F ARSTAD SHIPPING ASA

Transcription

1 F ARSTAD SHIPPING ASA A N N U A L R E P O R T

2 C O N T E N T S This is Farstad Shipping Positives Negatives 4 Main financial figures 6 Report of the Board of Directors 8 Profit and loss account 13 Balance sheet 14 Cash flow statement 16 Accounting principles 17 2 Notes to the account 19 Auditor s report 24 Analytical information 25 Shareholder matters 28 Strategy 30 The Narket for offshore supply vessels 32 Organisation and administration 38 Health, Safety and Environment 40 Far Sovereign 44 Fleet gallery 46 The Farstad fleet 47 Lochnagar 49

3 T H I S I S F A R S T A D S H I P P I N G In 1973, Farstad Shipping ASA began its offshore activity as one of the pioneers in the North Sea. At that time, the Company acquired its first supply vessel, a model UT 704, which was the first design from the Ulstein Group. Today, it has acquired a total of 28 vessels. Currently, there are three vessels under construction. Buying and selling tonnage in periods where it has been profitable to do so has been a vital part of building today s business. The Company s shares have traded on the Oslo Stock Exchange since It was fully consolidated in 1993 when all activities were consolidated under one entity. In 1998, Farstad Shipping increased its international efforts through a joint venture with P&O, Australia. 3 Farstad Shipping aims to be one of the leading operators of large, modern anchor handling vessels (AHTS) and platform supply vessels (PSV) worldwide. The Company s fleet is managed in a manner that reflects the customer s expectation for high quality. All vessels rate higher than the minimum national and international requirements with respect to safety and environmental regulations and standards. The fleet is maintained through a program that is designed in accordance with recommendations from manufacturers, classification companies and authorities as well as the Company s own experience. The Company s objective is to maintain a longterm charter strategy. Current contracts make up 80% of activities in 1999 and 65% of activities in The Company s fleet consists of 32 vessels. Of these, there are 14 PSV vessels, 17 AHTS and an additional vessel designed for laying flexible pipelines. Geographically, there are 18 vessels in the North Sea, 6 in Brazil, 6 in Australia and 2 in the Far East. There is approximately 700 crew. The Company s activities are managed from Ålesund and Aberdeen, with a total of 40 employees. P&O Maritime Services in Melbourne manage vessels that are employed in Australia and the Far East. There are currently 2,750 shareholders. The share price at the end of the year was NOK 21.00, which values the Company at NOK 950 million.

4 4 P O S I T I V E S Another good year economically. No fatal accidents. Good operational quality. More new longterm contracts. Good contract coverage for the Company s fleet. Still a high level of demand in the North Sea.

5 N E G A T I V E S Continued high contracting activity. Financial crises in the Far East and the Latin America. Declining oil price. Falling demand in some regions at the end of the year. High Norwegian interest level. Strong decrease in the price of the Company s shares.

6 M A I N F I N A N C I A L F I G U R E S S H A R E K E Y F I G U R E S FARSTAD SHIPPING ASA GROUP PROFIT AND LOSS ACCOUNT (NOK mill.) Operating income ex. sale of fixed assets Share capital (NOK mill.) Profit on sale of fixed assets Operating expenses (347.6) (275.0) (242.5) (220.0) (191.3) Market price at Market capitalisation (4) (NOK mill.) Operating profit before depreciation , , Depreciation (118.9) (124.5) (120.1) (116.9) (104.1) Share price high Operating profit Share price low Net financial items (59.9) (33.6) (37.9) (35.2) (26.7) Earning per share including sales profit (5) Pretax profit Earning per share excluding sales profit Cash flow per share including sales profit (6) BALANCE SHEET Cash flow per share excluding sales profit Dividend per share (7) Current assets RISKamount (8) Fixed assets 2, , , , ,218.6 Total assets 2, , , , ,485.5 Shortterm liabilities Longterm liabilities 1, Equity capital 1, LIQUIDITY Liquid assets Working capital (1) Cash flow (2) CAPITAL Total assets Equity capital Equity ratio (3) , , % , % , % , % , % (NOK) 1998 DEFINITIONS: (1) Current assets shortterm liabilities. (2) Pretax profit taxes paid + depreciation + change in revaluation of liabilities + losses on receivables. (3) Equity capital as a % of total assets. (4) Total share outstanding x share price. (5) Pretax profit taxes paid, divided by average number of shares outstanding. (6) (2) divided by the average shares outstanding. (7) For 1995 and 1996 by writedowns of the share capital in 1996 and (8) of the year shown in the actual column. OPERATING INCOME (EXCL. PROFIT ON SALES) mill. NOK CASH FLOW (BEFORE TAX AND PROFIT ON SALES OF VESSELS) mill. NOK 1994 FLEET Book value of vessels, interest in vessels Mortgage debt 1, , , , , , quarter 2. quarter 3. quarter 4. quarter 1. quarter 2. quarter 3. quarter 4. quarter

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8 T H E B O A R D O F D I R E C T O R S Per Norvald Sperre (52), Chairman of the Board High Court lawyer. Law degree from Oslo, Experience from banking etc. Established his own law firm in Holds a number of Board appointments in industry and shipping. Sverre A. Farstad (46), Director 8 Business degree Heriot Watt University, Edinburgh, Scotland. Managing Director of Farstad Shipping ASA. Chairman of the Board of Tyrholm & Farstad AS. Various Board appointments and other positions in banking, insurance and the Shipowners Association. Bjørn Havnes (52), Director Engineering degree, University of Newcastle upon Tyne. Associate Director in AS Toluma, Oslo. Various shipping experience from 1973, with the last 15 years mainly being in offshore. Previously responsible for marketing in Wilhelmsen Offshore Services (service vessels) and Wilh. Wilhelmsens rig division. Bjarne Sælensminde (52), Director Business degree NHH, Bergen. Underwriter, Regional Manager Vesta Forsikring AS, Marine & Energy Division. Varied finance and shipping background. Previously Director of A/S Investa s shipping and offshore section. Sigmund Borgundvåg (60), Director Engineer/marine architect. Design manager in the Ulstein Group since Designer of Ulstein s UT 700 series offshore service vessels. Per Erik Dalen (45), Director Managing Director in MMC GROUP. Managment experience from aviation, shipbuilding and manufacturing of equipment for fishing industry. Various Board appointments.

9 R E P O R T O F T H E B O A R D O F D I R E C T O R S (NOK mill.) DEVELOPMENT 1998 Farstad Shipping ASA is pleased to announce that the financial results for 1998 are above expectations. The combination of having a majority of the fleet on longterm contracts, yet some vessels available to reap the benefits of a tight spot market, has given results that are on level with the record year The Company s international efforts continued in Only 30% of revenues in 1998 came from the Norwegian sector. Investments that are complete as well as those investments that are in process put the Company in an excellent position to meet future market changes. The Board of Directors is satisfied with the development that took place in RESULTS AND DIVIDEND In 1998, Farstad Shipping achieved revenues of NOK million, including gains from the sale of vessels of NOK 62.0 million. The corresponding numbers for 1997 were NOK million and NOK 75.1 million, respectively. Net income before tax was NOK million, compared to NOK million in Net cash flow for the concern during this period was NOK million, or NOK 6.82 per share. The corresponding cash flow per share in 1997 was NOK Net finance costs totalled NOK 59.9 million (NOK 33.6 million). An adjustment in the Company s mortgage debt in USD caused an unrealised currency loss of NOK 10.1 million (NOK 3.4 million). Operating costs were NOK (275.0 million). Operating margins before depreciation and finance, excluding gains from the sale of vessels, was NOK million in 1998 (NOK million). Ordinary depreciation in 1998 totalled NOK million (NOK million). The Company changed the depreciation schedule in 1998, extending the useful life of the vessels from 20 to 25 years, which is standard in the industry. With this change, 1998 earnings were boosted by NOK 30 million. The Board will propose the following use of the parent company s profits of NOK 323,674,036 Charged to reserve funds NOK 278,344,666 Dividend per share 1.00 NOK 45,329,370 *) Cash flow here defined as EBIT + depreciation + disagio (loss from adjusting the value of debt in USD) (NOK) Operating income (before profit on sales of vessels) Cash flow (before tax and profit on sale of vessels) Cash flow per share (excl. profit on sales of vessels) Cash flow per share (incl. profit on sales of vessels) FINANCING AND CAPITAL STRUCTURE Interest earning shortterm assets made up NOK million at the end of Interest carrying mortgage debt made up NOK 1,061.8 million at the end of Of the mortgage debt at the end of the year, 66% is denominated in USD; the rest is in NOK. Debt denominated in USD is serviced with revenues from longterm contracts that are paid in USD. In 1998, there was a mortgage debt reduction of NOK million. Equity totalled NOK 1,172.1 million at the end of 1998, equal to NOK per share. At the end of the year, the Company received estimates on the value of the fleet from 3 shipbrokers. These values give an adjusted equity estimate of NOK per share. The element of uncertainty associated with these estimates is larger than in prior years. ADMINISTRATION The Company operates two independent administrative offices. The office in Ålesund has 29 employees, the one in Aberdeen has 11 employees. Together, these offices manage approximately 510 sailing crew. The P&O Maritime Services, based in Australia, manage the operation of vessels in the Asia/Pacific region. In 1998, the compensation to the Board was NOK 730,000. Compensation to the Managing Director was NOK 2,001,700, of which NOK 903,500 was paid as bonus. Auditors fees are estimated at NOK 297,000, of which NOK 167,000 is for audits and NOK 130,000 is for consulting fees. 9

10 R E P O R T O F T H E B O A R D O F D I R E C T O R S SHAREHOLDER MATTERS At the end of the year, the Company had 2,769 shareholders vs. 1,967 in the previous year. There were 52 foreign shareholders owning 4.9% of shares outstanding. Please see page 28 for listing of shareholders with more than 20% ownership, in addition to an overview of Management and Board members. No stock options have been given to the Board or to the Management. The share price has declined from NOK to NOK during A NOK 1.00 dividend per share has been proposed for The Company s Board has the authority to raise capital by issuing shares of up to 6 million shares before the shareholders preemptive rights come into play. This authority is valid until the Annual Meeting At the supplementary Annual Meeting on 17 December, a decision was made to give the Board authority to buy back up to 10% of outstanding shares. This authority is valid for 18 months from The King and Queen of Norway visits Farstad Shipping ASA, for a presentation of Maritime Nordvest. The signing of the contracts with Norsk Hydro The Naming Seremony of Far Senior THE FLEET On 4 June 1998, Far Senior (AHTS) was delivered by Langsten Slip & Båtbyggeri AS. The reconstruction of Lochnagar (PSV) to a pipelaying vessel for flexible pipes was completed in the beginning of September. The vessel began its employment contract with DSND on 5 August Far Grip commenced its 5 year contract with Norsk Hydro in the middle of August. In addition, Far Scandia accepted an extension of its contract with Norsk Hydro by another 5 years. Far Sun extended its contract with Amoco N. by another 5year period. Far Sleipner, located in Brazil, extended its contract by 8 years from October On January 29, the anchor handling vessels Far Sea and Far Minara were sold to P/R International Offshore Services ANS (IOS), a joint venture in which Farstad Shipping and P&O, Australia, have a 50/50 interest. In the beginning of October, IOS purchased two PSV vessels from Maersk. The vessels, Lady Elizabeth and Lady KariAnn, continued their 2 and 5year current contracts with Exxon in Australia. Lady Sandra, a new AHTS vessel, started on a bareboat contract with IOS on 29 October. In November 1997, an order was issued to Langsten Slip & Båtbyggeri AS, for the construction of an AHTS vessel, model UT741. The vessel is to be delivered in May/June The vessel is going to be employed on a contract with EMC. In 1998, Norsk Hydro awarded Farstad Shipping with a 10year contract for a large PSV vessel. To meet specifications in this contract, an order was placed with Brattvaag Skipsverft AS for delivery in July In addition, the Company has another AHTS vessel under construction for delivery in February This vessel is tied to an 8year contract with Petrobas in Brazil. In January and March 1999, Kværner Govan delivered two new PSV vessels. Both vessels were chartered under 5year contracts immediately following delivery. After the delivery of all current orders, the Farstad Fleet will be composed

11 of 25 vessels. In addition, there are 9 vessels owned through P/R International Offshore Services ANS (IOS), and one vessel chartered under a bareboat contract with IOS. HEALTH, SAFETY AND ENVIRONMENT Farstad Shipping has maintained its strong involvement in the awareness of health, safety and environmental issues aboard the vessels and on its land based operations. The Company s vessels are managed according to our customers quality expectations, and are maintained on a level that surpasses the minimum national and international requirements with respect to safety and environmental regulations. The vessels undergo a planned maintenance program set up in accordance with recommendations by manufacturers as well as classification companies, authorities as well as the Company s own experience. In an effort to focus on improvements on Health, Safety and Environmental issues, extensive training took place in Activities include the reporting of unwanted events (including potential accidents), a thorough investigation of the circumstances, and a discussion of experiences that involves causes, costs and effective steps to take to prevent such events from recurring. This is an effective tool, and one that gives the Company an opportunity to limit losses and improve operational safety. In addition, it encourages the crew to report hazards, which in turn can help highlight the hazards. Because the reporting now is performed in a more objective manner, the "individual at fault" risk is eliminated, and the sailing crew has a better incentive to report possible hazards to people, equipment and machinery. The Company initiated a project in 1998 to inspect equipment and systems to gain an insight on the Y2K problem. Today, approximately 85% of all the equipment has been inspected, and a small number of problem areas have been identified. All equipment is scheduled for inspection before the arrival of critical dates. Through DNV, the Company has certified the operations of vessels and landbased operations to the quality standard 9002 and the safety standard ISM, both on a voluntary basis. The Board believes that the significant efforts on HSE as well as technical improvements will strengthen the Company s competitive edge. Operations in 1998 have not caused any serious personal injury or material damage, nor have they caused any substantial pollution of the environment. The Board believes that the workplace aboard the vessels as well as onshore is healthy. THE MARKET IN 1998 The North Sea The Norwegian and British sector remains the most important markets for Farstad Shipping. About 65% of the Company s freight revenues came from these markets. The market balance in the North Sea improved in 1998 for the sixth consecutive year. Despite many newly built vessels and vessels coming in from other markets, the increase in the number of vessels has still remained limited. The explanation for this is that vessels still depart from the North Sea market to serve other markets. This is especially true for large AHTS vessels, many of which have left the North Sea for markets in South America, West Africa and the Far East. An increase in demand for the North Sea fleet, combined with a limited inflow of vessels, contributed to an average utilisation of 95% in The utilisation was 94% in 1997, and 92% in The 95% in 1998 was a higher than expected utilisation rate. Increased pipelaying and construction activities contributed to the high demand in the second half of the year. Demand associated with operations and maintenance at existing installations, as well as field construction and pipelaying activities, make up an increasing share of the market. These activities accounted for 90% of total demand in Demand for supply vessels related to exploration activities has steadily declined. In 1998, it made up only 10% of total demand. The booming market in recent years has led to a substantial increase of new vessels. During 1998, about 30 new vessels entered the market. At the end of the year, approximately 45 additional vessels were ordered or were under construction. This will have an impact on the North Sea market. Brazil Brazil will remain one of the pioneers of oil exploration in deep waters. In 1998, Petrobras started producing oil at 1,853 metres depth, a world record. About 20% of the Company s freight revenues in 1998 came from vessels employed in Brazil. On contracts during the entire year, Petrobras employed the AHTS vessels Far Centurion, Far Crusader, Far Sailor, Far Sea and in addition, the PSV vessel Far Sleipner. Following a complete conversion in Croatia, Lochnagar started its 8year contract with DSND (Søndenfjeldske) in August. The vessel is to be used by Petrobras for laying flexible oil pipelines. Australia and South East Asia This region contributed with 15% of the Company s freight revenues in Farstad Shipping and P&O, Australia, established a 50/50 joint venture, "IOS", at the end of At the end of 1998, the IOS fleet consisted of 2 PSV vessels and 8 AHTS vessels. One of the AHTS vessels, built in 1998, is chartered on a 5year bareboat contract. Eight of the IOS vessels are employed in the Far East/Australia, one is in Brazil, and one is located in the North Sea. P&O Maritime Services in Australia manages the vessels that are located in the AsiaPacific region. Farstad Shipping manages vessels in the Atlantic region, including the North Sea. 11

12 12 R E P O R T O F T H E B O A R D O F D I R E C T O R S MARKET OUTLOOK Historically, there is a high correlation between the oil companies profits and the level of activity that they put forth with respect to exploration and investments. Reduced revenues and shrinking margins as a result of the current low oil price has led to cuts in exploration budgets for However, due to the low share of the total demand that exploration activities represent in the North Sea, this reduction in activities will have a relatively lesser impact on demand for supply vessels in the North Sea market than in other markets. The number of newly constructed vessels that will enter the market is going to heavily influence the market balance in Additionally, there will be some impact by the reduction in exploration activities by the oil companies, as a result of the low oil price. The markets outside the North Sea will see a lower activity level than previously anticipated by this reduction. The demand for supply vessels in the markets in Brazil, the Far East, Australia and West Africa can not be expected to increase in the near future. The degree of utilisation in the North Sea is expected to decline in the times ahead, which in turn will have a negative effect on the rates. A substantial portion of the Farstad Fleet, estimated to be 80%, was at the beginning of 1999 employed under existing charter contracts. Based on today s contracts, the fleet is approximately 65% covered for the year TAX LAW REFORM In 1996, the Norwegian Parliament, the "Storting", passed a new tax law for Norwegian shipping companies. The new reform, which is based on a draw principle, gives the Norwegian shipping industry a tax law that is fair compared to tax laws in many of the countries it competes with. Farstad Shipping made a decision to make the necessary changes to conform to the new law. These changes were implemented in In our opinion, the system has performed in accordance with the intentions for which it was designed. REIMBURSEMENT FOR SAILORS The arrangement was implemented in 1993, with the intention of strengthening the NORregistered fleet s competitive edge as well as function as a vehicle to increase recruitment of Norwegian sailors. The result has become 2,200 additional sailors. The recruitment work has borne fruits in the form of increased enrolment into maritime learning institutions, in fact the best in 25 years! All qualified applicants have received apprenticeships. During the last few years, Farstad Shipping has had a recruitment program with an annual budget of NOK 5 million, which is about 50% of the annual reimbursement received. Unfortunately, since the new laws came into effect, at the annual budget debate in the Storting, doubt has been cast over the stability of the laws and regulations governing the shipping industry. Subsequently, in 1998, the reimbursement program was cut from 20% to 12%. To succeed in an industry that is as capital intensive as the shipping industry, visibility of laws and regulations is crucial. This is true for the reimbursement program as well as tax regulations. Ålesund, 3 March 1999 The Board of Farstad Shipping ASA Sverre A. Farstad Per Norvald Sperre Chairman Sigmund Borgundvåg Per Erik Dalen Bjørn Havnes Bjarne Sælensminde

13 P R O F I T A N D L O S S A C C O U N T PARENT COMPANY FARSTAD SHIPPING ASA (NOK 1000) GROUP ,857 5, ,491 28, ,910 Operating income: Freight income Other income Profit on sale of fixed assets 1 703,052 3,648 62, , , ,615 2, ,165, ,160 Total operating income 768, , ,036 (109,181) (76,564) (32,417) 4 (34,974) Operating expenses: Crewing expenses vessels Other operating expenses vessels Administration (184,671) (122,528) (40,430) (142,920) (99,644) (32,389) (121,256) (93,138) (28,099) (218,162) (34,970) Total operating expenses (347,629) (274,953) (242,493) 947, ,190 Operating profit before depreciation 421, , ,543 (92,927) (1,989) Depreciation 7 (118,893) (124,470) (120,137) , ,201 Operating result , ,977 96,406 17,986 (50,193) 16,878 (405) Financial items: Financial income Financial expenses ,306 (76,181) 22,076 (55,634) 17,123 (54,976) (32,207) 16,473 Net financial items (59,875) (33,558) (37,853) 822, ,674 Pretax profit 242, ,419 58, ,693 Taxes 10 (1,844) 102,361 (16,599) 924, ,674 Profit of the year 2 240, ,780 41,954 Which is proposed to be allocated as follows: 120, ,209 45, ,345 45,329 Transferred to legal reserve Transferred from retransfer reserve Transferred to general reserve Allocated to dividends 924, , Profit per share (NOK)

14 B A L A N C E S H E E T PARENT COMPANY FARSTAD SHIPPING ASA (NOK 1000) GROUP ASSETS ,911 11,171 27,991 44,261 62,516 21,257 39,003 9,326 Current assets: Bank deposits Other securities Accounts receivables, freight income Other shortterm receivables ,175 21, ,189 28, ,414 11,171 58,149 33, ,196 10,318 52,740 23, , ,102 Total current assets 281, , , ,042, , ,879 14, ,563 1,473, ,156 1,425 6,303 1,710 Fixed assets: Shares Receivables Farstad Supply Other longterm receivables Rate equalisation reserve Goodwill Contracts newbuildings Deferred maintenance cost Vessels etc , ,430 42,591 1,830, , ,610 36,589 1,549, ,455 39,432 1,270,321 2,186,556 1,690,180 Total fixed assets 2,087,647 1,709,185 1,319,767 2,386,890 1,822,282 Total assets 2,369,085 1,968,480 1,593,416

15 B A L A N C E S H E E T PARENT COMPANY FARSTAD SHIPPING ASA (NOK 1000) GROUP LIABILITIES AND EQUITY ,463 60,989 45,329 8,154 63,423 45,329 Shortterm liabilities: Debt to suppliers Other shortterm liabilities Allocated to dividends 8 37,374 50,355 45,329 25,347 43,582 45,329 23,146 42, , ,906 Total shortterm liabilities 133, ,258 65,959 1, ,606 2,068 Longterm liabilities: Other longterm liabilities Interestbearing mortgage debt Deferred tax ,068 1,061,843 1, , , , ,017 2,068 Total longterm liabilities 1,063, , ,939 45, ,509 1,299,254 45, ,396 1,459,583 Equity capital: Share capital ( of NOK 1.00) Legal reserve General reserve , , ,082 45, , ,001 79,326 90, , ,556,092 1,703,308 Total equity capital 1,172, , ,518 2,386,890 1,822,282 Total liabilities and equity 2,369,085 1,968,480 1,593, , ,887 Mortgages Guarantee liabilities ,078, , , , ,620 96,557

16 C A S H F L O W S T A T E M E N T PARENT COMPANY FARSTAD SHIPPING ASA (NOK 1000 ) GROUP ,595 (715,491) 92,927 11,528 24,677 (10,360) 404 1,726 (46,432) ,674 (315,910) 1,989 (11,012) (6,310) ,369 CASH FLOW FROM OPERATING ACTIVITY: Pretax profit Paid taxes this period Profit on sale of fixed assets Ordinary depreciations Periodical maintenance costs Changes in debtors Changes in creditors Discrepancies pension costs/payments from pension funds Unrealised foreign exchange loss/(gain) Changes in prepayments and accruals ,308 (348) (62,005) 118,893 24,069 (61,040) 12, ,145 9, ,419 (109) (75,117) 124,470 16,796 (5,409) 2, ,394 (14,226) ,553 (306) (203) 120,137 2,025 7, ,299 (1,800) 181,574 30,457 Net cash flow from operation activity A 294, , , ,975 (276,220) 207,030 (1.040,145) (870,198) 571,740 (956) (431,725) 671,638 (400) CASH FLOW FROM INVESTMENT ACTIVITY: Sale of fixed assets (sales price) Investments in fixed assets/ contracts newbuildings Payment from sales of shares Purchase of shares Changes in longterm receivables Other investments 120,139 (578,136) (225) (400) 127,415 (578,886) (500) 1,451 (450,135) (100) (396,558) 810,297 Net cash flow from investment activity B (458,622) (451,971) (448,784) 343,753 (160,291) (33,997) (708,606) (131,128) (45,329) CASH FLOW FROM FINANCE ACTIVITY: New longterm debt Repayment of debt Result 1997, transferred to subsidiaries Dividends Repayment of equity capital 331,506 (155,744) (45,329) 326,446 (163,230) (33,997) 387,543 (132,792) (33,997) 149,465 (885,063) Net cash flow from finance activity C 130, , ,754 (65,519) (44,309) Changes in liquidity over the year A + B + C (34,153) (29,929) (40,622) 193, ,082 Liquid assets at , , , ,082 83,773 Liquid assets at , , ,514

17 A C C O U N T I N G P R I N C I P L E S PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the parent company Farstad Shipping ASA and the subsidiaries specified in note 6. In the consolidated statements, all intercompany balances and transactions are eliminated. The cost of acquiring share in subsidiaries is eliminated against equity in the subsidiary at the time of acquisition or at the time of establishment. The cost method is used for this elimination. The profit and loss statement (P&L) for a foreign subsidiary are translated to NOK at average exchange rates for the year. The balance sheet is translated to NOK according to the exchange rate at the end of the year. OWNERSHIP OF THE GENERAL PARTNERSHIP (ANS) Shares in the this general company, see note 2, are entered using the principle of proportional consolidation (gross method). Accordingly, Farstad Shipping s share of the parent company s assets, debts and margins are included in Farstad Shipping s financial statements, under their respective accounts. Balance sheet items and P&L items between the general company and Farstad Shipping are eliminated proportionally to the extent of Farstad Shipping share of ownership in this company. SALE OF VESSELS Profit from sale of vessels are included in operating income, due to the perception that these transactions are part of the regular business operations. DEPRECIATION OF VESSELS Vessels and portion of vessels in ANS are valued in the consolidated balance sheet at cost, less accumulated depreciation. The cost of the vessels or the portion of the vessels in ANS follows a straightline depreciation schedule over 25 years. This principle was changed in Prior years depreciation expense of the fleet was based on a useful life of 20 years from the time of possession/acquisition. The effect that this change has for the year 1998 makes for a reduction in depreciation expense of NOK 30 million compared to the previous depreciation schedule. Smaller investments, alterations and investments necessitated by new charter contracts are normally depreciated in a straight line over 5 years, unless there are conditions that dictate a longer useful life of that particular investment. 17 GOODWILL With the acquisition of the management companies Sverre Farstad & Co AS and Farstad UK Ltd. in 1993, the goodwill value of NOK 15.8 million has been added to the balance sheet. This will be depreciated by 10% annually, in that the aquisition is anticipated to have value for the Company for at least ten years. CONSTRUCTION CONTRACTS Paid instalments for newbuildings are entered as fixed assets as each payment take place. Investments that are not included in the contract, such as inspection costs, and other related costs and rebates during construction, will be recorded as fixed assets. For details, see note 11. PENSION COSTS AND OBLIGATIONS The Company is financing its pension obligations to 234 employees through two group pension plans. The Company has separate arrangements with five individuals, for whom the Company pays the annual premiums. These premiums are recorded as pension costs as they incur. The net present value of the future obligations of the group pension plans is calculated based on insurance accounting principles. The estimated obligation for the employees on shore is recorded as a debt on the

18 A C C O U N T I N G P R I N C I P L E S balance sheet. The current year s change in net pension obligation then becomes a pension cost in the financial statements. Estimates of the pension obligation to the sailing crew currently indicate overfinancing. This is not included on the balance sheet. For details, please see note 12. MORTGAGE DEBT Mortgage debt for the fleet, including the first year s payment of principal, is recorded as longterm debt. For a detailed payment plan, please see note 13. MAINTENANCE COSTS Periodic maintenance is capitalized, and then gets charged to operating costs during the period until the next periodic maintenance is due; normally it is a 30month cycle. Upon delivery of newbuildings, a portion of the cost of the vessel is valued as periodic maintenance. If a vessel is sold, the periodic maintenance cost on the balance sheet is deducted from the gains on the sale. 18 FOREIGN EXCHANGE Entries are recorded according to the rates at the time of transaction or at the rate of a forward exchange contract when currency value have been secured. Current assets and shortterm debts are valued at rates on Long term debt is valued at the current rate at the time that the loan was established, or the current rate at the end of the year, whichever is higher. Any increase in long term debt due to a change in exchange rates is charged as an expense. TAX COST IN CONNECTION WITH THE NEW TAX REGIME FOR SHIPPING COMPANIES. In 1996, a new tax regime for shipping companies came into effect in Norway. The main principle is that no operating income tax has to be paid as long as a company conforms to the tax regime. Tax must be paid on payments made by a company that is within the regime, or when a company withdraws from the regime. The Company made steps to include its entire fleet in the regime as of Within the regime, the Company has to pay a tax based on the tonnage, which is classified as an operating expense. For Farstad Shipping, this expense is insignificant. Companies within the system can only own vessels and/or companies that own vessels. The operation of vessels must be hired from companies that are outside the regime, and at market prices. For the receiving company, this is taxable income. The net present value of deferred tax associated with the positive and temporary differences in tax payments which is transferred to companies that conform with the new tax regime, is considered insignificant; the reason is that the taxable income that these differences represent is not expected to be taxable in the foreseeable future. This judgement is based on the Company s dividend policy, cash reserves and the freely taxable equity of the part of the Company that remains outside the tax regime. The judgement is also based on the Company s intention that by conforming to the tax law, the change is a longterm commitment, and that the Company intends to maintain its activities. Estimated tax cost includes payable taxes to foreign tax authorities. For details, please see note 10. CASH FLOW STATEMENT The Company uses the socalled indirect model when presenting its cash flow statement. Bank deposits and other deposits are included in current assets. As mentioned in note 15, there is liability associated with a portion of this amount.

19 N O T E S ( N O K ) 1 PROFIT ON SALE OF FIXED ASSETS Deferred Vessels etc. Salesprice Book value maintenance Profit Sale of 5 vessels to Farstad Supply 571, ,026 14, ,873 Other fixed assets Total profit parent company 315,910 Far Minara (50% share) 46,036 13, ,897 Far Sea (50% share) 73,714 42,464 1,240 30,010 Other fixed assets Profitelimination from sale of vessels within the Group (315,873) Total profit group 62,005 In order to adapt to the new tax regime for Norwegian shipping companies, vessels have been sold to subsidiaries to market values. The last 5 vessels were transferred at INTERESTS IN GENERAL PARTNERSHIP Farstad Shipping s 50% participation in P/R International Offshore Services ANS is included in the Group figures as follows: Pretax Tax Profit Current Vessels and Shortterm Longterm profit assets def. maint. debt debt 22,722 (1,696) 21,026 42, ,169 12, ,774 3 FINANCIAL ITEMS Parent Company Farstad Shipping ASA Group Financial income 7,083 3,670 Interest income from bank deposits 7,905 9, Dividends received ,717 Interest income from subsidiaries 9, Agio, realised 7,382 11, Other financial income ,986 16,878 Total financial income 16,306 22,076 Financial expenses 38,466 Interest on mortgage loans 57,972 41,369 1, Other financial expenses 970 2,199 8, Disagio, realised 7,094 8,672 1,726 Disagio, unrealised 10,145 3,394 50, Total financial expenses 76,181 55, Parent OTHER SHORTTERM RECEIVABLES Company Farstad Shipping ASA Group Bunker and stock of lubrication oil 3,022 4,164 1,280 1,167 Loans to employees 1,167 1,290 1,389 1,212 Prepaid costs 5,065 3,682 30, Receivables from Group Companies 10,667 6,234 Other receivables and interest earned 19,563 24,425 44,261 9,327 28,817 33,561 All receivables are valued at par and are considered to be collectable. It has not been found necessary to make provisions for possible losses on claims.

20 N O T E S ( N O K ) 5 BANK DEPOSITS Taxes owed on behalf of employees, NOK 4,555, are comitted resourced deposited into seperate account, but are included in bank deposits. See note 15 concerning bank deposits and collateral SHARES IN SUBSIDIARIES AND OTHER SHARES Share Total no. Share Par Book Companies capital of shares in % value value Shares: Sparebanken Møre 552,615 84, ,460 11,389 Kreditbanken ASA 163,520 84, ,684 2,315 Ulstein Holding ASA 216,620 6, Solstad Offshore ASA 71,588 10, Total shares included in other securities 14,489 Shares in subsidiaries: Farstad Shipping Ltd. GBP ,691 Farstad Supply AS 1,471,245 1,471, ,471,245 1,471,245 Total shares in subsidiaries: 1,471,308 1,472,936 Sundry shares Total shares under fixed assets 1,471,958 1,473,586 Shares owned by Farstad Supply AS: Farstad International AS The parent company s receivables on Farstad Supply, amounting to NOK 207,156, arose through the sale of vessels to the new shipowning company within the tax regime for Norwegian shipping companies. The receivables bear interest at market interest rates. VESSELS AND OTHER OPERATING ASSETS (GROUP) Acquisition Additions Disposal Accumulated Book value Ordinary cost at 1.1. in the year in the year depreciation at depreciation Goodwill(10%) 15, ,576 Contracts on vessels(0%) 114, , , ,430 0 Cars (2025%) 1,958 1, ,220 1, Other fixed assets (225%) 7, ,877 5, Directly owned vessels 1,968, , , ,094 1,499,095 90,444 General partnership (ANS) 214, , , ,548 25,542 Total vessels etc. 2,193, , , ,869 1,830, ,317 Total operating assets 2,323, , , ,375 2,043, ,893 Contracts of a vessel in a yard implies that advance payment is included in that year s addition under contracts. When completed, the value of that vessel is included in that year s disposal under contracts and the cost price of the vessel is included. Sale of vessels to the general partnership will give a disposal at the line for directly owned vessels and our share will be included as additions to the line for ANS. Below, the investments are only included as contracts in order not to make double entries. INVESTMENTS IN AND SALE OF FIXED ASSETS (SALES PRICE) DURING THE PAST 5 YEARS: (NOK mill.) Purchase Sale Purchase Sale Purchase Sale Purchase Sale Purchase Sale Cars Goodwill 0.1 Other operating assets Directly owned vessels Interest in vessels in partnership Newbuildings Total for the Group

21 N O T E S ( N O K ) 8 OTHER SHORTTERM LIABILITIES Parent Company Farstad Shipping ASA Group ,815 18,004 Tax deductions, holiday pay, VAT, etc. 18,015 14,815 5,071 Deferred income recognition of option premiums 5,071 Estimated taxes payable 1, ,191 4,455 Accrued expenses 6,914 7,550 10,457 Accrued interest on mortgage debt 16,966 10,856 25,321 40,786 Liabilities to group companies Other shortterm liabilities 6,816 5,119 60,989 63,423 50,355 43,582 9 DEVELOPMENT IN THE COMPANY S SHARE CAPITAL, LEGAL RESERVE AND GENERAL RESERVE (PARENT COMPANY) Date Farstad Shipping ASA Number of shares Share capital Legal reserve General reserve ,329,370 45, ,509 1,299, Result 1997, transferred to Farstad Supply (13,113) (118,016) From this years profit 278,345 Total Parent Company 45,329,370 45, ,396 1,459, TAX SITUATION Parent Company Farstad Shipping ASA Group Calculation of taxable profit: 822, ,674 Operating income before taxes 1,750 1,458 Permanent discrepancies (686,612) (315,873) Profit sale of vessels within the Group (131,128) Operating result transferred to company within the new tax regime Changes in temporary discrepancies related to: Current assets / shortterm liabilities 347,445 1,571 Fixed assets / longterm liabilities 124,985 Income from profit and loss account (470,961) Reversed temporary discrepancies due to adapting the new tax regime (8,478) (11,487) Reversed from correction income 0 0 Taxable profit Calculation of deferred tax. Specification of discrepancies: (1,410) (2,068) Current assets / shortterm liabilities (2,068) (1,410) 8,028 6,457 Fixed assets 6,457 8,028 (1,072) (1,587) Unused dividend tax credit (1,587) (1,072) (13,659) (13,659) Loss carried forward (13,659) (13,659) (19,423) (7,935) Correction income (7,935) (19,423) (27,536) (18,792) Calculation base for deferred taxes (18,792) (27,536) 0 0 Deferred tax 0 0 Specification of taxes in profit and loss account: Taxes payable abroad 1, (101,693) This year s change in deferred taxes (102,502) (101,693) 0 Total tax costs 1,844 (102,361) 21

22 N O T E S ( N O K ) 11 CONTRACTS NEWBUILDINGS/CONVERSIONS The Company has ordered 5 newbuildings to be delivered January 1999, March 1999, May 1999, July 1999 and February Total investment is approximatly NOK 1,200,000, whereof NOK 206,430 is capitalized as fixed assets per for paid instalments to yards, inspection costs and owners supplies. Longterm financing is expected to be 7080% of the investments PENSIONS For the accounting purposes, the Company s pension plan is treated in accordance with standard for pension expenses. See further detals under accounting principles on page 17. The Company s net pension liabilities, can be specified as follows, and are classified in the balance sheet under longterm debt: Insured pension rights earned 8,915 6,811 Noninsured pension rights earned Pension funds (actual value) (6,309) (5,421) Estimated contribution to social security Actuarial corrections (883) (551) Net pension liabilities 1 ) 2,068 1,411 Calculations are based on the following financial and actuarial assumptions: Discount rate 7.0% 7.0% Expected return on pension funds 8.0% 8.0% Annual expected wage growth and G adjustment 3.3% 3.3% Adjusment in pension paid 2.5% 2.5% This year s net pension cost is calculated as follows: Pension payment from operations Pension cost from supplemental schemes 1,239 1,541 Pension cost, sailing crew, from operations 1 ) 1,453 1,285 Changes in net pension liabilities Total 3,405 3,547 1 ) Actuarial calculations for the sailing crew show that the fund is overfinanced by NOK 2,967. The Company has decided not to include this element in the balance sheet. 13 INTERESTBEARING DEBT Net interestbearing debt per 31.12: Interestbearing debt 1,061, ,937 Interestbearing current assets (141,241) (176,458) Net interestbearing debt 920, , Instalment schedule*) 174, , , , ,600 *) including calculated instalment for new debt for the financing of the newbuildings.. The interestbearing mortgage debt is in its entirety tied to financing the fleet. Of the total debt on , 66% of this is denominated in USD, and the rest is in NOK. Two newbuildings, delivered in January and March 1999 are financed in GBP. All debt denominated in NOK has a floating interest rate. On , arrangements were made to fix the interest rate for 5 years on USD 41.7 million. The interest rate is calculated with the basis in the market rate (NIBOR/LIBOR), plus a fixed margin charged by the banks. The margins varies between loans. The interest rate has recently been renewed for shorter periods, from one to three months. The mortgage debt associated with the individual vessels is shown on the fleet overview on page 47. In 1999 and 2000, when the Company takes delivery of additional 5 vessels that are currently on order, mortgage debt will increase by NOK 960 million.

23 N O T E S ( N O K ) OFFBALANCE FINANCIAL INSTRUMENTS In order to secure the currency exchange rate of shortterm receivables and freight income in foreign currency, at the Company has entered into the follwing agreements: a) Forward agreements for an amount of GBP 33.3 million due from January 1999 to May Forward rates varies between NOK and b) Forward agreements for an amount of USD 2.0 million due June 2000 and December Forward rate NOK To secure the planned financing of a newbuilding in USD the Company has per entered into forward agreements to buy USD 18.0 million, due date , at an average forward rate of NOK In 1999, this contract amount has been increase with USD 11.0 million at same average forward rate. 15 MORTGAGES, GUARANTEE LIABILITIES Farstad Shipping ASA Parent Company Group Mortgages: Debt and accrued interest secured by mortgages 0 1,078,809 Security includes: Bank deposits 7,460 Account receivables 113,656 Vessels, at book value 1,823, ,944,759 In addition the Company has assigned future freight income, and any insurance payment as security for debt. Guarantee: Guarantee liabilities not included in the balance sheet 865, ,629 Mortgage debt has been transferred from Farstad Shipping to Farstad Supply as a part of the adaptation to the new tax regime for Shipping Companies. Farstad Shipping remains as guarantor for this debt, amounting to NOK 865,887 per CONNECTED COMPANIES Tyrholm & Farstad AS, Ålesund, the Company s largest shareholder, is defined as a connected company. On the Company signed a fiveyear agreement with Tyrholm & Farstad AS with regard to office accommodation and the use of computer and other services at the head office in Ålesund at an annual cost of NOK 3,680. The rent agreement was at extended with another five years, and the agreement for other services was renegotiated for 3 years. The Company has no receivables or liabilities to Tyrholm & Farstad at GOVERNMENT GRANTS Parent Company Farstad Shipping ASA Group Government refund scheme to secure 12,371 10,589 employment of Norwegian seamen 10,589 12,525 Refund scheme for temporary posistions for seamen during training ,422 11,123 Government grants for reduction of crew costs 11,123 12,576 Contracting grant for rebuilding of ships 201 (reduction of capitalized value) ,623 11,123 Total government grants 11,123 12,777

24 N O T E S ( N O K ) 18 RESULT SORTED BY BUSINESS SEGMENTS Freight Operating Operating Depreciation Operating Book value income costs profit I(EBDIT) profit II(EBIT) vessels AHTS 421, , ,645 65, ,018 1,099,431 PSV 281, , ,778 50,359 70, ,804 Total vessels 703, , , , ,437 1,866,235 Norwegian sector 159,163 75,149 84,014 30,430 53, ,105 British sector 293, , ,851 37, , ,041 Brazil 154,037 87,123 66,914 26,469 40, ,429 Far East/Australia 96,374 51,730 44,644 21,787 22, ,660 Total sectors 703, , , , ,437 1,866,235 Operating result (EBIT) for Farstad Shipping is NOK 302,183. The difference of NOK 62,746 is divided between other revenues: NOK 3,648, sale of fixed assets, NOK 62,005, and other depreciation, NOK 2,907. In 1998, some of the vessels have had activity in more than one area. When allocating costs/revenues for each geographical area, consideration has been made to actual revenues. However, the vessels operating costs are prorated. The depreciation is allocated using the same principle as other costs. The administration overhead costs related to the entity as a whole are allocated equally between the vessels. The book value breakdown per vessel by geographical location was determined using the end of 1998 as basis. Book value as of was used, and includes the individual vessel s accrued periodic maintenance costs as of that date. 24 AUDITORS REPORT FOR 1998 TO THE ANNUAL SHAREHOLDERS MEETING OF FARSTAD SHIPPING ASA We have audited the annual report and accounts of Farstad Shipping ASA for 1998, which show a profit for the year of NOK 323,674,036. for the parent company and a consolidated profit for the year of NOK 240,464,000.. The annual report and accounts which comprise the annual report proper, profit and loss account, balance sheet, funds flow statement, notes to the accounts and consolidated accounts, are presented by the company s Board of Directors and it s Managing Director. Our responsibility is to examine the company s annual report and accounts, its accounting records and other related matters. We have conducted our audit in accordance with relevant laws, regulations and Norwegian generally accepted auditing standards. We have performed those audit procedures which we considered necessary to confirm that the annual report and accounts are free from material misstatements. We have examined selected parts of the evidence supporting the accounts and assessed the accounting principles applied, the estimates made by management and the content and presentation of the annual report and accounts. To the extent required by Norwegian generally accepted auditing standards we have reviewed the company s internal control and the management of its financial affairs. The Board of Directors proposal for appropriation of the profit is in accordance with the requirements of the JointStock Companies Act. In our opinion the annual report and accounts have been prepared in accordance with the requirements of the Norwegian Joint Stock Companies Act and present fairly the financial position of the company as of and the result of its operations for the financial year, in accordance with Norwegian generally accepted accounting principles. Ålesund, 4 March 1999 ERNST & YOUNG AS Odd Jarle Døving State Authorised Public Accountant (Norway) The translation into English has been prepared for infomation purposes only.

25 A N A L Y T I C A L I N F O R M A T I O N % E99 FREIGHT INCOME 1998 DEVELOPMENT IN FREIGHT INCOME EBDIT1998 (as % of freight income 1998) E99 Norwegian sector BritisH sector BraZil AHTS PSV Far East/Australia WestAfrica DEVELOPMENT EBDIT (as % of freight income) % 60 % 70 % AHTS PSV AHTS PSV TOTALT AHTS PSV TOTALT Norwegian sector British sector Norwegian sektor British sector Brazil Far East/Australia Brazil Far East/Australia % 25 BUSINESS SEGMENTS The Norwegian GAAP (Oct. 1995) sets guidelines for the division of the various business segments and for what information should be submitted detailing the individual segment. Note 18 in the financial statements details the business segments in Farstad Shipping. Uncertainties associated with the allocation of costs and revenues, as well as with balance sheet items, inhibit analysis of profitability by business segment. Factors that may be crucial when evaluating profitability: The different needs and requirements with respect to tonnage that exist in each individual market The useful financial life of each vessel differs between markets The age of the fleet Length of contract Operational risk Tax regulations The need for a local partner Differences in administrative and marketing services rendered The North Sea Of the Company s total freight revenues for 1998, 65% came from the North Sea market, where British sector made up 36.5%. The Norwegian sector s share of revenues has declined in later years. In 1998, 51.5% of revenues from AHTS activities came from the North Sea. The corresponding number for PSV was 84%. The AHTS s relative share of revenues and profits in the North Sea has increased during the last few years, partially due to the increased number of vessels, and partially due to the currently positive market. The Company s AHTS vessels have been in a better position to take advantage of the market changes because the PSV vessels have generally been tied to longterm contracts. In addition, AHTS vessels have commanded higher rates than PSV vessels. Brazil This market contributed with 22% of the Company s total revenues in 1998, the equivalent of NOK 154 million. AHTS vessels made up 75% of this number. EBDIT in percent of freight revenues is lower than in the North Sea market, due to the latter s positive market in Far East/Australia Represented by IOS, this market contributed with 13% of the Company's total revenues in 1998, or NOK 96.4 million. PSV revenues made up only 8% of the total, but that share is expected to increase in 1999 after 2 PSV vessels were purchased by IOS in October Australia is the most important market in this region, accounting for as much as 82% of total revenues for the region. EBDIT in percent of freight revenues is at a comparable level with the Brazilian market.

26 A N A L Y T I C A L I N F O R M A T I O N VALUE ADJUSTED EQUITY TOTAL PER SHARE mill. NOK NOK VALUE OF VESSELS PSV AHTS VALUE OF VESSELS VS. MORTGAGE MORTGAGE SORTED BY CURRENCY mill. NOK mill. NOK % 37% Est % 40% 15% % Far Scandia UT 705 Far Scotsman ME 202 Far Sea ME 303 II Far Crusader ME Est Value adjusted equity total and per share Market value Book value Mortgage NOK GBP USD 26 VALUE ADJUSTED EQUITY AT Due to the current market outlook, uncertainties associated with the 27 valuation estimates are greater than in prior years. Total (NOK mill.) Per share (NOK) Market value vessels 2, Book value vessels 1, Excess value vessels 1, Book equity 1, Value adjusted equity (VAE) 2, Estimated VAE has increased by approximately 6% compared to the value on Dec At the end of 1998, it was estimated at NOK 2.2 Bn. The market value of the Company (share value multiplied by number of shares outstanding) declined in the same period by 50%. At the end of 1998, it was approximately NOK 950 million. THE MARKET VALUE OF VESSELS The market value of the fleet is calculated by averaging estimates from 3 independent Norwegian ship brokers at the end of For a detailed table of the value estimates for each vessel, please turn to page 47. The brokers assessments assume that the vessels are without contracts and available for immediate sale. Value estimates in USD are calculated using exchange rates at the end of The historical value of the vessels during the last few years are shown above, represented by two vessels built in 1983 (Far Scotsman and Far Crusader) and two vessels built in The market value for the Farstad fleet fell in 1998 by 7% on average. VARIATION IN BROKERS ESTIMATES The brokers have submitted their value estimates using a highlow range. The average of the high end of the estimates gives a fleet market value of NOK 2,971 million, equivalent to NOK per share. The average of the low end of the range gives values of NOK 2,834 million for the fleet and NOK per share. A 10% change in fleet value corresponds to a change in VAE of NOK 6.40 per share. EXCESS VALUES Estimates of the value adjusted equity does not take into consideration other additional values in the Company than the excess values of the vessels. The value estimates assume that vessels can be sold individually. There are no adjustments for excess values that are derived from charter contracts already in service. There are no adjustments for excess values tied to vessels under construction. There are no adjustments made for changes in value which could derive from a sale of the fleet, or a sale of the whole Company as a going concern. Goodwill is valued at NOK 6.3 million. This balance comes from the 1993 acquisition of Sverre Farstad & Co. A/S and Farstad Shipping Ltd. No adjustments of these assets are included in the valuation of Farstad Shipping. The last years acquisition trend has clearly demonstrated that buyers are willing to pay a considerable premium above fair market value of the fleet when gaining control of an entire company. TAXES Value adjusted equity after tax is not calculated. The Company has, from the tax year 1997 and onward, repositioned itself to adapt to the new tax regime for shipping companies. Anyhow, the Company would not have reached a normal tax position for many years due to a substantial investment program. However, the transitional regulations made it advantageous to start adjusting to the new tax law as of The Company views this adaptation as a longterm effort. The Company s tax position in the future depends upon the results achieved in those subsidiaries that are not included in the new regulations, and the extent of activities on the Australian continental shelf. For details on the Company s tax position at the end of 1998, please see note 10 in the financial statements. DEPRECIATION ON VESSELS BOOK VALUE In 1998, the Company extended the depreciation schedule for the fleet from 20 to 25 years. This change improved the 1998 consolidated financial statements by approximately NOK 30 million compared to the previous depreciation schedule. INTEREST AND EXCHANGE RATE At the end of the year, 66% of the Company s total mortgage debt was denominated in USD. This debt is being serviced from revenues in USD. The remaining mortgage debt is denominated in NOK. Additional borrowing of NOK 960 million to finance vessels to be delivered in 1999 and 2000 will be made partially in GBP, partially in NOK and partially in USD. For details on anticipated allocation, please see figures. The interest risk exposure for 1999 is estimated to be NOK 0.01 per share for every 1.0% p.a. change in US interest rates. The equivalent effect for 1.0% p.a. change in Norwegian rates is NOK 0.08 per share, or NOK 3.8 million. For a similar change in British rates, the effect would be NOK 0.06 per share, or NOK 2.5 million. Interest rate exposure is reduced on a continuous basis through hedging activities. The Company expects the following breakdown in freight revenues, by currency: NOK approximately 20%, GBP approximately 45%, USD approximately 25%, and AUD approximately 10%. The currency risk associated with the portion of revenues that does not have an offsetting cost, is reduced through the use of hedging. Estimates at the beginning of 1999 show the following effect on cash flow for 1999 given currency fluctuations: A change in the relationship NOK/GBP of NOK 0.50 would change cash flow by NOK 4.6 million, or NOK 0.01 per share. An equivalent change in the relationship NOK/USD would impact cash flow by NOK 7.7 million, or NOK 0.17 per share. For NOK/AUD would the corresponding effect be NOK 3.3 million, or NOK 0.07 per share.

27 S H A R E H O L D E R M A T T E R S PAYMENT TO SHAREHOLDERS (NOK per share) 1,00 0,80 0,60 0,40 0,20 SHARE PRICE DEVELOPMENT SHARE PRICE DEVELOPMENT JANUARY 1998 MARCH 1999 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.. Jan. Feb , FINANCIAL CALENDAR Result for first quarter 27 April Annual General Meeting 27 April Payment to shareholders 12 May Result for first halfyear 19 Aug. Result for third quarter 28 Oct. (subject to change) Delphi Investor Service Delphi Investor Service THE COMPANY S 20 LARGEST SHAREHOLDERS AT : Number % 1. Tyrholm & Farstad A/S 21,236, Gjensidige Livsforsikring 2,465, NOR Forsikring AS 1,097, Sverre A. Farstad 1,000, Jan H. Farstad 1,000, Gjensidige Skadeforsikring 846, Bankers Trust Company 650, Storebrand Skadeforsikring 474, Det Stavangerske Dampskibs. 423, Morgan Guaranty Trust 410, Bank of New York 365, Aksjefondet Handelsbanken 300, Meieribrukets Pensjonskasse 285, KHolding AS 250, Artur Kleven 236, Verdipapirfondet KKapital 235, Aksjespar Postbanken 217, Trondheim Kommunale P. 217, Skandinaviska Enskilda 213, John Kleven AS 200, Total 20 largest 32,123, Total 10 largest 29,603, Total foreign shareholders 2,221, Total shares 45,329, THE COMPANY S 10 LARGEST SHAREHOLDERS AT : Number % 1. Tyrholm & Farstad A/S 18,550, Gjensidige Livsforsikring 2,725, NOR Forsikring AS 1,097, Norgesinvestor Verdi 1,000, Sverre A. Farstad 1,000, Jan H. Farstad 1,000, Gjensidige Skadeforsikring 850, Morgan Guaranty Trust 827, Brown Brothers HarrisEnergy 742, Orkla ASA 700, Total 10 largest 28,492, ALLOCATION OF SHARES AT : Shareholders Share Total shares Total % holding % , , ,000 49,999 1, ,003, ,000 99, ,204, , , ,615, More than 500, ,138, Sum 2, ,329, It is the Board's objective to give the owners of the Company, the shareholders, a competitive return on invested capital over time. The shareholders return must be achieved through a combination of appreciation in share price and the cash dividend paid by the Company. In light of the results achieved in 1998 and the Company s equity situation, the Board will propose a cash dividend to the shareholders of NOK 1.00 per share at the annual meeting on 27 April. The dividend payout will take place in the middle of May. The dividend that has been paid in recent years is shown in the figure above. Shareholders at the time of the annual meeting only are eligible for dividend. The dividend policy in the upcoming years will be determined based on profitability and investment plans. The Company s share price at the beginning of the year 1998 was NOK At the end of the year, the share price has declined to NOK The year s top price was NOK 43.00: the lowest NOK The fall correlates strongly with the general decline of all oil and offshorerelated stocks. The Company had 2,769 shareholders on , versus 1,967 shareholders on There were 52 foreign shareholders, with a total ownership of 4.9% of the shares outstanding. Foreign shareholders are permitted to hold 33 1/3% of the shares outstanding. At the annual meeting on , the Board was given authority to issue additional 6.5 million shares. This authority, which is valid until the annual meeting in 1998, has not been used. It will be proposed extended for one additional year. At a general meeting on 17 December 1998, the Board was given authority to buy back up to 10% of the Company s shares. This authority is valid for 18 months from Currently, there are 45,329,370 shares outstanding. In 1998, 25.6 million of the Company s shares were traded, vs million in The Company s shares were traded on 251 trading days out of 251 total trading days in the year. No member of the Board or the Management of the Company has stock options in Farstad Shipping. THE BOARD AND MANAGEMENT S SHARES AT : Shares In accordance with 11,12 of the Company s Act THE BOARD: Per Norvald Sperre 0 Sverre A. Farstad 22,252,199 Sigmund Borgundvåg 0 Bjørn Havnes 0 Per Erik Dalen 0 Bjarne Sælensminde 85,000 THE MANAGEMENT: Sverre A. Farstad see above Terje J.K. Andersen 25,000 Torstein L. Stavseng 28,000 The Company s auditor holds no shares to Farstad Shipping ASA.

28 S T R A T E G Y FLEET BREAKDOWN (as of January/February 1999): Today s New Total Fleet buildings Fleet World Fleet: AHTS > BHP PSV > DWT Total Farstad Shipping/IOS: AHTS > HK PSV >2.000 DWT Total Farstad Shipping s strategy remains focused on being a substantial, longterm and global operator of large, modern offshore service vessels. The Company has concentrated its activities around the market segment with demand for the largest and most technologically advanced service vessels. This means anchor handling vessels (AHTS with power in excess of 10,000 HP) and platform vessels (PSV size in excess of 2,000 DWT). The technological innovation that has taken place during the last few years has allowed exploration activities to move to areas of greater depths. The oil companies have prioritised these areas due to the increase in size and profits that they yield. In order to operate safely and efficiently under harsher weather conditions and to meet the challenges associated with exploration at greater depths, AHTS vessels need to have increased winch and engine capacity. Farstad Shipping has under construction, and has recently taken possession of a total of four new AHTS with sufficiently large winch and engine capacity in order to serve this market. This investment is clearly a strong statement by the Company that illustrates its ambition to be a substantial player among operators capable of servicing deep sea exploration activities. Whereas more than half of the world fleet of AHTS vessels are outside the North Sea, the situation is quite different for PSV vessels. The North Sea is their main market. As the oil companies have gradually focused more on cost control in later years, companies providing transportation to the various installations in the North Sea have been impacted. The oil companies now cooperate to a larger degree, either directly or through a logistics service supplier such as ASCo. The trend has therefore been towards fewer, but larger PSV vessels with large decks and larger tank capacity to minimise the transportation costs per ton. Since the trend has favoured larger sized vessels, there have been many new orders of these to meet demand. When deliveries of all current orders are completed, this segment will make up approximately 20% of the world s fleet of supply vessels. Farstad Shipping s share of this fleet is about 10%. In addition, Farstad Shipping has two PSV vessels with less than 2,000 DWT and Lochnagar, a pipelaying vessel for flexible pipes. Lochnagar is an example of a successful strategy to modify an older PSV vessel to secure a profitable, longterm employment. For details, please see page 49. Farstad Shipping has chosen an international strategy for the management of the vessels as well. The Company s vessels in the North Sea and Brazil are managed from Ålesund and Aberdeen. P&O in Melbourne manages the vessels operating in the East and Australia. This structure allows for a greater flexibility in moving vessels between the various markets. The Company s charter strategy remains one in which the priority is to minimise the exposure to shortterm fluctuations in the demand for supply vessels. The proximity to the maritime environment on the North West Coast of Norway offers an excellent opportunity to work with shipyards and equipment manufacturers to promote innovation and improve safety and efficiency in the industry. In addition, this position puts the Company in the forefront of the competition when faced with changes in demand. The sailing crew has been an active participant in this process, facilitated by the management s ability to utilise the crew s expertise and competence. Of the Company s fleet, 14 vessels are built for Farstad in Norway. Shipyards in the Northwest have built 10 of these. In addition, the Company currently has 3 vessels under construction at shipyards in Møre og Romsdal. Experience indicates that vessels that originated with the Company have performed better with respect to maintenance costs than tonnage that was acquired secondhand. AHTS is mainly used for towing missions and for anchoring mobile platforms and production modules/vessels. In addition to tow and anchor handling capabilities, this vessel is equipped for fire fighting, rescue operations and oil recovery. The AHTS vessel is therefore often used as standby rescue vessels for oil fields in production. The AHTS is also commonly utilised in anchor handling activities for cranes and pipelaying vessels, and in supply service for all types of platforms, transporting both dry and wet cargo in addition to deck cargo. PSV is mainly used to supply fields in production. This involves the transport of individual items, generally in containers as deck cargo. In addition, a modern supply vessel transports a variety of different products in segregated systems, such as methanol, preblended drill fluids, brine, water and oil. The various fluids are contained in epoxy painted tanks, with individual pumps and hoses for discharging. Dry bulk cargo such as cement, barite and bentonite are also transported by the PSV vessel, and are discharged at the installations using compressed air. Many of the larger PSV vessels have been employed in later years in pipelaying activities.

29 AHTS> BHP AND PSV>2.000 DWT SORTED BY COMPANY Worldwide per February Mærsk Farstad/IOS Gulf Trico Marine Edison Chouest Seacor Stirling Tidewater Solstad T H E M A R K E T F O R O F F S H O R E S U P P L Y V E S S E L S PSV > DWT SORTED BY COMPANY Havila 9 3 Brazil Number of vessels Gulf of Mexico Hvide Marine 4 6 Number of newbuildings Canada DOF 8 1 Australia Gulf of Mexico 32 West Africa 33 Swire 7 Gulf Farstad/IOS Stirling Edison Chouest Trico Marine Tidewater Mærsk Havila Hvide Marine Seacor PSV > DWT SORTED BY REGION North Sea Far East Worldwide per February No. of PSV Worldwide per February No. of newbuildings Number of PSV AHTS > BHP SORTED BY COMPANY Worldwide per February 99 Mærsk Farstad/IOS Solstad Seacor Swire Trico Marine Havila Gulf Edison Chouest DOF North Sea Brazil West Africa Far East Autralia Canada China No of AHTS No. of newbuildings AHTS > BHP SORTED BY REGION Worldwide per February Number of AHTS Source: Petrodata FLEET STRUCTURE The demand for supply vessels remained high in most markets throughout These North Sea based companies in particular have reported excellent results. Even though the rates did not match the record year 1997, they set record levels during large parts of the year. Taking into consideration the 30 or so new supply vessels that entered the market during 1998, the results were above expectations. High and increasing demand for large AHTS vessels in Brazil, West Africa and the Far East/Australia was crucial for maintaining the positive market in the North Sea in The orders for additional vessels are a consequence of this. There were strong indications towards the end of 1998 that the markets were unable to absorb additional tonnage. At the end of 1998, there were 80 large supply vessels on order or under construction. Most of these will be delivered during Approximately 30 of the new vessels are headed for the North American market and are not expected to influence the markets outside the U.S./Mexican Gulf area. The large number of additional vessels entering the market, combined with expectations of reduced activity world wide as a result of the current low oil price, gives the offshore supply industry a difficult market outlook in Substantial reductions in rates must be expected as well as a number of vessels laid up. It will obviously take some time for the market to absorb the excess tonnage. The length of time will depend on how quickly the oil price recovers and stabilises at a higher level. The restructuring of the industry continued into 1998, albeit at a slower pace than in On March 1st, Brøvig Supply was acquired by GulfMark, an American company that also owns North Sea based Gulf Offshore. Havila Supply ASA was incorporated and stock listed in the spring. The company is composed of vessels from Remøy, Taubåtkompaniet, and three new vessels. There have also been a string of mergers and pools among the oil companies. Aberdeen Service Company (ASCo), a logistics company, has acquired its competitor Wood Group Offshore, making it the largest charterer in the North Sea after Statoil. The low oil price has damaged margins and put the oil companies under a lot of pressure to reduce costs to make up for some of the shortfall in profits. The end result is reduced activity. The North Sea remains the most important market for the larger supply vessels. This is especially true for the large platform vessels, where 101 of the total world fleet of 114 large PSV vessels are located in the North Sea. In the beginning of 1999, there were approximately 20 large PSV vessels under construction. Although these vessels are to be employed in the North Sea market, only about half of them have longterm contracts. Outside the North Sea market, only Brazil and the U.S./Gulf of Mexico have displayed interest in using large PSV vessels as the start of an effort to rationalise the transportation activities to and from installations. It will take some time before operators of large PSV vessels can expect any growth in demand for this type of vessel outside the North Sea. The market on the American side of the Gulf of Mexico is reserved for vessels built in the U.S. The American offshore supply industry currently has 30 large PSV vessels under construction. Most of these are reportedly tied to longterm contracts, and are therefore expected to remain within the U.S. market. Oil exploration has increased considerably in areas of deeper and more challenging waters in recent years. This has increased demand for large AHTS outside the North Sea. Brazil is among the most active at great depths; Petrobras is currently producing oil at depths in excess of 1,800 meters. Petrobras current plans continue this trend and, if realised, they will increase the demand for large AHTS vessels in Brazil. The markets in the Far East/Australia performed well in However, the low oil price has led to a reduction in activities for 1999 in these markets. On the coast of West Africa, the oil companies increased their oil and gas exploration activities during 1998, resulting in significant discoveries. A reduction in efforts is expected until the oil price recovers to a level that makes production of oil and gas more attractive. At the start of the year, 25 large AHTS vessels were under construction worldwide (excl. the U.S./Gulf of Mexico), half of which are secured on contract. Under more normal circumstances, with a higher oil price and a rising market, a large number of the older North Sea tonnage as well as some new vessels would be employed in the markets outside the North Sea. The current situation makes this an unlikely outcome. American companies have contracted 5 large AHTS vessels for the U.S./Gulf of Mexico. Even when considering the collapse of the Gulf market in 1998, a question remains whether any of the operators would find it profitable to move tonnage from this market to another market. In any case, it is not likely that any of these would go to the North Sea. Far Sailor installing «suction anchor» on Campos Basin.

30 T H E M A R K E T F O R O F F S H O R E S U P P L Y V E S S E L S AHTS/PSV IN THE NORTH SEA SORTED BY COMPANY per February 99 DEVELOPMENT IN DEMAND FOR OFFSHORE SUPPLY VESSELS UTILISATION PER MONTH TERM DEMAND SORTED BY SECTOR TERM DEMAND SORTED BY ACTIVITY Gulf Offshore Mærsk Farstad/IOS Trico Marine Stirling Havila Boatyears % % % % 92% 94% 95% % % % Boatyears Boatyears Solstad E J F M A M J J A S O N D E99 No. of AHTS > BHP No. of PSV > DWT No. of newbuildings in Europe Supply Demand Utilisation E99 British sector Norwegian sector North Sea others Production Construction Drilling Source: Petrodata 34 THE NORTH SEA MARKET The demand for offshore service vessels was higher in 1998 than in The main causes for this were higher demand for productionrelated activities along with a longer and more comprehensive construction season, due to delays in pipelaying projects. The industry was 9698% utilised for large periods during the year. Companies that had many vessels on the spot market profited greatly from these market conditions. With the number of large supply vessels now under construction, a reduction of the small and medium sized supply vessels is anticipated. The alternative effect under these market conditions is that the newer vessels are preferred over the older tonnage. Shortterm contracts Supplying fields in production and performing emergency service Demand from oil fields in production totalled 116 boatyears in 1998, an 4th quarter. In December, approximately 25 vessels were employed in this activity, compared to expectations of 34 vessels. Recent years have seen an increase in demand for the laying of telephone cables offshore. During 1998, this was an important contributor in maintaining a high level of utilisation for large PSV vessels. In 1999, there are projects that are expected to create a demand similar to These include cable laying, pipe laying and installation of The spot market The activity in the spot market has traditionally been around 2025% of total demand. The tight market conditions in 1997 and 1998 has caused this share to drop to just under 20%. Because there have been periods in which the spot market was drained for tonnage, many oil companies set up shortterm contracts at the time in order to secure their operations. A substantial portion of the spot market activity is managed from Aberdeen and in the British sector. 35 The positive market in the North Sea attracted tonnage from other markets in However, high activity levels elsewhere also caused vessels to move away from the North Sea market. At the end of 1998, the North Sea market counted 215 vessels. Despite the new vessels entering the market, the increase was only a marginal 15 vessels from the previous year. The total number at the end of 1999 is expected to be 255 vessels. increase of 10 since Demand that was related to production activity represented 73% of shortterm contracts in 1998, up from 50% in 1991/1992. The main cause of this trend is the sheer increase in production installations, and that the activity has moved to more remote areas, often at greater depths. mobile production systems and other subseainstallations. The bulk of activities are expected to take place in the 2nd and 3rd quarter. The total demand for offshore service vessels, expressed in boatyears, increased by 4 to a total of 195 boatyears in The shortterm market (defined as contracts longer than 30 days) made up 158 boatyears, an increase of 3 compared to British and Norwegian sectors represented 60% and 32% of total demand, respectively. Only British sector expanded in 1998, from 84 to 90 boatyears. The average rate of utilisation in 1998 was 95% for the North Sea; it was above 90% during all months of the year. A reduction is expected for Approximately 77% of the shortterm contract market is serviced by PSV >2,000 DWT and AHTS >10,000 HP. The corresponding share in 1993 was 62%. The largest PSV vessels (in excess of 3,000 DWT) represent the bulk of the increase. Today, they have a market share of 30% for the shortterm contracts. Production related activity is expected to remain at high levels for years. Today, there are 279 fields producing oil in the North Sea, of which 60% are located in the British sector. There are plans to start production of additional 266 fields in the next five years, although some of these are submerged satellite fields. With the current low oil price, several of these will be postponed. Whether the increase in the number of production installations will influence the demand for offshore service vessels depends upon the oil companies ability to coordinate efficiently or pool vessels in the new and more remote areas with other companies. Construction activity Demand for supply vessels for construction purposes made up 26 boatyears in 1998, compared to 25 in This includes the construction of new production installations as well as infrastructure projects such as pipelines, booster stations and loading buoys was characterised by especially high pipelaying activities in the Norwegian sector. Due to delays, pipelaying activities remained high during the autumn and winter up to the Christmas season of 1998, contributing to a very active Exploration activities As a result of gains in productivity and logistics, the number of offshore service vessels involved with exploration activities has fallen considerably in recent years. This trend was exacerbated in 1998 by reduced rig activity. Whereas demand for supply vessels for this type of activity totalled 61 boatyears in 1992, it had declined to 16 boatyears in This is a decrease of 8 boatyears compared with Demand in 1999 is expected to be somewhat lower than in The trend into the future will depend upon the number of rigs involved with exploration activities, and the degree of involvement that the supply vessels will have. In particular, the operators use of AHTS vessels has changed recently. Previously, the oil companies engaged one, and often two AHTS vessels to assist an active exploration rig. Today, the AHTS vessel is most commonly used only when the rig is being relocated. Chartered vessels supply the rig during the drilling phase as well as fixed production installations and mobile exploration rigs. The consequence is that the demand for vessels in terms of rigyears is down to 0.3 boatyears. It is possible, however, that increased exploration in deeper and more remote waters will reverse this trend. Emergency Towing Vessels (ETV) Services for the UK Coastguard The UK Coastguard has chartered three large AHTS vessels for ETV patrol during the autumn and winter months (October April) in recent years. The vessels patrol the busiest and most exposed parts of the British coastline. Farstad owns two of the three vessels that were chartered this past winter. The partner for Farstad Shipping this winter was Howard Smith Towage and Salvage Ltd. The vessel Far Turbot is stationed at Dover to provide ETV cover for the English Chanel area, and Far Minara is stationed at Falmouth to patrol the ofte very stormy South West Approaches. Far Minara in service for the UK Coastguard

31 T H E M A R K E T F O R O F F S H O R E S U P P L Y V E S S E L S OILFIELDS OUTSIDE MACAÉ CAMPOS BASIN BRAZIL SUPPLY VESSEL OWNERS / MANAGERS WITHIN THE REGION per February 99 SUPPLY VESSELS WITHIN THE REGION per February 99 SUPPLY VESSELOWNERS / MANAGERS WITHIN THE REGION per February Mærsk Australia Farstad/IOS Farstad/IOS Finarge Solstad Gulf Tidewater China Philippines India Singapore Vietnam Chinese Mærsk Seacor Swire Others Other Other AHTS > BHP PSV > DWT AHTS > BHP PSV > DWT AHTS > BHP PSV > DWT 36 BRAZIL This year, the Company will have these vessels employed in Brazil: The FAR EAST/AUSTRALIA As a result of the establishment of IOS at the end of 1997, the exploration activities in shallow waters and as a consequence for the jackup market. For the deepwater rigs, on the other hand, the relatively 37 anchor handling vessels Far Sailor, Far Sea, Far Centurion, Far Company s presence in the AsiaPacific region has increased few rigs available in the market are much more sensitive to increases in Crusader, the platform vessel Far Sleipner, and in addition, the pipelaying vessel Lochnagar. Farstad Shipping also has an AHTS vessel under construction, to be employed under an 8year contract for Petrobas after delivery takes place in the beginning of year Approximately 22% of freight revenues for the Company are expected to come from activities in Brazil. Stationed in the Petrobas base in Macaè, approximately 200 kilometers substantially. By using the organisation that P&O have established in the region, IOS has especially focused its activities on the markets in Australia and the Far East. Australia is deemed the most important market in the region. In 1998, 13% of freight revenues in the Company came from this region. A similar share is expected in In the beginning of 1999, both the PSV vessels and four of the AHTS vessels were employed in areas outside Australia. Two of the AHTS vessels were employed in the Philippines. demand. Just a smaller increase in demand would likely create a positive effect on activities which in turn could be very positive for the large AHTS vessels in second half of northeast of Rio de Janeiro, the vessels service the fields in the "Campos Basin". They perform supply duties, anchor handling jobs, construction assistance, submerged pipelaying activities and maintenance. Source: Brasil energy Far Centurion and Far Crusader transferring bunkers offshore in the Campos Basin The total production in Brazil at the end of 1998 totaled 1.2 million barrels per day. Petrobas ambition is to increase production to 1.5 million barrels before year Offshore production represents about 80% of this total. A series of events took place in 1998 that will have a positive influence on the market for production of oil and gas in Brazil in the coming years: Petrobas started its Joint Venture Partnership Program for continued development of oil fields in Brazil, in cooperation with other large oil companies. The deep Campos Basin area is one of the most promising areas in this respect. Petrobas started developing two large new fields at depths of 1,000 2,000 meters, "Marlin Sul" and "Roncador". A pilot system is already installed in the Roncador field, capable of production at a depth of 1,853 meters. Petrobas has also started developing four other fields in the Campos Basin that have depths of 500 1,200 meters. The Brazilian government s oil ministry ANP has launched its first international bidding invitation for an offshore field of 90,000 km2. This region employs about 25% of the world s fleet of supply vessels, and about 17% of the world s fleet of rigs. However, it is a fairly small market of the large supply vessels. At the end of the year there were three large PSV vessels and 24 large AHTS vessels (5 of these were in China) in this region. With the acquisition of two PSV vessels in October 1998, IOS has consolidated its position as a leader in the market for large AHTS and PSV vessels. The region maintained a high rate and utilisation level far into This was an extension of the positive market conditions in 1996 and 1997, when the rate level increased by 20% annually. The financial crisis in Asia, combined with a low oil price contributed to a strong decline in rig activities in Q4 1998, and the trend continued into The rig utilisation level in Q is down to 60%. This trend has also been negative for the utilisation and rate level for the supply vessels. There are signals from Asia that indicate that the financial crisis has bottomed out. Several countries have predicted economic growth in If the oil price can be stabilised at a higher level (USD per barrel), the development yields some hope that the fall in the market for rigs and supply vessels could bottom out. It is expected that it will take some time before an improvement in the market is reflected for Lady KariAnn at the base in the Bassstrait Lady Sandra on trail trip Source: Petrodata

32 A D M I N I S T R A T I O N A N D O R G A N I S A T I O N Employees at the office in Aalesund Ålesund harbour Aberdeen harbour The Management: From left: Terje J. K. Andersen and Sverre A. Farstad. In front; Torstein L. Stavseng In the beginning of May, Sverre A. Farstad will step in as the Chairman of the Board. Terje J. K. Andersen will take over as Managing Director. Karl Johan Bakken is promoted as Director of Market and Operations Employees at the office in Aberdeen Macaé harbour Melbourne harbour F A R S T A D S H I P P I N G ASA F A R S T A D S H I P P I N G ASA Jan H. Farstad Technical Manager Magnar Gjerde Quality/Safety Manager Terje J. K. Andersen Deputy Managing Director Rolf Synnes Crewing Manager Sylvi L. Eliassen Chartering Manager F A R S T A D S H I P P I N G L T D. Mike Gibbon Safety & Personnel Manager Richard Stables Accountant Sverre A. Farstad Managing Director John R. Maxwell General & Chartering Manager Trevor Reid Ship Manager Jim Watt Ship Manager Torstein L. Stavseng Finance Director Idar Gjerde Finance Manager Hallkjell Dahle Finance Manager IOS OPERATION 100% F A R S T A D S H I P P I N G L T D. Farstad Shipping Ltd. is the company with office in Aberdeen, with a total of 11 employees. The office is responsible for operating 8 supply vessels with a crew of 183, most of whom is British. In addition, Farstad Shipping Ltd. and the Brazilian DSND Consub S.A. operate Lochnagar as a coop. In 1998, Lochnagar was reconstructed to serve as a pipelaying vessel for flexible pipes. The Company s headquarters are in Aalesund, with 29 employees. This office operates 15 of the Company s vessels with a crew of 285. In addition, the office is responsible for supervising the construction projects, and will later take on the operation of additional 3 vessels currently under construction. The 5 supply vessels that are located in Brazil are operated from Aalesund in cooperation with DSND Consub S.A., which has offices in Rio and Macae. P&O Maritime Services in Melbourne are responsible for the operation of the 8 vessels that P/R International Offshore Services (IOS) currently have in the Far East/Australia. 100% FARSTAD SUPPLY AS 100% FARSTAD INTERNATIONAL AS 50% 50% P&O AUSTRALIA P/R INTERNATIONAL OFFSHORE SERVICES ANS OWNERSHIP OF FLEET Farstad Supply is the company in the Farstad Group that owns the vessels. The company was founded in 1997, as a result of the Company s efforts to conform to the new tax regime for shipping companies. In the beginning of 1999, the Company owned 19 vessels, and in addition, there were 5 vessels on order. IOS owns 9 vessels, and in addition, it has one vessel on a bareboat contract. These companies have no employees.

33 H E A L T H, S A F E T Y A N D E N V I R O N M E N T ( H S E ) HEALTH, SAFETY AND ENVIRONMENTAL PROTECTION (HSE) POLICY Farstad Shipping acknowledges that the health and safety of personnel serving on Farstad Vessels or Offices, combined with concern for the environment is very important, and have, therefore, established the following policy: Farstad Shipping have undertaken to offer and maintain a safe working environment. The Company anticipates that all individuals will contribute to enhance safety, irrelevant to their position or rank, onshore or offshore. Every individual should have an understanding of responsibility towards himself, his family, his colleagues and the company in all matters concerning health and safety. Each individualõs attitude and actions, as others see and observe them, will be setting standards, and this can serve the purpose of encourage others to perform their job in a way that can contribute to the achievement of an accident free and non health damaging working environment. We have a common responsibility for preserving and improving the environment, onshore or offshore, and accordingly, we should by all means work to reduce any risk of damaging the environment by waste, pollutants or unnecessary use of nonenvironmentally friendly substances. Farstad Shipping will appreciate each individualõs cooperation and suggestions in health, safety ane environmental issues, and the Company will in its turn offer necessary resources to reach the goals set forth in this policy. INTERNATIONAL REGULATION IMO (International Maritime Organisation) The UN s shipping organisation (IMO) has developed a comprehensive set of regulations for international shipping. Transportation activities create risks of damages to the environment through pollution, primarily as discharge to air and water. Many countries have specific requirements, but all requirements essentially conform to the rules and regulations adopted by the IMO. Norway is an active participant in IMO s activities in order to regulate shipping activities. This is performed by Sjøfartsdirektoratet, Det Norske Veritas and the shipping companies, represented by Norges Rederiforbund. SOLAS/MARPOL (Convention Safety of Life at Sea)/Convention for the Prevention of Pollution from Ships) Within HSE, these are the conventions that form the basis for the shipping companies own systems. STCW (Standard for Training, Certificates and Watchkeeping for seafarers) ISM (International Safety Management Code) 40 This code requires that there is a documented leadership infrastructure lesund, 3 June 1993 Farstad Shipping ASA for environmental issues, similar to that of safety and other leadership 10 Sverre A. Farstad functions. The ISM code represents a substantial step forward to handle Managing Director environmental activities within the Company 5 41 The translation into english has been prepared for information purposes only. Captain and Chiefmeeting for british officers in Aberdeen. In addition to keeping a busy training schedule, there are conferences held regularly to update the crew about new developments in the Company and to discuss operational and organisational issues Separation of waste onboard LTIRATIO (LOST TIME INCIDENTS) (number of lost time incidents for every million hours worked) HSE AT FARSTAD SHIPPING With a strong focus on the prevention and reduction of injury to people, damage to equipment and the environment, Farstad Shipping has implemented its own requirements, procedures and systems for HSE. Only through the continuous and systematic reporting and followup of potential accidents, events and actual accidents can the Company achieve the goals set on HSE. The Company s environmental policy is defined to include the following main factors. Comply with requests from authorities and customers Reduce the risk for damages and uncontrolled discharges. Be proactive with health, safety and environmental improvements Even though there is no mandatory ISM certification for shipping companies managing supply vessels before July 2002, Farstad Shipping has already implemented this system. In 1996, the Company s offices were ISM certified. All vessels owned by the Company are on schedule to be certified by the end of year HSE REPORT FOR 1998 The goals set for HSE at the beginning of the year were essentially met. These are some examples: Introduction of "Cargo securing manuals" to all vessels. Emergency exercises for officers, crew and other personnel. Introduction of mandatory record keeping for rest time, in accordance with the STCW convention. Implementation of a garbage management plan, for treatment of waste. Quality systems translated to English and Portuguese. Acquisition of oilspill kit (oil collection equipment for small oil spills). To improve the atmosphere for the crew, a decision was made to install satellite TV systems aboard all the Company s vessels. The feedback from the crew has been very positive. In an effort to limit noise and vibrations, one of our new vessels is equipped with motors that are mounted on rubber blocks. In addition, there is an extra layer of insulation in the engine room to reduce noise pollution. Reports of incidents and Non Conformance Report In 1998, the vessels in the fleet managed by Farstad Shipping have reported 215 incidents, compared to 125 incidents in This increase is mainly a result of an awareness effort in incidents were reported in 1998 (7 in 1997) concerning personal injuries. These resulted in 137 days of absence (109 in 1997). The personal injuries for 1998 are equal to a LTIratio of 4,4 versus 5,7 in Non Conformance Report (NCR) shows result of operational interuptions and/or internal audits/inspections according to the Company s quality system. The number of NCR in 1998 was 78 versus 106 in incidents were reported in 1998 (6 in 1997) concerning a discharge of totally m 3 (2.63 m 3 in 1997). The numbers for 1998 include a discharge of m 3 of brine. Brine is not considered to be harmful to the environment. Other types of discharge include marine gas oil, lubricants and hydraulic oil. Discharge has in some instances occurred when loading and unloading at rigs or other offshore installations. Air pollution occurs generally when there is a discharge of exhaust gases (NOX or SO2). Most of the vessels use a grade of marine gas oil for fuel and production of electricity. A few vessels use a lighter type of heavy oil. The charterer of the vessel is the decision maker in terms of time schedule and fuel consumption. Farstad Shipping is dedicated to limiting the discharge of hazardous gases, and is always ready to evaluate optimal solutions and new technology. To meet future requirements, the Company is going to focus more on pollution control in the coming year. There is already a strong focus on how to reduce the use of chemicals for cleaning as well as adding cooling fluids. The increased use of environmentally friendly products has led to the use of an electrical system that reduces corrosion. This has contributed to a reduction in the use of chemicals and poisonous agents in engine / machinery and water intakes. There is an existing program to replace all fire extinguishers that contain halon that are located in engine rooms. This program will be prioritised in In recent years, the Company has increasingly used TBT free antifouling paint at a considerable cost premium. It has become a standard requirement for all vessels that are under construction and scheduled for delivery in The Company operates in many areas, and the infrastructure for waste management, including waste oil and hazardous materials is sometimes less than ideal. The Company separates waste and manages waste oil in a manner that is optimal with respect to the regulations and infrastructure that exist.

34 H E A L T H, S A F E T Y A N D E N V I R O N M E N T ( H S E ) Choice of Career Students from VKI visiting on board M/V Far Grip when the vessel called at Aalesund. The basis for choice of occupation on board is often laid at the completion of VKI (first year studies), and a visit on board a vessel is therefore important. Bridgechair on starboard side: Right armrest, joystick for manoeuvring, controls for winch, selector for the desired type of winch. Left armrest, winch controls with buttons, winch tension control and buttons to select the desired type of winch. Bridgechair on the port side: Equipped with a flexible microphone attached to the back of the chair Right armrest, joystick, controls for main propellers Left armrest, controls for thrusters, selector for communication systems VHF/UHF Bridge simulator, Especially developed for supply vessels. Captain Geir Jarnes on the bridge simulator at SMS. The simulator, which has been used since 1996, is developed in a joint effort by Farstad Shipping, the Ulstein Group and Ship Manoeuvring Simulator Centre AS (SMS) in Trondheim. The simulator is used for training officers in manoeuvring and handling crisis situations. Trainee Year 1 Motorman Trainee Elisabeth Nykrem engaged in maintenance of equipment on board M/V Far Superior. Trainee Year 2 AB Trainees Kim Andre Henden and Motorman Trainee Morten Hermansen being instructed in MOB vessel operation by AB Kjell Godø on M/V Far Fosna Farstad Shipping has, in a joint effort with Aktro AS in Molde, developed a deck manipulator for anchor handling vessels. The powerful manipulator is equipped with a special hydraulic grip tool to handle anchor chains, wire and heavy objects. The prototype was built and tested at Aktro s facility outside Molde. The first unit produced is now installed aboard Far Senior, and built into the deck astern, and is hydraulically powered. The manipulator can be operated with the use of a remote control. This dramatically improves the safety of the crew when handling heavy shackles, chaines and wires. In addition to its capabilities as a crane, the manipulator is also designed to pull chains or wire across the deck, with a horizontal power of 10 tons (regular cranes are only able to lift vertically). Nils Ove Giskegjerde, senior mechanical engineer aboard Far Senior, introduced the idea and created the first blueprint of the deck manipulator. Simulator for dynamic positioning (DP) Deck Officers Hans Engeseth and Ståle Synnes in front of the simulator at "Høgskolen" in Ålesund, which Farstad Shipping helped to finance in The simulator consists of an operator console, a controller console, an instructor s control, and a manual manoeuvring console. The modules that are installed include those for supply vessels, production vessels and drilling rigs. The Company wants to utilise the simulator for training deck officers who are designated to employment on vessels with DPequipment. Craftman s Certificate AB Trond Myrhaug and Motorman Trainee Tore Fjelle received their Craftman s Certificate in January FOCUS ON IMPROVED HSE The maritime environment that characterises the North West coast has enabled Farstad Shipping to take the initiative to, or participate in several projects aimed at improving safety at sea. The development of our own specifications for supply vessels has made it possible to utilise the experience gained by our crews. The cooperation with the maritime environment coupled with R&D efforts in developing new equipment has formed the basis for better vessels with improved safety. A joint project is now under way to develop our own type of vessel called "Far PSV 2000". In addition, there is substantial improvement with respect to equipment, noise, use of materials, maintenance requirements, documentation, and comfort for the crew. Farstad Shipping, the Ulstein Group, the electronics firm Øverland and chair manufacturer NorSap/Maritime Partner have all joined forces to develop a chair aimed at improving work posture when manoeuvring and handling the anchor of offshore vessels. A prototype was tested in a simulator in Trondheim. The chair is installed in Far Senior and ordered for our three newbuildings. TRAINING Training and skill enhancement are vital to the Company s future opportunities. The more advanced types of vessels that the Company has acquired in the last couple of years create new and greater demands for training. This is especially true for Far Sovereign, delivered in The STCW convention has adopted new international regulations that require the upgrade of older certificates. For the crew whose education was taken before 1997, training in some areas must be completed to ensure that their certificates are valid from February, A considerable effort by the office as well as the officers must be made in order to receive the new certificates in time. Requirements from the oil industry and the maritime authorities have led to increased demand for training and continuing education, especially for what safety is concerned. Because Farstad Shipping has traditionally prioritised training and safety, the new requirements have not had any significant impact on the Company. The use of IT as well as simulators for evaluating and testing the officers has become an increasingly important part of the training. The Company has set up its own computer facilities to train employees. In 1998, more than 1,000 days have been spent on safety as well as professional training. In 1998, the Company also trained personnel who had been designated the role as professional counsellors for new employees and apprentices on board. RECRUITMENT Results from the efforts in recruitment that the industry, including Farstad Shipping, has made in recent years, is starting to show. Even though recruitment will remain an important task for the HR department, there is going to be an increased focus on training and improving the competence level. The contribution that the public reimbursement program has given the industry, has laid the foundation for a continued growth of Norwegian sailors. YEAR 2000 The Company initiated a project in 1998 to inspect equipment and systems to gain an insight on the Y2K problem. Today, approximately 85% of all the equipment has been inspected, and a small number of problem areas have been identified. All equipment is scheduled for inspection before the arrival of critical dates. Officer s Education Two of the company s future officers who will complete their maritime education this year, Hans Engeseth and Ståle Synnes. Education Completed Arve Molnes joined the company as Trainee in 1993, and has since completed his maritime education. He is now serving as 1st Deck Officer on board M/V Far Senior. Here on DPwatch on board M/V Far Senior. Making Use of Qualifications Electrician Åge Nakken and 1st Engineer Frode Klokk are engaged in the Maritime Personnel Department where Åge is preparing for Year 2000, and Frode is preparing new forms for use on the PC s on board the vessels. Both Åge and Frode started as trainees in Farstad Shipping. New developed deck manipulator see above

35 UT741 FAR SOVEREIGN SUPER POWERFUL MULTI PURPOSE VESSEL FOR THE OFFSHORE INDUSTRY This new vessel under construction at Langsten Slip & Batbyggeri, will be delivered during late May / early June The Far Sovereign will be one of the largest and most powerful anchor handling vessels in the market. With a total of offshore use and is located midships, port side and can be used to work either over the vessels side or through the moon pool. Two further cranes are located forward, port and starboard, and can lift 7 tons at 12 meters. There is a further small crane located aft on the starboard side which can reach 19 meters with a 2.5 ton capacity. There is also a sectional, removable 27,400 BHP being developed from her four main mezzanine deck of 320 m 2 which provides engines she is estimated to have a continuous bollard pull of 280 tons and will be capable of additional deck space and a base for ROV operations. undertaking all AHTS duties worldwide in 44 offshore deep water locations for today s market and into the future. Her capabilities will also include subsea operations such as pipeline The DP system is a Kongsberg Simrad DP system, type SDP21. This system meets the requirements 45 plough trenching, cable lay, construction and abandonment. As a multipurpose vessel she will be equipped with a DP system ( DYNPOS AUTR NMD Class II) and has achieved ERN 99/99/99. Also fitted is a 19 metre helicopter deck, accommodation for 63 persons, a 7 x 5 metre moon pool, standby and rescue equipment for 300 persons and will be certified to NOFO oil recovery class. The Far Sovereign is 85.2 meters long, 20.5 meters wide, 4400 DWT and her main deck is 680 m2. The maximum speed will be 17 knots. For anchor handling and towing contracts she is equipped with a double drum, 500 ton pull winch, a a 130 ton pull secondary winch, two 20 ton tugger winches and a further two spooling/ storage winches located under the main deck. At the stern, she is equipped with a 160 ton SWL "A" Frame, four towpins rated at 270 tons SWL, two karm forks at 270 tons SWL and a further two rated at 750 tons SWL. The stern roller is a split/double type design and is 6 meters wide, 4.5 meters in diameter and has a SWL of 620 tons. The Far Sovereign is also equipped with 4 cranes. The largest has a 100 ton capability at 10 meters and 10 tons at 26 metres. This crane is rated for of DP Class II. The reference systems are, tautwire, laser, HIPAP (hydroacoustic) and DGPS. In addition to the two main propellers which are 4.5 meters in diameter, three tunnel thrusters and one azimuth thruster enables the vessel to maintain an exact position. The two stern thrusters each develop 1,200 BHP and in the bow the tunnel thruster develops 1,600 BHP and the azimuth 2,200 BHP. This unit is a KRM8 and is separately powered by a diesel engine and greatly enhances her station keeping abilities. The four main engines are Ulstein Bergen diesels and are configured in a "fatherson" arrangement. The two larger engines are BVM12 units and develop 7,200 BHP each and the smaller engines are BRM9 units and each develop 5,400 BHP. The axle generators are set for floating frequency in the 5060 Hz range and this makes it possible to operate a fuel saving combination operation. The propeller system is operated by gear boxes from Scana Volda. The port side is capable of running the axle generator without the propeller system rotating. The Far Sovereign has secured a term contract with European Marine Contractors Ltd. (EMC) for plough trenching work worldwide and other offshore construction and subsea activities.

36 F L E E T G A L L E R Y

37 T H E F A R S T A D F L E E T Owner Register i ) Year built Design BHP DWT Deck area m 2 Liquid mud Firefighting Standby Rescue class Oil recovery Estimated marketvalue v ) (NOK mill.) Mortgage debt iv ) at (NOK mill.) Employment vi ) at Charterer Fleet gallery No: A H T S A N C H O R H A N D L I N G / T U G / S U P P L Y CONTRACT OVERVIEW AT Farstad Supply AS 1999 UT x N x 35 years EMC 1 Farstad Supply AS 2000 UT years Petrobras 2 Farstad Supply AS NOR 1998 UT 722 L x N x 249,2 155,0 Spot 3 Farstad Supply AS NIS 1997 UT ,8 112,0 Sept. 02 Petrobras 4 Farstad Supply AS NOR 1993 UT x FIFI II N x 180,8 78,3 Nov. 05 Norske Shell 5 Farstad Supply AS NOR 1993 UT x FIFI II N x 180,8 79,7 Aug opt. Norsk Hydro 6 Farstad Supply AS IOM 1991 ME 303 II x N x 146,0 28,2 April 99. ASCo 7 Farstad Supply AS NIS 1983 ME x FIFI II UK x 100,8 16,9 Dec. 99 Petrobras 8 Farstad Supply AS IOM 1983 ME x FIFI II UK 100,8 16,1 Nov. 00 Petrobras 9 Farstad Supply AS NOR 1980 UT FIFI II N x 81,7 12,8 March ETPM/HM Coastguard 10 IOS (50%) ii ) NIS 1987 Hudong x FIFI I 81,5 34,3 Spot 11 IOS (50%) NIS 1983 ME x x 103,7 42,7 June 99 MSPMS/Woodside 12 IOS (50%) NIS 1983 Amels x FIFI I 83,5 38,5 June 99 MSPMS/Woodside 13 IOS (50%) NIS 1983 ME x 103,7 42,7 April 99 BHPP 14 IOS (50%) NIS 1983 Bolsønes x FIFI II 103,9 42,7 April 99 BHPP 15 IOS (50%) NIS 1991 ME 303 II x N x 145,7 67,5 Dec. 00 Petrobras 16 IOS (50%) NOR 1983 UT x 84,2 42,7 April 00 + opt. EMC/HM Coastguard 17 iii ) NIS 1998 KMAR x FIFI I x 0 0 Spot 18 Farstad Supply AS 1999 UT x FIFI II N x 10 years Norsk Hydro 19 Farstad Supply AS IOM 1999 VS x March 04 ASCo 20 Farstad Supply AS IOM 1999 VS x Jan opt. Amerada Hess UK 21 Farstad Supply AS IOM 1996 UT x 153,3 31,8 Feb. 01 ASCo 22 Farstad Supply AS IOM 1995 UT x 150,8 75,4 Jan opt. ASCo 23 Farstad Supply AS IOM 1991 UT x 107,5 23,8 Jan opt. ASCo 24 Farstad Supply AS NOR 1991 UT x N 107,5 17,3 April 05 + opt. Norsk Hydro 25 Farstad Supply AS NOR 1990 UT 705 L x 117,5 17,0 Dec opt. Saga Petroleum 26 Farstad Supply AS NOR 1983 UT 706 L x 74,2 11,5 Sept opt. ASCo 27 Farstad Supply AS IOM 1982 UT 705 omb x 190,8 121,6 Aug opt. DSND 28 Farstad Supply AS IOM 1982 ME x 69,7 12,1 April 02 + opsj. Amerada Hess UK 29 Farstad Supply AS NIS 1984 ME x 71,0 12,6 Nov. 06 Petrobras 30 Farstad Supply AS NOR 1983 UT x FIFI I N x 76,2 15,2 Feb opt. ASCo Norge 31 Farstad Supply AS NOR 1982 H/R omb x FIFI I N 44,5 7,7 Dec. 03 Amoco N 32 Farstad Supply AS IOM 1982 H/R x 33,7 5,2 July 99 + opt. BHP Petroleum 33 IOS (50%) NIS 1983 ME x 71,9 55,5 Oct. 03 Esso 34 IOS (50%) NIS 1982 ME x 72,2 55,5 Sept opt. Esso 35 FAR SOVEREIGN TBN FAR SANTANA TBN FAR SENIOR FAR SAILOR FAR FOSNA FAR GRIP FAR SKY FAR CRUSADER FAR CENTURION FAR TURBOT LADY CYNTHIA LADY AUDREY LADY ELAINE LADY VALISIA LADY DAWN FAR SEA FAR MINARA LADY SANDRA P S V P L A T F O R M S U P P L Y V E S S E L CONTRACT OVERVIEW AT FAR STAR TBN FAR SUPPLIER FAR STRIDER FAR SUPPORTER FAR SERVICE FAR SERVER FAR SCANDIA FAR SUPERIOR FAR GRIMSHADER LOCHNAGAR FAR SCOTSMAN FAR SLEIPNER FAR SPIRIT FAR SUN FAR VISCOUNT LADY ELIZABETH LADY KARIANN 48 i ) IOM = Isle of Man ii ) P/R International Offshore Services ANS iii ) The vessel is chartered by IOS on a 5 years bareboat charterparty. iv ) v ) The vessels debt is shown on a 100% basis. The estimate of market value are based on an average of three independent broker s estimate of the vessels value (free of charter) at the year end 1998/99. vi ) Certain freight contracts contain clauses which give the charterer the right to cancel the contracts. Contracts Charterer s option

38 L O C H N A G A R The PSV Lochnagar Lochnagar prior to the conversion to a flexible pipelaying vessel. This is a coop project between Farstad Shipping and DSND. New steel Orginally vessel The extent of the conversion Drawing showing the extensive conversion of the vessel. The project included 1,250 tons new steel, a new main engine, an extra azimuth thruster astern, a new tunnel thruster in the baugh, helicopter pad, accommodations for 60 people and a DP system in accordance with Dn V class Aut R. I addition to this, there is a new bridge astern. After the conversion, Lochnagar is 23 m. longer and 5 m. wider. Additionally, there was installation of equipment for pipelaying, which was DSND s portion of the conversion. 49 Lochnagar during conversion Lochnagar during conversion, here at the shipyard Victor Lenac in Rijeka, Croatia. The conversion project started immediately following the vessel s arrival at the yard in February The pipelaying vessel Lochnagar Lochnagar after completion of conversion. The vessel is chartered on an 8year contract with DSND, which will use the vessel in Brazil in the first part of the contract period.

39 F ARSTAD SHIPPING ASA PO Box 1301, 6001 lesund Notenesgt.14 Norway Tel: Fax: Tlx: TYFAR N post@farstad.no FARSTAD SHIPPING LTD. Farstad House, Badentoy Avenue. Badentoy Park, Portlethen, Aberdeen AB12 4YB Scotland Tel: Fax: Tlx: aberdeen@farstad.co.uk

40 Farstad Shipping Table of Contents Overview FARSTAD SHIPPING ASA A N N U A L R E P O R T Summary 1998 Key figures Report of the Board of Directors Income Statement Balance Sheet Cash Flow Analysis Notes Shareholders Policy Main menu HUGIN All rights reserved