Fairmount Heavy Transport N.V.
Financial report 2005
Fairmount Heavy Transport N.V.
Contents Financial report Directors’ report
1
Financial statements
5
Income statement for the period 8 July – 31 December 2005 Balance sheet as at 31 December 2005 Statement of recognised income and expense for the period 8 July – 31 December 2005 Cash flow statement for the period 8 July – 31 December 2005 Notes to the financial statements
5 6 7 8 9
Other information
27
Auditor’s report Provisions in the Articles of Association governing the appropriation of profit Appropriation of the result
27 28 28
FHTFS J60166
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Fairmount Heavy Transport N.V.
Directors’ report Fairmount Heavy Transport NV (“FHT” or “the Company”) was established on 8 July 2005 for the purpose of purchasing two modern semi-submersible heavy transportation barges to be converted into self-propelled heavy transportation vessels to meet the growing demand to transport valuable cargoes, such as drilling rigs, decks, modules etc. due to a rapidly expanding offshore oil and gas industry.
Vision and Strategy FHT's vision is - together with its Manager Fairmount Marine B.V. - to profit from and cement its position as a leading provider of world-wide heavy transportation services. FHT's strategy is to offer its clients superior services in the field of ocean transportation focusing on "high tech / high value" projects where Fairmount Marine's skills, experience and expertise represent a major contribution for its clients. FHT intends to achieve this by offering a wide range of equipment and services to cover its clients' needs for cost effective mobilisation requirements. FHT will particularly be focusing on the "high end" niche of the market, including:•
FPSOs, FPVs, GBS, SPARs, TLPs, offshore drilling rigs, jackets, offshore modules, etc.
•
Other floating- and non-floating cargoes (barges, dredgers, docks, etc.) which to an increasing extent are being moved across the oceans.
•
Performance of float-overs which FHT firmly believes will become a growing market niche.
Domicile and legal form of entity FHT is a Dutch N.V. company registered in Rotterdam. The Company's two barges are also registered in Rotterdam. It is the intention that this registry will remain the same after the barges have been converted into vessels. The Company is currently listed at the Over The Counter (OTC) market in Oslo, Norway, where its stock has traded since 4 August 2005. Currently the Company has about 150 shareholders, which is sufficiently exceeding the number required for future listing at the Oslo Stock Exchange (OSE).
Customers and employees FHT's customers are mainly large companies active in the offshore oil and gas industry such as drilling contractors, oil companies, construction and engineering companies, fabrication companies, etc. In addition dredging companies, shipyards, container crane manufacturers are likely to be customers of the Company from time to time. Since FHT does not employ any personnel, all its human resources are provided via a management contract with Fairmount Marine B.V.
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Fairmount Heavy Transport N.V.
Projects Whereas the Company expected that the barges would be in lay up until start of conversion, demand was such that the Company was able to secure three barge-transportation contracts in 2005 for execution in 2005 and 2006. One contract, scheduled to be executed in the period October – December 2005, was terminated during the transport because the Company’s Mexican client failed to pay instalments due. As several reminders to the client proved unsuccessful, it became evident that the client no longer had any intention to be bound by the terms of the contract, in particular as to the further payment terms to the Company. After careful consideration, the Company has accepted the repudiatory conduct of its client as bringing the contact to an end. Because of the early termination the contract resulted in a loss when the client stopped making freight instalment payments. The second contract, transportation of Transocean's jack-up drilling rig TRIDENT IV was successfully executed in 2006. The third contract concerns the transportation and float-over operation of an 11,000 tons module with FAIRMOUNT FJELL in the course of 2006.
Conversion of the Barges to Vessels In November 2005 the Company informed the market that the plan was to enter into a conversion contract (or two individual conversion contracts). Following positive response from conversion yards to the Company’s pre-qualification process, the Management Board saw the benefit of improving the basic engineering enabling interested conversion yards to increase the fixed price element rather than having open areas where prices could be subject to unwanted increases. Consequently, pre-qualified yards received the bid invitation just before Christmas, and delivered the bid package to the Company at the end of January. The Management is currently evaluating the responses with the intention to make a selection by mid March 2006. Since November 2005 the ship conversion market has significantly gained strength. On the one hand this a positive sign for the Company because it demonstrates the good health of the market in which the Company’s vessels will operate because the yards’ order books are filled with orders for the offshore oil and gas industry, the Company’s customers. On the other hand, this situation will, inevitably lead to higher than budgeted conversion costs. The Company insists on agreeing fixed-price contracts with the shipyard(s), eliminating to the highest degree possible, the potential for cost overruns during conversion. In the opinion of the Company, an open-ended calculation system, as is very often seen in large conversion projects, is an undesirable system in current market conditions. The combination of a strengthened conversion market, higher level specifications of the vessels (higher speed, heavy fuel instead of marine diesel, propulsion redundancy notation, preparation for future DP2) and other improvements will result in higher conversion costs than originally budgeted in Summer 2005 based on a basic concept design. The Company is of the strong opinion that the efforts made to optimise the design, the vessels’ propulsion and sea-keeping characteristics and the pre-selection of high quality, European yards will result in superior vessels, better than anything else presently in the market or in the pipeline with competitors.
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Fairmount Heavy Transport N.V.
Financing/Financial Instruments FHT entered into an eight year USD 60 million loan agreement with the HSH Nordbank. As FHT's main source of income is USD-denominated and its loan likewise, the Company's hedging policy applies against payment of certain sub-contractors and vendors in other currencies, mainly Euro. Necessary steps have been taken to reduce the Company's risks against such fluctuations. The Company has also fixed the interest rate for certain part of its loan exposure.
Listing at the Oslo Stock Exchange (OSE) - SMB (Small and Medium Sized Companies) List In October 2005, the Company took necessary steps to prepare an application to list the Company. However, given the increased interest from interested yards to perform the conversion of FHT’s two barges to vessels, the Company requested the OSE to delay the process and resolve FHT’s application for listing at the OSE by the time the conversion contract(s) have been awarded and all terms and conditions agreed. As the yard selection is nearing completion, the Company will resume its discussions with the OSE to seek a listing at the SMB list, hopefully by early April 2006. This would again indicate that the Company will request that the application is resolved in the end March 2006 OSE Board Meeting. Due to Norway entering into an Agreement with EU member states, the Dutch financial authorities AFM (Autoriteit Financiële Markten) have now to approve the prospectus of the Company as well. The Company has taken the necessary steps in this respect.
Attractive growth of share price As Shareholders no doubt have seen the share price has developed favourably, starting from NOK 11.46/share from the first listing date, 4 August 2005. By mid October the stock had rissen to NOK 20.50/share. However, the mid October 2005 stock market drop resulted in a decrease of most oil service sector stocks, including the Company's stock, down to a level of NOK 14.00/share. Fortunately, due to favourable momentum in the offshore industry as well as the reported transportation and float-over contract for FAIRMOUNT FJELL, the share price continued to increase after the close of the year, and has most recently been traded at around NOK 24.00/share.
Financials The 2005 reporting period was concluded with an after-tax result of minus MUSD 2.3. The Company's 2005 financials do not in any way represent future earnings.
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Fairmount Heavy Transport N.V.
General Meetings of Shareholders The Company held two Extraordinay General Meetings on 27 September 2005 and 25 October 2005. The main agenda point of the second meeting was the appointment of the Supervisory Board of Directors and the Management Board of Directors. The Company's Annual General Meeting will be held 27 March 2006.
Employment, Safety and Environmental Policies As the Company does not have any employees, applicable policies related to employment of personnel, i.e. office staff, vessel officers and crew, safety for all and environment policies are the responsibilities of the Company's manager Fairmount Marine B.V. The Company is of the opinion that the systems, procedures and policies in place with Fairmount Marine B.V. enables Fairmount Marine B.V. to look after FHT's interest in a professional manner, as can be expected from a first class vessel manager.
Prospects The Company is of the opinion that its future prospects remain favourable. The continuing strong momentum in the offshore industry, the further increase of number of rigs under construction and on order, as well as increased number of field developments, result in excellent opportunities for the Company’s vessels after conversion. Rotterdam, 28 February 2006 The Management Board:
H.J. van den Berg F.M. Steenbuch A.J. de Heer C.J.C. du Marchie Sarvaas
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Fairmount Heavy Transport N.V.
Income statement for the period 8 July – 31 December 2005 USD 1,000 Revenue Voyage related costs
1,905 2,385
Time-charter equivalent Vessel operating expenses General and administrative expenses
-480 664 657
Operating expenses, other than depreciation and amortisation
1,321
Earnings before interest, taxes, depreciation and amortisation (EBITDA)
-1,801
Depreciation
-711
Operating loss before financing costs Financial income Financial expenses
USD 1,000
-2,512 124 -1
Net financing costs
123
Loss before tax
-2,389
Income tax expenses
–
Loss for the period
-2,389
Weighted average number of ordinary shares Basic earnings per share Diluted earnings per share
FHTFS J60166
USD USD
26,154,545 -0.09 -0.09
5
Fairmount Heavy Transport N.V.
Balance sheet as at 31 December 2005 31 December 2005 USD 1,000
8 July 2005 USD 1,000
Assets Fixed assets Vessels Participating interests
54,744 22
– –
Total fixed assets
54,766
–
Current assets Trade and other receivables Cash and cash equivalents
1,707 1,427
– 22
Total current assets
3,134
22
57,900
22
Current liabilities Trade and other payables
6,144
–
Interest-bearing loan
5,879
Total assets
Liabilities
12,023
–
Issued capital Share premium Loss for the period
371 47,895 -2,389
22 – –
Total equity
45,877
22
Total equity and liabilities
57,900
22
Total liabilities
Equity
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Fairmount Heavy Transport N.V.
Statement of recognised income and expense for the period 8 July – 31 December 2005 2005 USD 1,000 Net expenses recognised directly in equity
-2,686
Loss for the period
-2,389
Total recognised income and expense for the period
-5,075
Attributable to: Equity holders
-5,075
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Fairmount Heavy Transport N.V.
Cash flow statement for the period 8 July – 31 December 2005 USD 1,000 Cash flows from operating activities Loss after taxation Depreciation/amortisation
USD 1,000
-2,389 711 -1,678
Changes in working capital (excluding cash and cash equivalents, short-term bank overdrafts, prepaid brokerage fees and investments in vessels not yet paid)
428
Net cash from operating activities Cash flow from investing activities Investments in: Vessels Financial fixed assets
-1,250
-51,121 -22
Net cash from investing activities Cash flow from financing activities Proceeds from the issue of share capital Less: External costs directly attributable to the issue of shares Interest-bearing loan less arrangement fees Net cash from financing activities
1
-51,143
50,930 -2,686 5,554 53,798
Net increase in cash and cash equivalents Cash and cash equivalents at 8 July 2005
1,405 22
Cash and cash equivalents at 31 December 2005
1,427
1
Balance of investments (USD 55,455,000) less investments not yet paid (USD 4,334,000).
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Fairmount Heavy Transport N.V.
Notes to the financial statements General Fairmount Heavy Transport N.V. is a company domiciled in Rotterdam, the Netherlands. The Company was established on 8 July 2005 and subsequently financed with approximately USD 50.9 million in equity through a private placement on 1 August 2005. On 10 August 2005 the Company took delivery of two modern semi-submersible barges. The barges have been renamed FAIRMOUNT FJORD en FAIRMOUNT FJELL, respectively and will be converted to self propelled semi-submersible heavy transportation vessels. The Company is currently listed at the OTC market in Oslo, Norway, where its stock has traded since 4 August 2005. In September 2005 the Company initiated discussions with the OSE to seek a listing at the SMB-exchange. The Company expects to file the final application in March-April 2006. The financial statements were authorised for issue by the Management Board on 28 February 2006.
Accounting principles Significant accounting policies Statement of compliance The financial statements of the Company have been prepared in accordance with Part 9 of Book 2 of the Netherlands Civil Code using International Financial Reporting Standards (IFRS) as endorsed in the EU and its interpretations adopted by the International Accounting Standards Board (IASB).
Basis of preparation These financial statements are presented in USD rounded to the nearest thousand. They are prepared on historical cost basis and the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognised when they occur and reported in the financial statements of the periods to which they relate. The preparation of the accounts of the Company in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are considered to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
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Fairmount Heavy Transport N.V.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRS that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in notes. Although the main elements of IFRS have been approved by the IASB, there are still areas of IFRS that have to be finally clarified. It is therefore likely that there will be continuous updating, adjustments and interpretations that may affect the Company’s accounting principles in the future.
Non-USD currency Non-USD currency transactions are translated into USD using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in non-USD currencies at the balance sheet date are translated to USD at the applicable exchange rate ruling at that date. Share capital and share premium denominated in EUR are translated to USD at historical rates. Non-USD exchange differences arising on translations are recognised in the income statement. Non-USD exchange differences arising in respect of operating business items are included in the operating result in the appropriate income statement account, and those arising in respect of financial assets and liabilities are recorded net as a financial item.
Derivative financial instruments The Company uses derivative financial instruments to hedge its exposure to non-USD exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see accounting principle regarding hedging – page 11). The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.
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Fairmount Heavy Transport N.V.
Hedging Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecasted transaction subsequently results in the recognition of a non-financial asset or nonfinancial liability, or the forecast transaction for a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. When a hedge of a forecasted transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (for example, when interest income or expense is recognised). For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the income statement. When a hedging instrument expires or is sold, terminated or exercised, or the Company revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement.
Hedge of monetary assets and liabilities Where a derivative financial instrument is used to hedge financially the non-USD exchange exposure of a recognised monetary asset or liability, no hedge accounting is applied and any gain or loss on the hedging instrument is recognised in the income statement.
Vessels General Vessels and other equipment acquired by the Company are stated at cost less accumulated depreciation and impairment losses, if any. Depreciation is charged to the income statement on a straight-line basis over the estimated useful life of each part of an item. Where parts of the vessels have different useful lives, they are accounted for separately.
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Fairmount Heavy Transport N.V.
Interest costs on borrowings to finance the conversion of the barges to vessels and external management costs relating to the conversion are capitalised during the period required to complete and prepare the vessels for their intended use. Other borrowing costs are expensed as they incur. Ordinary repairs and maintenance costs are charged to the income statement during the financial period in which they incur. The costs of any major renovations are included in the vessels' carrying amount when it is probable that the Company will derive future economic benefits in excess of the originally assessed standard of performance. Any major renovations are depreciated over the useful lives of such renovations. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount of the item and are included in operating profit. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less selling costs.
Drydocking After conversion the vessels will undergo a survey typically every 2.5 years. The costs incurred for drydocking of vessels are capitalised and depreciated over the period to the next drydocking.
Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful life of each part of an item. The estimated remaining useful life is as follows: •
Barges/vessels
25 years (from 10 August 2005)
•
Power equipment
25 years (from the date of delivery of the vessels after conversion)
•
Transportation equipment 2-5 years.
Transportation equipment includes cribbing, seafastening, guide posts etc. In 2005 the Company has not invested in transportation equipment. The residual value, if not insignificant, is reassessed annually.
Participating interests Participating interests where substantial influence is exercised over the business and financial policy are valued according to the equity method on the basis of net asset value. The net asset value is calculated on the basis of the accounting principles of the Company.
Impairment of long-lived assets The carrying amount of the Company’s vessels, and any other non-current assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets' recoverable amount is estimated.
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Fairmount Heavy Transport N.V.
An impairment loss is recognised whenever the carrying amount of an asset or its cashgenerating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable, mainly independent, cash flows (cash-generating units). An impairment loss is the amount by which the carrying amount of the assets exceeds the recoverable amount. The recoverable amount is the greater of the asset’s net selling price and its value in use. The value in use is determined by reference to discounted future net cash flows expected to be generated by the asset. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount, however not to an extent higher than the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised in prior years.
Cash and cash equivalents Cash and cash equivalents comprise cash and cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included within borrowings in current liabilities on the balance sheet.
Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value minus attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.
Provisions A provision is recognised in the balance sheet when the Company has a present obligation (legal or constructive) as a result of a past event, and it is probable (i.e. more likely than not) that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. The amount of the provision is the present value of the risk adjusted expenditures expected to be required to settle the obligations, determined using the estimated risk free interest rate as discount rate. Where discounting is used, the carrying amount of provision increases in each period to reflect the unwinding of the discount by the passage of time. This increase is recognised as interest expense.
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Fairmount Heavy Transport N.V.
Equity Share capital Share capital is classified as equity. The Company has not issued preference shares.
Costs in connection with share issuance External costs directly attributable to the issuance of shares are recognised directly in equity.
Costs in connection with the intended listing on OSE. Costs relating to the intended listing are expensed as incurred.
Dividends Dividends are recognised as a liability in the period in which they are declared.
Time-charter equivalent The time-charter equivalent is calculated as revenues minus voyage related costs. The timecharter equivalent of a voyage is estimated and recognised on a straight-line basis over the duration of the voyage. Probable losses on voyages are provided for in full at the time such losses can be estimated. Prepaid expenses and accrued expenses are recorded under trade and other receivables, and trade and other payables, respectively.
Revenues Revenues are lumpsum freights plus any demurrage payments generated by transportation projects.
Voyage related costs Voyage related costs are costs directly related to lumpsum freights encountered by transportation projects.
Vessel operating expenses Vessel operating expenses comprises the operating costs of the vessels as crew and crew related costs, repairs and maintenance, insurance, damage accruals and miscellaneous operating expenses directly attributable to the vessels.
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Fairmount Heavy Transport N.V.
Income tax Income tax on the profit and loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that is related to items recognised directly in equity, in which case it is recognised in equity. Income tax on the income from ocean shipping activities after conversion of the barges will be levied in accordance with the Dutch tonnage tax regime. Income tax on other income and income from transportation activities prior to conversion of the barges to vessels are levied in accordance with Dutch corporate income tax regulations, taking into account fiscal facilities and non-deductible expenses. Income tax is calculated at the nominal tax rates. Deferred tax is recognised at the nominal tax rate using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
Cash flow statement The cash flow statement has been prepared in accordance with the indirect method.
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Fairmount Heavy Transport N.V.
Notes to the income statement for the period 8 July– 31 December 2005 Time-charter equivalent In the period of preparing the barges for conversion into self-propelled semi-submersible heavy transportation vessels, the barges may be used for transportation contracts from time-to-time. One contract, scheduled to be executed in the period October – December 2005, was terminated during the transport because the Company’s Mexical client failed to pay instalments due. As several reminders to the client proved unsuccessful, it became evident that the client no longer had any intention to be bound by the terms of the contract, in particular as to the further payment terms to the Company. After careful consideration, the Company has accepted the repudiatory conduct of its client as bringing the contact to an end. Because of the early termination the contract resulted in a loss of USD 550,000. The Company has appointed a law firm in London, to protect the Company’s interests and to pursue the Company’s claims for damages of approximately USD 1.7 million. Although the Management Board is positive about the outcome of the arbitration procedures, collecting the money may be difficult. Consequently, the claim is valued at USD 1.
General and administrative expenses 8 July – 31 December 2005 USD 1,000 Management fees and administrative expenses Costs relating to intended listing of existing shares Miscellaneous
388 182 87 657
Personnel The Company has no employees.
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Fairmount Heavy Transport N.V.
Financial income 8 July – 31 December 2005 USD 1,000 Interest income Net foreign exchange gain
43 81 124
Interest amounting to EUR 73,000 was capitalised during the year relating to the construction of property, plant and equipment.
Income tax No income tax is recognised on the loss for the reporting period as it is expected that accumulated taxable results will be negative in the foreseeable future due to the fact that start-up losses in the period until conversion of the barges are expected to be tax-deductible, whereas results in the years after conversion of the barges will be taxed in accordance with the Dutch tonnage tax regime.
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Fairmount Heavy Transport N.V.
Notes to the balance sheet as at 31 December 2005 Fixed assets Vessels The movements can be shown as follows: Barges
Conversion of the barges USD 1,000
USD 1,000 Balance as at 8 July 2005
Total USD 1,000
–
–
–
Investments Depreciation
45,188 -711
10,267 –
55,455 -711
Balance as at 31 December 2005
44,477
10,267
54,744
Composed as follows: Purchase price Accumulated deprecations
45,188 -711
10,267 –
55,455 -711
Balance as at 31 December 2005
44,477
10,267
54,744
Depreciation of the barges started on 10 August 2005. The investments relating to the conversion of the barges include equipment, notably the power package (USD 9,600,000), engineering costs (USD 594,000) and capitalised interest (USD 73,000). At 31 December 2005, the Company's two barges, with a carrying amount of USD 44,477,000, are subject to a registered debenture to secure bank loans.
Participating interests This refers to a 100% participation in Fairmount Beheer B.V., Rotterdam, incorporated on 16 September 2005. This company had no activities up until 31 December 2005.
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Fairmount Heavy Transport N.V.
Movements were as follows: USD 1,000 Balance as at 8 July 2005 Incorporation
– 22
Balance as at 31 December 2005
22
Summary financial information on investments (100%) Assets USD 1,000 31 December 2005
Liabilities USD 1,000
22
Equity USD 1,000 –
Revenues USD 1,000
22
Profit/(loss) USD 1,000 –
–
As allowed by Dutch law for companies of a certain size, consolidated financial statements have not been prepared.
Current assets Trade and other receivables Details are: 31 December 2005 USD 1,000 Trade receivables Tax receivable Prepaid expenses and accrued income Prepaid arrangement fees
8 July 2005 USD 1,000
910 162 310 325
– – – –
1,707
–
Cash and cash equivalents The liquid assets are available without limitations.
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Fairmount Heavy Transport N.V.
Liabilities Trade and other payables Details are: 8 July 2005 USD 1,000
31 December 2005 USD 1,000 Trade creditors Related parties Accruals and accrued income
4,502 290 1,352
– – –
6,144
–
Trade creditors include amounts relating to investments in property, plant and equipment to an amount of USD 4,334,000.
Interest-bearing loan On 30 September 2005, the Company signed a loan agreement with the HSH Nordbank for MUSD 60 with a repayment schedule of eight years with a 12 year profile and an interest rate of LIBOR. The loan also includes a USD 5.0 million revolving facility. The loan is secured by a registered debenture on the barges. The Company entered into interest rate swap agreements for a total amount of USD 13,984,000. The term of the swaps is seven years. The fixed swap rates range from 6.3% to 6.4%.
Equity Statement of changes in equity Issued capital USD 1,000
Share premium USD 1,000
Loss for the period USD 1,000
Total USD 1,000
Incorporation
22
–
–
22
Balance as at 8 July 2005
22
–
–
22
Private placement of shares on 1 August 2005 Expenses relating to issuance of shares Result for the period
349 – –
50,581 -2,686 –
– – -2,389
50,930 -2,686 -2,389
Balance sheet as at 31 December 2005
371
47,895
-2,389
45,877
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Fairmount Heavy Transport N.V.
Issued capital The authorised capital of the Company amounts to EUR 500,000, divided into 50,000,000 shares of EUR 0.01, of which 30,000,000 shares have been placed.
Share premium The share premium comprises the proceeds from the private placement of 28.2 million shares on 1 August 2005 insofar as these exceed the nominal amount of the shares (proceeds above par) less expenses attributable to the issuance of the shares.
Financial instruments Exposure to credit, interest rate and currency risks arises in the normal course of the Company’s business. Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates and interest rates.
Credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on customers requiring credit over a certain amount. The Company does not require collateral in respect of financial assets. Investments are allowed only in liquid securities and only with counter parties that have a credit rating equal to or better than the Company. Transactions involving derivative financial instruments are with counterparties with whom the Company has a signed netting agreement as well as sound credit ratings. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations. At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet.
Interest rate risk Hedging The Company adopts a policy of ensuring that between 80 and 90% of its exposure to changes in interest rates on borrowings is on a fixed rate basis. Interest rate swaps, denominated in USD, have been entered into to achieve an appropriate mix of fixed and floating rate exposure within the Company’s policy. The swaps mature over the next seven years following the maturity of the related loans and have fixed swap rates ranging from 6.3 % to 6.4%. At 31 December 2005, the Company had interest rate swaps with a notional contract amount of USD 13,984,000.
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Fairmount Heavy Transport N.V.
The Company classifies interest rate swaps as cash flow hedges and states them at fair value. The net fair value of the swaps as at 31 December 2005 of USD 300,000 has not been recognised in the balance sheet.
Non-USD currency risk The Company has its assets valued in USD and its debt in USD. Clients normally pay lumpsum freights in USD, and the bulk of the Company cost will also be in USD, such as bunkers cost, harbour cost and other voyage related cost. The Company further expects to encounter most of its operating cost in USD, i.e. such as crew- and crew related cost, repairs and maintenance and insurance. Most of the general and administrative expenses will be in EUR. Compared to the Company’s overall cost these expenses are relatively low. The Company has not entered into financial instruments that are not shown on the balance sheet. In respect of other monetary assets and liabilities held in currencies other than the USD, the Company ensures that the net exposure is kept at an acceptable level, by buying or selling nonUSD currencies at spot rates where necessary to address short-term imbalances. The principal amounts of the Company’s EUR liabilities with regard to the conversion of the barges have been fully hedged using forward contracts that mature on the payment date of these liabilities.
Forecasted transactions The Company classifies its forward exchange contracts hedging forecasted transactions as cash flow hedges and states them at fair value. The net fair value of forward exchange contracts used as hedges of forecasted transactions at 31 December 2005 of minus USD 3,500 has not been recognised in the balance sheet.
Recognised assets and liabilities Changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies and for which no hedge accounting is applied are recognised in the income statement. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of “net financing costs”. The fair value of forward exchange contracts used as economic hedges of monetary assets and liabilities in foreign currencies at 31 December 2005 of minus USD 4,000 has not been recognised in the balance sheet.
Sensitivity analysis In managing interest rate and currency risks the Company aims to reduce the impact of shortterm fluctuations on the Company’s earnings. Over the longer-term, however, permanent changes in foreign exchange and interest rates would have an impact on earnings.
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Fairmount Heavy Transport N.V.
At 31 December 2005, it is estimated that a general increase of 1% in interest rates would have decreased the Company’s loss before tax by less than USD 10,000 for the year ended 31 December 2005. The interest paid on the loan is capitalised as part of the investment in the conversion of the barges. It is estimated that a general increase of 1% in the value of the USD against other non-USD currencies would have decreased the Company’s loss before tax by less than USD 10,000 for the year ended 31 December 2005. The forward exchange contracts have been included in this calculation.
Fair values The fair values together with the carrying amounts at 31 December 2005 shown in the balance sheet are as follows: Carrying amount USD 1,000 Trade and other receivables Cash and cash equivalents Secured bank loans Trade and other payables Cash flow hedges
Fair value USD 1,000
1,382 1,427 -5,879 -6,144 –
1,382 1,427 -5,879 -6,144 -300
-9,214
-9,514
Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table.
Derivatives Forward exchange contracts are either marked to market by using listed market prices or by discounting the contractual forward price and deducting the current spot rate. For interest rate swaps broker quotes are used. Those quotes are back tested using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date. Where other pricing models are used, inputs are based on market related data at the balance sheet date.
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Fairmount Heavy Transport N.V.
Interest-bearing loans and borrowings Fair value is calculated based on discounted expected future principal and interest cash flows.
Trade and other receivables / payables For receivables / payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables / payables are discounted to determine the fair value.
Related parties Identity of related parties The Company has a related party relationship with its subsidiary, associate and with its Management Board and Fairmount Marine B.V.
Transactions with key management Management Board of the Company and their immediate relatives control 5.8% of the voting shares of the Company either directly or indirectly. Details are: 31 December 2005 Fairmount Marine Investments B.V. (H.J. van den Berg) Capricorn Offshore AS (F.M. Steenbuch) A.J. de Heer C.J.C. du Marchie Sarvaas
2.9% 2.8% 0.03% 0.07%
The Supervisory Board members do not own shares in the Company. The personnel compensations are as follows: 2005 USD 1,000 Management board remuneration
132
Total remuneration is included in “general and administrative expenses”.
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Fairmount Heavy Transport N.V.
Transactions with Fairmount Marine B.V. Management agreement The Company has no employees. The Company has entered into a Management Agreement with Fairmount Marine B.V. to provide technical and commercial management during both the conversion phase and the subsequent operational phase. Fairmount Marine B.V. has entered into a Support Agreement with Capricorn Offshore AS to provide commercial management services under the Management Agreement. In the year ending 31 December 2005, USD 216,000 was invoiced by Fairmount Marine B.V. to the Company under the Management Agreement. Fairmount Marine B.V. was invoiced by Capricorn Offshore AS under the Support Agreement for USD 72,000.
Other related party transactions Other transactions with Fairmount Marine B.V. included vessel charter costs (USD 1,200,000), including cancellation fees, and other services (USD 147,000). Other transactions with parties related to the Management Board, Vstep B.V. and Studio Yacht B.V., amounted to USD 12,000. At 31 December 2005 the Company owed related parties USD 290,021. The transactions are priced on an arm’s length basis.
Capital commitments During the year ended 31 December 2005, the Company entered into a contract to purchase a complete power package and bridge equipment for its two vessels of which an amount of USD 17.5 million has not been included in the balance sheet as at 31 December 2005.
Accounting estimates and judgements The Management Board has discussed with the Supervisory Board the development, selection and disclosure of the Company’s critical accounting policies and estimates as well as the application of these policies and estimates.
Key sources of estimation uncertainty In note 5 to the “Financial instruments” a detailed analysis is given of the non-USD exchange exposure of the Company and risks in relation to foreign exchange movements.
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Fairmount Heavy Transport N.V.
Critical accounting judgements in applying the Company’s accounting policies Apart from the uncertainty regarding the outcome of the arbitration procedures mentioned in the notes to the income statement, there are no critical accounting judgements in applying the Company’s accounting policies. Rotterdam, 28 February 2006 The Management Board:
The Supervisory Board:
H.J. van den Berg
J.J.C.M. van Dooremalen
F.M. Steenbuch
W. Dirkzwager
A.J. de Heer
J.J.H. Verhagen
C.J.C. du Marchie Sarvaas
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Fairmount Heavy Transport N.V.
Other information Auditor’s report Introduction We have audited the financial statements which are part of the financial report 2005 of Fairmount Heavy Transport N.V., Rotterdam, The Netherlands, for the period 8 July – 31 December 2005 as set out on pages 5 to 26. These financial statements are the responsibility of the company's Management Board. Our responsibility is to express an opinion on these financial statements based on our audit.
Scope We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Opinion In our opinion, the financial statements give a true and fair view of the financial position of the company as at 31 December 2005 and of the result and the cash flows for the period 8 July – 31 December 2005 in accordance with International Financial Reporting Standards as adopted by the EU and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code. Furthermore we have established to the extent of our competence that the Directors’ report is consistent with the financial statements. Rotterdam, 28 February 2006 KPMG ACCOUNTANTS N.V. P.J. van der Vorm RA
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Fairmount Heavy Transport N.V.
Provisions in the Articles of Association governing the appropriation of profit Under article 25 of the Company’s Articles of Association, the profit is at the disposal of the General Meeting of Shareholders, which can allocate said profit either wholly or partly to the formation of – or addition to – one or more general or special reserve funds. The Company can only make payments to the shareholders and other parties entitled to the distributable profit insofar as the shareholders’ equity is greater than the paid-up and called-up part of the capital plus the legally required reserves.
Appropriation of the result The loss for 2005 of USD 2,389,000 has been presented as loss for the period and will be deducted from the share premium.
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