Securities registered or to be registered pursuant to Section
12(b) of the Act:
Securities registered or to be registered pursuant to Section
12(g) of the Act.
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 22,753,868
common shares, par value $0.001 per share, as of December 31, 2013.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
x
No
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
x
Yes
¨
No
Note - Checking the box above will not
relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
x
Yes
¨
No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
¨
Item 17
¨
Item 18
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
x
No
FreeSeas
Inc. is a Republic of the Marshall Islands company that is referred to in this annual report on Form 20-F, together with its subsidiaries,
as “FreeSeas Inc.,” “FreeSeas,” “the Company,” “we,” “us,” or “our.”
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.
All
share-related and per share information in this annual report have been adjusted to give effect to the one share for five share
reverse stock split that was effective on October 1, 2010, the one share for ten share reverse stock split that was effective
on February 14, 2013 and the one share for five share reverse stock split that was effective on December 2, 2013.
This
report should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto, which
are included in Item 18 to this annual report.
This
annual report 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 us or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future and
other statements other than statements of historical fact. In addition, any statements that refer to projections, forecasts or
other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.
The words “anticipates,” “forecasts,” “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 annual report may include, for example, statements about:
The
forward-looking statements contained in this annual report 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 publicly update or revise any forward-looking statements contained in this annual report, or the documents
to which we refer you in this annual report, to reflect any change in our expectations with respect to such statements or any change
in events, conditions or circumstances on which any statement is based.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not required.
Item 2. Offer Statistics and Expected Timetable
Not required.
Item 3. Key Information
|
A.
|
Selected Financial Data
|
The selected consolidated
financial information set forth below has been derived from our audited financial statements for the years ended December 31,
2013, 2012, 2011, 2010 and 2009. The information is only a summary and should be read in conjunction with our audited consolidated
financial statements for the years ended December 31, 2013, 2012 and 2011 and notes thereto contained elsewhere herein. The
financial results should not be construed as indicative of financial results for subsequent periods. See “Item 4. Information
on the Company” and “Item 5. Operating and Financial Review and Prospects.”
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
6,074
|
|
|
$
|
14,260
|
|
|
$
|
29,538
|
|
|
$
|
57,650
|
|
|
$
|
57,533
|
|
(Loss) / income from operations
|
|
|
(47,968
|
)
|
|
|
(28,036
|
)
|
|
|
(84,109
|
)
|
|
|
(17,000
|
)
|
|
|
11,459
|
|
Other expense
|
|
|
(737
|
)
|
|
|
(2,852
|
)
|
|
|
(4,087
|
)
|
|
|
(4,821
|
)
|
|
|
(4,600
|
)
|
Net (loss) / income
|
|
|
(48,705
|
)
|
|
|
(30,888
|
)
|
|
|
(88,196
|
)
|
|
|
(21,821
|
)
|
|
|
6,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) / income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) / earnings per share
|
|
$
|
(7.46
|
)
|
|
$
|
(36.90
|
)
|
|
$
|
(136.00
|
)
|
|
$
|
(34.56
|
)
|
|
$
|
13.47
|
|
Diluted (loss) / earnings per share
|
|
$
|
(7.46
|
)
|
|
$
|
(36.90
|
)
|
|
$
|
(136.00
|
)
|
|
$
|
(34.56
|
)
|
|
$
|
13.47
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
6,527,240
|
|
|
|
837,173
|
|
|
|
648,507
|
|
|
|
631,360
|
|
|
|
509,277
|
|
Diluted weighted average number of shares
|
|
|
6,527,240
|
|
|
|
837,173
|
|
|
|
648,507
|
|
|
|
631,360
|
|
|
|
509,277
|
|
Dividends per share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash
|
|
$
|
7,581
|
|
|
$
|
29
|
|
|
$
|
1,456
|
|
|
$
|
10,074
|
|
|
$
|
9,591
|
|
Vessels, net
|
|
|
71,834
|
|
|
|
75,690
|
|
|
|
81,419
|
|
|
|
213,691
|
|
|
|
270,701
|
|
Total assets
|
|
|
87,632
|
|
|
|
114,359
|
|
|
|
134,980
|
|
|
|
250,984
|
|
|
|
297,321
|
|
Long-term debt, including current portion
|
|
|
59,687
|
|
|
|
89,169
|
|
|
|
88,946
|
|
|
|
120,459
|
|
|
|
137,959
|
|
Total shareholders’ equity
|
|
|
12,793
|
|
|
|
7,803
|
|
|
|
35,119
|
|
|
|
123,190
|
|
|
|
144,452
|
|
|
B.
|
Capitalization and Indebtedness
|
Not required.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not required.
The common shares
of our company are considered speculative. Investing in our common shares involves a high degree of risk and uncertainty. You should
carefully consider the following risks and uncertainties in addition to other information in this annual report in evaluating our
company and our business before purchasing our common shares. Our business, operating or financial condition could be harmed due
to any of the following risks.
Risk Factors Relating to FreeSeas
At December 31, 2013, FreeSeas’
current liabilities exceeded its current assets, which could impair its ability to successfully operate its business and could
have material adverse effects on its revenues, cash flows and profitability and its ability to comply with its debt covenants and
pay its debt service and other obligations.
As a result of the
historically low charter rates for drybulk vessels which have been affecting the Company for over four years, and the resulting
material adverse impact on the Company’s results from operations, the accompanying consolidated financial statements have
been prepared on a going concern basis. The Company currently has cash and cash equivalents of $2,062 and based on its cash flow
projections for 2014, the Company will not be able to make scheduled debt repayments as of December 31, 2013, interest payments
as well as cover operating expenses and capital expenditure requirements for at least twelve months from the balance sheet date.
The Company has incurred
net losses of approximately $48,705, $30,888 and $88,196 during the years ended December 31, 2013, 2012 and 2011, respectively.
As of December 31, 2013 and 2012, the Company had working capital deficits of approximately, $59,041 and $70,973, respectively.
All of the above raises substantial doubt regarding the Company’s ability to continue as a going concern. Management plans
to continue to provide for its capital requirements by issuing additional equity securities and debt in addition to executing their
business plan. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary
financing to meet its obligations and repay its liabilities arising from normal course of business operations when they come due
and to generate profitable operations in the future.
In January and April
2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach
of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s
deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to
the National Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation.
The Company’s loan facility and deposits have been transferred to NBG. In January 2014, the Company received notification
from NBG that the Company has not paid the aggregate amount of $10,045 constituting repayment installments and accrued interest
due in December 2013. The Company has entered into an agreement with the NBG to settle the outstanding payments upon a cash payment
of a portion of the outstanding amount, whereby the NBG would forgive the remaining balance. The closing of such transaction is
contingent upon the Company raising the necessary funds. See “Item 5. Operating and Financial Review and Prospects –
Recent Developments” for more information.
In 2013, the Company
did not pay the interest due in an aggregate amount of $354 or interest rate swap amounts in an aggregate of $256 pursuant to the
Credit Suisse facility. On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate swap agreements
with Credit Suisse. The Company received several reservation of right letters in 2013 stating that Credit Suisse may take any actions
and may exercise all of their rights and remedies referred in the security documents. The Company has entered into a term sheet
with Credit Suisse to settle the outstanding payments upon a cash payment of a portion of the outstanding amount, whereby Credit
Suisse would forgive the remaining balance. The closing of such transaction is contingent upon the Company raising the necessary
funds. See “Item 5. Operating and Financial Review and Prospects – Recent Developments” for more information.
If the Company is not
able to raise the capital necessary to complete the agreements reached with the NBG and Credit Suisse or if the Company is unable
to comply with its restructured loan terms, this could lead to the acceleration of the outstanding debt under its debt agreements.
The Company’s failure to satisfy its covenants under its debt agreements, and any consequent acceleration and cross acceleration
of its outstanding indebtedness would have a material adverse effect on the Company’s business operations, financial condition
and liquidity.
Generally accepted
accounting principles require that long-term debt be classified as a current liability when a covenant violation gives the lender
the right to call the debt at the balance sheet date, absent a waiver. As a result of the actual breaches existing under the Company’s
credit facilities with NBG and Credit Suisse, acceleration of such debt by its lenders could result. Accordingly, as of December
31, 2013, the Company is required to reclassify its long term debt and derivative financial instrument liability (interest rate
swaps) as current liabilities on its consolidated balance sheet since the Company has not received waivers in respect of the breaches
discussed above.
Management is currently
seeking and will continue to seek to restructure the Company’s indebtedness and obtain waivers on covenant violations. If
the Company is not able to obtain the necessary waivers and/or restructure its debt, this could lead to the acceleration of the
outstanding debt under its debt agreements. The Company’s failure to satisfy its covenants and payment obligations under
its debt agreements, and any consequent acceleration and cross acceleration of its outstanding indebtedness would have a material
adverse effect on the Company’s business operations, financial condition and liquidity.
The Company is currently
exploring several alternatives aiming to manage its working capital requirements and other commitments, including offerings of
securities through structured financing agreements, disposition of certain vessels in its current fleet and additional reductions
in operating and other costs.
The condensed consolidated
financial statements included herein as of December 31, 2013, were prepared assuming that the Company would continue as a going
concern. Accordingly, the financial statements did not include any adjustments relating to the recoverability and classification
of recorded asset amounts, the amounts and classification of liabilities, or any other adjustments that might result in the event
the Company is unable to continue as a going concern, except for the current classification of debt and derivative financial instrument
liability
.
We received a report from our independent
registered public accounting firm with an explanatory paragraph for the year ended December 31, 2013 with respect to our ability
to continue as a going concern. The existence of such a report may adversely affect our stock price and our ability
to raise capital. There is no assurance that we will not receive a similar report for our year ended December 31, 2014.
In their report dated
March 24, 2014, our independent registered public accounting firm expressed substantial doubt about our ability to continue as
a going concern as we have incurred recurring operating losses, have a working capital deficiency, have failed to meet scheduled
payment obligations under our loan facilities and have not complied with certain covenants included in our loan agreements with
banks. Furthermore, if we were forced to liquidate our assets, the amount realized could be substantially lower than the carrying
value of these assets. Our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside
sources, including obtaining additional funding from the sale of our securities, obtaining loans from various financial institutions
or lenders where possible and restructuring outstanding debt obligations that are currently in default. Our continued net operating
losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
We have been in breach of certain
loan covenants contained in our loan agreements. Although we have entered into amendments to two of our loan facilities, if we
are not successful in obtaining a waiver and amendment from our other lender with respect to covenants breached, our lenders may
declare an event of default and accelerate our outstanding indebtedness under the relevant agreement, which would impair our ability
to continue to conduct our business, which raises substantial doubt about our ability to continue as a going concern.
Our loan agreements
require that we comply with certain financial and other covenants. As a result of the drop in our drybulk asset values we were
not in compliance with the NBG facility covenants relating to vessel values as of December 31, 2013. In addition, we were in breach
of interest cover ratios, leverage and minimum liquidity covenants with the NBG facility not previously waived. As well, we were
in breach of the interest coverage ratio for our loan agreement with Credit Suisse. A violation of these covenants constitutes
an event of default under our credit facilities, which would, unless waived by our lenders, provide our lenders with the right
to require us to post additional collateral, increase our interest payments and/or pay down our indebtedness to a level where we
are in compliance with our loan covenants. Furthermore, our lenders may accelerate our indebtedness and foreclose their liens on
our vessels, in which case our vessels may be auctioned or otherwise transferred which would impair our ability to continue to
conduct our business. As a result of these breaches, our total indebtedness is presented within current liabilities in the December
31, 2013 consolidated balance sheet.
In January and April
2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach
of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s
deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to
NBG. The license of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility and deposits
have been transferred to NBG. In January 2014 the Company received notification from NBG that the Company has not paid the aggregate
amount of $10,045, constituting repayment installments and accrued interest due in December 2013. The Company has entered into
an agreement with the NBG to settle the outstanding payments upon a cash payment of a portion of the outstanding amount, whereby
the NBG would forgive the remaining balance. The closing of such transaction is contingent upon the Company raising the necessary
funds. See “Item 5. Operating and Financial Review and Prospects – Recent Developments” for more information.
On January 31, 2013
the Company did not pay the interest due of $124 and the interest rate swap amounts of $52 and $28 due on March 5, 2013 and April
2, 2013, respectively, with the Credit Suisse facility. On April 26, 2013, the Company paid the interest of $124 due on January
31, 2013. On April 30 and July 31, 2013 the Company did not pay the interest due of $117 and $119, respectively. Also, the Company
did not pay the interest rate swap amounts of $48, $25, $43 and $22 due on June 5, 2013, July 2, 2013, September 5, 2013 and October
2, 2013, respectively, with the Credit Suisse facility. In addition, on October 31, 2013, the Company did not pay the interest
due of $118 with the Credit Suisse facility. As well, the Company did not pay the interest rate swap amounts of $38 due on December
5, 2013 and $19 due on January 2, 2014 with the Credit Suisse facility. On February 3, 2014, the Company paid the amount of $201
to fully unwind the two interest rate swap agreements with Credit Suisse. The Company received reservation of right letters on
August 9, 2013, October 4, 2013 and November 1, 2013 stating that Credit Suisse may take any actions and may exercise all of their
rights and remedies referred in the security documents. The Company has entered into a term sheet with Credit Suisse to settle
the outstanding payments upon a cash payment of a portion of the outstanding amount, whereby Credit Suisse would forgive the remaining
balance. The closing of such transaction is contingent upon the Company raising the necessary funds. See “Item 5. Operating
and Financial Review and Prospects – Recent Developments” for more information.
If the Company is not
able to raise the capital necessary to complete the agreements reached with the NBG and Credit Suisse or if the Company is unable
to comply with its restructured loan terms, this could lead to the acceleration of the outstanding debt under its debt agreements.
The Company’s failure to satisfy its covenants under its debt agreements, and any consequent acceleration and cross acceleration
of its outstanding indebtedness would have a material adverse effect on the Company’s business operations, financial condition
and liquidity.
Our loan agreements contain covenants
that may limit our liquidity and corporate activities.
If the drybulk market
remains depressed or further declines, we may require further waivers and/or covenant amendments to our loan agreements relating
to our compliance with certain covenants for certain periods of time. The waivers and/or covenant amendments may impose additional
operating and financial restrictions on us and modify the terms of our existing loan agreements. Any such waivers or amendments,
if needed, could contain such additional restrictions and might not be granted at all.
Our loan agreements
require that we maintain certain financial and other covenants. The low drybulk charter rates and drybulk vessel values have previously
affected, and may in the future affect, 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, 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.
As a result of our
loan covenants, our lenders have imposed operating and financial restrictions on us. These restrictions may limit our ability to:
|
·
|
incur additional indebtedness;
|
|
·
|
create liens on our assets;
|
|
·
|
sell capital stock of our subsidiaries;
|
|
·
|
engage in mergers or acquisitions;
|
|
·
|
make capital expenditures;
|
|
·
|
change the management of our vessels or terminate or materially amend our management agreements; and
|
The amended and restated
credit agreement dated September 7, 2012 with Deutsche Bank did not allow us to pay dividends without their prior written
approval, such approval not to be unreasonably withheld. In addition, the Sixth Supplemental agreement dated May 31, 2012 with
Credit Suisse does allow us to pay dividends after March 31, 2014 provided: i) that at the time of such payment no default has
occurred or would occur as a result of such payment; ii) at the time of such payment the market value of the aggregate fair market
value of the financed vessels is not less than 135% of the outstanding loan balance at such time plus the swap exposure minus the
aggregate amount, if any, standing to the credit of the operating accounts, the retention account and any bank accounts of the
Company opened with the bank; iii) between May 31, 2012 and the date of such payment of dividend or distribution, a part of the
loan which is not less than $11,300 has been prepaid and a part of the commitment which is not less than $11,300 has been permanently
reduced; and iv) the amount of such dividends in respect of a financial year does not exceed 50% of the consolidated net profit
of the Company for that financial year. If we need covenant waivers, our lenders may impose additional restrictions and 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 any future capital raising to repay a portion of our outstanding indebtedness. We
agreed with Credit Suisse to raise no less than $25.0 million by March 31, 2014, one third of which amount will be used to repay
our existing debt. This provision does not apply to the proceeds from sales of our common stock under equity line facilities. These
potential restrictions and requirements may limit our ability to pay dividends to you, finance our future operations, make acquisitions
or pursue business opportunities.
Once the payment holidays agreed
to by one of our two lenders expire, we will again be obligated to make significant payments to service our debt.
As a result of amendments
to our loan facility agreed in 2012 with Credit Suisse, we have substantially reduced our current debt repayment obligations. These
amendments provide for deferred principal repayments until June 30, 2014. Following this deferral period, however, our payment
obligations increase significantly and we will have a balloon payment due in December 2015 under the Credit Suisse facility. This
required payment will limit funds otherwise available for working capital, capital expenditures and other purposes. Our inability
to service our debt could lead to acceleration of our debt and foreclosures of our fleet. We may not be able to generate cash flow
in amounts that are sufficient for these purposes.
We depend
upon a few significant customers for a large part of our revenues. The loss of one or more of these customers could adversely affect
our financial performance.
We
have historically derived a significant part of our revenue from a small number of charterers. During the year ended December 31,
2013, we derived approximately 44% of our gross revenue from two charterers, and during the same period in 2012, we derived approximately
32% of our gross revenues from two charterers. If we do remain dependent, in large part, on a small number of charterers, if one
or more of our charterers is unable to perform under one or more charters with us, if we are not able to find appropriate replacement
charterers, or if a charterer exercises certain rights to terminate its charter, we could suffer a loss of revenues that could
materially adversely affect our business, financial condition and results of operations.
The international
drybulk shipping industry is highly competitive, and we may not be able to compete successfully for charters with new entrants
or established companies with greater resources.
We
employ our vessels in a highly competitive market that is capital intensive and highly fragmented. Competition arises primarily
from other vessel owners, some of which have substantially greater resources than we do. Competition for the transportation of
drybulk cargo by sea is intense and depends on price, customer relationships, operating expertise, professional reputation and
size, age, location and condition of the vessel. Due in part to the highly fragmented market, additional competitors with greater
resources could enter the drybulk shipping industry and operate larger fleets through consolidations or acquisitions and may be
able to offer lower charter rates than we are able to offer, which could have a material adverse effect on our fleet utilization
and, accordingly, our profitability.
We currently
rely on our Manager 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, through Free Bulkers,
S.A., our Manager. We rely on our Manager to provide the technical management of our fleet and to attract charterers and charter
brokers. The loss of its services or failure to perform its obligations could reduce our revenues and net income and adversely
affect our operations and business if we are not able to contract with other companies to provide these services or take over these
aspects of our business directly. FreeSeas has no control over our Manager. Our Manager is not liable to us for any losses or damages,
if any, that may result from its management of our fleet unless the same shall have resulted from willful misconduct or gross negligence
of our Manager or any person to whom performance of the management services has been delegated by our Manager. Pursuant to its
agreement with us, our Manager’s liability for such acts, except in certain limited circumstances, may not exceed ten times
the annual management fee payable by the applicable subsidiary to our Manager. Although we may have rights against our Manager,
if our Manager defaults on its obligations to us, we may have no recourse against our Manager. Further, we will need approval from
our lenders if we intend to replace our Manager as our fleet manager.
We and one
of our executive officers have affiliations with our Manager 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 our Manager.
These dual responsibilities of our officer and the relationships between the two companies could create conflicts of interest between
our Manager and us. Each of our operating subsidiaries has a nonexclusive management agreement with our Manager. Although our Manager
currently serves as manager for vessels owned by us, our Manager is not restricted from entering into management agreements with
other competing shipping companies. Our Manager could also allocate charter and/or vessel purchase and sale opportunities to others.
There can be no assurance that our Manager would resolve any conflicts of interest in a manner beneficial to us.
Management
and service fees are payable to our Manager, regardless of our profitability, which could have a material adverse effect on our
business, financial condition and results of operations.
The
management and service fees due from us to our Manager are payable whether or not our vessels are employed, and regardless of our
profitability. We have no ability to require our Manager to reduce the management fees and service fees if our profitability decreases,
which could have a material adverse effect on our business, financial condition and results of operations.
Our Manager
is a privately held company, and there is little or no publicly available information about it.
The
ability of our Manager to continue providing services for our benefit will depend in part on its own financial strength. Circumstances
beyond our control could impair our Manager’s financial strength. Because our Manager is privately held, it is unlikely that
information about its financial strength would become public or available to us prior to any default by our Manager under the management
agreement. As a result, an investor in us might have little advance warning of problems that affect our Manager, even though those
problems could have a material adverse effect on us.
As part
of its services to us, our Manager must continue to upgrade its operational, accounting and financial systems, and add more staff.
If our Manager cannot upgrade these systems or recruit suitable additional employees, its services to us and, therefore, our performance
may suffer.
Our
current operating, internal control, accounting and financial systems are provided by our Manager and may not be adequate if our
Manager’s efforts to improve those systems may be ineffective. If our Manager cannot continue to upgrade its operational
and financial systems effectively or recruit suitable employees, its services to us and, therefore, our performance may suffer
and our ability to expand our business further will be restricted.
We and our
Manager may be unable to attract and retain key executive officers with experience 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 and our Manager’s executive officers. The loss
of any of these individuals could adversely affect our business prospects and financial condition. Our success will depend on retaining
these key members of our and our Manager’s management team. Difficulty in retaining our executive officers, and difficulty
in our Manager retaining its executive officers, 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.
We intend
to continue to charter most of our vessels in the spot market, and as a result, we will be exposed to the cyclicality and volatility
of the spot charter market.
Since
we intend to continue to charter our vessels in the spot market, we will be exposed to the cyclicality and volatility of the spot
charter market, and we may not have long term, fixed time charter rates to mitigate the adverse effects of downturns in the spot
market. We cannot assure you that we will be able to successfully charter our vessels in the future at rates sufficient to allow
us to meet our obligations. The supply of and demand for shipping capacity strongly influences freight rates. Because the factors
affecting the supply and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and
degree of changes in industry conditions are also unpredictable.
Factors
that influence demand for drybulk vessel capacity include:
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demand for and production of drybulk products;
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global and regional economic and political conditions including developments in international trade,
fluctuations in industrial and agricultural production and armed conflicts;
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the distance drybulk cargo is to be moved by sea;
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environmental and other regulatory developments; and
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changes in seaborne and other transportation patterns.
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The factors that influence the supply of drybulk vessel capacity include:
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the number of newbuilding deliveries;
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port and canal congestion;
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the scrapping rate of older vessels;
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the number of vessels that are out of service, i.e., laid-up, drydocked, awaiting repairs or otherwise
not available for hire.
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In
addition to the prevailing and anticipated freight rates, factors that affect the rate of newbuilding, scrapping and laying-up
include newbuilding prices, availability of financing for dry-bulk vessel acquisition and building, 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 influencing
the supply of and demand for shipping capacity are outside of our control, and we may not be able to correctly assess the nature,
timing and degree of changes in industry conditions.
We
anticipate that the future demand for our drybulk carriers will be dependent upon economic growth in the world’s major industrialized
economies, as well as emerging economies including in particular China, Japan and India, seasonal and regional changes in demand,
changes in the capacity of the global drybulk carrier fleet and the sources and supply of drybulk cargo to be transported by sea.
The capacity of the global drybulk carrier fleet seems likely to increase, and we can provide no assurance as to the timing or
extent of future economic growth. Adverse economic, political, social or other developments could have a material adverse effect
on our business, results of operations, cash flows and financial condition. Should the drybulk market strengthen significantly
in the future, we may enter into medium to long term employment contracts for some or all of our vessels.
With
the exception of the M/V
Free Impala
which is in cold lay-up, we intend to employ our vessels predominantly in the spot
market with charters that typically last one to two months. Presently three of our vessels are undergoing dry-dockings, repairs
and /or extensive maintenance at shipyards. We anticipate that all three vessels will return to charter service by the end of March
and/or beginning of April with freshly passed surveys giving them a time window of at least two and half years until their next
scheduled dry-docking. If the rates in the charter market fall significantly during 2014, it will affect the charter revenue we
will receive from our 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.
When our charters in the spot market
end, we may not be able to replace them promptly, and any replacement charters could be at lower charter rates, which may materially,
adversely affect our earnings and results of operations.
We will generally attempt
to recharter our vessels at favorable rates with reputable charterers. All 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 reduced rates, if such charters are available at all. In the event charter rates fall below our costs
to operate a vessel or for any other strategic or operational matter, we may determine not to recharter a vessel until such time
as the charter rates increase or such strategic or operational matter ceases to exist. We cannot assure you that we will be able
to obtain new charters at comparable or higher rates or with comparable charterers, that we will be able to obtain new charters
at all or that we may decide not to charter a vessel at all. The charterers under our charters have no obligation to renew or extend
the charters. We will generally attempt to recharter our vessels at favorable rates with reputable charterers as our charters expire.
Failure to obtain replacement charters at rates comparable to our existing charters and our decision not to charter vessels will
reduce or eliminate our revenue and will adversely affect our ability to service our debt. Further, we may have to incur lay-up
expenses or reposition our vessels without cargo or compensation to deliver them to future charterers or to move vessels to areas
where we believe that future employment may be more likely or advantageous. Laying up expenses and reactivating expenses would
increase our vessel operating expenses. Repositioning our vessels would increase our vessel operating costs. If any of the foregoing
events were to occur, our revenues, net income and earnings may be materially adversely affected.
Further
declines in charter rates and other market deterioration could cause us to incur impairment charges.
We
evaluate the recoverable amounts of our vessels to determine if events have occurred that would require an impairment of their
carrying amounts. The recoverable amount of vessels is reviewed based on events and changes in circumstances that would indicate
that the carrying amount of the assets might not be recovered. The review for potential impairment indicators and future undiscounted
net operating cash flows related to the vessels is complex and requires us to make various estimates including future charter rates
and earnings from the vessels which have been historically volatile.
When
our estimate of future undiscounted net operating cash flows for any vessel is lower than the vessel’s carrying value, the
carrying value is written down, by recording a charge to operations, to the vessel’s fair market value if the fair market
value is lower than the vessel’s carrying value. The carrying values of our vessels may not represent their fair market value
because the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Any
impairment charges incurred as a result of declines in charter rates could have a material adverse effect on our business, results
of operations, cash flows and financial condition.
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. Charterers may not pay or may 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 may be at lower rates.
We
lose a charterer or the benefits of a charter if a charterer fails to make charter payments because of its financial inability,
disagreements with us or otherwise, terminates the charter because we fail to deliver the vessel within the time specified in the
charter, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire,
default under the charter or the vessel has been subject to seizure for more than a specified number of days.
Pursuant
to a charterparty dated November 8, 2012, the Company chartered the M/V
Free Neptune
to Tramp Maritime Enterprises Ltd.
("TME"). TME failed to pay outstanding hire in the amount of US$356. On April 2, 2013, the Company therefore commenced
arbitration proceedings against TME under the charterparty.
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. 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.
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 ending June 30 and September 30 and, conversely,
we expect our revenues from our drybulk carriers to be typically stronger in fiscal quarters ending December 31 and March 31.
Seasonality in the drybulk industry could materially affect our operating results.
The aging
of our fleet may result in increased operating costs in the future, which could adversely affect our ability to operate our vessels
profitably.
The
majority of our vessels were acquired second-hand, and we estimate their useful lives to be 28 years from their date of delivery
from the yard, depending on various market factors and management’s ability to comply with government and industry regulatory
requirements. As of December 31, 2013, the average age of the vessels in our current fleet was 16.3 years. Part of our business
strategy includes the continued acquisition of second hand vessels when we find attractive opportunities.
In
general, expenditures necessary for maintaining a vessel in good operating condition increase as a vessel ages. Second hand vessels
may also develop unexpected mechanical and operational problems despite adherence to regular survey schedules and proper maintenance.
Cargo insurance rates also tend to increase with a vessel’s age, and older vessels tend to be less fuel-efficient than newer
vessels. While the difference in fuel consumption is factored into the freight rates that our older vessels earn, if the cost of
bunker fuels were to increase significantly, it could disproportionately affect our vessels and significantly lower our profits.
In addition, changes in governmental regulations, safety or other equipment standards may require:
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expenditures for alterations to existing equipment;
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the addition of new equipment; or
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restrictions on the type of cargo a vessel may transport.
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We
cannot give assurances that future market conditions will justify such expenditures or enable us to operate our vessels profitably
during the remainder of their economic lives.
Although
we inspect the secondhand vessels that we acquire prior to purchase, this inspection does not provide us with the same knowledge
about a vessel’s 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.
Unless we
set aside reserves or are able to borrow funds for vessel replacement, at the end of a vessel’s useful life our revenue will
decline, which would adversely affect our business, results of operations and financial condition.
Unless
we maintain reserves or are able to borrow or raise funds for vessel replacement, we may be unable to replace the vessels in our
fleet upon the expiration of their useful lives, which we expect to be 28 years from their date of delivery from the yard. 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.
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.
A
vessel must undergo annual surveys, intermediate surveys, dry-dockings and special surveys. In lieu of a special survey, a vessel’s
machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period.
Our vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel
is also required to be dry-docked every two to three years for inspection of the underwater parts of such vessel.
If
any vessel does not maintain its class and/or fails any annual survey, intermediate survey, dry-docking or special survey, the
vessel will be unable to carry cargo between ports and will be unemployable and uninsurable, thereby reducing our revenues and
profitability. That could also cause us to be in violation of certain covenants in our loan agreements. In addition, the cost of
maintaining our vessels’ classifications may be substantial at times and could result in reduced revenues.
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 and vessel off-hire.
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 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.
Our growth
depends on the growth in demand for and the shipping of drybulk cargoes.
Our
growth strategy focuses on the drybulk shipping sector. Accordingly, our growth depends on growth in world and regional demand
for and the shipping of drybulk cargoes, which could be negatively affected by a number of factors, such as declines in prices
for drybulk cargoes or general political and economic conditions.
Reduced
demand for and the shipping of drybulk cargoes would have a material adverse effect on our future growth and could harm our business,
results of operations and financial condition. In particular, Asian Pacific economies and India have been the main driving force
behind the past increase in seaborne drybulk trade and the demand for drybulk carriers. The negative change in economic conditions
in any Asian Pacific country, but particularly in China or Japan, as well as India, may have a material adverse effect on our business,
financial condition and results of operations, as well as our future prospects, by further reducing demand and resultant charter
rates.
If we fail
to manage our growth properly, we may not be able to successfully expand our market share.
We
will continue exploring expansion opportunities as our financial resources permit. Our growth will depend on:
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locating and acquiring suitable vessels;
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placing newbuilding orders and taking delivery of 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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If
our financial resources permit, we could face risks in connection with growth by acquisition, such as undisclosed liabilities and
obligations and difficulty experienced in obtaining additional qualified personnel, managing relationships with customers and suppliers,
and 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.
Our
ability to successfully implement our business plan depends on our ability to obtain additional financing, which may affect the
value of your investment in us.
We
plan to continue to explore expansion opportunities. We will require substantial additional financing to fund any acquisitions
of additional vessels and to implement our business plan. We cannot be certain that sufficient financing will be available on terms
that are acceptable to us or at all. If we cannot raise the financing we need in a timely manner and on acceptable terms, we may
not be able to acquire the vessels necessary to implement our business plans and consequently you may lose some or all of your
investment in us.
While
we expect that a significant portion of the financing resources needed to acquire vessels, if any, will be through long-term debt
financing, we may raise additional funds through additional equity offerings. New equity investors may dilute the percentage of
the ownership interest of our existing shareholders. Sales or the possibility of sales of substantial amounts of shares of our
common stock in the public markets could adversely affect the market price of our common stock.
The market values of our vessels
have declined and may further decrease, and we may incur losses when we sell vessels or we may be required to write down their
carrying value, which may adversely affect our earnings and our ability to implement our fleet renewal program.
The market values of
our vessels will fluctuate depending on general economic and market conditions affecting the shipping industry and prevailing charter
hire rates, competition from other shipping companies and other modes of transportation, the types, sizes and ages of our vessels,
applicable governmental regulations and the cost of newbuildings.
If
a determination is made that a vessel’s future useful life is limited or its future earnings capacity is reduced, it could
result in an impairment of its carrying amount on our financial statements that would result in a charge against our earnings and
the reduction of our shareholders’
equity.
If for any reason we sell our vessels at a time when prices have fallen, the sale price may be less than the vessels’
carrying amount on our financial statements, and we would incur a loss
and a reduction in earnings. During the year ended December 31, 2013, we incurred an aggregate impairment loss of $27,455 of which
$3,477 related to the vessels formerly
“held
for sale” (M/V
Free Hero
, M/V
Free Jupiter
, M/V
Free Impala
and M/V
Free Neptune
) subsequently
classified to “held and used”
as
of December 31, 2013 and the amount of $23,978 as a result of the sale of M/V
Free Knight
on February 18, 2014.
We have incurred secured
debt under loan agreements for all of our vessels. The market value of our vessels is based, in part, on charter rates and the
stability of charter rates over a period of time. As a result of global economic conditions, volatility in charter rates, generally
declining charter rates, and other factors, we have recently experienced a decrease in the market value of our vessels. Due to
the decline of the market value of our fleet, we were not 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.
There can be no assurances that charter rates will stabilize or increase, that the market value of our vessels will stabilize or
increase or that we will regain compliance with the financial covenants in our loan agreements or that our lenders will agree to
waivers or forbearances.
If we fail to sell
our vessels at prices acceptable to us, it could have a material adverse effect on our competitiveness and business operations.
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 lien holder, such as our lenders, 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 “associated vessel”
theory
of liability, a claimant may arrest both the vessel which is subject to the claimant’s maritime lien and any “associated”
vessel, which is any vessel owned or controlled by the same owner or managed
by the same manager. Claimants could try to assert “associated vessel”
liability
against one of our vessels for claims relating to another of our vessels or a vessel managed by our Manager.
Economic conditions and regulatory
pressures impacting banks in Greece may cause disruptions to one of our lenders, which may cause an increase in the cost of our
borrowings from that lender.
On
May 11, 2013 the Bank of Greece announced that the operating license of one of our Greek-based Lenders, FBB - First Business Bank
had been revoked and that the bank would be split into a “good bank”
to
be absorbed by the National Bank of Greece and a “bad bank”
consisting
of the loans characterized under ‘permanent default’
to
be handed over to a specially appointed liquidator for the purpose of the extraordinary liquidation of its assets. Effective May
13, 2013, the bank’s deposits and loans other than the loans ‘under permanent default’ as well as the bank’s
network of nineteen branches were transferred to the NBG. As a result, the Company’s loan facility and deposits have been
transferred to the NBG. We cannot estimate how this situation will affect our relationship with the bank and how cooperative it
will be with regards to our non-compliance with financial and other covenants and our non-payment of overdue interest and principal.
The smuggling
of drugs or other contraband onto our vessels may lead to governmental claims against us.
We
expect that our vessels will call in ports in South America and other areas where smugglers are known to attempt to hide drugs
and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband,
whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face
governmental or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows and
financial condition.
Rising fuel
prices may adversely affect our profits.
Upon
redelivery of vessels at the end of a period time or trip time charter, we may be obligated to repurchase bunkers on board at prevailing
market prices, which could be materially higher than fuel prices at the inception of the charter period. In addition, although
we rarely deploy our vessels on voyage charters, fuel is a significant, if not the largest, expense that we would incur with respect
to vessels operating on voyage charter. As a result, an increase in the price of fuel may adversely affect our profitability. The
price and supply of fuel is volatile and fluctuates based on events outside our control, including geopolitical developments, supply
and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and regions,
regional production patterns and environmental concerns and regulations.
We are subject
to regulation and liability under environmental laws and the failure to comply with these regulations may subject us to increased
liability, may adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain ports.
This 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, including those governing the management and disposal of hazardous substances and wastes,
the cleanup of oil spills and other contamination, air emissions, and water discharges and ballast water management. 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, or the required additional
measures for compliance are still under development, 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 which could limit our ability to do business or increase the cost of our doing business and
which may materially adversely affect our business, financial condition and results of operations.
Environmental
requirements can also affect the resale prices or useful lives of our vessels or require reductions in cargo capacity, ship modifications
or operational changes or restrictions. Failure to comply with these requirements could lead to decreased availability of or more
costly insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports,
or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could
incur material liabilities, including cleanup obligations and claims for natural resource, personal injury and property damages
in the event that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with
our operations. The 2010 explosion of the Deepwater Horizon and the subsequent release of oil into the Gulf of Mexico or similar
events may result in further regulation of the shipping industry, including modifications to statutory liability schemes.
The
operation of our vessels is affected by the requirements set forth in the International Safety Management, or ISM Code. 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.
The
European Union is currently considering proposals to further regulate vessel operations. Individual countries in the European Union
may also have additional environmental and safety requirements. It is difficult to predict what legislation or regulation, if any,
may be adopted by the European Union or any other country or authority.
The
International Maritime Organization or other regulatory bodies may adopt additional regulations in the future that could adversely
affect the useful lives of our vessels as well as our ability to generate income from them or resell them at attractive prices.
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. 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).
Violations
of, or liabilities under, environmental or other applicable laws and regulations can result in substantial penalties, fines and
other sanctions, including, in certain instances, seizure or detention of our vessels. Events of this nature could have a material
adverse effect on our business, financial condition and results of operations.
Technological
innovation related to existing or new vessels could reduce the competitiveness of our older vessels and therefore the value of
such vessels in the chartering and secondhand resale markets.
The
charter hire rates and the value and operational life of a vessel are determined by a number of factors, including the vessel’s
efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge
cargo quickly. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and
straits. The length of a vessel’s physical life is related to its original design and construction, its maintenance and the
impact of the stress of operations. If new drybulk carriers are built that are more efficient or more flexible or have longer physical
lives than our older vessels, competition from these more technologically advanced vessels could adversely affect the competitiveness
of our older vessels, and, in turn, the amount of charter hire payments we receive for our older vessels once their initial charters
expire, and the resale value of our older vessels could significantly decrease.
Our vessels
are exposed to inherent operational risks that may not be adequately covered by our insurance.
The
operation of any vessel includes risks such as mechanical failure, collision, fire, contact with fixed or floating objects, cargo
or property loss or damage and business interruption due to political circumstances in foreign countries, piracy, terrorist attacks,
armed hostilities and labor strikes. With a drybulk carrier, the cargo itself and its interaction with the ship can be a risk factor.
By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk
carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes
out of the hold), and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during
unloading procedures may be more susceptible to breach to the sea. Hull breaches in drybulk carriers may lead to the flooding of
the vessels’ holds. If a drybulk carrier suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged
that its pressure may buckle the vessel’s 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 and results of operations.
Further,
such occurrences could result in death or injury to persons, loss of property or environmental damage, delays in the delivery of
cargo, loss of revenues from or termination of charter contracts, governmental fines, penalties or restrictions on conducting business,
higher insurance rates and damage to our reputation and customer relationships generally. 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 and
the Gulf of Aden and Indian Ocean off the coast of Somalia and Kenya. If these attacks and other disruptions result in areas where
our vessels are deployed being characterized by insurers as “war risk” zones or Joint War Committee “war, strikes,
terrorism and related perils” listed areas, as the Gulf of Aden currently is, premiums payable for such coverage could increase
significantly and such insurance coverage may be more difficult or impossible to obtain. In addition, there is always the possibility
of a marine disaster, including oil spills and other environmental damage. Although our vessels carry a relatively small amount
of the oil used for fuel (“bunkers”), a spill of oil from one of our vessels or losses as a result of fire or explosion
could be catastrophic under certain circumstances.
We
may not be adequately insured against all risks, and our insurers may not pay particular claims. With respect to war risks insurance,
which we usually obtain for certain of our vessels making port calls in designated war zone areas, such insurance may not be obtained
prior to one of our vessels entering into an actual war zone, which could result in that vessel not being insured. Even if our
insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement vessel in the event of a
loss. Under the terms of our credit facilities, we will be subject to restrictions on the use of any proceeds we may receive from
claims under our insurance policies. Furthermore, in the future, we may not be able to maintain or obtain adequate insurance coverage
at reasonable rates for our fleet. We may also be subject to calls, or premiums, in amounts based not only on our own claim records
but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity
insurance coverage for tort liability. Our insurance policies also contain deductibles, limitations and exclusions which, although
we believe are standard in the shipping industry, may nevertheless increase our costs in the event of a claim or decrease any recovery
in the event of a loss. If the damages from a catastrophic oil spill or other marine disaster exceeded our insurance coverage,
the payment of those damages could have a material adverse effect on our business and could possibly result in our insolvency.
In
addition, we may not carry loss of hire insurance. Loss of hire insurance covers the loss of revenue during extended vessel off-hire
periods, such as those that occur during an unscheduled drydocking due to damage to the vessel from accidents. Accordingly, any
loss of a vessel or any extended period of vessel off-hire, due to an accident or otherwise, could have a material adverse effect
on our business, financial condition and results of operations.
We may be
subject to increased premium payments because we obtain some of our insurance through protection and indemnity associations.
We
may be subject to increased premium payments, or calls, in amounts based not only on our and our Manager’s claim records
but also the claim records of other members of the protection and indemnity associations through which we receive insurance coverage
for tort liability, including pollution-related liability. Our protection and indemnity associations may not have enough resources
to cover claims made against them. Our payment of these calls could result in significant expense to us, which could have a material
adverse effect on our business, results of operations, cash flows and financial condition.
Our operations
expose us to global political risks, such as wars and political instability that may interfere with the operation of our vessels
causing a decrease in revenues from such vessels.
We
are an international company and primarily conduct our operations outside the United States. Changing economic, political and governmental
conditions in the countries where we are engaged in business or where our vessels are registered will affect us. In the past, political
conflicts, particularly in the Middle East, resulted in attacks on vessels, mining of waterways and other efforts to disrupt shipping
in the area. For example, recent political and governmental instability in Egypt, Syria and Libya may affect vessels trading in
such regions. In addition, future political and governmental instability, revolutions and wars in regions where our vessels trade
could affect our trade patterns and adversely affect our operations by causing delays in shipping on certain routes or making shipping
impossible on such routes, thereby causing a decrease in revenues.
During
a period of war or emergency, 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, when a
government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Government requisition of
one or more of our vessels could reduce our revenues and net income.
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.
Crew
costs are a significant expense for us under our charters. Recently, the limited supply of and increased demand for well-qualified
crew, due to the increase in the size of the global shipping fleet, has created upward pressure on crewing costs, which we generally
bear under our period time and spot charters. Increases in crew costs may adversely affect our profitability.
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.
We may enter
into derivative contracts to hedge our exposure to fluctuations in interest rates, which could result in higher than market interest
rates and charges against our income.
We
previously entered into two interest rate swaps for purposes of managing our exposure to fluctuations in interest rates applicable
to indebtedness under two of our credit facilities with Credit Suisse, which provided for a floating interest rate based on LIBOR.
On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate swap agreements with Credit Suisse.
In the future, we may enter into new interest rate swap or other derivative contracts to hedge against fluctuation in interest
rates. Our hedging strategies, however, may not be effective and we may incur substantial losses if interest rates move materially
differently from the fixed rates agreed to in our derivative contracts. Future derivative contracts may not qualify for treatment
as hedges for accounting purposes, therefore, we would be required to recognize fluctuations in the fair value of such contracts
in our income statement. In addition, our financial condition could be materially adversely affected since we currently do not
hedge our exposure to interest rate fluctuations under our financing arrangements. Any hedging activities we engage in may not
effectively manage our interest rate exposure or have the desired impact on our financial conditions or results of operations.
From
time to time in the future, we may take positions in derivative instruments including freight forward agreements, or FFAs. FFAs
and other derivative instruments may be used to hedge a vessel owner’s exposure to the charter market by providing for the
sale of a contracted charter rate along a specified route and period of time. Upon settlement, if the contracted charter rate is
less than the average of the rates, as reported by an identified index, for the specified route and time period, the seller of
the FFAs is required to pay the buyer an amount equal to the difference between the contracted rate and the settlement rate, multiplied
by the number of days in the specified period. Conversely, if the contracted rate is greater than the settlement rate, the buyer
is required to pay the seller the settlement sum. If we take positions in FFAs or other derivative instruments and do not correctly
anticipate charter rate movements over the specified route and time period, we could suffer losses in the settling or termination
of the FFA. This could adversely affect our results of operation and cash flow. As of the date of this annual report, we had no
FFAs outstanding.
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. For the year ended December 31, 2013 and 2012, the fluctuation in the value of the
dollar against foreign currencies did not have a material impact on us.
We may have
to pay tax on United States source income, which would reduce our earnings.
Under the laws of the
Countries of the Company and its subsidiaries incorporation and/or vessels’ registration, the Company is not subject to tax
on international shipping income; however, they are subject to registration and tonnage taxes, which have been included in Vessel
operating expenses in the accompanying consolidated statement of operations. Pursuant to the Internal Revenue Code of the United
States (the “Code”), U.S. source income from the international operations of ships is generally exempt from U.S. tax
if the company operating the ships meets both of the following requirements, (a) the Company is organized in a foreign country
that grants an equivalent exemption to corporations organized in the United States, and (b) either (i) more than 50%
of the value of the Company’s stock is owned, directly or indirectly, by individuals who are “residents” of the
Company’s country of organization or of another foreign country that grants an “equivalent exemption” to corporations
organized in the United States (the “50% Ownership Test”) or (ii) the Company’s stock is “primarily
and regularly traded on an established securities market” in its country of organization, in another country that grants
an “equivalent exemption” to United States corporations, or in the United States (the “Publicly-Traded Test”).
To
complete the exemption process, the Company’s shipowning subsidiaries must file a U.S. tax return, state the basis of their
exemption and obtain and retain documentation attesting to the basis of their exemptions. The Company’s subsidiaries completed
the filing process for 2013 on or prior to the applicable tax filing deadline. All the Company’s ship-operating subsidiaries
currently satisfy the Publicly-Traded Test based on the trading volume and the widely-held ownership of the Company’s shares,
but no assurance can be given that this will remain so in the future, since continued compliance with this rule is subject to factors
outside the Company’s control.
In addition, the Company’s vessels did not call
on any U.S. ports during the year ended December 31, 2013 and thus the Company’s shipowning subsidiaries have no tax obligations
despite the exemptions. Based on its U.S. source Shipping Income for 2011 and 2012, the Company would be subject to U.S. federal
income tax of approximately $93 and $25, respectively, in the absence of an exemption under Section 883.
U.S. tax
authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income
tax consequences to U.S. holders.
A
foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax
purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income”
or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those
types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest,
and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received
from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived
from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from
the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
Based
on our 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 federal court decision
has 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 shareholder’s holding period of our common
stock.
Risk Factors
Relating to the Drybulk Shipping Industry
The international
drybulk shipping industry is cyclical and volatile and charter rates have decreased significantly and may further decrease in the
future, which may adversely affect our earnings, vessel values and results of operations.
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, they may remain volatile for the foreseeable future and could continue
to decline further. Additionally, charter rates have been particularly volatile. As a result, our charter rates could further decline
significantly, resulting in a loss and a reduction in earnings.
We
anticipate that the future demand for our drybulk vessels will be dependent upon existing conditions in the world’s economies,
seasonal and regional changes in demand, changes in the number of drybulk vessels being ordered and constructed, particularly if
there is an oversupply of vessels, 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 charters, 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 vessel’s carrying amount on our financial statements,
resulting in a loss and a reduction in earnings.
The drybulk
carrier charter market remains significantly below its high in the middle of 2008 and the average rates achieved in the five prior
years, which has and may continue to adversely affect our revenues, earnings and profitability and our ability to comply with our
loan covenants and repay our indebtedness.
The
drybulk shipping industry is cyclical with attendant volatility in charter hire rates and profitability. The degree of charter
hire rate volatility among different types of dry bulk vessels has varied widely; however, the continued downturn in the drybulk
charter market has severely affected the entire dry bulk shipping industry and charter hire rates for drybulk vessels have declined
significantly from historically high levels. The Baltic Dry Index (the “BDI”), which is published daily by the Baltic
Exchange Limited, a London-based membership organization that provides daily shipping market information to the global investing
community, is a daily average of charter rates in selected shipping routes measured on a time charter and voyage basis covering
Handysize, Supramax, Panamax and Capesize drybulk carriers. The BDI has long been viewed as the main benchmark to monitor the movements
of the dry bulk vessel charter market and the performance of the entire drybulk shipping market. The BDI declined 94% in 2008 from
a peak of 11,793 in May 2008 to a low of 663 in December 2008 and remained volatile during 2009, ranging from a low of 772 in January
2009 to a high of 4,661 in November 2009. The BDI continued its volatility in 2012 and 2013, reaching a high of 1,738 in January
2012 and a low of approximately 647 in February 2012 and a high of 2,337 in December 2013 and a low of 698 in January 2013.
As
of March 10, 2014, the BDI was 1,562. The decline and volatility in charter rates has been due to various factors, including the
lack of trade financing for purchases of commodities carried by sea, which had resulted in a significant decline in cargo shipments.
The decline and volatility in charter rates in the drybulk market also affects the value of our drybulk vessels, which follows
the trends of drybulk charter rates, and earnings on our charters, and similarly, affects our cash flows, our ability to repay
our indebtedness and compliance with the covenants contained in our loan agreements.
Economic
recession and disruptions in world financial markets and the resulting governmental action in the United States and in other parts
of the world could have a further material adverse impact on our results of operations, financial condition and cash flows.
We
face risks resulting from changes in economic environments, changes in interest rates and instability in the banking, energy, commodities
and securities markets around the world, among other factors. Major market disruptions, the adverse changes in market conditions
and the regulatory climate in the United States and worldwide may adversely affect our business, impair our ability to borrow amounts
under our existing credit facility or any credit facilities we enter into. In addition, the economic environment in Greece, which
is where our operations are based, may have adverse impacts on us. We cannot predict how long the current market conditions will
last. However, these economic and governmental factors, together with the concurrent decline in charter rates, could have a significant
effect on our results of operations and could affect the price of our common stock.
An economic
slowdown in the Asia Pacific region could exacerbate the effect of recent slowdowns in the economies of the European Union and
may have a material adverse effect on our business, financial condition and results of operations.
We
anticipate a significant number of the port calls made by our vessels will continue to involve the loading or discharging of drybulk
commodities in ports in the Asia Pacific region. As a result, any negative changes in economic conditions in any Asia Pacific country,
particularly in China, may exacerbate the effect of recent slowdowns in the economies of the European Union and may have a material
adverse effect on our business, financial condition and results of operations, as well as our future prospects. Before the global
economic financial crisis that began in 2008, China had one of the world’s fastest growing economies in terms of gross domestic
product (“GDP”) which had a significant impact on shipping demand. The growth rate of China’s GDP decreased to
approximately 7.8% for the year ended December 31, 2012, as compared to 9.3% and 10.4% for the years ended December 31, 2011
and 2010, respectively, and continues to remain below pre-2008 levels. It is possible 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 European Union and other Asian countries may further adversely affect economic growth in China
and elsewhere. Our business, financial condition and results of operations, as well as our future prospects, will likely be materially
and adversely affected by a further 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. Since 1978, increasing emphasis has been placed on the utilization
of market forces in the development of the Chinese economy. There is an increasing level of freedom and autonomy in areas such
as allocation of resources, production, pricing and management and a gradual shift in emphasis to a “market economy”
and enterprise reform. Although limited price reforms were undertaken, with the result that prices for certain commodities are
principally determined by market forces, many of the reforms are experimental and may be subject to change or abolition. We cannot
assure you that the Chinese government will continue to pursue a policy of economic reform. The level of imports to and exports
from China could be adversely affected by changes to these economic reforms, as well as by changes in political, economic and social
conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions,
all of which could, adversely affect our business, financial condition and operating results.
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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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.
The M/V
Free
Goddess
had been hijacked by Somali pirates on February 7, 2012 while transiting the Indian Ocean eastbound. On October
11, 2012, we announced that all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s release
by the pirates. At the time of the hijacking the vessel was on time charter in laden condition. Since the release from the pirates,
the vessel had been laying at the port of Salalah, Oman, undertaking repairs funded mostly by Insurers. The repairs of
the vessel were completed, and notice of readiness was tendered to her Charterers for the resumption of the voyage. The Charterers
repudiated the Charter and we accepted Charterers' repudiation and terminated the fixture reserving our right to claim damages
and other amounts due to us. The Tribunal previously constituted will hear our claim for (amongst others) unpaid hire
and damages from the Charterers. At the same time, all options are being explored for the commercial resolution
of the situation arising from Charterers refusal to honor their obligations, including the further contribution by Insurers and
cargo interests towards the completion of the voyage and recovery of amounts due. The Company is working for a diligent
solution in order to complete the voyage without further delays.
An oversupply of drybulk vessel capacity
may lead to reductions in charter rates and profitability.
As of December 31,
2013, newbuilding orders had been placed for an aggregate of approximately 17% of the total DWT of the then-existing global drybulk
fleet, with deliveries expected mainly during the succeeding 36 months, although available data with regard to cancellations of
existing newbuilding orders or delays of new build deliveries are not always accurate. As of December 31, 2012, newbuilding
orders had been placed for an aggregate of approximately 18% of the total DWT of the then-existing global drybulk fleet, with deliveries
expected mainly during the succeeding 36 months, although available data with regard to cancellations of existing new build orders
or delays of new build deliveries are not always accurate. An over-supply of drybulk carrier capacity may result in a reduction
of charter hire rates. Because the factors affecting the supply and demand for vessels are outside of our control and are unpredictable,
the nature, timing, direction and degree of changes in industry conditions are also unpredictable.
Factors
that influence demand for vessel capacity include:
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supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial
products;
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changes in the exploration or production of energy resources, commodities, semi-finished and finished
consumer and industrial products;
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the location of regional and global exploration, production and manufacturing facilities;
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the location of consuming regions for energy resources, commodities, semi-finished and finished
consumer and industrial products;
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the globalization of production and manufacturing; global and regional economic and political conditions,
including armed conflicts, terrorist activities, embargoes and strikes;
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developments in international trade;
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changes in seaborne and other transportation patterns, including the distance cargo is transported
by sea;
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environmental and other regulatory developments;
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currency exchange rates; and weather.
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The
factors that influence the supply of vessel capacity include:
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the number of newbuilding deliveries;
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port and canal congestion;
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the scrapping rate of older vessels;
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the number of vessels that are out of service.
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We
anticipate that the future demand for our drybulk carriers will be dependent upon continued economic growth in the world’s
economies, including China and India, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier
fleet and the sources and supply of drybulk cargoes to be transported by sea. The capacity of the global drybulk carrier fleet
seems likely to increase and economic growth may not continue. Adverse economic, political, social or other developments could
have a material adverse effect on our business and operating results.
Increased
inspection procedures and tighter import and export controls could increase costs and disrupt our business.
International
shipping is subject to various security and customs inspection and related procedures in countries of origin and destination. Inspection
procedures can result in the seizure of the contents of our vessels, delays in the loading, offloading or delivery and the levying
of customs duties, fines or other penalties against us.
Since the
terrorist attacks of September 11, 2001, there has been a variety of limitations intended to enhance vessel security.
Regulations
by the U.S. Coast Guard (“USCG”) and rules pursuant to the International Convention for the Safety of Life at Sea have
imposed increased compliance costs on vessel owners and charterers. These costs include certification costs imposed by relevant
agencies and bonding costs under U.S. Customs and Border Protection, as well as potential delays in transit due to increased security
procedures regulating the entry into harbors or the discharge of cargo.
It
is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes
to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render
the shipment of certain types of cargo uneconomical or impractical. Any such changes or developments may have a material adverse
effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.
Risks Related to Our Common Stock
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.
As long as our stock price remains
below $5.00 per share, our shareholders will face restrictions in using our shares as collateral for margin accounts.
The closing price of
our common stock on the NASDAQ Capital Market on March 11, 2014 was $1.78 per share. If the market price of our shares of common
stock remains below $5.00 per share, under Federal Reserve regulations and account maintenance rules of many brokerages, our shareholders
will face restrictions in using such shares as collateral for borrowing in margin accounts. These restrictions on the use of 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.
If our common stock is delisted
from The NASDAQ Stock Market, we would be subject to the risks relating to penny stocks
.
If
our common stock were to be delisted from trading on The NASDAQ Stock Market and the trading price of the common stock were below
$5.00 per share on the date the common stock were delisted, trading in our common stock would also be subject to the requirements
of certain rules promulgated under the Securities Exchange Act of 1934, as amended. These rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a "penny stock" and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, generally
institutions. These additional requirements may discourage broker-dealers from effecting transactions in securities that are classified
as penny stocks, which could severely limit the market price and liquidity of such securities and the ability of purchasers to
sell such securities in the secondary market. A penny stock is defined generally as any non-exchange listed equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
As a foreign private issuer whose
shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain
NASDAQ requirements and are not required to obtain shareholder approval for the sale of shares under the Investment Agreement.
As a foreign private
issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the NASDAQ Marketplace Rules. For example, we may follow home country practice with
regard to, among other things, the composition of the board of directors, compensation of officers, director nomination process
and quorum at shareholders’ meetings. In addition, we may follow home country practice instead of the NASDAQ requirement
to obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity-based
compensation plans, a stock issuance that will result in a change of control of the company, certain transactions other than a
public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of
another company. In particular, we are not required to obtain shareholder approval for our sale of shares pursuant to the Investment
Agreement, which may result in the issuance of shares totaling more than 20% of our outstanding shares. Accordingly, our shareholders
may not be afforded the same protections as provided under NASDAQ’s corporate governance rules.
Future sales or issuances of our
stock could cause the market price of our common stock to decline.
Issuance of a substantial
number of shares of our common stock in public or private offerings, including pursuant to the Investment Agreement, or in payment
of obligations due, or the perception that these issuances could occur, may depress the market price for our common stock. These
issuances 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 common stock in the future and our shareholders may elect to sell large numbers of shares held
by them from time to time. Also, we may need to raise additional capital to achieve our business plans.
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.
We can issue
shares of preferred stock without shareholder approval, which could adversely affect the rights of common shareholders.
Our
articles of incorporation permit us to establish the rights, privileges, preferences and restrictions, including voting rights,
of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of
our common stock may suffer as a result of the rights granted to holders of preferred stock that we may issue in the future. In
addition, we could issue preferred stock to prevent a change in control of our company, depriving common shareholders of an opportunity
to sell their stock at a price in excess of the prevailing market price.
Our stockholder rights plan may discourage a takeover.
In
January 2009, our Board of Directors authorized shares of Series A Participating Preferred Stock in connection with its adoption
of a stockholder rights plan, under which we issued rights to purchase Series A Preferred Stock to holders of our common stock.
Upon certain triggering events, each Right entitles the registered holder to purchase from us one one-thousandth of a share of
Preferred Stock at an exercise price of $90.00, subject to adjustment. Our stockholder rights plan may generally discourage a merger
or tender offer involving our securities that is not approved by our Board of Directors by increasing the cost of effecting any
such transaction and, accordingly, could have an adverse impact on stockholders who might want to vote in favor of such merger
or participate in such tender offer. Our stockholder rights plan expires in January 2019.
Provisions in our organizational
documents, our management agreement and under Marshall Islands corporate law could make it difficult for our shareholders to replace
or remove our current Board of Directors or have the effect of discouraging, delaying or preventing a merger or acquisition, which
could adversely affect the market price of our common stock.
Several provisions
of our amended and restated articles of incorporation and by-laws, and certain provisions of the Marshall Islands corporate law,
could make it difficult for our shareholders to change the composition of our Board of Directors in any one year, preventing them
from changing the composition of management. In addition, these provisions may discourage, delay or prevent a merger or acquisition
that shareholders may consider favorable. These provisions include:
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authorizing our Board of Directors to issue “blank check” preferred stock without shareholder
approval;
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providing for a classified Board of Directors with staggered, three year terms;
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prohibiting cumulative voting in the election of directors;
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authorizing the removal of directors only for cause and only upon the affirmative vote of the holders
of a two-thirds majority of the outstanding shares of our common shares, voting as a single class, entitled to vote for the directors;
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limiting the persons who may call special meetings of shareholders;
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establishing advance notice requirements for election to our Board of Directors or proposing matters
that can be acted on by shareholders at shareholder meetings; and
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limiting our ability to enter into business combination transactions with certain shareholders.
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Pursuant to the terms
of our management agreement, our Manager is entitled to a termination fee if such agreement is terminated upon a “change
of control,” which term includes, but is not limited to, the election of a director not recommended by the then-current Board
of Directors, any person or entity or group of affiliated persons or entities that becomes a beneficial owner of 15% or more of
our voting securities, a merger of FreeSeas where less than a majority of the shares of the resulting entity are held by the FreeSeas
shareholders or the sale of all or substantially all of FreeSeas’ assets. The termination fee as of December 31, 2013 would
have been $91,314. 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 $90.00 per share, subject to adjustment. The rights become exercisable upon the occurrence of certain change in control events.
These 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.
Item 4. Information on the Company
Our Organization and Corporate Structure
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.”
We
became a public reporting company on December 15, 2005, when 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. We currently own six vessels,
each of which is owned through a separate wholly owned subsidiary.
Our
common stock currently trades on the NASDAQ Capital Market under the trading symbol “FREE”.
Our
principal executive offices are located at 10, Eleftheriou Venizelou Street (Panepistimiou Ave.), 10671, Athens, Greece and our
telephone number is 011-30-210-452-8770.
Capital Expenditures
and Divestitures
During
the last three fiscal years, our capital expenditures and divestitures related to our efforts to renew and expand our fleet were
as follows:
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On May 13, 2011, the Company sold the M/V
Free Envoy
, a 1984 built 26,318 dwt
Handysize dry bulk vessel for a sale price of $4.2 million and recognized a gain of $1,561 as a result of the sale. From the net
proceeds of the sale, the Company paid on May 13, 2011 an amount of $3.7 million constituting prepayment towards the Deutsche
Bank loan facility B.
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On November 8, 2011, the Company sold the M/V
Free Lady
, a 2003-built, 50,246
dwt Handymax dry bulk vessel, for a sale price of $21.9 million. From the net proceeds of the sale, the Company paid on November 8,
2011 the amount of $19.8 million constituting prepayment towards the Credit Suisse loan facility.
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On February 18, 2014 the Company sold
the M/V
Free Knight
, a 1998-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of $3.6 million and
the vessel was delivered to her new owners. The Company recognized an impairment charge of $24 million in the accompanying consolidated
statement of operations.
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Our Fleet
We are an international
drybulk shipping company incorporated under the laws of the Republic of the Marshall Islands with principal executive offices in
Athens, Greece. Our fleet currently consists of five Handysize vessels and one Handymax vessel 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 March 7, 2014, the aggregate dwt of our
operational fleet is approximately 197,200 dwt and the average age of our fleet is 16.5 years.
Our investment and
operational focus has been in the Handysize sector, which is generally defined as less than 40,000 dwt of carrying capacity and
the Handymax sector which is generally defined as between 40,000 dwt and 60,000 dwt. Handysize and Handymax vessels are, we believe,
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 believe this segment also offers better demand and supply demographics than other drybulk asset classes.
Due to the very adverse charter rate environment of the latest shipping cycle values of larger vessels have dropped to levels that
constitute buying opportunities. We shall explore the possibility to expand into other segments of the dry-bulk sector.
We have contracted
the management of our fleet to our Manager, Free Bulkers S.A., an entity controlled by Ion G. Varouxakis, our Chairman, President
and Chief Executive Officer, and one of our principal shareholders. Our Manager provides technical management of our fleet, commercial
management of our fleet, financial reporting and accounting services and office space. While the Manager is responsible for finding
and arranging charters for our vessels, the final decision to charter our vessels remains with us.
The following table
details the vessels in our fleet as of March 7, 2014:
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 Jupiter
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Handymax
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2002
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47,777
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About 20 – 25 days time charter trip at $10,100 per day through March 2014
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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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Completing drydock- thereafter chartered for a 20-day time charter trip at $8,500 daily
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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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Laid-up
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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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Completing repairs from collision damage – expected to be completed by beginning of April 2014
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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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Undergoing scheduled drydock –expected to be completed by beginning of April 2014
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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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See note below
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The M/V
Free
Goddess
had been hijacked by Somali pirates on February 7, 2012 while transiting the Indian Ocean eastbound. On October
11, 2012, we announced that all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s release
by the pirates. At the time of the hijacking the vessel was on time charter in laden condition. Since the release from the pirates,
the vessel had been laying at the port of Salalah, Oman, undertaking repairs funded mostly by Insurers. The repairs of
the vessel were completed, and notice of readiness was tendered to her Charterers for the resumption of the voyage. The Charterers
repudiated the Charter and we accepted Charterers' repudiation and terminated the fixture reserving our right to claim damages
and other amounts due to us. The Tribunal previously constituted will hear our claim for (amongst others) unpaid hire
and damages from the Charterers. At the same time, all options are being explored for the commercial resolution
of the situation arising from Charterers refusal to honor their obligations, including the further contribution by Insurers and
cargo interests towards the completion of the voyage and recovery of amounts due. The Company is working for a diligent
solution in order to complete the voyage without further delays.
On June 5, 2013, the
M/V
Free Neptune
, while at anchorage off Port Nouakchott, Mauritania, was stricken by the general cargo vessel Dazi Yun.
Severe collision damage incurred at the contact side shell point in way of cargo hold No. 2 starboard side and the cargo hold No.
2 flooded. No pollution or crew injuries were reported. Nominated salvage team delivered the vessel to a shipyard in Turkey for
repairs on September 2, 2013. The vessel is drydocked in the yard where she is undertaking necessary maintenance and repairs to
enable her to return to service. The costs incurred are claimable from hull and machinery underwriters.
Competitive Strengths
We
believe that we possess a number of strengths that provide us with a competitive advantage in the drybulk shipping industry, including:
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Positive macro environment.
The broader shipping sector is currently at a cyclical
low and poised for a significant upswing in a positive macroeconomic environment. Several key market indicators support increased
seaborne dry trade, including growing Chinese and Japanese iron ore and coal imports as well as strengthening Indian demand for
thermal coal imports. Industrial production in emerging and developing economies constitutes a major driving force and is expected
to generate enhanced demand for dry bulk commodities in the near term. The rising world population and economic recovery in the
importing regions are also expected to contribute to the overall growth of the seaborne dry bulk trade.
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Solid Handysize fundamentals.
We are strategically well positioned to take advantage
of the growing Handysize fleet shortage. A considerable percentage of the worldwide Handysize fleet is over 20 years old, and nearing
the end of its useful life, making it considerably older than any other fleet type. In addition, Handysize fleet growth is expected
to be less than half the growth of any other vessel type. Operationally, Handysize vessels are more versatile than other drybulk
vessels. Their shallow draft allows for access to smaller ports unserviceable by larger Panamax and Capesize vessels, and they
are equipped with on-board cranes, enabling entry into ports with inadequate loading and discharging facilities.
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Experienced management team.
We have benefited from the expertise of our executive
officers, including that of Ion G. Varouxakis, our Chairman, President and Chief Executive Officer, and that of our Manager’s
personnel, which consists of seasoned shipping professionals with long-standing experience in the industry. We believe that our
management team has a proven track record of strong performance throughout a challenging economic climate, as we have actively
and decisively renewed our fleet while reducing operating costs without sacrificing quality or safety in the process.
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Experienced in managing older vessels.
We have solid experience in managing older
vessels and have very good relationships with third party suppliers, shipyards and contractors who can accommodate urgent needs
for vessels that are older and may require urgent and competitively priced repairs. We have also forged over the years a relationship
of trust with insurers and classification societies who are willing to provide their services at competitive rates, and accommodate
bespoke requirements suitable to older vessels. The lower capital requirement for the acquisition of older vessels in conjunction
with our ability to keep their maintenance cost at competitive levels provides us with unique investment opportunities.
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Business Strategy
Our
primary objectives are to profitably grow our business and maximize value to our shareholders by pursuing the following strategies:
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Grow and optimize our fleet.
We
aim to grow our fleet in order to take advantage of the cyclical downturn of the dry-bulk market ahead of its expected cyclical
improvement. A larger and well diversified fleet in terms of operational deployment is expected to provide optimal return on capital.
We are focused on deploying our capital to optimize return on capital including through the disposal of assets that require
disproportionate amounts of capital for maintenance or upgrading to continue generating income, and replace them with assets that
have technical and commercial specifications allowing them to immediately yield income to the bottom line.
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Focus on Handysize and Handymax
carriers with a view to expanding into other asset classes.
Our
existing fleet of drybulk carriers consists of Handysize and Handymax vessels. Given the relatively low number of Handysize drybulk
vessels on order, and a relatively great number of Handysize drybulk vessels at an age of 20 years or older, we believe there
will be continued demand for such vessels. Handysize vessels are typically shallow-drafted and equipped with onboard cranes. This
makes them more versatile and able to access a wider range of loading and discharging ports than larger ships that are unable to
service many ports due to their size or the lack of 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 that we may 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 vessels have also historically achieved greater charter rate stability
than larger drybulk vessels. The recent market downturn has particularly affected the value of larger asset classes creating
the potential for relatively greater capital appreciation and operational leverage as the market recovers. We shall
also consider pursuing investments in larger asset classes in order to take advantage of all available opportunities as they
arise.
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Build on our experience in operating
older vessels
.
Our experience in managing older
vessels provides us with the flexibility to make investments in older vessels, a segment where little or no financing is available
from traditional capital sources, and often superior return on capital can be achieved compared to high capital modern vessels.
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Build upon our strategic relationships.
We intend to continue to build upon our extensive experience and relationships with ship brokers, financial institutions, industrial
partners and commodity traders. We use these relationships to identify chartering and acquisition opportunities and gain access
to sources of additional financing, industry contacts and market intelligence. In addition, our relationships and experience with
insurers and technical service providers, spares suppliers and repair shipyards position us optimally for the competitive
operation of a versatile fleet with heavy employment commitments and demanding technical requirements.
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Vessel Employment
With the exception
of the M/V
Free Impala
which is in cold lay-up, we intend to employ predominantly our vessels in the spot market with charters
that typically last one to two months. Presently three of our vessels are undergoing dry-dockings, repairs and /or extensive maintenance
at shipyards. We anticipate that all three vessels will return to charter service by the end of March and/or beginning of April
with freshly passed surveys giving them a time window of at least two and half years until their next scheduled dry-docking.
A
trip time charter is a short-term time charter for a voyage between load port(s) and discharge port(s) under which the charterer
pays fixed daily hire rate on a semi-monthly basis for use of the vessel. A period time charter is charter for a vessel for a fixed
period of time at a set daily rate. Under trip time charters and time charters, the charterer pays voyage expenses. Under all three
types of charters, the vessel owners pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs. The vessel owners are also responsible for each vessel’s dry-docking
and intermediate and special survey costs. Lastly, vessels can be chartered under “bareboat” contracts whereby the
charterer is responsible for the vessel’s maintenance and operations, as well as all voyage expenses.
Vessels
operating on period time charter provide more predictable cash flows, but can yield lower profit margins than vessels operating
in the spot market during periods characterized by favorable market conditions. Vessels operating in the spot market generate revenues
that are less predictable but may enable us to increase profit margins during periods of increasing drybulk charter rates. However,
we would then be exposed to the risk of declining drybulk charter rates, which may be higher or lower than the rates at which we
chartered our vessels. We are constantly evaluating opportunities for period time charters, but only expect to enter into additional
period time charters if we can obtain contract terms that satisfy our criteria.
Although
we have not previously done so, we may from time to time utilize forward freight agreements that enable us to enter into contractual
obligations to sell the spot charter forward and thereby reduce our exposure to a potential deterioration of the charter market.
Customers
During
2013, we derived approximately 44% of our gross revenues from two charterers, and during 2012, we derived approximately 32% of
our gross revenues from two charterers. We believe that our customer base is composed of established charterers.
Management
of Operations and Fleet
Pursuant
to our amended and restated services agreement with our Manager, our operations are executed and supervised by our Manager, based
on the strategy devised by the board of directors and subject to the approval of our board of directors as described below. We
pay a monthly fee of $136,275, (on the basis that the $/Euro exchange rate is 1.35 or lower; if on the last business day of each
month the $/Euro exchange rate exceeds 1.35 then the service fee payable will be adjusted for the following month in question,
so that the amount payable in dollars will be the equivalent in Euro based on 1.35 $/Euro exchange rate) as compensation for services
related to accounting, financial reporting, implementation of Sarbanes-Oxley internal control over financial reporting procedures
and general administrative and management services plus expenses. The Manager is entitled to a termination fee if the agreement
is terminated upon a “change of control” as defined in its services agreement. The termination fee as of December 31,
2013 would be approximately $91,314.
Our
Manager provides us with the following services:
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General Administration. Our Manager 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.
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Financial Accounting Services. Our Manager maintains our books, records and accounts and provides
all services as are necessary for the preparation and maintenance of the our accounting records in accordance with 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;
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Sale and Purchase of Vessels. Our Manager 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 our
Manager. 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.
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We
also contract the technical and commercial management of our vessels to our Manager. Our Manager 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, as described below.
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. Pursuant to our amended management agreement
with our Manager, we pay our Manager a monthly technical management fee of $18,975 (on the basis that the dollar/Euro exchange
rate is 1.30 or lower; if on the first business day of each month the dollar/Euro exchange rate exceeds 1.30 then the management
fee payable will be increased for the month in question, so that the amount payable in dollars will be the equivalent in Euro based
on 1.30 dollar/Euro exchange rate) plus a fee of $400 per day for superintendent attendance and other direct expenses.
We
also pay our Manager a fee equal to 1.25% of the gross freight or hire from the employment of FreeSeas’ vessels and a 1%
commission on the gross purchase price of any new vessel acquired or the gross sale price of any vessel sold by FreeSeas with the
assistance of our Manager.
Our
Manager currently manages all of our vessels and we anticipate that our Manager will manage any additional vessels we may acquire
in the future.
We
believe that we pay our Manager industry-standard fees for these services.
Crewing and
Employees
We
currently have no employees, our Manager is responsible for employing all of the executive officers and staff to execute and supervise
the operations. In addition, our Manager is responsible for recruiting, either directly or through a crewing agent, the senior
officers and all other crew members for our vessels.
Long-Term Debt
We
and our subsidiaries are parties to various loan facilities secured by our vessels. Please see “Item 5. Operating and Financial
Review and Prospects – Long-Term Debt” for a description of these facilities, our current non-compliance with our obligations
and covenants under the facility agreements, and the status of our efforts to restructure the terms of these agreements.
All the Company’s
credit facilities bear interest at LIBOR plus a margin, ranging from 1% to 4%, and are secured by mortgages on the financed vessels
and assignments of vessels’ earnings and insurance coverage proceeds. They also include affirmative and negative financial
covenants of the borrowers, including maintenance of operating accounts, minimum cash deposits, average cash balances to be maintained
with the lending banks and minimum ratios for the fair values of the collateral vessels compared to the outstanding loan balances.
Each borrower is restricted under its respective loan agreement from incurring additional indebtedness, changing the vessels’
flag without the lender’s consent or distributing earnings. The weighted average interest rate for the year ended December 31,
2013 and 2012 was 2.3% and 2.7%, respectively. Interest expense incurred under the above loan agreements amounted to $1,946, $
2,415 and $3,173 (net of capitalized interest $282) for the years ended December 31, 2013, 2012 and 2011, respectively, and
is included in “Interest and Finance Costs” in the accompanying consolidated statements of operations.
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 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
In
June 2011, we relocated our principal offices to Athens, Greece and we reimbursed the Manager in an amount equal to $144 (equivalent
of Euro 100) for the expenses incurred in relation to this relocation and early termination cost for previous lease agreement.
In addition, we entered into an agreement with our Manager pursuant to which we agreed to pay our Manager 65% of the rents due
from our Manager to the lessor of our rented office space, commencing in June 2011, and 65% of the apportioned common expenses
and maintenance expenses.
Competition
We
operate in markets that are highly competitive and based primarily on supply and demand. 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. and Eagle Bulk Shipping Inc. 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.
Our
Manager 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, Handysize
and Handymax sectors. Charters for our vessels are negotiated by our Manager utilizing a worldwide network of shipbrokers. These
shipbrokers advise our Manager on a continuous basis of the availability of cargo for any particular vessel. There may be several
shipbrokers involved in any one charter. The negotiation for a charter typically begins prior to the completion of the previous
charter in order to avoid any idle time. The terms of the charter are based on industry standards.
Seasonality
Coal,
iron ore and grains, which are the major bulks of the drybulk shipping industry, are somewhat seasonal in nature. The energy markets
primarily affect the demand for coal, with increases during hot summer periods when air conditioning and refrigeration require
more electricity and towards the end of the calendar year in anticipation of the forthcoming winter period. The demand for iron
ore tends to decline in the summer months because many of the major steel users, such as automobile makers, reduce their level
of production significantly during the summer holidays. Grains are completely seasonal as they are driven by the harvest within
a climate zone. Because three of the five largest grain producers (the United States of America, Canada and the European Union)
are located in the northern hemisphere and the other two (Argentina and Australia) are located in the southern hemisphere, harvests
occur throughout the year and grains required drybulk shipping accordingly.
Environmental
and Other Regulations
Government
regulation and laws significantly affects the ownership and operation of our vessels. The vessels are subject to international
conventions and treaties, national, state and local laws and regulations in force in the countries in which our vessels may operate
or are registered, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil
spills and other contamination, air emissions, and water discharges and ballast water management.
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 International Convention for the Prevention of Pollution from Ships to address
air pollution from vessels. Annex VI, which came into effect on May 19, 2005, set limits on sulfur oxide ("SOx")
and NOx emissions from vessels and prohibited deliberate emissions of ozone depleting substances, such as chlorofluorocarbons.
Annex VI also included a global cap on the sulfur content of fuel oil and allowed for special areas to be established with
more stringent controls on sulfur emissions. Annex VI has been ratified by some, but not all IMO member states, including
the Marshall Islands. Pursuant to a Marine Notice issued by the Marshall Islands Maritime Administrator as revised in March 2005,
vessels flagged by the Marshall Islands that are subject to Annex VI must, if built before the effective date, obtain an International
Air Pollution Prevention Certificate evidencing compliance with Annex VI by the first dry docking after May 19, 2005,
but no later than May 19, 2008. All vessels subject to Annex VI and built after May 19, 2005 must also have this
Certificate. We have obtained International Air Pollution Prevention certificates for all of our vessels. Amendments to Annex VI
regarding particulate matter, NOx and SOx emission standards entered into force in July 2010. The amendments provide for a progressive
reduction in SOx emissions from ships, with the global sulfur cap reduced initially to 3.50% (from the current 4.50%), effective
from 1 January 2012; then progressively to 0.50%, effective from 1 January 2020, subject to a feasibility review to be
completed no later than 2018. The Annex VI amendments also establish tiers of stringent NOx emissions standards for new marine
engines, depending on their dates of installation. The United States ratified the amendments, and all vessels subject to Annex VI
must comply with the amended requirements when entering U.S. ports or operating in U.S. waters. Additionally, more stringent emission
standards apply in coastal areas designated by MEPC as Emission Control Areas (ECAs). The North American ECA, which includes the
area extending 200 nautical miles from the Atlantic/Gulf and Pacific Coasts of the United States and Canada, the Hawaiian Islands,
and the French territories of St. Pierre and Miquelon, has been enforceable since August 1, 2012. Fuel used by vessels
operating in the ECA cannot exceed a 1.0% sulfur content, dropping to a 0.1% sulfur content in 2015. NOx after-treatment requirements
will apply in 2016. The U.S. Caribbean ECA, which includes the waters of Puerto Rico and the Virgin Islands, became enforceable
on January 1, 2014. We may incur costs to install control equipment on our engines in order to comply with the new requirements.
Other ECAs may be designated, and the jurisdictions in which our vessels operate may adopt more stringent emission standards independent
of IMO.
The
operation of our vessels is also affected by the requirements set forth in the IMO’s 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 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 drybulk vessels
to the greater of $1,000 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 party’s 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.
In response to the 2010 oil spill in the Gulf of Mexico resulting from the explosion of the
Deepwater Horizon
drilling
rig, bills have been introduced in the U.S. Congress to increase the limits of OPA liability for all vessels.
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 and carrying COFRs for each of our vessels that operate in U.S. waters,
currently the M/V
Free Hero
, the M/V
Free Jupiter
and the M/V
Free Maverick
. We may incur
additional costs to obtain COFRs for additional vessels, if required, and to comply with increased limits of liability in the future.
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.
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.
Under U.S. Environmental Protection Agency, or EPA, regulations we are required to obtain
a CWA permit regulating and authorizing any discharges of ballast water or other wastewaters incidental to our normal vessel operations
if we operate within the three-mile territorial waters or inland waters of the United States. The permit, which EPA has designated
as the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP, incorporated the then-current
U.S. Coast Guard requirements for ballast water management, as well as supplemental ballast water requirements and limits for 26
other specific discharges. Regulated vessels cannot operate in U.S. waters unless they are covered by the VGP. To do so, vessel
owners must submit a Notice of Intent, or NOI, at least 30 days before the vessel operates in U.S. waters. To comply with
the VGP vessel owners and operators may have to install equipment on their vessels to treat ballast water before it is discharged
or implement port facility disposal arrangements or procedures at potentially substantial cost. The VGP also requires states to
certify the permit, and certain states have imposed more stringent discharge standards as a condition of their certification. Many
of the VGP requirements have already been addressed in our vessels' current ISM Code SMS Plan. We have submitted NOIs for all of
our vessels that operate in U.S. waters. As part of a settlement of a lawsuit challenging the VGP, EPA has proposed a new VGP with
numerical restrictions on organisms in ballast water discharges. The new VGP is now in effect by EPA and it is monitored onboard
by the USCG. Our ships are in full compliance with the VGP regulations.
Other Environmental
Initiatives
The
EU has also adopted legislation that: requires member states to impose criminal sanctions for certain pollution events, such as
the unauthorized discharge of tank washings. The European Parliament recently endorsed a European Commission proposal to criminalize
certain pollution discharges from ships. If the proposal becomes formal EU law, it will affect the operation of vessels and the
liability of owners for oil and other pollutional discharges. It is difficult to predict what legislation, if any, may be promulgated
by the European Union or any other country or authority.
The
Paris Memorandum of Understanding on Port State Control (Paris MoU) to which 27 nations are party adopted the "New Inspection
Regime" (NIR) to replace the existing Port State Control system, effective January 1, 2011. The NIR is a significant
departure from the previous system, as it is a risk based targeting mechanism that will reward quality vessels with a smaller inspection
burden and subject high-risk ships to more in-depth and frequent inspections. The inspection record of a vessel, its age and type,
the Voluntary IMO Member State Audit Scheme, and the performance of the flag State and recognized organizations are used to develop
the risk profile of a vessel.
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. Under NISA, the USCG adopted regulations in July 2004
imposing 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, by retaining ballast water on board the ship, or by using environmentally
sound alternative ballast water management methods approved by the USCG. (However, mid-ocean ballast exchange is mandatory for
ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope crude oil.) Mid-ocean
ballast exchange is the primary method for compliance with the USCG 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 record keeping requirements and
document the reasons they could not follow the required ballast water management requirements. On March 23, 2012 the USCG
adopted ballast water discharge standards that set maximum acceptable discharge limits for living organisms and established standards
for ballast water management systems. The regulations became effective on June 21, 2012 and will be phased in between January 1,
2014 and January 1, 2016 for existing vessels, depending on the size of their ballast water tanks and their next drydocking
date. Although the USCG ballast water management requirements are consistent with the requirements in EPA's proposed VGP, the USCG
intends to review the practicability of implementing even more stringent ballast water discharge standards and publish the results
of that review no later than January 1, 2016. In the past absence of federal standards, states enacted legislation or regulations
to address invasive species through ballast water and hull cleaning management and permitting requirements. Michigan's ballast
water management legislation was upheld by the Sixth Circuit Court of Appeals and California enacted legislation extending its
ballast water management program to regulate the management of "hull fouling" organisms attached to vessels and adopted
regulations limiting the number of organisms in ballast water discharges. Other states may proceed with the enactment of requirements
similar to those of California and Michigan or the adoption of requirements that are more stringent than the EPA and USCG requirements.
We could incur additional costs to comply with the new VGP and additional USCG or state ballast water management requirements.
At
the international level, the IMO adopted the International Convention for the Control and Management of Ships' Ballast Water and
Sediments, or the BWM Convention, in February 2004. The Convention's 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 enter into force until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent
not less than 35% of the gross tonnage of the world's merchant shipping. The Convention has not yet entered into force because
a sufficient number of states have failed to adopt it. However, in March 2010, MEPC passed a resolution urging the ratification
of the Convention and calling upon those countries that have already ratified it to encourage the installation of ballast water
management systems.
If
the mid-ocean ballast exchange is made mandatory throughout the United States or at the international level, or if water treatment
requirements or options are instituted, the cost of compliance could increase for ocean carriers. Although we do not believe that
the costs of compliance with a mandatory mid-ocean ballast exchange would be material, it is difficult to predict the overall impact
of such a requirement on our business.
Greenhouse
Gas Regulation
The
2005 Kyoto Protocol to the United Nations Framework Convention on Climate Change required adopting countries to implement national
programs to reduce emissions of certain greenhouse gases, but emissions from international shipping are not subject to the soon
to expire Kyoto Protocol. International negotiations regarding a successor to the Kyoto Protocol are on-going. The IMO's MEPC adopted
two new sets of mandatory requirements to address greenhouse gas emissions from vessels at its July 2011 meeting. The EEDI establishes
a minimum energy efficiency level per capacity mile and will be applicable to new vessels. The Ship Energy Efficiency Management
Plan will be applicable to currently operating vessels of 400 metric tons and above. These requirements entered into force in January
2013 and could cause us to incur additional compliance costs. The IMO is also considering the development of market based mechanisms
to reduce greenhouse gas emissions from vessels, as well as sustainable development goals for marine transportation, but it is
impossible to predict the likelihood that such measures might be adopted or their potential impacts on our operations at this time.
The EU is considering measures including an expansion of the existing EU emissions trading scheme to greenhouse gas emissions from
marine vessels, The U.S. EPA Administrator issued a finding that greenhouse gases threaten the public health and safety and has
adopted regulations relating to the control of greenhouse gas emissions from certain mobile and stationary sources. Although the
EPA findings and regulations do not extend to vessels and vessel engines, the EPA is separately considering a petition from the
California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going vessels under the CAA.
Any passage of climate control legislation or other regulatory initiatives by the IMO, the EU or individual countries in which
we operate or any international treaty adopted to succeed the Kyoto Protocol could require us to make significant financial expenditures
or otherwise limit our operations that we cannot predict with 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;
|
|
•
|
on-board installation of ship security alert systems;
|
|
•
|
the development of vessel security plans; and
|
|
•
|
compliance with flag state security certification requirements.
|
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 vessel’s 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 vessel’s
machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period.
Our vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel
is also required to be dry-docked every two to three years for inspection of the underwater parts of such vessel. If any vessel
does not maintain its class and/or fails any annual survey, intermediate survey, dry-docking or special survey, the vessel will
be unable to carry cargo between ports and will be unemployable and uninsurable. That could cause us to be in violation of certain
covenants in our loan agreements.
At
an owner’s 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 all of which are members of the International Association
of Classification Societies.
The
table below lists the 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 annual report:
|
|
Next Intermediate
|
|
Next Special Survey
|
Vessel
|
|
Dry-docking
|
|
Dry-docking
|
M/V
Free Goddess
|
|
Third quarter 2013*
|
|
Third quarter 2015
|
M/V
Free Hero
|
|
Undergoing scheduled drydock – expected to be completed by beginning of April 2014
|
|
Third quarter 2015
|
M/V
Free Impala
|
|
Fourth quarter 2015
|
|
Fourth quarter 2012**
|
M/V
Free Jupiter
|
|
Third quarter 2015
|
|
Second quarter 2017
|
M/V
Free Maverick
|
|
First quarter 2016
|
|
Completing drydock
|
M/V
Free Neptune
|
|
Completing repairs from collision damage – expected to be completed by beginning of April 2014
|
|
Third quarter 2016
|
* The M/V
Free
Goddess
cannot pass her intermediate drydocking until the cargo on board has been delivered to its receivers.
**The M/V
Free
Impala
has not yet passed her special survey drydocking and no assurances can be made that the drydockings will be completed.
ISM
and ISPS certifications have been awarded to all of our vessels and to the Manager by either the vessel’s flag country or
a member of the International Association of Classification Societies.
Risk of Loss and Liability Insurance
General
The operation of
any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss or damage and
business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is
always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising
from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon owners, operators
and bareboat charterers of any vessel trading in the exclusive economic zone of the United States of America for certain oil pollution
accidents in the United States of America, has made liability insurance more expensive for ship owners and operators trading in
the United States of America market. While we believe that our present insurance coverage is adequate, not all risks can be insured,
and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance
coverage at reasonable rates.
Hull and Machinery Insurance
We have obtained
marine hull and machinery and war risk insurance, which include the risk of actual or constructive total loss, for all of our vessels.
The vessels are each covered up to at least their fair market values or such higher amounts as may be required to meet the requirements
of any outstanding indebtedness on a particular vessel, with deductibles in amounts of approximately $250.
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 world’s commercial tonnage and have entered into a pooling agreement
to reinsure each association’s 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.
Loss of Hire Insurance
With the exception
of kidnap and ransom insurance and its loss of hire extension (described below), we have not obtained loss of hire insurance for
any of our vessels. Loss of hire insurance generally provides coverage against loss of charter hire that result from the loss of
use of a vessel. We will review annually whether obtaining and/or maintaining this insurance is cost effective. Our ability to
obtain loss of hire insurance is subject to market conditions and general availability.
Kidnap and Ransom
We have kidnap and
ransom insurance on a case by case basis, generally when one of our vessels is transitioning in an area where acts of piracy are
known to take place. Kidnap and ransom insurance generally provides coverage of ransom paid, including interest if ransom money
are through financing products and including delivery expense of ransom, fees of negotiators and crisis management personnel and
the cost of reinstatement of replacement crew. The loss of hire extension covers the insured for any hire lost during seizure for
a certain number of days that have been agreed on at the inception of the coverage, typically either 90, 120 or 180 days.
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 vessel’s 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.
Legal Proceedings
We
are not and have not been involved in any legal proceedings that have, or have had, a significant effect on our business, financial
position, results of operations or liquidity, nor are we aware of any proceedings that are pending or threatened that may have
significant effect on our business, financial position, results of operations or liquidity. From time to time, we may be subject
to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. We
expect that these claims would be covered by insurance, subject to customary deductibles. Those claims, even if lacking in merit,
could result in the expenditure of significant financial and managerial resources.
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.
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Item 4A.
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Unresolved Staff Comments
|
None.
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Item 5.
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Operating and Financial Review and Prospects
|
The following management’s
discussion and analysis should be read in conjunction with our historical consolidated financial statements and accompanying notes
included elsewhere in this report. This discussion contains forward-looking statements that reflect our current views with respect
to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, such as those set forth in the section entitled “Risk Factors” and elsewhere
in this report.
The historical consolidated
financial results of FreeSeas described below are presented, unless otherwise stated, in thousands of United States dollars.
Overview
We are an international
drybulk shipping company incorporated under the laws of the Republic of the Marshall Islands with principal executive offices in
Athens, Greece. Our fleet currently consists of five Handysize vessels and one Handymax vessel 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 March 7, 2014, the aggregate dwt of our
operational fleet is approximately 197,200 dwt and the average age of our fleet is 16.5 years.
Our investment
and operational focus has been in the Handysize sector, which is generally defined as less than 40,000 dwt of carrying capacity
and the Handymax sector which is generally defined as between 40,000 dot and 60,000 dwt. Handysize and Handymax vessels are, we
believe, 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 believe this segment also offers better demand and supply demographics than other drybulk asset
classes. Due to the very adverse charter rate environment of the latest shipping cycle values of larger vessels have dropped to
levels that constitute buying opportunities. We shall explore the possibility to expand into other segments of the dry-bulk sector.
We have contracted
the management of our fleet to Free Bulkers S.A., referred to as our Manager, an entity controlled by Ion G. Varouxakis, our Chairman,
President and Chief Executive Officer, and one of our principal shareholders. Our Manager provides technical management of our
fleet, commercial management of our fleet, financial reporting and accounting services and office space. While the Manager is responsible
for finding and arranging charters for our vessels, the final decision to charter our vessels remains with us.
Recent Developments
|
1.
|
On January 3, 2014, the Company issued to Crede 1,500,000 shares of common stock upon conversion
of 30,000 shares of Series C Preferred Stock.
|
|
2.
|
On January 8, 2014, the Company issued to Crede 1,300,000 shares of common stock upon conversion
of 26,000 shares of Series C Preferred Stock.
|
|
3.
|
On January 29, 2014, the Company entered into a deferral interest payment agreement with Credit
Suisse, pursuant to which the interest payment of $115 due on January 31, 2014 was deferred to February 28, 2014.
|
|
4.
|
On January 30, 2014, the Company and certain of its subsidiaries entered into a term sheet with
Credit Suisse in order to settle its obligations arising from the Loan Agreement with the Bank. Pursuant to the term sheet, Credit
Suisse agreed to accept a cash payment of approximately $22,000 in full and final settlement of all of the Company’s
obligations to Credit Suisse and Credit Suisse would forgive the remaining outstanding balance of approximately $15,000. Upon payment,
all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security
interests on its three vessels (M/V
Free Goddess
, M/V
Free Hero
and M/V
Free Jupiter
) as well as all
assignments in favor of Credit Suisse will be released. The closing of such transaction is contingent upon
the Company being able to raise capital towards making such payment.
|
|
5.
|
On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate
swap agreements with Credit Suisse.
|
|
6.
|
On February 6, 2014, the Company issued 67,476 shares of common stock to Asher upon conversion
of $75 principal of a convertible promissory note dated July 29, 2013 plus accrued interest.
|
|
7.
|
On February 7, 2014, the Company issued 53,700 shares of common stock to Asher upon conversion
of the remaining principal of $53.5 convertible promissory note dated July 29, 2013 plus accrued interest.
|
|
8.
|
On December 31, 2013, Charterers, Transbulk submitted a claim against the Company for a balance
of hire of M/V
Free Knight
relating to alleged period of off-hire, other deductions from hire and various expenses incurred
on Company’s account in the sum of $265 and obtained a court arrest order. On February 6, 2014 the Charterers agreed to accept
$200 all inclusive in full and final settlement of all claims under the Charterparty and M/V
Free Knight
was released.
|
|
9.
|
On February 18, 2014 the Company sold the M/V
Free Knight
, a 1998-built, 24,111 dwt Handysize
dry bulk carrier for a gross sale price of $3.6 million and the vessel was delivered to her new owners. The Company recognized
an impairment charge of $24 million in the accompanying consolidated statement of operations.
|
|
10.
|
On February 22, 2014, the Company and certain of its subsidiaries entered into terms
with NBG for settlement of its obligations arising from the Loan Agreement with the Bank. Pursuant to the terms, NBG agreed to
accept a cash payment of $22,000 in full and final settlement of all of the Company’s obligations to the NBG and
NBG would forgive the remaining outstanding balance of approximately $3,700. Upon payment, all of the existing corporate guarantees of
the Company and its subsidiaries and the mortgages and security interests on its two vessels (M/V
Free Impala
and M/V
Free Neptune
) as well as all assignments in favor of NBG will be released.
The
closing of s
uch transaction is contingent upon the Company being able to raise capital towards making such payment.
|
|
11.
|
On February 28, 2014, pursuant to the deferral interest payment agreement with Credit Suisse, the
Company paid the deferred interest of $115.
|
Employment and Charter Rates
The following table
details the vessels in our fleet as of March 7, 2014:
Vessel Name
|
|
Type
|
|
Built
|
|
Dwt
|
|
|
Employment
|
M/V Free Jupiter
|
|
Handymax
|
|
2002
|
|
|
47,777
|
|
|
About 20 – 25 days time charter trip at $10,100 per day through March 2014
|
M/V Free Maverick
|
|
Handysize
|
|
1998
|
|
|
23,994
|
|
|
Completing drydock- thereafter chartered for a 20-day time charter trip at $8,500 daily
|
M/V Free Impala
|
|
Handysize
|
|
1997
|
|
|
24,111
|
|
|
Laid-up
|
M/V Free Neptune
|
|
Handysize
|
|
1996
|
|
|
30,838
|
|
|
Completing repairs from collision damage – expected to be completed by beginning of April 2014
|
M/V Free Hero
|
|
Handysize
|
|
1995
|
|
|
24,318
|
|
|
Undergoing scheduled drydock –expected to be completed by beginning of April 2014
|
M/V Free Goddess
|
|
Handysize
|
|
1995
|
|
|
22,051
|
|
|
See note below
|
The M/V
Free
Goddess
had been hijacked by Somali pirates on February 7, 2012 while transiting the Indian Ocean eastbound. On October
11, 2012, we announced that all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s release
by the pirates. At the time of the hijacking the vessel was on time charter in laden condition. Since the release from the pirates,
the vessel had been laying at the port of Salalah, Oman, undertaking repairs funded mostly by Insurers. The repairs of
the vessel were completed, and notice of readiness was tendered to her Charterers for the resumption of the voyage. The Charterers
repudiated the Charter and we accepted Charterers' repudiation and terminated the fixture reserving our right to claim damages
and other amounts due to us. The Tribunal previously constituted will hear our claim for (amongst others) unpaid hire
and damages from the Charterers. At the same time, all options are being explored for the commercial resolution
of the situation arising from Charterers refusal to honor their obligations, including the further contribution by Insurers and
cargo interests towards the completion of the voyage and recovery of amounts due. The Company is working for a diligent
solution in order to complete the voyage without further delays.
On June 5, 2013, the
M/V
Free Neptune
, while at anchorage off Port Nouakchott, Mauritania, was stricken by the general cargo vessel Dazi Yun.
Severe collision damage incurred at the contact side shell point in way of cargo hold No. 2 starboard side and the cargo hold No.
2 flooded. No pollution or crew injuries were reported. Nominated salvage team delivered the vessel to a shipyard in Turkey for
repairs on September 2, 2013. The vessel is drydocked in the yard where she undertakes necessary maintenance and repairs enabling
her to return to service. The costs incurred are claimable from hull and machinery underwriters.
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.
When a vessel is acquired free of charter, we enter into a new charter contract. The shipping industry uses income days (also referred
to as “voyage” or “operating” days) to measure the number of days in a period during which vessels actually
generate revenues.
Consistent with shipping
industry practice, we treat the acquisition of a vessel (whether acquired with or without a charter) as the acquisition of an asset
rather than a business. When we acquire a vessel, we conduct, also consistent with shipping industry practice, an inspection of
the physical condition of the vessel, unless practical considerations do not allow such an inspection. We also examine the vessel’s
classification society records. We do not obtain any historical operating data for the vessel from the seller. We do not consider
that information material to our decision on acquiring the vessel.
Prior to the delivery
of a purchased vessel, the seller typically removes from the vessel all records and log books, including past financial records
and accounts related to the vessel. Upon the change in ownership, the technical management agreement between the seller’s
technical manager and the seller is automatically terminated and the vessel’s trading certificates are revoked by its flag
state, in the event the buyer determines to change the vessel’s flag state.
When a vessel has been under a voyage charter,
the seller delivers the vessel free of charter to the buyer. When a vessel is under time charter and the buyer wishes to assume
that charter, the buyer cannot acquire the vessel without the charterer’s consent and an agreement between the buyer and
the charterer for the buyer to assume the charter. The purchase of a vessel does not in itself transfer the charter because the
charter is a separate service agreement between the former vessel owner and the charterer.
When we acquire a vessel and want to assume
or renegotiate a related time charter, we must take the following steps:
|
·
|
Obtain the charterer’s consent to us as the new owner;
|
|
·
|
Obtain the charterer’s consent to a new technical manager;
|
|
·
|
Obtain the charterer’s consent to a new flag for the vessel,
if applicable;
|
|
·
|
Arrange for a new crew for the vessel;
|
|
·
|
Replace all hired equipment on board the vessel, such as gas cylinders
and communication equipment;
|
|
·
|
Negotiate and enter into new insurance contracts for the vessel through
our own insurance brokers;
|
|
·
|
Register the vessel under a flag state and perform the related inspections
in order to obtain new trading certificates from the flag state, if we change the flag state;
|
|
·
|
Implement a new planned maintenance program for the vessel; and
|
|
·
|
Ensure that the new technical manager obtains new certificates of
compliance with the safety and vessel security regulations of the flag state.
|
Business Components and Activities
Our business comprises the following primary
components:
|
·
|
Employment and operation of our drybulk carriers; and
|
|
·
|
Management of the financial, general and administrative elements involved
in the ownership and operation of our drybulk vessels.
|
The employment and operation of our
vessels involve the following activities:
|
·
|
Vessel maintenance and repair;
|
|
·
|
Planning and undergoing dry-docking, special surveys and other major
repairs;
|
|
·
|
Organizing and undergoing regular classification society surveys;
|
|
·
|
Crew selection and training;
|
|
·
|
Vessel spares and stores supply;
|
|
·
|
Contingency response planning;
|
|
·
|
Onboard safety procedures auditing;
|
|
·
|
Vessel insurance arrangements;
|
|
·
|
Vessel hire management; and
|
|
·
|
Vessel performance monitoring.
|
Our Fleet-Illustrative Comparison of Possible Excess of Carrying
Value over Estimated Charter-Free Market Value of Certain Vessels
In
“-Critical Accounting Policies-Impairment of Long Lived Assets,” we discuss our policy for impairing the carrying values
of our vessels. Historically, the market values of vessels have experienced volatility, which from time to time may be substantial.
As a result, the charter-free market value, or basic market value, of certain of our vessels may have declined below those vessels’
carrying value, even though we would not impair those vessels’ carrying value under our accounting impairment policy, due
to our belief that future undiscounted cash flows expected to be earned by such vessels over their operating lives would exceed
such vessels’ carrying amounts. Based on: (i) the carrying value of each of our vessels as of December 31, 2013
and (ii) what we believe the charter free market value of each of our vessels was as of December 31, 2013, the aggregate
carrying value of two of our vessels (the M/V
Free Goddess
and the M/V
Free Maverick
) in our fleet as of December 31,
2013 exceeded their aggregate charter-free market value by approximately $30.2 million, as noted in the table below
(which
includes a comparative analysis of how the carrying values of our vessels compare to the fair market value of such vessels as of
each balance sheet date presented in our accompanying consolidated financial statements). This aggregate difference represents
the approximate analysis of the amount by which we believe we would have to reduce our net income if we sold all of such vessels
(at December 31, 2013, on industry standard terms, in cash transactions, and to a willing buyer where we were not under any
compulsion to sell, and where the buyer was not under any compulsion to buy. For purposes of this calculation, we have assumed
that these vessels would be sold at a price that reflects our estimate of their charter-free market values as of December 31,
2013).
Our estimates of charter-free
market value assume that our vessels are all in good and seaworthy condition without need for repair and if inspected would be
certified in class without notations of any kind. Our estimates are based on information available from various industry sources,
including:
|
•
|
reports by industry analysts and data providers that focus on our
industry and related dynamics affecting vessel values;
|
|
•
|
news and industry reports of similar vessel sales;
|
|
•
|
news and industry reports of sales of vessels that are not similar
to our vessels where we have made certain adjustments in an attempt to derive information that can be used as part of our estimates;
|
|
•
|
approximate market values for our vessels or similar vessels that
we have received from shipbrokers, whether solicited or unsolicited, or that shipbrokers have generally disseminated;
|
|
•
|
offers that we may have received from potential purchasers of our
vessels; and
|
|
•
|
vessel sale prices and values of which we are aware through both
formal and informal communications with shipowners, shipbrokers, industry analysts and various other shipping industry participants
and observers.
|
As we obtain information
from various industry and other sources, our estimates of basic market value are inherently uncertain. In addition, vessel values
are highly volatile; as such, our estimates may not be indicative of the current or future charter-free market value of our vessels
or prices that we could achieve if we were to sell them. The market values of our vessels have declined and may further decrease,
and we may incur losses when we sell vessels or we may be required to write down their carrying value, which may adversely affect
our earnings”.
Drybulk
Vessels
|
|
DWT
|
|
|
Year
Built
|
|
Date of
Acquisition
|
|
Date of
Disposal
|
|
Purchase
Price (in
million
USD)
|
|
|
Carrying
Value as of
31/12/2013
(in million
USD)
|
|
|
Fair Market
Value as of
31/12/2013
(in million
USD)
|
|
|
Carrying
Value as of
31/12/2012
(in million
USD)
|
|
|
Fair Market
Value as of
31/12/2012
(in million
USD)
|
|
Free Hero
|
|
|
24,318
|
|
|
1995
|
|
07/03/07
|
|
|
|
$
|
25.3
|
|
|
$
|
4.7
|
|
|
$
|
5.5
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Free Jupiter
|
|
|
47,777
|
|
|
2002
|
|
09/05/07
|
|
|
|
$
|
47
|
|
|
$
|
12.9
|
|
|
$
|
14.2
|
|
|
$
|
14
|
|
|
$
|
14
|
|
Free Goddess
|
|
|
22,051
|
|
|
1995
|
|
10/30/07
|
|
|
|
$
|
25.2
|
|
|
$
|
15.9
|
|
|
$
|
5.3
|
|
|
$
|
17.4
|
|
|
$
|
6
|
|
Free Impala
|
|
|
24,111
|
|
|
1997
|
|
04/02/08
|
|
|
|
$
|
37.5
|
|
|
$
|
4.1
|
|
|
$
|
4.8
|
|
|
$
|
6.5
|
|
|
$
|
6.5
|
|
Free Knight*
|
|
|
24,111
|
|
|
1998
|
|
03/19/08
|
|
02/18/14
|
|
$
|
39.3
|
|
|
$
|
3.5
|
|
|
$
|
3.5
|
|
|
$
|
29.5
|
|
|
$
|
6.5
|
|
Free Maverick
|
|
|
23,994
|
|
|
1998
|
|
09/01/08
|
|
|
|
$
|
39.6
|
|
|
$
|
26.6
|
|
|
$
|
7
|
|
|
$
|
28.6
|
|
|
$
|
7.5
|
|
Free Neptune
|
|
|
30,838
|
|
|
1996
|
|
08/25/09
|
|
|
|
$
|
11
|
|
|
$
|
7.6
|
|
|
$
|
8.7
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Total
|
|
|
197,200
|
|
|
|
|
|
|
|
|
$
|
224.9
|
|
|
$
|
75.3
|
|
|
$
|
49
|
|
|
$
|
110
|
|
|
$
|
54.5
|
|
* Vessel classified
as held for sale. The vessel was sold on February 18, 2014 and as of December 31, 2013, the Company recognized an impairment charge
of $24 million in the accompanying consolidated statement of operations.
Critical Accounting Policies
The discussion and
analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of those financial statements requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at the date of our financial
statements. Actual results may differ from these estimates under different assumptions and conditions. Critical accounting policies
are those that reflect significant judgments of 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, because they generally
involve a comparatively higher degree of judgment in their application. For a description of all our significant accounting policies,
see Note 2 to our consolidated financial statements.
Impairment of Long-lived
Assets:
The Company follows the guidance under ASC 360, “Property, Plant and Equipment,” which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. The standard requires that, long-lived assets and
certain identifiable intangibles held and used or disposed of by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash
flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, the Company
should evaluate the asset for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset which
is determined based on management estimates and assumptions and by making use of available market data. The fair values are determined
through Level 2 inputs of the fair value hierarchy as defined in ASC 820 “Fair value measurements and disclosures”
and are derived principally from or by corroborated or observable market data. Inputs, considered by management in determining
the fair value, include independent broker’s valuations, FFA indices, average charter hire rates and other market observable
data that allow value to be determined. The Company evaluates the carrying amounts and periods over which long-lived assets are
depreciated to determine if events have occurred which would require modification to their carrying values or useful lives. In
evaluating useful lives and carrying values of long-lived assets, management reviews certain indicators of potential impairment,
such as future undiscounted net operating cash flows, vessel sales and purchases, business plans and overall market conditions.
In performing the recoverability tests the Company determines future undiscounted net operating cash flows for each vessel and
compares it to the vessel’s carrying value. The future undiscounted net operating cash flows are determined by considering
the Company’s alternative courses of action, estimated vessel’s utilization, its scrap value, the charter revenues
from existing time charters for the fixed fleet days and an estimated daily time charter equivalent for the unfixed days over the
remaining estimated useful life of the vessel, net of vessel operating expenses adjusted for inflation, and cost of scheduled major
maintenance. When the Company’s estimate of future undiscounted net operating cash flows for any vessel is lower than the
vessel’s carrying value, the carrying value is written down, by recording a charge to operations, to the vessel’s fair
market value.
As of December 31,
2013, the Company, since the market conditions were not favorable enough for concluding acceptable multiple sales and in accordance
with the guidance under ASC 360, decided to change in the accompanying consolidated balance sheet the classification of the “held
for sale” vessels (M/V
Free Hero
, M/V
Free Jupiter
, M/V
Free Impala
and M/V
Free Neptune
) to
“held and used” thereby recognizing an impairment loss of $3,477 in the accompanying consolidated statements of operations.
In addition, the Company, also in accordance with the provisions of ASC 360, has classified the M/V
Free Knight
, as “held
for sale” in the accompanying consolidated balance sheet for the year ended December 31, 2013 at her estimated market value.
As of December 31,
2013, the Company performed an impairment assessment of its long-lived assets by comparing the undiscounted net operating cash
flows for each vessel to its respective carrying value. The significant factors and assumptions the Company used in each future
undiscounted net operating cash flow analysis included, among others, operating revenues, commissions, off-hire days, dry-docking
costs, operating expenses and management fee estimates. Revenue assumptions were based on contracted time charter rates up to the
end of life of the current contract of each vessel as well as Forward Freight Agreements (FFAs) and ten year historical average
time charter rates for the remaining life of the vessel after the completion of the current contracts. In addition, the Company
used an annual operating expenses escalation factor and an estimate of off hire days. All estimates used and assumptions made were
in accordance with the Company’s internal budgets and historical experience of the shipping industry. The Company’s
assessment concluded that for the vessels that are held and used no impairment existed as of December 31, 2013, as the vessels’
future undiscounted net operating cash flows exceeded their carrying value by $10,014. If the Company were to utilize the most
recent five year historical average rates, three year historical average rates or one year historical average rates, would recognize
an impairment loss of $19,685 (using the most recent five year historical average rates) and $30,340 (using the most recent three
year or one year historical average rates).
Vessels’ Depreciation:
The cost of the Company’s vessels is depreciated on a straight-line basis over the vessels’ remaining economic
useful lives from the acquisition date, after considering the estimated residual value (vessel’s residual value is equal
to the product of its lightweight tonnage and estimated scrap rate). Effective April 1, 2009, and following management’s
reassessment of the useful lives of the Company’s assets, the fleets useful life was increased from 27 to 28 years since
the date of initial delivery from the shipyard. Management’s estimate was based on the current vessels’ operating condition,
as well as the conditions prevailing in the market for the same type of vessels.
Accounting for Special
Survey and Dry-docking Costs:
The Company follows the deferral method of accounting for special survey and dry-docking costs,
whereby actual costs incurred are deferred and are amortized over periods of five and two and a half years, respectively. If special
survey or dry-docking is performed prior to the scheduled date, the remaining un-amortized balances are immediately written-off.
In the accompanying financial statements, costs deferred are presented on a consistent basis and are limited to actual costs incurred
at the yard, paints, class renewal expenses, and parts used in the dry docking or special survey. Indirect costs and/or costs related
to ordinary maintenance, carried out while at dry dock, are expensed when incurred as they do not provide any future economic benefit.
Unamortized dry-docking and special survey costs of vessels that are sold are written off at the time of the respective vessels’
sale and are included in the calculation of the resulting gain or loss from such sale.
Accounting for Revenue
and Expenses:
Revenue is recorded when services are rendered, the Company has a signed charter agreement or other evidence
of an arrangement, the price is fixed or determinable, and collection is reasonably assured. A voyage charter involves the carriage
of a specific amount and type of cargo from specific load port(s) to specific discharge port(s), subject to various cargo handling
terms, in return for payment of an agreed upon freight rate per ton of cargo. A time charter involves placing a vessel at the charterers’
disposal for a period of time during which the charterer uses the vessel in return for the payment of a specified daily hire rate.
Short period charters for less than three months are referred to as spot charters. Time charters extending three months to a year
are generally referred to as medium term charters. All other time charters are considered long term. Voyage revenues for the transportation
of cargo are recognized ratably over the estimated relative transit time of each voyage. A voyage is deemed to commence when a
vessel is available for loading of its next fixed cargo and is deemed to end upon the completion of the discharge of the current
cargo. Revenues from time chartering of vessels are accounted for as operating leases and are thus recognized on a straight line
basis as the average revenue over the rental periods of such charter agreements, as service is provided, Voyage expenses, primarily
consisting of port, canal and bunker expenses that are unique to a particular charter, are paid for by the charterer under time
charter arrangements or by the Company under voyage charter arrangements, except for commissions, which are always paid for by
the Company, regardless of charter type. All voyage and vessel operating expenses are expensed as incurred, except for commissions.
Commissions are deferred over the related voyage charter period to the extent revenue has been deferred since commissions are earned
as the Company’s revenues are earned. Probable losses on voyages in progress are provided for in full at the time such losses
can be estimated.
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:
|
•
|
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, including days of vessels in lay-up. 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.
|
|
•
|
Available days. We define available days as the number of ownership days less the aggregate number
of days that our vessels are offhire due to major repairs, dry-dockings or special or intermediate surveys or days of vessels in
lay-up. 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.
|
|
•
|
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 circumstances. The shipping industry uses operating
days to measure the aggregate number of days in a period during which vessels could actually generate revenues.
|
|
•
|
Fleet utilization. We calculate fleet utilization by dividing the number of operating days during
a period by the number of available days during that period. The shipping industry uses fleet utilization to measure a company’s
efficiency properly operating its vessels and minimizing the amount of days that its vessels are off-hire for any unforeseen reason.
|
|
•
|
Off-hire. The period a vessel is unable to perform the services for which it is required under
a charter. Off-hire periods typically include days spent undergoing repairs and dry-docking, whether or not scheduled.
|
|
•
|
Time charter. A time charter is a contract for the use of a vessel for a specific period of time
during which the charterer pays substantially all of the voyage expenses, including port costs, canal charges and bunkers expenses.
The vessel owner pays the vessel operating expenses, which include crew wages, insurance, technical maintenance costs, spares,
stores and supplies and commissions on gross voyage revenues. Time charter rates are usually fixed during the term of the charter.
Prevailing time charter rates do fluctuate on a seasonal and year-to-year basis and may be substantially higher or lower from a
prior time charter agreement when the subject vessel is seeking to renew the time charter agreement with the existing charterer
or enter into a new time charter agreement with another charterer. Fluctuations in time charter rates are influenced by changes
in spot charter rates.
|
|
•
|
Voyage charter. A voyage charter is an agreement to charter the vessel for an agreed per-ton amount
of freight from specified loading port(s) to specified discharge 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.
|
|
•
|
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 company’s performance despite changes in the mix of charter types (i.e., spot charters, time
charters and bareboat charters) under which the vessels may be employed during a specific period.
|
|
•
|
Adjusted EBITDA represents net earnings before taxes, depreciation and amortization, amortization
of deferred revenue, (gain)/loss on derivative instruments, stock-based compensation expense, vessel impairment loss, write-off
of advances for vessels under construction, interest and finance cost net, provision and write-offs of insurance claims and bad
debts, loss on debt extinguishment, (gain)/loss on sale of vessel, gain on settlement of payable and loss on settlement of liability
through stock issuance. 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. The shipping industry is capital intensive
and may involve significant financing costs. The Company uses Adjusted EBITDA because it presents useful information to management
regarding the Company’s ability to service and/or incur indebtedness by excluding items that we do not believe are indicative
of our core operating performance, and therefore is an alternative measure of our performance. The Company also believes that Adjusted
EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the
evaluation of companies in our industry. Adjusted EBITDA has limitations as an analytical tool, however, and should not be considered
in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP. Some of these limitations
are: (i) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future,
and Adjusted EBITDA does not reflect any cash requirements for such capital expenditures.
|
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:
|
·
|
The nature and duration of our charters;
|
|
·
|
The amount of time that we spent repositioning its vessels;
|
|
·
|
The amount of time that our vessels spent in dry-dock undergoing repairs;
|
|
·
|
Maintenance and upgrade work;
|
|
·
|
The age, condition and specifications of our vessels;
|
|
·
|
The levels of supply and demand in the drybulk carrier transportation
market; and
|
|
·
|
Other factors affecting charter rates for drybulk carriers under voyage
charters.
|
A voyage charter is
generally a contract to carry a specific cargo from a load port to a discharge port for an agreed-upon total amount. Under voyage
charters, voyage expenses such as port, canal and fuel costs are paid by the vessel owner. A trip time charter is a short-term
time charter for a voyage between load port(s) and discharge port(s) under which the charterer pays fixed daily hire rate on a
semi-monthly basis for use of the vessel. A period time charter is charter for a vessel for a fixed period of time at a set daily
rate. Under trip time charters and time charters, the charterer pays voyage expenses. Under all three types of charters, the vessel
owners pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs. The vessel owners are also responsible for each vessel’s dry-docking and intermediate and special
survey costs.
Vessels operating on
period time charters provide more predictable cash flows, but can yield lower profit margins than vessels operating in the spot
charter market for single trips during periods characterized by favorable market conditions.
Vessels operating in
the spot charter market generate revenues that are less predictable, but can yield increased profit margins during periods of improvements
in drybulk rates. Spot charters also expose vessel owners to the risk of declining drybulk rates and rising fuel costs. Our vessels
were chartered in the spot market during the year ended December 31, 2013.
A standard maritime
industry performance measure is the TCE. TCE rates are defined as our time charter revenues less voyage expenses during a period
divided by the number of our operating 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
2011, 2012 and 2013 was $9,408, $4,515 and $3,256, 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.
Principal Factors Affecting Our Business
The principal factors
that affected our financial position, results of operations and cash flows include the following:
|
·
|
Number of vessels owned and operated;
|
|
·
|
Charter market rates and periods of charter
hire;
|
|
·
|
Vessel operating expenses and direct voyage
costs, which are incurred in both U.S. dollars and other currencies, primarily Euros;
|
|
·
|
Management fees and service fees;
|
|
·
|
Depreciation and amortization expenses,
which are a function of vessel cost, any significant post-acquisition improvements, estimated useful lives, estimated residual
scrap values, and fluctuations in the carrying value of our vessels, as well as, drydocking and special survey costs;
|
|
·
|
Financing costs related to indebtedness
associated with the vessels; and
|
|
·
|
Fluctuations in foreign exchange rates.
|
Performance Indicators
(All amounts in tables in thousands of U.S. dollars except
for fleet data and average daily results)
The following performance
measures were derived from our audited consolidated financial statements for the year ended December 31, 2013, 2012 and 2011
included elsewhere in this report. The historical data included below is not necessarily indicative of our future performance.
|
|
For the year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (1)
|
|
$
|
(18,513
|
)
|
|
$
|
(7,092
|
)
|
|
$
|
5,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of vessels (2)
|
|
|
7.00
|
|
|
|
7.02
|
|
|
|
8.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership days (3)
|
|
|
2,555
|
|
|
|
2,562
|
|
|
|
2,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available days (4)
|
|
|
1,068
|
|
|
|
2,529
|
|
|
|
2,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating days (5)
|
|
|
887
|
|
|
|
2,337
|
|
|
|
2,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet utilization (6)
|
|
|
83.1
|
%
|
|
|
92.4
|
%
|
|
|
96.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average TCE rate (7)
|
|
$
|
3,256
|
|
|
$
|
4,515
|
|
|
$
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses (8)
|
|
|
4,252
|
|
|
|
4,242
|
|
|
|
4,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees (9)
|
|
|
583
|
|
|
|
726
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses(10)
|
|
|
1,528
|
|
|
|
1,494
|
|
|
|
1,538
|
|
Total vessel operating expenses (11)
|
|
$
|
4,835
|
|
|
|
4,968
|
|
|
|
5,492
|
|
|
(1)
|
Adjusted EBITDA represents net loss before taxes, depreciation and
amortization, amortization of deferred revenue, (gain)/loss on derivative instruments, stock-based compensation expense, vessel
impairment loss, impairment of advances for vessels under construction, interest and finance cost net, loss on debt extinguishment,
provision and write-offs of insurance claims and bad debts, (gain)/loss on sale of vessel, gain on settlement of payable, loss
on settlement of liability through stock issuance and gain 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. The shipping industry is capital intensive and may involve significant financing costs. The Company
uses Adjusted EBITDA because it presents useful information to management regarding the Company’s ability to service and/or
incur indebtedness by excluding items that we do not believe are indicative of our core operating performance, and therefore is
an alternative measure of our performance. The Company also believes that Adjusted EBITDA is useful to investors because it is
frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted EBITDA has limitations as an analytical tool, however, and should not be considered in isolation or as a substitute for
analysis of the Company’s results as reported under U.S. GAAP. Some of these limitations are: (i) Adjusted EBITDA does
not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation and amortization are
non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not
reflect any cash requirements for such capital expenditures.
|
|
|
For the year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net loss
|
|
$
|
(48,705
|
)
|
|
$
|
(30,888
|
)
|
|
$
|
(88,196
|
)
|
Depreciation and amortization
|
|
|
5,927
|
|
|
|
6,717
|
|
|
|
9,579
|
|
Amortization of deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
(136
|
)
|
Stock-based compensation expense
|
|
|
42
|
|
|
|
122
|
|
|
|
122
|
|
Vessel impairment loss
|
|
|
27,455
|
|
|
|
12,480
|
|
|
|
69,998
|
|
Impairment of advances for vessels under construction
|
|
|
—
|
|
|
|
—
|
|
|
|
11,717
|
|
Loss on derivative instruments
|
|
|
40
|
|
|
|
85
|
|
|
|
178
|
|
Interest and finance cost, net of interest income
|
|
|
2,381
|
|
|
|
2,583
|
|
|
|
3,999
|
|
(Gain) on sale of vessel
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,561
|
)
|
Provision and write-offs of insurance claims and bad debts
|
|
|
1,215
|
|
|
|
1,675
|
|
|
|
133
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
|
134
|
|
|
|
—
|
|
Gain on settlement of payable
|
|
|
(1,149
|
)
|
|
|
—
|
|
|
|
—
|
|
Loss on settlement of liability through stock issuance
|
|
|
3,914
|
|
|
|
—
|
|
|
|
—
|
|
Gain on debt extinguishment
|
|
|
(9,633
|
)
|
|
|
—
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
(18,513
|
)
|
|
$
|
(7,092
|
)
|
|
$
|
5,833
|
|
|
(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, including days of vessels in lay-up. 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 or days of vessels
in lay-up. 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.
|
|
(5)
|
Operating days are the number of available days less the aggregate
number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses
operating days to measure the aggregate number of days in a period during which vessels could actually generate revenues.
|
|
(6)
|
We calculate fleet utilization by dividing the number of our fleet’s
operating days during a period by the number of available days during the period. The shipping industry uses fleet utilization
to measure a company’s efficiency in properly operating its vessels and minimizing the amount of days that its vessels are
off-hire for any unforeseen reasons.
|
|
(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 company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat
charters) under which the vessels may be employed between the periods:
|
|
|
For the year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
6,074
|
|
|
$
|
14,260
|
|
|
$
|
29,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage expenses and commissions
|
|
|
(3,186
|
)
|
|
|
(3,709
|
)
|
|
|
(2,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
2,888
|
|
|
|
10,551
|
|
|
|
26,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating days
|
|
|
887
|
|
|
|
2,337
|
|
|
|
2,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time charter equivalent daily rate
|
|
$
|
3,256
|
|
|
$
|
4,515
|
|
|
$
|
9,408
|
|
|
(8)
|
Average daily vessel operating expenses, which includes crew costs,
provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, is calculated by dividing vessel operating
expenses by ownership days for the relevant time periods:
|
|
|
For the year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses
|
|
$
|
10,865
|
|
|
$
|
10,868
|
|
|
$
|
14,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership days
|
|
|
2,555
|
|
|
|
2,562
|
|
|
|
2,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily vessel operating expense
|
|
$
|
4,252
|
|
|
$
|
4,242
|
|
|
$
|
4,858
|
|
|
(9)
|
Daily management fees are calculated by dividing total management
fees (excluding stock-based compensation expense and gain on shares issued to the Manager) 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 (excluding stock-based compensation expense and gain on shares issued to the Manager)
by ownership days for the relevant period.
|
|
(11)
|
Total vessel operating expenses, or TVOE, is a measurement of our
total expenses associated with operating our vessels. TVOE is the sum of vessel operating expenses and management fees. Daily TVOE
is calculated by dividing TVOE by fleet ownership days for the relevant time period.
|
Results of Operations
Year Ended December 31, 2013
as Compared to Year Ended December 31, 2012
REVENUES - Operating
revenues for the year ended December 31, 2013 were $6,074 compared to $14,260 for the year ended December 31, 2012. The decrease
of $8,186 is mainly attributable to (i) the lower average daily TCE rate of $3,256 in the year ended December 31, 2013 compared
to an average daily TCE rate of $4,515 in the year ended December 31, 2012 on the back of the very weak spot charter rates, (ii)
the decrease of the operational vessels in our fleet (see “Employment and Charter Rates” above) and (iii) a lower fleet
utilization of 83.1% for the year ended December 31, 2013 compared to 92.4% for the year ended December 31, 2012.
VOYAGE EXPENSES AND
COMMISSIONS - Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra insurance and
various expenses, were $2,669 for the year ended December 31, 2013, as compared to $2,835 for the year ended December 31, 2012.
The variance in voyage expenses reflects mainly the decreased replenishment of bunkers to the owners’ account during the
year ended December 31, 2013. For year ended December 31, 2013, commissions charged amounted to $517, as compared to $874 for the
year ended December 31, 2012. The decrease in commissions is mainly due to the large decrease of operating revenues for the year
ended December 31, 2013 compared to the year ended December 31, 2012. The commission fees represent commissions paid to the Manager,
other affiliated companies associated with family members of our CEO, and unaffiliated third parties relating to vessels chartered
during the relevant periods.
OPERATING EXPENSES
- Vessel operating expenses, which include crew cost, provisions, deck and engine stores, lubricating oil, insurance, maintenance
and repairs, totaled $10,865 in the year ended December 31, 2013, as compared to $10,868 in the year ended December 31, 2012. The
operating expenses were roughly similar reflecting the cost of maintaining the vessels even when not operational for income producing
purposes.
DEPRECIATION AND AMORTIZATION
- For the years ended December 31, 2013 and 2012, depreciation expense was the same at $5,729. For the year ended December 31,
2013, amortization of dry-dockings and special survey costs totaled $199, a decrease of $789 over the $988 expenses reported in
the year ended December 31, 2012. The main reason for the decrease is that the M/V
Free Knight
and the M/V
Free
Maverick
scheduled dry-docking and special survey costs have been fully amortized as of December 31, 2013.
MANAGEMENT FEES - Management
fees for the year ended December 31, 2013 totaled $1,490 as compared to $2,404 in the year ended December 31, 2012. The
$914 decrease in management fees mainly resulted from the recognition of $436 as gain for the issuance of 492,714 shares of the
Company’s common stock to the Manager in payment of $1,077 in unpaid management fees due to the Manager for the months of
February through September 2013.
GENERAL
AND ADMINISTRATIVE EXPENSES - General and administrative expenses, which include, among other things, legal, audit, audit-related
expenses, travel expenses, communications expenses, and services fees and expenses charged by the Manager, totaled $3,904 (includes
$238 stock-based compensation expense
for the issuance of 34,069 shares of the Company’s
common stock to the Manager in payment of $136 in unpaid services fees due to the Manager for January 2013) for the year ended
December 31, 2013, as compared to $4,443 (includes $616 stock-based compensation expense) for the year ended December 31,
2012. The decrease of $539 was mainly due to the recognition of $518 as gain for the issuance of 498,944 shares of the Company’s
common stock to the Manager in payment of $1,091 in unpaid services fees due to the Manager for the months of February through
September 2013 and the issuance of 34,326 shares of the Company’s common stock to the non-executive members of the Company’s
Board of Directors, in payment of $120 in unpaid Board fees for the first, second and third quarter of 2013.
PROVISION AND WRITE-OFFS
OF INSURANCE CLAIMS AND BAD DEBTS - For the years ended December 31, 2013 and 2012, the amounts were $1,215 and $1,675, respectively,
which reflected the write-off of various long outstanding accounts receivable.
VESSEL IMPAIRMENT LOSS
– As of December 31, 2013, the Company, according to the guidance under ASC 360, decided to change in the accompanying
consolidated balance sheet the classification of the “held for sale” vessels (M/V
Free Hero
, M/V
Free Jupiter
,
M/V
Free Impala
and M/V
Free Neptune
) to “held and used” since the market conditions were not favorable
enough for concluding their sale and recognized an impairment loss of $3,477 in the accompanying consolidated statements of operations,
of which $935 relates to the M/V
Free Hero
, $455 to the M/V
Free Jupiter
and $2,087 to the M/V
Free Impala
.
In addition, the Company, also according to the provisions of ASC 360, has classified the M/V
Free Knight
, as “held
for sale” in the accompanying consolidated balance sheet for the year ended December 31, 2013 at her estimated market value.
On February 18, 2014, the M/V
Free Knight
was sold and an impairment charge of $23,978 was recognized in the accompanying
consolidated statement of operations for the year ended December 31, 2013.
The Company according
to the provisions of ASC 360, has classified the M/V
Free Hero
, the M/V
Free Jupiter
, the M/V
Free Impala
and the M/V
Free Neptune
as “held for sale” for the year ended December 31, 2012 at their estimated market values
less costs to sell, as all criteria required for the classification as “Held for Sale” were met. As of December 31,
2012, the Company compared the carrying values of vessels classified as held for sale with their estimated market values less costs
to sell and recognized an impairment loss of $12,480 in the accompanying consolidated statements of operations, of which $2,880
relates to the M/V
Free Hero
, $3,360 to the M/V
Free Jupiter
, $3,360 to the M/V
Free Impala
and $2,880 to
the M/V
Free Neptune
.
FINANCING COSTS - Financing
costs amounted to $2,381 for the year ended December 31, 2013 and $2,583 for the year ended December 31, 2012. The decrease
of the interest and financing costs incurred for the year ended December 31, 2013 as compared to the same period in 2012 was mainly
attributed to the write-off of unamortized deferred amendment and restructuring fees of $939 related to the Deutsche Bank loan
facilities, since the Bank, in accordance with the Settlement Agreement (see “Long-term debt” below), forgave the outstanding
indebtedness and overdue interest owed by the Company of approximately $30 million in total and released all collateral associated
with the loan, including the lifting of the mortgages over the M/V
Free Knight
and the M/V
Free Maverick
.
GAIN/(LOSS)
ON INTEREST RATE SWAPS - The Company was party to two interest rate swap agreements which were fully unwound on February 3, 2014.
Those do not qualify for hedge accounting and as such, the changes in their fair values are recognized in the statement of operations
as of December 31, 2013. The Company has agreed to make quarterly payments to the counterparty based on decreasing notional amounts,
standing at $2,686 and $1,438, respectively as of December 31, 2013 at fixed rates of 5.07% and 5.55% respectively, and the
counterparty has agreed to make quarterly floating-rate payments at LIBOR to the Company based on the same decreasing notional
amounts. The change in the fair value of the Company’s two interest rate swaps for the years ended December 31, 2013,
2012 and 2011 resulted in unrealized gains of $246, $314 and $361, respectively. The settlements on the interest rate swaps for
the years ended December 31, 2013, 2012 and 2011 resulted in realized losses of $286, $399 and $539, respectively. The total
of the change in fair value and settlements for the year ended December 31, 2013, 2012 and 2011 aggregate to losses of $40,
$85 and $178, respectively, which is separately reflected in “Loss on derivative instruments”
in
the accompanying consolidated statements of operations.
NET LOSS - Net loss
for the year ended December 31, 2013 was $48,705 as compared to net loss of $30,888 for the year ended December 31, 2012.
The increase of the net loss for the year ended December 31, 2013 resulted primarily from the impairment charge the Company
recognized due to the sale of M/V
Free Knight
on February 18, 2014 and a decline in revenue, which resulted from the weak
spot charter rates and the decrease of the operational vessels in our fleet.
Year Ended December 31, 2012
as Compared to Year Ended December 31, 2011
REVENUES - Operating
revenues for the year ended December 31, 2012 were $14,260 compared to $29,538 for the year ended December 31, 2011. The decrease
of $15,278 is mainly attributable to the lower average daily TCE rate of $4,515 in the year ended December 31, 2012 compared to
an average daily TCE rate of $9,408 in the year ended December 31, 2011 on the back of the very weak spot charter rates and to
a lesser degree to the decrease of the average number of vessels in our fleet to 7.02 vessels for the year ended December 31, 2012
compared to 8.21 vessels for the year ended December 31, 2011 and to a lower fleet utilization of 93% for the year ended December
31, 2012 compared to 96.8% for the year ended December 31, 2011.
VOYAGE EXPENSES AND
COMMISSIONS - Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra insurance and
various expenses, were $2,835 for the year ended December 31, 2012, as compared to $807 for the year ended December 31, 2011. The
variance in voyage expenses reflects mainly the increased replenishment of bunkers to the owners’ account and the increased
idle time of the vessels during 2012. For the year ended December 31, 2012, commissions charged amounted to $874, as compared to
$1,777 for the year ended December 31, 2011. The decrease in commissions is mainly due to the large decrease of operating revenues
for the year ended December 31, 2012 compared to the year ended December 31, 2011. The commission fees represent commissions paid
to the Manager, other affiliated companies associated with family members of our CEO, and unaffiliated third parties relating to
vessels chartered during the relevant periods.
OPERATING EXPENSES
- Vessel operating expenses, which include crew cost, provisions, deck and engine stores, lubricating oil, insurance, maintenance
and repairs, totaled $10,868 in the year ended December 31, 2012, as compared to $14,563 in the year ended December 31, 2011. The
decrease of $3,695, which is translated to daily operating expenses of $4,242 for the year ended December 31, 2012 versus $4,858
for the year ended December 31, 2011 is primarily due to the intensification of the cost cutting initiatives initiated in the fourth
quarter of 2010 and continued throughout 2012 and the ownership of 7.02 vessels versus 8.21 during the prior year.
DEPRECIATION AND AMORTIZATION
- For the year ended December 31, 2012, depreciation expense totaled $5,729 as compared to $8,664 for the year ended December 31,
2011. The decrease of $2,935 in depreciation expense resulted mainly from the ownership of 7.02 vessels for the year ended December
31, 2012 compared to 8.21 vessels for the year ended December 31, 2011. For the year ended December 31, 2012, amortization
of dry-dockings and special survey costs totaled $988, a slight increase of $73 over the $915 expenses reported in the year ended
December 31, 2011. The main reason for the slight increase is the amortization, commenced in August 2012, of the M/V Free
Jupiter scheduled dry-docking and special survey costs.
MANAGEMENT FEES - Management
fees for the year ended December 31, 2,012 totaled $2,404, as compared to $1,900 in the year ended December 31, 2011.
The $504 increase in management fees mainly resulted from the recognition of $543 as stock-based compensation expense for the issuance
of: i) 201,037 shares of the Company's common stock to the Manager in payment of $916 in unpaid management fees due to the Manager
for the first and third quarter of 2012 and ii) 149,561 shares on February 28, 2013 of its common stock to the Manager in payment
of $266 in unpaid management fees due to the Manager for November and December 2012 under the management agreement with the Company.
GENERAL AND ADMINISTRATIVE
EXPENSES - General and administrative expenses, which include, among other things, legal, audit, audit-related expenses, travel
expenses, communications expenses, and services fees and expenses charged by the Manager, totaled $4,443 (including $616 stock-based
compensation expense) for the year ended December 31, 2012, as compared to $4,734 (including $122 stock-based compensation
expense) for the year ended December 31, 2011. The decrease of $291 due to the cost cutting policy applied throughout 2012,
was counterbalanced by the amount of $494 recognized as stock-based compensation expense for the issuance of: i) 237,326 shares
of the Company's common stock to the Manager in payment of $818 in unpaid services fees due to the Manager for the first and third
quarter of 2012, in payment of $155 in unpaid Board fees for the last three quarters of 2011 and in payment of $152 in unpaid Board
fees for the first, second and third quarter of 2012 and ii) 195,219 shares on February 28, 2013 of its common stock to the Manager
in payment of $272 in unpaid services fees due to the Manager for November and December 2012 and in payment of $48 in unpaid Board
fees for the fourth quarter of 2012, under the services agreement with the Company.
PROVISION AND WRITE-OFFS
OF INSURANCE CLAIMS AND BAD DEBTS - For the year ended December 31, 2012, the amount of $1,675 reflected the write-off of
various long outstanding accounts receivable. The amount of $1,173 relates to the remaining outstanding balance of the KLC time
charter, which the Company wrote-off. Despite the write-off, the Company is considering its options if KLC does not pay the balance,
including the possibility of pursuing this in the Korean rehabilitation proceedings, where the hearing of the Company’s claim
has been stayed pending the outcome of the London arbitration. The Company believes that, if the Korean claim succeeds, the Company
should make a recovery in accordance with the rehabilitation plan, which has been approved by the Korean court. The Company intends
to seek a further award (if this matter does not settle) for the disputed balance, which is adequately secured. For the year ended
December 31, 2011, the provision totaled $133, which reflected the write-off of various long outstanding accounts receivable.
GAIN/LOSS ON SALE OF
VESSEL - During the year ended December 31, 2012, there were no vessel disposals. For the year ended December 31, 2011, the
Company recognized a gain of $1,561 on the sale of the M/V
Free Envoy
.
VESSEL IMPAIRMENT LOSS
- The Company according to the provisions of ASC 360, has classified the M/V Free Hero, the M/V Free Jupiter, the M/V Free Impala
and the M/V Free Neptune as “held for sale” for the year ended December 31, 2012 at their estimated market values
less costs to sell, as all criteria required for the classification as “Held for Sale” were met at the balance sheet
date. As of December 31, 2012, the Company compared the carrying values of vessels classified as held for sale with their estimated
market values less costs to sell and recognized an impairment loss of $12,480 in the consolidated statements of operations, of
which $2,880 relates to the M/V Free Hero, $3,360 to the M/V Free Jupiter, $3,360 to the M/V Free Impala and $2,880 to the M/V
Free Neptune. The Company according to the provisions of ASC 360, has classified the M/V Free Hero, the M/V Free Jupiter,
the M/V Free Impala and the M/V Free Neptune as “held for sale” in the consolidated balance sheet for the year ended
December 31, 2011 at their estimated market values less costs to sell, as all criteria required for the classification as
“Held for Sale” were met at the balance sheet date. On February 28, 2011, after obtaining the respective lenders
consent (FBB), the Company’s Board of Directors, approved a plan of sale of the vessels M/V Free Impala and M/V Free Neptune
within the context of its plans to fund its working capital requirements. On July 15, 2011, the Company’s Board of Directors
approved a plan of sale of the vessels M/V Free Jupiter and M/V Free Lady (which was sold on November 8, 2011) as a result
of the fourth supplemental agreement the Company entered into with Credit Suisse. Drydocking costs consists of the unamortized
dry docking and special survey costs of the M/V Free Neptune which were included in “Vessels held for sale” following
the vessel’s classification as held for sale in February 2011 as well as $373 relating to the cost of the drydocking and
special survey performed on this vessel in November 2011. As of December 31, 2011, the Company compared the carrying values
of vessels classified as held for sale with their estimated market values less costs to sell and recognized an impairment loss
of $23,483 in the consolidated statements of operations.
IMPAIRMENT OF ADVANCES
FOR VESSELS UNDER CONSTRUCTION - As of December 31, 2011, the Company has impaired the advances and the capitalized expenses
relating to the vessels under construction after the cancelation of ABN AMRO financing commitment on December 30, 2011. There
were no advances and capitalized expenses relating to the vessels under construction, since their cancelation in 2011, to be impaired
for the year ended December 31, 2012.
FINANCING COSTS - Financing
costs amounted to $2,717 for the year ended December 31, 2012 and $4,003 for the year ended December 31, 2011. The decrease
of the interest and financing costs incurred for the year ended December 31, 2012 as compared to the same period in 2011 was
attributed to:
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·
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the write-off of the commitment fees that
ABN AMRO Bank had charged the Company for pre-delivery and post delivery debt financing for the purchase of the two newbuilding
Handysize vessels which were canceled (the bank agreed to return them to the Company, pursuant to a settlement agreement entered
into on April 13, 2012);
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·
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the lower weighted average interest rate
as a result of the amended and restated facilities the Company entered with Credit Suisse and Deutsche Bank, on May 31, 2012 and
September 7, 2012, respectively; and
|
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·
|
the write-off of the unamortized deferred
financing fees of $191 related to the prior Credit Suisse and Deutsche Bank loan facilities consequently;
|
alleviated by the quarterly amortization
of the amendment and restructuring fees incurred, due to the amendment of Credit Suisse and Deutsche Bank loan facilities in May
and September 2012, respectively.
GAIN/(LOSS) ON INTEREST
RATE SWAPS - The Company is a party to two interest rate swap agreements that do not qualify for hedge accounting and as such,
the changes in their fair values are recognized in the statement of operations. The Company makes quarterly payments to the counterparty
based on decreasing notional amounts, standing at $4,340 and $2,323, respectively as of December 31, 2012 at fixed rates of
5.07% and 5.55% respectively, and the counterparty makes quarterly floating-rate payments at LIBOR to the Company based on the
same decreasing notional amounts. The swaps mature in September 2015 and July 2015, respectively. The change in the fair value
of the Company’s two interest rate swaps for the year ended December 31, 2012, 2011 and 2010 resulted in unrealized
gains of $314, $361 and $129, respectively. The settlements on the interest rate swaps for the year ended December 31, 2012,
2011 and 2010 resulted in realized losses of $399, $539 and $594, respectively. The total of the change in fair value and settlements
for the year ended December 31, 2012, 2011 and 2010 aggregate to losses of $85, $178 and $465, respectively, which is separately
reflected in “Loss on derivative instruments” in the consolidated statements of operations.
NET LOSS - Net loss
for the year ended December 31, 2012 was $30,888 as compared to net loss of $88,196 for the year ended December 31,
2011. The decrease of the net loss for the year ended December 31, 2012 resulted primarily from
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the
higher amount of impairment loss the Company recognized in the consolidated statements
of operations in the year ended December 31, 2011, compared to an impairment loss of
$12,480 the Company recognized in the year ended December 31, 2012 and
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·
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the
write off of $11,717 regarding the advances of vessels under construction the Company
recognized in the year ended December 31, 2011.
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Liquidity and Capital Resources
We have historically
financed our capital requirements from sales of equity securities, operating cash flows and long-term borrowings. As of December 31,
2013, our long-term borrowings totaled $59,687. We have primarily used our funds for capital expenditures to maintain our fleet,
comply with international shipping standards and environmental laws and regulations, and fund working capital requirements.
In January and April
2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach
of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s
deposits and loans other than the loans in ‘permanent default’ and the bank’s network of nineteen branches were
transferred to the National Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special
liquidation. The Company’s loan facility and deposits have been transferred to NBG. In January 2014, the Company received
notification from NBG that the Company has not paid the aggregate amount of $10,045 constituting repayment installments and accrued
interest due in December 2013.
On February 22, 2014, the Company and certain of its subsidiaries entered
into terms with NBG for settlement of its obligations arising from the Loan Agreement with the Bank. Pursuant to the terms, NBG
agreed to accept a cash payment of $22,000 in full and final settlement of all of the Company’s obligations to
the NBG and NBG would forgive the remaining outstanding balance of approximately $3,700. Upon payment, all of the existing
corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its two vessels
(M/V
Free Impala
and M/V
Free Neptune
) as well as all assignments in favor of NBG will be released.
The closing of s
uch transaction is contingent upon the Company being able to raise capital towards making such
payment.
In addition, the Company
did not pay the monthly loan installment amounts for $20 for each of Facility A and Facility B with Deutsche Bank along with accrued
interest due in January, February, March and April 2013. In May 2013, the Company did not pay the monthly loan installment
amounts of $11.5 for each of Facility A and Facility B with Deutsche Bank, totaling $23 along with accrued interest due. Moreover,
the Company did not pay the interest installment due in June 2013. On September 25, 2013, the Company and its wholly-owned subsidiaries:
Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure Eleven S.A. entered into the Amendment with Deutsche
Bank, Hanover and Crede, which, upon court approval on October 9, 2013 (see “Long-term debt” below), removed approximately
$30 million of debt from the Company’s consolidated balance sheet.
On
January 31, 2013 the Company did not pay the Credit Suisse facility interest installment of $124. The Company did not pay the interest
rate swap amounts of $52 and $28 due on March 5, 2013 and April 2, 2013. On April 26, 2013, the Company paid the Credit Suisse
facility interest installment of $124 due on January 31, 2013. On April 30 and July 31, 2013 the Company did not pay the Credit
Suisse facility interest installments of $117 and $119, respectively. Additionally, the Company did not pay the interest rate swap
amounts of $48, $25, $43 and $22 due on June 5, 2013, July 2, 2013, September 5, 2013 and October 2, 2013, respectively. In addition,
on October 31, 2013, the Company did not pay the Credit Suisse facility interest installment of $118. Furthermore, the Company
did not pay the interest rate swap amounts of $38 due on December 5, 2013 and $19 due on January 2, 2014, respectively. On February
3, 2014, the Company paid the amount of $201 to fully unwind its two interest rate swap agreements with Credit Suisse. The Company
received reservation of right letters on August 9, 2013, October 4, 2013 and November 1, 2013 stating that Credit Suisse may take
any actions and may exercise all of their rights and remedies referred to in the security documents.
On January 30, 2014,
the Company and certain of its subsidiaries entered into a term sheet with Credit Suisse in order to settle its obligations arising
from the Loan Agreement with the Bank. Pursuant to the term sheet, Credit Suisse agreed to accept a cash payment of approximately
$22,000 in full and final settlement of all of the Company’s obligations to Credit Suisse and Credit Suisse would
forgive the remaining outstanding balance of approximately $15,000. Upon payment, all of the existing corporate guarantees of
the Company and its subsidiaries and the mortgages and security interests on its three vessels (M/V
Free Goddess
, M/V
Free Hero
and M/V
Free Jupiter
) as well as all assignments in favor of Credit Suisse will be released.
The closing of s
uch transaction is contingent upon the Company being able to raise capital towards making such
payment.
If the Company is not
able to raise the capital necessary to complete the agreements reached with the NBG and Credit Suisse or if the Company is unable
to comply with its restructured loan terms, this could lead to the acceleration of the outstanding debt under its debt agreements.
The Company’s failure to satisfy its covenants under its debt agreements, and any consequent acceleration and cross acceleration
of its outstanding indebtedness would have a material adverse effect on the Company’s business operations, financial condition
and liquidity.
The Company is currently
exploring several alternatives aiming to manage its working capital requirements and other commitments, including offerings of
securities through structured financing agreements, disposition of certain vessels in its current fleet and additional reductions
in operating and other costs.
The consolidated financial
statements as of December 31, 2013, were prepared assuming that the Company would continue as a going concern despite its
significant losses and working capital deficit. Accordingly, the financial statements did not include any adjustments relating
to the recoverability and classification of recorded asset amounts, the amounts and classification of liabilities, or any other
adjustments that might result in the event the Company is unable to continue as a going concern, except for the classification
of all debt, and derivative financial instrument liability as current.
Cash Flows
Year Ended December 31, 2013 as Compared
to Year Ended December 31, 2012
OPERATING ACTIVITIES
- Net cash used in operating activities increased by $1,953 to $3,978 for the year ended December 31, 2013, as compared to
$2,025 for the year ended December 31, 2012. The increase reflected the weak freight market and the decrease of the operational
vessels in our fleet (see “Employment and Charter Rates” above) during the year ended December 31, 2013.
FINANCING ACTIVITIES
– Net cash provided by financing activities for year ended December 31, 2013 was $11,530, as compared to $1,723 for
the year ended December 31, 2012. The increase in cash was due to:
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the proceeds of $489 from the four 8% interest
bearing convertible notes the Company entered into agreements with Asher Enterprises, Inc. (“Asher”) in January, April,
May and July 2013.
As of the date
of this report, all of the convertible notes have been converted into common shares;
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the sale of series B and C convertible
preferred stock to Crede for gross cash proceeds of $10,000 (see "Item 18 Financial Statements — Note 15 Shareholders’
Equity"); and
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the proceeds of $1,041 related to the
equity lines the Company entered with Dutchess and Granite on May 29, 2013 and January 24, 2013, respectively (see "Item 18
Financial Statements — Note 15 Shareholders’ Equity").
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Year Ended December 31, 2012
as Compared to Year Ended December 31, 2011
OPERATING ACTIVITIES
-
Net cash from operating activities decreased by $6,495 to $(2,025) for the year ended December 31, 2012, as compared
to net cash from operating activities of $4,470 for the year ended December 31, 2011. The decrease resulted from the weak
freight market in the year ended December 31, 2012 compared to the same period in 2011 and the reduced average number of vessels
to 7.02 in the year ended December 31, 2012 from 8.21 in the year ended December 31, 2011.
INVESTING ACTIVITIES
-
Net cash provided by (used in) investing activities during the year ended December 31, 2012 was $nil, as compared to $18,422
provided by investing activities for the year ended December 31, 2011. The variation reflected the cancelation of the two
Handysize newbuildings and the fact that no vessel disposals incurred during the year ended December 31, 2012.
FINANCING ACTIVITIES
- The cash from financing activities for the year ended December 31, 2012 was $1,723, as compared to $(26,255) used in
for the year ended December 31, 2011. The increase in cash was mainly due to:
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the decrease of $1,125 in restricted cash;
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the payment of the unpaid management and
services fees of $2,271 due to the Manager in 2012 through the issuance of common shares to the Manager;
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the
equity raising of $629 through the equity line from YA Global and Dutchess; and
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the raise of $250 from the sale of a promissory
note, in August 2012, pursuant to the Note Purchase Agreement dated May 11, 2012 between the Company and YA Global.
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Long-Term Debt
All the Company’s
credit facilities bear interest at LIBOR plus a margin, ranging from 1.00% to 4%, and are secured by mortgages on the financed
vessels and assignments of vessels’ earnings and insurance coverage proceeds. They also include affirmative and negative
financial covenants of the borrowers, including maintenance of operating accounts, minimum cash deposits, average cash balances
to be maintained with the lending banks and minimum ratios for the fair values of the collateral vessels compared to the outstanding
loan balances. Each borrower is restricted under its respective loan agreement from incurring additional indebtedness, changing
the vessels’ flag without the lender’s consent or distributing earnings.
The weighted average
interest rate for the year ended December 31, 2013 and 2012 was 2.3% and 2.7%, respectively. Interest expense incurred under
the above loan agreements amounted to $1,946, $ 2,415 and $3,173 (net of capitalized interest $282) for the years ended December 31,
2013, 2012 and 2011, respectively, and is included in “Interest and Finance Costs” in the accompanying consolidated
statements of operations.
Deutsche Bank Facility
On September 7, 2012,
the Company and certain of its subsidiaries entered into an amended and restated facility agreement with Deutsche Bank. As amended
and restated, the facility agreement:
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Defers and reduces the balloon payment
of $16,009 due on Facility B from November 2012 to December 2015;
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Provides for monthly repayments of $20
for each of Facility A and Facility B commencing September 30, 2012 through April 30, 2013 and a monthly repayment of $11.5 for
each of Facility A and Facility B on May 31, 2013;
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Suspends principal repayments from June
1, 2013 through June 30, 2014 on each of Facility A and Facility B;
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Provides for quarterly repayments of $337
for Facility A commencing June 30, 2014, which quarterly repayments have been reduced from $750;
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Provides for quarterly repayments of $337
for Facility B commencing June 30, 2014;
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Bears interest at the rate of LIBOR plus
1% through March 31, 2014 and LIBOR plus 3.25% from April 1, 2014 through maturity, which were reduced from LIBOR plus 2.25% for
Facility A and LIBOR plus 4.25% for Facility B;
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Establishes certain financial covenants,
including an interest coverage ratio that must be complied with starting January 1, 2013, a consolidated leverage ratio that must
be complied with starting January 1, 2014, and a minimum liquidity ratio that must be complied with starting July 1, 2014;
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Removes permanently the loan to value
ratio;
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Requires the amount of any “Excess
Cash,” as determined in accordance with the amended and restated facility agreement at each fiscal quarter end beginning
June 30, 2012, to be applied to pay the amendment and restructuring fee described below and prepay the outstanding loan balance;
and
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Removes the success fee originally due
under the previous agreement and provides for an amendment and restructuring fee of $1,480 payable on the earlier of March 31,
2014, the date of a voluntary prepayment, or the date the loan facility becomes due or is repaid in full.
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The Company did not
pay the monthly repayments of $20 for each of Facility A and Facility B with Deutsche Bank along with accrued interest due in
January, February, March and April 2013. Also, in May 2013, the Company did not pay the monthly repayments of $11.5 for each of
Facility A and Facility B with Deutsche Bank, totaling $23 along with accrued interest due. As well, the Company did not pay the
interest due in June 2013.
On July 5, 2013, the
Company entered into a Debt Purchase and Settlement Agreement (the “Settlement Agreement”) with Deutsche Bank, Hanover
and the Company’s wholly-owned subsidiaries: Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure
Eleven S.A. Pursuant to the terms of the Settlement Agreement, Hanover agreed to purchase $10,500 of outstanding indebtedness owed
by the Company to Deutsche Bank, out of a total outstanding amount owed of $29,958, subject to the satisfaction of a number of
conditions set forth in the Settlement Agreement. Upon payment in full of the $10,500 purchase price for such purchased indebtedness
by Hanover to Deutsche Bank in accordance with the terms and conditions of the Settlement Agreement, the remaining outstanding
indebtedness of the Company and its subsidiaries to Deutsche Bank would be forgiven, and the mortgages of two security vessels
would be discharged.
The Settlement Agreement
would not have become effective until Hanover deposited in escrow an amount of $2,500 plus all reasonably incurred legal fees and
expenses and the parties enter into an escrow agreement (the “Settlement Conditions”). If the Settlement Conditions
were not met by August 2, 2013 (20 trading days after execution of the Settlement Agreement), the Settlement Agreement would automatically
be dissolved without any further action of the parties. In addition, the Settlement Agreement would have automatically terminated
upon the occurrence of certain events set forth in the Settlement Agreement. In addition, Deutsche Bank had the right to terminate
the Settlement Agreement upon the failure of Hanover to make certain installment payments of the purchase price for the purchased
debt within certain time frames set forth in the Settlement Agreement.
On August 2, 2013,
the Company entered into an Addendum to the Debt Purchase and Settlement Agreement (the “Addendum”) with Deutsche Bank,
Hanover and the Company’s wholly-owned subsidiaries: Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure
Eleven S.A. As previously reported, the Settlement Agreement was not to become effective until Hanover deposited in escrow an amount
of $2,500 plus all reasonably incurred legal fees and expenses and the parties entered into an escrow agreement (the “Settlement
Conditions”). On August 2, 2013, the Settlement Conditions were fulfilled and the Settlement Agreement became effective.
The Addendum extended the date upon which the parties had to achieve one of the conditions to the fulfillment of the terms of the
Settlement Agreement.
On
September 25, 2013, the Company entered into the Amendment with Deutsche Bank, Hanover, Crede and the Company’s wholly-owned
subsidiaries: Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure Eleven S.A. Pursuant to the Amendment,
Hanover assigned all of its rights and obligations under the Settlement Agreement and the Escrow Agreement to Crede on the terms
set forth therein. Crede agreed to pay Hanover $3,624 in the aggregate, $2,624 of which represented the amount deposited in escrow
by Hanover as well as fees and other expenses incurred by Hanover. In addition, the Escrow Agreement was amended to provide that
Crede would deposit an additional $8,003 into escrow, following which the entire aggregate amount being held in escrow pursuant
to the Escrow Agreement became $10,542 which represented the entire purchase price for the purchased indebtedness plus fees and
expenses incurred by Deutsche Bank. This amount was released from escrow in favor of Deutsche Bank upon receipt of Court approval
of the Settlement Agreement together with the simultaneous debt forgiveness, mortgage release of both security vessels, release
of all general and specific assignments, release of all corporate guarantees of the parent and subsidiaries from Deutsche Bank.
In addition to the foregoing, the Company, in consideration for Hanover’s cancellation of certain covenants, issued to Hanover
400,000 shares of common stock and granted customary piggy-back registration rights for such shares, together with a demand registration
right commencing 120 days after September 25, 2013.
Said registration was filed and became
effective on January 28, 2014.
On September 26, 2013,
Crede and the Company entered into an Exchange Agreement, in order to settle the complaint filed against the Company by Crede seeking to
recover an aggregate of $10,500, representing all amounts due under the Settlement Agreement, as amended. The total number
of shares of Common Stock to be issued to Crede pursuant to the Exchange Agreement equal the quotient of (i) $11,850 divided by
(ii) 78% of the volume weighted average price of the Company’s Common Stock, over the 75-consecutive trading day period immediately
following the first trading day after the Court approved the Order (or such shorter trading-day period as may be determined by
Crede in its sole discretion by delivery of written notice to the Company) (the “Calculation Period”), rounded up to
the nearest whole share (the “Crede Settlement Shares”). 1,011,944 of the Crede Settlement Shares were issued
and delivered to Crede on October 10, 2013 and 7,729,818 Crede Settlement Shares were issued and delivered to Crede between October
11, 2013 and December 27, 2013.
The Exchange Agreement
further provided that if, at any time and from time to time during the Calculation Period (as defined below), the total number
of Crede Settlement Shares (as defined below) previously issued to Crede is less than the total number of Crede Settlement Shares
to be issued to Crede or its designee in connection with the Exchange Agreement, Crede may, in its sole discretion, deliver one
or more written notices to the Company requesting that a specified number of additional shares of Common Stock promptly be issued
and delivered to Crede or its designee (subject to the limitations described below), and the Company will upon such request issue
the number of additional shares of Common Stock requested to be so issued and delivered in the notice (all of which additional
shares shall be considered “Crede Settlement Shares” for purposes of the Exchange Agreement. At the end of the Calculation
Period, (i) if the total number of Crede Settlement Shares required to be issued exceeds the number of Crede Settlement Shares
previously issued to Crede, then the Company will issue to Crede or its designee additional shares of Common Stock equal to the
difference between the total number of Crede Settlement Shares required to be issued and the number of Crede Settlement Shares
previously issued to Crede, and (ii) if the total number of Crede Settlement Shares required to be issued is less than the number
of Crede Settlement Shares previously issued to Crede, then Crede or its designee will return to the Company for cancellation that
number of shares of Common Stock equal to the difference between the number of total number of Crede Settlement Shares required
to be issued and the number of Crede Settlement Shares previously issued to Crede. Crede may sell the shares of Common Stock issued
to it or its designee in connection with the Exchange Agreement at any time without restriction, even during the Calculation Period.
On October 9, 2013,
the Company received approval by the Supreme Court of the State of New York of the terms and conditions of the Exchange Agreement
between the Company and Crede. As a result of the court approval, Crede released $10,500 to Deutsche Bank and Deutsche Bank, upon
receipt of the funds, had, in accordance with the Settlement Agreement, forgiven the remaining outstanding indebtedness and overdue
interest owed by the Company approximately $19,500 in total and released all collateral associated with the loan, including the
lifting of the mortgages over the M/V
Free Knight
and the M/V
Free Maverick
.
Credit Suisse Facility
On May 31, 2012, the
Company entered into a Sixth Supplemental Agreement with Credit Suisse, which amends and restates the Facility Agreement dated
December 24, 2007, as amended, between the Company and Credit Suisse. The Sixth Supplemental Agreement, among other things, modifies
the Facility Agreement to:
|
·
|
Defer further principal repayments until
March 31, 2014;
|
|
·
|
Reduce the interest rate on the facility
to LIBOR plus 1% until March 31, 2014 from a current interest margin of 3.25
|
|
·
|
Release restricted cash of $1,125;
|
|
·
|
Waive compliance through March 31, 2014
with the requirement to maintain a minimum ratio of aggregate fair market value of the financed vessels to loan balance, after
which date the required minimum ratio will be 115% beginning April 1, 2014, 120% beginning October 1, 2014, and 135% beginning
April 1, 2015;
|
|
·
|
Establish certain financial covenants,
including an interest coverage ratio, which must be complied with starting January 1, 2013, a consolidated leverage ratio, which
must be complied with starting January 1, 2014, and a minimum liquidity ratio, which must be complied with starting July 1, 2014;
and
|
|
·
|
Require the amount of any “Excess
Cash,” as determined in accordance with the Facility Agreement at each fiscal quarter end beginning June 30, 2012, to be
applied to pay the amendment and restructuring fee described below and prepay the outstanding loan balance, depending on the Company’s
compliance at the time with the vessel market value to loan ratio and the outstanding balance of the loan.
|
On January 31, 2013
the Company did not pay the Credit Suisse facility interest installment of $124. The Company did not pay the interest rate swap
amounts of $52 and $28 due on March 5, 2013 and April 2, 2013. On April 26, 2013, the Company paid the Credit Suisse facility interest
installment of $124 due on January 31, 2013. On April 30 and July 31, 2013 the Company did not pay the Credit Suisse facility interest
installments of $117 and $119, respectively. Additionally, the Company did not pay the interest rate swap amounts of $48, $25,
$43 and $22 due on June 5, 2013, July 2, 2013, September 5, 2013 and October 2, 2013, respectively. In addition, on October 31,
2013, the Company did not pay the Credit Suisse facility interest installment of $118. Furthermore, the Company did not pay the
interest rate swap amounts of $38 due on December 5, 2013 and $19 due on January 2, 2014, respectively. On February 3, 2014, the
Company paid the amount of $201 to fully unwind its two interest rate swap agreements with Credit Suisse. The Company received
reservation of right letters on August 9, 2013, October 4, 2013 and November 1, 2013 stating that Credit Suisse may take any actions
and may exercise all of their rights and remedies referred to in the security documents. The Company has entered into a term sheet
with Credit Suisse to settle the outstanding payments upon a cash payment of a portion of the outstanding amount, whereby Credit
Suisse would forgive the remaining balance. The closing of such transaction is contingent upon the Company raising the necessary
funds. See “Item 5. Operating and Financial Review and Prospects – Recent Developments” for more information.
An amendment and restructuring
fee equal to 5% of the current outstanding indebtedness, $1,823, is due and payable on the earlier of March 31, 2014, the date
of a voluntary prepayment, or the date the loan facility becomes due or is repaid in full.
NBG Facility (fka FBB Facility)
In
January and April 2013, the Company received notifications from FBB that the Company is in default under its loan agreements as
a result of the breach of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective
May 13, 2013, the bank’s deposits and loans other than the loans in ‘permanent default’
and
the bank’s network of nineteen branches were transferred to the National Bank of Greece (“NBG”). The license
of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility and deposits have been
transferred to NBG. In January 2014, the Company received notification from NBG that the Company has not paid the aggregate amount
of $10,045 constituting repayment installments and accrued interest due in December 2013. The Company has entered into an agreement
with the NBG to settle the outstanding payments upon a cash payment of a portion of the outstanding amount, whereby the NBG would
forgive the remaining balance. The closing of such transaction is contingent upon the Company raising the necessary funds. See
“Item 5. Operating and Financial Review and Prospects – Recent Developments” for more information.
Loan Covenants
As of December 31,
2013, the Company was in breach of certain of its financial covenants for its loan agreement with NBG, including the loan-to-value
ratio, interest cover ratio, minimum liquidity requirements and leverage ratio. As well, as of December 31, 2013 the Company was
in breach of the interest coverage ratio for its loan agreement with Credit Suisse.
Thus, in accordance
with guidance related to classification of obligations that are callable by the creditor, the Company has classified all of the
related long-term debt amounting to $59,687 as current at December 31, 2013.
Credit Suisse Sixth Supplemental Agreement
:
|
(a)
|
during the period commencing on April 1, 2014 and ending on September 30, 2014, the aggregate fair
market value of the financed vessels must not be less than 115% of the outstanding loan balance at such time plus the swap exposure
minus the aggregate amount, if any, standing to the credit of the operating accounts, the retention account and any bank accounts
of the Company opened with the bank;
|
|
(b)
|
during the period commencing on October 1, 2014 and ending on March
31, 2015, the aggregate fair market value of the financed vessels must not be less than 120% of the outstanding loan balance at
such time plus the swap exposure minus the aggregate amount, if any, standing to the credit of the operating accounts, the retention
account and any bank accounts of the Company opened with the bank;
|
|
(c)
|
after March 31, 2015, the aggregate fair market value of the financed
vessels must not be less than 135% of the outstanding loan balance at such time plus the swap exposure minus the aggregate amount,
if any, standing to the credit of the operating accounts, the retention account and any bank accounts of the Company opened with
the bank;
|
|
·
|
Consolidated leverage ratio:
at the end of each accounting
period falling between January 1, 2014 and December 31, 2015 (both inclusive), the ratio of funded debt to shareholders’
equity shall not be greater than 2.5:1.0;
|
|
·
|
Liquidity:
it maintains (on a consolidated basis) on each
day falling after June 30, 2014, cash in an amount equal to the higher of $2,500 and $500 per vessel; and
|
|
·
|
Interest coverage ratio:
the ratio of EBITDA to Interest Expense
at the end of each accounting period falling between January 1, 2013 and December 31, 2013 (both inclusive), shall not be less
than 2.0:1.0; falling between January 1, 2014 and December 31, 2014 (both inclusive), shall not be less than 3.5:1.0; and falling
between January 1, 2015 and December 31, 2015 (both inclusive), shall not be less than 4.5:1.0.
|
NBG (fka FBB) loan agreement
:
|
·
|
Average corporate liquidity:
the Company is required to maintain
an average corporate liquidity of at least $3,000;
|
|
·
|
Leverage ratio:
the corporate guarantor’s leverage ratio shall not at any time exceed
55%;
|
|
·
|
Ratio of EBITDA to net interest expense
shall not be less than 3; and
|
|
·
|
Value to loan ratio:
the fair market value of the financed vessels shall be at least (a) 115%
for the period July 1, 2010 to June 30, 2011 and (b) 125% thereafter.
|
The covenants described above are tested
annually on December 31st.
Off-Balance
Sheet Arrangements
As
of December 31, 2013, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K
promulgated by the SEC.
Summary of
Contractual Obligations
The
following table summarizes our contractual obligations and their maturity dates as of December 31, 2013:
|
|
Payments Due by Period
|
|
(Dollars in
thousands)
|
|
Total
|
|
|
Less
than 1
year
|
|
|
2-
year
|
|
|
3-
year
|
|
|
4-
year
|
|
|
5-
year
|
|
|
More
than 5
years
|
|
|
|
(U.S. dollars in thousands)
|
|
Long-term debt
|
|
$
|
59,687
|
|
|
$
|
59,687
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on variable-rate debt
|
|
|
1,195
|
|
|
|
1,195
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services fees to the Manager
|
|
|
8,175
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees to the Manager
|
|
|
9,013
|
|
|
|
1,822
|
|
|
|
683
|
|
|
|
683
|
|
|
|
683
|
|
|
|
683
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
78,070
|
|
|
$
|
64,339
|
|
|
$
|
2,318
|
|
|
$
|
2,318
|
|
|
$
|
2,318
|
|
|
$
|
2,318
|
|
|
$
|
4,459
|
|
The above
table does not include our share of the monthly rental expenses for our offices of approximately 8.7 Euro (in thousands)
|
Item 6.
|
Directors, Senior Management
and Employees
|
|
A.
|
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. The primary business address
of each of our executive officers and directors is 10, Eleftheriou Venizelou Street (Panepistimiou Ave.), 106 71, Athens, Greece.
|
|
|
|
|
|
Term
|
Name
|
|
Age
|
|
Position
|
|
Expires
|
Ion G. Varouxakis
|
|
43
|
|
Chairman of the Board of Directors, Chief Executive Officer and President
|
|
2014
|
Dimitris Papadopoulos
|
|
69
|
|
Chief Financial Officer and Treasurer
|
|
—
|
Focko H. Nauta
|
|
56
|
|
Director
|
|
2013
|
Dimitrios Panagiotopoulos
|
|
53
|
|
Director
|
|
2014
|
Keith Bloomfield
|
|
43
|
|
Director
|
|
2013
|
Xenophon Galinas
|
|
57
|
|
Director
|
|
2015
|
Maria Badekas
|
|
42
|
|
Secretary
|
|
—
|
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. 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, a member of the Hellenic and Black Sea Committee of Bureau Veritas and an officer of the reserves of the Hellenic Army.
Dimitris
D. Papadopoulos
became our chief financial officer in November 2013. Mr. Papadopoulos
started his career with Citigroup in New York from 1968 to 1970, in the European credit division, and was later posted in Athens
from 1970 to 1975, where he left as general manager of corporate finance to join Archirodon Group Inc. There he served as financial
and administration vice president from 1975 to 1991, which included the financial supervision of the Group's shipping division,
the Konkar Group. He served as chairman and chief executive officer of the group's U.S. arm, Delphinance Development Corp. from
1984 to 1991. In addition to its real estate development, oil and gas development and venture capital investments, Delphinance
owned several U.S. contracting companies engaged in both the public and private sectors, with special expertise in harbor and marine
works. In 1991, he assumed the position of managing director of Dorian Bank, a full-charter commercial and investment bank in Greece,
where he served until 1996. From 1996 until 1998 and from 2000 until 2001, he was a freelance business consultant. From 1998 to
1999, he served as managing director of Porto Carras S.A., a resort hotel in Northern Greece. Later, as executive vice president
at the Hellenic Investment Bank, from 1999 to 2000, he was responsible for developing the bank's new banking charter formation,
obtaining charter approval, and organizing, staffing and commencing banking operations. From 2004 until April 2007, Mr. Papadopoulos
served as president of Waterfront Developments S.A. As a Fullbright grantee, Mr. Papadopoulos studied economics at Austin
College, Texas (B.A. and "Who's Who amongst Students in American Colleges and Universities" — 1968) and did graduate
studies at the University of Delaware. In 1974, he received an executive business diploma from Cornell University, Ithaca, N.Y.
Focko
H. Nauta
joined our Board of Directors in 2005. Since September 2000, he has also been a director of FinShip SA, a ship
financing company. 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.
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 worked as chief accountant in Ionia
Management, a Greek shipping company. He holds a degree in economics from Athens University and a master’s of science in
shipping, trade and finance from City University of London. He was an officer of the Greek Special Forces and today is a captain
of the reserves of Hellenic Army.
Keith
Bloomfield
joined our Board of Directors in 2010. He has
over 13 years of experience in mergers and acquisitions, corporate law, and wealth management. He is currently the President and
Chief Executive Officer of Forbes Family Trust, a private wealth management firm which he founded in September 2009. From October
2006 to September 2009, he was a Senior Managing Director and Corporate Counsel at Third Avenue Management, a global asset management
firm with approximately $16 billion in assets under management. At Third Avenue, he was responsible for mergers and acquisitions,
corporate transactions and business development. Prior to joining Third Avenue, he was a corporate attorney with Simpson Thacher &
Bartlett LLP. Mr. Bloomfield earned an LL.M. (Master of Law) in Taxation from New York University School of Law and a J.D.
with honors from Hofstra University School of Law, and graduated summa cum laude with a B.A. in History from Tulane University.
Xenophon
Galinas
joined our Board of Directors in 2012. From July
2011 to July 2012, Mr. Galinas served as a managing director of Rodman & Renshaw LLC, an investment banking firm. Prior to
joining Rodman & Renshaw, Mr. Galinas was a Managing Director and Head of Shipping at the investment banking firm of Morgan
Joseph TriArtisan LLC, from September 2009 to June 2011. From February 2007 to August 2009, he served as a non-Executive Chairman
of Manhattan Group Partners LLC, a New York-based merchant banking firm focused exclusively on shipping and transportation. From
November 1986 to December 1998, he served as President of Olympic Tower Associates, Executive Vice President of Central American
Steamship, Inc., and was a member of the Board of Directors of Williston S.A., all of which were management and business operating
arms of the Alexander S. Onassis Public Benefit Foundation. Mr. Galinas served for 12 years as head of the Onassis Group’s
business activities in the U.S. Mr. Galinas received a M.S. in Marine Engineering from the University of Michigan at Ann Arbor,
and an MBA in finance from New York University.
Maria
Badekas
holds a Master of Law from University of Cambridge
(UK) and a Bachelor in English and European Laws from Essex University (UK). From 2001 to 2003 she was a political expert to the
European Commission, DG Development. From 2003 to 2005, she was a special advisor to the Mayor of Athens and participated in the
preparation of the Athens 2004 Olympic Games (international affairs and public relations). Between 2005 and 2006, she was a special
advisor to the Minister of the Hellenic Ministry of Foreign Affairs, and from 2006 to 2009, she was a special advisor to the General
Secretary for European Affairs of the Hellenic Ministry of Foreign Affairs.
The total gross cash compensation paid for
2012 and for the year ended December 31, 2013 to our directors was $nil and $ $40, respectively. We have agreed to pay each
of our non-executive directors a fee of $40 per year. On April 23, 2012, the Company’s Board of Directors approved the issuance
of 33,214 shares of the Company's common stock to the Manager in payment of the $926 in unpaid fees due to the Manager for the
first quarter of 2012 under the management and services agreements with the Company. The number of shares issued to the Manager
was based on the closing prices of the Company's common stock on the first day of each month during the quarter, which are the
dates the management and services fees were due and payable. The Board also approved the issuance of an aggregate of 3,993 shares
of the Company's common stock to the non-executive members of its Board of Directors in payment of $31 per person in unpaid Board
fees for the last three quarters of 2011. The aggregate number of shares issued to the directors was based on the closing prices
of the Company's common stock on the last day of each of the last three quarters of 2011, which are the dates that the Board fees
were due and payable.
On October 3, 2012, the Company’s
Board of Directors approved the issuance of 43,930 shares of the Company's common stock to the Manager in payment of the $807 in
unpaid fees due to the Manager for the third quarter of 2012 under the management and services agreements with the Company. The
number of shares issued to the Manager was based on the closing prices of the Company’s common stock on the first day of
each month during the quarter, which are the dates the management and services fees were due and payable. The Board also approved
the issuance of an aggregate of 6,536 shares of the Company’s common stock to the non-executive members of its Board of Directors
in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012. The aggregate number of shares issued
to the directors was based on the closing prices of the Company's common stock on the last day of each of the three quarters of
2012, which are the dates that the Board fees were due and payable.
On February 28, 2013,
pursuant to the approval of the Company’s Board of Directors at its January 18, 2013 meeting, the Company issued 128,328
shares of its common stock to the Manager in payment of $809 in unpaid fees due to the Manager for November and December 2012
and January 2013 and 8,382 shares of its common stock to its non-executive directors in payment of $48 in unpaid Board fees for
the fourth quarter of 2012.
On July 10, 2013,
pursuant to the approval of the Company’s Compensation Committee, the Company issued an aggregate of 493,911 shares of its
common stock to officers, directors and employees as a bonus for their commitment and hard work during adverse market conditions.
On September 20, 2013,
pursuant to the approval of the Company’s Compensation Committee, the Company issued an aggregate of 1,197,034 shares of
its common stock to officers, directors and employees as a bonus for their commitment and hard work during adverse market conditions.
On October 14, 2013,
the Company issued 991,658 shares of its common stock to the Manager in payment of $2,168 in unpaid fees due to the Manager for
the months of February – September 2013 under the management and services agreements with the Company. The number of shares
issued to the Manager was based on the closing prices of the Company's common stock on the first day of each month, which is the
date the management and services fees were due and payable. In addition, the Company also issued an aggregate of 34,326 shares
of the Company’s common stock to its non-executive members of its Board of Directors in payment of $120 in unpaid Board
fees for the first, second and third quarters of 2013.
Our Manager receives
a monthly management fee from us to provide overall executive and commercial management of our affairs. See “Principal Shareholders”
and “Certain Relationships and Related Transactions.”
There are no agreements
between us and any director that provide for benefits upon termination or retirement.
Other than through
stock options, pursuant to our Amended and Restated 2005 Stock Incentive Plan and as determined by our Board of Directors, our
executive officers do not receive any compensation, including any cash compensation, from us.
The term of our Class A
directors expires in 2015, the term of our Class B directors expires in 2016 and the term of our Class C directors expires
in 2014. 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, a nominating committee and a corporate governance committee. Our board of directors
has adopted a charter for each of these committees.
Audit Committee
Our audit committee
consists of Messrs. Nauta, Panagiotopoulos and Galinas, 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. Bloomfield 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. Bloomfield and Galinas, 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.
Corporate
Governance Committee
Our corporate governance
committee consists of Messrs. Bloomfield and Nauta, each of whom is an independent director. The corporate governance committee
ensures that we have and follow appropriate governance standards.
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, Panagiotopoulos, Bloomfield and Galinas 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, Panagiotopoulos, Bloomfield and Galinas 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, Panagiotopoulos, Bloomfield and Galinas 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, Panagiotopoulos, Bloomfield and Galinas 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.
We
currently have no employees. Our 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 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, nonqualified stock options, stock appreciation
rights, dividend equivalent rights, restricted stock, unrestricted stock, restricted stock units and performance shares. Pursuant
to the plan, there are no shares of our common stock available for grant as of the date of this annual report.
In December 2007,
the Company’s Board of Directors granted 180 options to directors and 500 options to executive officers, as adjusted to reflect
the reverse stock split effective December 2, 2013, of which 560 would vest in one year, 60 would vest in two years and 60
in three years from the grant, all at an exercise price of $2,062.5 per share. Effective December 18, 2009, certain of the
Company’s officers and directors have forfeited 440 of the stock options granted to them, leaving 240 stock options unexercised,
which expired on December 24, 2012.
On December 31,
2009, the Company’s Board of Directors awarded 5,100 restricted shares, as adjusted to reflect the reverse stock split effective
December 2, 2013, to its non-executive directors, executive officers and certain of Manager’s employees. The remaining
unvested restricted shares amounted to 1,000 were vested on December 31, 2013.
|
Item 7.
|
Major Shareholders and Related Party Transactions
|
The
following table sets out certain information regarding the beneficial ownership of our common stock as of March 10, 2014 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. As beneficial owners of shares of common stock, the persons named in the table do not have different
voting rights than any other holder of common stock.
Name
|
|
Number of
Shares of
Common
Stock
Beneficially
Owned
|
|
|
Shares of
Common
Stock
Beneficially
Owned (1)
|
|
Ion G. Varouxakis (2)
|
|
|
2,193,864
|
|
|
|
8.5
|
%
|
Dimitris Papadopoulos
|
|
|
-
|
|
|
|
*
|
|
Focko H. Nauta
|
|
|
77,457
|
|
|
|
*
|
|
Dimitrios Panagiotopoulos
|
|
|
75,330
|
|
|
|
*
|
|
Keith Bloomfield
|
|
|
75,210
|
|
|
|
*
|
|
Xenophon Galinas
|
|
|
42,528
|
|
|
|
*
|
|
Maria Badekas
|
|
|
54,908
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (seven persons)
|
|
|
2,519,297
|
|
|
|
9.8
|
%
|
* 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. Based on 25,675,044 shares of common stock outstanding as of March 10, 2014.
|
|
(2)
|
Includes 1,063,821 shares held directly by Mr. Varouxakis, 10,059
shares owned by The Mida's Touch S.A., a Marshall Islands corporation wholly owned by Mr. Varouxakis and 1,119,984 shares
owned by Free Bulkers S.A. which Mr. Varouxakis has voting and dispositive power for shares owned by that entity. Does not include
160 shares owned of record by V Estates S.A., which is controlled by his father, or 122 shares owned of record by his mother, as
to which shares he disclaims beneficial ownership.
|
|
B.
|
Related Party Transactions
|
Manager
All
vessels owned by the Company receive management services from the Manager, pursuant to ship management agreements between each
of the ship-owning companies and the Manager.
In June 2011, each of the ship-owning subsidiaries
entered into an amended and restated management agreement and the Company entered into a services agreement with the Manager pursuant
to which the monthly technical management fee increased from $16,500 to $18,975 and the monthly services fee increased from $118,500
to $136,275, effective June 1, 2011. In addition, in connection with the relocation of the Company’s offices in June
2011, the Company entered into an agreement with the Manager pursuant to which the Company agreed to pay the Manager 65% of the
rental due for the office space, commencing June 2011, and 65% of the apportioned common expenses and maintenance expenses.
In addition, based on the amended services
agreement the Company reimbursed the Manager with the lump sum of $144 (equivalent of Euro 100) for the expenses incurred in relation
to the relocation of the Manager’s offices and early termination cost for previous lease agreement. This compensation is
included in “General and Administrative Expenses” in the accompanying consolidated statement of operations.
Each of the Company’s ship-owning
subsidiaries pays, as per its management agreement with the Manager, a monthly technical management fee of $18,975 (on the basis
that the $/Euro exchange rate is 1.30 or lower; if on the first business day of each month the $/Euro exchange rate exceeds 1.30
then the management fee payable will be increased for the month in question, so that the amount payable in $ will be the equivalent
in Euro based on 1.30 $/Euro exchange rate) plus a fee of $400 per day for superintendent attendance and other direct expenses.
The Company also pays the Manager a fee
equal to 1.25% of the gross freight or hire from the employment of FreeSeas’ vessels. In addition, the Company pays a 1%
commission on the gross purchase price of any new vessel acquired or the gross sale price of any vessel sold by the Company with
the assistance of the Manager. During the years ended December 31, 2013 and 2012, there were no vessel disposals. In addition,
the Company has incurred commission expenses relating to its commercial agreement with the Manager amounting to $104, $174 and
$371 for the years ended December 31, 2013, 2012 and 2011 respectively, included in “Commissions” in the accompanying
consolidated statements of operations.
The Company also pays, as per its services
agreement with the Manager, a monthly fee of $136,275, (on the basis that the $/Euro exchange rate is 1.35 or lower; if on the
last business day of each month the $/Euro exchange rate exceeds 1.35 then the service fee payable will be adjusted for the following
month in question, so that the amount payable in dollars will be the equivalent in Euro based on 1.35 $/Euro exchange rate) as
compensation for services related to accounting, financial reporting, implementation of Sarbanes-Oxley internal control over financial
reporting procedures and general administrative and management services plus expenses. The Manager is entitled to a termination
fee if the agreement is terminated upon a “change of control” as defined in its services agreement with the Manager.
The termination fee as of December 31, 2013 would be approximately $91,314. In connection with the shares issued to the Manager
in payment of unpaid management and services fees, described below, the Manager has waived its right to terminate the services
agreement and receive such termination fee.
On April 23, 2012, the Company’s Board
of Directors approved the issuance of 33,214 shares of the Company's common stock to the Manager in payment of the $926 in unpaid
fees due to the Manager for the first quarter of 2012 under the management and services agreements with the Company. The number
of shares issued to the Manager was based on the closing prices of the Company's common stock on the first day of each month during
the quarter, which are the dates the management and services fees were due and payable. The Board also approved the issuance of
an aggregate of 3,993 shares of the Company's common stock to the non-executive members of its Board of Directors in payment of
$31 per person in unpaid Board fees for the last three quarters of 2011. The aggregate number of shares issued to the directors
was based on the closing prices of the Company's common stock on the last day of each of the last three quarters of 2011, which
are the dates that the Board fees were due and payable. On August 10, 2012, pursuant to the above approval of the Company’s
Board of Directors, the Company issued 33,214 shares of its common stock to the Manager in payment of the $926 in unpaid fees due
to the Manager for the first quarter of 2012 and 3,993 shares of its common stock to its non-executive directors in payment of
$155 in unpaid Board fees for the last three quarters of 2011. All of the foregoing shares will be restricted shares under applicable
U.S. securities laws.
On October 3, 2012, the Company’s
Board of Directors approved the issuance of 43,930 shares of the Company's common stock to the Manager in payment of the $807 in
unpaid fees due to the Manager for the third quarter of 2012 under the management and services agreements with the Company. The
number of shares issued to the Manager was based on the closing prices of the Company’s common stock on the first day of
each month during the quarter, which are the dates the management and services fees were due and payable. The Board also approved
the issuance of an aggregate of 6,536 shares of the Company’s common stock to the non-executive members of its Board of Directors
in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012. The aggregate number of shares issued
to the directors was based on the closing prices of the Company's common stock on the last day of each of the three quarters of
2012, which are the dates that the Board fees were due and payable. On October 11, 2012, pursuant to the above approval of the
Company’s Board of Directors, the Company issued 43,930 shares of its common stock to the Manager in payment of the $807
in unpaid fees due to the Manager for the third quarter of 2012 and 6,536 shares of its common stock to its non-executive directors
in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012. All of the foregoing shares will be restricted
shares under applicable U.S. securities laws.
On January 18, 2013, the Company’s’
Board of Directors approved the issuance of an additional 128,328 shares of the Company’s common stock to the Manager in
payment of $809 in unpaid fees due to the Manager for November and December 2012 and January 2013 under the management and services
agreements with the Company. The number of shares issued to the Manager was based on the closing prices of the Company's common
stock on the first day of each month, which are the dates the management and services fees were due and payable. The Board also
approved the issuance of an aggregate of 10,604 shares of the Company’s common stock to its non-executive directors in payment
of $48 in unpaid Board fees for the fourth quarter of 2012. The aggregate number of shares issued to the directors was based on
the closing price of the Company’s common stock on the last day of the fourth quarter of 2012, which is the date that the
Board fees were due and payable.
On February 28, 2013, pursuant to the above
approval of the Company’s Board of Directors, the Company issued 128,328 shares of its common stock to the Manager in payment
of $809 in unpaid fees due to the Manager for November and December 2012 and January 2013 and 8,382 shares of its common stock
to its non-executive directors in payment of $48 in unpaid Board fees for the fourth quarter of 2012. All of the foregoing shares
will be restricted shares under applicable U.S. securities laws.
On
October 14, 2013, the Company issued 991,658 shares of its common stock to the Manager in payment of $2,168 in unpaid fees due
to the Manager for the months of February – September 2013 under the management and services agreements with the Company.
The number of shares issued to the Manager was based on the closing prices of the Company's common stock on the first day of each
month, which is the date the management and services fees were due and payable. In addition, the Company also issued an aggregate
of 34,326 shares of the Company’s common stock to its non-executive members of its Board of Directors in payment of $120
in unpaid Board fees for the first, second and third quarters of 2013.
Fees
and expenses charged by the Manager are included in the accompanying consolidated financial statements in “Management and
other fees to a related party,” “General and administrative expenses,” “Operating expenses,” “Gain
on sale of vessel”, “Vessel impairment loss”, “Advances for vessels under construction” and “Write-off
of advances for vessels under construction”. The total amounts charged for the year ended December 31, 2013, 2012 and
2011 amounted to $3,133 ($1,490 of management fees, $1,499 of services fees, $131 of superintendent fees and $13 for other expenses),
$4,560 ($2,404 of management fees, $1,985 of services fees, $134 of superintendent fees and $37 for other expenses), and $4,451
($1,900 of management fees, $1,609 of services fees, $146 of superintendent fees, $144 for compensation of relocation expenses,
$179 for other expenses and $473 for management fees and supervision expenses for vessels under construction), respectively.
The
“Management and other fees to a related party” and the “General and administrative expenses” for the year
ended December 31, 2013 include the amount of $474 recognized as stock-based compensation expense for the issuance of 67,754 shares
of the Company’s common stock to the Manager in payment of $271 in unpaid fees due to the Manager for January 2013 under
the management and services agreements with the Company. In addition, the “Management and other fees to a related party”
and the “General and administrative expenses” for the year ended December 31, 2013 include the amount of $954 recognized
as gain for the issuance of 991,658 shares of the Company’s common stock to the Manager in payment of $2,168 in unpaid fees
due to the Manager for the months of February, March, April, May, June, July, August and September 2013 and the issuance of 34,326
shares of the Company’s common stock to the non-executive members of its Board of Directors, in payment of $120 in unpaid
Board fees for the first, second and third quarter of 2013.
The
balance due from the Manager as of December 31, 2013 and December 31, 2012 was $1,167 and $346 respectively. The amount
paid to the Manager for office space during the year ended December 31, 2013, 2012 and 2011 was $147, $143 and $178, respectively
and is included in “General and administrative expenses” in the accompanying consolidated statements of operations.
National Bank of Greece (NBG)
Effective May 13, 2013,
FBB ceased to be a related party according to the requirements of ASC 850 (“Related Party Disclosures”), since the
bank’s deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred
to the NBG. The license of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility
and deposits have been transferred to NBG.
Other Related Parties
The Company, through
the Manager uses from time to time a ship-brokering firm associated with family members of the Company’s Chairman, Chief
Executive Officer and President for certain of the charters of the Company’s fleet. During the years ended December 31,
2013, 2012 and 2011, such ship-brokering firm charged the Company commissions of $19, $43 and $56, respectively, which are included
in “Commissions” in the accompanying consolidated statements of operations. The balance due to the ship-brokering firm
as of December 31, 2013 and December 31, 2012 was $nil and $94, respectively.
|
C.
|
Interest of Experts and Counsel
|
Not required.
|
Item 8.
|
Financial Information
|
|
A.
|
Consolidated Statements and Other Financial Information.
|
Please see “Item 18.
Financial Statements” for a list of the financial statements filed as part of this annual report.
Except as described
in this annual report, since the date of the annual financial statements included in this annual report, no significant changes
have occurred to our financial condition.
|
Item 9.
|
The Offer and Listing
|
|
A.
|
Offer and Listing Details
|
The closing high and
low sales prices of our common stock as reported by the NASDAQ Stock Market, for the years, quarters and months indicated, are
as follows (adjusted to give effect of our one share for five share reverse stock split that was effective on October 1, 2010,
the one share for ten share reverse stock split that was effective on February 14, 2013 and the one share for five share reverse
stock split that was effective on December 2, 2013):
|
|
Common Stock
|
|
For the Years Ended:
|
|
High
|
|
|
Low
|
|
December 31, 2009
|
|
$
|
872.50
|
|
|
$
|
292.50
|
|
December 31, 2010
|
|
|
397.50
|
|
|
|
180.50
|
|
December 31, 2011
|
|
|
194.50
|
|
|
|
20.00
|
|
December 31, 2012
|
|
|
92.50
|
|
|
|
3.50
|
|
December 31, 2013
|
|
|
29.00
|
|
|
|
0.85
|
|
|
|
Common Stock
|
|
For the Quarters Ended:
|
|
High
|
|
|
Low
|
|
March 31, 2012
|
|
$
|
46.50
|
|
|
$
|
40.00
|
|
June 30, 2012
|
|
|
92.50
|
|
|
|
31.50
|
|
September 30, 2012
|
|
|
33.00
|
|
|
|
10.50
|
|
December 31, 2012
|
|
|
12.00
|
|
|
|
3.50
|
|
March 31, 2013
|
|
|
29.00
|
|
|
|
3.10
|
|
June 30, 2013
|
|
|
7.20
|
|
|
|
1.70
|
|
September 30, 2013
|
|
|
4.65
|
|
|
|
0.85
|
|
December 31, 2013
|
|
|
4.20
|
|
|
|
1.00
|
|
|
|
Common Stock
|
|
For the Months Ended:
|
|
High
|
|
|
Low
|
|
September 30, 2013
|
|
$
|
4.65
|
|
|
$
|
0.85
|
|
October 31, 2013
|
|
|
4.20
|
|
|
|
1.80
|
|
November 30, 2013
|
|
|
2.23
|
|
|
|
1.43
|
|
December 31, 2013
|
|
|
3.10
|
|
|
|
1.00
|
|
January 31, 2014
|
|
|
2.44
|
|
|
|
1.65
|
|
February 28, 2014
|
|
|
2.12
|
|
|
|
1.55
|
|
Not applicable.
Our common stock began
trading on the NASDAQ Capital Market on February 26, 2013 under the trading symbol “FREE.” Prior to that time, our
common stock traded on the NASDAQ Global Market between November 8, 2007 and February 25, 2013 under the trading symbol “FREE.”
Prior to that time, our common stock was traded on the NASDAQ Capital Market under the symbol “FREE.”
Not required.
Not required.
Not required.
|
Item 10.
|
Additional Information
|
Not required.
|
B.
|
Memorandum and Articles of Association
|
The
information required herein was provided in the Registration Statement on Form F-1 (File No. 333-145203), the report
on Form 6-K dated October 22, 2009, both previously filed by us with the Securities and Exchange Commission and incorporated
herein by reference, and filed herewith as Exhibit 1.5.
One
million shares of our preferred stock have been designated Series A Participating Preferred Stock in connection with our adoption
of a shareholder rights plan as described below.
Shareholder Rights Plan
General
Each
share of our common stock includes a right that entitles the holder to purchase from us a unit consisting of one-thousandth of
a share of our Series A participating preferred stock at a purchase price of $90.00 per unit, subject to specified adjustments.
The rights are issued pursuant to a rights agreement between us and American Stock Transfer & Trust Company, LLC, as rights
agent. Until a right is exercised, the holder of a right will have no rights to vote or receive dividends or any other shareholder
rights.
The
rights may have anti-takeover effects. The rights will cause substantial dilution to any person or group that attempts to acquire
us without the approval of our board of directors. As a result, the overall effect of the rights may be to render more difficult
or discourage any attempt to acquire us. Because our board of directors can approve a redemption of the rights or a permitted offer,
the rights should not interfere with a merger or other business combination approved by our board of directors.
We
have summarized the material terms and conditions of the rights agreement and the rights below. For a complete description of the
rights, we encourage you to read the rights agreement, which we have filed as an exhibit to this annual report.
Detachment
of the Rights
The
rights are attached to all certificates representing our outstanding common stock and will attach to all common stock certificates
we issue prior to the rights distribution date that we describe below. The rights are not exercisable until after the rights distribution
date and will expire at the close of business on the tenth anniversary date of the adoption of the rights plan, unless we redeem
or exchange them earlier as described below. The rights will separate from the common stock and a rights distribution date will
occur, subject to specified exceptions, on the earlier of the following two dates:
|
·
|
10 days following a public announcement that a person or group of affiliated or associated persons or an “acquiring
person” has acquired or obtained the right to acquire beneficial ownership of 15% or more of our outstanding common stock;
or
|
|
·
|
10 business days following the start of a tender or exchange offer that would result, if closed, in a person becoming an “acquiring
person.”
|
Existing
shareholders and their affiliates are excluded from the definition of “acquiring person” for purposes of the rights,
and therefore their ownership or future share acquisitions cannot trigger the rights. Specified “inadvertent” owners
that would otherwise become an acquiring person, including those who would have this designation as a result of repurchases of
common stock by us, will not become acquiring persons as a result of those transactions.
Our
board of directors may defer the rights distribution date in some circumstances, and some inadvertent acquisitions will not result
in a person becoming an acquiring person if the person promptly divests itself of a sufficient number of shares of common stock.
Until
the rights distribution date:
|
·
|
our common stock certificates will evidence the rights, and the rights will be transferable only with those certificates; and
|
|
·
|
any new shares of common stock will be issued with rights and new certificates will contain a notation incorporating the rights
agreement by reference.
|
As
soon as practicable after the rights distribution date, the rights agent will mail certificates representing the rights to holders
of record of common stock at the close of business on that date. After the rights distribution date, only separate rights certificates
will represent the rights.
We
will not issue rights with any shares of common stock we issue after the rights distribution date, except as our board of directors
may otherwise determine.
Flip-In Event
A
“flip-in event” will occur under the rights agreement when a person becomes an acquiring person. If a flip-in event
occurs and we do not redeem the rights as described under the heading “—Redemption of Rights” below, each right,
other than any right that has become void, as described below, will become exercisable at the time it is no longer redeemable for
the number of shares of common stock, or, in some cases, cash, property or other of our securities, having a current market price
equal to two times the exercise price of such right.
If
a flip-in event occurs, all rights that then are, or in some circumstances that were, beneficially owned by or transferred to an
acquiring person or specified related parties will become void in the circumstances the rights agreement specifies.
Flip-Over Event
A
“flip-over event” will occur under the rights agreement when, at any time after a person has become an acquiring person:
|
·
|
we are acquired in a merger or other business combination transaction; or
|
|
·
|
50% or more of our assets, cash flows or earning power is sold or transferred.
|
If
a flip-over event occurs, each holder of a right, other than any right that has become void as we describe under the heading “—Flip-In
Event” above, will have the right to receive the number of shares of common stock of the acquiring company having a current
market price equal to two times the exercise price of such right.
Antidilution
The
number of outstanding rights associated with our common stock is subject to adjustment for any stock split, stock dividend or subdivision,
combination or reclassification of our common stock occurring prior to the rights distribution date. With some exceptions, the
rights agreement does not require us to adjust the exercise price of the rights until cumulative adjustments amount to at least
1% of the exercise price. It also does not require us to issue fractional shares of our preferred stock that are not integral multiples
of one one-hundredth of a share, and, instead we may make a cash adjustment based on the market price of the common stock on the
last trading date prior to the date of exercise. The rights agreement reserves us the right to require, prior to the occurrence
of any flip-in event or flip-over event that, on any exercise of rights, that a number of rights must be exercised so that we will
issue only whole shares of stock.
Redemption
of Rights
At
any time until 10 days after the date on which the occurrence of a flip-in event is first publicly announced, we may redeem
the rights in whole, but not in part, at a redemption price of $0.01 per right. The redemption price is subject to adjustment for
any stock split, stock dividend or similar transaction occurring before the date of redemption. At our option, we may pay that
redemption price in cash, shares of common stock or any other consideration our board of directors may select. The rights are not
exercisable after a flip-in event until they are no longer redeemable. If our board of directors timely orders the redemption of
the rights, the rights will terminate on the effectiveness of that action.
Exchange of
Rights
We
may, at our option, exchange the rights (other than rights owned by an acquiring person or an affiliate or an associate of an acquiring
person, which have become void), in whole or in part. The exchange must be at an exchange ratio of one share of common stock per
right, subject to specified adjustments at any time after the occurrence of a flip-in event and prior to:
|
·
|
any person other than our existing shareholders becoming the beneficial owner of common stock with voting power equal to 50%
or more of the total voting power of all shares of common stock entitled to vote in the election of directors; or
|
|
·
|
the occurrence of a flip-over event.
|
Amendment of
Terms of Rights
While
the rights are outstanding, we may amend the provisions of the rights agreement only as follows:
|
·
|
to cure any ambiguity, omission, defect or inconsistency;
|
|
·
|
to make changes that do not adversely affect the interests of holders of rights, excluding the interests of any acquiring person;
or
|
|
·
|
to shorten or lengthen any time period under the rights agreement, except that we cannot change the time period when rights
may be redeemed or lengthen any time period, unless such lengthening protects, enhances or clarifies the benefits of holders of
rights other than an acquiring person.
|
At
any time when no rights are outstanding, we may amend any of the provisions of the rights agreement, other than decreasing the
redemption price.
The following is a
summary of the agreements considered material to the Company and should be read together with the full text of such agreements.
|
·
|
On September 25, 2013, the Company and its wholly-owned subsidiaries:
Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure Eleven S.A. entered into the Amendment with Deutsche
Bank, Hanover and Crede which, upon court approval on October 9, 2013 removed approximately $30 million of debt from the Company’s
consolidated balance sheet.
See "Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Long Term Debt".
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On November 3, 2013, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with Crede for an aggregate investment of $10 million into the company through the private placement of two series
of zero-dividend convertible preferred stock (collectively, the “Preferred Stock”) and Series A Warrants and Series
B Warrants (collectively, the “Warrants”), subject to certain terms and conditions. See "Item 18 Financial
Statements — Note 15 Shareholders’ Equity".
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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 shares.
The
following is a discussion of the material Marshall Islands and United States federal income tax consequences relevant to a U.S.
Holder, as defined below, of our 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 U.S. Holders that 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.
The
discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible
tax considerations.
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 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.
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.
TO ENSURE COMPLIANCE
WITH TREASURY DEPARTMENT CIRCULAR 230, HOLDERS OF OUR COMMON STOCK ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF FEDERAL
TAX ISSUES IN THIS ANNUAL REPORT IS NOT INTENDED OR WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY HOLDERS FOR THE PURPOSE
OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON HOLDERS UNDER THE INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS BEING USED IN
CONNECTION WITH THE PROMOTION OR MARKETING (WITHIN THE MEANING OF CIRCULAR 230) BY THE ISSUERS OF THE TRANSACTIONS OR MATTERS ADDRESSED
HEREIN; AND (C) HOLDERS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
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 U.S. 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.
U.S. 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.
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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;
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we satisfy one of the following ownership tests (discussed in more detail below): (1) more
than 50% of the value of our stock is owned, directly or indirectly, by “qualified shareholders,” which includes 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 “Qualified Shareholder Ownership Test,” or (2) 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;”
and we are not considered “closely held,” which we refer to as the “Closely-Held Test;” and
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we meet certain substantiation, reporting and other requirements.
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Exemption of Operating Income from United
States Federal Income Taxation
Under Section 883
of the Code, we will be exempt from United States federal income taxation on our U.S.-source shipping income if:
The Republic of the
Marshall Islands, the jurisdiction where we and our ship-owning subsidiaries are incorporated, grants “equivalent exemptions”
to United States corporations. Therefore, we should meet the first requirement for the Section 883 exemption. Additionally,
we intend to comply with the substantiation, reporting and other requirements that are applicable under Section 883 of the
Code. As a result, qualification for the Section 883 exemption will turn primarily on our ability to satisfy the second requirement
enumerated above.
Since the 2007 tax
year, we have claimed the benefits of the Section 883 tax exemption for our ship-owning subsidiaries on the basis of the Publicly-Traded
Test. For 2012 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 regard. 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 tax year on all established
securities markets in that country exceeds the number of shares in each such class that are traded during that year on established
securities markets in any other single country. Our common stock, our sole class of our issued and outstanding stock, is “primarily
traded” on the NASDAQ Capital Market.
Under the regulations,
our stock will be considered to be “regularly traded” if one or more classes of our stock representing 50% or more
of our outstanding shares, by total combined voting power of all classes of stock entitled to vote and 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 Capital Market, and accordingly, we will
satisfy this listing requirement.
The regulations further
require that with respect to each class of stock relied upon to meet the listing requirement: (i) such class of the stock
is traded on the market, other than in minimal quantities, on at least 60 days during the tax year or 1/6 of the days in a
short tax year; and (ii) the aggregate number of shares of such class of stock traded on such market is at least 10% of the
average number of shares of such class of stock outstanding during such year or as appropriately adjusted in the case of a short
tax year. We believe we will satisfy the trading frequency and trading volume tests. Even if this were not the case, the regulations
provide that the trading frequency and trading volume tests will be deemed satisfied by a class of stock if, as we expect to be
the case with our common stock, such class of stock is traded on an established market in the United States, and such class of
stock is regularly quoted by dealers making a market in such stock. While we anticipate that we will satisfy the trading frequency
and trading volume tests, satisfaction of these requirements is outside of our control and hence, no assurances can be provided
that we will satisfy the Publicly-Traded Test each year.
In addition, even if
the “primarily traded” and “regularly traded” portions of the Publicly-Traded Test described above are
satisfied, the Closely-Held Test provides, in pertinent part, that a class of stock will not be considered to be “regularly
traded” on an established securities market for any tax year in which 50% or more of the vote and value of the outstanding
shares of such class of stock are owned, actually or constructively under specified stock attribution rules, on more than half
the days during the tax year by persons who each own directly or indirectly 5% or more of the vote and value of such class of stock,
who we refer to as “5% Shareholders.” For purposes of being able to determine our 5% Shareholders under the Closely-Held
Test, the regulations permit us to rely on Schedule 13G and Schedule 13D filings with the Securities and Exchange Commission. The
regulations further provide that an investment company that is registered under the Investment Company Act of 1940, as amended,
will not be treated as a 5% Shareholder for purposes of the Closely-Held Test.
In the event the Closely-Held
Test is triggered, the regulations provide that the Closely-Held Test will nevertheless not apply if we can establish that among
the closely-held group of 5% Shareholders, sufficient shares are owned by our 5% Shareholders that are considered to be “qualified
shareholders,” to preclude non-qualified 5% Shareholders in the closely-held group from owning 50% or more of the value of
such class of stock for more than half of the days during the tax year, which we refer to as the exception to the Closely-Held
Test. Establishing such qualification and ownership by our direct and indirect 5% Shareholders will depend on their meeting the
requirements of one of the qualified shareholder tests set out under the regulations applicable to 5% Shareholders and compliance
with certain ownership certification procedures by each intermediary or other person in the chain of ownership between us and such
qualified 5% Shareholders. Further, the regulations require, and we must certify, that no person in the chain of qualified ownership
of shares relied on by us to qualify for exemption holds those shares in bearer form.
The ability to avoid
application of the Closely-Held Test will be outside our control, and, as a result, there can be no assurance regarding whether
we will satisfy the Publicly Traded Test for any year. For this and other reasons, there can be no assurance that we or any of
our subsidiaries will qualify for the benefits of Section 883 of the Code for any year.
Taxation in Absence of Exemption
To the extent the benefits
of Section 883 are unavailable, our USSGTI, to the extent not considered to be “effectively connected” with the
conduct of a U.S. trade or business, as described below, would be subject to a 4% tax imposed by Section 887 of the Code on
a gross basis, without the benefit of deductions, otherwise referred to as the “4% Tax.” Since under the sourcing rules
described above, no more than 50% of our shipping income would be treated as being derived from U.S. sources, the maximum effective
rate of U.S. federal income tax on our shipping income would never exceed 2% under the 4% gross basis tax regime.
To the extent the benefits
of the Section 883 exemption are unavailable, and our USSGTI is considered to be “effectively connected” with
the conduct of a U.S. trade or business, as described below, any such “effectively connected” U.S.-source shipping
income, net of applicable deductions, would be subject to the U.S. federal corporate income tax currently imposed at rates of up
to 35%. In addition, we may be subject to the 30% “branch profits” taxes on earnings effectively connected with the
conduct of such trade or business, as determined after allowance for certain adjustments, and on certain interest paid or deemed
paid attributable to the conduct of its U.S. trade or business.
Our U.S.-source shipping
income would be considered “effectively connected” with the conduct of a U.S. trade or business only if:
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We have, or are considered to have, a fixed place of business in the United States involved in
the earning of shipping income; and
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substantially all of our U.S.-source shipping income is attributable to regularly scheduled transportation,
such as the operation of a vessel that follows a published schedule with repeated sailings at regular intervals between the same
points for voyages that begin or end in the United States.
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We do not intend to
have, or permit circumstances that would result in having any vessel operating to the United States on a regularly scheduled basis.
Based on the foregoing and on the expected mode of our shipping operations and other activities, we believe that none of our U.S.-source
shipping income will be “effectively connected” with the conduct of a U.S. trade or business.
United States Taxation of Gain on Sale
of Vessels
If we qualify for the
Section 883 exemption, then gain from the sale of any vessel may be exempt from tax under Section 883. Even if such gain
is not exempt from tax under Section 883, we will not be subject to United States federal income taxation with respect to
gain realized on a sale of a vessel, assuming that we are not, and have never been, engaged in a U.S. trade or business. Under
certain circumstances, if we are so engaged, gain on the sale of vessels could be subject to U.S. federal income tax.
United States Federal Income Taxation
of U.S. Holders
As used herein, the
term “U.S. Holder” means a beneficial owner of common stock that is a United States citizen or resident, United States
corporation or other United States entity taxable as a corporation, an estate the income of which is subject to United States federal
income taxation regardless of its source, or a trust if a court within the United States is able to exercise primary jurisdiction
over the administration of the trust and one or more United States persons have the authority to control all substantial decisions
of the trust.
If a partnership holds
our common stock, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of
the partnership. If you are a partner in a partnership holding our common stock, you are encouraged to consult your tax advisor.
Distributions.
Subject
to the discussion of passive foreign investment companies (or “PFICs”) below, any distributions made by us with respect
to our common stock will generally be taxable as dividend income to the extent of our current or accumulated earnings and profits,
as determined under United States federal income tax principles. Distributions in excess of our earnings and profits will be treated
first as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in his or her common stock on a dollar-for-dollar
basis and thereafter as capital gain. Because we are not a United States corporation, U.S. Holders that are corporations will not
be entitled to claim a dividends received deduction with respect to any distributions they receive from us. Dividends paid with
respect to our common stock will generally be treated as passive category income or, in the case of certain types of U.S. Holders,
general category income for purposes of computing allowable foreign tax credits for United States foreign tax credit purposes.
For tax years beginning
before January 1, 2013, dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate, which we
refer to as a “U.S. Individual Holder,” will generally be treated as “qualified dividend income” that is
taxable to such a U.S. Individual Holder at preferential tax rates provided that (1) we are not a passive foreign investment
company for the tax year during which the dividend is paid or the immediately preceding tax year (which we do not believe we are,
have been or will be), (2) our common stock is readily tradable on an established securities market in the United States (such
as the NASDAQ Capital Market), and (3) the U.S. Individual Holder has owned the common stock for more than 60 days in
the 121-day period beginning 60 days before the date on which the common stock becomes ex-dividend. There is no assurance
that any dividends paid on our common stock will be eligible for these preferential rates in the hands of a U.S. Individual Holder.
Any distributions treated as dividends paid by us that are not eligible for these preferential rates will be taxed as ordinary
income to a U.S. Individual Holder.
Special rules may apply
to any “extraordinary dividend” generally, a dividend in an amount which is equal to or exceeds ten percent of a stockholder’s
adjusted basis (or fair market value in certain circumstances) in a share of our stock paid by us. If we pay an “extraordinary
dividend” on our stock that is treated as “qualified dividend income,” then any loss derived by a U.S. Individual
Holder from the sale or exchange of such stock will be treated as long-term capital loss to the extent of such dividend.
Sale, Exchange or
Other Disposition of Common Stock.
Assuming we do not
constitute a passive foreign investment company for any tax year, a U.S. Holder generally will recognize taxable gain or loss upon
a sale, exchange or other disposition of our common stock in an amount equal to the difference between the amount realized by the
U.S. Holder from such sale, exchange or other disposition and the U.S. Holder’s tax basis in such stock. Such gain or loss
will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time
of the sale, exchange or other disposition. Such capital gain or loss will generally be treated as U.S.-source income or loss,
as applicable, for U.S. foreign tax credit purposes. A U.S. Holder’s ability to deduct capital losses is subject to certain
limitations.
Passive Foreign
Investment Company Status and Significant Tax Consequences.
Special
United States federal income tax rules apply to a U.S. Holder that holds stock in a foreign corporation classified as a passive
foreign investment company for United States federal income tax purposes. In general, we will be treated as a passive foreign investment
company with respect to a U.S. Holder if, for any tax year in which such holder held our common stock, either:
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at least 75% of our gross income for such tax year consists of passive income (e.g., dividends,
interest, capital gains and rents derived other than in the active conduct of a rental business); or
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at least 50% of the average value of the assets held by the corporation during such tax year produce,
or are held for the production of, passive income.
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For purposes of determining
whether we are a passive foreign investment company, we will be treated as earning and owning our proportionate share of the income
and assets, respectively, of any of our subsidiary corporations in which we own at least 25% of the value of the subsidiary’s
stock. Income earned, or deemed earned, by us in connection with the performance of services would not constitute passive income.
By contrast, rental income would generally constitute “passive income” unless we were treated under specific rules
as deriving our rental income in the active conduct of a U.S. trade or business. We may own, directly or indirectly, interests
in other entities that are passive foreign investment companies, or subsidiary PFICs. If we are a passive foreign investment company,
each U.S. Holder will be treated as owning its pro rata share by value of the stock of any such subsidiary PFICs.
Based on our current
operations and future projections, we do not believe that we are, nor do we expect to become, a passive foreign investment company
with respect to any tax year. Although we are not relying upon an opinion of counsel on this issue, our belief is based principally
on the position that, for purposes of determining whether we are a passive foreign investment company, the gross income we derive
or are deemed to derive from the time chartering and voyage chartering activities of our wholly owned subsidiaries should constitute
services income, rather than rental income. Correspondingly, such income should not constitute passive income, and the assets that
we or our wholly-owned subsidiaries own and operate in connection with the production of such income, in particular, the vessels,
should not constitute passive assets for purposes of determining whether we are a passive foreign investment company. Internal
Revenue Service pronouncements concerning the characterization of income derived from time charters and voyage charters as services
income for other tax purposes support this position. However, a recent case reviewing the deductibility of commissions by a foreign
sales corporation decided that time charter income constituted rental income under the law. While the IRS asserted in such case
that the time charter income should be considered services income, in the absence of any legal authority specifically relating
to the statutory provisions governing PFICs and time charter income, the IRS or a court could disagree with our position. In addition,
although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to any tax year, we cannot
assure you that the nature of our operations will not change in the future.
If we are determined
to be a PFIC for any tax year (or portion thereof) that is included in the holding period of a U.S. Holder of our common stock,
and the U.S. Holder did not make a timely qualified electing fund (“QEF”) election for our first tax year as a PFIC
in which the U.S. Holder held (or was deemed to hold) common stock, as described below, such holder generally will be subject to
special rules with respect to:
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any gain recognized by the U.S. Holder on the sale or other disposition of its common stock; and
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any “excess distribution” made to the U.S. Holder (generally, any distributions to
such U.S. Holder during a tax year of the U.S. Holder that are greater than 125% of the average annual distributions received by
such U.S. Holder in respect of the common stock during the three preceding tax years of such U.S. Holder or, if shorter, such U.S.
Holder’s holding period for the common stock).
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Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s
holding period for the common stock;
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the amount allocated to the U.S. Holder’s current tax year and any tax years in the U.S.
Holder’s holding period before the first day of our first tax year in which we are a PFIC, will be taxable as ordinary income;
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the amount allocated to other tax years (or portions thereof) of the U.S. Holder and included in
its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of
the tax attributable to each such other tax year of the U.S. Holder.
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In general, if we are
determined to be a PFIC, a U.S. Holder will avoid the PFIC tax consequences described above in respect to our common stock by making
a timely QEF election to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings
and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the tax year of the U.S. Holder
in which or with which our tax year ends. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed
income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
Although a determination
as to our PFIC status will be made annually, an initial determination that our company is a PFIC will generally apply for subsequent
years to a U.S. Holder who held our common stock while we were a PFIC, whether or not we meet the test for PFIC status in those
subsequent years. A U.S. Holder who makes the QEF election discussed above for our first tax year as a PFIC in which the U.S. Holder
owns (or is deemed to own) our common stock, however, will not be subject to the PFIC tax and interest charge rules discussed above
in respect to such shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime with respect to such shares
for any tax year of ours that ends within or with a tax year of the U.S. Holder and in which we are not a PFIC. On the other hand,
if the QEF election is not effective for each of our tax years in which we are a PFIC, and the U.S. Holder owns (or is deemed to
hold) our common stock, the PFIC rules discussed below will continue to apply to such shares unless the holder makes a purging
election, as described below, and pays the tax and interest charge with respect to the gain inherent in such shares attributable
to the pre-QEF election period.
If a U.S. Holder has
made a QEF election with respect to our common stock, and the special tax and interest charge rules do not apply to such shares
(because of a timely QEF election for our first tax year as a PFIC in which the U.S. Holder owns (or is deemed to own) such shares
or a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized on the sale of our common
stock generally will be taxable as capital gain, and no interest charge will be imposed. As discussed above, U.S. Holders of a
QEF are currently taxed on their pro rata shares of its earnings and profits, whether or not distributed. In such case, a subsequent
distribution of such earnings and profits that were previously included in income generally should not be taxable as a dividend
to such U.S. Holders. The tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included in
income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply
to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning shares
in a QEF.
The QEF election is
made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally
makes a QEF election by attaching a completed IRS Form 8621 (Return by a Shareholder of a Passive Foreign investment Company or
Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal
income tax return for the tax year to which the election relates. Retroactive QEF elections generally may be made only by filing
a protective statement with such return and if certain other conditions are met or with the consent of the IRS. U.S. Holders should
consult with their tax advisors regarding the availability and tax consequences of a retroactive QEF election under their particular
circumstances. In order to comply with the requirements of a QEF election, a U.S. Holder must receive a PFIC annual information
statement from us. If we determine we are a PFIC for any tax year, we will endeavor to provide to a U.S. Holder such information
as the IRS may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and maintain
a QEF election. However, there is no assurance that we will have timely knowledge of our status as a PFIC in the future or of the
required information to be provided.
If a U.S. Holder, at
the close of its tax year, owns shares in a PFIC that are treated as “marketable stock”, the U.S. Holder may make a
mark-to-market election with respect to such shares for such tax year. If the U.S. Holder makes a valid mark-to-market election
for the first tax year of the U.S. Holder in which the U.S. Holder owns (or is deemed to hold) common stock in us and for which
we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its common
stock. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value
of its common stock at the end of its tax year over the adjusted basis in its common stock. The U.S. Holder also will be allowed
to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its common stock over the fair market value
of its common stock at the end of its tax year (but only to the extent of the net amount of previously included income as a result
of the mark-to-market election). The U.S. Holder’s basis in its common stock will be adjusted to reflect any such income
or loss amounts, and any further gain recognized on a sale or other taxable disposition of the common stock will be treated as
ordinary income. The mark-to-market election is available only if our common stock is treated as marketable stock. If our common
stock is listed on the NASDAQ Capital Market and is regularly traded on such market in accordance with applicable Treasury Regulations,
our common stock will be treated as “marketable stock” for this purpose. U.S. Holders are advised to consult with their
tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our common stock under
their particular circumstances.
If we are a PFIC and,
at any time, have a foreign subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed to own a portion of
the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above
if we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC or the U.S. Holders otherwise
were deemed to have disposed of an interest in the lower-tier PFIC. We will endeavor to cause any lower-tier PFIC to provide to
a U.S. Holder the information that may be required to make or maintain a QEF election with respect to the lower- tier PFIC. However,
there is no assurance that we will have timely knowledge of the status of any such lower-tier PFIC. In addition, we may not hold
a controlling interest in any such lower-tier PFIC and thus there can be no assurance we will be able to cause the lower-tier PFIC
to provide the required information. U.S. Holders are advised to consult with their tax advisors regarding the tax issues raised
by lower-tier PFICs.
A U.S. Holder that
owns (or is deemed to own) shares in a PFIC during any tax year of the U.S. Holder, may have to file an IRS Form 8621 (whether
or not a QEF or mark-to-market election is made) and such other information as may be required by the U.S. Treasury Department.
The rules dealing with
PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders are advised to consult with their tax advisors concerning the application of the PFIC rules (and
the QEF and mark-to-market elections) to our common stock under their particular circumstances.
United States Federal Income Taxation
of “Non-U.S. Holders”
A beneficial owner
of common stock that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”
Dividends on Common
Stock.
Non-U.S. Holders generally will not be subject
to United States federal income tax or withholding tax on dividends received from us with respect to our common stock, unless that
income is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States. If the Non-U.S.
Holder is entitled to the benefits of a United States income tax treaty with respect to those dividends, that income is taxable
only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States.
Sale, Exchange or
Other Disposition of Common Stock.
Non-U.S. Holders generally
will not be subject to United States federal income tax or withholding tax on any gain realized upon the sale, exchange or other
disposition of our common stock, unless:
|
·
|
the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business
in the United States. If the Non-U.S. Holder is entitled to the benefits of an income tax treaty with respect to that gain, that
gain is taxable only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States;
or
|
|
·
|
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more
during the tax year of disposition and other conditions are met.
|
If the Non-U.S. Holder
is engaged in a United States trade or business for United States federal income tax purposes, the income from the common stock,
including dividends and the gain from the sale, exchange or other disposition of the stock that is effectively connected with the
conduct of that trade or business will generally be subject to regular United States federal income tax in the same manner as discussed
in the previous section relating to the taxation of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder, your earnings
and profits that are attributable to the effectively connected income, which are subject to certain adjustments, may be subject
to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income tax treaty.
Backup Withholding and Information Reporting
In general, dividend
payments, or other taxable distributions, made within the United States to you will be subject to information reporting requirements.
Such payments will also be subject to backup withholding tax if you are a non-corporate U.S. Holder and you:
|
·
|
fail to provide an accurate taxpayer identification number;
|
|
·
|
are notified by the Internal Revenue Service that you have failed to report all interest or dividends
required to be shown on your federal income tax returns; or
|
|
·
|
in certain circumstances, fail to comply with applicable certification requirements.
|
Non-U.S. Holders may
be required to establish their exemption from information reporting and backup withholding by certifying their status on Internal
Revenue Service Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If you sell your stock
to or through a United States office or broker, the payment of the proceeds is subject to both United States backup withholding
and information reporting unless you certify that you are a non-U.S. person, under penalties of perjury, or you otherwise establish
an exemption. If you sell your stock through a non-United States office of a non-United States broker and the sales proceeds are
paid to you outside the United States, then information reporting and backup withholding generally will not apply to that payment.
However, United States information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds,
even if that payment is made to you outside the United States, if you sell your stock through a non-United States office of a broker
that is a United States person or has some other contacts with the United States.
Backup withholding
tax is not an additional tax. Rather, you generally may obtain a refund of any amounts withheld under backup withholding rules
that exceed your income tax liability by filing a refund claim with the Internal Revenue Service.
We encourage each stockholder
to consult with his, her or its own tax advisor as to particular tax consequences to it of holding and disposing of our shares,
including the applicability of any state, local or foreign tax laws and any proposed changes in applicable law.
|
F.
|
Dividends and paying agents
|
Not applicable.
Not applicable.
This annual report
and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied
at prescribed rates at the following Securities and Exchange Commission public reference rooms: 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the operation of the Securities and Exchange Commission’s public reference
room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by visiting the Securities and
Exchange Commission’s website at
http://www.sec.gov
, and may obtain copies of our filings from the public reference
room by calling 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange Commission filings is 000-49760.
The Securities and
Exchange Commission maintains a website at
www.sec.gov
that contains reports, proxy and information statements, and other
information regarding registrants that make electronic filings with the Securities and Exchange Commission using its EDGAR (Electronic
Data Gathering, Analysis, and Retrieval) system.
We will also provide
without charge to each person, including any beneficial owner, upon written or oral request of that person, a copy of any and all
of the information that has been incorporated by reference in this annual report. Please direct such requests to Dimitris Papadopoulos,
Chief Financial Officer, FreeSeas Inc., 10, Eleftheriou Venizelou Street (Panepistimiou Ave.) 106 71, Athens, Greece, telephone
number +30-210-4528770 or facsimile number +30-210-4291010.
|
I.
|
Subsidiary Information
|
Not applicable.
|
Item 11.
|
Quantitative and Qualitative Disclosure About 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. We had two interest rate swaps outstanding (on February 3, 2014, the Company paid
the amount of $201 to fully unwind its two interest rate swap agreements with Credit Suisse).
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 2013 fiscal
year by approximately $584 based upon our debt level during the period in 2013 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 fiscal
2013 in U.S. dollars to a 100-basis-point increase in LIBOR.
Vessel Name
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Free Hero / Free Goddess / Free Jupiter
|
|
$
|
362
|
|
|
$
|
327
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Free Impala / Free Neptune
|
|
$
|
221
|
|
|
$
|
187
|
|
|
$
|
148
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Free Knight (free of mortgage and sold on February 18, 2014)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Free Maverick (free of mortgage)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Please
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Long Term Debt”
for a full description of each of these loans.
Interest Rate
Risk
We are exposed to interest
rate risk associated with our variable rate borrowings, and our objective is to manage the impact of such fluctuations on earnings
and cash flows of our borrowings. In this respect, we use interest rate swaps to manage net exposure to interest rate fluctuations
related to our borrowings and to lower our overall borrowing costs. We had two interest rate swaps outstanding (on February 3,
2014, the Company paid the amount of $201 to fully unwind its two interest rate swap agreements with Credit Suisse) with a total
notional amount of $4,124 as of December 31, 2013. These interest rate swap agreements did not qualify for hedge accounting,
and changes in their fair values were reflected in our earnings.
Our
derivative financial instruments are valued using pricing models that are used to value similar instruments by market participants.
Where possible, we verify the values produced by our pricing models to market prices. Valuation models require a variety of inputs,
including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs.
Model inputs can generally be verified and do not involve significant management judgment. Such instruments are typically classified
within Level 2 of the fair value hierarchy.
Foreign Exchange
Rate Risk
We
generate all of our revenues in U.S. dollars, but incur a portion of our expenses in currencies other than U.S. dollars. For accounting
purposes, expenses incurred in Euros are converted into U.S. dollars at the exchange rate prevailing on the date of each transaction.
At December 31, 2013, 2012 and 2011, approximately 53%, 29% and 32%, respectively, of our outstanding accounts payable was
denominated in currencies other than the U.S. dollar (mainly in the Euro). As an indication of the extent of our sensitivity to
foreign exchange rate changes, an increase of an additional 10% in the value of other currencies against the dollar would have
decreased our net income and cash flows in 2013 by approximately $334 based upon the accounts payable we had denominated in currencies
other than the U.S. dollar as of December 31, 2013.
Credit Risk
Financial
instruments, which potentially subject us to significant concentrations of credit risk, consist principally of cash and cash equivalents,
trade accounts receivable, insurance claims and derivative contracts (interest rate swaps). We place our cash and cash equivalents,
consisting mostly of deposits, with high credit qualified financial institutions.
We
monitor the credit risk regarding charterer’s turnover in order to review its reliance on individual charterers. We do not
obtain rights to collateral to reduce its credit risk. We are exposed to credit risk in the event of non-performance by counter
parties to derivative instruments; however, we limit our exposure by diversifying among counter parties with high credit ratings.
In addition, the counterparty to the derivative financial instrument is a major financial institution in order to manage exposure
to non-performance counterparties.
Charter Market
Risk
Our
revenues, earnings and profitability are affected by the prevailing charter market rates. During 2013, the BDI remained volatile.
In 2013, the BDI reached a high of 2,337 in December 2013 and a low of 698 in January 2013. Furthermore, charter rates have been
particularly volatile during the first two and a half months of 2014. On, March 10, 2014, the BDI was 1,562, increasing from a
low of 1,085 on February 12, 2014. Such chartering market volatility is expected to adversely impact our financial performance
for the relevant quarter including its net income and cash flow.
|
Item 12.
|
Description of Securities Other than Equity Securities
|
Not applicable.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
|
1.
|
Basis of Presentation and General Information
|
The accompanying consolidated financial
statements include the accounts of FreeSeas Inc. and its wholly owned subsidiaries (collectively, the “Company” or
“FreeSeas”). FreeSeas, formerly known as Adventure Holdings S.A., was incorporated in the Marshall Islands on April 23,
2004 for the purpose of being the ultimate holding company of ship-owning companies. The management of FreeSeas’ vessels
is performed by Free Bulkers S.A. (the “Manager”), a Marshall Islands company that is controlled by the Chief Executive
Officer of FreeSeas (see Note 4).
Effective December 2, 2013, the Company
effectuated a five-to-one reverse stock split on its issued and outstanding common stock (Note 13). All share and per share
amounts disclosed in the financial statements give effect to this reverse stock split retroactively, for all periods presented.
During the year ended December 31,
2013, the Company owned and operated six Handysize dry bulk carriers and one Handymax dry bulk carrier. As of December 31,
2013, FreeSeas is the sole owner of all outstanding shares of the following subsidiaries:
Company
|
|
% Owned
|
|
|
M/V
|
|
Type
|
|
|
Dwt
|
|
|
Year Built/
Expected
Year of
Delivery
|
|
|
Date of
Acquisition
|
|
|
Date of
Disposal
|
|
|
Date of
Contract
Termination
|
Adventure Two S.A.
|
|
|
100
|
%
|
|
Free Destiny
|
|
|
Handysize
|
|
|
|
25,240
|
|
|
|
1982
|
|
|
|
08/04/04
|
|
|
|
08/27/10
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Three S.A.
|
|
|
100
|
%
|
|
Free Envoy
|
|
|
Handysize
|
|
|
|
26,318
|
|
|
|
1984
|
|
|
|
09/29/04
|
|
|
|
05/13/11
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Four S.A.
|
|
|
100
|
%
|
|
Free Fighter
|
|
|
Handysize
|
|
|
|
38,905
|
|
|
|
1982
|
|
|
|
06/14/05
|
|
|
|
04/27/07
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Five S.A.
|
|
|
100
|
%
|
|
Free Goddess
|
|
|
Handysize
|
|
|
|
22,051
|
|
|
|
1995
|
|
|
|
10/30/07
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Six S.A.
|
|
|
100
|
%
|
|
Free Hero
|
|
|
Handysize
|
|
|
|
24,318
|
|
|
|
1995
|
|
|
|
07/03/07
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Seven S.A.
|
|
|
100
|
%
|
|
Free Knight
|
|
|
Handysize
|
|
|
|
24,111
|
|
|
|
1998
|
|
|
|
03/19/08
|
|
|
|
02/18/14
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Eight S.A.
|
|
|
100
|
%
|
|
Free Jupiter
|
|
|
Handymax
|
|
|
|
47,777
|
|
|
|
2002
|
|
|
|
09/05/07
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Nine S.A.
|
|
|
100
|
%
|
|
Free Impala
|
|
|
Handysize
|
|
|
|
24,111
|
|
|
|
1997
|
|
|
|
04/02/08
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Ten S.A.
|
|
|
100
|
%
|
|
Free Lady
|
|
|
Handymax
|
|
|
|
50,246
|
|
|
|
2003
|
|
|
|
07/07/08
|
|
|
|
11/08/11
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Eleven S.A.
|
|
|
100
|
%
|
|
Free Maverick
|
|
|
Handysize
|
|
|
|
23,994
|
|
|
|
1998
|
|
|
|
09/01/08
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Twelve S.A.
|
|
|
100
|
%
|
|
Free Neptune
|
|
|
Handysize
|
|
|
|
30,838
|
|
|
|
1996
|
|
|
|
08/25/09
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Fourteen S.A.
|
|
|
100
|
%
|
|
Hull 1
|
|
|
Handysize
|
|
|
|
33,600
|
|
|
|
2012
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
04/28/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adventure Fifteen S.A.
|
|
|
100
|
%
|
|
Hull 2
|
|
|
Handysize
|
|
|
|
33,600
|
|
|
|
2012
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
06/04/12
|
|
2.
|
Significant Accounting Policies
|
a) Principles of Consolidation:
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(or “U.S. GAAP”) and include in each of the three years in the period ended December 31, 2013 the accounts and
operating results of the Company and its wholly-owned subsidiaries referred to in Note 1 above. All inter-company balances and
transactions have been eliminated upon consolidation. FreeSeas as the holding company determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity. Under ASC
810 “Consolidation” a voting interest entity is an entity in which the total equity investment at risk is sufficient
to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the
right to receive residual returns and the right to make financial and operating decisions. The holding company consolidates voting
interest entities in which it owns all, or at least a majority (generally, greater than 50%) of the voting interest. Variable interest
entities (“VIE”) are entities as defined under ASC 810 that in general either do not have equity investors with voting
rights or that have equity investors that do not provide sufficient financial resources for the entity to support its activities.
The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the
other entity’s design and purpose and the reporting entity’s power, through voting or similar rights, to direct the
activities of the other entity that most significantly impact the other entity’s economic performance. A controlling financial
interest in a VIE is present when a company has the obligation to absorb losses or the right to receive benefits that could potentially
be significant to the VIE, or both. Only one reporting entity, known as the primary beneficiary, is expected to be identified as
having a controlling financial interest and thus is required to consolidate the VIE. The Company evaluates all arrangements that
may include a variable interest in an entity to determine if it may be the primary beneficiary, and would be required to include
assets, liabilities and operations of a VIE in its consolidated financial statements. As of December 31, 2013 and 2012, no
such interest existed.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
b) Use of Estimates:
The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
c) Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally
of cash and cash equivalents, trade accounts receivable, insurance claims, prepayments and advances, and derivative contracts (interest
rate swaps). The Company places its cash and cash equivalents, consisting mostly of deposits, with high credit qualified financial
institutions. The Company monitors the credit risk regarding charterer’s turnover in order to review its reliance on individual
charterers. The Company does not obtain rights to collateral to reduce its credit risk. The Company is exposed to credit risk in
the event of non-performance by counter parties to derivative instruments; however, the Company limits its exposure by diversifying
among counter parties with high credit ratings. Credit risk with respect to trade account receivable is considered high due to
the fact that the Company’s total income is derived from a few charterers. For the year ended December 31, 2013, two
charterers individually accounted for more than 10% of the Company’s voyage revenues, one charterer individually accounted
for more than 10% of the Company’s voyage revenues for the year ended December 31, 2012, and one charterer individually
accounted for more than 10% of the Company’s voyage revenues for the year ended December 31, 2011 as follows:
Charterer
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
A
|
|
|
|
32
|
%
|
|
|
22
|
%
|
|
|
33
|
%
|
|
B
|
|
|
|
12
|
%
|
|
|
Less than 10
|
%
|
|
|
Less than 10
|
%
|
d) Foreign Currency Translation:
The functional
currency of the Company is the U.S. Dollar because the Company’s vessels operate in international shipping markets,
and therefore primarily transact business in U.S. Dollars. The Company’s accounting records are maintained in U.S. Dollars.
Transactions involving other currencies during the year are converted into U.S. Dollars using the exchange rates in effect at
the time of the transactions. At the balance sheet date, monetary assets and liabilities, which are denominated in other currencies,
are translated into U.S. Dollars at the year-end exchange rates. Resulting gains or losses are included in other income/loss in
the accompanying consolidated statements of operations.
e) Cash and Cash Equivalents:
The
Company considers highly liquid investments such as time deposits and certificates of deposit with an original maturity of three
months or less to be cash equivalents.
f) Restricted Cash:
Restricted cash
includes bank deposits that are required under the Company’s borrowing arrangements to be kept as part of the security required
under the respective loan agreements.
g) Trade Receivables, net:
The amount
shown as Trade Receivables at each balance sheet date includes receivables from charterers for hire, freight and demurrage billings,
net of an allowance for doubtful debts. An estimate is made of the allowance for doubtful debts based on a review of all outstanding
amounts at year end, and an allowance is made for any accounts which management believes are not recoverable.
h) Insurance Claims:
Insurance claims
comprise claims submitted and/or claims in the process of compilation for submission (claims pending) relating to hull and machinery
or protection and indemnity insurance coverage. They are recorded as incurred on the accrual basis and represent the claimable
expenses incurred, net of deductibles, the recovery of which is probable under the related insurance policies and the Company can
make an estimate of the amount to be reimbursed. Any non-recoverable amounts are included in accrued liabilities and depending
on their nature, are classified as operating expenses or voyage expenses in the statement of operations. The classification of
insurance claims (if any) into current and non-current assets is based on management’s expectations as to their collection
dates.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
i) Inventories:
Inventories, which
are comprised of bunkers and lubricants remaining on board of the vessels at year end, are valued at the lower of cost, as determined
on a first-in, first-out basis, or market.
j) Advances for vessels under construction:
This account includes milestone payments relating to the shipbuilding contracts with the shipyard, and various pre-purchase costs
and expenses for which the recognition criteria are met.
k) Vessels’ Cost:
Vessels
are stated at cost, which consists of the contract purchase price and any material expenses incurred upon acquisition (initial
repairs, improvements, delivery expenses and other expenditures to prepare the vessel for her initial voyage). Subsequent expenditures
for conversions and major improvements are also capitalized when they appreciably extend the life, increase the earning capacity
or improve the efficiency or safety of the vessels. Otherwise, these expenditures are charged to expense as incurred.
l) Vessels’ Depreciation:
The cost of the Company’s vessels is depreciated on a straight-line basis over the vessels’ remaining economic useful
lives from the acquisition date, after considering the estimated residual value (vessel’s residual value is equal to the
product of its lightweight tonnage and estimated scrap rate). Effective April 1, 2009, and following management’s reassessment
of the useful lives of the Company’s assets, the fleets useful life was increased from 27 to 28 years since the date
of initial delivery from the shipyard. Management’s estimate was based on the current vessels’ operating condition,
as well as the conditions prevailing in the market for the same type of vessels.
m) Vessels held for sale:
It is
the Company’s policy to dispose of vessels when suitable opportunities arise and not necessarily to keep them until the end
of their useful life. The Company classifies assets and disposal groups of assets as being held for sale in accordance with ASC
360, “Property, Plant and Equipment,” when the following criteria are met: (i) management possessing the necessary
authority has committed to a plan to sell the asset; (ii) the asset is immediately available for sale on an “as is”
basis; (iii) an active program to find the buyer and other actions required to execute the plan to sell the asset have been
initiated; (iv) the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed
sale within one year; (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current
fair value and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn. Long-lived assets or disposal groups classified as held for sale are measured
at the lower of their carrying amount or fair value less cost to sell. These assets are not depreciated once they meet the criteria
to be held for sale and are classified in current assets on the consolidated balance sheet.
n) Impairment of Long-lived Assets:
The Company follows the guidance under ASC 360, “Property, Plant and Equipment,” which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The standard requires that, long-lived assets and certain identifiable
intangibles held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows, excluding interest
charges, expected to be generated by the use of the asset is less than its carrying amount, the Company should evaluate the asset
for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset which is determined based on
management estimates and assumptions and by making use of available market data. The fair values are determined through Level 2
inputs of the fair value hierarchy as defined in ASC 820 “Fair value measurements and disclosures” and are derived
principally from or by corroborated or observable market data. Inputs, considered by management in determining the fair value,
include independent broker’s valuations, FFA indices, average charter hire rates and other market observable data that allow
value to be determined. The Company evaluates the carrying amounts and periods over which long-lived assets are depreciated to
determine if events have occurred which would require modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, management reviews certain indicators of potential impairment, such as future undiscounted
net operating cash flows, vessel sales and purchases, business plans and overall market conditions. In performing the recoverability
tests the Company determines future undiscounted net operating cash flows for each vessel and compares it to the vessel’s
carrying value. The future undiscounted net operating cash flows are determined by considering the Company’s alternative
courses of action, estimated vessel’s utilization, its scrap value, the charter revenues from existing time charters for
the fixed fleet days and an estimated daily time charter equivalent for the unfixed days over the remaining estimated useful life
of the vessel, net of vessel operating expenses adjusted for inflation, and cost of scheduled major maintenance. When the Company’s
estimate of future undiscounted net operating cash flows for any vessel is lower than the vessel’s carrying value, the carrying
value is written down, by recording a charge to operations, to the vessel’s fair market value.
As of December 31,
2013, the Company, since the market conditions were not favorable enough for concluding acceptable multiple sales and in accordance
with the guidance under ASC 360, decided to change in the accompanying consolidated balance sheet the classification of the “held
for sale” vessels (M/V
Free Hero
, M/V
Free Jupiter
, M/V
Free Impala
and M/V
Free Neptune
) to
“held and used” thereby recognizing an impairment loss of $3,477 in the accompanying consolidated statements of operations.
In addition, the Company, also in accordance with the provisions of ASC 360, has classified the M/V
Free Knight
, as “held
for sale” in the accompanying consolidated balance sheet for the year ended December 31, 2013 at her estimated market value
(see Notes 5,6 and 17) .
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
As of December 31, 2013, the Company
performed an impairment assessment of its long-lived assets by comparing the undiscounted net operating cash flows for each vessel
to its respective carrying value. The significant factors and assumptions the Company used in each future undiscounted net operating
cash flow analysis included, among others, operating revenues, commissions, off-hire days, dry-docking costs, operating expenses
and management fee estimates. Revenue assumptions were based on contracted time charter rates up to the end of life of the current
contract of each vessel as well as Forward Freight Agreements (FFAs) and ten year historical average time charter rates for the
remaining life of the vessel after the completion of the current contracts. In addition, the Company used an annual operating expenses
escalation factor and an estimate of off hire days. All estimates used and assumptions made were in accordance with the Company’s
internal budgets and historical experience of the shipping industry. The Company’s assessment concluded that for the vessels
that are held and used no impairment existed as of December 31, 2013, as the vessels’ future undiscounted net operating
cash flows exceeded their carrying value by $10,014. If the Company were to utilize the most recent five year historical average
rates, three year historical average rates or one year historical average rates, would recognize an impairment loss of $19,685
(using the most recent five year historical average rates) and $30,340 (using the most recent three year or one year historical
average rates).
o) Accounting for Special Survey and
Dry-docking Costs:
The Company follows the deferral method of accounting for special survey and dry-docking costs, whereby
actual costs incurred are deferred and are amortized over periods of five and two and a half years, respectively. If special survey
or dry-docking is performed prior to the scheduled date, the remaining unamortized balances are immediately written-off. In the
accompanying financial statements, costs deferred are presented on a consistent basis and are limited to actual costs incurred
at the yard, paints, class renewal expenses, and parts used in the dry docking or special survey. Indirect costs and/or costs related
to ordinary maintenance, carried out while at dry dock, are expensed when incurred as they do not provide any future economic benefit.
Unamortized dry-docking and special survey costs of vessels that are sold are written off at the time of the respective vessels’
sale and are included in the calculation of the resulting gain or loss from such sale.
p) Financing
Costs:
Fees incurred for obtaining new loans are deferred and amortized over the loans’ respective repayment periods,
using the effective interest rate method. These charges are included in the balance sheet line item Deferred Charges. Any unamortized
balance of costs relating to loans repaid or refinanced is expensed in the period the repayment or refinancing is made, if the
refinancing is deemed to be a debt extinguishment under the provision of ASC 470-50 “Debt: Modifications and Extinguishments.”
q) Unearned Revenue:
Unearned revenue
includes cash received prior to the balance sheet date and is related to revenue earned after such date. These amounts are recognized
as revenue over the voyage or charter period.
r) Interest Rate Swaps:
The Company
uses interest rate swaps to manage net exposure to interest rate changes related to its borrowings. Such swap agreements, designated
as “economic hedges” are recorded at fair value with changes in the derivatives’ fair value recognized in earnings
unless specific hedge accounting criteria are met. During the years ended December 31, 2011, 2012 and 2013, there was no derivative
transaction meeting such hedge accounting criteria; therefore the change in their fair value is recognized in earnings.
s) Financial Instruments:
The principal
financial assets of the Company consist of cash and cash equivalents and restricted cash, trade receivables (net of allowance),
insurance claims, prepayments and advances. The principal financial liabilities of the Company consist of accounts payable, accrued
liabilities, deferred revenue, long-term debt, and interest-rate swaps. The carrying amounts reflected in the accompanying consolidated
balance sheets of financial assets and liabilities, approximate their respective fair values.
t) Fair Value Measurements:
The
Company follows the provisions of ASC 820, “Fair Value Measurements and Disclosures” which defines, and provides guidance
as to the measurement of, fair value. ASC 820 creates a hierarchy of measurement and indicates that, when possible, fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets and the lowest priority (Level
3) to unobservable data, for example, the reporting entity’s own data. Under the standard, fair value measurements are separately
disclosed by level within the fair value hierarchy. ASC 820 applies when assets or liabilities in the financial statements are
to be measured at fair value, but does not require additional use of fair value beyond the requirements in other accounting principles.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
u) Fair value option:
In February,
2007, the FASB issued ASC 825, “Financial Instruments,” which permits companies to report certain financial assets
and financial liabilities at fair value. ASC 825 was effective for the Company as of January 1, 2008 at which time the Company
could elect to apply the standard prospectively and measure certain financial instruments at fair value. The Company evaluated
the guidance contained in ASC 825 and elected not to report any existing financial assets or liabilities at fair value that are
not already reported at fair value, therefore the adoption of the statement had no impact on its financial position and results
of operations. The Company retains the ability to elect the fair value option for certain future assets and liabilities acquired
under this pronouncement.
v) Accounting for Revenue and Expenses:
Revenue is recorded when services are rendered, the Company has a signed charter agreement or other evidence of an arrangement,
the price is fixed or determinable, and collection is reasonably assured. A voyage charter involves the carriage of a specific
amount and type of cargo from specific load port(s) to specific discharge port(s), subject to various cargo handling terms, in
return for payment of an agreed upon freight rate per ton of cargo. A time charter involves placing a vessel at the charterers’
disposal for a period of time during which the charterer uses the vessel in return for the payment of a specified daily hire rate.
Short period charters for less than three months are referred to as spot charters. Time charters extending three months to a year
are generally referred to as medium term charters. All other time charters are considered long term. Voyage revenues for the transportation
of cargo are recognized ratably over the estimated relative transit time of each voyage. A voyage is deemed to commence when a
vessel is available for loading of its next fixed cargo and is deemed to end upon the completion of the discharge of the current
cargo. Revenues from time chartering of vessels are accounted for as operating leases and are thus recognized on a straight line
basis as the average revenue over the rental periods of such charter agreements, as service is provided. Voyage expenses, primarily
consisting of port, canal and bunker expenses that are unique to a particular charter, are paid for by the charterer under time
charter arrangements or by the Company under voyage charter arrangements, except for commissions, which are always paid for by
the Company, regardless of charter type. All voyage and vessel operating expenses are expensed as incurred, except for commissions.
Commissions are deferred over the related voyage charter period to the extent revenue has been deferred since commissions are earned
as the Company’s revenues are earned. Probable losses on voyages in progress are provided for in full at the time such losses
can be estimated.
w) Profit Sharing Arrangements:
From time to time, the Company has entered into profit sharing arrangements with its charterers, whereby the Company may have received
additional income at an agreed percentage of net earnings earned by such charterer, where those earnings are over the base rate
of hire and settled periodically during the term of the charter agreement. Revenues generated from the profit sharing arrangements
are recorded in the period they are earned.
x) Repairs and Maintenance:
All
repair and maintenance expenses, including major overhauling and underwater inspection expenses, are charged against income as
incurred and are included in vessel operating expenses in the accompanying consolidated statements of operations.
y) Stock-Based Compensation:
Following
the provisions of ASC 718, “Compensation- Stock Compensation” the Company recognizes all share-based payments to employees,
including grants of employee stock options, in the consolidated statements of operations based on their fair values on the grant
date. Compensation cost on stock based awards with graded vesting is recognized on an accelerated basis as though each separately
vesting portion of the award was in substance, a separate award.
z) Earnings/(Losses) per Share:
Basic earnings/(losses) per share are computed by dividing net income (loss) by the weighted average number of common shares
outstanding during the periods presented. Diluted earnings per share reflect the potential dilution that would occur if securities
or other contracts to issue common stock were exercised. Dilution has been computed by the treasury stock method whereby all of
the Company’s dilutive securities (warrants, options and restricted shares) are assumed to be exercised and the proceeds
used to repurchase common shares at the weighted average market price of the Company’s common stock during the relevant periods.
The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased)
are included in the denominator of the diluted earnings/(losses) per share computation unless such inclusion would be anti-dilutive.
aa) Segment Reporting:
The Company
reports financial information and evaluates its operations by total charter revenues. The Company does not have discrete financial
information to evaluate the operating results for each type of charter. Although revenue can be identified for these types of charters,
management does not identify expenses, profitability or other financial information for these charters. As a result, management,
including the chief operating decision makers, review operating results solely by revenue per day and operating results of the
fleet and thus the Company has determined that it operates under one reportable segment. Furthermore, when the Company charters
a vessel to a charterer, the charterer is free to trade the vessel worldwide and, as a result, the disclosure of geographic information
is impracticable.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
bb) Subsequent Events:
The
Company evaluates subsequent events or transactions up to the date in which the consolidated financial statements are issued
according to the requirements of ASC 855.
cc) Recent Accounting Pronouncements:
Comprehensive Income -
Reporting
of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Within the period the
Company adopted the requirements of ASU 2013-02, "Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income"
. The objective of this Update is to improve the reporting of reclassifications
out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or
other comprehensive income in the financial statements. However, the amendments require an entity to provide information about
the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present,
either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated
other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S.
GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under
U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required
under U.S. GAAP that provide additional detail about those amounts. The adoption of the new guidance for fair value measurements
had no effect on the Company’s consolidated financial statements.
The accompanying consolidated financial
statements have been prepared on a going concern basis. The historically low charter rates for drybulk vessels affected the Company
for over three years, and resulted in a material adverse impact on Company’ results from operations, The Company has incurred
net losses of $48,705, $30,888 and $88,196 during the years ended December 31, 2013, 2012 and 2011, respectively. While recent
market improvement has been realized the Company’s cash flow projections for 2014, indicate that cash on hand will not be
sufficient to cover debt repayments scheduled as of December 31, 2013 and operating expenses and capital expenditure requirements
for at least twelve months from the balance sheet date. As of December 31, 2013 and 2012, the Company had working capital deficits
of $59,041 and $70,973, respectively. All of the above raises substantial doubt regarding the Company’s ability to continue
as a going concern. Management plans to continue to provide for its capital requirements by issuing additional equity securities
in addition to executing their business plan. The Company’s ability to continue as a going concern is dependent upon its
ability to obtain the necessary funding to meet its obligations and repay its liabilities arising from the normal course of business
operations when they come due and to generate profitable operations in the future.
In January and April 2013, the Company
received notifications from FBB that the Company is in default under its loan agreements as a result of the breach of certain covenants
and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s deposits
and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to the National
Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation. The Company’s
loan facility and deposits have been transferred to NBG. In January 2014, the Company received notification from NBG that the Company
has not paid the aggregate amount of $10,045 constituting repayment installments and accrued interest due in December 2013. The
Company has entered into an agreement with the NBG to settle the outstanding payments upon a cash payment of a portion of the outstanding
amount, whereby the NBG would forgive the remaining balance. The closing of such transaction is contingent upon the Company raising
the necessary funds. See Note 17 for more information.
Also the Company did not pay the monthly
repayments of $20 for each of Facility A and Facility B with Deutsche Bank along with accrued interest due in January, February,
March and April 2013. In May 2013, the Company did not pay the monthly repayments of $11.5 for each of Facility A and Facility
B with Deutsche Bank, totaling $23 along with accrued interest due. As well, the Company did not pay the interest due in June 2013.
On September 25, 2013, the Company and its wholly-owned subsidiaries: Adventure Two S.A., Adventure Three S.A., Adventure Seven
S.A. and Adventure Eleven S.A. have entered into an Assignment and Amendment Agreement (the “Amendment”) with Deutsche
Bank, Hanover Holdings I, LLC (“Hanover”) and Crede CG III, Ltd. (“Crede”) which, upon court approval on
October 9, 2013 (see Note 10 “Long-term debt”), removed approximately $30 million of debt from the Company’s
consolidated balance sheet.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On January 31, 2013 the Company did not
pay the interest due of $124 and the interest rate swap amounts of $52 and $28 due on March 5, 2013 and April 2, 2013, respectively,
with the Credit Suisse facility. On April 26, 2013, the Company paid the interest of $124 due on January 31, 2013. On April 30
and July 31, 2013 the Company did not pay the interest due of $117 and $119, respectively. Also, the Company did not pay the interest
rate swap amounts of $48, $25, $43 and $22 due on June 5, 2013, July 2, 2013, September 5, 2013 and October 2, 2013, respectively,
with the Credit Suisse facility. In addition, on October 31, 2013, the Company did not pay the interest due of $118 with the Credit
Suisse facility. As well, the Company did not pay the interest rate swap amounts of $38 due on December 5, 2013 and $19 due on
January 2, 2014, respectively, with the Credit Suisse facility. On February 3, 2014, the Company paid the amount of $201 to fully
unwind the two interest rate swap agreements with Credit Suisse. The Company received reservation of right letters on August 9,
2013, October 4, 2013 and November 1, 2013 stating that Credit Suisse may take any actions and may exercise all of their rights
and remedies referred in the security documents. The Company has entered into a term sheet with Credit Suisse to settle the outstanding
payments upon a cash payment of a portion of the outstanding amount, whereby Credit Suisse would forgive the remaining balance.
The closing of such transaction is contingent upon the Company raising the necessary funds. See Note 17 for more information.
If the Company is not able to raise the
capital necessary to complete the agreements reached with the NBG and Credit Suisse or if the Company is unable to comply with
its restructured loan terms, this could lead to the acceleration of the outstanding debt under its debt agreements. The Company’s
failure to satisfy its covenants under its debt agreements, and any consequent acceleration and cross acceleration of its outstanding
indebtedness would have a material adverse effect on the Company’s business operations, financial condition and liquidity.
Generally accepted accounting principles
require that long-term debt be classified as a current liability when a covenant violation gives the lender the right to call the
debt at the balance sheet date, absent a waiver. As a result of the actual breaches existing under the Company’s credit facilities
with NBG and Credit Suisse (Note 10) acceleration of such debt by its lenders could result. Accordingly, as of December 31, 2013,
the Company is required to reclassify its long term debt and derivative financial instrument liability (interest rate swaps) as
current liabilities on its consolidated balance sheet since the Company has not received waivers in respect to the breaches discussed
above.
The Company is currently exploring several
alternatives aiming to manage its working capital requirements and other commitments, including offerings of securities through
structured financing agreements (as reported in Note 15), disposition of certain vessels in its current fleet (Note 17) and additional
reductions in operating and other costs.
The consolidated financial statements as
of December 31, 2013, were prepared assuming that the Company would continue as a going concern despite its significant losses
and working capital deficit. Accordingly, the financial statements did not include any adjustments relating to the recoverability
and classification of recorded asset amounts, the amounts and classification of liabilities, or any other adjustments that might
result in the event the Company is unable to continue as a going concern, except for the classification of all debt, and derivative
financial instrument liability as current and the recognized impairment losses on the carrying value of its vessels
.
|
4.
|
Related Party Transactions
|
Manager
All vessels owned by the Company receive
management services from the Manager, pursuant to ship management agreements between each of the ship-owning companies and the
Manager.
Each of the Company’s ship-owning
subsidiaries pays, as per its management agreement with the Manager, a monthly technical management fee of $18,975 (on the basis
that the $/Euro exchange rate is 1.30 or lower; if on the first business day of each month the $/Euro exchange rate exceeds 1.30
then the management fee payable will be increased for the month in question, so that the amount payable in $ will be the equivalent
in Euro based on 1.30 $/Euro exchange rate) plus a fee of $400 per day for superintendent attendance and other direct expenses.
The Company also pays the Manager a fee
equal to 1.25% of the gross freight or hire from the employment of FreeSeas’ vessels. In addition, the Company pays a 1%
commission on the gross purchase price of any new vessel acquired or the gross sale price of any vessel sold by the Company with
the assistance of the Manager. During the year ended December 31, 2013 and 2012, there were no vessel disposals. In addition,
the Company has incurred commission expenses relating to its commercial agreement with the Manager amounting to $104, $174 and
$371 for the years ended December 31, 2013, 2012 and 2011 respectively, included in “Commissions” in the accompanying
consolidated statements of operations.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
The Company also pays, as per its services
agreement with the Manager, a monthly fee of $136,275, (on the basis that the $/Euro exchange rate is 1.35 or lower; if on the
last business day of each month the $/Euro exchange rate exceeds 1.35 then the service fee payable will be adjusted for the following
month in question, so that the amount payable in dollars will be the equivalent in Euro based on 1.35 $/Euro exchange rate) as
compensation for services related to accounting, financial reporting, implementation of Sarbanes-Oxley internal control over financial
reporting procedures and general administrative and management services plus expenses. The Manager is entitled to a termination
fee if the agreement is terminated upon a “change of control” as defined in its services agreement with the Manager.
The termination fee as of December 31, 2013 would be approximately $91,314. In connection with the shares issued to the Manager
in payment of unpaid management and services fees, described below, the Manager has waived its right to terminate the services
agreement and receive such termination fee.
On January 18, 2013, the Company’s’
Board of Directors approved the issuance of 67,754 shares of the Company’s common stock to the Manager in payment of $271
in unpaid fees due to the Manager for January 2013 under the management and services agreements with the Company. These shares
were issued to the Manager on February 28, 2013 (Note 15) and were based on the closing prices of the Company's common stock on
the first day of each month, which are the dates the management and services fees were due and payable.
On September 13, 2013, the Company’s’
Board of Directors approved the issuance of 991,658 shares of the Company’s common stock to the Manager in payment of $2,168
in unpaid fees due to the Manager for the months of February, March, April, May, June, July, August and September 2013 under the
management and services agreements with the Company. These shares were issued to the Manager on October 14, 2013 (Note 15) and
were based on the closing prices of the Company's common stock on the first day of each month, which are the dates the management
and services fees were due and payable. The Board also approved the issuance of an aggregate of 34,326 shares of the Company’s
common stock to its non-executive members of its Board of Directors in payment of $120 in unpaid Board fees for the first, second
and third quarter of 2013. These shares were issued to the directors on October 14, 2013 (Note 15) and were based on the closing
price of the Company’s common stock on the last day of the first, second and third quarter of 2013, which is the date that
the Board fees were due and payable. All of the foregoing shares are restricted shares under applicable U.S. securities laws.
Fees and expenses charged by the Manager
are included in the accompanying consolidated financial statements in “Management and other fees to a related party,”
“General and administrative expenses,” “Operating expenses,” “Gain on sale of vessel”, “Vessel
impairment loss”, “Advances for vessels under construction” and “Write-off of advances for vessels under
construction”. The total amounts charged for the year ended December 31, 2013, 2012 and 2011 amounted to $3,133 ($1,490
of management fees, $1,499 of services fees, $131 of superintendent fees and $13 for other expenses), $4,560 ($2,404 of management
fees, $1,985 of services fees, $134 of superintendent fees and $37 for other expenses), and $4,451 ($1,900 of management fees,
$1,609 of services fees, $146 of superintendent fees, $144 for compensation of relocation expenses, $179 for other expenses and
$473 for management fees and supervision expenses for vessels under construction), respectively.
The “Management and other fees to
a related party” and the “General and administrative expenses” for the year ended December 31, 2013 include the
amount of $474 recognized as stock-based compensation expense for the issuance of 67,754 shares of the Company’s common stock
to the Manager in payment of $271 in unpaid fees due to the Manager for January 2013 under the management and services agreements
with the Company. In addition, the “Management and other fees to a related party” and the “General and administrative
expenses” for the year ended December 31, 2013 include the amount of $954 recognized as gain for the issuance of 991,658
shares of the Company’s common stock to the Manager (Note 15) in payment of $2,168 in unpaid fees due to the Manager for
the months of February, March, April, May, June, July, August and September 2013 and the issuance of 34,326 shares of the Company’s
common stock to the non-executive members of its Board of Directors (Note 15), in payment of $120 in unpaid Board fees for the
first, second and third quarter of 2013.
The balance due from the Manager as of
December 31, 2013 and December 31, 2012 was $1,167 and $346 respectively. The amount paid to the Manager for office space
during the year ended December 31, 2013, 2012 and 2011 was $147, $143 and $178, respectively and is included in “General
and administrative expenses” in the accompanying consolidated statements of operations.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
National Bank of Greece (NBG)
Effective May 13, 2013, FBB ceased to be
a related party according to the requirements of ASC 850 (“Related Party Disclosures”), since the bank’s deposits
and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to the National
Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation. The Company’s
loan facility and deposits have been transferred to NBG.
Other Related Parties
The Company, through the Manager uses from
time to time a ship-brokering firm associated with family members of the Company’s Chairman, Chief Executive Officer and
President for certain of the charters of the Company’s fleet. During the years ended December 31, 2013, 2012 and 2011,
such ship-brokering firm charged the Company commissions of $19, $43 and $56, respectively, which are included in “Commissions”
in the accompanying consolidated statements of operations. The balance due to the ship-brokering firm as of December 31, 2013
and December 31, 2012 was $nil and $94, respectively.
|
|
Vessels Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net Book
Value
|
|
December 31, 2010
|
|
$
|
251,314
|
|
|
$
|
(37,623
|
)
|
|
$
|
213,691
|
|
Depreciation
|
|
|
—
|
|
|
|
(8,664
|
)
|
|
|
(8,664
|
)
|
Disposal
|
|
|
(9,461
|
)
|
|
|
7,279
|
|
|
|
(2,182
|
)
|
Vessel held for sale
|
|
|
(76,302
|
)
|
|
|
1,214
|
|
|
|
(75,088
|
)
|
Vessel impairment charge
|
|
|
(62,414
|
)
|
|
|
16,076
|
|
|
|
(46,338
|
)
|
December 31, 2011
|
|
$
|
103,137
|
|
|
$
|
(21,718
|
)
|
|
$
|
81,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
—
|
|
|
|
(5,729
|
)
|
|
|
(5,729
|
)
|
December 31, 2012
|
|
$
|
103,137
|
|
|
$
|
(27,447
|
)
|
|
$
|
75,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
—
|
|
|
|
(5,727
|
)
|
|
|
(5,727
|
)
|
Reclassified to vessel held for sale
|
|
|
(3,466
|
)
|
|
|
—
|
|
|
|
(3,466
|
)
|
Vessel impairment charge
|
|
|
(23,978
|
)
|
|
|
—
|
|
|
|
(23,978
|
)
|
Reclassified to vessels, net
|
|
|
29,315
|
|
|
|
—
|
|
|
|
29,315
|
|
December 31, 2013
|
|
$
|
105,008
|
|
|
$
|
(33,174
|
)
|
|
$
|
71,834
|
|
Vessels disposed during the year
ended December 31, 2011.
On May 13, 2011, the Company sold
the M/V
Free Envoy
for a sale price of $4,200 and recognized a gain of $1,561 as a result of the sale. From the net proceeds
of the sale, the Company paid on May 13, 2011 an amount of $3,700 constituting prepayment towards the Deutsche Bank Nederland
loan facility B. According to the loan terms, all future installments have been reduced to nil until the balloon payment due in
November 2012 (Note 10).
As a result of the fourth supplemental
agreement, the Company entered into with Credit Suisse on July 15, 2011(Note 10), the Company committed to a plan for sale
of the vessels M/V
Free Jupiter
and M/
V Free Lady.
Thus Company assessed for recoverability
the carrying value of M/V
Free Jupiter
and M/V
Free Lady
, including unamortized deferred dry docking costs of $177,
due to their expected sale. In performing its assessment, the Company compared the carrying value of the vessels with their estimated
fair value. As a result of this assessment, the Company has recognized an impairment loss of $46,515 in the consolidated statements
of operations of which $15,048 relates to the M/V
Free Jupiter
and $31,467 to the M/V
Free Lady
.
On November 8, 2011, the Company sold
the M/V
Free Lady
, for a sale price of $21,900. From the net proceeds of the sale, the Company paid on November 8,
2011 the amount of $19,800 constituting prepayment towards the Credit Suisse loan facility (Note 10).
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Vessels disposed during the year
ended December 31, 2012.
During the year ended December 31, 2012,
there were no vessel disposals.
Vessels disposed during the year
ended December 31, 2013.
During the year ended December 31, 2013,
there were no vessel disposals.
As of December 31, 2013, the Company,
according to the guidance under ASC 360, decided to change in the accompanying consolidated balance sheet the classification of
the “held for sale” vessels (M/V
Free Hero
, M/V
Free Jupiter
, M/V
Free Impala
and M/V
Free
Neptune
) to “held and used” since the market conditions were not favorable enough for concluding their sale and
recognized an impairment loss of $3,477 in the accompanying consolidated statements of operations, of which $935 relates to the
M/V
Free Hero
, $455 to the M/V
Free Jupiter
and $2,087 to the M/V
Free Impala
. In addition, the Company, also
according to the provisions of ASC 360, has classified the M/V
Free Knight
, as “held for sale” in the accompanying
consolidated balance sheet for the year ended December 31, 2013 at her estimated market value. Subsequent to December 31, 2013
the M/V
Free Knight
was sold (Note 17) and an impairment charge of $23,978 was recognized in the accompanying consolidated
statement of operations for the year ended December 31, 2013. As of December 31, 2013, the Company performed an impairment
assessment of its long-lived assets by comparing the undiscounted net operating cash flows for each vessel to its respective carrying
value. The Company’s assessment concluded that for the vessels that are held and used no impairment existed as of December 31,
2013, as the vessels’ future undiscounted net operating cash flows exceeded their carrying value by $10,014. If the Company
were to utilize the most recent five year historical average rates, three year historical average rates or one year historical
average rates, would recognize an impairment loss of $19,685 (using the most recent five year historical average rates) and $30,340
(using the most recent three year or one year historical average rates).
|
|
Net Book
Value
|
|
December 31, 2010
|
|
$
|
13,606
|
|
Additions
|
|
|
75,088
|
|
Disposals
|
|
|
(20,503
|
)
|
Drydocking costs
|
|
|
564
|
|
Vessel impairment charge
|
|
|
(23,483
|
)
|
December 31, 2011
|
|
$
|
45,272
|
|
Vessel impairment charge
|
|
|
(12,480
|
)
|
December 31, 2012
|
|
$
|
32,792
|
|
Vessel impairment charge
|
|
|
(3,477
|
)
|
Reclassified to vessels, net
|
|
|
(29,315
|
)
|
Reclassified to vessel held for sale
|
|
|
3,465
|
|
December 31, 2013
|
|
$
|
3,465
|
|
Vessels classified as assets held
for sale during the year ended December 31, 2011.
The Company according to the provisions
of ASC 360, had classified the M/V
Free Hero
, the M/V
Free Jupiter
, the M/V
Free Impala
and the M/V
Free
Neptune
as “held for sale” in the consolidated balance sheet for the year ended December 31, 2011 at their
estimated market values less costs to sell, as all criteria required for the classification as “Held for Sale” were
met at the balance sheet date. On February 28, 2011, after obtaining the respective lenders consent (FBB), the Company’s
Board of Directors, approved a plan of sale of the vessels M/V
Free Impala
and M/V
Free Neptune
within the context
of its plans to fund its working capital requirements as discussed in Note 3. On July 15, 2011, the Company’s Board
of Directors approved a plan of sale of the vessels M/V
Free Jupiter
and M/V
Free
Lady
(the latter was sold on November 8,
2011) as a result of the fourth supplemental agreement the Company entered into with Credit Suisse (Note 10).
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Drydocking costs consists of the unamortized
dry docking and special survey costs of the M/V
Free Neptune
which were included in “Vessels held for sale”
following the vessel’s classification as held for sale in February 2011 as well as $373 relating to the cost of the drydocking
and special survey performed on this vessel in November 2011.
As of December 31, 2011, the Company
compared the carrying values of vessels classified as held for sale with their estimated market values less costs to sell and recognized
an impairment loss of $23,483 in the accompanying consolidated statements of operations.
Vessels classified as assets held
for sale during the year ended December 31, 2012.
The Company according to the provisions
of ASC 360, has classified the M/V
Free Hero
, the M/V
Free Jupiter
, the M/V
Free Impala
and the M/V
Free
Neptune
as “held for sale” in the accompanying consolidated balance sheet for the year ended December 31,
2012 at their estimated market values less costs to sell, as all criteria required for the classification as “Held for Sale”
were met at the balance sheet date.
As of December 31, 2012, the Company compared
the carrying values of vessels classified as held for sale with their estimated market values less costs to sell and recognized
an impairment loss of $12,480 in the accompanying consolidated statements of operations, of which $2,880 relates to the M/V
Free
Hero
, $3,360 to the M/V
Free Jupiter
, $3,360 to the M/V
Free Impala
and $2,880 to the M/V
Free Neptune
.
Vessel classified as asset held
for sale during the year ended December 31, 2013.
As of December 31, 2013 the Company (i)
classified the M/V
Free Knight
as “held for sale”, and (ii) reclassified the M/V
Free Hero
, M/V
Free
Jupiter
, M/V
Free Impala
and M/V
Free Neptune
as ‘‘held and used’’ – see Note
5 above.
|
|
Dry Docking
Costs– Non
Current
|
|
|
Special Survey
Costs – Non
Current
|
|
|
Financing
Costs-
Current
|
|
|
Total
|
|
December 31, 2010
|
|
$
|
1,231
|
|
|
$
|
975
|
|
|
$
|
606
|
|
|
$
|
2,812
|
|
Additions
|
|
|
172
|
|
|
|
20
|
|
|
|
—
|
|
|
|
192
|
|
Write-offs
|
|
|
(126
|
)
|
|
|
(280
|
)
|
|
|
(100
|
)
|
|
|
(506
|
)
|
Vessels held for sale
|
|
|
(124
|
)
|
|
|
(67
|
)
|
|
|
—
|
|
|
|
(191
|
)
|
Amortization
|
|
|
(622
|
)
|
|
|
(293
|
)
|
|
|
(176
|
)
|
|
|
(1,091
|
)
|
December 31, 2011
|
|
|
531
|
|
|
|
355
|
|
|
|
330
|
|
|
|
1,216
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
3,303
|
|
|
|
3,303
|
|
Write-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(191
|
)
|
|
|
(191
|
)
|
Vessels held for sale
|
|
|
112
|
|
|
|
189
|
|
|
|
—
|
|
|
|
301
|
|
Amortization
|
|
|
(628
|
)
|
|
|
(360
|
)
|
|
|
(555
|
)
|
|
|
(1,543
|
)
|
December 31, 2012
|
|
|
15
|
|
|
|
184
|
|
|
|
2,887
|
|
|
|
3,086
|
|
Additions
|
|
|
167
|
|
|
|
—
|
|
|
|
—
|
|
|
|
167
|
|
Write-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(939
|
)
|
|
|
(939
|
)
|
Vessels held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
|
|
|
(16
|
)
|
|
|
(184
|
)
|
|
|
(904
|
)
|
|
|
(1,104
|
)
|
December 31, 2013
|
|
$
|
166
|
|
|
$
|
—
|
|
|
$
|
1,044
|
|
|
$
|
1,210
|
|
Unamortized deferred amendment and restructuring
fees of $939 related to the Deutsche Bank loan facilities, were expensed, since Deutsche Bank has, in accordance with the Settlement
Agreement (Note 10), forgiven the outstanding indebtedness and overdue interest owed by the Company of approximately $30 million
in total and released all collateral associated with the loan, including the lifting of the mortgages over the M/V
Free Knight
and the M/V
Free Maverick
.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Additions to financing costs in 2012 related
to the amendment and restructuring fees of $1,823 and $1,480, concerning the Credit Suisse and Deutsche Bank loan facilities, respectively,
both due and payable on the earlier of March 31, 2014, the date of a voluntary prepayment, or the date the loan facilities become
due or are repaid in full. Additions to deferred dry-docking and special survey costs in 2011 related to the dry docking and special
survey of the M/V
Free Maverick
.
Unamortized deferred financing fees of
$191 related to the Credit Suisse and Deutsche Bank loan facilities, were written off due to the amended and restated facilities
the Company entered with Credit Suisse and Deutsche Bank Nederland, on May 31, 2012 and September 7, 2012, respectively (Note 10).
Unamortized dry docking and special survey
costs of $406 related to the M/V
Free Envoy
and M/V
Free Lady
were written off upon the vessels sale in 2011 as well
as $100 related to unamortized deferred financing fees of the Credit Suisse loan facility (Note 10) due to the prepayment
made in 2011.
Unamortized dry docking and special survey
costs of $191 related to the M/V
Free Neptune
were included in “Vessels held for sale” following the vessel’s
classification as held for sale in February 2011.
|
8.
|
Financial Instruments
and Fair Value Measurements
|
The Company is exposed to interest rate
fluctuations associated with its variable rate borrowings and its objective is to manage the impact of such fluctuations on earnings
and cash flows of its borrowings. In this respect, the Company partially uses interest rate swaps to manage net exposure to interest
rate fluctuations related to its borrowings.
The Company was party of two interest rate
swap agreements which were fully unwound on February 3, 2014, (see Note 17), which do not qualify for hedge accounting and as
such, the changes in their fair values are recognized in the statement of operations. The Company makes quarterly payments to the
counterparty based on decreasing notional amounts, standing at $2,686 and $1,438, respectively as of December 31, 2013 at
fixed rates of 5.07% and 5.55% respectively, and the counterparty makes quarterly floating-rate payments at LIBOR to the Company
based on the same decreasing notional amounts. The swaps mature in September 2015 and July 2015, respectively.
The change in the fair value of the Company’s
two interest rate swaps for the years ended December 31, 2013, 2012 and 2011 resulted in unrealized gains of $246, $314 and
$361, respectively. The settlements on the interest rate swaps for the years ended December 31, 2013, 2012 and 2011 resulted
in realized losses of $286, $399 and $539, respectively. The total of the change in fair value and settlements for the year ended
December 31, 2013, 2012 and 2011 aggregate to losses of $40, $85 and $178, respectively, which is separately reflected in
“Loss on derivative instruments” in the accompanying consolidated statements of operations.
As of December 31, 2013, the Company
was in breach of certain of its financial covenants relating to its loan agreements with NBG and Credit Suisse (Note 10). Thus
the cross default provisions of the swap agreements could be activated and as such and in accordance with the guidance related
to classification of obligations that are callable by the creditor, the Company has classified the entire long-term amount as current
at December 31, 2013. In this respect the total fair value amounting to $200 is reflected in “Derivative financial instruments-current
portion” in the accompanying consolidated balance sheet.
Tabular Disclosure of Derivatives Location
Derivatives are recorded in the balance
sheet on a net basis by counterparty when a legal right of setoff exists. The following tables present information with respect
to the fair values of derivatives reflected in the balance sheet on a gross basis by transaction. The tables also present information
with respect to gains and losses on derivative positions reflected in the Statement of income.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Fair Value of Derivative Instruments
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Derivative
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Derivative financial instruments - current portion
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200
|
|
|
$
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments - net of current portion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200
|
|
|
$
|
446
|
|
The Effect of Derivative Instruments on the Statement of
Operations for the Years Ended December 31, 2013, 2012 and 2011
Derivatives Not Designated as Hedging Instruments
|
|
|
|
Amount
|
|
Derivative
|
|
Loss Recognized on Derivative Location
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Interest rate swaps
|
|
Loss on derivative instruments
|
|
$
|
40
|
|
|
$
|
85
|
|
|
$
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
40
|
|
|
$
|
85
|
|
|
$
|
178
|
|
The following methods and assumptions were
used to estimate the fair value of each class of financial instrument:
|
•
|
Cash and cash equivalents, restricted cash, accounts receivable and accounts payable:
The
carrying values reported in the consolidated balance sheets for those financial instruments are reasonable estimates of their fair
values due to their short-term nature.
|
|
•
|
Long-term debt:
The fair values of long-term bank loans approximate the recorded values
due to the variable interest rates payable.
|
|
•
|
Derivative financial instruments:
The fair values of the Company’s derivative financial
instruments equate to the amount that would be paid or received by the Company if the agreements were cancelled at the reporting
date, taking into account current market data per instrument and the Company’s or counterparty’s creditworthiness,
as appropriate.
|
The guidance for fair value measurements
applies to all assets and liabilities that are being measured and reported on a fair value basis.
This statement enables the reader of the
financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality
and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at
fair value be classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted market prices
in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Observable inputs other than quoted
prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical
or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Level 3: Unobservable inputs that are not
corroborated by market data and that are significant to the fair value of the assets or liabilities.
The Company’s derivative financial
instruments are valued using pricing models that are used to value similar instruments by market participants. Where possible,
the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs,
including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs.
The Company’s derivatives trade in liquid markets, and as such, model inputs can generally be verified and do not involve
significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy. The following
table summarizes the valuation of liabilities measured at fair value on a recurring basis as of the valuation date:
|
|
December 31,
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Recurring measurements:
|
|
2013
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Interest rate swap contracts
|
|
$
|
200
|
|
|
$
|
—
|
|
|
$
|
200
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
200
|
|
|
$
|
—
|
|
|
$
|
200
|
|
|
$
|
—
|
|
The following table summarizes the valuation of assets measured
at fair value on a non-recurring basis as of the valuation date:
|
|
December 31,
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Non -Recurring measurements:
|
|
2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Vessels held for sale
|
|
$
|
32,792
|
|
|
$
|
—
|
|
|
$
|
32,792
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,792
|
|
|
$
|
—
|
|
|
$
|
32,792
|
|
|
$
|
—
|
|
Non -Recurring measurements:
|
|
December 31,
2013
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Vessel held for sale
|
|
$
|
3,465
|
|
|
$
|
—
|
|
|
$
|
3,465
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,465
|
|
|
$
|
—
|
|
|
$
|
3,465
|
|
|
$
|
—
|
|
In accordance with the provisions of relevant
guidance, as of December 31, 2012, the Company compared the carrying values of the M/V
Free Hero
, the M/V
Free
Jupiter
, the M/V
Free Impala
and the M/V
Free Neptune
which were classified as held for sale in the accompanying
consolidated balance sheet for the year ended December 31, 2012 (Note 6), with their estimated fair market values less costs
to sell and recognized an impairment loss of $12,480 in the accompanying consolidated statements of operations.
As of December 31, 2013 the Company (i)
classified the M/V
Free Knight
as “held for sale”, and (ii) reclassified the M/V
Free Hero
, M/V
Free
Jupiter
, M/V
Free Impala
and M/V
Free Neptune
as ‘‘held and used’’ – see Notes
5 & 6 above.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
|
9.
|
Convertible Notes Payable
|
In January, April, May and July 2013, the
Company entered into agreements with Asher Enterprises, Inc. (“Asher”) to four 8% interest bearing convertible notes
for $489 due in nine months (“The 8% Convertible Notes”). One hundred eighty days following the date of this note,
the holder has the right to convert all or any part of the outstanding and unpaid principal amount of the note into Company’s
common shares at a 35% discount rate. In connection with these notes, the Company recorded a $263 discount on debt, related to
the beneficial conversion feature of the notes to be amortized over the life of the notes or until the notes were converted or
repaid. On August 2, 2013, the Company issued 232,948 shares of common stock to Asher upon conversion of the $153.5 convertible
promissory note dated January 31, 2013. On October 10, 2013, the Company issued 53,618 shares of common stock to Asher upon
conversion of the $103.5 convertible promissory note dated April 8, 2013. On November 18, 2013, the Company issued 109,279 shares
of common stock to Asher upon conversion of the $103.5 convertible promissory note dated May 13, 2013 plus accrued interest. The
Company has recorded amortization expense amounting to $249 for the year ended December 31, 2013 in connection with the beneficial
conversion feature of the notes. As of the date of this filing 100% of the balance of the convertible notes has been converted
into common shares (Note 17).
|
10.
|
Bank Loans – current
portion
|
Bank loan debt as of December 31,
2013 and 2012 consists of the following:
|
|
(In thousands of U.S. Dollars)
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Lender
|
|
Current
Portion
|
|
|
Long-
term
portion
|
|
|
Total
|
|
|
Current
portion
|
|
|
Long-
Term portion
|
|
|
Total
|
|
Deutsche Bank Nederland
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,741
|
|
|
$
|
—
|
|
|
$
|
14,741
|
|
Deutsche Bank Nederland
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,741
|
|
|
$
|
—
|
|
|
$
|
14,741
|
|
Credit Suisse (a)
|
|
$
|
8,170
|
|
|
$
|
—
|
|
|
$
|
8,170
|
|
|
$
|
8,170
|
|
|
$
|
—
|
|
|
$
|
8,170
|
|
Credit Suisse (b)
|
|
$
|
8,170
|
|
|
$
|
—
|
|
|
$
|
8,170
|
|
|
$
|
8,170
|
|
|
$
|
—
|
|
|
$
|
8,170
|
|
Credit Suisse (c)
|
|
$
|
20,110
|
|
|
$
|
—
|
|
|
$
|
20,110
|
|
|
$
|
20,110
|
|
|
$
|
—
|
|
|
$
|
20,110
|
|
National Bank of Greece (d)
|
|
$
|
23,237
|
|
|
$
|
—
|
|
|
$
|
23,237
|
|
|
$
|
23,237
|
|
|
$
|
—
|
|
|
$
|
23,237
|
|
Total
|
|
$
|
59,687
|
|
|
$
|
—
|
|
|
$
|
59,687
|
|
|
$
|
89,169
|
|
|
$
|
—
|
|
|
$
|
89,169
|
|
The remaining repayment terms of the loans
outstanding as of December 31, 2013 are as follows:
Lender
|
|
Vessel
|
|
Remaining Repayment Terms
|
|
|
|
|
|
(a) Credit Suisse
|
|
M/V
Free Hero
|
|
Seven quarterly installments of $286 commencing
on June 30, 2014 and a balloon payment of $6,168 payable together with the last installment due on December 31, 2015.
|
b) Credit Suisse
|
|
M/V
Free Goddess
|
|
Seven quarterly installments of $286 commencing
on June 30, 2014 and a balloon payment of $6,168 payable together with the last installment due on December 31, 2015.
|
(c) Credit Suisse
|
|
M/V
Free Jupiter
|
|
Seven quarterly installments of $350 commencing on June 30, 2014 and a balloon payment of $17,660 payable together with the last installment due on December 31, 2015.
|
|
|
|
|
|
(d) National Bank of Greece
|
|
M/V
Free Impala
M/V
Free Neptune
|
|
Eleven quarterly installments of $837.5 and a balloon payment of $14,025, payable together with the last installment due on December 16, 2016.
|
The vessels indicated in the above table
are pledged as collateral for the respective loans.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
All the Company’s credit facilities
bear interest at LIBOR plus a margin, ranging from 1.00% to 4%, and are secured by mortgages on the financed vessels and assignments
of vessels’ earnings and insurance coverage proceeds. They also include affirmative and negative financial covenants of the
borrowers, including maintenance of operating accounts, minimum cash deposits, average cash balances to be maintained with the
lending banks and minimum ratios for the fair values of the collateral vessels compared to the outstanding loan balances. Each
borrower is restricted under its respective loan agreement from incurring additional indebtedness, changing the vessels’
flag without the lender’s consent or distributing earnings.
The weighted average interest rate for
the year ended December 31, 2013 and 2012 was 2.3% and 2.7%, respectively. Interest expense incurred under the above loan
agreements amounted to $1,946, $ 2,415 and $3,173 (net of capitalized interest $282) for the years ended December 31, 2013,
2012 and 2011, respectively, and is included in “Interest and Finance Costs” in the accompanying consolidated statements
of operations.
Deutsche Bank Facility
On September 7, 2012, the Company and certain
of its subsidiaries entered into an amended and restated facility agreement with Deutsche Bank. As amended and restated, the facility
agreement:
|
·
|
Defers and reduces the balloon payment of $16,009 due on Facility B from November 2012 to December
2015;
|
|
·
|
Provides for monthly repayments of $20 for each of Facility A and Facility B commencing September
30, 2012 through April 30, 2013 and a monthly repayment of $11.5 for each of Facility A and Facility B on May 31, 2013;
|
|
·
|
Suspends principal repayments from June 1, 2013 through June 30, 2014 on each of Facility A and
Facility B;
|
|
·
|
Provides for quarterly repayments of $337 for Facility A commencing June 30, 2014, which quarterly
repayments have been reduced from $750;
|
|
·
|
Provides for quarterly repayments of $337 for Facility B commencing June 30, 2014;
|
|
·
|
Bears interest at the rate of LIBOR plus 1% through March 31, 2014 and LIBOR plus 3.25% from April
1, 2014 through maturity, which were reduced from LIBOR plus 2.25% for Facility A and LIBOR plus 4.25% for Facility B;
|
|
·
|
Establishes certain financial covenants, including an interest coverage ratio that must be complied
with starting January 1, 2013, a consolidated leverage ratio that must be complied with starting January 1, 2014, and a minimum
liquidity ratio that must be complied with starting July 1, 2014;
|
|
·
|
Removes permanently the loan to value ratio;
|
|
·
|
Requires the amount of any “Excess Cash,” as determined in accordance with the amended
and restated facility agreement at each fiscal quarter end beginning June 30, 2012, to be applied to pay the amendment and restructuring
fee described below and prepay the outstanding loan balance; and
|
|
·
|
Removes the success fee originally due under the previous agreement and provides for an amendment
and restructuring fee of $1,480 payable on the earlier of March 31, 2014, the date of a voluntary prepayment, or the date the loan
facility becomes due or is repaid in full.
|
The Company did not pay the monthly repayments
of $20 for each of Facility A and Facility B with Deutsche Bank along with accrued interest due in January, February, March
and April 2013. Also, in May 2013, the Company did not pay the monthly repayments of $11.5 for each of Facility A and Facility
B with Deutsche Bank, totaling $23 along with accrued interest due. As well, the Company did not pay the interest due in June 2013.
On July 5, 2013, the Company entered into
a Debt Purchase and Settlement Agreement (the “Settlement Agreement”) with Deutsche Bank, Hanover and the Company’s
wholly-owned subsidiaries: Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure Eleven S.A. Pursuant to
the terms of the Settlement Agreement, Hanover has agreed to purchase $10,500 of outstanding indebtedness owed by the Company to
Deutsche Bank, out of a total outstanding amount owed of $29,958, subject to the satisfaction of a number of conditions set forth
in the Settlement Agreement. Upon payment in full of the $10,500 purchase price for such purchased indebtedness by Hanover to Deutsche
Bank in accordance with the terms and conditions of the Settlement Agreement, the remaining outstanding indebtedness of the Company
and its subsidiaries to Deutsche Bank shall be forgiven, and the mortgages of two security vessels will be discharged.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
The Settlement Agreement would not have
become effective until Hanover deposited in escrow an amount of $2,500 plus all reasonably incurred legal fees and expenses and
the parties enter into an escrow agreement (the “Settlement Conditions”). If the Settlement Conditions were not met
by August 2, 2013 (20 trading days after execution of the Settlement Agreement), the Settlement Agreement would automatically be
dissolved without any further action of the parties. In addition, the Settlement Agreement would have automatically terminated
upon the occurrence of certain events set forth in the Settlement Agreement. In addition, Deutsche Bank had the right to terminate
the Settlement Agreement upon the failure of Hanover to make certain installment payments of the purchase price for the purchased
debt within certain time frames set forth in the Settlement Agreement.
On August 2, 2013, the Company entered
into an Addendum to Debt Purchase and Settlement Agreement (the “Addendum”) with Deutsche Bank, Hanover and the Company’s
wholly-owned subsidiaries: Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure Eleven S.A. As previously
reported, the Settlement Agreement was not to become effective until Hanover deposits in escrow an amount of $2,500 plus all reasonably
incurred legal fees and expenses and the parties enter into an escrow agreement (the “Settlement Conditions”). On August
2, 2013, the Settlement Conditions were fulfilled and the Settlement Agreement became effective. The Addendum extended the date
upon which the parties had to achieve one of the conditions to fulfilling the terms of the Settlement Agreement.
On September
25, 2013, the Company entered into an Assignment and Amendment Agreement (the “Amendment”) with Deutsche Bank, Hanover,
Crede and the Company’s wholly-owned subsidiaries: Adventure Two S.A., Adventure Three S.A., Adventure Seven S.A. and Adventure
Eleven S.A. Pursuant to the Amendment, Hanover assigned all of its rights and obligations under the Settlement Agreement and the
Escrow Agreement to Crede on the terms set forth therein. Crede agreed to pay Hanover $3,624 in the aggregate, $2,624 of which
represented the amount deposited in escrow by Hanover and fees and other expenses incurred by Hanover. In addition, the Escrow
Agreement was amended to provide that Crede would deposit an additional $8,003 into escrow, following which the entire aggregate
amount being held in escrow pursuant to the Escrow Agreement was $10,542 which represents the entire purchase price of the purchased
indebtedness plus fees and expenses incurred by Deutsche Bank. Such entire amount will be released from escrow to Deutsche Bank
upon the receipt of the court approval described in the Settlement Agreement, and the debt forgiveness, mortgage discharge, and
owning the two vessels free and clear of all liens granted to Deutsche Bank would occur concurrently with such release. In addition
to the foregoing, the Company, in consideration for Hanover’s cancellation of certain covenants, issued to Hanover 400,000
shares of common stock and granted customary piggy-back registration rights for such shares, together with a demand registration
right commencing 120 days after September 25, 2013.
Said
registration was filed and became effective on January 28, 2014.
On September 26, 2013, Crede and the Company
entered into an Exchange Agreement, in order to settle the complaint filed against the Company by Crede seeking to recover
an aggregate of $10,500, representing all amounts due under the Settlement Agreement, as amended. The total number of shares
of Common Stock to be issued to Crede pursuant to the Exchange Agreement will equal the quotient of (i) $11,850 divided by (ii)
78% of the volume weighted average price of the Company’s Common Stock, over the 75-consecutive trading day period immediately
following the first trading day after the Court approved the Order (or such shorter trading-day period as may be determined by
Crede in its sole discretion by delivery of written notice to the Company) (the “Calculation Period”), rounded up to
the nearest whole share (the “Crede Settlement Shares”). 1,011,944 of the Crede Settlement Shares were issued
and delivered to Crede on October 10, 2013 and 7,729,818 Crede Settlement Shares were issued and delivered to Crede between October
11, 2013 and December 27, 2013.
The Exchange Agreement further provides
that if, at any time and from time to time during the Calculation Period (as defined below), the total number of Crede Settlement
Shares (as defined below) previously issued to Crede is less than the total number of Crede Settlement Shares to be issued to Crede
or its designee in connection with the Exchange Agreement, Crede may, in its sole discretion, deliver one or more written notices
to the Company requesting that a specified number of additional shares of Common Stock promptly be issued and delivered to Crede
or its designee (subject to the limitations described below), and the Company will upon such request issue the number of additional
shares of Common Stock requested to be so issued and delivered in the notice (all of which additional shares shall be considered
“Crede Settlement Shares” for purposes of the Exchange Agreement. At the end of the Calculation Period, (i) if the
total number of Crede Settlement Shares required to be issued exceeds the number of Crede Settlement Shares previously issued to
Crede, then the Company will issue to Crede or its designee additional shares of Common Stock equal to the difference between the
total number of Crede Settlement Shares required to be issued and the number of Crede Settlement Shares previously issued to Crede,
and (ii) if the total number of Crede Settlement Shares required to be issued is less than the number of Crede Settlement Shares
previously issued to Crede, then Crede or its designee will return to the Company for cancellation that number of shares of Common
Stock equal to the difference between the number of total number of Crede Settlement Shares required to be issued and the number
of Crede Settlement Shares previously issued to Crede. Crede may sell the shares of Common Stock issued to it or its designee in
connection with the Exchange Agreement at any time without restriction, even during the Calculation Period.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On October 9, 2013, the Company received
approval by the Supreme Court of the State of New York of the terms and conditions of the Exchange Agreement between the Company
and Crede. As a result of the court approval, Crede released $10,500 to Deutsche Bank and Deutsche Bank, upon receipt of the funds,
has, in accordance with the Settlement Agreement, forgiven the remaining outstanding indebtedness and overdue interest owed by
the Company approximately $19,500 in total and released all collateral associated with the loan, including the lifting of the mortgages
over the M/V
Free Knight
and the M/V
Free Maverick
. The other $10,500 of outstanding indebtedness has been eliminated
upon consummation of the transactions contemplated by the Exchange Agreement.
Credit Suisse Facility
On May 31, 2012, the Company entered into
a Sixth Supplemental Agreement with Credit Suisse, which amends and restates the Facility Agreement dated December 24, 2007, as
amended, between the Company and Credit Suisse. The Sixth Supplemental Agreement, among other things, modifies the Facility Agreement
to:
|
·
|
Defer further principal repayments until March 31, 2014;
|
|
·
|
Reduce the interest rate on the facility to LIBOR plus 1% until March 31, 2014 from a current interest
margin of 3.25;
|
|
·
|
Release restricted cash of $1,125;
|
|
·
|
Waive compliance through March 31, 2014 with the requirement to maintain a minimum ratio of aggregate
fair market value of the financed vessels to loan balance, after which date the required minimum ratio will be 115% beginning April
1, 2014, 120% beginning October 1, 2014, and 135% beginning April 1, 2015;
|
|
·
|
Establish certain financial covenants, including an interest coverage ratio, which must be complied
with starting January 1, 2013, a consolidated leverage ratio, which must be complied with starting January 1, 2014, and a minimum
liquidity ratio, which must be complied with starting July 1, 2014; and
|
|
·
|
Require the amount of any “Excess Cash,” as determined in accordance with the Facility
Agreement at each fiscal quarter end beginning June 30, 2012, to be applied to pay the amendment and restructuring fee described
below and prepay the outstanding loan balance, depending on the Company’s compliance at the time with the vessel market value
to loan ratio and the outstanding balance of the loan.
|
On January 31, 2013 the Company did not
pay the interest due of $124 and the interest rate swap amounts of $52 and $28 due on March 5, 2013 and April 2, 2013, respectively,
with the Credit Suisse facility. On April 26, 2013, the Company paid the interest of $124 due on January 31, 2013. On April 30
and July 31, 2013 the Company did not pay the interest due of $117 and $119, respectively. Also, the Company did not pay the interest
rate swap amounts of $48, $25, $43 and $22 due on June 5, 2013, July 2, 2013, September 5, 2013 and October 2, 2013, respectively,
with the Credit Suisse facility. In addition, on October 31, 2013, the Company did not pay the interest due of $118 with the Credit
Suisse facility. Furthermore, the Company did not pay the interest rate swap amounts of $38 due on December 5, 2013 and $19 due
on January 2, 2014, respectively. On February 3, 2014, the Company paid the amount of $201 to fully unwind its two interest rate
swap agreements with Credit Suisse. The Company received reservation of right letters on August 9, 2013, October 4, 2013 and November
1, 2013 stating that Credit Suisse may take any actions and may exercise all of their rights and remedies referred in the security
documents. The Company has entered into a term sheet with Credit Suisse to settle the outstanding payments upon a cash payment
of a portion of the outstanding amount, whereby Credit Suisse would forgive the remaining balance. The closing of such transaction
is contingent upon the Company raising the necessary funds. See Note 17 for more information.
An amendment and restructuring fee equal
to 5% of the current outstanding indebtedness, $1,823, is due and payable on the earlier of March 31, 2014, the date of a voluntary
prepayment, or the date the loan facility becomes due or is repaid in full.
NBG Facility (fka FBB Facility)
In January and April 2013, the Company
received notifications from FBB that the Company is in default under its loan agreements as a result of the breach of certain covenants
and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s deposits
and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to NBG. The
license of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility and deposits have
been transferred to NBG. In January 2014, the Company received notification from NBG that the Company has not paid the aggregate
amount of $10,045 constituting repayment installments and accrued interest due in December 2013. The Company has entered into an
agreement with the NBG to settle the outstanding payments upon a cash payment of a portion of the outstanding amount, whereby the
NBG would forgive the remaining balance. The closing of such transaction is contingent upon the Company raising the necessary funds.
See Note 17 for more information.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Loan Covenants
As of December 31, 2013, the Company was
in breach of certain of its financial covenants for its loan agreement with NBG, including the loan-to-value ratio, interest cover
ratio, minimum liquidity requirements and leverage ratio. As well, as of December 31, 2013 the Company was in breach of the interest
coverage ratio for its loan agreement with Credit Suisse.
Thus, in accordance with guidance related
to classification of obligations that are callable by the creditor, the Company has classified all of the related long-term debt
amounting to $59,687 as current at December 31, 2013.
Credit Suisse Sixth Supplemental Agreement:
|
(a)
|
during the period commencing on April 1, 2014 and ending on September 30, 2014, the aggregate fair
market value of the financed vessels must not be less than 115% of the outstanding loan balance at such time plus the swap exposure
minus the aggregate amount, if any, standing to the credit of the operating accounts, the retention account and any bank accounts
of the Company opened with the bank;
|
|
(b)
|
during the period commencing on October 1, 2014 and ending on March 31, 2015, the aggregate fair
market value of the financed vessels must not be less than 120% of the outstanding loan balance at such time plus the swap exposure
minus the aggregate amount, if any, standing to the credit of the operating accounts, the retention account and any bank accounts
of the Company opened with the bank; and
|
|
(c)
|
after March 31, 2015, the aggregate fair market value of the financed vessels must not be less
than 135% of the outstanding loan balance at such time plus the swap exposure minus the aggregate amount, if any, standing to the
credit of the operating accounts, the retention account and any bank accounts of the Company opened with the bank;
|
|
·
|
Consolidated leverage ratio: at the end of each accounting period falling between January 1, 2014 and December 31, 2015 (both
inclusive), the ratio of funded debt to shareholders’ equity shall not be greater than 2.5:1.0;
|
|
·
|
Liquidity: it maintains (on a consolidated basis) on each day falling after June 30, 2014, cash in an amount equal to the higher
of $2,500 and $500 per vessel; and
|
|
·
|
Interest coverage ratio: the ratio of EBITDA to Interest Expense at the end of each accounting period falling between January
1, 2013 and December 31, 2013 (both inclusive), shall not be less than 2.0:1.0; falling between January 1, 2014 and December 31,
2014 (both inclusive), shall not be less than 3.5:1.0; and falling between January 1, 2015 and December 31, 2015 (both inclusive),
shall not be less than 4.5:1.0.
|
NBG (fka FBB) loan agreement:
|
·
|
Average corporate liquidity: the Company is required to maintain an average corporate liquidity
of at least $3,000;
|
|
·
|
Leverage ratio: the corporate guarantor’s leverage ratio shall not at any time exceed 55%;
|
|
·
|
Ratio of EBITDA to net interest expense shall not be less than 3; and
|
|
·
|
Value to loan ratio: the fair market value of the financed vessels shall be at least (a) 115%
for the period July 1, 2010 to June 30, 2011 and (b) 125% thereafter.
|
The covenants described above are tested
annually on December 31st.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
11.
|
Commitments and Contingencies
|
The following table summarizes our contractual
obligations and their maturity dates as of December 31, 2013:
|
|
Payments Due by Period
|
|
(Dollars in thousands)
|
|
Total
|
|
|
Less
than 1
year
|
|
|
2-
year
|
|
|
3-
year
|
|
|
4-
year
|
|
|
5-
year
|
|
|
More
than 5
years
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
59,687
|
|
|
$
|
59,687
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on variable-rate debt
|
|
|
1,195
|
|
|
|
1,195
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services fees to the Manager
|
|
|
8,175
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees to the Manager
|
|
|
9,013
|
|
|
|
1,822
|
|
|
|
683
|
|
|
|
683
|
|
|
|
683
|
|
|
|
683
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
78,070
|
|
|
$
|
64,339
|
|
|
$
|
2,318
|
|
|
$
|
2,318
|
|
|
$
|
2,318
|
|
|
$
|
2,318
|
|
|
$
|
4,459
|
|
The above table does
not include our share of the monthly rental expenses for our offices of approximately 8.7 Euro (in thousands)
Claims
Various claims, suits, and complaints,
including those involving government regulations and product liability, arise in the ordinary course of the shipping business.
In addition, losses may arise from disputes with charterers, agents, insurance and other claims with suppliers relating to the
operations of the Company’s vessels. Currently, management is not aware of any such claims or contingent liabilities, which
should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements. The
Company is a member of a protection and indemnity association, or P&I Club that is a member of the International Group of P&I
Clubs, which covers its third party liabilities in connection with its shipping activities. A member of a P&I Club that is
a member of the International Group is typically subject to possible supplemental amounts or calls, payable to its P&I Club
based on its claim records as well as the claim records of all other members of the individual associations, and members of the
International Group. Although there is no cap on its liability exposure under this arrangement, historically supplemental calls
have ranged from 25%-40% of the Company’s annual insurance premiums, and in no year have exceeded $1 million. The Company
accrues for the cost of environmental liabilities when management becomes aware that a liability is probable and is able to reasonably
estimate the probable exposure. Currently, management is not aware of any such claims or contingent liabilities, which should be
disclosed, or for which a provision should be established in the accompanying consolidated financial statements. The Company’s
protection and indemnity (P&I) insurance coverage for pollution is $1 billion per vessel.
The M/V
Free Goddess
had been hijacked by Somali pirates on February 7, 2012 while transiting the Indian Ocean eastbound. On October 11, 2012, we announced
that all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s release by the pirates. At
the time of the hijacking the vessel was on time charter in laden condition. Since the release from the pirates, the vessel had
been laying at the port of Salalah, Oman, undertaking repairs funded mostly by Insurers. The repairs of the vessel were completed,
and notice of readiness was tendered to her Charterers for the resumption of the voyage. The Charterers repudiated the Charter
and we accepted Charterers' repudiation and terminated the fixture reserving our right to claim damages and other amounts due to
us. The Tribunal previously constituted will hear our claim for (amongst others) unpaid hire and damages from the
Charterers. At the same time, all options are being explored for the commercial resolution of the situation arising from
Charterers refusal to honor their obligations, including the further contribution by Insurers and cargo interests towards the completion of
the voyage and recovery of amounts due. The Company is working for a diligent solution in order to complete the voyage
without further delays.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Pursuant to a charterparty dated November
8, 2012, the Company chartered the M/V
Free Neptune
to Tramp Maritime Enterprises Ltd. ("TME"). TME failed to
pay outstanding hire in the amount of US$356. On April 2, 2013, the Company therefore commenced arbitration proceedings against
TME under the charterparty.
On December 14, 2012, while the M/V
Free
Neptune
was at Singapore, bunkers were supplied to the vessel through O.W. Bunker Malta Limited. The bunkers were ordered by
TME but were not paid for. OW Bunker is now pursuing the Company for their claim amount which currently stands at $542 inclusive
of interest as per their terms & conditions. The Company intends to vigorously defend this claim on the basis that it did not
contract with O.W. Bunker Malta Limited (TME did) and is therefore not responsible for this amount. TME were responsible for bunkers
as time charterers pursuant to the terms of the charterparty. The Company will claim an indemnity from TME with regard to
any exposure which it may face with regard to this claim.
On June 5, 2013, the M/V
Free Neptune
,
while at anchorage off Port Nouakchott, Mauritania, was stricken by the general cargo vessel Dazi Yun. Severe collision damage
incurred at the contact side shell point in way of cargo hold No. 2 starboard side and the cargo hold No. 2 flooded. No pollution
or crew injuries were reported. Nominated salvage team delivered the vessel to a shipyard in Turkey for repairs on September 2,
2013. The vessel is drydocked in the yard where she undertakes necessary maintenance and repairs enabling her to return to service.
The costs incurred are claimable from hull and machinery underwriters.
On December 31, 2013, Charterers, Transbulk
submitted a claim against the Company for a balance of hire of M/V
Free Knight
relating to alleged period of off-hire, other
deductions from hire and various expenses incurred on Company’s account in the sum of $265 and obtained a court arrest order
(said claim was settled, see Note 17).
The outstanding balance of the Company’s
claims as of December 31, 2013 stands at $186 related to Company’s insurance claims for vessel incidents arising in the ordinary
course of business.
The computation of basic earnings per share
is based on the weighted average number of common shares outstanding during the period, as adjusted to reflect the reverse stock
split effective December 2, 2013. The Company entered on November 3, 2013 into a securities purchase agreement (the “Purchase
Agreement”), with Crede, for an aggregate investment of $10,000 through the private placement of two series of zero-dividend
convertible preferred stock (collectively, the “Preferred Stock”) and Series A Warrants and Series B Warrants (collectively,
the “Warrants”), subject to certain terms and conditions (Note 15). The computation of the dilutive common
shares outstanding includes 5,000,000 Series A Warrants and 2,500,000 Series B Warrants, as the average market price
was greater than their exercise price, thus resulting in an incremental number of shares. The potential proceeds to the Company
of the 5,000,000 Series A and 2,500,000 Series B exercisable warrants as of December 31, 2013 amounts to $19,500.
The components of the denominator for the
calculation of basic loss per share and diluted loss per share for the years ended December 31, 2013, 2012 and 2011, respectively,
are as follows:
|
|
For the year
ended
December 31,
2013
|
|
|
For the year
ended
December 31,
2012
|
|
|
For the year
ended
December 31,
2011
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss – basic and diluted
|
|
$
|
(48,705
|
)
|
|
$
|
(30,888
|
)
|
|
$
|
(88,196
|
)
|
Basic earnings per share denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,527,240
|
|
|
|
167,435
|
|
|
|
129,701
|
|
Diluted earnings per share denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,351,960
|
|
|
|
167,435
|
|
|
|
129,701
|
|
Dilutive common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Warrants
|
|
|
2,824,720
|
|
|
|
—
|
|
|
|
—
|
|
Restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect
|
|
|
2,824,720
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – diluted
|
|
|
9,351,960
|
|
|
|
167,435
|
|
|
|
129,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(7.46
|
)
|
|
$
|
(184.48
|
)
|
|
$
|
(679.99
|
)
|
Diluted loss per common share
|
|
$
|
(5.21
|
)
|
|
$
|
(184.48
|
)
|
|
$
|
(679.99
|
)
|
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Effective February 14, 2013, the Company
effectuated a reverse stock split at a ratio of 1 for 10. The reverse stock split consolidated 10 shares of common stock into one
share of common stock at a par value of $0.001 per share. Effective December 2, 2013, the Company effectuated a reverse stock split
at a ratio of 1 for 5. The reverse stock split consolidated five shares of common stock into one share of common stock at a par
value of $0.001 per share. As a result of the reverse stock split, the number of outstanding common shares reduced at that time
from 94,324,530 to 18,864,906 subject to adjustment for fractional shares. The reverse stock split did not affect any shareholder’s
ownership percentage of the Company’s common shares, except to the limited extent that the reverse stock split resulted in
any shareholder owning a fractional share. Fractional shares of common stock were rounded up to the nearest whole share.
On December 31, 2009, the Company’s
Board of Directors awarded 5,100 restricted shares, as adjusted to reflect the reverse stock split effective December 2, 2013,
to its non-executive directors, executive officers and certain of Manager’s employees. The remaining unvested restricted
shares amounted to 1,000 were vested on December 31, 2013.
For the year ended December 31, 2013, the
recognized stock based compensation expense in relation to the restricted shares granted is $42. All the cost has been recognized.
Presented below is a table reflecting the
activity in the restricted shares, options, Class A warrants, Class W warrants and Class Z Warrants from January 1, 2011
through December 31, 2013, as adjusted to reflect the reverse stock split effective December 2, 2013:
|
|
Restricted
Shares
|
|
|
Options
|
|
|
Class A
Warrants
|
|
|
Class W
Warrants
|
|
|
Class Z
Warrants
|
|
|
Total
|
|
|
Average
Exercise
Price
|
|
|
Options
Exercisable
|
|
|
Class A
Warrants
Exercisable
|
|
|
Class W
Warrants
Exercisable
|
|
|
Class Z
Warrants
Exercisable
|
|
|
Total
|
|
|
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
01-Jan-11
|
|
|
2,680
|
|
|
|
240
|
|
|
|
3,000
|
|
|
|
0
|
|
|
|
33,100
|
|
|
|
39,020
|
|
|
$
|
1,276
|
|
|
|
240
|
|
|
|
3,000
|
|
|
|
0
|
|
|
|
33,100
|
|
|
|
36,340
|
|
|
$
|
1,276
|
|
Options vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(177
|
)
|
|
|
(177
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(177
|
)
|
|
|
(177
|
)
|
|
|
|
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,000
|
)
|
|
|
—
|
|
|
|
(32,923
|
)
|
|
|
(35,923
|
)
|
|
|
|
|
|
|
—
|
|
|
|
(3,000
|
)
|
|
|
—
|
|
|
|
(32,923
|
)
|
|
|
(35,923
|
)
|
|
|
|
|
Restricted shares vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Restricted shares forfeited
|
|
|
(280
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(280
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-Dec-11
|
|
|
2,400
|
|
|
|
240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,640
|
|
|
$
|
2,063
|
|
|
|
240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
240
|
|
|
$
|
2,063
|
|
Options vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options expired
|
|
|
—
|
|
|
|
(240
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
(240
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(240
|
)
|
|
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Restricted shares vested
|
|
|
(1,400
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,400
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Restricted shares forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-Dec-12
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Restricted shares vested
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
31-Dec-13
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On December 9, 2011, the Company received
a deficiency letter from NASDAQ stating that, because the Company’s common stock has not maintained a minimum bid price of
$1.00 per a share for the last 30 consecutive business days, the Company was no longer in compliance with NASDAQ Listing Rule Section 5450(a)(1).
In order to regain compliance, the Company had until June 4, 2012 for the closing bid price of its common stock to meet or
exceed $1.00 for a minimum of 10 consecutive business days. On January 6, 2012, the Company received a deficiency letter from
NASDAQ stating that, because the Company has not maintained a minimum Market Value of Publicly Held Shares (the “MVPHS”)
of $5,000 for the last 30 consecutive business days, the Company is no longer in compliance with NASDAQ Listing Rule Section 5450(b)(1)(C).
In order to regain compliance, the Company had until July 2, 2012 for the Company’s MVPHS to meet or exceed $5,000 for
a minimum of 10 consecutive business days. By letter dated February 29, 2012, the Company received notice from NASDAQ that
it has regained compliance with Listing Rules 5450(a)(1) and 5450(b)(1)(C), since for the last 10 consecutive business days, from
February 14, 2012 to February 28, 2012, the closing bid price of the Company’s common stock has been at $1.00 per
share or greater and the Company’s minimum market value of publicly held shares has been $5,000 or greater, respectively.
The Company received letters dated June
21, 2012 and June 25, 2012 from NASDAQ stating that for the previous 30 consecutive business days, the bid price of the Company'
common stock closed below the minimum $1.00 per share and the market value of the Company' publicly held common stock, or MVPHS,
was below the minimum of $5,000. These are both requirements for continued listing on the NASDAQ Global Market pursuant to NASDAQ
Marketplace Rules 5450(a)(1), the Minimum Bid Price Rule, and 5450(b)(1), the MVPHS Rule, respectively. These letters have no immediate
effect on the listing of the Company's common stock. The Company has been provided a grace period of 180 calendar days to regain
compliance by maintaining a closing bid price of at least $1.00 per share (which grace period ends December 18, 2012) and a closing
MVPHS of $5,000 or more for a minimum of ten consecutive business days (which grace period ends December 24, 2012). If at any time
before those dates, the bid price of the Company' common stock closed at $1.00 per share or more and its MVPHS closes at $5,000
or more for a minimum of 10 consecutive business days, NASDAQ would notify the Company that it had achieved compliance with the
Minimum Bid Price Rule and the MVPHS Rule. The Company was granted an initial six month period, or until December 24, 2012, to
regain compliance with the minimum bid price rule, unless it was able to obtain an extension of the deadline to regain compliance.
In December 2012, the Company applied to
NASDAQ to transfer the listing of the Company's common stock from The NASDAQ Global Market to The NASDAQ Capital Market. To transfer
to the NASDAQ Capital Market, the Company was required to meet all of the continued listing requirements of the NASDAQ Capital
Market, except for the minimum bid price. One of the continued listing requirements of the NASDAQ Capital Market is to have a MVPHS
of $1,000. Such a transfer would have granted the Company an additional six month period to regain compliance with the minimum
bid price.
On December 19, 2012, the Company received
notification from NASDAQ that on December 18, 2012, it failed to meet all continued listing criteria for the NASDAQ Capital Market,
as its MVPHS was $897. As a result, the notice indicated that the Company’s common stock would be delisted from NASDAQ. The
Company appealed that decision and the appeals hearing was scheduled for February 21, 2013.
On May 11, 2012, the Company entered
into a Standby Equity Distribution Agreement, or SEDA, with YA Global Master SPV Ltd., or YA Global, a fund managed by
Yorkville Advisors, LLC, pursuant to which, for a 24-month period, the Company has the right to sell up to $3.2 million of
shares of the Company’s common stock. The SEDA entitles the Company to sell and obligates YA Global to purchase, from
time to time over a period of 24 months, shares of the Company’s common stock for cash consideration up to an aggregate
of $3.2 million, subject to conditions the Company must satisfy as set forth in the SEDA. For each share of common stock
purchased under the SEDA, YA Global will pay 96% of the lowest daily volume weighted average price during the pricing period,
which is the five consecutive trading days after the Company delivers an advance notice to YA Global. Each such advance may
be for an amount not to exceed the greater of $200 or 100% of the average daily trading volume of the Company’s common
stock for the 10 consecutive trading days prior to the notice date. The Company registered the resale by YA Global of up to
36,795 shares of its common stock. As of December 31, 2012, the Company had sold all the shares of its common stock under the
SEDA for aggregate proceeds of $432. Pursuant to the terms of the SEDA, the Company could not deliver any further advance
notices until such time as the Company has filed and declared effective a new registration statement covering the resale of
additional shares of its common stock by YA Global.
On August 21, 2012, pursuant to the terms
of a Note Purchase Agreement dated May 11, 2012 between the Company and YA Global, the Company raised an aggregate of $250 from
the sale of a promissory note pursuant to the Note Purchase Agreement. The note was expected to be repaid in 10 equal weekly installments
to mature 90 days from the date of funding. Thereafter, the Company requested an extension of the repayment schedule which was
granted. As of December 31, 2012, the outstanding balance under the Note Purchase Agreement totaled $75.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On August 10, 2012, pursuant to the approval
of the Company’s Board of Directors at its April 2012 meeting, the Company issued 33,214 shares of its common stock to the
Manager in payment of the $926 in unpaid fees due to the Manager for the first quarter of 2012 and 3,993 shares of its common stock
to its non-executive directors in payment of $155 in unpaid Board fees for the last three quarters of 2011.
On October 11, 2012, pursuant to the approval
of the Company’s Board of Directors at its October 2012 meeting, the Company issued 43,930 shares of its common stock to
the Manager in payment of the $807 in unpaid fees due to the Manager for the third quarter of 2012 and 6,536 shares of its common
stock to its non-executive directors in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012.
On October 11, 2012, the Company entered
into an Investment Agreement, or Dutchess Agreement, with Dutchess Opportunity Fund, II, LP, or Dutchess, a fund managed by Dutchess
Capital Management, II, LLC, pursuant to which, for a 36-month period, the Company has the right to sell up to 47,060 shares of
our common stock. The Dutchess Agreement entitles the Company to sell and obligates Dutchess to purchase, from time to time over
a period of 36 months, up to 47,060 shares of its common stock, subject to conditions the Company must satisfy as set forth in
the Dutchess Agreement. For each share of common stock purchased under the Dutchess Agreement, Dutchess will pay 98% of the lowest
daily volume weighted average price during the pricing period, which is the five consecutive trading days commencing on the day
the Company delivers a put notice to Dutchess. Each such put may be for an amount not to exceed the greater of $200 or 200% of
the average daily trading volume of the Company’s common stock for the three consecutive trading days prior to the put notice
date, multiplied by the average of the three daily closing prices immediately preceding the put notice date, subject to a 9.99%
blocker provision. The Company registered the resale by Dutchess of up to 47,060 shares of its common stock. As of December 31,
2012, the Company had sold 18,587 shares of its common stock under the Dutchess Agreement for aggregate proceeds of $91.
On January 15, 2013, the Company issued
27,500 shares of our common stock (the “Settlement Shares”) to Hanover in connection with a stipulation of settlement
(the “First Settlement Agreement”) of an outstanding litigation claim. The First Settlement Agreement provided that
the Settlement Shares would be subject to adjustment on the 36th trading day following the date on which the Settlement Shares
were initially issued to reflect the intention of the parties that the total number of shares of Common Stock to be issued to Hanover
pursuant to the First Settlement Agreement be based upon a specified discount to the trading volume weighted average price (the
“VWAP”) of the Common Stock for a specified period of time. Specifically, the total number of shares of Common Stock
to be issued to Hanover pursuant to the First Settlement Agreement shall be equal to the quotient obtained by dividing (i) $305,485.59
by (ii) 70% of the VWAP of the Common Stock over the 35-trading day period following the date of issuance of the Settlement Shares
(the “True-Up Period”), rounded up to the nearest whole share (the “VWAP Shares”). The First Settlement
Agreement further provided that if, at any time and from time to time during the True-Up Period, Hanover reasonably believed that
the total number of Settlement Shares previously issued to Hanover were less than the total number of VWAP Shares to be issued
to Hanover or its designee in connection with the First Settlement Agreement, Hanover could, in its sole discretion, deliver one
or more written notices to the Company, at any time and from time to time during the True-Up Period, requesting that a specified
number of additional shares of Common Stock promptly be issued and delivered to Hanover or its designee (subject to the limitations
described below), and the Company would upon such request reserve and issue the number of additional shares of Common Stock requested
to be so issued and delivered in the notice (all of which additional shares shall be considered “Settlement Shares”
for purposes of the First Settlement Agreement).
On January 18, 2013, the Company delivered
an additional 8,000 shares to Hanover and on January 29, 2013, delivered an additional 1,657 shares to Hanover. At the end of the
True-Up Period, (i) if the number of VWAP Shares exceeds the number of Settlement Shares issued, then the Company would issue to
Hanover or its designee additional shares of Common Stock equal to the difference between the number of VWAP Shares and the number
of Settlement Shares, and (ii) if the number of VWAP Shares were less than the number of Settlement Shares, then Hanover or its
designee will return to the Company for cancellation that number of shares of Common Stock equal to the difference between the
number of VWAP Shares and the number of Settlement Shares.
On January 31, 2013, an amendment to the
First Settlement Agreement reduced the True-Up Period from 35 trading days following the date the Initial Settlement Shares were
issued to four trading days following the date the Initial Settlement Shares were issued. As a result, the True-Up Period expired
on January 22, 2013. Accordingly, the total number of shares of Common Stock issuable to Hanover pursuant to the First Settlement
Agreement, as amended, was 37,157, which number is equal to the quotient obtained by dividing (i) $305,485.59 by (ii) 70% of the
VWAP of the Common Stock over the four-trading day period following the date of issuance of the Initial Settlement Shares, rounded
up to the nearest whole share. All of such 37,157 shares of Common Stock had been issued to Hanover prior to the amendment of the
First Settlement Agreement. Accordingly, no further shares of Common Stock are issuable to Hanover pursuant to the First Settlement
Agreement, as amended, and Hanover is not required to return any shares of Common Stock to the Company for cancellation pursuant
thereto.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
The First Settlement Agreement provided
that in no event should the number of shares of Common Stock issued to Hanover or its designee in connection with the First Settlement
Agreement, when aggregated with all other shares of Common Stock then beneficially owned by Hanover and its affiliates (as calculated
pursuant to Section 13(d) of the Exchange, and the rules and regulations thereunder, result in the beneficial ownership by Hanover
and its affiliates (as calculated pursuant to Section 13(d) of the Exchange Act and the rules and regulations thereunder) at any
time of more than 9.99% of the Common Stock.
On January 24, 2013, the Company entered
into an Investment Agreement with Granite (the “Granite Agreement”), pursuant to which, for a 36-month period, the
Company had the right to sell up to 79,159 shares of its common stock to Granite. The Granite Agreement entitled the Company to
sell and obligated Granite to purchase, from time to time over a period of 36 months (the “Open Period”), 79,159 shares
of the Company’s common stock, subject to conditions the Company must had satisfied as set forth in the Granite Agreement.
For each share of common stock purchased under the Granite Agreement, Granite would pay 98% of the lowest daily volume weighted
average price during the pricing period, which was the five consecutive trading days commencing on the day the Company delivered
a put notice to Granite. Each such put could be for an amount not to exceed the greater of $500 or 200% of the average daily trading
volume of our common stock for the three consecutive trading days prior to the put notice date, multiplied by the average of the
three daily closing prices immediately preceding the put notice date. In no event, however, should the number of shares of common
stock issuable to Granite pursuant to a put cause the aggregate number of shares of common stock beneficially owned by Granite
and its affiliates to exceed 9.99% of the outstanding common stock at the time.
On February 13, 2013, the Company issued
37,000 shares of our common stock (the “Second Settlement Shares”) to Hanover in connection with a second stipulation
of settlement (the “Second Settlement Agreement”) of an outstanding litigation claim. The Second Settlement Agreement
provides that the Second Settlement Shares would be subject to adjustment on the 36th trading day following the date on which the
Second Settlement Shares were initially issued to reflect the intention of the parties that the total number of shares of Common
Stock to be issued to Hanover pursuant to the Second Settlement Agreement be based upon a specified discount to the VWAP of the
Common Stock for a specified period of time. Specifically, the total number of shares of Common Stock to be issued to Hanover pursuant
to the Second Settlement Agreement should be equal to the quotient obtained by dividing (i) $740,651.57 by (ii) 75% of the VWAP
of the Common Stock over the 35-trading day period following the date of issuance of the Second Settlement Shares (the “Second
True-Up Period”), rounded up to the nearest whole share (the “Second VWAP Shares”). The Second Settlement Agreement
further provided that if, at any time and from time to time during the Second True-Up Period, Hanover reasonably believed that
the total number of Second Settlement Shares previously issued to Hanover were less than the total number of Second VWAP Shares
to be issued to Hanover or its designee in connection with the Second Settlement Agreement, Hanover could, in its sole discretion,
deliver one or more written notices to the Company, at any time and from time to time during the Second True-Up Period, requesting
that a specified number of additional shares of Common Stock promptly be issued and delivered to Hanover or its designee, and the
Company would upon such request reserve and issue the number of additional shares of Common Stock requested to be so issued and
delivered in the notice (all of which additional shares should be considered “Second Settlement Shares” for purposes
of the Second Settlement Agreement). On February 19, 2013, the Company issued and delivered to Hanover 18,000 additional Second
Settlement Shares, on February 25, 2013, the Company issued and delivered to Hanover another 18,000 additional Second Settlement
Shares, on February 26, 2013 the Company issued and delivered to Hanover another 18,000 additional Second Settlement Shares, on
February 27, 2013, the Company issued and delivered to Hanover another 20,000 additional Second Settlement Shares, on February
28, 2013, the Company issued and delivered to Hanover another 20,000 additional Second Settlement Shares and on March 4, 2013,
the Company issued and delivered to Hanover another 20,000 additional Second Settlement Shares. At the end of the Second True-Up
Period, on March 6, 2013, the Company issued and delivered 6,351 additional Second Settlement Shares to Hanover.
On February 15, 2013, the Company entered
into a termination agreement of the Standby Equity Distribution Agreement, or SEDA with YA Global. As a result, the outstanding
fees of $10 owed to YA Global under the SEDA were written off.
On February 19, 2013, the Company issued
the press release announcing the approval of the transfer of the listing of the Company’s common stock to The NASDAQ Capital
Market, the granting of the additional extension to comply with the minimum bid price requirement and the cancellation of the NASDAQ
appeal hearing.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On February 28, 2013, pursuant to the approval
of the Company’s Board of Directors at its January 18, 2013 meeting, the Company issued 128,328 shares of its common stock
to the Manager in payment of $809 in unpaid fees due to the Manager for November and December 2012 and January 2013 and 8,382 shares
of its common stock to its non-executive directors in payment of $48 in unpaid Board fees for the fourth quarter of 2012.
On March 14, 2013, the Company issued to
YA Global 14,038 shares of its common stock for final settlement of $63 of outstanding principal of Note and accrued unpaid interest
due.
On April 4, 2013, the Company received
notification from NASDAQ that it has regained compliance with the NASDAQ Listing Rule 5450(a)(1) (the "Minimum Bid Price Rule")
requirement for continued listing on NASDAQ, as the bid price of the Company’s common stock closed at or above $1.00 per
share for a minimum of 10 consecutive business days.
As of April 2, 2013, the Company has sold
all the 79,159 shares of its common stock to Granite under the Granite Agreement for aggregate proceeds of $458.
On April 17, 2013, the Company issued 112,000
shares of our common stock (the “Fourth Settlement Shares”) to Hanover in connection with a fourth stipulation of settlement
(the “Fourth Settlement Agreement”) of an outstanding litigation claim. The Fourth Settlement Agreement provided that
the Fourth Settlement Shares would be subject to adjustment on the 36th trading day following the date on which the Fourth Settlement
Shares were initially issued to reflect the intention of the parties that the total number of shares of Common Stock to be issued
to Hanover pursuant to the Fourth Settlement Agreement be based upon a specified discount to the trading VWAP of the Common Stock
for a specified period of time. Specifically, the total number of shares of Common Stock to be issued to Hanover pursuant to the
Fourth Settlement Agreement should be equal to the quotient obtained by dividing (i) $1,792,416.92 by (ii) 75% of the VWAP of the
Common Stock over the 35-trading day period following the date of issuance of the Fourth Settlement Shares (the “Fourth True-Up
Period”), rounded up to the nearest whole share (the “Fourth VWAP Shares”). The Fourth Settlement Agreement further
provided that if, at any time and from time to time during the Fourth True-Up Period, Hanover reasonably believed that the total
number of Fourth Settlement Shares previously issued to Hanover were less than the total number of Fourth VWAP Shares to be issued
to Hanover or its designee in connection with the Fourth Settlement Agreement, Hanover could, in its sole discretion, deliver one
or more written notices to the Company, at any time and from time to time during the Fourth True-Up Period, requesting that a specified
number of additional shares of Common Stock promptly be issued and delivered to Hanover or its designee (subject to the limitations
described below), and the Company should upon such request reserve and issue the number of additional shares of Common Stock requested
to be so issued and delivered in the notice (all of which additional shares should be considered “Fourth Settlement Shares”
for purposes of the Fourth Settlement Agreement). On April 22, 2013, the Company issued and delivered to Hanover 60,000 additional
Settlement Shares, on April 29, 2013, the Company issued and delivered to Hanover another 65,000 additional Settlement Shares,
on May 6, 2013, the Company issued and delivered to Hanover another 67,000 additional Settlement Shares, on May 10, 2013, the Company
issued and delivered to Hanover another 70,000 additional Settlement Shares, on May 16, 2013 the Company issued and delivered to
Hanover another 150,000 additional Settlement Shares and on May 22, 2013, the Company issued and delivered to Hanover another 40,000
additional Settlement Shares. At the end of the Fourth True-Up Period, on May 24, 2013, the Company issued and delivered 119 additional
Settlement Shares to Hanover.
On May 22, 2013, the Company entered into
a debt settlement agreement with Navar pursuant to which the Company issued Navar 27,385 shares of common stock in exchange for
the extinguishment of $94 of outstanding debt related to shipbrokerage services provided to the Company by Navar.
On May 29, 2013, the Company entered into
an Investment Agreement with Dutchess (the “Dutchess Agreement”), a fund managed by Dutchess Capital Management, II,
LLC, pursuant to which, for a 36-month period, the Company has the right to sell up to 460,933 shares of its common stock, which
equaled approximately 28.6% of its 1,611,656 shares outstanding as of May 29, 2013. As of December 20, 2013, the Company has sold
458,344 shares of its common stock to Dutchess under the Dutchess Agreement for aggregate gross proceeds of $485.
On June 17, 2013, we received a letter
from NASDAQ , notifying us that for the last 30 consecutive business days, the closing bid price of the Company’s common
stock has been below $1.00 per share, the minimum closing bid price required by the continued listing requirements of NASDAQ set
forth in Listing Rule 5450(a)(1). We had 180 calendar days, or until December 16, 2013, to regain compliance with Rule 5450(a)(1)
(the "Compliance Period"). To regain compliance, the closing bid price of the Company’s common stock should be
at least $1.00 per share for a minimum of 10 consecutive business days during the Compliance Period. The NASDAQ notification had
no effect at that time on the listing of the Company's common stock on The NASDAQ Capital Market.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On June 26, 2013, the Company issued 178,000
shares of our common stock (the “Fifth Settlement Shares”) to Hanover in connection with a fifth stipulation of settlement
(the “Fifth Settlement Agreement”) of an outstanding litigation claim. The Fifth Settlement Agreement provided that
the Fifth Settlement Shares should be subject to adjustment on the 121st trading day following the date on which the Fifth Settlement
Shares were initially issued to reflect the intention of the parties that the total number of shares of Common Stock to be issued
to Hanover pursuant to the Fifth Settlement Agreement be based upon a specified discount to the trading VWAP of the Common Stock
for a specified period of time. Specifically, the total number of shares of Common Stock to be issued to Hanover pursuant to the
Fifth Settlement Agreement shall be equal to the quotient obtained by dividing (i) $5,331,011.90 by (ii) 75% of the VWAP of the
Common Stock over the 120 consecutive trading day period following the date of issuance of the Fifth Settlement Shares (the “Fifth
True-Up Period”), rounded up to the nearest whole share (the “Fifth VWAP Shares”). The Fifth Settlement Agreement
further provided that if, at any time and from time to time during the Fifth True-Up Period, Hanover reasonably believed that the
total number of Fifth Settlement Shares previously issued to Hanover were less than the total number of Fifth VWAP Shares to be
issued to Hanover or its designee in connection with the Fifth Settlement Agreement, Hanover could, in its sole discretion, deliver
one or more written notices to the Company, at any time and from time to time during the Fifth True-Up Period, requesting that
a specified number of additional shares of Common Stock promptly be issued and delivered to Hanover or its designee (subject to
the limitations described below), and the Company should upon such request reserve and issue the number of additional shares of
Common Stock requested to be so issued and delivered in the notice (all of which additional shares should be considered “Fifth
Settlement Shares” for purposes of the Fifth Settlement Agreement). Between July 2, 2013 and September 9, 2013, the Company
issued and delivered to Hanover an aggregate of 5,501,600 additional Settlement Shares.
At the end of the Fifth True-Up Period,
on September 10, 2013, the Company issued and delivered 426,943 additional Settlement Shares to Hanover.
For the year ended December 31, 2013, as
a result of the issuance of an aggregate of 7,159,749 shares of common stock to Hanover in connection with five settlement agreements
of a total outstanding litigation claim of $9,434 (described above), the Company recognized a loss of $3,914, which is included
in “Loss on settlement of liability through stock issuance” in the accompanying consolidated statements of operations.
On July 10, 2013, pursuant to the approval
of the Company’s Compensation Committee, the Company issued an aggregate of 493,911 shares of its common stock to officers,
directors and employees as a bonus for their commitment and hard work during adverse market conditions. As well, the Company recognized
for the year ended December 31, 2013 the amount of $1,030 as compensation cost, which is included in “Other income/ (expense)”
in the accompanying consolidated statements of operations.
On August 2, 2013, the Company issued 232,948
shares of common stock to Asher upon conversion of $153.5 convertible promissory note dated January 31, 2013.
On August 16, 2013, the Company issued
100,000 shares of common stock to its legal counsel in exchange for the extinguishment of $105 of outstanding debt related to services
provided to the Company.
On September 20, 2013, pursuant to the
approval of the Company’s Compensation Committee, the Company issued an aggregate of 1,197,034 shares of its common stock
to officers, directors and employees as a bonus for their commitment and hard work during adverse market conditions. As well,
the Company recognized for the year ended December 31, 2013 the amount of $2,753 as compensation cost, which is included in “Other
income/ (expense)” in the accompanying consolidated statements of operations.
On October 1, 2013 the Company, in partial
consideration for Hanover’s cancellation of certain covenants of the Settlement Agreement (Note 10), issued to Hanover 400,000
shares of common stock and granted customary piggy-back registration rights for such shares, together with a demand registration
right commencing 120 days after September 25, 2013. Said registration was filed and effective on January 28, 2014. As a result
of the issuance of common stock, the Company recognized for the year ended December 31, 2013 a loss of $1,180, which is included
in “Other income/ (expense)” in the accompanying consolidated statements of operations.
On September 26, 2013, Crede and the Company
entered into an Exchange Agreement, in order to settle the complaint filed against the Company by Crede seeking to recover
an aggregate of $10,500, representing all amounts due under the Settlement Agreement, as amended (Note 10). The total number
of shares of Common Stock to be issued to Crede pursuant to the Exchange Agreement would equal the quotient of (i) $11,850 divided
by (ii) 78% of the volume weighted average price of the Company’s Common Stock, over the 75-consecutive trading day period
immediately following the first trading day after the Court approved the Order (or such shorter trading-day period as could be
determined by Crede in its sole discretion by delivery of written notice to the Company) (the “Calculation Period”),
rounded up to the nearest whole share (the “Crede Settlement Shares”). 1,011,944 of the Crede Settlement Shares
were issued and delivered to Crede on October 10, 2013 and an aggregate of 6,151,708 Crede Settlement Shares were issued and delivered
to Crede between October 11, 2013 and November 7, 2013.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
The Exchange Agreement further provided
that if, at any time and from time to time during the Calculation Period (as defined below), the total number of Crede Settlement
Shares (as defined below) previously issued to Crede were less than the total number of Crede Settlement Shares to be issued to
Crede or its designee in connection with the Exchange Agreement, Crede could, in its sole discretion, deliver one or more written
notices to the Company requesting that a specified number of additional shares of Common Stock promptly be issued and delivered
to Crede or its designee (subject to the limitations described below), and the Company should upon such request issue the number
of additional shares of Common Stock requested to be so issued and delivered in the notice (all of which additional shares should
be considered “Crede Settlement Shares” for purposes of the Exchange Agreement. At the end of the Calculation Period,
(i) if the total number of Crede Settlement Shares required to be issued exceeds the number of Crede Settlement Shares previously
issued to Crede, then the Company should issue to Crede or its designee additional shares of Common Stock equal to the difference
between the total number of Crede Settlement Shares required to be issued and the number of Crede Settlement Shares previously
issued to Crede, and (ii) if the total number of Crede Settlement Shares required to be issued were less than the number of Crede
Settlement Shares previously issued to Crede, then Crede or its designee will return to the Company for cancellation that number
of shares of Common Stock equal to the difference between the number of total number of Crede Settlement Shares required to be
issued and the number of Crede Settlement Shares previously issued to Crede. Crede could sell the shares of Common Stock issued
to it or its designee in connection with the Exchange Agreement at any time without restriction, even during the Calculation Period.
On October 9, 2013, the Company received
approval by the Supreme Court of the State of New York of the terms and conditions of the Exchange Agreement between the Company
and Crede. As a result of the court approval, Crede released $10,500 to Deutsche Bank and Deutsche Bank, upon receipt of the funds,
in accordance with the Settlement Agreement, has forgiven the remaining outstanding indebtedness and overdue interest owed by the
Company of approximately $19,500 in total as well as released all collateral associated with the loan, including the lifting of
the mortgages over the M/V
Free Maverick
and the M/V
Free Knight
.
The Calculation Period expired on December
24, 2013. Accordingly, the total number of shares of Common Stock issuable to Crede pursuant to the Exchange Agreement was 8,741,761.
Accordingly, 1,578,110 additional Crede Settlement Shares were owed to Crede, and on December 27, 2013, the Company issued and
delivered to Crede 1,578,110 Crede Settlement Shares.
On October 10, 2013, the Company issued
53,618 shares of common stock to Asher upon conversion of the $103.5 convertible promissory note dated April 8, 2013.
On October 14, 2013, the Company issued
991,658 shares of its common stock to the Manager in payment of $2,168 in unpaid fees due to the Manager for the months of February
– September 2013 under the management and services agreements with the Company. The number of shares issued to the Manager
was based on the closing prices of the Company's common stock on the first day of each month, which is the date the management
and services fees were due and payable. In addition, the Company also issued an aggregate of 34,326 shares of the Company’s
common stock to its non-executive members of its Board of Directors in payment of $120 in unpaid Board fees for the first, second
and third quarters of 2013.
On November 3, 2013, the Company entered
into a securities purchase agreement (the “Purchase Agreement”) with Crede for an aggregate investment of $10,000 into
the company through the private placement of two series of zero-dividend convertible preferred stock (collectively, the “Preferred
Stock”) and Series A Warrants and Series B Warrants (collectively, the “Warrants”), subject to certain terms
and conditions.
At the first closing (the “Initial
Closing”), which occurred on November 5, 2013, for $1,500, the Company sold to Crede 15,000 shares of Series B Convertible
Preferred Stock (the “Series B Preferred Stock”), together with the Warrants. The Series B Preferred Stock was convertible
into shares of Common Stock at $2.00 per share.
The Series A Warrants are initially exercisable
for 5,000,000 shares of our Common Stock at an initial exercise price of $2.60 per share and will have a 5-year term. The Series
B Warrants are initially exercisable for 2,500,000 shares of our Common Stock at an initial exercise price of $2.60 per share and
will expire on the one year anniversary of the Initial Closing.
At the second closing, which occurred on
December 30, 2013, the Company sold to Crede 85,000 shares of our Series C Convertible Preferred Stock (the “Series C Preferred
Stock”) for $8,500. The Series C Preferred Stock was convertible into our Common Stock at the same price at which the Series
B Preferred Stock is convertible.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Crede may exercise the Warrants by paying
cash or electing to receive a cash payment from us equal to the Black Scholes value of the number of shares Crede elects to exercise.
We may elect to treat such request for a cash payment as a cashless exercise of the Warrants so long as (i) we are in compliance
in all material respects with our obligations under the transaction documents, (ii) the Registration Statement is effective and
(iii) our Common Stock is listed or designated for quotation on an eligible market. In the event that our Common Stock trades at
or above $3.25 for a period of 20 consecutive trading days, the average daily dollar volume of our Common Stock equals at least
$1 million during such period and various equity conditions are also satisfied during such period, we may, at our election, require
Crede to exercise the Warrants for cash.
The convertibility of the Preferred Stock
and the exercisability of the Warrants each may be limited if, upon conversion or exercise (as the case may be), the holder thereof
or any of its affiliates would beneficially own more than 9.9% of our Common Stock. The Preferred Stock and the Warrants contain
customary weighted-average anti-dilution protection.
The Preferred Stock will not accrue dividends,
except to the extent dividends are paid on our Common Stock. Our Common Stock will be junior in rank to the Preferred
Stock upon the liquidation, dissolution and winding up of our company. The Preferred Stock will generally have no voting
rights except as required by law.
In addition, the Company reimbursed Crede
for all costs and expenses incurred by it or its affiliates in connection with the transactions contemplated by the transaction
documents in a non-accountable amount equal to $75. In addition, the Company paid Crede an additional non-refundable amount equal
to $75 upon occurrence of the Initial Closing and paid Crede $425 upon occurrence of the second closing as an unallocated
expense reimbursement.
Crede has the right to participate on the
same terms as other investors, up to 25% of the amount of any subsequent financing the Company enters into, for a period of (i)
one year from the second closing or (ii) if parties’ obligations to consummate the second closing are terminated pursuant
to Section 8 of the Purchase Agreement, then (A) one year from the Initial Closing if the Company is not in material breach of
its obligations under the transaction documents at the time of such termination or (B) two years from the Initial Closing if the
Company is in material breach of its obligations under the transaction documents at the time of such termination.
Further, the Company is prohibited from
issuing additional shares of our Common Stock or securities convertible into or exercisable for its Common Stock until 150 days
after the later to occur of (x) November 3, 2013, and (y) the second closing, provided that if parties’ obligations
to consummate the second closing are terminated pursuant to Section 8 of the Purchase Agreement, then (I) 150 days after November
3, 2013, if the Company is not in material breach of its obligations under the transaction documents at the time of such termination
or (II) November 3, 2014, if the Company is in material breach of its obligations under the transaction documents at the time of
such termination. Such prohibition will not apply to issuances (i) to employees, consultants, directors and officers approved by
the Board or pursuant to a plan approved by the Board, not to exceed 819,869 shares, (ii) shares issued upon exercise or conversion
of securities outstanding as of the Initial Closing, (iii) shares issued to the manager of our fleet, in lieu of cash compensation,
(iv) shares issuable pursuant to an exchange agreement previously entered into between the Company and Crede and (v) shares issued
solely in exchange for an acquisition of a nautical vessel, provided that such shares do not exceed the greater of 1.5 million
shares or $3 million of shares.
Until one year after the second closing
(provided, that, if parties’ obligations to consummate the second closing are terminated pursuant to Section 8 of the Purchase
Agreement, the restricted period shall be (i) one year from the Initial Closing if the Company is not in material breach of its
obligations under the transaction documents at the time of such termination or (ii) two years from the Initial Closing if the Company
is in material breach of its obligations under the transaction documents at the time of such termination), the Company is prohibited
from entering into any transaction to (i) sell any convertible securities at a conversion rate or other price that is generally
based on and/or varies with the trading prices of its Common Stock at any time after the initial issuance of such convertible securities
or (ii) sell securities at a future determined price, including, without limitation, an “equity line of credit” or
an “at the market offering.”
Between December 30, 2013 and January 8,
2014 (Note 17), Crede converted all of the Preferred Stock into shares of Common Stock.
On November 18, 2013, the Company issued
109,279 shares of common stock to Asher upon conversion of the $103.5 convertible promissory note dated May 13, 2013 plus accrued
interest.
FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On December 16, 2013, the Company received
notification from NASDAQ that it has regained compliance with the NASDAQ Listing Rule 5450(a)(1) (the "Minimum Bid Price Rule")
requirement for continued listing on NASDAQ, as the bid price of the Company’s common stock closed at or above $1.00 per
share for a minimum of 10 consecutive business days.
On December 30, 2013, the Company issued
to Crede 750,000 shares of common stock upon conversion of 15,000 shares of Series B Preferred Stock.
On December 31, 2013, the Company issued
to Crede 1,450,000 shares of common stock upon conversion of 29,000 shares of Series C Preferred Stock.
Common Stock Dividends
During the year ended December 31,
2013, 2012 and 2011, the Company did not declare or pay any dividends.
Under the laws of the Countries of the
Company and its subsidiaries incorporation and/or vessels’ registration, the Company is not subject to tax on international
shipping income; however, they are subject to registration and tonnage taxes, which have been included in Vessel operating expenses
in the accompanying consolidated statement of operations. Pursuant to the Internal Revenue Code of the United States (the “Code”),
U.S. source income from the international operations of ships is generally exempt from U.S. tax if the company operating the ships
meets both of the following requirements, (a) the Company is organized in a foreign country that grants an equivalent exemption
to corporations organized in the United States, and (b) either (i) more than 50% of the value of the Company’s
stock is owned, directly or indirectly, by individuals who are “residents” of the Company’s country of organization
or of another foreign country that grants an “equivalent exemption” to corporations organized in the United States
(the “50% Ownership Test”) or (ii) the Company’s stock is “primarily and regularly traded on an established
securities market” in its country of organization, in another country that grants an “equivalent exemption” to
United States corporations, or in the United States (the “Publicly-Traded Test”).
To complete the exemption process, the
Company’s shipowning subsidiaries must file a U.S. tax return, state the basis of their exemption and obtain and retain documentation
attesting to the basis of their exemptions. The Company’s subsidiaries completed the filing process for 2013 on or prior
to the applicable tax filing deadline. All the Company’s ship-operating subsidiaries currently satisfy the Publicly-Traded
Test based on the trading volume and the widely-held ownership of the Company’s shares, but no assurance can be given that
this will remain so in the future, since continued compliance with this rule is subject to factors outside the Company’s
control. In addition, the Company’s vessels did not call on any U.S. ports during the year ended December 31, 2013 and thus
the Company’s shipowning subsidiaries have no tax obligations despite the exemptions. Based on its U.S. source Shipping Income
for 2011 and 2012, the Company would be subject to U.S. federal income tax of approximately $93 and $25, respectively, in the absence
of an exemption under Section 883.
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1.
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On January 3, 2014, the Company issued to Crede 1,500,000 shares of common stock upon conversion
of 30,000 shares of Series C Preferred Stock.
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2.
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On January 8, 2014, the Company issued to Crede 1,300,000 shares of common stock upon conversion
of 26,000 shares of Series C Preferred Stock.
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3.
|
On January 29, 2014, the Company entered into a deferral interest payment agreement with Credit
Suisse, pursuant to which the interest payment of $115 due on January 31, 2014 was deferred to February 28, 2014.
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4.
|
On January 30, 2014, the Company and certain of its subsidiaries entered into a term sheet with
Credit Suisse in order to settle its obligations arising from the Loan Agreement with the Bank. Pursuant to the term sheet, Credit
Suisse agreed to accept a cash payment of approximately $22,000 in full and final settlement of all of the Company’s
obligations to Credit Suisse and Credit Suisse would forgive the remaining outstanding balance of approximately $15,000. Upon payment,
all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security
interests on its three vessels (M/V
Free Goddess
, M/V
Free Hero
and M/V
Free Jupiter
) as well as all
assignments in favor of Credit Suisse will be released. The closing of such transaction is contingent upon
the Company being able to raise capital towards making such payment.
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5.
|
On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate
swap agreements with Credit Suisse (Note 8).
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FREESEAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
|
6.
|
On February 6, 2014, the Company issued 67,476 shares of common stock to Asher upon conversion
of principal of $75 convertible promissory note dated July 29, 2013 plus accrued interest.
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7.
|
On February 7, 2014, the Company issued 53,700 shares of common stock to Asher upon conversion
of the remaining principal of $53.5 convertible promissory note dated July 29, 2013 plus accrued interest.
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8.
|
On December 31, 2013, Charterers, Transbulk submitted a claim against the Company for a balance
of hire of M/V
Free Knight
relating to alleged period of off-hire, other deductions from hire and various expenses incurred
on Company’s account in the sum of $265 and obtained a court arrest order (Note 11). On February 6, 2014 the Charterers agreed
to accept $200 all inclusive in full and final settlement of all claims under the Charterparty and M/V
Free Knight
was released.
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9.
|
On February 18, 2014 the Company sold the M/V
Free Knight
, a 1998-built, 24,111 dwt Handysize
dry bulk carrier for a gross sale price of $3.6 million and the vessel was delivered to her new owners. The company recognized
an impairment charge of $24 million in the accompanying consolidated statement of operations (Notes 5 & 6).
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10.
|
On February 22, 2014, the Company and certain of its subsidiaries entered into terms
with NBG for settlement of its obligations arising from the Loan Agreement with the Bank. Pursuant to the terms, NBG agreed to
accept a cash payment of $22,000 in full and final settlement of all of the Company’s obligations to the NBG and
NBG would forgive the remaining outstanding balance of approximately $3,700. Upon payment, all of the existing corporate guarantees of
the Company and its subsidiaries and the mortgages and security interests on its two vessels (M/V
Free Impala
and M/V
Free Neptune
) as well as all assignments in favor of NBG will be released.
The
closing of s
uch transaction is contingent upon the Company being able to raise capital towards making such payment.
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11.
|
On February 28, 2014, pursuant to the deferral interest payment agreement with Credit Suisse, the
Company paid the deferred interest of $115.
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