybulk vessel values have affected our ability to comply with
these covenants. A violation of these covenants constitutes an
event of default under our credit facilities and would provide
our lenders with various remedies, including the right to
require us to post additional collateral, enhance our equity and
liquidity, continue to withhold payment of dividends, increase
our interest payments, pay down our indebtedness to a level
where we are in compliance with our loan covenants, sell vessels
in our fleet, or reclassify our indebtedness as current
liabilities. Our lenders could also accelerate our indebtedness
and foreclose their liens on our vessels. The exercise of any of
these remedies could materially adversely impair our ability to
continue to conduct our business. Moreover, our lenders may
require the payment of additional fees, require prepayment of a
portion of our indebtedness to them, accelerate the amortization
schedule for our indebtedness and increase the interest rates
they charge us on our outstanding indebtedness
16
As of December 31, 2008, March 31, 2009 and June 30,
2009, we were not in full compliance with certain of our loan
covenants, principally those related to the value of our vessels
compared to the amounts of our loans. During March and July
2009, we obtained waivers from our lenders of our compliance
with these various financial and other covenants. These waivers
currently expire between April 2010 and July 2010. As a result
of these waivers, we are not in default under any of our credit
facilities. For more information, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Long-Term Debt Loan Agreement
Covenants and Waivers. If conditions in the drybulk
charter market remain depressed or worsen, we may need to
request extensions of these waivers. There can be no assurance
that our lenders will provide such extensions. If we require
extensions to the waivers and are unable to obtain them, as
described above, we would be in default under our credit
facilities and your investment in our shares could lose most or
all of its value
As a result of these waivers, our lenders may 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;
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change the management of our vessels or terminate or materially
amend our management agreements; and
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sell our vessels.
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The loan covenant waivers from our lenders that are currently in
place restrict us from paying any dividends during the term of
the covenant waiver. If we need to extend these covenant
waivers, our lenders may impose additional restrictions. In
addition to the above restrictions, our lenders may require the
payment of additional fees, require prepayment of a portion of
our indebtedness to them, accelerate the amortization schedule
for our indebtedness, and increase the interest rates they
charge us on our outstanding indebtedness. We may be required to
use a significant portion of the net proceeds from this offering
to repay a portion of our outstanding indebtedness. We have
agreed to pay HBU up to 10% of the net proceeds of any capital
raise, including this offering, up to a maximum of
$3.0 million. These potential restrictions and requirements
may limit our ability to pay dividends to you, finance our
future operations, make acquisitions or pursue business
opportunities.
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 fleet, we incurred secured debt under various
loan agreements. As of June 30, 2009, we had outstanding an
aggregate of $146.85 million in debt. 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
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.
17
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.
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.
We
depend entirely on Free Bulkers and Safbulk to manage and
charter our fleet.
We currently have no employees and contract all of our
financial, accounting, including our financial reporting and
internal controls, and other back-office services, and the
management of our fleet, including crewing, maintenance and
repair, 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, we 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.
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
18
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.
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.
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.
Increases
in interest rates would reduce funds available to purchase
vessels and service debt.
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.
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.
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, 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 only for
so long as we are in compliance with all applicable financial
covenants, terms and conditions of our debt. In addition, we and
our subsidiaries are subject to limitations on the payment of
dividends under Marshall Islands laws discussed above.
19
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 significantly expand the size of our fleet, and our
attempt to improve those systems may be ineffective. In
addition, if we significantly 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 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. 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.
Purchasing
and operating previously owned, or secondhand, vessels may
result in increased operating costs and vessels off-hire, which
could adversely affect our earnings.
Although we inspect the secondhand vessels that we acquire prior
to purchase, this inspection does not provide us with the same
knowledge about a vessels condition and the cost of any
required (or anticipated) repairs that we would have had if this
vessel 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. The average age
of our drybulk carriers is currently approximately
14 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 may be unable to replace the vessels
in our fleet upon the expiration of their useful lives, which we
expect to be 28 years. 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.
20
Our
board of directors has determined to suspend the payment of cash
dividends as a result of certain restrictions in waivers we
received from our lenders relating to our loan covenants and
prevailing market conditions in the international shipping
industry. Until such market conditions improve, it is unlikely
that we will reinstate the payment of dividends.
In light of a lower freight environment and a highly challenging
financing environment that has resulted in a substantial decline
in the international shipping industry, our board of directors,
beginning in February 2009, suspended the cash dividend on our
common stock. Our dividend policy will be assessed by our board
of directors from time to time; however, it is unlikely that we
will reinstate the payment of dividends until market conditions
improve. Further, the waivers we have received from our lenders
relating to our loan covenants restrict our ability to pay
dividends. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Long-Term Debt Loan Agreement Covenants and
Waivers. Therefore, there can be no assurance that, if we
were to determine to resume paying cash dividends, FBB, HBU or
Credit Suisse would provide any required consent.
We are
required by Section 404 of the Sarbanes-Oxley Act of 2002
to evaluate our controls, which evaluation requires 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. Our internal controls and procedures are
tested on an annual basis. During the course of our annual
testing, deficiencies may be identified that we may not be able
to remediate to meet the deadline imposed for filing our annual
reports. 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 is required since the fiscal year ended
December 31, 2008 and for each fiscal year thereafter.
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.
Because
we 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 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 our 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
net income. Although for the year ended December 31, 2008
and for the six months ended June 30, 2009, the fluctuation
in the value of the dollar against foreign currencies had an
immaterial impact on us. 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
21
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. As of the date of this prospectus,
we had no freight forward agreements outstanding.
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, as
amended, or the Code, 50% of the gross shipping income of a
vessel owning or chartering corporation, such as our
subsidiaries and us, that is attributable to transportation that
begins or ends, but that does not both begin and end, in the
United States, exclusive of certain U.S. territories and
possessions, may be subject to a 4% U.S. 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 thereunder.
For the 2006 tax year, we could not qualify our ship-owning
subsidiaries for the benefits of the Section 883 tax
exemption and paid U.S. taxes on 4% of our U.S. Source
Gross Transportation Income. For the 2007 and 2008 tax years, we
claimed the benefits of the Section 883 tax exemption for
our ship-owning subsidiaries. We expect that our ship-owning
subsidiaries will again claim the benefits of Section 883
for the 2009 tax year. However, there are factual circumstances
beyond our control that could cause us to fail to qualify for
this tax exemption and thereby subject us to U.S. federal
income tax on our U.S. 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 did 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 certain of our direct or indirect shareholders as residents
of qualifying jurisdictions and whether those shareholders own
their shares through bearer share arrangements and will also
require these shareholders compliance with ownership
certification procedures attesting that they are residents of
qualifying jurisdictions, and each intermediarys or other
persons similar compliance in the chain of ownership
between us and such shareholders. Due to the factual nature of
the issues involved, we can give no assurances on our tax-exempt
status or that of any of our subsidiaries.
If we or our subsidiaries are not entitled to exemption under
Section 883 for any taxable year, we or our subsidiaries
could be subject for those years to an effective 4%
U.S. federal income tax on the shipping income these
companies derive during the year that are attributable to the
transport of cargoes to or from the U.S. 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.
22
Based on our currently anticipated operations, 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, and a recent
federal court decision characterized income received from vessel
time charters as rental rather than services income for
U.S. tax purposes. 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), 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 stock, as
if the excess distribution or gain had been recognized ratably
over the shareholders holding period of our common stock.
Industry
Risk Factors Relating to FreeSeas
Charter
hire rates for drybulk vessels have decreased significantly and
may remain at low rates or further decrease in the future, which
may adversely affect our earnings.
The drybulk shipping industry is cyclical with volatility in
charter hire rates and profitability. The degree of charter hire
rate volatility among different types of drybulk vessels has
varied widely. Since the middle of the third quarter of 2008,
charter hire rates for drybulk vessels have decreased
substantially, and although charter rates have recovered from
their lows, they may remain volatile for the foreseeable future
and could decline further.
We anticipate that the future demand for our drybulk vessels
will be dependent upon existing conditions in the worlds
economies, seasonal and regional changes in demand, changes in
the capacity of the global drybulk fleet and the sources and
supply of drybulk cargo to be transported by sea. Adverse
economic, political, social or other developments could have a
further material adverse effect on drybulk shipping in general
and on our business and operating results in particular.
Our ability to re-charter our drybulk vessels upon the
expiration or termination of their current time charter, the
charter rates payable under any renewal or replacement charters
will depend upon, among other things, the current state of the
drybulk shipping market. If the drybulk shipping market is in a
period of depression when our vessels charters expire, it
is likely that we may be forced to re-charter them at reduced
rates, including rates whereby we incur a loss, which may reduce
our earnings or make our earnings volatile.
In addition, because the market value of our vessels may
fluctuate significantly, we may incur losses when we sell
vessels, which may adversely affect our earnings. If we sell
vessels at a time when vessel prices have fallen and before we
have recorded an impairment adjustment to our financial
statements, the sale may be at less than the vessels
carrying amount on our financial statements, resulting in a loss
and a reduction in earnings.
Disruptions
in world financial markets and in the international charter
market could have a material adverse impact on our ability to
obtain financing, our results of operations, financial condition
and cash flows and could cause the market price of our common
stock to decline.
The United States and other countries are experiencing
deteriorating economic trends and have entered into a recession.
For example, the credit markets worldwide and in the United
States have experienced significant contraction, de-leveraging
and reduced liquidity, and the United States government and
foreign
23
governments have either implemented or are considering a broad
variety of governmental action
and/or new
regulation of the financial markets. Securities and futures
markets and the credit markets are subject to comprehensive
statutes, regulations and other requirements.
The uncertainty surrounding the future of the global credit
markets has resulted in reduced access to credit worldwide and
inability of many parties to obtain trade finance, including
letters of credit, which, in turn has adversely affected drybulk
charter rates. We face risks attendant to changes in economic
environments, changes in interest rates, and instability in
certain securities markets, among other factors. Major market
disruptions and the current adverse changes in global market
conditions, and the economic climate in the United States and
worldwide, may adversely affect our business or impair our
ability to borrow amounts under our credit facilities or any
future financial arrangements. The current market conditions may
last longer than we anticipate. These recent and developing
economic and governmental factors may have a material adverse
effect on our results of operations, financial condition or cash
flows and could cause the price of our common stock to decline
significantly.
The recession currently occurring worldwide has resulted in
fewer imports to industrialized nations from Asia, which in turn
has resulted in fewer requirements for imports of raw materials
from the Asia, and in particular China. This trend has coincided
with the credit crisis, which has made the availability of trade
credit scarce; documentary letters of credit were largely
unavailable in the last quarter of 2008. At the same time, the
extreme volatility of commodity prices has substantially
increased the risk of physical commodity traders, who have
reduced the volume of their trades. The volatility of commodity
prices, resulting in particular in a dramatic fall of spot iron
ore prices, has shifted the negotiating balance of power in
favor of China, the largest iron ore importing country, against
iron ore producers based in Brazil and Australia, and has led
China to centrally implement a suspension of iron ore imports in
order to have more ample negotiating leverage for the conclusion
of its longer-term contract prices for iron ore imports.
The combination of all the above factors has caused the volume
of seaborne trade to drop dramatically and charter rates to
plummet. These conditions may last longer than expected and may
continue to adversely affect our results of operations.
A
continuing economic slowdown in the Asia Pacific region could
have a material adverse effect on our business, financial
position and results of operations.
We anticipate a significant number of the port calls made by our
vessels will involve the loading or discharging of drybulk
commodities in ports in the Asia Pacific region. As a result,
continuing negative economic conditions in any Asia Pacific
country, but particularly in China, may have an adverse effect
on our business, financial position and results of operations,
as well as our future prospects. In recent years, China has been
one of the worlds fastest growing economies in terms of
gross domestic product, which has had a significant impact on
shipping demand. Through the end of the third quarter of 2008,
Chinas gross domestic product was approximately 2.3% lower
than it was during the same period in 2007, and it is likely
that China and other countries in the Asia Pacific region will
continue to experience slowed or even negative economic growth
in the near future. Moreover, the current economic slowdown in
the economies of the United States, the European Union and Asian
countries may further adversely affect economic growth in China
and elsewhere. Our business, financial position, results of
operations, ability to pay dividends as well as our future
prospects, would be materially and adversely affected by a
long-lasting or significant 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
24
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.
Continuing
turbulence in the financial services markets and the tightening
of credit may affect the ability of purchasers of drybulk cargo
to obtain letters of credit to purchase drybulk goods, resulting
in declines in the demand for vessels.
Continuing turbulence in the credit markets has led many lenders
to reduce, and in some cases, cease to provide credit, including
letters of credit, to borrowers. Purchasers of drybulk cargo
typically pay for cargo with letters of credit. The tightening
of the credit markets has reduced the issuance of letters of
credit and as a result decreased the amount of cargo being
shipped as sellers determine not to sell cargo without a letter
of credit. Reductions in cargo results in less business for
charterers and declines in the demand for vessels. Any material
decrease in the demand for vessels may decrease charter rates
and make it more difficult for us to charter our vessels in the
future at competitive rates. Reduced charter rates would reduce
our revenues.
If the
recent volatility in LIBOR continues, it could affect our
profitability, earnings and cash flow.
LIBOR has recently been volatile, with the spread between LIBOR
and prime lending rates widening significantly at times. These
conditions are the result of the disruptions in the
international credit markets that began in the fourth quarter of
2008. Because the interest rates borne by our outstanding
indebtedness fluctuate with changes in LIBOR, if this volatility
were to continue, it would affect the amount of interest payable
on our debt, which in turn, would have an effect on our
profitability, earnings and cash flow.
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
25
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.
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 adopted by the European Union or any other country or
authority. The European Commission has presented various
proposals and the European Parliament has endorsed many of them,
but the member governments have yet to reach a consensus on
legislation to enact.
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 could 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).
26
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, Germanischer Lloyd
and Bureau Veritas.
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.
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 conflicts 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.
Acts
of piracy on ocean-going vessels have recently increased in
frequency, which could adversely affect our
business.
Acts of piracy have historically affected ocean-going vessels
trading in regions of the world such as the South China Sea and
in the Gulf of Aden off the coast of Somalia. Throughout 2008
and 2009, the frequency of piracy incidents has increased
significantly, particularly in the South China Sea and the Gulf
of Aden off the coast of Somalia, with drybulk vessels and
tankers particularly vulnerable to such attacks. For example, in
November 2008, the Sirius Star, a tanker vessel not affiliated
with us, was captured by pirates in the Indian Ocean while
carrying crude oil estimated to be worth $100.0 million and
was released in January 2009 upon a ransom payment of
$3 million. If these piracy attacks result in regions in
which our vessels are deployed being characterized as war
risk zones by insurers, as the Gulf of Aden temporarily
was in May 2008, or as war and strikes listed areas
by the Joint War Committee, premiums payable for such coverage
could increase
27
significantly and such insurance coverage may be more difficult
to obtain. In addition, crew costs, including due to employing
onboard security guards, could increase in such circumstances.
We may not be adequately insured to cover losses and pay ransoms
from these incidents, which could have a material adverse effect
on us. In addition, detention of any of our vessels, hijacking
as a result of an act of piracy against our vessels, or an
increase in cost, or unavailability, of insurance for our
vessels, could have a material adverse impact on our business,
financial condition, results of operations and ability to pay
dividends in the future.
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.
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.
Our
vessels may suffer damage and we may face unexpected dry-docking
costs, which could affect our cash flow and financial
condition.
If our vessels suffer damage, they may need to be repaired at a
dry-docking facility, resulting in vessel downtime. 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 inactivity of these vessels while they are being
repaired and repositioned, as well as the actual cost of these
repairs, would decrease our earnings. In addition, space at
28
dry-docking facilities is sometimes limited and not all
dry-docking facilities are conveniently located. We may be
unable to find space at a suitable dry-docking facility or we
may be forced to move to a dry-docking facility that is not
conveniently located to our vessels positions. The loss of
earnings while our vessels are forced to wait for space or to
relocate to dry-docking facilities that are farther away from
the routes on which our vessels trade would also decrease our
earnings.
Risks
Related to this Offering
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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our lenders willingness to extend our loan covenant
waivers, if necessary;
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changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
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changes in 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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strategic actions by us or our competitors such as acquisitions
or restructurings;
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the thin trading market for our common stock, which makes it
somewhat illiquid;
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the current ineligibility of our common stock to be the subject
of margin loans because of its low current market price;
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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 particular, have experienced
extreme volatility that has sometimes been unrelated to the
operating performance of individual companies. These broad
market fluctuations may adversely affect the trading price of
our common stock.
Investors
may experience significant dilution as a result of possible
future offerings.
We will
have shares
of common stock outstanding
( shares
if the underwriters exercise their over-allotment option in
full), which represents in the aggregate an increase
of %
( % if the underwriter exercises
its over-allotment option in full) in our issued and outstanding
shares of common stock. We may sell additional shares of common
stock following the conclusion of this offering in order to
fully implement our business plans. Such sales could be made at
prices below the price at which we sell the shares offered by
this prospectus, in which case, investors who purchase shares in
this offering could experience some dilution of their
investment, which could be significant.
29
As
long as our stock price remains below $5.00 per share, our
shareholders will not be able to use our shares as collateral
for margin accounts. Further, if our stock price falls below
$1.00, we may be subject to delisting or be forced to take
action to cure this problem.
The last reported sale price of our common stock on the NASDAQ
Global Market on October 21, 2009 was $1.62 per share. If
the market price of our shares of common stock remains below
$5.00 per share, under Financial Industry Regulatory Authority,
or FINRA, rules, our shareholders will not be able to use such
shares as collateral for borrowing in margin accounts. This
inability to continue to use our common stock as collateral may
lead to sales of such shares creating downward pressure on and
increased volatility in, the market price of our shares of
common stock. In addition, many institutional investors will not
invest in stocks whose prices are below $5.00 per share.
Under the rules of the NASDAQ Stock Market, listed companies
have historically been required to maintain a share price of at
least $1.00 per share and if the share price declines below
$1.00 for a period of 30 consecutive business days, then the
listed company would have a cure period of at least
180 days to regain compliance with the $1.00 per share
minimum. The NASDAQ Stock Market suspended the foregoing rules
in October 2008, but reinstated them in July 2009. In the event
that our share price declines below $1.00, we may be required to
take action, such as a reverse stock split, in order to comply
with NASDAQ rules that may be in effect at the time. We may
raise additional equity capital at the market
and/or in
privately negotiated transactions. The effect of this may be to
depress our share price and dilute our shareholders
investment
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 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.
30
Because
the Republic of the Marshall Islands, where we are incorporated,
does not have a well-developed body of corporate law,
shareholders may have fewer rights and protections than under
typical United States law, such as Delaware, and
shareholders may have difficulty in protecting their interest
with regard to actions taken by our Board of
Directors.
Our corporate affairs are governed by amended and restated
articles of incorporation and by-laws and by the Marshall
Islands Business Corporations Act, or BCA. The provisions of the
BCA resemble provisions of the corporation laws of a number of
states in the United States. However, there have been few
judicial cases in the Republic of the Marshall Islands
interpreting the BCA. The rights and fiduciary responsibilities
of directors under the law of the Republic of the Marshall
Islands are not as clearly established as the rights and
fiduciary responsibilities of directors under statutes or
judicial precedent in existence in certain
U.S. jurisdictions. Shareholder 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.
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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31
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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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limiting our ability to enter into business combination
transactions with certain shareholders.
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In addition, we have implemented a shareholder rights plan
pursuant to which the holders of our common stock receive one
right to purchase one one-thousandth of a share of our
Series A Participating Preferred Stock at an exercise price
of $18.00, subject to adjustment. The rights become exercisable
upon the occurrence of certain change in control events. These
anti-takeover provisions and our shareholder rights plan 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.
32
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements.
These forward-looking statements include information about
possible or assumed future results of our operations and our
performance. Our forward-looking statements include, but are not
limited to, statements regarding our or our managements
expectations, hopes, beliefs, intentions or strategies regarding
the future and other statements other than statements of
historical fact. In addition, any statements that refer to
projections, forecasts or other characterizations of future
events or circumstances, including any underlying assumptions,
are forward-looking statements. The words
anticipates, believe,
continue, could, estimate,
expect, intends, may,
might, plan, possible,
potential, predicts,
project, should, would and
similar expressions may identify forward-looking statements, but
the absence of these words does not mean that a statement is not
forward-looking. Forward-looking statements in this prospectus
may include, for example, statements about our:
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our future operating or financial results;
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our financial condition and liquidity, including our ability to
comply with our loan covenants and 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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drybulk shipping industry trends, including charter rates and
factors affecting vessel supply and demand;
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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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the useful lives and value of our vessels;
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anticipated levels of drybulk vessel new building orders or
drybulk vessel scrapping;
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changes in the cost of other modes of bulk commodity
transportation;
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availability of crew, number of off-hire days, dry-docking
requirements and insurance costs;
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changes in condition of our vessels or applicable maintenance or
regulatory standards (which may affect, among other things, our
anticipated dry-docking costs);
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global and regional economic and political conditions;
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our ability to leverage to our advantage our managers
relationships and reputation 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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acts of terrorism and other hostilities; and
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other factors discussed in the section titled Risk
Factors.
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The forward-looking statements contained in this prospectus are
based on our current expectations and beliefs concerning future
developments and their potential effects on us. There can be no
assurance that future developments affecting us will be those
that we have anticipated. These forward-looking statements
involve a number of risks, uncertainties (some of which are
beyond our control) or other assumptions that may cause actual
results or performance to be materially different from those
expressed or implied by these forward-looking statements. These
risks and uncertainties include, but are not limited to, those
factors described under the heading Risk Factors.
Should one or more of these risks or uncertainties materialize,
or should any of our assumptions prove incorrect, actual results
may vary in material respects from those projected in these
forward-looking statements. We undertake no obligation to update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as may be
required under applicable securities laws
and/or if
and when management knows or has a reasonable basis on which to
conclude that previously disclosed projections are no longer
reasonably attainable.
33
PRICE
RANGE OF OUR PUBLICLY TRADED SECURITIES
Our common stock, Class W warrants and Class Z
warrants began trading on the NASDAQ Global Market on
November 8, 2007 under the trading symbols FREE, FREEW and
FREEZ, respectively. Prior to that time our common stock,
Class W warrants and Class Z warrants were traded on
the NASDAQ Capital Market under the symbols FREE, FREEW and
FREEZ, respectively.
The closing high and low sales prices of our common stock,
Class W warrants and Class Z warrants as reported by
the NASDAQ Stock Market, for the quarters and months indicated,
are as follows:
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Common Stock
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Class W Warrants
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Class Z Warrants
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For the Years Ended:
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High
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Low
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High
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Low
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High
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Low
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December 31, 2007
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$
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10.24
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$
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2.76
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$
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5.14
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$
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0.25
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$
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5.20
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$
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0.48
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December 31, 2008
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7.97
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0.90
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3.05
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0.02
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3.35
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0.05
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Common Stock
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Class W Warrants
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Class Z Warrants
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For the Quarters Ended:
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High
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Low
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High
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Low
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High
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Low
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March 31, 2007
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$
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5.15
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$
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2.76
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$
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1.29
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$
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0.25
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|
$
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1.15
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$
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0.48
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June 30, 2007
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7.63
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|
|
4.55
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|
|
2.65
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|
|
0.81
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|
|
|
2.76
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|
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1.00
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September 30, 2007
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9.35
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|
|
6.77
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|
|
3.30
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|
|
|
1.82
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|
|
3.35
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|
|
2.10
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December 31, 2007
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10.24
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|
|
5.12
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|
|
|
5.14
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|
|
|
1.68
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|
|
5.20
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|
|
|
1.73
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March 31, 2008
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|
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6.09
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|
|
|
4.49
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|
|
|
2.45
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|
|
|
1.06
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|
|
|
2.45
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|
|
|
1.40
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|
June 30, 2008
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7.97
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|
|
|
5.90
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|
|
|
3.05
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|
|
|
1.85
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|
|
|
3.35
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|
|
|
1.85
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September 30, 2008
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|
7.07
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|
|
|
3.95
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|
|
|
2.24
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|
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0.97
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|
|
|
2.65
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|
|
|
1.25
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December 31, 2008
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|
|
4.01
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|
|
|
0.90
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|
|
|
1.15
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|
|
|
0.02
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|
|
|
1.46
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|
|
|
0.05
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|
March 31, 2009
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|
1.88
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|
|
|
0.54
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|
|
|
0.24
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|
|
|
0.04
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|
|
|
0.33
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|
|
|
0.08
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|
June 30, 2009
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|
3.49
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|
|
|
1.17
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|
|
0.34
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|
|
0.07
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|
|
|
0.65
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|
|
|
0.10
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|
September 30, 2009
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2.43
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|
|
|
1.57
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|
|
0.31
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|
|
0.04
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|
|
|
0.55
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0.16
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Common Stock
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|
Class W Warrants
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Class Z Warrants
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For the Months Ended:
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High
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Low
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High
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Low
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High
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Low
|
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April 30, 2009
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$
|
1.43
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|
|
$
|
1.17
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|
|
$
|
0.20
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|
|
$
|
0.07
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|
|
$
|
0.20
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|
|
$
|
0.10
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|
May 31, 2009
|
|
|
2.79
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|
|
|
1.45
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|
|
|
0.34
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|
|
|
0.08
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|
|
|
0.60
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|
|
|
0.16
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|
June 30, 2009
|
|
|
3.49
|
|
|
|
2.11
|
|
|
|
0.24
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|
|
|
0.08
|
|
|
|
0.65
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|
|
|
0.46
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|
July 31, 2009
|
|
|
2.43
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|
|
|
1.77
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|
|
|
0.22
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|
|
|
0.04
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|
|
|
0.55
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|
|
|
0.28
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|
August 31, 2009
|
|
|
1.87
|
|
|
|
1.61
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|
|
|
0.31
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|
|
|
0.14
|
|
|
|
0.36
|
|
|
|
0.19
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|
September 30, 2009
|
|
|
1.93
|
|
|
|
1.57
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|
|
|
0.24
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|
|
|
0.24
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|
|
|
0.39
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|
|
|
0.16
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|
DIVIDEND
POLICY
In light of prevailing economic conditions, our board of
directors determined in February 2009 to suspend payment of cash
dividends. In addition, the covenant compliance waivers we have
received form the lenders, which currently expire on
April 1, 2010 and July 2, 2010, restrict us from
paying dividends. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Long-Term Debt Loan Agreement
Covenants and Waivers.
Declaration and payment of any dividend is subject to the
discretion of our board of directors. The timing and amount of
dividend payments will be dependent upon our earnings, financial
condition, cash requirements and availability, restrictions in
our loan agreements or other financing arrangements, the
provisions of Marshall Islands law affecting the payment of
distributions to stockholders, and other factors. The payment of
dividends is not guaranteed or assured, and may be discontinued
at any time at the discretion of our board of directors. Because
we are a holding company with no material assets other than the
stock of our subsidiaries, our ability
34
to pay dividends will depend on the earnings and cash flow of
our subsidiaries and their ability to pay dividends to us. If
there is a substantial decline in the drybulk carrier market,
our earnings would be negatively affected thus limiting our
ability to pay dividends. 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 thereof. As noted above, our loan agreements contain
restrictions on our payment of dividends in certain
circumstances. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Long-Term Debt Loan Agreement
Covenants and Waivers.
USE OF
PROCEEDS
We estimate that we will receive net proceeds of approximately
$ from this offering, assuming
that the underwriters over-allotment option is not
exercised and after deducting underwriting discounts and
commissions and offering expenses, based on $1.62 per share,
which was the closing price of our common stock on
October 21, 2009. We intend to use the net proceeds of this
offering to purchase additional vessels, for repayment of debt
and for general working capital purposes. We are required to use
$ of the proceeds of this offering
to prepay the HBU facilities. We intend to pursue vessel
acquisitions when market conditions prove attractive and may
increase the size of the offering as necessary. The registration
statement of which this prospectus forms a part will provide us
with additional flexibility to raise capital, which is limited
under our previously filed shelf registration statement, for the
purposes described above.
35
CAPITALIZATION
The following table sets forth our consolidated capitalization
(assuming no exercise of the underwriters over-allotment
option) as of June 30, 2009:
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|
|
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on a historical basis without any adjustment to reflect
subsequent events;
|
|
|
|
as adjusted as of June 30, 2009 to give effect to the
scheduled loan repayments we made from July 1, 2009 through
October 21, 2009;
|
|
|
|
as further adjusted to give effect to our issuance and sale
of shares
of our common stock at a price of
$ per share, net of underwriting
fees on certain shares and offering expenses, and application of
the net proceeds as described under Use of Proceeds.
|
Other than as set forth in the As Adjusted column,
there have been no material changes in our capitalization
between June 30, 2009 and the date of this prospectus.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
As Further
|
|
|
|
June 30, 2009
|
|
|
As Adjusted
|
|
|
Adjusted
|
|
|
|
(U.S. dollars in thousands,
|
|
|
|
except share amounts)
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, current portion
|
|
$
|
32,290
|
|
|
$
|
27,290
|
|
|
$
|
|
|
Long-term debt, net of current portion
|
|
|
114,560
|
|
|
|
107,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt(1)
|
|
$
|
146,850
|
|
|
$
|
134,559
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 250,000,000 shares
authorized, 21,171,329, 31,212,480
and shares
issued and outstanding actual, as adjusted, and as further
adjusted, respectively
|
|
|
21
|
|
|
|
31
|
|
|
|
|
|
Additional paid-in capital
|
|
|
110,328
|
|
|
|
127,018
|
|
|
|
|
|
Retained earnings
|
|
|
17,268
|
|
|
|
17,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
127,617
|
|
|
|
144,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
274,467
|
|
|
$
|
278,876
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total debt does not include the fair value of the derivative
liabilities, which was $1.35 million as of June 30,
2009. |
In July 2009, we completed a public offering of
10,041,151 shares of our common stock at $1.80 per share,
resulting in net proceeds to us of approximately
$16.7 million. We used approximately $11 million of
the net proceeds for the acquisition of the M/V Free
Neptune, $1.7 million for the prepayment of HBU debt,
and the remaining balance for general working capital purposes.
36
SELECTED
FINANCIAL DATA
The following summary financial information and data were
derived from our audited consolidated financial statements for
the years ended December 31, 2008, 2007, 2006, 2005 and
2004 and our unaudited condensed consolidated financial
statements for the six months ended June 30, 2009 and 2008.
The information is only a summary and should be read in
conjunction with our historical consolidated financial
statements and related notes included elsewhere 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, per share data and per
diem amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
|
Six Months Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
|
|
to December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
29,923
|
|
|
$
|
23,755
|
|
|
$
|
66,689
|
|
|
$
|
20,147
|
|
|
$
|
11,727
|
|
|
$
|
10,326
|
|
|
$
|
2,830
|
|
Vessel operating expenses
|
|
|
(7,401
|
)
|
|
|
(7,381
|
)
|
|
|
(16,354
|
)
|
|
|
(6,001
|
)
|
|
|
(4,483
|
)
|
|
|
(3,596
|
)
|
|
|
(786
|
)
|
Voyage expenses
|
|
|
(638
|
)
|
|
|
(255
|
)
|
|
|
(527
|
)
|
|
|
(267
|
)
|
|
|
(689
|
)
|
|
|
(55
|
)
|
|
|
(16
|
)
|
Depreciation expense
|
|
|
(8,086
|
)
|
|
|
(5,040
|
)
|
|
|
(13,349
|
)
|
|
|
(4,435
|
)
|
|
|
(4,479
|
)
|
|
|
(3,553
|
)
|
|
|
(872
|
)
|
Amortization of deferred charges
|
|
|
(774
|
)
|
|
|
(274
|
)
|
|
|
(788
|
)
|
|
|
(757
|
)
|
|
|
(442
|
)
|
|
|
(355
|
)
|
|
|
(109
|
)
|
Management fees to a related party
|
|
|
(838
|
)
|
|
|
(1,032
|
)
|
|
|
(2,634
|
)
|
|
|
(875
|
)
|
|
|
(540
|
)
|
|
|
(488
|
)
|
|
|
(180
|
)
|
Commissions
|
|
|
(1,589
|
)
|
|
|
(1,160
|
)
|
|
|
(3,383
|
)
|
|
|
(1,095
|
)
|
|
|
(799
|
)
|
|
|
(553
|
)
|
|
|
(127
|
)
|
Stock-based compensation expense
|
|
|
(6
|
)
|
|
|
(54
|
)
|
|
|
(107
|
)
|
|
|
(96
|
)
|
|
|
(651
|
)
|
|
|
(200
|
)
|
|
|
|
|
General and administrative expenses
|
|
|
(1,773
|
)
|
|
|
(1,306
|
)
|
|
|
(2,756
|
)
|
|
|
(2,111
|
)
|
|
|
(1,925
|
)
|
|
|
(321
|
)
|
|
|
(34
|
)
|
Bad debts
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of vessel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
8,818
|
|
|
|
7,253
|
|
|
|
26,570
|
|
|
|
5,761
|
|
|
|
(2,281
|
)
|
|
|
1,205
|
|
|
|
706
|
|
Interest and finance costs
|
|
|
(2,446
|
)
|
|
|
(2,520
|
)
|
|
|
(6,209
|
)
|
|
|
(3,204
|
)
|
|
|
(1,004
|
)
|
|
|
(1,076
|
)
|
|
|
(240
|
)
|
Loss on debt extinguishment
|
|
|
|
|
|
|
(639
|
)
|
|
|
(639
|
)
|
|
|
(2,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in derivatives fair value
|
|
|
460
|
|
|
|
(54
|
)
|
|
|
(1,061
|
)
|
|
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
14
|
|
|
|
535
|
|
|
|
580
|
|
|
|
639
|
|
|
|
19
|
|
|
|
23
|
|
|
|
4
|
|
Other
|
|
|
(89
|
)
|
|
|
(105
|
)
|
|
|
(49
|
)
|
|
|
(33
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,757
|
|
|
$
|
4,470
|
|
|
$
|
19,192
|
|
|
$
|
(156
|
)
|
|
$
|
(3,324
|
)
|
|
|
152
|
|
|
|
470
|
|
Basic earnings (loss) per share
|
|
$
|
0.32
|
|
|
$
|
0.21
|
|
|
$
|
0.91
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
|
|
0.03
|
|
|
|
0.10
|
|
Diluted earnings (loss) per share
|
|
$
|
0.32
|
|
|
$
|
0.20
|
|
|
$
|
0.91
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
|
|
0.03
|
|
|
|
0.10
|
|
Basic weighted average number of shares
|
|
|
21,171,329
|
|
|
|
20,839,854
|
|
|
|
21,006,497
|
|
|
|
8,786,287
|
|
|
|
6,290,100
|
|
|
|
4,574,588
|
|
|
|
4,500,000
|
|
Diluted weighted average number of shares
|
|
|
21,171,329
|
|
|
|
21,851,940
|
|
|
|
21,051,963
|
|
|
|
8,786,287
|
|
|
|
6,290,100
|
|
|
|
4,600,444
|
|
|
|
4,500,000
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April 23, 2004)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets, including cash
|
|
$
|
19,381
|
|
|
$
|
27,184
|
|
|
$
|
81,440
|
|
|
$
|
1,417
|
|
|
$
|
5,286
|
|
|
$
|
1,443
|
|
Fixed assets, net
|
|
|
267,319
|
|
|
|
275,405
|
|
|
|
108,021
|
|
|
|
19,369
|
|
|
|
23,848
|
|
|
|
16,188
|
|
Total assets
|
|
|
291,350
|
|
|
|
307,861
|
|
|
|
191,972
|
|
|
|
23,086
|
|
|
|
29,840
|
|
|
|
18,335
|
|
Total current liabilities, including current portion of
long-term debt
|
|
|
47,284
|
|
|
|
50,768
|
|
|
|
34,097
|
|
|
|
10,260
|
|
|
|
10,231
|
|
|
|
4,971
|
|
Derivative financial instruments, net of current portion
|
|
|
817
|
|
|
|
1,337
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including shareholder loans net of current
portion
|
|
|
114,560
|
|
|
|
133,650
|
|
|
|
44,500
|
|
|
|
5,819
|
|
|
|
9,750
|
|
|
|
9,978
|
|
Total liabilities
|
|
|
163,733
|
|
|
|
187,006
|
|
|
|
79,346
|
|
|
|
16,079
|
|
|
|
20,135
|
|
|
|
14,949
|
|
Total shareholders equity
|
|
|
127,617
|
|
|
|
120,855
|
|
|
|
112,626
|
|
|
|
7,007
|
|
|
|
9,705
|
|
|
|
3,386
|
|
38
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
consolidated financial condition and results of operations
together with our consolidated financial statements and notes
thereto that appear elsewhere in this prospectus. FreeSeas
consolidated financial statements have been prepared in
conformity with US GAAP. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties,
and assumptions. Actual results may differ materially from those
anticipated in these forward-looking statements.
The historical consolidated financial results of FreeSeas
described below are presented in United States dollars.
Overview
We are an international drybulk shipping company incorporated
under the laws of the Republic of the Marshall Islands with
headquarters in Piraeus, Greece. Our existing fleet consists of
eight Handysize vessels and two Handymax vessels that carry a
variety of drybulk commodities, including iron ore, grain and
coal, which are referred to as major bulks, as well
as bauxite, phosphate, fertilizers, steel products, cement,
sugar and rice, or minor bulks. As of
October 21, 2009, the aggregate dwt of our fleet is
approximately 300,000 dwt and the average age of our fleet is
approximately 14 years.
We are currently focusing on the Handysize and Handymax sectors,
which we believe are more versatile in the types of cargoes that
they can carry and trade routes they can follow, and offer less
volatile returns than larger vessel classes. We may, however,
acquire larger drybulk vessels if appropriate opportunities
present themselves.
We have contracted the management of our fleet to Free Bulkers,
a company owned by Ion G. Varouxakis, our chairman, chief
executive officer and president. Free Bulkers provides technical
management of our fleet, accounting services and office space
and has subcontracted the charter and post-charter management of
our fleet to Safbulk, 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.
Our
Fleet
The following table details the vessels in our fleet as of
October 21, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
Vessel Name
|
|
Type
|
|
Dwt
|
|
Employment
|
|
Built
|
|
Price
|
|
Date of Acquisition
|
|
M/V Free Destiny
|
|
Handysize
|
|
|
25,240
|
|
|
26 day trip time charter at $9,075 per day through November
2009
|
|
|
1982
|
|
|
$7.60 million
|
|
August 3, 2004
|
M/V Free Envoy
|
|
Handysize
|
|
|
26,318
|
|
|
30-35 day trip time charter at $8,000 per day through
November 2009
|
|
|
1984
|
|
|
$9.50 million
|
|
September 29, 2004
|
M/V Free Goddess
|
|
Handysize
|
|
|
22,051
|
|
|
Balance of time charter at $10,500 per day through
January/February 2010 (plus 50% profit sharing above $12,500 per
day)
|
|
|
1995
|
|
|
$25.20 million
|
|
October 30, 2007
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
Vessel Name
|
|
Type
|
|
Dwt
|
|
Employment
|
|
Built
|
|
Price
|
|
Date of Acquisition
|
|
M/V Free Hero
|
|
Handysize
|
|
|
24,318
|
|
|
40-50 day trip time charter at $13,500 per day through
November 2009
|
|
|
1995
|
|
|
$25.25 million
|
|
July 3, 2007
|
M/V Free Impala
|
|
Handysize
|
|
|
24,111
|
|
|
60 day trip time charter at $10,000 per day through
December 2009
|
|
|
1997
|
|
|
$37.5 million
|
|
April 2, 2008
|
M/V Free Jupiter
|
|
Handymax
|
|
|
47,777
|
|
|
Balance of time charter at $25,216 per day through February 2011
and $28,000 per day through March 2011
|
|
|
2002
|
|
|
$47.00 million
|
|
September 5, 2007
|
M/V Free Knight
|
|
Handysize
|
|
|
24,111
|
|
|
60-65 day spot time charter trip at $7,000 per day through
December 2009
|
|
|
1998
|
|
|
$39.25 million
|
|
March 19, 2008
|
M/V Free Lady
|
|
Handymax
|
|
|
50,246
|
|
|
Balance of time charter at $51,150 per day through May 2010
|
|
|
2003
|
|
|
$65.2 million
|
|
July 7, 2008
|
M/V Free Maverick
|
|
Handysize
|
|
|
23,994
|
|
|
60-65 day trip time charter at $9,000 or $11,000 per day
through December 2009
|
|
|
1998
|
|
|
$39.6 million
|
|
September 1, 2008
|
M/V Free Neptune
|
|
Handysize
|
|
|
30,838
|
|
|
30-35 day trip time charter at $20,000 per day through
November 2009
|
|
|
1996
|
|
|
$11.0 million
|
|
August 25, 2009
|
Recent
Developments
Increase
in Authorized Common Stock
Our shareholders approved at our Annual Meeting of Shareholders
held on September 17, 2009, an amendment to our Amended and
Restated Articles of Incorporation increasing the number of
authorized shares of common stock from 40,000,000 to
250,000,000 shares.
Amendment
and Restatement of HBU Credit Agreement
Effective September 15, 2009, we entered into an amended
and restated credit agreement with Hollandsche Bank-Unie N.V.,
or HBU, which replaces our 2008 credit agreement with HBU. Under
the amended and restated credit agreement, we have obtained a
new 3.5 year facility, the principal of which is payable in
13 quarterly installments of $600,000 beginning on
August 1, 2009 and one balloon payment of $19,300,000 on
November 1, 2012. This new facility bears interest at the
rate of 4.25% above LIBOR. In addition, the amended and restated
credit agreement further amends the value to loan covenant ratio
previously agreed to in March 2009 (see
Long-Term Debt) as follows: (i) 70% from
September 15, 2009 through June 30, 2010,
(ii) 100% from July 1, 2010 through June 30,
2011, (iii) 110% from July 1, 2011 through
June 30, 2012, (iv) 120% from July 1, 2012
through December 30, 2012, and (v) 125% from
December 31, 2012 onwards. We will be required to use 10%
of the proceeds of any capital raise, including this offering,
to prepay any amounts outstanding (up to a maximum of $3,000,000
over the life of the facilities). Additionally,
40
at the end of each fiscal year, we are is required to make a
prepayment in an aggregate amount equal to: (i) 75% of
excess cash, if the value to loan ratio is less than or equal to
70%, (ii) 50% of excess cash, if the value to loan ratio is
less than or equal to 100%, (iii) 25% of excess cash, if
the value to loan ratio is less than 110%, or (iv) zero, if
the value to loan ratio is equal to or greater than 110%
Acquisition
of M/V Free Neptune
In August 2009, we purchased and took delivery of a Handysize
vessel from an unaffiliated third party for approximately
$11 million. We financed the acquisition using a portion of
the net proceeds of our public offering in July 2009. With the
acquisition of the M/V Free Neptune, our fleet increases
from nine to 10 vessels. The M/V Free Neptune is a
30,838 dwt Handysize vessel built in 1996 in Japan. The M/V
Free Neptune has been fixed for a spot time charter trip
of approximately
30-35 days
through November 2009 at a daily rate of $20,000.
Public
Offering
In July 2009, we completed a public offering of
10,041,151 shares of our common stock at $1.80 per share,
including 1,309,715 shares sold upon exercise of the
underwriters overallotment option. The offering resulted
in net proceeds of approximately $16.7 million, after
deducting underwriting fees and estimated offering expenses. Of
these net proceeds, approximately $11 million was used for
the acquisition of the M/V Free Neptune and approximately
$1.7 million was used to prepay a portion of our debt
outstanding to HBU, with the remaining balance used for general
working capital purposes.
Extension
of Class W Warrants
In July 2009, we extended the expiration date and reduced the
exercise price of our 786,265 outstanding Class W warrants
currently listed on the NASDAQ Global Market under the symbol
FREEW. The expiration date of the Class W
warrants has been extended to December 31, 2009 from
July 29, 2009, and the exercise price per share has been
reduced to $2.50 per share from $5.00 per share. Each
Class W warrant entitles the holder to purchase one share
of our common stock. All other terms of the Class W
warrants remain unchanged.
Expiration
of Purchase Option to IPO Underwriter
As part of our 2005 merger with Trinity, we assumed
Trinitys obligations under a purchase option sold to HCFP
Brenner, or HCFP, the underwriter of Trinitys initial
public offering. Under that purchase option, HCFP had the right
to purchase up to 12,500 Series A Units at a price of
$17.325 per unit and up to 65,000 Series B Units at a price
of $16.665 per unit. Each Series A Unit consisted of two
shares of our common stock, five Class W warrants and five
Class Z warrants. Each Series B Unit consisted of two
shares of our common stock, one Class W warrant and one
Class Z warrant. The exercise price of the warrants
included in the units was $5.50 per share. The purchase option
expired unexercised on July 29, 2009.
Loan
Covenant Waivers
In July 2009, certain of our lenders agreed to extend or modify
certain of the financial covenants in our credit agreements.
First Business Bank S.A., or FBB, agreed to extend the
previously provided waivers of the vessel value to debt ratio
covenant and the parent company leverage ratio covenant from
January 1, 2010 to July 1, 2010. In connection with
this extension, we agreed to an increase in the interest rate on
the loan by 0.75%. HBU agreed to modify our interest coverage
and debt service coverage ratios requirements. For 2009 and
2010, the interest coverage ratio will defined as EBITD/net
financing charges and is to be at least 3.75 until July 1,
2010 and at least 3.00 through December 31, 2010. During
this period, the debt service coverage ratio must be at least
1.00 through December 31, 2010. The foregoing ratios for
2011 will be determined
41
based on the prevailing market conditions. See
Long-Term Debt Loan Agreement Covenants and
Waivers.
Employment
and Charter Rates
The BDI fell 94% from a peak of 11,793 in May 2008 to a low of
663 in December 2008. It subsequently rose to a high of 4,291 on
June 3, 2009 and then declined to 2,163 on
September 24, 2009. It was 2,728 as of October 16,
2009. The Baltic Handysize Index fell 92% from a peak of 3,407
in May 2008 to a low of 270 in January 2009. It has since risen
to 961 as of October 16, 2009. The steep decline in charter
rates is due to various factors, including the lack of trade
financing for purchases of commodities carried by sea, which has
resulted in a significant decline in cargo shipments, and the
excess supply of iron ore in China, which has resulted in
falling iron ore prices and increased stockpiles in Chinese
ports.
As of June 30, 2009, we had six vessels trading in the spot
market that are currently exposed to the downturn in the drybulk
charter rates. Should drybulk charter rates continue to decline
or remain at their current low level, our charter revenue with
respect to these vessels will remain low as well. Most of our
vessels have employment in the first quarter and the second
quarter of 2009 and, while we expect that charter rates will
gradually recover as economic activity improves during the
course of the year, those vessels that are redelivered earlier
in the year are expected to receive lower charter rates.
On March 23, 2009, in order to secure cash flow for a
longer period, we announced that we agreed to extend the charter
of the M/V Free Goddess, which had been scheduled to
expire over the next few months. The charter was extended until
January/February 2010 on the following terms: a lump-sum amount
of $500,000 was paid by the charterer on February 15, 2009
as an upfront non-refundable performance guarantee; charter rate
of $8,000 per day to September 15, 2009, with an additional
50% profit sharing for any amounts earned by our charterers in
excess of $10,000 per day; and charter rate of $10,500 per day
starting September 15, 2009 (until January/February 2010),
with an additional 50% profit sharing for amounts earned by our
charterers in excess of $12,500 per day.
The M/V Free Destiny, the M/V Free Envoy, the M/V
Free Hero, the M/V Free Knight, the M/V Free
Maverick and the M/V Free Impala are being
successively chartered in the spot market.
Historically high levels of scrapping have been taking place
since October 2008 among older vessels as a result of the
adverse rate environment, in particular with respect to smaller
size Handysize vessels, the segment in which we operate. It may
take some time until the elimination of excess tonnage supply
manifests itself in the form of higher charter rates.
A prolonged period of extremely low charter rates may lead
owners to face difficulties in meeting their cash flow
obligations, and they may seek to find mutual accommodations
with charterers in which charterers may pay lower charter rates
over a longer period of time. Depending on their overall
financial condition, some weaker owners may not be able to
service their debt obligations, which may cause them to cease
operations or seek protection from creditors.
Change
in Auditors
In May 2009, our Audit Committee approved, and the full Board of
Directors ratified, the appointment of Ernst & Young
(Hellas) Certified Auditors Accountants S.A, or E&Y, as our
independent registered public accounting firm for the fiscal
year ending December 31, 2009, replacing
PricewaterhouseCoopers, S.A., or PWC. The decision to change
auditors is not a result of any disagreements with PWC on any
matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. PWCs
report on our financial statements for the years ended
December 31, 2008 and 2007 did not contain an adverse
opinion or a disclaimer of opinion nor was such report qualified
or modified as to uncertainty, audit scope or accounting
principles. The appointment of E&Y as our auditors for the
2009 fiscal year was ratified by our shareholders at our annual
meeting held on September 17, 2009.
42
Dividends
on Common Stock
In 2008 we paid quarterly cash dividends to our shareholders of
$0.175 per share in February and May, $0.20 per share in August
and $0.075 per share in November, however, due to prevailing
economic conditions, our board of directors determined in 2009
to suspend payment of cash dividends. In addition, the waivers
of covenant defaults that we received from our lenders restrict
our ability to pay dividends.
Series A
Preferred Shares
We have entered into a shareholders rights agreement with
American Stock Transfer & Trust Company, LLC
effective January 14, 2009 and declared a dividend of one
purchase right, or a right, to purchase one one-thousandth of
our Series A Participating Preferred Stock, par value
$0.001 per share, for each outstanding share of our common
stock. The dividend was paid on January 23, 2009 to our
shareholders of record on that date. Each right entitles the
registered holder, upon the occurrence of certain events, to
purchase from us one one-thousandth of a share of preferred
stock at an exercise price of $18.00, subject to adjustment. The
rights become exercisable under certain circumstances set forth
in the shareholders rights agreement.
Acquisition
of Vessels
From time to time, as opportunities arise and depending on the
availability of financing, we intend to acquire additional
secondhand drybulk carriers. On August 5, 2009 we agreed to
purchase the M/V Free Neptune from an unaffiliated third party
for approximately $11,000,000. The vessel acquired was free of
charter and on September 1, 2009 was fixed for a spot time
charter trip of approximately 30 days at a daily rate of
$15,000. On September, 29 2009, the M/V Free Neptune has
been fixed for a new spot time charter trip of approximately
30-35 days
at a daily rate of $20,000. When a vessel is acquired free of
charter, we enter into a new charter contract. The shipping
industry uses income days (also referred to as
voyage or operating days) to measure the
number of days in a period during which vessels actually
generate revenues.
Consistent with shipping industry practice, we treat the
acquisition of a vessel (whether acquired with or without a
charter) as the acquisition of an asset rather than a business.
When we acquire a vessel, we conduct, also consistent with
shipping industry practice, an inspection of the physical
condition of the vessel, unless practical considerations do not
allow such an inspection. We also examine the 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.
When a vessel has been under a voyage charter, the seller
delivers the vessel free of charter to the buyer. When a vessel
is under time charter and the buyer wishes to assume that
charter, the buyer cannot acquire the vessel without the
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:
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Obtain the charterers consent to us as the new owner;
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Obtain the charterers consent to a new technical manager;
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Obtain the charterers consent to a new flag for the
vessel, if applicable;
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Arrange for a new crew for the vessel;
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Replace all hired equipment on board the vessel, such as gas
cylinders and communication equipment;
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43
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Negotiate and enter into new insurance contracts for the vessel
through our own insurance brokers;
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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;
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Implement a new planned maintenance program for the
vessel; and
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Ensure that the new technical manager obtains new certificates
of compliance with the safety and vessel security regulations of
the flag state.
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Our business comprises the following primary components:
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Employment and operation of our drybulk carriers; and
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Management of the financial, general and administrative elements
involved in the ownership and operation of our drybulk vessels.
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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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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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Critical
Accounting Policies and Estimates
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
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
44
undiscounted projected net operating cash flows for each vessel
and compare it to the vessel carrying value. In the event that
the undiscounted projected cash flows do not exceed the recorded
amount, we would determine the fair value of the related asset
and we would 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 valuations performed on an individual vessel basis.
During the six-month period ended June 30, 2009 we
concluded that events occurred and circumstances had changed,
which may indicate the existence of potential impairment of our
long-lived assets. These indicators included a significant
decline in our stock price, continued deterioration in the spot
market, and the related impact of the current worldwide economic
conditions on our expectation for future revenues. As a result,
we performed an interim impairment assessment of long-lived
assets. Unless these indicators improve, it is likely we will be
required to perform an interim impairment analysis in future
quarters.
The interim testing was a review of the undiscounted projected
net operating cash flows for each vessel compared to its
carrying value. The significant factors and assumptions we used
in our undiscounted projected net operating cash flow analysis
included: earnings, remaining useful life, dry-docking costs,
average daily operating expenses of $4,500 with an increase
factor of 2.5% each year and residual value. Earnings
assumptions were based on time charter rates, spot market rates,
FFA rates through 2012 and 10 years of historical charter
rates, adjusting for the current economic assumptions. The
assumed charter rates ranged from $8,000 to $14,900 and $23,000
for Handysize and Handymax vessels, respectively. Our assessment
concluded that step two of the impairment analysis was not
required and no impairment of vessels existed as of
June 30, 2009, as the undiscounted projected net operating
cash flows exceeded the carrying value for each vessel. A
material impairment charge would occur for certain vessels if
the forecasted charter rates were to range from $6,000 to $8,000
until 2012 and were less than $14,900 from 2013 onwards until
the remaining lives of the vessels.
Although we believe our underlying assumptions supporting this
assessment are reasonable, if charter rate trends and the length
of the current market downturn vary significantly from our
forecasts, we may be required to perform step two of the
impairment analysis in the future. Therefore, there can be no
assurances that we would not have material impairment charges in
the future.
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. 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 June 30, 2009, which is in line with historical average
scrap values in the shipping industry. 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.
Effective April 1, 2009, and following our reassessment of
the useful lives of our assets, the vessels useful life
was increased from 27 to 28 years. Our estimate was based
on the current vessels operating condition and the
conditions prevailing in the market for same type of vessels.
The effect of this change in accounting estimate, which did not
require retrospective adoption as per SFAS No. 154
Accounting Changes and Error Corrections, was to
increase net income for the six-month periods ended
June 30, 2009 by $313,000 or $0.01 per share.
Deferred dry-dock and special survey
costs. Our vessels are required to be dry-docked
approximately twice in any
60-month
period for major repairs and maintenance that cannot be
performed while the vessels are operating. The vessels are
required to undergo special surveys every 60 months that
occasionally coincide with dry-docking due dates, in which case
the procedures are combined in a cost-efficient manner. We
follow the deferral method of accounting for special survey and
dry-docking costs, whereby actual costs incurred are deferred
and amortized on a straight line basis over the period through
the date the next dry-docking or special
45
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 otherwise reasonably quantified 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.
Important
Measures for Analyzing Results of Operations
We believe that the important measures for analyzing trends in
the results of our operations consist of the following:
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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 earned and the amount of expenses that we
incur during that period.
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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. We define operating days as
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
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46
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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, or TCE, 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 non-GAAP, 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.
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Adjusted EBITDA. We consider adjusted EBITDA
to represent net earnings before interest, taxes, depreciation
and amortization, unrealized gains or losses from changes in the
value of derivatives and non-cash charges such as losses on debt
extinguishment. 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
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and does
not represent and should not be considered as an alternative to
net income or cash flow from operations, as determined by
U.S. GAAP, and our calculation of Adjusted EBITDA may not
be comparable to that reported by other companies. Adjusted
EBITDA is included herein because it is an alternative measure
of our liquidity performance and indebtedness.
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Revenues
Our revenues were driven primarily by the number of vessels we
operate, the number of operating days during which our vessels
generate revenues, and the amount of daily charter hire that our
vessels earn under charters. These, in turn, are affected by a
number of factors, including the following:
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The nature and duration of our charters;
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The amount of time that we spent repositioning its vessels;
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The amount of time that our vessels spent in dry-dock undergoing
repairs;
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47
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Maintenance and upgrade work;
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The age, condition and specifications of our vessels;
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The levels of supply and demand in the drybulk carrier
transportation market; and
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Other factors affecting charter rates for drybulk carriers under
voyage charters.
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A voyage charter is generally a contract to carry a specific
cargo from a load port to a discharge port for an
agreed-upon
total amount. Under voyage charters, voyage expenses such as
port, canal and fuel costs are paid by the vessel owner. A trip
time charter is a short-term time charter for a voyage between
load port(s) and discharge port(s) under which the charterer
pays fixed daily hire rate on a semi-monthly basis for use of
the vessel. A period time charter is charter for a vessel for a
fixed period of time at a set daily rate. Under trip time
charters and time charters, the charterer pays voyage expenses.
Under all three types of charters, the vessel owners pay for
vessel operating expenses, which include crew costs, provisions,
deck and engine stores, lubricating oil, insurance, maintenance
and repairs. The vessel owners are also responsible for each
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.
Vessels operating in the spot charter market generate revenues
that are less predictable, but can yield increased profit
margins during periods of improvements in drybulk rates. Spot
charters also expose vessel owners to the risk of declining
drybulk rates and rising fuel costs. Our vessels were chartered
on period time charters as well as in the spot market during the
six months ended June 30, 2009.
A standard maritime industry performance measure is the
time charter equivalent or TCE. TCE
rates are defined as our time charter revenues less voyage
expenses during a period divided by the number of our available
days during the period, which is consistent with industry
standards. Voyage expenses include port charges, bunker (fuel
oil and diesel oil) expenses, canal charges and commissions. Our
average TCE rate for financial year 2008 and the six months
ended June 30, 2009 was $25,719 and $17,441, respectively.
Vessel
Operating Expenses
Vessel operating expenses include crew wages and related costs,
the cost of insurance, expenses relating to repairs and
maintenance, the costs of spares and consumable stores, tonnage
taxes and other miscellaneous expenses. Vessel operating
expenses generally represent costs of a fixed nature.
Seasonality
Coal, iron ore and grains, which are the major bulks of the
drybulk shipping industry, are somewhat seasonal in nature. The
energy markets primarily affect the demand for coal, with
increases during hot summer periods when air conditioning and
refrigeration require more electricity and towards the end of
the calendar year in anticipation of the forthcoming winter
period. The demand for iron ore tends to decline in the summer
months because many of the major steel users, such as automobile
makers, reduce their level of production significantly during
the summer holidays. Grains are completely seasonal as they are
driven by the harvest within a climate zone. Because three of
the five largest grain producers (the United States of America,
Canada and the European Union) are located in the northern
hemisphere and the other two (Argentina and Australia) are
located in the southern hemisphere, harvests occur throughout
the year and grains require drybulk shipping accordingly.
48
Principal
Factors Affecting Our Business
The principal factors that affected our financial position,
results of operations and cash flows include the following:
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Number of vessels owned and operated;
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Charter market rates and periods of charter hire;
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Vessel operating expenses and direct voyage costs, which are
incurred in both U.S. dollars and other currencies,
primarily Euros;
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Depreciation expenses, which are a function of vessel cost, any
significant post-acquisition improvements, estimated useful
lives, estimated residual scrap values, and fluctuations in the
market value of our vessels;
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Financing costs related to indebtedness associated with the
vessels; and
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Fluctuations in foreign exchange rates.
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Performance
Indicators
The following performance measures were derived from our
unaudited condensed consolidated financial statements for the
six months ended June 30, 2009 and 2008, included elsewhere
in this prospectus. The historical data included below is not
necessarily indicative of our future performance.
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Six Months Ended
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June 30,
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2009
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2008
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(U.S. dollars in thousands, except
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per diem amounts)
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Adjusted EBITDA(1)
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$
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17,589
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$
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12,462
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Fleet Data:
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Average number of vessels(2)
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9.00
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6.04
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Ownership days(3)
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1,629
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1,100
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Available days(4)
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1,609
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1,046
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Operating days(5)
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1,588
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949
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Fleet utilization(6)
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97.5
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%
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86.3
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%
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Average Daily Results:
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Average TCE rate(7)
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$
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17,441
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$
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23,541
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Vessel operating expenses(8)
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4,543
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6,710
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Management fees(9)
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514
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711
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General and administrative expenses(10)
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1,117
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1,415
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Total vessel operating expenses(11)
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5,057
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7,421
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(1) |
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Adjusted EBITDA reconciliation to net income: |
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Adjusted EBITDA represents net earnings before interest, taxes,
depreciation and amortization, change in the fair value of
derivatives and loss on debt extinguishment. Adjusted EBITDA
does not represent and should not be considered as an
alternative to net income or cash flow from operations, as
determined by U.S. GAAP and our calculation of adjusted
EBITDA may not be comparable to that reported by other |
49
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companies. Adjusted EBITDA is included herein because it is an
alternative measure of our liquidity, performance and
indebtedness. The following is a reconciliation of adjusted
EBITDA to net income: |
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Six Months Ended
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June 30,
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2009
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2008
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( U.S. dollars in thousands)
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Net income
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$
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6,757
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$
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4,470
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Depreciation and amortization
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8,860
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5,314
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Change in derivatives fair value
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(460
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)
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54
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Interest and finance costs, net
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2,432
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1,985
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Loss on debt extinguishment
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639
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Adjusted EBITDA
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$
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17,589
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$
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12,462
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(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 technical breakdowns and unforeseen
circumstances. The shipping industry uses operating days to
measure the aggregate number of days in a period during which
vessels are available to 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) |
|
TCE is a non-GAAP 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 and commissions) 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 |
50
|
|
|
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(U.S. dollars in thousands, except
|
|
|
|
per diem amounts)
|
|
|
Operating revenues
|
|
$
|
29,923
|
|
|
$
|
23,755
|
|
Voyage expenses and commissions
|
|
|
(2,227
|
)
|
|
|
(1,415
|
)
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
27,696
|
|
|
|
22,340
|
|
Operating days
|
|
|
1,588
|
|
|
|
949
|
|
|
|
|
|
|
|
|
|
|
Time charter equivalent daily rate
|
|
$
|
17,441
|
|
|
$
|
23,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) |
|
Average daily vessel operating expenses, which includes crew
wages and 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: |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(U.S. dollars in thousands, except per diem amounts)
|
|
|
Vessel operating expenses
|
|
$
|
7,401
|
|
|
$
|
7,381
|
|
Ownership days
|
|
|
1,629
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
Daily vessel operating expenses
|
|
$
|
4,543
|
|
|
$
|
6,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) |
|
Daily management fees are calculated by dividing total
management fees charged on ships owned by ownership days for the
relevant time period. |
|
(10) |
|
Average daily general and administrative expenses are calculated
by dividing general and administrative expenses by operating
days for the relevant period. |
|
(11) |
|
Total vessel operating expenses, or TVOE, is a measurement of
our total expenses associated with operating our vessels. TVOE
is the sum of daily vessel operating expense and daily
management fees. Daily TVOE is calculated by dividing TVOE by
fleet ownership days for the relevant time period. |
Results
of Operations
Six
Months Ended June 30, 2009 as Compared to Six Months Ended
June 30, 2008
REVENUES Operating revenues for the six
months ended June 30, 2009 were $29,923,000 compared to
$23,755,000 generated during the comparable period in 2008. The
increase of $6,168,000 is primarily attributable to an increase
in the average number of vessels in our fleet to nine in the six
months ended June 30, 2009 compared to six in the same
period in 2008.
OPERATING EXPENSES Vessel operating expenses,
which include crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs, totaled
$7,401,000 in the six months ended June 30, 2009 as
compared to $7,381,000 in the six months ended June 30,
2008. This small increase of $20,000 in vessel operating
expenses, despite the considerable increase of the average
number of vessels owned to nine during the six-month period
ended June 30, 2009 as compared to six during the six-month
period ended June 30, 2008, is a result of our monitoring
of vessel operating expenses and the more efficient operation of
our vessels resulting from repairs completed in 2008 to bring
the newly purchased vessels to our operational standards.
51
Consequently, the total daily vessel operating expenses per
vessel owned, including management fees, were $5,057 for the six
months ended June 30, 2009 as compared to $7,421 for the
comparable period in 2008, a decrease of 31.9%.
VOYAGE EXPENSES AND COMMISSIONS Voyage
expenses, which include bunkers, cargo expenses, port expenses,
port agency fees, tugs, extra insurance and various expenses,
were $638,000 for the six months ended June 30, 2009, as
compared to $255,000 for the six months ended June 30,
2008. Six of our vessels were chartered in the spot market
during the six months ended June 30, 2009. The variation in
voyage expenses reflects mainly the bunkers delivery
redelivery transactions which expired during the six-month
period of 2009.
For the six months ended June 30, 2009, commissions charged
amounted to $1,589,000 as compared to $1,160,000 for the six
months ended June 30, 2008. The commission fees represent
commissions paid to Free Bulkers and unaffiliated third parties.
Commissions paid to Free Bulkers equal 1.25% of gross hire or
freight for vessels chartered through Safbulk commencing with
the charters secured by it for the M/V Free Envoy and the
M/V Free Destiny in March 2007. This agreement is for an
initial one-year term and renews automatically until terminated
by either party, with or without cause, upon one months
notice. The increase of $429,000 over the six months ended
June 30, 2009 as compared to the same period in 2008 relate
directly to the increase in charter revenues in the respective
period.
DEPRECIATION AND AMORTIZATION For the
six-month period ended June 30, 2009, depreciation expense
totaled $8,086,000 as compared to $5,040,000 for the same period
in 2008. The increase in depreciation expense resulted from the
growth of our fleet from an average of six to an average of nine
vessels and the related investment in fixed assets. This
increase in depreciation expense has been mitigated by the
change of our depreciation policy as described below. For the
six-month period ended June 30, 2009, amortization of
dry-dockings and special survey costs totaled $774,000, an
increase of $500,000 over the expenses reported in the
comparable period of 2008. During the period ended June 30,
2008, we amortized only three vessels scheduled
dry-dockings and special surveys. However, during the period
ended June 30, 2009, we amortized five vessels
scheduled dry-docking and special surveys. As a result,
amortization of deferred dry-dockings and special survey costs
increased for the period ended June 30, 2009.
Effective April 1, 2009, and following our reassessment of
the useful lives of our assets, our vessels useful life
was increased from 27 to 28 years. Our estimate was based
on the current vessels operating condition and the
conditions prevailing in the market for same type of vessels.
The effect of this change in accounting estimate, which did not
require retrospective adoption as per SFAS No. 154
Accounting Changes and Error Corrections, was to
increase net income for the six-month period ended June 30,
2009 by $313,000 or $0.01 per share.
For the six-month periods ended June 30, 2009 and
June 30, 2008, back-log assets amortization expense
amounted to $907,000 and $0, respectively, and is included in
voyage revenue.
MANAGEMENT FEES Management fees for the six
months ended June 30, 2009 totaled $838,000, as compared to
$1,032,000, which included $782,000 of management fees and
$250,000 for accounting services, for the comparable period in
2008. The increase in management fees from $782,000 to $838,000
resulted from the fees charged in connection with the increased
number of vessels under the technical management by our
affiliate, Free Bulkers. Pursuant to the management agreements
related to each of our current vessels, we pay Free Bulkers a
monthly management fee equal to $15,000 per vessel (based on the
rate of $1.30 per Euro) from the date of the relevant purchase
memorandum of agreement. In September 2009 we amended these
management agreements with Free Bulkers to increase the monthly
technical management fee to $16,500 (based on $1.30 per Euro)
plus a fee of $400 per day for superintendant attendance. In
addition, we reimburse at cost the travel and other personnel
expenses of the Free Bulkers staff, including the per diem
charged by Free Bulkers, when Free Bulkers employees are
required to attend our vessels at port, both prior to and after
taking delivery. These agreements have no specified termination
date. We anticipate that Free Bulkers would manage any
additional vessels that we may acquire in the future on
comparable terms. We believe that the management fees charged by
Free Bulkers are comparable to those charged by unaffiliated
management companies.
52
GENERAL AND ADMINISTRATIVE EXPENSES General
and administrative expenses, which include, among other things,
management remuneration, legal, audit, audit related expense,
international safety code compliance expenses, travel expenses,
communications expenses, accounting and financial reporting
fess, totaled $1,773,000 for the six months ended June 30,
2009 as compared to $1,306,000 for the six months ended
June 30, 2008. The difference was primarily due to the
change of the classification of accounting and financial
reporting fees account from management fees to
general and administrative expenses account.
STOCK-BASED COMPENSATION EXPENSE For the six
months ended June 30, 2009, compensation cost totaled
$6,000 as compared to $54,000 for the six months ended
June 30, 2008. Compensation costs reflect non-cash,
equity-based compensation of our executive officers valued by
the Black Scholes fair value method as of the date such options
were granted. As of June 30, 2009, there was $19,000 of
total unrecognized compensation cost related to non-vested
option-based compensation arrangements granted under our stock
option plan. The cost is expected to be recognized over a
weighted-average period of 1.48 years. No options vested
during the period ended June 30, 2009.
FINANCING COSTS Financing costs amounted to
$2,446,000 in the six months ended June 30, 2009, compared
to $2,520,000 in the six months ended June 30, 2008. The
decrease of $74,000 is mainly the result of the decreased
interest rates during 2009. Our financing costs represent
primarily the interest incurred, the amortized financing fees in
connection with the bank loans used for the acquisition of our
vessels, and the interest differential paid under the interest
rate swap contracts.
The amortization of financing costs for the six-month period
ended June 30, 2009 totaled $220,000 or an increase of
$120,000 over the amortized expenses reported in the comparable
period of 2008. The increase was mainly due to the amortized
portion of the finance costs related to the HBU overdraft
facility IV.
NET INCOME Net income for the six months
ended June 30, 2009 was $6,757,000 as compared to
$4,470,000 for the six months ended June 30, 2008. The
substantial increase in net income for the six-month period
resulted primarily from increased revenues due to the increased
number of operating vessels.
Year
ended December 31, 2008 (fiscal 2008) as
compared to year ended December 31, 2007
(fiscal 2007)
REVENUES Operating revenues for fiscal 2008
were $66,689,000, an increase of $46,542,000 over fiscal 2007.
Revenues increased primarily as a result of the increase in the
size of our fleet, and the delay in the receipt of time charter
earnings of approximately $3,232,000 that were not received
during 2007 because of the M/V Free Jupiters
casualty incident in September 2007.
OPERATING EXPENSES Vessel operating expenses,
which include crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs, totaled
$16,354,000 for fiscal 2008 as compared to $6,001,000 for fiscal
2007. This increase of $10,353,000 in vessel operating expenses
reflects primarily the increase in the size of our fleet to nine
vessels at the end of fiscal 2008 from five vessels at the end
of fiscal 2007. These expenses in fiscal 2008 also include
approximately $182,000 associated with two unscheduled repairs
during fiscal 2008, causing expenses beyond normal operation and
maintenance costs (i.e., main engine turbocharger of the M/V
Free Envoy and the main engine of the M/V Free
Impala). As a result, the total daily vessel operating
expenses per vessel owned, including the management fees charged
by our affiliate, Free Bulkers, was $6,811 for fiscal 2008 and
$5,702 for fiscal 2007, a net increase of $1,109, or 19.45%, for
fiscal 2008.
VOYAGE EXPENSES Voyage expenses, which
include bunkers, cargo expenses, port expenses, port agency
fees, tugs, extra insurance and various expenses, were $527,000
for fiscal 2008 as compared to $267,000 for fiscal 2007. The
increase in voyage expenses reflected primarily the shore crane
hire cost for an amount of $53,000 and bunkers costs of $189,000
due to delivery and re-delivery operations during fiscal 2008.
DEPRECIATION AND AMORTIZATION For fiscal
2008, depreciation expense totaled $13,349,000 as compared to
depreciation expense of $4,435,000 for fiscal 2007. The increase
in depreciation expense resulted primarily from the increase in
the number of our vessels from five to nine vessels during
fiscal 2008. For
53
fiscal 2008 amortization of dry-docking and special survey costs
and amortization of financing costs totaled $1,141,000, an
increase of $384,000 compared to $757,000 reported in fiscal
2007, primarily resulting from the financing costs related to
the availability of the credit facilities secured for the
purchase of the new vessels and the incurrence of costs for
dry-docking and special survey for the M/V Free Envoy,
the M/V Free Hero, and the M/V Free Goddess during
fiscal 2008.
MANAGEMENT FEES Management fees for fiscal
2008 totaled $2,634,000 as compared to $875,000 for fiscal 2007.
The increase resulted primarily from the larger number of
vessels under management during fiscal 2008, from an additional
fee of $300,000 charged by Free Bulkers as partial contribution
for the refurbishment of our office space in December 2008 and
from an increase in the annual fee from $500,000 to $1,200,000
commencing in October 2008 in connection with Free Bulkers
undertaking to provide additional services to FreeSeas including
execution and supervision of all of FreeSeas operations
under the direction and supervision of the FreeSeas board.
Commencing on January 1, 2008, an annual fee of $500,000
was paid to Free Bulkers quarterly as compensation for services,
including but not limited to, services related to our accounting
and financial reporting obligations and implementation of
Sarbanes-Oxley internal control over financial reporting
procedures, general and administrative operation, the purchase
and sale of vessels, and negotiations with our lenders. On
October 1, 2008, in connection with Free Bulkers
undertaking to provide additional services to FreeSeas,
including execution and supervision of all of our operations
under the direction and supervision of our board, the annual fee
of $500,000 was increased to $1,200,000. An additional fee of
$300,000 was paid to Free Bulkers as partial contribution for
the refurbishment of our office space. Management fees are paid
to our affiliate, Free Bulkers, for the technical management of
our vessels and for accounting services related to the
vessels operations and our public financial reporting
obligations. 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 and ending two
months after delivery of the vessel to its new owners. In
addition, we reimburse at cost the travel and other personnel
expenses of the Free Bulkers staff, including the per diem paid
by Free Bulkers, when Free Bulkers employees are required
to attend our vessels at port, 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 fiscal 2008, commissions charged
totaled $3,383,000 as compared to $1,095,000 for fiscal 2007.
These commissions represent commissions paid to Free Bulkers and
other related and unrelated 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 $2,288,000 for fiscal 2008 as
compared to fiscal 2007 related 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 $2,756,000 in comparison
with $2,111,000 for fiscal 2007. Our general and administrative
expenses increased by $645,000 mainly due to managers and
directors fees and expenses, which increased by $163,000,
rent and utilities, which increased by $139,000, legal expenses,
which increased by $130,000, and investor relations expenses,
which increased by $200,000.
STOCK-BASED COMPENSATION EXPENSE For fiscal
2008 stock compensation expenses totaled $107,000 as compared to
$96,000 for fiscal 2007. Compensation costs reflect non-cash,
equity based compensation of our executive officers.
INTEREST AND FINANCE COSTS For fiscal 2008,
financing costs were $6,209,000 compared to $3,204,000 for
fiscal 2007. Our financing costs represent primarily the
interest paid in connection with the
54
bank loans for our vessels. The increase in financing costs
resulted from financing costs incurred to secure the financing
sources related to the acquisition of new vessels.
LOSS ON DEBT EXTINGUISHMENT During fiscal
2008, we expensed the unamortized financing costs of $639,000 in
comparison with a related expenses incurred for fiscal 2007 of
$2,570,000. The $639,000 unamortized financing cost relates to
the refinancing of the HSH Nordbank AG loan facility with a new
credit facility from Credit Suisse.
CHANGE IN FAIR VALUE OF DERIVATIVES During
fiscal 2007 we entered into a swap agreement with respect to the
loan from HSH Nordbank AG, which swap converted this loan into a
fixed rate loan. The interest rate swap did not qualify for
hedge accounting; therefore, the marked to market
fair value adjustment is recorded in the statement of income. We
recorded an unrealized loss of $1,061,000 during fiscal 2008. On
April 9, 2008, we entered into a novation for this swap
agreement in connection with the refinancing of the loan from
HSH Nordbank AG with a new credit facility from Credit Suisse.
NET INCOME/(LOSS) Net income for fiscal 2008
was $19,192,000 as compared to a net loss of $156,000 for fiscal
2007. The significant increase in our net income reflected
primarily the increased revenues due to the increased number of
vessels and due to the favorable charter rates environment
prevailing during the first nine months of 2008.
Year
ended December 31, 2007 (fiscal 2007) as
compared to year ended December 31, 2006
(fiscal 2006)
REVENUES Operating revenues for fiscal 2007
were $20,147,000, an increase of $8,420,000 over fiscal 2006.
Revenues increased primarily as a result of the increase the
size of our fleet and the improved time charter rates, despite
the deferral of time charter earnings of approximately
$3,232,000 that were not received during 2007 by the M/V Free
Jupiters casualty incident in September 2007.
OPERATING EXPENSES Vessel operating expenses,
which include crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs, totaled
$6,001,000 for fiscal 2007 as compared to $4,483,000 for fiscal
2006. This increase of $1,518,000 in vessel operating expenses
reflects primarily the increase in the size of our fleet to five
vessels at the end of fiscal 2007 from three vessels at the end
of 2006. These expenses in 2007 also include 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; and the main generator of the M/V Free
Destiny) and $100,000 of insurance deductibles associated
with the grounding casualty of M/V Free Jupiter in
September 2007 that were partially off set by reductions in
certain operating expenses while the vessel was in dry-dock for
repairs. Consequently, the total daily vessel operating expenses
per vessel owned, including the management fees paid to our
affiliate, Free Bulkers, was $5,702 for fiscal 2007, as compared
to $4,587 for fiscal 2006, an increase of 24%.
VOYAGE EXPENSES Voyage expenses, which
include bunkers, cargo expenses, port expenses, port agency
fees, tugs, extra insurance and various expenses, were $267,000
for fiscal 2007 as compared to $689,000 for fiscal 2006. The
decrease in voyage expenses reflected primarily the occurrence
of only one twenty-five day voyage charter during fiscal 2007.
DEPRECIATION AND AMORTIZATION For fiscal
2007, depreciation expense totaled $4,435,000 as compared to
$4,479,000 for fiscal 2006. The slight 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 in April 2007. For fiscal 2007,
amortization of dry-dockings, special survey costs and
amortization of financing costs totaled $757,000, an increase of
$315,000 from the expense reported in fiscal 2006, reflecting
primarily the financing costs related to the availability of the
credit facilities secured for the purchase of the new vessels.
MANAGEMENT FEES Management fees for fiscal
2007 totaled $875,000 as compared to $540,000 for fiscal 2006.
The increase resulted primarily from the greater number of
vessels under management during
55
fiscal 2007 and 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 accounting services related to the vessels
operations and our public financial reporting obligations.
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 and ending two months after
delivery of the vessel to its new owners. In addition, we
reimburse at cost the travel and other personnel expenses of the
Free Bulkers staff, including the per diem paid by Free Bulkers,
when Free Bulkers employees are required to attend our
vessels at port, 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 fiscal 2007, commissions paid
totaled $1,095,000 as compared to $799,000 for fiscal 2006.
These commissions 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 $296,000 for fiscal 2007 as
compared to fiscal 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 $2,111,000 for fiscal 2007,
as compared to $1,925,000 for fiscal 2006. Our general and
administrative expenses increased by $186,000 due to the
incurrence of $448,891 of advisory fees to third parties in
2007, partly off-set by the reduction resulting from the
departure of two of our executive officers in January 2007.
STOCK-BASED COMPENSATION EXPENSE For fiscal
2007, stock-based compensation expense totaled $96,000 as
compared to $651,000 for fiscal 2006. Compensation costs reflect
non-cash, equity based compensation of our executive officers.
The decrease is primarily a result of the departure of two of
our executive officers in January 2007 and forfeitures of their
stock options.
INTEREST AND FINANCE COSTS For fiscal 2007,
financing costs were $3,204,000, an increase of $2,200,000 from
the $1,004,000 for fiscal 2006. Our financing costs represent
primarily the interest paid in connection with the bank loans
for our vessels. The increase in financing costs resulted from
financing costs incurred to secure the financing sources related
to the acquisition of new vessels.
LOSS ON DEBT EXTINGUISHMENT During the last
quarter of 2007, we expensed the unamortized financing costs
related to repaid loans of $63,074,000 in accordance with their
terms.
CHANGE IN FAIR VALUE OF DERIVATIVES During
fiscal 2007, we entered into a swap agreement with respect to
the loan from HSH Nordbank AG, which swap converted such loan
into a fixed rate loan. The interest rate swaps did not qualify
for hedge accounting, therefore, the marked to
market fair value adjustment is recorded in the statement
of income. We recorded an unrealized loss of $749,000 during
fiscal 2007. We entered into a novation for those swap
agreements in connection with the refinancing of the loan from
HSH Nordbank with a credit facility from Credit Suisse.
NET (LOSS) Net loss for fiscal 2007 was
$156,000 as compared to net loss of $3,324,000 for fiscal 2006.
The significant reduction in our net loss reflected primarily
the increased revenues due to increased charter rates,
recognition of a gain $1,369,000 from the sale of the M/V
Free Fighter and somewhat 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 stock-based compensation expense of $555,000 for
fiscal 2007 as compared to the fiscal 2006.
56
Liquidity
and Capital Resources
We have historically financed our capital requirements from
equity provided by our shareholders, operating cash flows and
long-term borrowings. We have primarily used our funds for
capital expenditures to acquire and maintain our fleet, comply
with international shipping standards and environmental laws and
regulations, fund working capital requirements, make principal
repayments on outstanding loan facilities, and payment of
dividends. We expect to continue to rely upon operating cash
flows, long-term borrowings, and the working capital available
to us, as well as possible future equity financings, to fund our
future operations and possible growth. In addition, to the
extent that the options and warrants currently issued are
subsequently exercised, the proceeds from those exercises would
provide us with additional funds.
Because of the recent global economic downturn that has affected
the international drybulk industry we may not be able to obtain
financing either from new credit facilities or the equity
markets. Therefore, in the first quarter of 2009, our board of
directors suspended the payment of dividends, so as to retain
cash from operations to fund our working capital needs, to
service our debt and to fund possible vessel acquisitions
depending on market conditions and opportunities. We believe
that this suspension will enhance our future flexibility by
permitting cash flow that would have been devoted to dividends
to be used for opportunities that may arise in the current
marketplace.
The drybulk carriers we owned had an average age of
approximately 14 years as of June 30, 2009. Effective
April 1, 2009, and following our reassessment of the useful
lives of our assets, the vessels useful life was increased
from 27 to 28 years. Our estimate was based on the current
vessels operating condition and the conditions prevailing
in the market for same type of vessels. The effect of this
change in accounting estimate, which did not require
retrospective adoption as per SFAS No. 154
Accounting Changes and Error Corrections was to
increase net income for the six-month periods ended
June 30, 2009 by $313 or $0.01 per share. However,
economics, rather than a set number of years, determines the
actual useful life of a vessel. As a vessel ages, the
maintenance costs rise particularly with respect to the cost of
surveys. So long as the revenue generated by the vessel
sufficiently exceeds its maintenance costs, the vessel will
remain in use. If the revenue generated or expected future
revenue does not sufficiently exceed the maintenance costs, or
if the maintenance costs exceed the revenue generated or
expected future revenue, then the vessel owner usually sells the
vessel for scrap.
The M/V Free Destiny, which is 26.7 years old,
underwent its scheduled dry-dock and special survey in
October/November 2007 and its next intermediate dry-docking is
scheduled for the third quarter 2010. The
M/V Free
Envoy, which is 25.1 years old, completed its special
survey dry-docking on June 30, 2008 and its next
intermediate dry-docking is scheduled for 2011. If future
dry-docking surveys do not require us to make extensive capital
outlays to keep the vessels profitably operating, we will
continue the operation of M/V Free Destiny and the M/V
Free Envoy and will extend their estimated useful lives;
otherwise, it is likely that these vessels will be disposed of
and replaced by younger vessels.
Our business is capital intensive and our future success will
depend on our ability to maintain a high-quality fleet through
the timely acquisition of additional vessels and the possible
sale of selected vessels. Such acquisitions will be principally
subject to managements expectation of future market
conditions as well as our ability to acquire drybulk carriers on
favorable terms and secure partial financing at appropriate
terms.
As of June 30, 2009, we are of the opinion that our working
capital is sufficient for our present requirements. We intend to
use the net proceeds of this offering to purchase additional
vessels, for the repayment of debt and for additional general
working capital purposes. See Use of Proceeds.
Cash
Flows
Six
Months Ended June 30, 2009 as Compared to Six Months Ended
June 30, 2008
OPERATING ACTIVITIES Net cash from operating
activities increased by $8,139,000 from $12,851,000 for the six
months ended June 30, 2009, as compared to $4,712,000 of
net cash used for operating activities in the six months ended
June 30, 2008. This is attributable to the increased
revenues due to the increased number of available days.
57
INVESTING ACTIVITIES We have not been engaged
into any major investing activities during the six months ended
June 30, 2009 as compared to $84,090,000 for the six months
ended June 30, 2008 associated with the acquisition of the
M/V Free Knight on March 19, 2008 for the purchase
price of $39,250,000, exclusive of commissions and pre-purchase
expenses, with the acquisition of the M/V Free Impala on
April 2, 2008 for the purchase price of $37,500,000,
exclusive of commissions and pre-purchase expenses and with the
advance of $6,520,000 paid for the acquisition of the M/V
Free Lady on July 7, 2008 for a purchase price of
$65,200,000.
FINANCING ACTIVITIES The cash used in
financing activities during the six months ended June 30,
2009 was $14,138,000 as compared to cash provided by $37,440,000
from financing activities for the six months ended June 30,
2008, a net decrease of $51,578,000 attributable mainly to the
proceeds from the HBU rollover eight-year loan facility and the
proceeds from the FBB loan facility we utilized for the purchase
of the M/V Free Knight and the purchase of the M/V
Free Impala respectively.
Fiscal
2008 as Compared to Fiscal 2007
We consider highly liquid investments such as time deposits with
an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents are primarily held in
U.S. dollars. The decrease in fiscal year 2008 as compared
to fiscal year 2007 was attributable to the acquisition of four
additional newer built vessels in 2008: the Handysize vessels
the M/V Free Knight on March 19, 2008 for the
purchase price of $39,250,000, exclusive of commission and
pre-purchase expenses, and the M/V Free Impala on
April 2, 2008 for a purchase price of $37,500,000; the
Handymax vessel the M/V Free Lady on July 7, 2008
for a purchase price of $65,200,000; and the Handysize vessel
the M/V Free Maverick on September 1, 2008 for a
purchase price of $39,600,000. These acquisitions were partly
financed by bank debt and the remainder of the purchase prices
were paid from our available cash on hand.
OPERATING ACTIVITIES Net cash from operating
activities increased by $27,492,000, or 542.1%, to $32,563,000
during fiscal 2008 as compared to $5,071,000 during fiscal 2007.
This increase was primarily attributable to the increase in
charter revenues and the increase in the number of vessels in
2008. Net cash from operating activities increased by
$3,993,000, or 370.4%, to $5,071,000 during fiscal 2007 as
compared to $1,078,000 during fiscal 2006. This increase
reflected primarily the increase in charter revenues received in
2007.
INVESTING ACTIVITIES We used $182,539,000 of
cash in investing activities during fiscal 2008 as compared to
$86,979,000 used in investing activities during fiscal 2007. The
increase was primarily a result of the purchases of the M/V
Free Knight, the M/V Free Impala, the M/V Free
Lady and the M/V Free Maverick. We used $86,979,000
of cash in investing activities during fiscal 2007 as compared
to no cash used in investing activities during fiscal 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, which was offset by
the proceeds received from the sale of the M/V Free
Fighter.
FINANCING ACTIVITIES Net cash from financing
activities during fiscal 2008 was $89,960,000 and consists of
$153,650,000 obtained from long-term loans to finance the
acquisition of additional vessels, $13,157,000 in cash dividends
paid on our common stock, and $49,600,000 of payments on bank
loans. Net cash from financing activities during fiscal 2007 was
$144,930,000, $104,743,000 from a long-term loan obtained to
finance the acquisition of additional vessels, $95,153,000 in
net proceeds from our public offering of common stock in 2007,
and $14,000,000 of proceeds from a shareholder loan, which
shareholder loan was repaid in full in 2007. 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.
Long-Term
Debt
We and our subsidiaries have obtained financing from affiliated
and unaffiliated lenders for our vessels.
58
HBU
Credit Facility
On August 12, 2008, we amended our existing 2008 credit
facility with HBU, and were granted a new credit facility of
$34,600,000 from HBU in addition to the then-outstanding
facility of $32,125,000. The breakdown of the facility amount of
$66,725,000 is as follows: (i) the pre-existing overdraft
facility I in the outstanding amount of $2,500,000, which amount
was reduced to $0 as December 2008; (ii) an unused
overdraft facility II in the amount of $1,375,000, the
availability of which will be reduced quarterly by $125,000
beginning three months after the first draw down date;
(iii) an overdraft facility III in the amount of
$3,000,000 which can be drawn down when the overdraft
facility IV has been repaid and, except for earlier
alteration the limit of the overdraft facility III, will be
reduced to zero on April 1, 2016; (iv) an overdraft
facility IV in the amount of $34,600,000, which has been
used to finance a portion of the purchase price of the M/V
Free Maverick; and (v) the then-outstanding amount
of $25,250,000 of the rollover eight-year loan facility, the
original principal amount of which was $27,000,000. The
$27,000,000 was drawn on March 18, 2008 to finance a
portion of the purchase price of the M/V Free Knight.
On March 20, 2009, we entered into a term sheet with HBU,
pursuant to which HBU agreed to refinance the balloon payment
due on August 1, 2009 on overdraft facility IV
amounting to $27,100,000 with a new 3.5 year facility which
is payable in 13 quarterly installments of $600,000 beginning on
August 1, 2009 and one balloon payment of $19,300,000 on
November 1, 2012. Pursuant to this term sheet, the facility
would bear interest at the rate of 3.00% above LIBOR, increased
by a liquidity premium to be determined following
the signing of the restated agreement. The existing conditional
HBU overdraft facility III amounting to $3,000,000 was
terminated upon the refinancing of the balloon payment in August
2009. Based on this term sheet, HBU agreed to waive any breach
of the 70% loan to value ratio in our existing credit agreements
during the period from October 1, 2008 through July 1,
2010. A new value to loan covenant ratio was introduced to the
existing credit agreement, as well as to the new $27,100,000
facility and is as follows: (i) 100% as per July 1,
2010, (ii) 110% as per July 1, 2011, (iii) 120%
as per July 1, 2012, (iv) 125% as per
December 31, 2012. In addition, commencing March 1,
2009, interest due on the continuing term loan and overdraft
facilities increased. In May 2009, we initiated discussions with
HBU in order to obtain a waiver for the covenant breaches
related with the interest coverage ratio and debt service
coverage ratio, which according to management estimates, it is
probable would not be met in the
12-month
period following the balance sheet date. These discussions were
concluded on July 17, 2009 when we obtained a waiver
amending the terms of these covenants for a period up to and
including December 31, 2010. (see Loan Agreement
Covenants and Waivers below).
As of June 30, 2009, the outstanding loan balances under
the amended HBU facility totaled $19,250,000 for the M/V Free
Knight, $27,100,000 for the M/V Free Maverick and $0
for the M/V Free Destiny. The remaining undrawn
availability as of June 30, 2009 totaled $875,000.
Effective September 15, 2009, we entered into an amended
and restated credit agreement and related agreements with HBU
based on the term sheet discussed above, amending the loan to
value ratio introduced in the term sheet and incorporating the
modified interest coverage and debt service coverage ratios
introduced in the waiver letter obtained on July 17, 2009
discussed below under Loan Agreement Covenants and
Waivers. The facility, as amended and restated, bears
interest at the rate of 4.25% above LIBOR, which includes the
liquidity premium described above.
Credit
Suisse Credit Facility
During 2008, Credit Suisse provided us with a $91,000,000
rollover loan facility in two tranches; (i) Tranche A
of $48,700,000, which amount was reduced by $5,000,000 on
July 31, 2009, for the refinancing of the
M/V Free
Hero, the M/V Free Goddess and the M/V Free
Jupiter. This facility replaced previous
financings of $68,000,000 received from HSH Nordbank under a
senior loan and from BTMU Capital Corporation under a
$21,500,000 junior loan; and (ii) Tranche B of
$42,300,000, which amount shall be reduced on July 31,
2009, for partly financing the acquisition of the M/V Free
Lady acquired on July 7, 2008. On March 23, 2009,
in connection with the waiver of certain loan covenants, Credit
Suisse increased the interest rate from March 23, 2009 to
March 31, 2010 to 2.25% above LIBOR.
59
FBB
Credit Facility
During 2008, we obtained a loan of $26,250,000 from FBB, to
partially finance the acquisition of the
M/V Free
Impala. As of June 30, 2009, this facility had an
outstanding balance of $23,250,000. On March 17, 2009, in
connection with the waiver of certain loan covenants, FBB
increased the interest rate to 2.00% above LIBOR and restricted
our ability to pay dividends through the end of the waiver
period.
As of June 30, 2009, our total indebtedness was
$146,850,000.
All of the above credit facilities bear interest at LIBOR plus a
margin, ranging from 2.00% to 4.25%, and are secured by
mortgages on the financed vessels and assignments of
vessels earnings and insurance coverage proceeds. They
also include affirmative and negative financial covenants of the
borrowers, including maintenance of operating accounts, minimum
cash deposits, minimum market values and minimum charter rates.
Each borrower is restricted under its respective loan agreement
from incurring additional indebtedness or changing the
vessels flags without the lenders consent, and
distributing earnings only in case of default under any credit
agreement.
Loan
Agreement Covenants and Waivers
Our loan agreements contain various financial covenants as
follows:
HBU
Credit Facility
The HBU facility required (i) the interest coverage ratio
should not be less than 2.5; (ii) the debt service coverage
ratio should not be less than 1.10; (iii) the gearing ratio
should not exceed 2.5; and (iv) the outstanding loan
balance should not be more than 70% of the fair market value of
the financed vessels.
On July 17, 2009, we agreed with HBU to an extension and
modification of the above-mentioned financial covenants. Current
interest coverage ratio and debt service ratio covenants have
been waived until January 1, 2011. Pursuant to the amended
and restated facility agreement we signed effective
September 15, 2009, the Interest Cover Ratio
will be defined as EBITD/net financing charges (instead of
EBIT/net financial charges) and is to be at least 3.75 up to and
including July 1, 2010; thereafter, the ratio must be at
least 3.00 up to and including December 31, 2010. The
Debt Service Ratio should not be less than 1.00.
These ratios will be calculated on a
12-month
rolling basis during the waiver period. The aforementioned
ratios will be reexamined for the year 2011 based on the
prevailing market conditions at that time. In addition, the new
value to loan covenant ratio, as ultimately agreed to in the
amended and restated facility agreement, is as follows:
(i) 70% from September 15, 2009 until and including
June 30, 2010, (ii) 100% from July 1, 2010 until
and including June 30, 2011, (iii) 110% from
July 1, 2011 until and including June 30, 2012,
(iv) 120% from July 1, 2012 until and including
December 30, 2012, and (v) 125% from December 31,
2012 and thereafter. In addition, pursuant to the amended and
restated facility agreement, an amount equal to 10% of any
capital market proceeds received by us (with a maximum of
$3,000,000 over the lifetime of the facility) shall be applied
to prepay the HBU facility. We may also required to make
additional prepayments if, based on our financial statements for
the fiscal year-end:
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if the value to loan ratio for a fiscal year is less than or
equal to 70%, we must prepay an amount equal to 75% of excess
cash for that fiscal year;
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if the value to loan ratio for a fiscal year is less than or
equal to 100% and greater than 70%, we must prepay an amount
equal to 50% of excess cash for that fiscal year;
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if the value to loan ratio for a fiscal year is less than 110%
and greater than 100%, we must prepay an amount equal to 25% of
excess cash for that fiscal year; and
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if the value to loan ratio for a fiscal year is equal to or
greater than 110%, no prepayment is required for that fiscal
year.
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60
Credit
Suisse Credit Facility
Under our Credit Suisse facility, we must maintain minimum cash
balance of $375,000 for each of our vessels covered by the loan
agreement; and the aggregate fair market value of the financed
vessels must not be less than 135% of the outstanding loan
balance.
FBB
Credit Facility
Under our FBB facility, we must maintain on average corporate
liquidity of at least $3,000,000; free cash balance as of
June 30, 2009 being $2,091,000. In addition, the leverage
ratio of FreeSeas, the corporate guarantor, should not at any
time exceed 68%; the ratio of EBITDA to net interest expense
must not be less than 3; and the fair market value of the
financed vessel must not be less than 130% of the outstanding
loan balance.
If we are not in compliance with the covenants in our loan
agreements such as the ones identified above, including due to a
sharp decline in the market value of our vessels, we may be at
risk of default under our loan agreements. If we default, our
lender would have the option of accelerating our loan, meaning
that we could be required to immediately pay the amount due on
our loan including accrued interest. If we were unable to pay
the accelerated indebtedness due, or to refinance under our loan
agreements, our lenders may foreclose on their liens, in which
case we would lose vessels in our fleet.
We may need to seek permission from our lenders in order to
engage in some corporate actions that would otherwise put us at
risk of default. Any declines in the market value of our vessels
and in the drybulk charter market may increase our risk of
default under the covenants described above. Our lenders
interests may be different from ours and we may not be able to
obtain our lenders permission or waivers when needed. This
may limit our ability to continue to conduct our operations, pay
dividends to you, finance our future operations, make
acquisitions or pursue business opportunities.
Waivers
Received as of June 30, 2009
As of June 30, 2009, we obtained the following waivers:
On March 17, 2009, FBB agreed to waive any breach of the
130% value to loan covenant for the mortgaged vessel and any
breach of the leverage ratio by the corporate guarantor from
January 1, 2009 until January 1, 2010. Further, FBB
has confirmed that no event of default had occurred as of
December 31, 2008. Effective as January 1, 2009, the
interest rate increased. In May 2009, we initiated discussions
with FBB in order to further extend the waiver related to the
value to loan covenant until July 1, 2010; this request was
approved on July 17, 2009, as described below.
On March 23, 2009, Credit Suisse agreed to waive any breach
of the 135% value to loan covenant from October 1, 2008
until March 31, 2010 and reduce the minimum charter rate
requirements. In consideration of the waiver, we agreed to a
prepayment of $5,000,000 on July 31, 2009. In addition,
from March 23, 2009 until March 31, 2010, the interest
rate on the loan shall increase, the amounts available under
Tranche A and B will be reduced on July 31, 2009 and
we are restricted from paying dividends.
Waivers
Received Subsequent to June 30, 2009
On July 17, 2009, we obtained from HBU and FBB extensions
and further modifications of certain financial covenants as
follows:
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HBU: Current interest coverage ratio and debt
service ratio covenants waived until January 1, 2011.
These ratios will be calculated on a
12-month
rolling basis. During the waiver period, Interest Cover
Ratio will be defined as EBITD/net financing charges
(instead of EBIT/net financial charges) and is to be at least
3.75 up to and including July 1, 2010; thereafter the ratio
to be at least 3.00 up to and including December 31, 2010;
and Debt Service Ratio should not be less than 1.00.
The aforementioned ratios will be reexamined for the year 2011
based on the prevailing market conditions at that time.
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FBB: The bank agreed to extend until
July 1, 2010 the waivers provided to us, as described above.
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61
Scheduled
Debt Repayments
The table below presents the repayment schedule of the
outstanding debt under the above credit facilities as of
June 30, 2009 and subsequently. The table reflects all
changes to the original debt repayment schedule resulting from
the waivers received from our lenders. Based on the waivers and
waiver renewals received above, all of the debt continues to be
classified as long-term, except for the principal payments
falling due in the next 12 months and the $10,890,000 with
Credit Suisse which has been recorded as current portion to
reflect the difference between todays vessel market value
and value to loan covenant requirement coming into effect in the
second quarter of 2010. These waivers expire between April 2010
and July 2010; there can be no assurance they will be extended,
if necessary.
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Long-Term Debt Repayment Due by Period
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More than
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Total
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Up to 1 Year
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1-3 Years
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3-5 Years
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5 Years
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(U.S. dollars in thousands)
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HBU
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$
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46,350
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$
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5,400
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$
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10,800
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$
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25,900
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$
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4,250
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Credit Suisse
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77,250
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23,890
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16,000
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16,000
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21,360
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FBB
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23,250
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3,000
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6,000
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6,000
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8,250
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As of June 30, 2009
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$
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146,850
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$
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32,290
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$
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32,800
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$
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47,900
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$
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33,860
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Quantitative
and Qualitative Disclosures 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. To mitigate this risk, we have entered into two
interest rate swap contracts (see Note 6 to our Unaudited
Condensed Consolidated Financial Statements included elsewhere
in this prospectus).
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 next six months of 2009 by approximately
$705,000 based upon our debt level in the second half of 2009
during which we had debt outstanding.
The following table sets forth for a period of five years the
sensitivity of the loans on each of the vessels owned by us
during the six-month period ended June 30, 2009 in
U.S. dollars to a 100-basis-point increase in LIBOR.
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Second
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Half of
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Vessel Name
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2009
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2010
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2011
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2012
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2013
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(U.S. dollars in thousands)
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Free Impala
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$
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113
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$
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202
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$
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171
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$
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141
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$
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110
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Free Knight/Free Destiny/Free Envoy
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96
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167
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137
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107
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76
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Free Hero/Free Goddess/Free Jupiter
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196
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347
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297
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247
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195
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Free Maverick
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135
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249
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225
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170
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Free Lady
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165
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298
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268
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238
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207
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Please see Managements Discussion and Analysis of
Financial Condition and Results of Operations Long
Term Debt for a full description of each of these loans.
Currency
and Exchange Rates
We generate all of our revenue in U.S. dollars. The
majority of our operating expenses are in U.S. dollars
except primarily for our management fees and our executive
office rental expenses which are denominated in
62
Euros. This difference could lead to fluctuations in net income
due to changes in the value of the U.S. dollar relative to
the Euro, but we do not expect such fluctuations to be material.
As of June 30, 2009, we had no open foreign currency
exchange contracts.
Inflation
We do not consider inflation to be a significant risk to direct
expenses in the current and foreseeable future.
Off-Balance
Sheet Arrangements
As of June 30, 2009, we did not have off-balance sheet
arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K
promulgated by the SEC.
Contractual
Obligations and Commercial Commitments
The following tables summarize our contractual obligations as of
June 30, 2009:
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Payments Due by Period
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Less than
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More than
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(U.S. dollars in thousands)
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Long-term debt
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$
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146,850
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|
|
$
|
32,290
|
|
|
$
|
32,800
|
|
|
$
|
47,900
|
|
|
$
|
33,860
|
|
Interest on variable-rate debt
|
|
|
21,727
|
|
|
|
5,415
|
|
|
|
9,467
|
|
|
|
5,002
|
|
|
|
1,843
|
|
Services fees to Free Bulkers
|
|
|
13,099
|
|
|
|
1,367
|
|
|
|
2,844
|
|
|
|
2,844
|
|
|
|
6,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
181,676
|
|
|
$
|
39,072
|
|
|
$
|
45,111
|
|
|
$
|
55,746
|
|
|
$
|
41,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table does not include our share of the monthly rental
expenses for our offices of approximately Euro 10,000. The
rental agreement expires on November 11, 2011.
In September 2009, we amended our services agreement with Free
Bulkers to increase the annual fee from $1,200,000 to $1,422,000
(based on $1.35 per Euro). Effective October 1, 2009, we
will pay an annual fee of $1,422,000.
63
BUSINESS
Overview
We are an international drybulk shipping company incorporated
under the laws of the Republic of the Marshall Islands with
headquarters in Piraeus, Greece. Our existing fleet consists of
eight Handysize vessels and two Handymax vessels that carry a
variety of drybulk commodities, including iron ore, grain and
coal, which are referred to as major bulks, as well
as bauxite, phosphate, fertilizers, steel products, cement,
sugar and rice, or minor bulks. As of June 30,
2009, the aggregate dwt of our fleet is approximately 300,000
dwt and the average age of our fleet is approximately
14 years.
We are currently focusing on the Handysize and Handymax sectors,
which we believe are more versatile in the types of cargoes that
they can carry and trade routes they can follow, and offer less
volatile returns than larger vessel classes. We may, however,
acquire larger drybulk vessels if appropriate opportunities
present themselves.
We have contracted the management of our fleet to Free Bulkers,
a company owned by Ion G. Varouxakis, our chairman, chief
executive officer and president. Free Bulkers provides technical
management of our fleet, accounting services and office space
and has subcontracted the charter and post-charter management of
our fleet to Safbulk, 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.
Our
Fleet
The following table details the vessels in our fleet as of
October 21, 2009:
|
|
|
|
|
|
|
|
|
Vessel Name
|
|
Type
|
|
Built
|
|
Dwt
|
|
Employment
|
|
M/V Free Destiny
|
|
Handysize
|
|
1982
|
|
25,240
|
|
26 day trip time charter at $9,075 per day through November
2009
|
M/V Free Envoy
|
|
Handysize
|
|
1984
|
|
26,318
|
|
30-35 day trip time charter at $8,000 per day through
November 2009
|
M/V Free Goddess
|
|
Handysize
|
|
1995
|
|
22,051
|
|
Balance of time charter at $10,500 per day through
January/February 2010 (plus 50% profit sharing above $12,500 per
day)
|
M/V Free Hero
|
|
Handysize
|
|
1995
|
|
24,318
|
|
40-50 day trip time charter at $13,500 per day through
November 2009
|
M/V Free Impala
|
|
Handysize
|
|
1997
|
|
24,111
|
|
60 day trip time charter at $10,000 per day through
December 2009
|
M/V Free Jupiter
|
|
Handymax
|
|
2002
|
|
47,777
|
|
Balance of time charter at $25,216 per day through February 2011
and $28,000 per day through March 2011
|
M/V Free Knight
|
|
Handysize
|
|
1998
|
|
24,111
|
|
60-65 day trip time charter at $7,000 per day through
December 2009
|
M/V Free Lady
|
|
Handymax
|
|
2003
|
|
50,246
|
|
Balance of time charter at $51,150 per day through May 2010
|
M/V Free Maverick
|
|
Handysize
|
|
1998
|
|
23,994
|
|
60-65 day trip time charter at $9,000 or $11,00 per day
through December 2009
|
M/V Free Neptune
|
|
Handysize
|
|
1996
|
|
30,838
|
|
30-35 day trip time charter at $20,000 per day through
November 2009
|
64
All of our vessels except the M/V Free Neptune have been
provided as collateral to secure the bank loans discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Long Term
Debt.
The global drybulk carrier fleet is divided into three
categories based on a vessels carrying capacity. These
categories are:
|
|
|
|
|
Capesize. Capesize vessels have a carrying
capacity of 80,000 dwt. and above. Only the largest ports around
the world possess the infrastructure to accommodate vessels of
this size. Capesize vessels are primarily used to transport iron
ore or coal and, to a much lesser extent, grains, primarily on
long-haul routes.
|
|
|
|
Panamax. Panamax vessels have a carrying
capacity of between 60,000 and 79,999 dwt. These vessels are
designed to meet the physical restrictions of the Panama Canal
locks (hence their name Panamax the
largest vessels able to transit the Panama Canal, making them
more versatile than larger vessels). These vessels carry coal,
grains, and, to a lesser extent, minerals such as
bauxite/alumina and phosphate rock. As the availability of
capesize vessels has dwindled, panamaxes have also been used to
haul iron ore cargoes.
|
|
|
|
Handymax. Handymax vessels have a carrying
capacity of between 40,000 and 59,999 dwt. These vessels operate
on a large number of geographically dispersed global trade
routes, carrying primarily grains and minor bulks. The standard
vessels are usually built with
25-30 ton
cargo gear, enabling them to discharge cargo where grabs are
required (particularly industrial minerals), and to conduct
cargo operations in countries and ports with limited
infrastructure. This type of vessel offers good trading
flexibility and can therefore be used in a wide variety of bulk
and neobulk trades, such as steel products.
|
|
|
|
Handysize. Handysize vessels have a carrying
capacity of up to 39,999 dwt. These vessels are almost
exclusively carrying minor bulk cargo. Increasingly, vessels of
this type operate on regional trading routes, and may serve as
trans-shipment feeders for larger vessels. Handysize vessels are
well suited for small ports with length and draft restrictions.
Their cargo gear enables them to service ports lacking the
infrastructure for cargo loading and unloading.
|
The supply of drybulk carriers is dependent on the delivery of
new vessels and the removal of vessels from the global fleet.
The demand for drybulk carrier capacity is determined by the
underlying demand for commodities transported in drybulk
carriers which in turn is influenced by trends in the global
economy.
Vessel
Employment
We have employed and continue to employ our vessels in the spot
charter market, under trip time charts and period time charters.
A spot time charter, trip time charter and period time charter
are each contracts to charter a vessel for an agreed period of
time at a set daily rate. Under all three 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.
65
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, 2008, we had contracts
with four charterers, and during the six months ended
June 30, 2009, we have contracts with nine charterers. We
believe that our customer base is composed of established
charterers, including MUR Shipping FZCO and Premuda S.p.A.
Management
of Operations and Fleet
Pursuant to our amended and restated services agreement with
Free Bulkers, a Marshall Islands corporation owned by Ion G.
Varouxakis, our chairman, chief executive officer and president,
our operations are executed and supervised by Free Bulkers,
based on the strategy devised by the board of directors and
subject to the approval of our board of directors as described
below. The amended services agreement is for a term of
10 years and can be terminated by either party upon prior
written notice in certain circumstances. Free Bulkers is
entitled to a termination fee if the agreement is terminated
upon a change of control as defined in the
agreement. We pay Free Bulkers a monthly fee of $100,000 (based
on an exchange rate of $1.35 to 1.00) in aggregate for
these services. Free Bulkers provides us with the following
services:
|
|
|
|
|
General Administration. Free Bulkers provides
us with general administrative, office and support services
necessary for our operations and our fleet, including technical
and clerical personnel, communication, accounting, and data
processing services.
|
|
|
|
Financial Accounting Services. Free Bulkers
maintains our books, records and accounts and provides all
services as are necessary in connection with our compliance with
the rules promulgated by the Securities and Exchange Commission
(the SEC) and the NASDAQ Stock Market relating to
the preparation and maintenance of the our accounting records in
accordance with United States generally accepted accounting
principals (U.S. GAAP), preparing and filing
financial statements with the SEC and NASDAQ in accordance with
applicable financial reporting requirements, and developing,
implementing, monitoring and assessing our internal controls;
|
|
|
|
Sale and Purchase of Vessels. Free Bulkers
advises our board of directors when opportunities arise to
purchase, including through newbuildings, or to sell any
vessels. All decisions to purchase or sell vessels require the
approval of our board of directors. Any purchases or sales of
vessels approved by our board of directors are arranged and
completed by Free Bulkers. This involves the appointment of
superintendents to inspect and take delivery of vessels and to
monitor compliance with the terms and conditions of the purchase
contracts.
|
We also contract the technical and commercial management of our
vessels to Free Bulkers. Free Bulkers has a separate management
contract with each of our ship-owning subsidiaries and provides
a wide range of services on 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 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 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,
enhances the
66
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 provides us experienced
technical and commercial management for our fleet and enables us
to better manage our costs.
Free Bulkers currently manages only our vessels, but 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.
Pursuant to the management agreements, we pay Free Bulkers a
monthly (pro rata for the calendar days) management fee of
$15,000 (effective as of January 1, 2008, the fee has been
paid on the basis of an exchange rate of $1.30 to 1.00)
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. In September 2009, we amended our
management agreements with Free Bulkers to increase the monthly
technical management fee to $16,500 (based on $1.30 per Euro)
plus a fee of $400 per day for superintendant attendance. In
addition, we have 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 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. Our ship management agreements
with Free Bulkers remain in effect indefinitely unless, in each
case, it is terminated by either party upon two months
advance notice.
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.
Crewing
and Employees
As of October 21, 2009 Free Bulkers, our affiliate,
employed approximately 23 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.
Charter
Hire Rates
Charter hire rates fluctuate by varying degrees among drybulk
carrier size categories. The volume and pattern of trade in a
small number of commodities (major bulks) affect demand for
larger vessels. Therefore, charter rates and vessel values of
larger vessels often show greater volatility. Conversely, trade
in a greater number of commodities (minor bulks) drives demand
for smaller drybulk carriers. Accordingly, charter rates and
vessel values for those vessels are subject to less volatility.
Charter hire rates paid for drybulk carriers are primarily a
function of the underlying balance between vessel supply and
demand, although at times other factors may play a role.
Furthermore, the pattern seen in charter rates is broadly
mirrored across the different charter types and the different
drybulk carrier categories. However, because demand for larger
drybulk vessels is affected by the volume and pattern of trade
in a relatively small number of commodities, charter hire rates
(and vessel values) of larger ships tend to be more volatile
than those for smaller vessels.
In the time charter market, rates vary depending on the length
of the charter period and vessel specific factors such as age,
speed and fuel consumption.
In the voyage charter market, rates are influenced by cargo
size, commodity, port dues and canal transit fees, as well as
commencement and termination regions. In general, a larger cargo
size is quoted at a lower
67
rate per ton than a smaller cargo size. Routes with costly ports
or canals generally command higher rates than routes with low
port dues and no canals to transit. Voyages with a load port
within a region that includes ports where vessels usually
discharge cargo or a discharge port within a region with ports
where vessels load cargo also are generally quoted at lower
rates, because such voyages generally increase vessel
utilization by reducing the unloaded portion (or ballast leg)
that is included in the calculation of the return charter to a
loading area.
Within the drybulk shipping industry, the charter hire rate
references most likely to be monitored are the freight rate
indices issued by the Baltic Exchange. These references are
based on actual charter hire rates under charters entered into
by market participants as well as daily assessments provided to
the Baltic Exchange by a panel of major shipbrokers.
Property
Free Bulkers provided us with our office space at no rental cost
to us until February 5, 2007. On that date, and in
conjunction with moving into new 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 rented office space, commencing on
January 1, 2007. During 2007, the amount paid under that
agreement totaled approximately $67,000 (48,200 based on
an exchange rate of $1.39 to 1.00). Beginning on
January 1, 2008 and in conjunction with a further expansion
of our office space, we agreed to pay Free Bulkers one half of
the monthly rent of 9,704 plus one half of the apportioned
common expenses charged by the lessor. Reimbursement of rental
and common expenses continue on the same basis under our amended
services agreement with Free Bulkers. See Certain
Relationships and Related Transactions.
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 on our reputation. There are many drybulk shipping
companies which are publicly traded on the U.S. stock
markets, such as DryShips Inc., Diana Shipping Inc., Eagle Bulk
Shipping Inc., Euroseas Ltd. 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.
68
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 (United States 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
result in the temporary suspension of 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 International Maritime Organization, or IMO, the United
Nations agency for maritime safety and the prevention of
pollution by ships, has adopted the International Convention for
the Prevention of Marine Pollution, 1973, as modified by the
related Protocol of 1978, or the MARPOL Convention, which has
been updated through various amendments. The MARPOL Convention
establishes environmental standards relating to oil leakage or
spilling, garbage management, sewage, air emissions, handling
and disposal of noxious liquids and handling of harmful
substances in packaged forms. The IMO adopted regulations that
set forth pollution prevention requirements applicable to
drybulk carriers. These regulations have been adopted by over
150 nations, including many of the jurisdictions in which our
vessels operate.
In September 1997, the IMO adopted Annex VI to the MARPOL
Convention to address air pollution from ships. 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. In October 2008, IMO adopted
amendments to Annex VI regarding particulate matter,
nitrogen oxide, and sulfur oxide emission standards that are
expected to enter into force on July 1, 2010. Among other
things, the Annex VI amendments will progressively reduce
sulfur oxide emissions from ships, with the global sulfur cap
reduced initially to 3.50% (from the current 4.50%), effective
from January 2012; then progressively to 0.50%, effective from
January 2020. The limits applicable in Sulfur Emission Control
Areas (SECAs) will be reduced to 1.00%, beginning on July 2010
(from the current 1.50%); being further reduced to 0.10%,
effective from January 2015. The United States ratified the
Annex VI amendments in October 2008, thereby rendering its
emission standards equivalent to IMO requirements. The United
States has requested IMO to designate the area extending
200 miles from the territorial sea baseline adjacent to the
Atlantic/Gulf and Pacific coasts and the Hawaiian Islands as
Emission Control Areas under the Annex VI amendments. We
believe we are in substantial compliance with current
Annex VI requirements, but we may incur costs to comply
with the new standards in future years.
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 the ISM
Code. The ISM Code requires shipowners and bareboat charterers
to develop and maintain an extensive Safety Management
System that
69
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.
Additional or new conventions, laws and regulations may also be
adopted that could adversely affect our ability to operate our
vessels.
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. The United States has also enacted the Comprehensive
Environmental Response, Compensation and Liability Act, or
CERCLA, which applies to the discharge of hazardous substances
other than oil, whether on land or at sea. Both OPA and CERCLA
affect our operations.
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).
Effective July 31, 2009, the U.S. Coast Guard adjusted
the limits of OPA liability for dry bulk vessels to the greater
of $1000 per gross ton or $854,400 and established a procedure
for adjusting the limits for inflation every three years. CERCLA
contains a liability scheme that is similar to that under the
OPA, and liability under CERCLA is limited to the greater of
$300 per gross ton or $5 million for vessels carrying a
hazardous substance as cargo and the greater of $300 per gross
ton or $0.5 million for any other vessel. 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.
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. 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 five of our
vessels and carrying such COFRs on each of these vessels. These
COFRs are effective January 2007 through April 2011, but we may
incur costs to comply with increased limits of liability.
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.
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.
70
The
United States Clean Water Act
The United States 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 OPA and CERCLA.
The United States Environmental Protection Agency, or EPA,
regulates the discharge of ballast water and other wastewater
incidental to the operation of a vessel under the CWA. EPA
regulations require vessels greater than 79 feet in length
(excluding commercial fishing vessels) to obtain coverage under
the Vessel General Permit, or VGP, to discharge ballast water
and other wastewaters into U.S. waters by submitting a
Notice of Intent. The new VGP requires vessel owners and
operators to comply with a range of best management practices,
reporting, and other requirements, for various types of
discharges and incorporates United States Coast Guard
requirements for ballast water management and exchange. In order
to remain covered by the VGP, vessels must comply with numerous
inspection, monitoring, reporting and recordkeeping
requirements. Vessel owners/operators must, among other things,
conduct and document routine self-inspection to track compliance
with the VGP, and must conduct a comprehensive vessel inspection
every 12 months. We will likely incur certain costs to
obtain coverage under the VGP for our vessels and to meet its
requirements.
Other
Environmental Initiatives
The European Union is considering legislation that will affect
the operation of vessels and the liability of owners for oil
pollution In 2005, the European Union adopted a directive on
ship-source pollution, imposing criminal sanctions for
intentional, reckless or negligent pollution discharges by
ships. The directive could result in criminal liability for
pollution from vessels in waters of European countries that
adopt implementing legislation. Criminal liability for pollution
may result in substantial penalties or fines and increased civil
liability claims. It is difficult to predict what legislation,
if any, may be adopted by the European Union or any other
country or authority.
Although the United States is not a party thereto, many
countries have ratified and currently follow the liability plan
adopted by the IMO and set out in the International Convention
on Civil Liability for Oil Pollution Damage of 1969, or the 1969
Convention. Under this convention, and depending on whether the
country in which the damage results is a party to the 1992
Protocol to the International Convention on Civil Liability for
Oil Pollution Damage, a vessels registered owner is
strictly liable for pollution damage caused in the territorial
waters of a contracting state by discharge of persistent oil,
subject to certain complete defenses. The limits on liability
outlined in the 1992 Protocol use the International Monetary
Fund currency unit of Special Drawing Rights, or SDR. Under an
amendment to the 1992 Protocol that became effective in November
2003, for vessels of 5,000 to 140,000 gross tons, liability
is limited to approximately 4.51 million SDR plus 631 SDR
for each additional gross ton over 5,000. For vessels of over
140,000 gross tons, liability is limited to
89.77 million SDR. The exchange rate between SDRs and
U.S. dollars was 0.62966 SDR per U.S. dollar on
October 13, 2009. Under the 1969 Convention, the right to
limit liability is forfeited where the spill is caused by the
owners actual fault; under the 1992 Protocol, a shipowner
cannot limit liability where the spill is caused by the
owners intentional or reckless conduct. Vessels trading in
jurisdictions that are parties to these conventions must provide
evidence of insurance covering the liability of the owner. In
jurisdictions where the 1969 Convention has not been adopted,
including the United States, various legislative schemes or
common law govern, and liability is imposed either on the basis
of fault or in a manner similar to that convention. We believe
that our protection and indemnity insurance will cover the
liability under the plan adopted by the IMO.
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 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
71
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 recently proposed new ballast
water management and discharge standards. Compliance with any
new regulations could require the installation of equipment on
our vessels to treat ballast water before it is discharged or
arranging for disposal at port facilities at potentially
substantial costs.
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.
Beginning in 2009, the BWM Conventions implementing
regulations call for a phased introduction of mandatory ballast
water exchange requirements, to be replaced in time with
mandatory concentration limits. The BWM Convention will not be
in force until 12 months after it has been adopted by 30
countries, the combined merchant fleets of which represent not
less than 35% of the gross tonnage of the worlds merchant
shipping. As of October 2, 2009, the BWM Convention has
been adopted by 18 states, representing approximately
15.36% of the worlds tonnage.
Greenhouse
Gas Regulation
In February 2005, the Kyoto Protocol to the United Nations
Framework on Climate Change, or Kyoto Protocol, entered into
force. Under the Kyoto Protocol adopting countries are required
to implement national programs to reduce emissions of certain
gases, generally referred to as greenhouse gases, which are
suspected of contributing to global warming. Currently,
emissions of greenhouse gases from international shipping are
not subject to the Kyoto Protocol. However, a new treaty may be
adopted at the United Nations climate change conference in
Copenhagen in December 2009, and restrictions on shipping may be
included. The European Union has indicated that it intends to
propose an expansion of the existing European Union emissions
trading scheme to include greenhouse gas emissions from vessels.
In the United States, the EPA has issued a proposed finding that
greenhouse gases threaten public health and safety and is
considering a petition from the California Attorney General to
regulate greenhouse gas emissions from ocean-going vessels.
Federal regulations relating to the control of greenhouse gas
emissions may follow, and climate change initiatives are being
considered by the U.S. Congress. Any passage of climate
change legislation or other regulatory initiatives by the IMO,
the European Union, the United States or other countries where
we operate that restrict emissions of greenhouse gases could
require us to make significant financial expenditures that we
cannot predict with any certainty at this time.
Vessel
Security Regulation
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 United States
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;
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the development of vessel security plans; and
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compliance with flag state security certification requirements.
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The United States 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.
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. 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.
The table below lists the classification society, next
dry-docking and special surveys scheduled for our each vessel in
our fleet, to the extent such dates are known as of the date of
this prospectus:
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Next Intermediate
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Next Special Survey
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Vessel
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Classification Society
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Dry-docking
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Dry-docking
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Free Destiny
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Korean Register of Shipping
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Third quarter 2010
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Third quarter 2012
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Free Envoy
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Korean Register of Shipping
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Second quarter 2011
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Third quarter 2013
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Free Goddess
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Bureau Veritas
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Third quarter 2013
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Third quarter 2010
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Free Hero
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Bureau Veritas
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Fourth quarter 2013
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Fourth quarter 2010
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Free Impala
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Bureau Veritas
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Second quarter 2012
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Third quarter 2012
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Free Jupiter
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Bureau Veritas
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Second quarter 2010
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Second quarter 2012
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Free Knight
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Bureau Veritas
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Second quarter 2010
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Second quarter 2013
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Free Lady
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Bureau Veritas
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Second quarter 2011
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Second quarter 2013
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Free Maverick
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Korean Register of Shipping
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First quarter 2011
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First quarter 2013
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Free Neptune
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Korean Register of Shipping
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Fourth quarter 2009
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Third quarter 2011
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ISM and ISPS certifications have been awarded to all of our
vessels and to Free Bulkers by Lloyds Register of Shipping.
73
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 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. Each P&I association has
capped its exposure to this pooling agreement at
$5.4 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.
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Vessel
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Protection and Indemnity Association
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Free Destiny
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London Steamship Mutual Bilbrough Association Ltd.
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Free Envoy
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London Steamship Mutual Bilbrough Association Ltd.
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Free Goddess
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The Standard Club
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Free Hero
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London Steamship Mutual Bilbrough Association Ltd.
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Free Impala
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The Standard Club
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Free Jupiter
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London Steamship Mutual Bilbrough Association Ltd.
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Free Knight
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The Standard Club
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Free Lady
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The Standard Club
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Free Maverick
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London Steamship Mutual Bilbrough Association Ltd.
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Free Neptune
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The Standard Club
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Loss
of Hire Insurance
We have obtained loss of hire insurance for seven of our vessels
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 charter hire that results from the loss
of use of a vessel. The insurance is subject to various and
significant deductibles, conditions and coverage limitations.
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 were
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 vessel was returned to service in
February 2008.
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 did not
maintain insurance for loss of charter hire for that vessel, 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.
We are subject to a claim by cargo interests in China of
approximately $643,000 (CNY 4.5 million) for certain
nickel/ore cargo tonnage off-loaded during the refloating
salvage process and eventually abandoned as it could not be
delivered to its final destination due to its dangerous
condition. This claim has been defended and settled by our
P&I club.
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.
Exchange
Controls
Under Marshall Islands law, there are currently no restrictions
on the export or import of capital, including foreign exchange
controls or restrictions that affect the remittance of
dividends, interest or other payments to non-resident holders of
our common stock.
75
MANAGEMENT
Directors
and Senior Management
The following sets forth the names of the members of our board
of directors and our senior management. Generally, each member
of the board of directors serves for a three-year term.
Additionally, the directors are divided among three classes, so
the term of office of a certain number of directors expires each
year. Consequently, the number of directors who stand for
re-election each year may vary. Our executive officers are
appointed by, and serve at the pleasure of, the board of
directors.
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Director
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Name
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Age
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Position
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Class
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Ion G. Varouxakis
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Chairman of the Board of Directors, Chief Executive Officer and
President
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C
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Alexandros Mylonas
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Chief Financial Officer
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Kostas Koutsoubelis
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Director, Vice President and Treasurer
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Alexis Varouxakis
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Secretary
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Didier Salomon
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Director
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A
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Focko H. Nauta
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Director
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B
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Dimitrios Panagiotopoulos
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Director
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C
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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. In 2003,
Mr. Varouxakis founded Free Bulkers, the beginning of a
single-vessel, self-financed entrepreneurial venture that led to
FreeSeas founding and NASDAQ listing in 2005. Under
Mr. Varouxakis leadership, FreeSeas has grown to be a
leader in the Handysize and Handymax segment in the
U.S. capital market. Prior to founding Free Bulkers,
Mr. Varouxakis held since 1997 management positions in
private shipping companies operating in the drybulk sector.
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 a member of the
Hellenic Committee of the Korean Register of Shipping and is an
officer of the reserves of the Hellenic Army.
Mr. Varouxakis is the brother of Alexis Varouxakis, our
Secretary.
Alexandros Mylonas is our Chief Financial Officer and
joined us in October 2009. Prior to joining FreeSeas,
Mr. Mylonas was the Banking Executive of Cardiff Marine
Inc., a ship management company managing a fleet of tankers and
drybulk carriers including the fleet of Dryships Inc. a company
listed on the NASDAQ Global Select Market. From 2005 to 2008,
Mr. Mylonas was an Account Manager with the Global Shipping
Group of Fortis Bank, an international shipping bank.
Previously, from 2002 to 2005, Mr. Mylonas was an
Investment Associate with NBG Venture Capital, a private equity
firm investing in the Southeast Europe. Mr. Mylonas holds
an MBA in Finance and Supply Chain Management from Michigan
State University and a Bachelor of Business Administration from
University of Macedonia in Thessaloniki.
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 of First Business Bank, South African Marine Corp.
S.A., Seanergy Maritime Holdings Corp. 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 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
76
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 as assistant
operations manager. Mr. Varouxakis is the brother of Ion
Varouxakis, our Chairman, Chief Executive Officer and President.
Didier Salomon joined our board of directors in
2008. He has spent fourteen years as head of global
shipping at BNP Paribas. Prior to that, he held similar
positions at Banque Louis-Dreyfus, Banque Bruxelles Lambert and
Credit Naval. Mr. Salomon holds a diploma in political
science (Sciences Po Paris), a degree in law (Paris Assas) and a
post graduate diploma in banking (Centre dEtudes
Superieures de Banque). For many years he has been a lecturer on
the economy and capital markets at the Conservatoire des Arts et
Metiers in Paris.
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. Mr. Panagiotopoulos also serves on the
board of directors of Seanergy Maritime Holdings Corp. 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.
Messrs. Ion and Alexis Varouxakis are brothers. There are
no other family relationships among our directors and executive
officers.
Compensation
The total gross compensation paid in 2008 to our executive
officers and directors as a group was $377,722. Commencing
October 1, 2008, in connection with the execution of our
amended and restated services agreement with Free Bulkers, our
executive officers received salaried compensation from Free
Bulkers, which receives a monthly management fee from us to
provide overall executive and commercial management of its
affairs. See Principal Shareholders and
Related Party Transactions.
Board
Practices
The term of our Class A directors expires in 2012, the term
of our Class B directors expires in 2010 and the term of
our Class C directors expires in 2011. Mr. Nauta was
appointed to the board of directors on December 16, 2005.
Each of Messrs. Koutsoubelis and Panagiotopoulos were
elected to the board on January 5, 2007. Mr. Salomon
was appointed to the board of directors on October 31,
2008. There are no agreements between us and any director that
provide for benefits upon termination or retirement.
Board
Committees
Our board of directors has an audit committee, a compensation
committee and a nominating committee. Our board of directors has
adopted a charter for each of these committees.
77
Audit
Committee
Our audit committee consists of Messrs. Nauta, Salomon and
Panagiotopoulos, each of whom is an independent director.
Mr. Nauta has been designated the Audit Committee
Financial Expert under the SEC rules and the current
listing standards of the NASDAQ Marketplace Rules.
The audit committee has powers and performs the functions
customarily performed by such a committee (including those
required of such a committee under the NASDAQ Marketplace Rules
and the SEC). The audit committee is responsible for selecting
and meeting with our independent registered public accounting
firm regarding, among other matters, audits and the adequacy of
our accounting and control systems.
Compensation
Committee
Our compensation committee consists of Messrs. Nauta,
Salomon and Panagiotopoulos, each of whom is an independent
director. The compensation committee reviews and approves the
compensation of our executive officers.
Nominating
Committee
Our nominating committee consists of Messrs. Nauta, Salomon
and Panagiotopoulos, each of whom is an independent director.
The nominating committee is responsible for overseeing the
selection of persons to be nominated to serve on our board of
directors.
Director
Independence
Our securities are listed on the NASDAQ Stock Market and we are
exempt from certain NASDAQ listing requirements including the
requirement that our board be composed of a majority of
independent directors. The board of directors has evaluated
whether each of Messrs. Nauta, Salomon and Panagiotopoulos
is an independent director within the meaning of the
listing requirements of NASDAQ. The NASDAQ independence
definition includes a series of objective tests, such as that
the director is not our employee and has not engaged in various
types of business dealings with us. In addition, as further
required by the NASDAQ requirements, the board of directors made
a subjective determination as to each of Messrs. Nauta,
Salomon and Panagiotopoulos that no relationships exist which,
in the opinion of the board of directors, would interfere with
the exercise of his independent judgment in carrying out the
responsibilities of a director. In making this determination,
the board of directors reviewed and discussed information
provided by each of Messrs. Nauta, Salomon and
Panagiotopoulos with regard to his business and personal
activities as they may relate to us and our management. After
reviewing the information presented to it, our board of
directors has determined that each of Messrs. Nauta,
Salomon and Panagiotopoulos is independent within
the meaning of such rules. Our independent directors will meet
in executive session as often as necessary to fulfill their
duties, but no less frequently than annually.
Code of
Conduct and Ethics
We have adopted a code of conduct and ethics applicable to our
directors, officers and employees in accordance with applicable
federal securities laws and the NASDAQ Marketplace Rules.
Employees
We currently have no employees. Free Bulkers, our ship manager,
is responsible for employing all of the executive officers and
staff to execute and supervise our operations based on the
strategy devised by the board of directors and subject to the
approval of our board of directors and for recruiting, and
employing, either directly or through a crewing agent, the
senior officers and all other crew members for our vessels.
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
78
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 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
Agreement
In 2005, we entered into an employment agreement with Ion G.
Varouxakis, our Chief Executive Officer and President. The
agreement was 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. Varouxakis salary
was subject to increases as may be approved by our board of
directors and he was 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. Effective
October 1, 2008, in connection with the execution of an
amended and restated services agreement with Free Bulkers,
Mr. Varouxakis employment agreement was terminated by
mutual consent of the parties and all service of
Mr. Varouxakis and our Chief Financial Officer are provided
to us under the amended services agreement with Free Bulkers.
79
PRINCIPAL
SHAREHOLDERS
The following table sets out certain information regarding the
beneficial ownership of our common stock as of October 21,
2009 by each of our officers and directors, all of our officers
and directors as a group, and each person or group of affiliated
persons who is currently known to us to be the beneficial owner
of 5% or more of the shares of our common stock.
Unless otherwise indicated, we believe that all persons named in
the table have sole voting and investment power with respect to
all shares of beneficially owned by them.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of Shares of
|
|
|
Shares of Common
|
|
|
|
Common Stock
|
|
|
Stock Beneficially
|
|
Name
|
|
Beneficially Owned
|
|
|
Owned(1)
|
|
|
Ion G. Varouxakis
|
|
|
2,654,890
|
(2)
|
|
|
8.3
|
%
|
Alexandros Mylonas
|
|
|
0
|
|
|
|
*
|
|
Focko H. Nauta
|
|
|
15,000
|
(3)
|
|
|
*
|
|
Dimitrios Panagiotopoulos
|
|
|
15,000
|
(3)
|
|
|
*
|
|
Kostas Koutsoubelis
|
|
|
15,000
|
(3)
|
|
|
*
|
|
Didier Salomon
|
|
|
0
|
|
|
|
*
|
|
Alexis Varouxakis
|
|
|
21,000
|
(4)
|
|
|
*
|
|
All directors and executive officers as a group
(seven persons)
|
|
|
2,720,890
|
(5)
|
|
|
8.7
|
%
|
FS Holdings Limited
|
|
|
3,240,593
|
(6)
|
|
|
10.4
|
%
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
For purposes of computing the percentage of outstanding shares
of common stock held by each person named above, any shares that
the named person has the right to acquire within 60 days
under warrants or options are deemed to be outstanding for that
person, but are not deemed to be outstanding when computing the
percentage ownership of any other person. |
|
(2) |
|
Reflects 2,588,223 shares owned by The Midas Touch
S.A., a Marshall Islands corporation wholly owned by
Mr. Varouxakis, 16,667 shares underlying warrants
owned by The Midas Touch, and 50,000 shares
underlying fully vested options. Does not include
58,969 shares owned by V Estates S.A., which is controlled
by his father, 30,600 shares owned by his mother, or
21,000 shares beneficially owned by Alexis Varouxakis,
his brother, as to which shares he disclaims beneficial
ownership. |
|
(3) |
|
Reflects 15,000 shares underlying fully vested options. |
|
(4) |
|
Includes 6,000 shares owned by Edifice Holdings, S.A. a
Marshall Islands corporation wholly owned by Mr. Alexis
Varouxakis, and 15,000 shares underlying fully vested
options. |
|
(5) |
|
Includes an aggregate of 110,000 shares underlying fully
vested options. |
|
(6) |
|
Reflects 2,808,782 shares owned by FS Holdings Limited, a
Marshall Islands corporation, and 431,811 shares owned by
Benbay Limited, a Republic of Cyprus corporation, each of which
is controlled by the Restis Family. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Management
and Services Agreements
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.
Each agreement calls for a monthly technical management fee of
$15,000 (based on $1.30 per Euro). In September 2009, we amended
these management agreements with Free Bulkers to increase the
technical management fee to $16,500 (based on $1.30 per Euro)
plus a fee of $400 per day for superintendant attendance.
FreeSeas also
80
pays Free Bulkers a fee equal to 1.25% of the gross freight or
hire from the employment of FreeSeas vessels and a 1%
commission 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.
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.
In September 2007, we entered into an additional agreement with
Free Bulkers pursuant to which Free Bulkers provided 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
for 2007 was $300,000, payable quarterly, and the fee was
increased to $500,000 per year for 2008 through the date of the
amended services agreement in order to cover increased costs for
staff, installation of a new accounting software and our
internal controls reporting requirements. This agreement was for
an initial term of one year and has been amended and superseded
by the amended service agreement described below.
In October 2008, we entered into an amended and restated
services agreement with Free Bulkers pursuant to which the
annual fee of $500,000 was increased to $1,200,000. An
additional fee of $300,000 was paid to Free Bulkers as partial
contribution for the refurbishment of our offices. Under the
amended service agreement, Free Bulkers is responsible for
executing and supervising all of our operations based on the
strategy devised by the board of directors and subject to the
approval of our board of directors. Free Bulkers is responsible,
among other things, for with general administrative, office and
support services necessary for our operations and our fleet,
including technical and clerical personnel, communication,
accounting, and data processing services; advising our board of
directors when opportunities arise to purchase, including
through newbuildings, or to sell any vessels; and negotiating
all borrowings, deposits and lending arrangements for us. The
agreement is for an initial term of 10 years but may be
terminated by either party upon written notice in certain
circumstances. If the agreement is terminated by Free Bulkers
upon a change in control as defined in the
agreement, Free Bulker is entitled to a termination fee equal
to: (i) the total aggregate of the rental fee due for our
office from the date of such termination to the end of the term
of the agreement; plus (ii) 25 multiplied by the sum of
(a) the annualized aggregate ship management fees to which
the Free Bulkers would be entitled under the ship management
agreements, based on the monthly ship management fees in effect
on the date of termination, and (b) the annualized
management fee to which the Free Bulkers would be entitled under
the agreement, based on the monthly management fee in effect on
the date of termination; plus (iii) 25 multiplied by the
average of the bonuses previously paid to the Free Bulkers under
the agreement (with the dollar value of any bonus paid in shares
or other of our securities based on the aggregate fair market
value of such shares or securities on the date such bonus was
awarded).
In September 2009, we amended our services agreement with Free
Bulkers to increase the annual fee from $1,200,000 to $1,422,000
(based on $1.35 per Euro). Effective October 1, 2009, we
will pay an annual fee of $1,422,000.
The expenses related to the technical management fee and the
services from Free Bulkers under the amended and restated
services agreement are reflected in the accompanying condensed
consolidated statements of operations as Management and
Other Fees to a Related Party. The amounts charged for the
six months ended June 30, 2009 and 2008 totaled $1,446,000
and $1,032,000, respectively, and for the years ended
December 31, 2008, 2007 and 2006 totaled $2,634,000,
$875,000 and $540,000, respectively. The balance due
81
from or (to) related party as of June 30, 2009 and 2008 was
$1,927,000 and $1,597,000, respectively, and as of
December 31, 2008, 2007 and 2006 was $1,622,000, $1,037,
000 and $40,000 respectively. Amounts paid to related parties
for office space during the six months ended June 30, 2009
and 2008 totaled $75,000 and $91,000, respectively, and for the
years ended December 31, 2008, 2007 and 2006 the amounts
were $206,000 (Euro 139,000), $67,000 (Euro 48,000), and $nil,
respectively.
Prior to entering into the amended services agreement, Free
Bulkers provided us with our office space at no rental cost to
us until February 2007. In February 2007, and in conjunction
with moving into new 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 commencing on January 1,
2007. During 2007, the amount paid under that agreement totaled
approximately $67,000 (48,000 based on the exchange rate
of $1.39 to 1.00). Beginning on January 1, 2008 and
in conjunction with a further expansion of our office space, we
agreed to pay Free Bulkers one half of the monthly rent of
$15,526 (9,704 based on the exchange rate of $1.60 to
1.00) plus one half of the apportioned common expenses
charged by the lessor. Reimbursement of rental and common
expenses continue on the same basis under our amended services
agreement with Free Bulkers.
We believe that the fees charged by Free Bulkers are comparable
to those paid by other shipping companies to management
companies for similar services.
Loans
In May 2007, FS Holdings 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 was
fully drawn as of June 2007. The note accrued interest on the
then-outstanding principal balance at the annual rate of 12.0%,
payable upon maturity of the loan. The loan was 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 was
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. In connection with this loan, we agreed
to issue to FS Holdings Limited, for every $1,000,000 (or pro
rata portion thereof) drawn under the loan, warrants to purchase
50,000 shares of our common stock at an exercise price of
$5.00 per share. We issued warrants to acquire a total of
700,000 shares of our common stock, and FS Holdings Limited
exercised these warrants in full on November 14, 2007. We
used a portion of the net proceeds of the October 2007 offering
to repay all the amounts outstanding under this loan.
During 2007, we had outstanding two loans from our principal
shareholders. 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 were 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. 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 November 2007, we used a portion of the
net proceeds of the October 2007 offering to repay all the
amounts outstanding under these loans.
We obtained a loan from FBB in the aggregate amount of
$26,250,000 to partially finance the acquisition of the M/V
Free Impala, which as of December 31, 2008 has an
outstanding balance of $24,750,000. FS Holdings Limited, one of
our principal shareholders, is also a principal shareholder of
FBB.
82
Restructuring
of Principal Shareholders
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.
Vessel
Brokering
Mr. Constantinos Varouxakis, the brother of Mr. Ion
Varouxakis, our chairman, chief executive officer and president,
is associated with a ship-brokering company. Free Bulkers and
Safbulk use such brokering company, from time to time, as one of
the shipping brokers for our fleet. This shipping brokerage firm
received commissions of approximately $112,000 during the twelve
month period ended December 31, 2008, which represents
3.4%, respectively, of the $3.3 million of total
commissions paid in the same period. This compares to $36,000 of
commissions paid to this firm during the same period in 2007
which represent 3.3% of the $1,095,000 of total commissions paid
in the same period. During the twelve month period ended
December 31, 2006 the total commissions paid to this firm
was nil.
SHARES
ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will
have shares
of common stock outstanding
or shares
if the underwriters over-allotment option is exercised in
full.
The shares
sold in this offering,
or 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 Securities Act.
After the consummation of this offering, our existing
shareholders will continue to
own 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
parties will be subject to the underwriters 75-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 75-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 six
months 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 75 days immediately preceding the
sale may sell restricted securities in reliance on Rule 144
without regard to the limitations described above, provided that
one year has elapsed since the later of the date on which the
same restricted securities were
83
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 on 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 2,720,890 shares during
the period beginning from the date of this prospectus and
continuing to and including the date 75 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 Dahlman Rose & Company, 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:
|
|
|
|
|
Days After the Date
|
|
Number of Shares
|
|
|
of this Prospectus
|
|
Eligible for Sales
|
|
Comment
|
|
Date of prospectus
|
|
|
|
Shares not locked up and eligible for sale freely or under Rule
144
|
75 days
|
|
|
|
Lock-up released
|
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, or the perception that those sales may
occur, could adversely affect prevailing market prices for our
common stock.
DESCRIPTION
OF SECURITIES
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.
Our authorized capital stock consists of 250,000,000 shares
of common stock, par value, $.001 per share, of which
31,212,480 shares are issued and outstanding as of
October 21, 2009, and 5,000,000 shares of blank check
preferred stock, par value, $.001 per share, none of which are
outstanding. All of our shares of stock must be in registered
form.
Common
Stock
As of October 21, 2009, 31,212,480 shares of common
stock were outstanding out of 250,000,000 shares authorized
to be issued, which is 10,041,151 more shares outstanding than
on June 30, 2009. As of October 21, 2009,
2,732,271 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.
84
We have entered into a shareholders rights agreement with
American Stock Transfer & Trust Company, LLC
effective January 14, 2009 and declared a dividend of one
purchase right, or a Right, to purchase one one-thousandth of a
share of our Series A Participating Preferred Stock, par
value $0.001 per share, for each outstanding share of our common
stock. The dividend was paid on January 23, 2009 to our
shareholders of record on that date. In addition, we authorized
the issuance of one Right in respect of each share of common
stock that shall become outstanding at any time between
January 23, 2009 and the earliest of the distribution
date, the redemption date or the final
expiration date, as such terms are defined in the
shareholders rights agreement, including shares of common stock
that become outstanding upon the exercise or conversion of
options, warrants or convertible securities as long as they are
outstanding on the distribution date. Each Right
entitles the registered holder, upon the occurrence of certain
events, to purchase from us one one-thousandth of a share of
Preferred Stock at an exercise price of $18.00, subject to
adjustment. The Rights become exercisable under certain
circumstances set forth in the shareholders rights agreement.
Other
Securities
Class A
Warrants
We issued to our founding shareholders warrants to purchase an
aggregate of 200,000 shares of our common stock at an
exercise price of $5.00 per share, of which 150,000 remain
outstanding. 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 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 $2.50 per
share, and expires on December 31, 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, and expires on July 29, 2011 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
$0.05 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
our books and will have no further value except for the $0.05
call price.
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, 2009, options to purchase
140,000 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.
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 by the board of directors, by our
chairman or by our president. Our board of directors may set a
record date
85
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 and our shareholder rights plan may
have anti-takeover effects. These 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.
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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 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.
Shareholder
Rights Plan
We have implemented a shareholder rights plan pursuant to which
the holders of our common stock receive one right to purchase
one one-thousandth of a share of our Series A Participating
Preferred Stock at an exercise price of $18.00, subject to
adjustment. The rights become exercisable upon the occurrence of
certain change in control events. These anti-takeover provisions
and our shareholder rights plan 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
Our
Transfer Agent and Warrant Agent
The transfer agent for our common stock and warrant agent for
our warrants is American Stock Transfer &
Trust Company, LLC.
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 cannot
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
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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
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May be held within or outside the
Marshall Islands
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May be held within or outside Delaware
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Notice:
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Notice:
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87
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Marshall Islands
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Delaware
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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, unless it is the annual
meeting, indicate that it is being issued by or at the direction
of the person or persons calling the meeting. Notice of a
special meeting shall also state the purpose for which the
meeting is called.
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Whenever shareholders 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
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Stockholders may act by written consent
to elect directors
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Any person authorized to vote may
authorize another person to act for him by proxy
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Any person authorized to vote may
authorize another person or persons to act for him by proxy
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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
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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
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The articles of incorporation may
provide for cumulative voting in the election of directors
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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
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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
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The certificate of incorporation may
provide for cumulative voting
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Any sale, lease, exchange or other
disposition of all 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
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Any two or more corporations existing
under the laws of 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
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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
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Marshall Islands
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Delaware
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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
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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
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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 or approval off the shareholders is required
pursuant to the BCA
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Any mortgage or pledge of a
corporations property and assets may be authorized without
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
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Board must consist of at least one member
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Number of members can be changed by an
amendment to the by-laws, by the shareholders, or by action of
the board under the specific provisions of a bylaw
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Number of board members shall be fixed
by the bylaws, unless the certificate of incorporation fixes the
number of directors
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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
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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
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Removal
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Removal
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Any or all of the directors may be
removed for cause by vote of the shareholders
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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
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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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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 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
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Alters or abolishes any preemptive right
of such holder to acquire shares or other securities; or
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Marshall Islands
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Delaware
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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 the
transaction of which he complains, or that has shares or his
interest therein devolved upon him by operation of law
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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
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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
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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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Such action shall not be discontinued,
compromised or settled, without the approval of the High Court
of the Republic
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Reasonable expenses including
attorneys fees may be awarded if the action is successful
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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 shares have a value of less than $50,000
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TAXATION
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. Holders of our common stock or warrants who are not
residents of, domiciled in, or carrying on any commercial
activity in the Marshall Islands will not be subject to Marshall
Islands tax on the sale or other disposition of our common stock
or warrants.
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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, as amended, 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 below is based, in part,
upon Treasury Regulations promulgated under Section 883 of
the Code, and in part, on the description of our business as
described in About Our Company above and assumes
that we conduct our business as described in that section.
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, exclusive of
certain US territories and possessions, constitutes income from
sources within the United States, which we refer to as
U.S.-Source
Gross Transportation Income or USSGTI.
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. US law prohibits us from
engaging in transportation that produces income 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
USSGTI would be subject to a 4% tax imposed without allowance
for deductions as described below.
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 shareholders, that are
persons (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
91
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.
For the 2006 tax year, we could not qualify our ship-owning
subsidiaries for the benefits of the Section 883 tax
exemption and paid US taxes on 4% of our USSGTI (see the next
section, Taxation in Absence of Exemption, for further
information regarding the 4% tax). For the 2007 and 2008 tax
years, we claimed the benefits of the Section 883 tax
exemption for our ship-owning subsidiaries on the basis of the
Publicly-Traded Test. For 2009 and subsequent tax years, we
anticipate that we will need to satisfy the Publicly-Traded Test
in order to qualify for benefits under Section 883. While
we expect to satisfy the Publicly-Traded Test for such years,
there can be no assurance in this regards. 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 the taxable year on all established securities markets in
that country exceed 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 Global 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 by total combined value of all classes of stock, are 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
Global Market, and accordingly, we will satisfy this listing
requirement.
The regulations furth