Global Reports LLC. DEEP SEA SUPPLY Plc

Transcription

1 DEEP SEA SUPPLY Plc ANNUAL REPORT 2008

2 KEY FIGURES Figures in USD PROFIT AND LOSS ACCOUNT Sales - freight revenue 190, ,660 Gross profit 99,977 89,928 Gross profit margin 53% 61% Operating profit 92,668 92,346 Operating profit margin 49% 63% EBITDA 122, ,532 EBITDA margin 64% 69% Profit before tax 50,294 70,549 Profit margin before tax 26% 48% Profit 53,404 57,705 Profit margin 28% 39% SOLVENCY AND LIQUIDITY Cash 33,799 31,396 Book equity 112, ,254 Book equity margin 1) 14% 23% Value adjusted equity 404, ,000 Value adjusted equity margin 2) 41% 56% PROFITABILITY Average number of shares 126, ,608 Share price Earnings per share Earnings per share diluted Cash flow per share VESSELS AND NEWBUILDINGS Vessels in operation Newbuildings 9 16 Definitions: 1) Total equity / Total assets 2)Value adjusted equity / Total value adjusted assets

3 DEEP SEA SUPPLY AT A GLANCE ANNUAL REPORT 2008 CONTENTS left Key figures Deep Sea Supply at a glance Highlights Fleet list Existing Vessels Newbuilding delivery Board of Directors Report from the Board Consolidated Financial Statements Consolidated balance sheet Consolidated income statement Consolidated statement of changes in equity Consolidated cash flow statement Notes to the consolidated financial statements Auditor s report The largest shareholders Corporate governance Parent Company Financial Statements 1

4 DEEP SEA SUPPLY AT A GLANCE DEEP SEA SUPPLY Plc ( DESSC or the Company on a consolidated basis) is a company listed on the Oslo Børs. The company is incorporated in Cyprus. Deep Sea Supply ASA was established for the purpose of building up an offshore support vessel business. In July 2005, the company acquired six 15,000 BHP AHTS (Anchor Handling Tug Supply vessels) from Tidewater Marine Inc. (Tidewater) of the KMAR 404 design. The vessels are built in Norway and are ideally suited for operations in the North Sea and internationally. In April 2006 the Company acquired 22 new-building contracts from Seatankers Management Co. Ltd. (the Seller ) at a price of USD 394 mill. Such acquisition increased the size of the Company significantly. Following this acquisition, the Company has acquired additional shipbuilding contracts at shipyards in Norway and Singapore. DESSC was established on 7 November 2006 for the purpose of acquiring all shares of Deep Sea Supply ASA. The Board of Deep Sea Supply ASA concluded in 2006 that the tax regime in Cyprus is expected to afford more stable, attractive and competitive conditions over time compared to the Norwegian regime under which Deep Sea Supply ASA used to operate. Strategy The Company intends to become one of the leading owners and operators of supply vessels on a global basis. The Company will primarily seek to obtain and maintain a chartering profile with emphasis on the spot, medium and long term contract markets for the medium and large AHTS and medium to long term employment contracts for the small AHTS and the PSVs (Platform Supply Vessel). The Company s primary aims are to meet the demand from the markets that require modern and advanced offshore vessels. The Company will focus on acknowledged Safety Standards developed during recent years within the Offshore Marine Industry world wide, and in particular in the North Sea area. The top management is dedicated to supervise that all personnel are well acquainted with HSEQ standards and procedures, and all efforts will be made to ensure that each individual has the preferred attitude and behaviour with respect to safety matters and is carrying out the operations in accordance with best practices. DESSC will actively consider investments in the perspective of providing financial returns to its shareholders. The Company will actively consider possibilities to participate in industry consolidation, mergers and acquisitions, and will position itself to be part of such consolidation. The Company will actively use the capital market when doing investments, and does not intend to hold significant liquid reserves for investments. Retained earnings will, to the extent permitted under operational constraints, financial covenants and with due regard to appropriate working capital requirements, be paid out as dividends. 2

5 DEEP SEA SUPPLY AT A GLANCE ANNUAL REPORT 2008 Vessel operation The Company has per 31 December 2008 a fleet consisting of 12 AHTS and 8 PSVs. At year-end the vessels operated in Africa, Asia, South America and Europe. In 2008, 7 newbuildings have been delivered; 1 AHTS from Havyard Leirvik, Norway, 1 AHTS from ABG Shipyard, India (sold later same year), 4 PSVs from Cochin Shipyard Ltd., India and 1 PSV from Karmsund Maritime, Norway. Management and employees The Company was established with the aim to employ and maintain a small, focused and qualified management within the following predefined core activities; Chartering Finance, Accounts and Investor Relations Business Development Monitoring and control of external suppliers The Company intends to focus its in-house resources on key competence within the above activities and purchase other services, such as technical management, crew management, construction supervision and accounting services, from third party providers. The Company is incorporated in Limassol, Cyprus. The Company has one management company in Limassol, Cyprus, one management company in Arendal, Norway and one representative office in Singapore. As of year-end the current staff of the Company is 14 persons. During 2008 staff has increased with 3 persons. The Management team of the Company is as follows: Odd Brevik, CEO Chief Executive Officer; Mr. Brevik has nearly 25 years experience from the offshore supply business. From , he worked as Director with Balder Management and from with Supply Service Management. In 1988 he joined Viking Supply Ships AS as managing director where he worked until During this period, Viking Supply Ships was actively investing, operating and divesting ships and other equipment. At the peak, Viking Supply Ships operated 61 vessels and had more than 1,700 employees. It was listed on Oslo Børs for a three years period. Finn Amund Norbye, CFO Chief Financial Officer: Finn Amund Norbye has a long and international career within shipping and finance. From he was CFO of Bergshav Management AS and from he was Director and Head of Fortis Bank s Shipping Division in Rotterdam. Prior to that, he worked 12 years with Christiania Bank s Shipping department. From he was head of the bank s Shipping department in Singapore and from he was Head of the bank s Shipping department in London. Prior to joining Christiania Bank, Mr. Norbye has worked with Storebrand Finans, Norges Eksportråd (Stockholm), Electrolux (Bangkok). Mr. Norbye holds a Masters degree (Siviløkonom) from Norges Handelshøyskole (NHH) and Handelshögskolan in Stockholm. Olaf Hafredal, CCO Chief Chartering Officer: Olaf Hafredal has a long and extensive experience from the offshore supply chartering business. From 1971 to 1990, he worked as shipbroker with Johan G. Olsen Shipbrokers AS, most of the time with the offshore department which he managed from In 1990 he joined Viking Supply Ships AS as chartering manager. When Viking Supply Ships sold its supply fleet to Sævik Supply ASA at the end of 1996, he followed the fleet and worked as chartering manager for Sævik Supply until the same fleet was sold on to Trico Supply ASA. Mr. Hafredal then started as chartering manager for Trico Supply, a position he held until Before joining Deep Sea Supply ASA, Mr. Hafredal worked as chartering manager for Havila Shipping. 3

6 4

7 HIGHLIGHTS ANNUAL REPORT 2008 HIGHLIGHTS 08 January 2008 Second sale and leaseback transaction with SFI for Sea Leopard and Sea Bear. Gross sales proceeds are $126 mill. (net $104 mill.). The transaction improves the Company s cash position with $63 mill. 12 years term with several purchase options. Sale of Sea Trout, the first PSV delivered from Cochin. Sales price $36,5 mill. Delivery of Sea Bass, the fifth PSV from Cochin. 2 years t/c entered into with Melittah Gas (ENI) Libya for Sea Bass and Sea Cheetah. April 2008 Delivery of Sea Pollock, the sixth PSV from Cochin. May 2008 Sale of Sea Wolverine, the second AHTS from ABG, following delivery. Sales price $21,9 mill. 4 years time charters from August 2008 entered into with Exxon Exploration Inc for Sea Pollock and Sea Turbot. June 2008 Refinancing the Senior Bank Loan by a USD240 mill. and NOK970 mill. Loan facility. Delivery of Sea Trout, a PSV design VS470 from Karmsund Maritime Services AS in Norway. The vessel is chartered to Petrofac for operations in North Sea. 1 year time charter with option for another 2 years entered into with ENI North Africa for the AHTS vessel Sea Jaguar. July 2008 Prepayment of the NOK200 mill. Bond Loan facility for the purposes of facilitating further growth and enhanced financial flexibility. September year bareboat charter contract entered into for the PSV Sea Witch with commencement from delivery of the vessel at Cochin Shipyard in December October 2008 The Company obtained GBP 160,000 per day in the North Sea spot market for the vessel Sea Tiger, the highest freight rates in the Company s history. After finishing a 12 month bareboat charter that commenced directly upon delivery from Jaya Shipyard, the option to purchase Sea Ocelot was exercised. November 2008 Delivery of Sea Lion, a Havyard 842 design with 17,520 BHP, from Havyard Leirvik. December 2008 Delivery of Sea Witch, the 8th and last in a series of 8 newbuilding PSVs delivered to Deep Sea Supply from Cochin Shipyard. March 2009 Cancelled the contract with Jaya Shipbuilding and Engineering Pte. Ltd. ("Jaya") pursuant to which Deep Sea Supply was to take delivery of "Sea Hawk 1". The cancellation was based on substantial delays beyond the revised, contractual delivery date. Entered into settlement agreement with Scan Geophysical ASA ( Scan ), whereby Scan shall pay USD 1,0 mill to Deep Sea Supply. The claim was related to a contract entered into between Deep Sea Supply Management AS (DESS) and SCAN Geophysical ASA (SCAN) on 2 June 2006 whereby SCAN acquired three of DESS's shipbuilding contracts with ABG Shipyard in India. 09 August 2008 Delivery of Sea Turbot, the 7th PSV from Cochin. Share price 30,0 25,0 20,0 15,0 10,0 5,0 0,0 sep. 05 jan. 06 mai. 06 sep. 06 jan. 07 mai. 07 sep. 07 jan. 08 mai. 08 sep. 08 jan. 09 Distribution to shareholders Amount per share Ex. dividend date Payment date 2006* NOK 0, Q1 2007* NOK 0, Q2 2007* USD 0,85 (NOK 4,62) Q3 2007* USD 0,40 (NOK 2,18) Q4 2007* USD 0,40 (NOK 2,00) Q1 2008** USD 0,13 (NOK 0,68) Q2 2008** NOK 1, * Dividend by way of reducing the share premium account ** Ordinary dividend from profit 5

8 FLEET LIST AS PER 24 MARCH 2009 Existing Vessels Yard Built Type BHP/DWT AHTS VESSELS Sea Lion Havyard Leirvik AHTS Havyard BHP Sea Tiger Kværner Leirvik 1998 AHTS KMAR BHP Sea Leopard Kværner Kleven 1998 AHTS KMAR BHP Sea Lynx Kværner Leirvik 1999 AHTS KMAR BHP Sea Panther Kværner Leirvik 1999 AHTS KMAR BHP Sea Wolf 1 Kværner Leirvik 1999 AHTS KMAR BHP Sea Bear Kværner Kleven 1999 AHTS KMAR BHP Sea Cougar Kværner Leirvik 1999 AHTS KMAR BHP Sea Cheetah Jaya Shipbuilding AHTS Khiam Chuang BHP Sea Jaguar Jaya Shipbuilding AHTS Khiam Chuang BHP Sea Ocelot Jaya Shipbuilding AHTS Khiam Chuang BHP Sea Otter ABG Shipyard Ltd AHTS Seatech P BHP PSVs Sea Halibut Cochin Shipyard Ltd PSV UT 755 L 3250 DWT Sea Angler Cochin Shipyard Ltd PSV UT 755 L 3250 DWT Sea Pike Cochin Shipyard Ltd PSV UT 755 L 3250 DWT Sea Bass Cochin Shipyard Ltd PSV UT 755 L 3250 DWT Sea Pollock Cochin Shipyard Ltd PSV UT 755 L 3250 DWT Sea Trout Karmsund Maritime Services VS 470 MK II 3300 DWT Sea Turbot Cochin Shipyard Ltd PSV UT 755 L 3250 DWT Sea Witch Cochin Shipyard Ltd PSV UT 755 L 3250 DWT 6

9 FLEET LIST ANNUAL REPORT 2008 NEWBUILDING DELIVERY Vessel no Vessel Yard Type Date Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q AHTS VESSELS Sea Eagle 1 Jaya AHTS Khiam Chuang Apr 09 Sea Weasel ABG AHTS Seatech P-729 June 09 Sea Marten ABG AHTS Seatech P-729 Oct 09 Sea Fox ABG AHTS Seatech P-729 Dec 09 Sea Jackal ABG AHTS Seatech P-729 Feb 10 Sea Badger ABG AHTS Seatech P-729 Apr 10 Sea Vixen ABG AHTS Seatech P-729 June 10 Sea Stoat ABG AHTS Seatech P-729 Aug 10 Deep Sea Supply Plc secured a purchase option at the end of the bareboat charter. 7

10 BOARD OF DIRECTORS Svein Aaser Born 1946 Chairman since 2007 Other board assignments: Marine Harvest (chairman) VM-2011, Holmenkollen (chairman) National Museum of Norway (chairman) Aktiv Kapital (director) J.P. Morgan, European Advisory Council Laerdal Medical AS (director) Education: Master of business administration Norges Handelshøyskole (NHH), Bergen and IMEDE, Lausanne. Bjørn Giæver Born 1967 Director since 2007 Other board assignments: None Education: Bachelor of Science in International Business from Norway and Japan Shares in Deep Sea Supply Plc per : None Shares in Deep Sea Supply Plc per : Frixos Savvides Born 1951 Director since 2007 Other board assignments: Frontline Ltd. Golar LNG Ltd. Vassiliko Cement Works Public Co., Ltd. 3D Global Financial Services Ltd. Education: Fellow of the Institute of Chartered Accountants in England and Wales. Shares in Deep Sea Supply Plc per : None Anna Cecilie Holst Born 1954 Director since 2004 Other current board assignments: Poly Display ASA Optimum ASA Education: Lic.Oec.HSG (University of St. Gallen) CEFA (Norwegian School of Economics and Business Administration) Shares in Deep Sea Supply Plc per : 64,628 8

11 ANNUAL REPORT 2008

12 REPORT FROM THE BOARD the financial year 2008 Deep Sea Supply PLC ( Deep Sea Supply, DESSC or the Company on a consolidated basis) achieved in 2008 operating revenues of USD 190,4 mill., EBITDA of USD 122,2 mill., EBIT of USD 104,6 mill. and a pre-tax profit of USD 50,3 mill. Net result after taxes was USD 53,4 mill. or USD 0.42 per share. The book equity at the turn of the year was USD 112,2 mill.. Company background Deep Sea Supply is a Cyprus based offshore supply company with a modern fleet of anchor handling tug and supply vessels ( AHTS ) and platform supply vessels ( PSVs ) operating world-wide. The Company owned as per 31st December 2008 a fleet of 12 AHTS and 8 PSVs in operation and 9 newbuilding contracts for AHTS. The newbuildings are expected to be delivered in 2009 and The parent company is domiciled in Limassol, Cyprus and the Company has management companies in Cyprus and Norway and a representative office in Singapore. The total number of employees at year-end was 14. Deep Sea Supply is listed on Oslo Stock Exchange with the ticker code DESSC. Company strategy and operations The Company s vision is to become one of the leading offshore supply vessel companies on a global basis. The business model is to maintain a small staff and to outsource technical and crew management to external professional ship management companies. The crew on board the vessels is hence employed by the management companies and are not employees of the Company. The Company focuses on the following main activities; Chartering of the vessels Business development Investor relations / finance / accounting Monitoring of the external technical/crew management companies Growth through acquisition of yard contracts The Company became operational in July 2005 through the acquisition of 6 second hand AHTS, all built in 1998/1999 at Norwegian shipyards. In April 2006, the Company acquired 22 new-building contracts from Seatankers Management Co. Ltd. of which 2 large AHTS, 8 medium sized PSVs and 12 smaller AHTS. In 2006, the Company furthermore acquired a large 1999-built second hand AHTS and late 2006, Deep Sea Supply acquired a newbuilding contract for one AHTS vessel from Havyard, Norway. Three contracts at ABG Shipyard Ltd. were sold in In March 2007 the Company agreed to bareboat an AHTS newbuilding from Jaya Shipbuilding Engineering, Singapore ( Jaya ), from delivery in September The agreement included a purchase option which was exercised in October In September 2007, the Company acquired three shipbuilding contracts; one PSV from Karmsund Yard, Norway and two AHTS from Jaya (of which one was cancelled in March 2009 due to delayed delivery). Early 2008, DESSC sold the first PSV delivered from Cochin Shipyard and the first AHTS delivered from ABG. Delivery of new-buildings In 2007, Deep Sea Supply took delivery of 8 vessels and the Fleet expanded from 7 to 15 vessels as per 31st December In 2008, Deep Sea Supply took delivery of 7 vessels, sold 2 vessels and the Fleet expanded from 15 to 20 vessels as per 31st December Vessels under construction / on order: By year-end 2008, the Company owned 9 new-building contracts for deliveries in 2009 and 2010 at one Singaporean and one Indian shipyard. From ABG Shipyard, India, 7 small AHTS are expected to be delivered in 2009 and in This delivery schedule reflects a delay compared to the original delivery schedule in excess of 12 months. DESSC cancelled one of the Jaya newbuildings in March 2009 due to delays. The remaining AHTS vessel from Jaya is expected to be delivered on schedule in April Vessel operation, technical and crew management and construction supervision The vessels have been employed worldwide throughout 2008 and by year end the vessels operated in the following geographical areas; North Sea: West Africa: Mediterranean: Asia/Middle East: Australia: 3 vessels 3 vessels 9 vessels 4 vessels 1 vessel During 2008, major surveys were performed on 3 vessels. Of the 20 vessels in operation as per 31 December 2008, 14 vessels had Cyprus flag and 6 vessels had Norwegian flag (NOR). The NOR flagged vessels are primarily crewed with Norwegians, however, we also have some few seafarers from EU on these vessels. The Cyprus flagged vessels have either a full Filipino crew, a combination of Filipino crew and East European officers or a combination of Filipinos and Indonesians. The vessels are managed by the external ship management companies Thome Offshore Ltd., Singapore, OSM Ship management AS, Norway and Tidewater International Inc., New Orleans. The Company s Fleet Managers supervise the technical and cost performance of the ship management companies. Construction supervision at the Singaporean and Indian shipyards is performed by Thome Offshore Ltd., Singapore. The Company s two Fleet Managers supervise the external ship management companies performance and perform cost control. 10

13 REPORT FROM THE BOARD ANNUAL REPORT 2008 The 2008 financial statements and certain main risk factors The financial accounts are presented on a consolidated basis. The Board is of the opinion that the financial accounts present a true and fair view about the development, profit and financial condition of DESSC and consolidated at year end. Revenue and profit The Company recorded freight revenues of USD190,4 mill. and vessels operating expenses of USD60,2 mill. Other operating expenses (mainly general and administrative expenses for the offices in Cyprus, Singapore and Norway) were USD 7,9 mill. The Company s revenues in 2008 were in USD, EURO, NOK and GBP and the operating expenses were mainly in USD and NOK. The Company s EBITDA was USD 122,2 mill. Normal depreciation of the vessels was USD 30,3 mill. The vessels book values are depreciated to zero when the vessels are 30 years old. The Vessels intermediate and major surveys are balanced and depreciated until the time for the next intermediate or major survey (every approximately 2,5 years). Other losses consisted of the following; (i) Allocation for loss on shares; DESSC has throughout 1H08 acquired shares in an offshore supply company booked as financial assets at fair value through profit and loss. The shares have reduced in value and caused an unrealized loss of -USD8,2 mill. in 2008 and; (ii) Loss on other short term receivables related to Scan Geophysical ASA ( Scan ) of USD 11,0 mill. See more information below ( Important events after the year end ). Gain on sale; The USD 29,4 mill. gain on sale relates to the sale of the vessels Sea Trout and Sea Wolverine, both sold early 2008 and to deferred gain on the sale of vessels to Ship Finance International in 2007 and 2008 where the gain on sale is recorded as revenue over a period of 12 years. Net currency items were negative USD 3,0 mill. mainly due to customers/trade payables mainly due to changes in the USD/NOK currency exchange rate. Changes in value of financial derivatives were negative USD 9 mill. In order to provide more reliable and relevant information, DESSC has changed its accounting policies related to two 5 years interest rate swaps entered into in relation to the sale and leaseback transaction with Ship Finance International Ltd. The two mentioned interest rate swaps are removed from the 2008 accounts and hence the changes in derivatives are limited to other derivatives entered into for hedging purposes. Corresponding changes have been made also for the 2007 financials. (Note 2.32). Net income before taxes was USD 50,3 mill. The former tax liability of USD 3,3 million has been derecognised at 31 December This is the remaining one third of the untaxed profits which will be waived by the tax authorities, unless distributed, if an amount equal to the related tax is spent on qualifying environmental investments within 15 years. The Norwegian Government had stated its intention that this arrangement should not create a tax liability, but the legislation and the secondary regulations issued by the Finance Ministry were not clear and the Company recognized a liability of USD 12,9 million at 31 December The Norwegian Parliament and Government further clarified the interpretation of the legislation during 2008 and based on this the Ministry of Finance acknowledged that there was a conflict between the transition rules enacted by the Parliament and secondary regulations issued by the Ministry of Finance. As a consequence of this, the Ministry of Finance announced on 20 January 2009 that the 15 year time limit would be withdrawn so that no tax liability exists at This clarification means that the remaining one third of untaxed equity will not be taxed unless it is distributed. The liability of USD 3,3 million has hence been derecognised at 31 December Net income after taxes was USD 53,4 mill. Dividend policy and distributions made in 2008 The Company intends to actively use the capital market when doing investments, and does not intend to hold liquid reserves for significant investments. Retained earnings will, to the extent permitted under operational constraints, financial covenants and with due regard to appropriate working capital requirements, be distributed to shareholders as dividend. The following distributions to shareholders were made in 2008; Dividend Q USD 0,40 (NOK 2.00) Ex. Dividend date Dividend Q USD 0,13 (NOK 0.68) Ex. dividend date Dividend Q NOK 1,00 Ex. dividend date The distribution from Q407 was made by way of reducing the share premium account. Distributions from Q108 and Q208 were from retained earnings. For Q308 and Q408, no dividend payments were made due to the recent international financial crises and the possible negative impacts on the market for offshore supply vessels and the lack of visibility in the financial markets. Vessel revenues and net result development during the year Vessel revenues and EBITDA increased each quarter as can be illustrated below. The main reasons for this positive development was growth in the number of vessels in operation, improved utilization of the Fleet and a strong international market throughout the year and an improved North Sea Market in the 4th quarter of Rate levels for AHTS have improved significantly in 2008 compared to Rate levels for PSVs have been fairly stable during this period. Daily operating expenses for the Vessels have increased for most vessels during 2007 and from 2007 to However Vessels operating expenses have shown a reducing trend from 1st to 4th quarter of

14 Balance sheet Total assets were USD 830,5 mill. consisting mainly of (i) the book value of vessels which includes the 6 vessels in the mentioned sale & leaseback transactions with Ship Finance International and (ii) construction contracts (new-buildings) which include all payments made to the shipyards on the 7 new-building contracts. Bank deposits at year end were USD33,8 mill. Book value of vessels and newbuildings - impairments The market values of vessels have reduced in 4Q08. The Company has obtained independent assessments from external brokers, however, no impairment has been found necessary. Trade and other receivables The Company has recognized losses on trade receivables of GBP 374,000 (USD 546,000). No further provisions have been deemed necessary, except for Scan. Freight income not received of USD47,8 mill. is equivalent to average outstanding payment from charterers of approximately 2.5 months. The Company has experienced earlier payments from charterers in 2008 compared to CIRR Loans During the period ended 31 December 2008 the Group has applied for Commercial Interest Reference Rate (CIRR) loans from the Norwegian Export Credit Agency. The total loan amount was USD 48,9 mill. The duration of the loans is 12 years and the cash proceeds from the loans have been deposited in fixed deposit account with a Norwegian bank at a higher interest rate than that of the loans. The agreed period of the deposits is identical with the one of the loans. The loans and the interest thereof will be repaid from that account and the difference has been recognized as deferred gain and will be amortized over the period of the life of the loans. Deferred gain A gain from the sale of the vessels to Ship Finance International Ltd. (in 2007 and 2008) of currently approx. USD 100,0 mill has been deferred in the balance as liabilities (long and short term), and will be amortized over the lease term which is 12 years. In the balance, the seller s credit is deducted from the gross long term debt related to the leasing transaction. Financing bank facility 14 vessels are financed by a senior loan facility of which USD 295,4 mill. was outstanding by the end of The loan has a 15 years repayment profile for the new vessels and 10 year repayment profile for the 1998/1999-built vessels. Interests on the loan facility are NIBOR / LIBOR plus a margin of 1.30% p.a. The senior loan facility is secured with a 1st priority mortgage in the financed vessels. Financing - bond loan: The Company s NOK 200 mill. bond loan was repaid in July with a call premium of 5%. Financing bareboat charter: The vessel Sea Ocelot was on a one year bareboat agreement with Java Marine Lines PTE Ltd, Singapore until the vessel was acquired on 6 October 2008 and financed by the Senior Bank Loan and included in Vessels together with the other owned vessels. Financing - Sale and leaseback transactions In August 2007, DESSC entered into a heads of agreement with Ship Finance International Ltd. for a sale and leaseback transaction which now include the vessels Sea Cheetah, Sea Jaguar, Sea Halibut and Sea Pike. In November 2007, DESSC entered another heads of agreement with Ship Finance International for a sale and leaseback transaction of the AHTS vessels Sea Bear and Sea Leopard. The transaction was concluded in January, The gain from the sale of the above vessels to Ship Finance International Ltd., currently of approximately USD 100 mill. ( deferred gain on sale ), has been deferred in the balance sheet as long term liability, and will be amortized over the lease term which is 12 years. In the balance sheet, long term debt shows the outstanding lease obligations net of the seller s credit USD per day USD st Quarter 08 2nd Quarter 08 3rd Quarter 08 4rd Quarter 08

15 REPORT FROM THE BOARD ANNUAL REPORT 2008 Capital expenditure Below are presented the future expected contractual yard payments (after cancellation of Sea Hawk 1 from Jaya) and committed borrowings for the remaining new-building program (all numbers in USD1,000): Total Contractual yard payments 36,600 79, ,100 Committed bank borrowings from delivery 36,600 48,800 85,400 Equity Shareholders equity at the start of 2008 was USD 159,3 mill. At the end of 2008 the Company s equity was USD 112,2 mill. The reduction in equity is mainly caused by dividend distributions of USD 90,2 mill. Shareholders Hemen Holding Limited is the Company s largest shareholder and holds just below 34.3% of the Company s shares. Liquidity Total current assets at year end were USD 99,2 mill and short term debt (including short term portion of long term debt) was USD 83,8 mill. Cash flow Net cash generated from operating activities were USD 88,8 mill., net cash generated from investment activities were a negative - USD 75,1 mill., net cash from financing activities were a negative - USD 11,2mill. Main risk factors and uncertainties A number of the Company s vessels are on short or medium term charters and the earnings on these vessels are hence sensitive to changes in the charter rates. Charterer s payments are normally 30 days after end of months which expose the Company to credit risk from its charterers. By end of 4Q08, the Company had 9 newbuildings remaining and DESSC is hence exposed to delays in delivery which may postpone future revenues. The Company is furthermore sensitive to changes in exchange rates and interest rates. The current financial turmoil can cause changes in the number of delivered offshore supply vessels and rigs and floaters and hence affect the supply and demand situation for the offshore supply sector. The financial turmoil can furthermore influence negatively on the banking market and the Company s ability to obtain financing. Going concern The financial accounts are prepared on the going concern basis. Financial risks Liquidity and risk In a long lasting and depressed freight market, the freight revenues can be lower than the Company s operating and financial / bareboat expenses and hence reduce the liquid means of the Company. The current financial turmoil and a lower oil price create uncertainty with respect to the future offshore activity and hence the future rate levels for the offshore supply vessels. The value of the Company s assets The value of the Company s Vessels can reduce due to changes in the demand and supply for offshore supply vessels. This can impact on the equity and the financing of the Company. The current international financial turmoil creates uncertainties about future market values and possible distressed sales can intensify this process. 13

16 Market risks Some of the Company s vessels will be either in the spot or short term charter markets. Reduced market rates may hence reduce and negatively impact the Company s freight revenues and net profit. Credit risks The Company has entered into charter contracts and is hence subject to counterpart risks if some of the charterers do not honour their charter obligations. The Company is focused on entering into charter parties with financially solid charterers. Yard risk The Company has currently 8 vessels on order/under construction at two shipyards, one in India and one in Singapore. The Company is hence exposed to late or no delivery from shipyards. The Company has guarantees from the Seller of 7 of the newbuilding contracts that cover most of its exposure in the case of non delivery from the shipyards. Health, safety and environment By year end 2008, the Company s staff increased to 14 employees world-wide. The working environment is considered good and all employees are encouraged to participate in the development of his/her position and in the development of the Company. 12 of the employees are male and 2 female. The Company treats men and women equal in the recruitment processes. Technical management and crewing are outsourced to ISM certified companies. Emphasis is made on professionalism and adherence to national and international laws and regulations by the suppliers delivering services to the Company. Efforts and initiatives to reduced accidents and pollution to the environment are compulsory. The Company s vessels are engaged in sea transportation and hence at risk related to pollution of the environment. All the vessels are in compliance with requirements issued by regulatory bodies and the risk of pollution is hence viewed as limited. The Company has in 2008 taken several initiatives towards more environmentally friendly vessels and made significant investments to the benefit of the environment. The Company s shore based activities are considered environmental friendly and normal for this type (office) activity. In 2008, the Company recruited a HSE Manager for the purpose of enhancing its focus on health, safety and the environment. Changes in the Board of Directors in 2008 There have been no changes to the composition of the Board. In accordance with the Company s Articles of Association the members of the Board of Directors retire at 08 May 2009 and, being eligible, offer themselves for re-election. Future outlook The World is currently experiencing a financial turmoil which creates a level of general uncertainty. A lower oil price provides weaker market fundamentals for the offshore supply industry. DESSC has secured financing for all 7 newbuildings from ABG Shipyard and the newbuilding Sea Eagle 1 (with expected delivery in April 2009) will be delivered from Jaya Shipyard on a 15 months bareboat after which DESSC needs to obtain long term financing if the purchase option for the vessel is declared. The contract situation for the remainder of 2009 is considered good. The markets for AHTS and PSVs still remain active with good rates with the exception of a volatile and currently weak North Sea spot market. The financial turmoil has resulted in an unrealized loss on USD 8 mill. on shares acquired in a listed offshore supply company and a USD 11 mill. loss on other short term receivables to Scan Geophysical ASA (see other losses above). The longer term consequences of a continued financial turmoil on the AHTS and PSV markets and the market values remains to be seen. Vessel sales concluded in January 09 have however been done at strong levels. We remain cautiously optimistic on the future market outlook for AHTS and PSV markets for Transaction between related parties DESSC has entered into two sale and leaseback transactions with Ship Finance International Limited ( SFI ) in 2007 and SFI s largest shareholder is Hemen Holding Ltd. who is also DESSC s largest shareholder. The sale and leaseback transactions are done on fully competitive terms. In 2008, DESSC exercised a purchase option for the vessel Sea Trout which was included in the first transaction with SFI, and the vessel was thereafter sold outright. The Company borrowed USD 12 mill. short term from Metrogas Holdings Ltd., a company controlled by the Company s main shareholder, and fully repaid the loan prior to year-end. Tax issue 2006 The Norwegian tax authorities have raised questions about the 2006 tax return for the subsidiary Deep Sea Supply ASA related to the sales price of the shipbuilding contracts that were sold to Cyprus subsidiaries later the same year and claiming that the sales price should have been higher. The Company has explained and provided background for the terms of the sale and strongly disagree with the Tax Authorities view. Change of control The share options for the board and the share options and certain other benefits for the management will come into effect at a change of control in the Company (in excess of 33%). Corporate Governance DESSC`s principles for Corporate Governance is based on the Norwegian Recommendation for Corporate Governance issued on 4 December Listed companies are expected to practice Corporate Governance that regulates the division of roles between Shareholders, the Board of Directors and the Executive Management more comprehensively than is required by applicable legislation. The code of practice intends to strengthen the confidence in listed companies in order to provide the highest possible value creation benefiting shareholders, employees and others. As long as DESSC remains listed in the Oslo Stock Exchange, the "Nor- 14

17 REPORT FROM THE BOARD ANNUAL REPORT 2008 wegian Recommendation for Corporate Governance" can be applicable to the Company as long as the recommendations do not contravene Cyprus Companies law. DESSC s Corporate Governance report is included in the Annual Report. In accordance with new principles for good corporate governance, DESSC has established an Audit Committee. The Audit Committee has had its first meeting related to the 4Q08 financials and the meeting was conducted together with Management of DESSC and the Company s auditors. Important events after the year end On 2 March 2009, the Company cancelled the newbulding contract for the Sea Hawk 1 from Jaya Shipbuilding & Engineering Ltd., Singapore due to an announced delay in the delivery of the vessel. As a consequence of the cancellation, the Shipyard will repay USD 3,6 mill. to the Company and the Company s future capital expenditures will reduce by USD 32,5 mill. In 2006 Deep Sea Supply Management AS sold three shipbuilding contracts at ABG Shipyard to SCAN Geophysical ASA (SCAN). DESSC had a claim on outstanding payments of USD 12,4 million upon delivery of the vessels. The claim was to be settled upon delivery of the three vessels. As it is unlikely that Scan would take delivery of all vessels, DESSC made an allocation for losses of USD8 mill. in 4Q08 accounts anticipating that Scan will take delivery of 1 vessel from ABG. Scan has later cancelled all deliveries from ABG Shipyard. On 16 March 2009, Scan and DESSC settled the issues by an agreement whereby SCAN shall pay USD 1 million to DESSC and hence, in the 2008 financial statements, the allocation for losses increased from USD 8 mill. to USD 11 mill. Responsibility statement: In accordance with Article 9, sections (3)(c) and (7) of the Transparency Requirements (Securities for Trading on Regulated Market) Law of 2007 ( Law ), we the members of the Board of Directors and the other responsible persons for the financial statements of the Company for the year ended 31 December 2008 we confirm that, to the best of our knowledge: a) The annual consolidated financial statements that are presented on pages 18 to 53: i. were prepared in accordance with the International Financial Reporting Standards as adopted by the European Union, and in accordance with the provisions of Article 9, section (4) of the Law, and ii. give a true and fair view of the assets and liabilities, the financial position and the profit or losses of the Company, and b) the director s report gives a fair view of the developments and performance of the business as well as the financial position of the Company, together with a description of the principal risks and uncertainties that they are facing. Limassol, Cyprus 30 March 2009 The Board of Deep Sea Supply Plc Svein Aaser Bjørn Giæver Frixos Savvides Chairman Anna Cecilie Holst Odd Brevik Finn Amund Norbye Chief Executive Officer Chief Financial Officer 15

18 16

19 17

20 CONSOLIDATED BALANCE SHEET (all amounts in thousands of United States Dollars). Year ended 31 December Note ASSETS Non-Current Assets Property,plant and equipment Vessels Vessels under finance lease contracts Vessels under construction Equipment and vehicle Total property, plant and equipment Pension schemes CIRR Deposit 14 44,799 0 Total non-current assets 731, ,888 Current assets Financial derivatives 8 0 6,003 CIRR Deposit short term portion 14 4,144 0 Inventories ,767 Trade and other receivables Other short term receivables 26 6,172 18,981 Financial assets at fair value through profit and loss 8 6,335 0 Cash and cash equivalents 11 33,799 31,396 Total current assets 99,195 99,778 Total assets 830, ,666 EQUITY Capital and reserves attributable to equity holders of the company Share capital 12 2,599 2,639 Share premium 16,203 66,948 Treasury shares -9,787-9,787 Other paid in capital 1, Retained earnings and currency translation reserves 101, ,223 Total equity 112, ,254 LIABILITIES Non-current liabilities Bank borrowings , ,012 Finance lease liability , ,707 CIRR Loan 14 44,799 0 Deferred gain on sale and finance leaseback 90,752 56,087 Deferred gain on CIRR Loan 1,426 0 Long term tax liability 5,336 11,565 Pension scheme Total non-current liabilities 634, ,371 Current liabilities Trade and other payables 13 25,039 12,928 Current income tax liabilities 667 1,338 Bank borrowings 14 23,724 13,453 Finance lease liability 14 15,495 39,578 CIRR Loan 14 4,144 0 Deferred gain on sale and finance leaseback 9,201 0 Deferred gain on CIRR Loan Financial derivatives 8 5,254 0 Dividends payable 0 50,745 Total current liabilities 83, ,041 Total liabilities 718, ,411 Total equity and liabilities 830, ,666 18

21 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 CONSOLIDATED INCOME STATEMENT (all amounts in thousands of United States Dollars) Note Sales - freight revenue 190, ,660 Operating expenses vessels -60,199-40,176 Depreciation related to vessels 6-30,230-16,556 Gross profit 99,977 89,928 Other depreciation Administrative expenses -7,971-5,952 Other (losses)/gains - net ,375 Operating profit 92,668 92,346 Finance income 21 2,122 2,616 Finance costs 21-44,496-24,413 Profit before income tax 50,294 70,549 Income tax expenses 15 3,110-12,843 Profit for the year 53,404 57,705 Attributable to: -Equity holders for the company 53,404 57,705 -Minority interest ,404 57,705 Earnings per share for profit attributable to the equity holders of the company, expressed in USD per share USD per share USD per share -Basic 22 0,42 0,46 -Diluted 22 0,42 0,45 19

22 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (all amounts in thousands of United States Dollars) Deep Sea Supply Plc Share Capital Reverse acquisition reserves Share premium reserves Treasury shares Other paid -in-equiy Retained earnings Minority interest Currency translation differences Total Balance at 1 January , , , ,380 17, ,202 Currency translation differences 8,138 8,138 Net income recognised directly in equity 8,138 8,138 Result for the year 57,705 57,705 Total income recognised for the year ended 31 December ,705 8,138 65,843 Issuance of new shares in January 2007 from mandatory offering ,856-17, Issuance of new shares in August 2007 relating to exercise of share warrant agreement 36 3, ,184 Value of share option scheme, issued in December Buy back of own shares -9,787-9,787 Payment of dividend -179, ,919 Balance at 31 December , ,334-9, , , ,254 Balance at 1 January , , ,407-9, , , ,254 Currency translation differences -15,259-15,259 Net income recognised directly in equity -15,259-15,259 Result for the year 53,404 53,404 Total income recognised for the year ended 30 December ,404-15,259 38,145 Cancelation of own shares (non traded) Value of share option scheme, issued in December ,011 1,011 Payment of dividend -50,746-39,404-90,150 Balance at 31 December , , ,589-9,787 1, , , ,221 20

23 CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 CONSOLIDATED CASH FLOW STATEMENT (all amounts in thousands of United States Dollars) Year ended 31 December Note Cash flows from operating activities Cash generated from operations ,463 79,221 Interest paid -38,351-11,823 Net cash generated from operating activities 88,112 67,398 Cash flows from investing activities Acquisitions of vessels and constructions contracts -133, ,329 Disposals of vessels and construction contracts 58,611 0 Net Cash used in investing activities -75, ,329 Cash flows from financing activities Payment of dividend to shareholders -140, ,898 Proceeds from borrowings 430, ,300 Repayments of borrowings -300,435-93,194 Cash flow from acquisition of own shares 0-9,787 Cash flow from acquisition of shares in Deep Sea Supply ASA / Change in domicile 0-6,539 Net cash from financing activities -11,232 71,882 Total changes in liquidity in the year 1,735-20,049 Cash and cash equivalents at beginning of year 31,396 51,445 Cash and cash equivalents at end of the year 33,799 31,396 21

24 22

25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 Notes to the consolidated financial statements 1. General information Deep Sea Supply PLC s ( the Company ) and subsidiaries, hereinafter collectively ( the Group ), principal activities are to engage and invest, directly or indirectly, by itself or through subsidiaries or part-owned companies, partnerships or other forms of entities, in the international offshore supply vessel business. The Company was incorporated as a public limited liability company on 7 November 2006 in Cyprus in accordance with the provisions of the Companies Law, Cap The Company was established for the purpose of acquiring all shares of Deep Sea Supply ASA. Deep Sea Supply PLC presented on the 4 December 2006 a voluntary exchange offer to acquire all issued and outstanding shares in Deep Sea Supply ASA. The offer price presented was 1 Deep Sea Supply PLC share for each owned share in Deep Sea Supply ASA, and the offer period was from 5 December 2006 until 18 December Regarding the exchange offer Deep Sea Supply PLC received acceptances representing approximately 93.8% of the total issued shares in Deep Sea Supply ASA. Settlement under the exchange offer was completed on the 22 December The shares in Deep Sea Supply PLC were delivered to the tendering shareholders of Deep Sea Supply ASA on the 27 December 2006, and the first trading day of Deep Sea Supply PLC shares on Oslo Børs was on the 28 December Following the voluntary exchange offer, the Board presented on 4 January 2007 a mandatory offer for purchase of the remaining 6.2% of the shares of Deep Sea Supply ASA. At the same time, the Board of Directors resolved to exercise Deep Sea Supply PLC s right of compulsory acquisition of all remaining shares of Deep Sea Supply ASA. The offer period under the mandatory offer was from 5 January 2007 to 2 February The rights to the shareholders of Deep Sea Supply ASA in relation to the mandatory offer and compulsory acquisition were 1 share in Deep Sea Supply PLC, for each owned share in Deep Sea Supply ASA, or to receive a cash consideration of NOK 18 per share in Deep Sea Supply ASA. Under the mandatory offer, Deep Sea Supply PLC received acceptance representing approximately 4.9% of the issued shares in Deep Sea Supply ASA, whereof approximately 4.5% were tendered under the share alternative and 0.4% under the cash alternative. The shareholders of Deep Sea Supply ASA, who remained passive, or did not take any action, representing approximately 1.2% of the total number of outstanding shares of Deep Sea Supply ASA, were treated as bound to receive the offered redemption amount (i.e. NOK 18 per share in Deep Sea Supply ASA). Settlement did take place in mid March, and after that, Deep Sea Supply PLC owns 100% of the issued and outstanding shares in Deep Sea Supply ASA. The Company has its primary and only listing on the Oslo Stock Exchange. These consolidated financial statements have been approved for issue by the Board of Directors on 30 March Summary of significant accounting policies 2.1 Statement of Compliance and Basis for preparation These financial statements have been prepared in accordance with, and comply with, International Financial Reporting Standards as adopted by the EU and the requirements of the Cyprus Companies Law, Cap The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities, including derivative instruments at fair value through profit or loss. The financial statement has been prepared under the assumption that the company is a going concern. A summary of the principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process applying the Company s accounting policies. There are no areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements. All International Financial Reporting Standards issued by the International Standards Board (IASB) and effective as of 1 January 2008 have been adopted by the EU through the endorsement procedure established by the European Commission, with the exception of certain provisions of IAS39 "Financial Instruments: Recognition and Measurement" relating to portfolio hedge accounting. IFRIC 12 "Service Concession Arrangements" has been endorsed by the EU on 26 March 2009 and its mandatory effective date was changed from annual periods beginning on or after 1 January 2008 in IFRIC 12 to an entity's first financial year starting after 29 March 2009 in the EU-endorsed version, but with earlier adoption permitted. 23

26 Standards issued not yet effective: At the date of approval of these financial statements the following accounting standards were issued by the International Accounting Standards Board but were not yet effective : Standard / Interpretation Effective for annual periods beginning on or after (i) Adopted by the European Union Improvements to IFRSs January 2009 Amendments to IFRS 1 and International Accounting Standard (IAS) 27 Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate 1 January 2009 Amendment to IFRS 2 Share Based Payment: Vesting Conditions and Cancellations 1 January 2009 IFRS 8 Operating Segments 1 January 2009 IAS 1 (Revised) Presentation of Financial Statements 1 January 2009 IAS 23 (Revised) Borrowing Costs 1 January 2009 Amendments to IAS 32 and IAS 1 Puttable Financial Instruments and Obligations arising on Liquidation 1 January 2009 International Financial Reporting Interpretation Committee (IFRIC) 12 Service Concession Arrangement 29 March 2009 International Financial Reporting Interpretation Committee (IFRIC) 13 Customer Loyalty Programmes 1 July 2008 (ii) Not adopted by the European Union IFRS 1 (Revised) First Time Adoption of International Financial Reporting Standards 1 January 2009 IFRS 7 (Amendments) - Financial Instruments: Disclosures: Improving disclosures about financial instruments" 1 January 2009 IFRS 3 (Revised) Business Combinations 1 July 2009 IAS 27 (Revised) Consolidated and Separate Financial Statements 1 July 2009 Amendment to IAS 39 Eligible Hedged Items 1 July 2009 Amendment to IAS 39 Reclassification of Financial Assets: Effective date and Transition 1 July 2008 IFRIC 15 Agreements for the Construction of Real Estate 1 January 2009 IFRIC 16 Hedges of a Net Investment in a Foreign Operation 1 October 2008 IFRIC 17 Distributions of Non cash Assets to Owners 1 July 2009 IFRIC 18 Transfers of Assets from Customers 1 July 2009 The Board of Directors expects that the adoption of these accounting standards in future periods will not have a material effect on the financial statements of the Company except from the application of IAS 1 (Revised) Presentation of Financial Statements which will have a material effect on the presentation of the financial statements and the application of IFRS 7 (Amendments) - Financial Instruments: Disclosures: Improving disclosures about financial instruments which will enhance disclosures about fair value measurements and liquidity risk and IAS 23 whereby the borrowing costs for qualifying assets will be capitalized. 24

27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Consolidation Subsidiaries are those companies and other entities in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases. These consolidated financial statements are prepared following the provisions of IFRS 3 Business combination for reverse acquisition. Deep Sea Supply PLC ( legal parent ) issued shares to acquire 93,8% of Deep Sea Supply ASA ( legal subsidiary ). For consolidation purposes, Deep Sea Supply ASA, is the acquirer and Deep Sea Supply PLC, is the acquiree. The cost of the business combination is deemed to have been incurred by the legal subsidiary and is determined by the number of equity instruments Deep Sea Supply ASA would have had to issue to provide the same percentage ownership interest of the combined entity to the owners of the Company as they have in the combined entity as a result of the reverse acquisition. These consolidated financial statements reflect the fair values of the assets, liabilities and contingent liabilities of the legal parent. The cost of the combination is allocated by measuring the identifiable assets, liabilities and contingent liabilities of the legal parent at their fair values at the acquisition date. Any excess of the cost of the combination over the acquirer s interest in the net fair value of these items is accounted for as goodwill. If the cost of the combination is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. The owners of the legal subsidiary who do not exchange their equity instruments for equity instruments of the legal parent are treated as a minority interest. The minority shareholders have an interest only in the results and net assets of the legal subsidiary. The consolidated financial statements are issued under the name of the legal parent, the Company and are a continuation of the financial statements of the legal subsidiary. As a result: - The assets and liabilities of the legal subsidiary are recognised and measured at their pre-combination carrying amounts; - The retained earnings and other equity balances are the retained earnings and other equity balances of the legal subsidiary immediately before the business combination; - The amount of issued equity instruments is determined by adding to the issued equity of the legal subsidiary immediately before the business combination the cost of the combination determined as described in the paragraph above; and - Comparative information presented is that of the legal subsidiary. All intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. The minority interest in equity as well as net income is reported separately in the consolidated financial statement. Transactions with minority interests The group applies a policy of treating transactions with minority interests as transactions with equity owners of the group. For purchases from minority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to minority interests are also recorded in equity Underlying concepts The financial statements are prepared on the going concern basis using accrual accounting. Assets and liabilities and income and expenses are not offset unless specifically permitted by an accounting standard. Financial assets and financial liabilities are offset and the net amount reported only when a legally enforceable right to set off exists and the intention is either to settle on a net basis or to realize the asset and settle the liability simultaneously. Changes in accounting policies are accounted for in accordance with the transitional provisions in the IFRS standards. If no such guidance is given, they are applied retrospectively, unless it is impracticable to do so, in which case they are applied prospectively. There have been prior year adjustments in Please see note 2.32 for explanations Recognition of assets and liabilities Assets are only recognized if they meet the definition of an asset, it is probable that future economic benefits associated with the asset will flow to the group and the cost or fair value can be measured reliably. Liabilities are only recognized, if they meet the definition of a liability, it is probable that future economic benefits associated with the liability will flow from the entity and the cost or fair value can be measured reliably Valuation and classification of assets and liabilities Assets intended for long-term ownership or use is classified as non-current. Other assets are classified as current. Receivables due to be repaid within one year are classified as current assets. Non-current assets are stated at historic cost price, but written down to recoverable amount when the fall in value is considered to be permanent. Such write-downs are reversed when the reason for the write-down no longer applies. Fixed assets with a limited economic life are depreciated on a straight line basis Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles under IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from such estimates. In the current market for supply vessels, the fair value of the Company s vessels is 25

28 significantly higher than the balance sheet value. The Company makes use of the cost model according to IAS 16 Property, Plant and Equipment ǁ, and subsequently depreciates the fixed assets over their estimated useful life, irrespective of the extent to which there has been a genuine increase in value of the Company s fixed assets. When calculating annual depreciation, the estimated period of use for the vessel and the estimated outstanding value at the end of the period of use is significant estimates. The key sources of estimation of uncertainty at the balance sheet date, that have a significant risk for causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below under section Impairment of assets Non-current assets are reviewed for potential impairment at each reporting date, and whenever events of changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of assessing an impairment, assets are grouped at the lowest levels of which there are separately identifiable cash flows. An impairment loss is the amount by which the carrying amount of the assets exceeds the recoverable amount. The recoverable amount is the higher of the asset s fair value less cost to sell and its value in use. The value in use is determined by reference to the discounted future net cash flows expected to be generated by the asset. When the asset is considered to be impaired, it is written down to its recoverable amount, and recognized in the income statement in those expense categories consistent with the function of the impaired asset Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The Company is organized into main geographic regions which are the primary business segments; North Sea, Mediterranean, Africa, Australia/Far East and North & South America. The geographical segments are based on the location of the vessels. Secondary segment is the type of vessel AHTS and PSV. Depreciation is allocated between the different segments based on number of days the vessels have been operated within the different segments. The segment split of assets and liabilities at year end are based on the location of the actual vessels on the balance sheet date Foreign currency translation (a) Functional and presentation currency Deep Sea Supply Plc, located in Cyprus, became the parent company of the Group with effect from 28 December As of 1 January 2007 the functional currency changed from Norwegian Kroner (NOK) to USD as a lot of the underlying transactions changed from NOK to USD. The effect of the change in functional currency is accounted for prospectively. In other words the Group translates all items into the new functional currency (USD) using the exchange rate at the date of the change which was NOK/USD 6,25. Items included in the financial statements of each of the Company s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in USD, which is the Company s functional and presentation currency. All amounts in these financial statements are in USD unless otherwise stated. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, The exchange rate used throughout the Company at the balance sheet date, compared to the USD, were as follows; Average NOK EUR GBP Average NOK EUR GBP (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions) Non-current Assets and Maintenance Costs Property, plant and equipment are stated at historical cost, less subsequent depreciation and impairment. For vessels purchased, these costs include expenditures that are directly attributable to the acquisition of the items. Depreciation is 26

29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 calculated on a straightline basis, taking residual values into consideration, and adjusted for impairment charges, if any. The carrying value of the fixed assets on the balance sheet represents the cost less accumulated depreciation and any impairment charges. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. In accordance with IFRS, each component of the vessels, with a cost significant to the total cost, is separately identified and depreciated, on a straight-line basis, over that component s economic life. Vessels and related equipment have expected useful life of approximately 30 years. Fixed assets are depreciated to their residual values, which are reviewed at each balance sheet date. Future depreciations are based on depreciation schedules including residual values. Expected useful lives of long-lived assets, and residual values, are reviewed at each balance sheet date and, where they differ significantly from previous estimates, depreciation periods are changed accordingly. Day-to-day maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations and periodic maintenance of vessels are capitalized and depreciated over the useful lifetime of the parts replaced. The useful lifetime of regular vessels docking expenses will normally be the period until next docking. Maintenance and classification costs for ships are capitalized and charged to expenses over the period up to the next occasion when maintenance is carried out, normally 30 months. When ships are acquired, a proportion of the acquisition cost is capitalized as periodic maintenance. Depreciation on vessels and other assets (equipment) is calculated using the straight-line method to allocate their cost or re-valued amounts to their residual values over their estimated useful lives, as follows: Vessels Vehicles Furniture, fittings and equipment 30 years 5 years 3 years The assets residual values and useful lifetime assumptions of fixed-assets are reviewed at each balance sheet date, and where they differ significantly from previous estimates, depreciation charges are changed accordingly. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in operating profit. For vessels under finance sale and leaseback disposals the deferred gain is recognised fully into the profit and loss Newbuild contracts Installments on new build contracts are posted in the balance sheet as non-current assets. Costs related to the on-site supervision and other pre-delivery construction costs are capitalized per vessel Lease agreements The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Financial leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to financial expenses. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term Impairment of non-current assets The Company determines whether there are indications that fixed assets are impaired at least on a quarterly basis. The carrying value of vessels are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.the asset s cash generating ability either through use or sale is reviewed and compared to the asset s carrying value in the balance sheet. If the carrying value is higher, the difference must be written off as an impairment loss. Fair value reduced by estimated sales costs is the amount achievable on an arm s length sale to an independent third party. The recoverable amount is established individually for all assets. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time and the risk specific to the asset that is considered impaired. A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. Reversal of previously recognised impairment is limited to the amount the carrying value of the asset would have been, had the initial impairment charge not taken place Financial assets The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date. 27

30 (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management, and they meet certain criteria (IAS 39.9).Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realized within 12 months of the balance sheet date. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet. (c) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of financial assets are recognized on the trade-date, the date on which the Company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss, are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the income statement within other (losses)/gains net, in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Company s right to receive payment is established. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (2) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or (3) hedges of a net investment in a foreign operation (net investment hedge). As of 31 December 2008 and 2007, the Company did not have any derivative transactions that qualified for hedge accounting under IAS 39. Changes in the fair value of these derivative instruments are recognized immediately in the income statement. When the Group provides guarantees for any losses suffered in derivatives due to breach of contract, a provision is made for the fair value of the derivative when the loss becomes probable Inventories Bunkers inventories are valued at the lower of historical cost and net realisable value applying the FIFO (first-in, first-out) principle Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account Cash and cash equivalents Cash and cash equivalents, includes cash in hand and deposits held at call with banks Restricted cash Restricted cash deposits comprise of funds held in separate Group bank accounts, which will be used to settle accrued taxation liabilities related to employee s tax deduction Share capital Ordinary shares are classified as equity. Costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 28

31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method Taxation Tax expense/income includes current taxes and the change in deferred taxes. Deferred income tax is provided for all temporary differences between the book value and the tax basis of assets and liabilities and for tax losses carried forward. Deferred tax assets made probable through prospective earnings that can be utilized against the tax reducing temporary differences are recognized as deferred income tax. Deferred tax asset and deferred tax liability are recognised independently of when the differences will be reversed and, as a rule, at nominal value. Deferred tax asset and tax liability are measured on the basis of estimated future tax rate. Parts of the Company s activities within the Norwegian subsidiaries are structured within the regulations for the Norwegian Tonnage Tax System for shipping companies. Based on the fact that the companies organized within this tax regime have, the Company has estimated a tax rate of 0% for the Companies subject to the regulations of the shipping company regime. For all companies under this regime, the Company has estimated 0% deferred tax on temporary differences when entering the regime. For companies not included in the regime, and for taxable financial revenues in companies under the regime, the Company applies a tax rate of 28% for Norwegian companies and 10% for Cyprus companies. Tax expense/income includes current taxes and the change in deferred taxes. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects either accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Company and its probable that the temporary difference will not reverse in the foreseeable future Profit-sharing and bonus plans The Group recognizes a liability and an expense for bonuses and profit-sharing to all employees, based on comparisons with peer group companies. The Group recognizes a provision where contractual obligations exists or where there is a past practice that has created a constructive obligation Pension costs and obligations The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation in the balance sheet date less the fair value of plan assets, adjusted for unrecognised actuarial gains and losses. The present value of the defined benefit obligations is determined by discounting the estimated future cash outflows using interest rates for high-quality corporate bonds which are denominated in the currency in which the benefits will be paid, and which have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from new information or changes in actuarial assumptions in excess of the higher of 10% of the value of the pension assets or 10% of the pension obligations are recognised in the income statement over the expected average remaining working live of the employees. The net pension cost for the year (gross pension cost minus estimated return on pension funds) is included in the profit and loss account as salary-related expenses. The estimated net obligations are included in provisions in the balance sheet Provisions Provisions represent liabilities of uncertain timing or amount. Provisions are recognised when the group has a present legal or constructive obligation, as a result of past event, for which it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made for the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. 29

32 2.27. Revenue recognition The group s activity is hiring out different kind of Anchor Handling Tug Supply vessels (AHTS s) and Platform Supply Vessels (PSV`s). Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group s activities. Revenue is shown net of value-added tax, withholding tax, returns, rebates and discounts and after eliminated sales within the Group. Revenue is recognised as follows: Charter rate contracts Charter contracts are classified as operating leases under IAS 17. Revenue derived from charter contracts is recognised in the period over the lease term. Related services are recognised as revenue in accordance with the services being rendered. Vessels without signed contract in place at discharge have no revenue before a new contract is signed. Charter related expenses incurred for vessels in the idle time are expensed. Revenues from time charters and bareboat charters accounted for as operating leases are recognised rateably over the rental periods of such charters, as service is performed on a straight line basis. Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. Dividend income Dividend income is recognised when the right to receive payment is established Dividend distribution Dividend distribution to the Company s shareholders is recognised as a liability in the Group s financial statements in the period in which the dividends are approved by the Company s shareholders until payment is made Earnings per share Earnings per share are calculated by dividing the net profit/loss for the Company by the average weighted number of outstanding shares over the period in question. Diluted earnings per share include the effect of the assumed conversion of potentially dilutive instruments such as stock options. The impact of share equivalents is computed using the treasury stock method for share options Statement of cash flow The statement of cash flow is presented in accordance with the indirect method Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.(please see notes 2.32) Changes in accounting policies In September and October 2007 Deep Sea Supply Plc entered into a sale and finance lease back transaction with Ship Finance International Ltd. for five offshore supply vessels. The classification of the leaseback as finance lease was based mainly on the fact that the Group has various options to acquire the vessel; and the last one at year 12 was considered to be sufficiently lower than the fair value. The general terms of the agreement are as follows: (1) Option to acquire the vessels at year 3; 6; 9 and 12; (2) The Group to pay fixed rental for years 1 to 4 and provide a guarantee to the lessor for the four-year interest rate swap agreement entered by the less or to pay fixed rate/ receive variable rate; and (3) pay variable interest for years 5 to 12. Deep Sea Supply Plc. guaranteed the lessor that any losses suffered by the lessor on the derivative due to breach of the contract from Deep Sea Supply, or execution of purchase option, will be covered by Deep Sea Supply Plc. Possible benefits would also accrue to the Group. In the financial accounts for 2007 Deep Sea Supply Plc booked the guarantee for the interest rate swap agreement as being a separate interest rate swap (derivative) towards the lessor, and recorded the fair value of this synthetic interest rate swap agreement as a financial derivative. In financial statements for the year ended 31 December 2007 (and the accounts for the 4th quarter of 2007), a loss of USD 4.9 mill was recorded as a financial expense in the income statement and a financial derivative (liability) was recognised in the balance sheet. The Group has revisited the accounting policy followed in 2007 and considers that the non recognition of the derivative on the Company s balance sheet provides reliable and more relevant information about the effects of the specific transaction on the Group s financial position and financial performance. This is based on the fact that economically the Group will not cancel the lease agreement before year 12 as this is the most economical option to the Group except if it has an opportunity to sell (as happened during 2008), in which case it needs to obtain the approval of the lessor to break the lease or exercise the option at year 3. In this case the Group will take into consideration the value of the derivative/ purchase option for the purpose of disposing the vessel and the gain/ loss on disposal of the vessel will be affected accordingly. If not exercised the Group will not suffer any cash gains/losses. During the year 2008 the Group has agreed to cancel one of the sale and leaseback transactions and has disposed the vessel on the same date recognising a gain of USD 14.3 million (excluding USD 2.2m reimbursement for the derivative). Based on the revised policy the Group will recognise the derivative on its balance sheet only if it breaches the contract with the lessor; or it is highly probable to dispose a vessel and has agreed or has an option to break the lease agreement with the lessor. The comparable figures for 2007 have been restated. The impact of the revised accounting policy is as follows: 30

33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Decrease in finance expenses 14,9 3,9 Increase in profits attributable to the Company s shareholders 14,9 3,9 Decrease on financial liability 18,9 3,9 Increase in EPS and diluted EPS Interim unaudited figures have been amended accordingly; see table provided below The company had recognised USD 4.9 million in the 2007 accounts. The USD 1m relates to the disposal and cancelation of a vessel and therefore that amount (USD 1 million) has not been derecognised from the books of the Group. 1st quarter 2nd quarter 3rd quarter 4th quarter As As As As As As As As reported adjusted reported adjusted reported adjusted reported adjusted * Net profit 11,296 17,424 19,935 14,571 9,764 11,966 12,452 9,442 EPS Equity 127, , , , , ,077 96, ,222 * The adjusted result contains a provision for loss on other receivables of USD 3,010 (note 26) Commercial Interest Reference Rate (CIRR) loan The Group has applied for two Commercial Interest Reference Rate (CIRR) loan from the Norwegian Export Credit Agency. The duration of the loans may vary (DESSC 12 years) and the cash proceeds from the loans have been deposited in fixed deposit account with a Norwegian bank at a higher interest rate than that of the loans. The agreed period of the deposits is identical with the one of the loans. The loans and the interest thereof will be repaid from that account and the difference has been recognised as deferred gain and will be amortised over the period of the life of the asset. 31

34 3. Financial risk management 3.1 Financial risk factors The Group s normal business activities expose it to a variety of financial risks. Financial market risk is the possibility that fluctuations in currency exchange rates, interest rates and freight rates in particular will affect the value of the Group s assets, liabilities or future cash flow. The Group has formulated a finance strategy where certain basic targets and policies are made for value adjusted equity (note 3.2), required liquidity, exchange rates, interest rates, funds management etc. To reduce and manage these risks, management daily reviews and assesses its primary financial and market risks. Once risks are identified, appropriate action is taken to mitigate the specific risk. Financial derivatives are used for hedging purposes in order to mitigate financial risks and only well understood conventional derivatives are used. Financial derivatives are entered into with our main banks which are highly rated financial institutions. The Group use derivatives in order to manage risks associated with interest rate and currency. Foreign exchange risk: The Group s functional currency is USD. The Group operates internationally and is exposed to foreign exchange risks arising from various currency exposures primarily with respect to Euro (EUR), UK Pounds (GBP) and Norwegian kroner (NOK). Foreign exchange risks arise from future commercial transactions and recognized assets and liabilities. The Group had in 2007 and 2008 mainly USD, EUR, GBP and NOK revenues and mainly USD and NOK expenses. Imbalances between revenues and costs are managed using forward currency contracts. The table below shows the impact on profit before tax as a consequence of an increase/decrease in the NOK/USD and GBP/USD exchange rates; NOK Increase Effect /-10% +/- 4, /-10% +/- 7,314 GBP Increase Effect /-10% +/ /-10% +/- 445 EUR Increase Effect /-10% +/- 1, /-10% +/- 0 Credit risk Concentration risk: The Group trades only with recognized, creditworthy third parties. Receivable balances are monitored on an ongoing basis with the result that the Group s exposure to bad debt is not significant. Below, we present a table showing the concentration risks for 2007 and 2008; Receivables at : USD 000 % of total 1 to 5 largest 32, % 6 to 10 largest 8, % 11 to 15 largest 4, % Others 2, % Total 47, % Receivables at : USD 000 % of total 1 to 5 largest 17, % 6 to 10 largest 10, % 11 to 15 largest 6, % Others 6, % Total 41, % Cash flow and fair value interest rate risk The Group s exposure to the risk of market interest rates are mainly related to the Group s long term debt obligations with floating interest rates. Depending on the development of and on internal analyses of the interest rate market, the Group enters into various interest rate contracts to alter the ratio of fixed rate to floating rate debt. The sale and leaseback transactions are based on 5 year fixed interest rates from closing of the respective transactions and are as such not exposed to changes in LIBOR during the initial 5 year period. As of 31 December 2008 and 2007, after taking into account the effect of the interest rate swaps, approximately 51% and 61% respectively of the interest bearing debt was fixed. Interest rate risk table: The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group s profit before tax. GBP Increase Effect 2008: +/-10% +/ : +/-10% +/

35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 Liquidity risk: The Group monitors its risk to a shortage of funds by closely monitoring the projected cash flow from operations, financial expenses, its capital expenditure program related, in particular and to commitments (Note 6) under its newbuilding program. The Group maintains sufficient cash for its daily operations via short term cash deposits at banks. The table below summarizes the maturity profile of the Group s financial liabilities; (all numbers in USD 1,000) Less than 3 to 12 1 to 5 More than Total 3 months months years 5 years At 31 December 2008 Interest bearing loans and borrowings 10,001 29, , , ,416 Trade and other payables 10,636 14, ,163 20,637 43, , , ,579 At 31 December 2007 Interest bearing loans and borrowings 7,891 45, , , ,750 Trade and other payables 12, ,928 20,819 45, , , ,678 Future capital expenditure newbuilding contracts at 31 December 2008 Contractual yard payments 0 36,600 79, ,100 Future capital expenditure newbuilding contracts at 31 December 2007 Contractual yard payments 28, , , , Capital risk management The Company s objective is to actively pursue an optimal financing of its fleet at any time for the purposes of providing good return to shareholders and benefits for other stakeholders, to aim at low cost of capital and at the same time secure the Company s ability to continue as a going concern. The Company will actively use the capital markets when doing investments, and does not intend to hold significant liquid reserves for investments. The Company will aim at distributing retained earnings above a satisfactory working capital level as dividend. In the shipping and offshore industry, emphasis in made on Value Adjusted Equity. A certain minimum Value Adjusted Equity is often used as one financial covenant by financial institutions. Market values of the Company s vessels increased after the vessels or newbuilding contracts were acquired and the Company refinanced its fleet based on higher valuations in 2008 and increased its financial leverage. Part of the excess proceeds was used to repay the NOK200 mill. Bond Facility and part of the proceeds was distributed to shareholders as dividend. Towards the end of 2008, market values of vessels and newbuilding contracts have reduced slightly following the international financial crises which creates some uncertainty regarding the market values for offshore supply vessels. Hence, the Company has seen a reduction in its Value Adjusted Equity. The main source of financing of the Company is Senior Bank Loans from international banks which are long term players in the shipping and offshore business segments. The Company believes in building and maintaining long term relationships with these financial institutions and has pursued this strategy since the Company was founded. Bank loan financing has been combined with two specially structured sale and leaseback transactions for (currently) 6 vessels. The sale and leaseback transactions are designed to withstand possible drops in the market by having fewer and leaner financial covenants compared to the senior bank loan facility. We consider the combination of senior bank loans and sale and the leaseback transaction as an effective and flexible way to finance the Company s fleet at an acceptable cost. The Value Adjusted Equity by year end 2008 and 2007 can be seen in the below table; (all numbers in USD million) Year end 2008 Year end 2007 Total value adjusted assets (*): 991 1,080 Total debt (**): Value Adjusted Equity 404 or 41% 601 or 56% of total of total value adjusted assets value adjusted assets (*) Market values obtained from two independent brokers on a charterfree basis including excess value of newbuilding contracts (**) Excluding deferred gain. Distributions to shareholders in Q108 and Q208 were financed from the Company s retained earnings. No distributions of dividend were made in Q308 and Q408 due to the international financial crises which may impact the market for offshore supply vessels and due to the lower visibility in the financial and equity markets. The Company s newbuilding program consists of 9 vessels by year end 2008 of which USD 31,7 mill. was paid to shipyards and/or sellers of contracts by year-end. Early 2008, the Company cancelled the newbuilding contract for Sea Hawk 1 due to a delay from the shipyard and hence reduced the number of newbuildings from 9 to 8 vessels. 33

36 All the pre-delivery yard installments are financed with equity. For 7 out of the 8 newbuilding contracts, the Company has committed long term bank financing. The exception is Sea Eagle 1, which is expected to be delivered in April 2009 when the Company will enter a 15 months bareboat charter with a subsidiary of the Shipyard after which the Company has an option to acquire the vessels in 2H10. The Company expects to obtain long term financing for this vessel in 2010 and to utilize the purchase option after the 15 months bareboat. The Company s 3,1 mill of own shares acquired at an average price of NOK 19,21 per share are still owned by the Company in accordance with Cyprus Law. Acquisition of more own shares will be considered going forward and depends on the Company s liquidity and level of dividend distributions and other factors. In 1H08, the Company acquired shares in a public listed offshore supply company. The shares reduced in value in 3Q08 and 4Q08 and the Company hence incurred an unrealized loss on this investment. 4. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. a) Impairment of vessels The preparation of financial statements in conformity with generally accepted accounting principles under IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and are accounted for when estimates are changed. Actual results could differ from such estimates. The balance sheet value of the Company s vessels, newbuild contract excluded, comprises approximately 79 % (2007: 74 %) of the total balance sheet. In the current market for supply vessels, the fair value of the Company s vessels at 31 December 2008 was higher than the balance sheet value. The Group reviews long-lived assets or groups of assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale. If the estimated recoverable amount (being the higher of the fair value less costs to sell and value in use) is less than the carrying amount of the asset or group of assets, the asset is not recoverable and we recognize an impairment loss for the difference between the estimated recoverable amount and the carrying value of the asset or group of assets. We assess long-lived assets for possible impairment upon the occurrence of a triggering event. Events that can trigger assessments for possible impairments include, but are not limited to (a) significant decreases in the market value of an asset, (b) significant changes in the extent or manner of use of an asset, and (c) a physical change in the asset. Based on the current world-wide economic circumstances, the Group performed a test of the estimated recoverable amount of the vessels by obtaining third party professional valuations for all vessels and compared to the carrying value of the vessels. No impairment was identified for any of the Group's vessels as the fair value less costs to sell was in all cases higher than the carrying amount. For vessels under sale and finance lease back, the deferred gain on sale and finance leaseback was deducted from the carrying amount of the vessel before comparing it to the fair value less costs to sell. The Company makes use of the cost model according to IAS 16, and subsequently depreciates non-current assets over their estimated useful life, irrespective of the extent to which there has been a genuine increase in value of the Group s non-current assets. (b) Tax legislation Tax legislation is subject to varying interpretations. Refer to Note Critical judgements in applying the group s accounting policies a) Classification of sale and leaseback transaction The Group's management has recognised the sale and leaseback transaction for six of its vessels in accordance with IAS 17 "Leases" and SIC Interpretation 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Management has considered that the provisions of SIC 27 are not applicable however the Group has substantial risks and rewards incidental to ownership and the exercise of the option to purchase the vessels is considered to be almost certain. Following this analysis the Group's management has concluded that the leaseback is a finance lease since it considers that the Group retains substantially all the risks and rewards incidental to ownership since it is reasonably certain that the Group will exercise the option to purchase the vessels. As a result of the above the Group has derecognised the vessels and has recognised them back at their fair value which was higher than the carrying amount. The gain has been deferred and isbeing amortised to the income statement over the lease term which is considered to be 12 years (refer to the accounting policy on Lease agreements). 34

37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Segment information The Company operates as per year end 2008 with two business segments (i) in relation to geographical area of operation and (ii) in relation to vessel type, namely the AHTS (Anchor Handling Tug Supply Vessel) and the PSV (Platform Supply Vessel). Primary Segment - Area of Operations. The segment results for the year ended 31 December 2008 is as follows: North Sea Africa Australia / North/South Mediter- Unallocated Total Far East America ranean items Segment revenues 33,832 35,349 34,274 25,512 61, ,405 Vessel operating expenses -11,183-9,643-8,272-9,179-21, ,199 Other operating expenses -1,416-1,480-1,435-1,068-2, ,970 EBITDA per segment 21,233 24,226 24,567 15,265 36, ,237 Depreciation -4,455-3,096-4,240-3,738-14, ,277 Other gains/(losses) ,769-19,769 Gain on sale 1,387 21,614 6, ,440 EBIT per segment / Segment result 16,778 22,517 20,327 33,142 28,652-19, ,631 Net Financial Items -51,336 Pre-tax result 50,294 Taxes 3,110 Net Result 53,404 The segment split on assets and liabilities at 31 December 2008 are as follows: North Sea Africa Australia / North/South Mediter- Unallocated Total Far East America ranean items Assets 97,864 48, , , , ,515 Liabilities 68,626 51,359 89, ,495 88, ,294 Segment assets allocated consist of vessels, deferred maintenance costs and stock. All the other assets are not allocated items. Segment liabilities comprise of bank borrowings, sale and leaseback debt and deferred gain. All other liabilities are not allocated items. The corresponding segment results for the year ended 31 December 2007 is as follows: North Sea Africa Australia / North/South Mediter- Unallocated Total Far East America ranean items Segment revenues 53,651 29,314 20,702 42, ,660 Vessel operating expenses -15,043-5,702-5,031-14, ,176 Other operating expenses -2,177-1, , ,952 EBITDA per segment 36,431 22,422 14,831 26, ,532 Depreciation -5,808-2,712-3,975-4, ,561 Other gains/(losses) Gain on sale ,518 EBIT per segment / Segment result 30,623 20,554 11,531 22, ,489 Net Financial Items -14,940 Pre-tax result 70,549 Taxes -12,843 Net Result 57,705 The segment split on assets and liabilities at 31 December 2007 are as follows: North Sea Africa Australia / North/South Mediter- Unallocated Total Far East America ranean items Assets 118, , , , , ,666 Liabilities 102,902 94, , , , ,411 35

38 Continued from note 5. Segment information Secondary Segment - Type of Vessel The segment results for the operating period in 2007 is as follows: AHTS PSV Unallocated items Total Segment revenues 146,061 44, ,405 Vessel operating expenses -46,907-13, ,199 Other operating expenses -6,114-1, ,970 EBITDA per segment 93,040 29, ,237 Depreciation -24,657-5, ,277 Other gains/(losses) -19,769-19,769 Gain on sale 13,695 15, ,440 EBIT per segment / Segment result 82,078 39, ,630 Net Financial Items -51,336 Pre-tax result 50,294 Taxes 3,110 Net Result 53,404 The segment split on assets and liabilities at 31 December 2008 are as follows: AHTS PSV Unallocated items Total Assets 535, ,829 95, ,515 Liabilities 460, ,242 78, ,294 Segment assets allocated consist of vessels, deferred maintenance costs, stock and freight income not received. All the other assets are not allocated items. Segment liabilities comprise of bank borrowings, sale and leaseback debt, deferred gain and trade payables. All other liabilities are not allocated items. The corresponding segment results for the year ended 31 December 2007 is as follows: AHTS PSV Unallocated items Total Segment revenues 127,943 18, ,660 Vessel operating expenses -35,552-4, ,176 Other operating expenses -5, ,952 EBITDA per segment 87,199 13, ,532 Depreciation -14,497-2, ,561 Other gains/(losses) Gain on sale ,518 EBIT per segment / Segment result 73,616 11, ,489 Net Financial Items -14,940 Pre-tax result 70,549 Taxes -12,843 Net Result 57,705 The segment split on assets and liabilities at 31 December 2007 are as follows: AHTS PSV Unallocated Total items Assets 542, , ,737 Liabilities 332, ,294 50, ,411 36

39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Property, plant and equipment Vessels, finance lease vessels, vessels in progress (construction contracts) and equipment Vessels Finance Vessels in Vehicles & Total lease vessls progress equipment Opening net book value as at 1 January , , ,372 Additions 124,195 39, ,370 Vessels leased -110, , ,605 Disposals Delivered new buildings 50, , Depreciation and amortisation -12,209-4, ,561 Closing net book value as at 31 December , ,328 83, ,785 Opening net book value as at 1 January , ,328 83, ,785 Additions 17, , ,540 Vessels leased -28,451 89, ,049 Disposals 0-21,847-15, ,578 Delivered new buildings 114, , Depreciation and amortisation -14,534-15, ,277 Closing net book value as at 31 December , ,285 31, ,520 Construction contracts (newbuildings) for investments in AHTS vessels and PSV s are entered in the balance sheet as vessels in progress, as the installments are payable to the shipyards. Directly attributable costs such as on-site supervision and other predelivery construction costs are also entered in the balance sheet as part of the purchase costs. Contractual yard payments and debt construction contracts The newbuildings which will be delivered during have the following payment- and funding profile: (Unaudited figures in USD 1,000) Future capital expenditure newbuilding contracts Total Contractual yard payments 36,600 79, ,100 Committed bank borrowings from delivery 36,600 48,800 85,400 37

40 Sale and leaseback transaction and bareboat contract Sale and leaseback transaction: As per 31 December 2008 Deep Sea Supply has entered heads of agreement for a sale and leaseback transaction with Ship Finance international Limited for 6 of its vessels (2007: 5 vessels) Gross proceeds from the sale and lease back of the 6 vessels are USD mill. A seller s credit of USD 39.5 mill has been agreed and the sales proceeds net of such seller s credit are USD 285 mill. Net proceeds to Deep Sea Supply after repayment of the existing debt related to the vessels are USD 159 mill. A gain from the sale of the vessels to Ship Finance International Ltd. of approx. USD 120 mill has been deferred in the balance sheet as long term liability, and will be amortised over the lease term which is 12 years. In the balance sheet, the seller s credit is deducted from the gross long term debt related to the leasing transaction and expensed using the effective interest rate. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance cost is charged to the income statement over the leased period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Finance leased vessels are capitalized at their fair value, or if lower, the present value of the minimum lease payments, established in the sale and lease back transaction, and subsequently depreciated on a linear basis of their remaining useful lifetime. (See also note 2.32) During the year 2008 the Group has agreed to cancel one of the sale and leaseback transactions and has disposed the vessel on the same date recognising a gain of USD 14.3 million. Bareboat contract: In March 2007 Deep Sea Supply PLC entered, through its subsidiary DESS Cyprus Limited, into an agreement with Java Marine Lines Pte Ltd. for a 1 year firm bareboat charter of a BHP Anchor Handling Tugs Supply vessel (Sea Ocelot). The vessel was commissioned and delivered by Jaya Shipbuilding & Engineering Pte. Ltd. in Singapore in October Deep Sea Supply PLC has secured a purchase option at the end of the 1 year BB charter which was exercised and the vessel is now recorded under vessel cost. 38

41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Pensions The Group went in to a defined benefit pension plan in the fourth quarter of The scheme is generally funded through payments to an insurance company. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The pension plan includes per year end 9 employees. The amount recognised in the balance sheet are determined as follows: Present value of funded obligation Fair value of plan assets Estimated pension obligations at Present value of unfunded obligation Unrecognised actuarial losses 59 9 Unrecognised past service costs 0 0 Asset (liability) in the balance sheet The movement in the defined benefit obligation over the year is as follows: Beginning of year Service costs Interest costs 10 4 Actuarial loss (gain) Payroll tax of employer contribution, assets Exchange differences End of year The movement in the fair value of plan assets of the year is as follows: Beginning of year Expected return on plan assets 14 6 Employer contribution Actuarial losses/(gains) Exchange differences End of year The amounts recognised in the income statement are as follows: Net over funded penson liability 0 0 Interest cost 10 4 Expected return on plan assets Net actuarial losses recognised during the year 0 0 Past service costs Losses on curtaliment 0 0 Total included in staff costs The principal actuarial assumptions used were as follows: Discount rate 4.30% 4.70% Expected return on plan assets 6.30% 5.75% Future salary increase 4.50% 4.50% Future pension increases 2.00% 2.00% 39

42 8. Derivative Financial Instruments Asset Liability Asset Liability Currency exchange rate swap 2,836 6,003 Interest rate swaps 2,418 0 Total 0 5,254 6,003 0 Financial assets at fair value through profit and loss Listed securities - held-for-trading 6,335 0 In the balance sheet the currency exchange rate swap and interest rate swap are presented as a net liability of 5,254. (in 2007, a net asset of 6,003). The financial derivatives are traded in an active market, and their fair value is based on general market assumptions. The derivatives are used for economic hedging purposes. The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged itemis more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months. The fair value of all equity securities is based on their current bid prices in an active market. 9. Trade and other receivables As at 31 December 2008 As at 31December 2007 Trade receivables 47,866 41,631 Less:Provision for impairment of receivables 0 0 Trade receivables -Net 47,866 41,631 Less non-current portion: loans to related parties 0 0 Current portion 47,866 41,631 Trade receivables that are less than four months due are not considered impaired. As of 31 December 2008, trade receivbles of USD 6.5 mill (2007: USD 16.4 mill) were past due but not impaired. These relate to a number of independent customers for whom there has been one case of default amounting USD0.5 mill which the Group has written off as other losses. None of the receivables due for more than four months are considered impaired. The aging analysis of these trade receivables is as follows: Aging As at 31 December 2008 As at 31December 2007 Up to one month 40,690 22,502 One to four months 6,525 16,392 More than four months 651 2,737 Total 47,866 41,631 The carrying amount of the group s trade and other receivables are denominated in the following currencies: Currency As at 31 December 2008 As at 31December 2007 United State Dollars (USD) 23,328 28,869 Great British Pounds (GBP) 7,482 9,733 Norwegian Kroner (NOK) 0 3,029 Euro (EUR) 17,056 0 Total 47,866 41,631 The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security. 40

43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Inventories Bunkers 878 1,767 Total 878 1, Cash and cash equivalents Cash at bank and in hand 33,799 31,396 Short-term bank deposits 0 0 Total bank deposits 33,799 31,396 Specification of restricted deposits Bank deposits The carrying amounts of cash approximate fair value. Currently, there is no credit facility for the Group. Restricted bank deposits are for employee tax withholdings. According to the loan agreement and corresponding covenants regulations, the Company have to maintain, at all times, a minimum cash amount which equals 5% of the total debt (on the vessel accounts), or at least NOK 85 mill. (USD 12,1 mill.) 41

44 12. Share capital Deep Sea Supply PLC, located in Cyprus, became the parent company of the Group with effect from 28 December Deep Sea Supply ASA, located in Norway, was the parent company of the Group until 28. December The relocation of parent company was conducted trough a 1:1 share swap offering. As per 31. December 2006, Deep Sea Supply PLC owned of the shares in Deep Sea Supply ASA and the remaining shares in Deep Sea Supply ASA were held by other shareholders (minority interest). Following the voluntary exchange offer, where 93,8% of the Deep Sea Supply ASA shareholders accepted to swap their Deep Sea Supply ASA shares into Deep Sea Supply PLC shares, the Board presented 4 January 2007 a mandatory offer and a compulsory acquisition to purchase the remaining 6,2% Deep Sea Supply ASA shares. Through the mentioned mandatory offer and through the compulsory acquisition, Deep Sea Supply PLC has during February and March become a 100% owner of Deep Sea Supply ASA. In connection with the Group`s change of domicile from Norway to Cyprus, Metrogas Holdings Inc (a sistercompany of Hemen Holding Ltd.) issued in January 2007 a short term loan facility to Deep Sea Supply PLC which amounted to USD 25,6 mill. The purpose of the loan was to provide security and to finance the mandatory bid for the remaining 6,2% shares in Deep Sea Supply ASA. The loan was fully repaid in mid March. Deep Sea Supply Plc Number of Share Share Other paid Total Shares capital premium -in equity (thousands) Opening balance as at 1 January ,374 2, , ,350 Issuance of new shares in January 2007 from mandatory offering 5, Reclassification of minority interest 0 16,856 16,856 Issuance of new shares in August 2007 relating to exercise of share warrant agreement 1, , ,184 Valuation of share option scheme, issued in September Payment of dividend 0-179, ,919 At 31 December ,965 2,639 66, ,819 Opening balance as at 1 January ,965 2,639 66, ,891 Payment of dividend from share premium 0-50,746-50,746 Valuation of share option scheme 1,011 1,011 Cancelation of own shares (non traded) -2, At 31 December ,965 2,599 16,202 1,242 20,044 In August 2007 the Company received an exercise notice from the holders of warrants in Deep Sea Supply PLC, Drawbridge Special Opportunities Fund LP of New York and DB Special Opportunities LLC of New York, by which the two funds request that their warrants are converted into shares for an exercise price of NOK 10 per shares. Drawbridge Special Opportunities Fund LP of New York is the holder of warrants, and DB Special Opportunities LLC of New York is the holder of warrants. The total authorised number of ordinary shares as per 31 December 2007 is shares with a par value of USD 0.02 per share, of which shares are hold by the company. All issued shares are fully paid. The equity structure (share capital and share premium) presented above reflects equity structure of the legal parent including the equity instruments issued to reflect the combination together with the issued equity of the legal subsidiary immediately before the business combination and the cost of the business combination is settled. 42

45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 Share options scheme Employees: The Board of Deep Sea Supply PLC has approved a share option scheme for all employees. By year-end 2007, 1,328,500 share options were granted to management and employees of the Company. Initial share options to the management and employees were granted at an exercise price equal to the closing price on June 11, 2007 increased by 5% or NOK per share. These share options may be exercised with one third after one, two and three years, respectively and all options must be exercised within 5 years. The strike price shall be reduced, on a USD for USD basis, by the amount of all dividends declared by the Company in the period from the date of grant until the date the subsisting options is exercised. Subsequent share options have been granted to new employees based on the same principle. By year end 2008, a total of 1,412,500 options were granted at the following (December 2008) strike prices; Strike price No of options: (as per ): 1,100, , , , Board: The Extraordinary General Meeting of Deep Sea Supply PLC awarded 300,000 stock options to the Chairman of the Board, and 200,000 stock options to each of the Directors of the Company, totally 900,000 stock options were awarded. The exercise price is the closing price on July increased by 5%, or NOK per share. This stock option award is a part of the Company`s incentive program and with the aim to attract qualified international directors. By year end 2008, a total of 900,000 options were granted at the following (December 2008) strike prices; Strike price No of options: (as per ): 900, Change of control: The share options for the board and the share options an certain other benefits for the employees will come into effect at change of control in the Company (in excess of 33%). 43

46 13. Trade and other payables Trade payables 7,274 7,945 5,380 Amounts due to related parties Social Security and other taxes Accrued expenses 2,666 4,297 3,486 Other payables 14, Total 25,039 12,928 9,068 Fair value of trade and other payables equal their carrying amounts. 14. Borrowings As at 31 December 2008 As at 31 December 2007 Borrowings Non-current 266, ,012 Current 23,724 13, , ,465 Sale and leaseback and bareboat Non-current 225, ,707 Current 15,495 39, , ,285 CIRR Loan Non-Current 44,799 0 Current 4, ,944 0 Total Borrowings 580, ,750 The outstanding loan of the Group's borrowings are denominated in the following currencies: As at 31 December 2008 As at 31 December 2007 Borrowings NOK 44, ,771 USD 245,793 73,694 Sale and leaseback and bareboat USD 240, ,285 CIRR Loan NOK 48,944 0 Total Borrowings 580, ,750 44

47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 The maturity of non-current assets is as follows: As at 31 December 2008 As at 31 December 2007 Borrowings Between 1 and 2 years 49,016 26,907 Between 2 and 5 years 73,524 76,529 Over 5 years 144,458 75, , ,012 Sale and leaseback and bareboat Between 1 and 2 years 29,604 16,793 Between 2 and 5 years 47,567 26,406 Over 5 years 148, , , ,707 CIRR Loan Between 1 and 2 years 4,144 0 Between 2 and 5 years 8,574 0 Over 5 years 32, ,799 0 The effective interest rates at the balance sheet day were as follows: Bank borrowings (NOK) 11.26% 6.44% Bank borrowings (USD) 5.32% 6.99% Fair values are not materially different from the carrying value for all the loans. Borrowings During the period ended 31 December 2008 the Group has replaced its existing senior loan facility with a NOK 783 mill (USD 154 mill) and a USD 102 mill 1st priority loan facility. In November the group has converted part of its NOK (630m) facility to USD (90m). The senior loan facility is secured with a first priority mortgage in the financed vessels. The Group issued a 5 years NOK 200 mill (USD 39m) bond in January The Group has exercised the issuer s call option for early settlement of the bond, in Quarter 3, The early call option included a 5% premium on the NOK 200 mill which has been recognised in the financial expenses. Sale and leaseback and bareboat In January 2008 the Group has entered into the second sale and leaseback transaction with Ship Finance International Ltd. for another two of its vessels. Gross sales proceeds were USD 126 mill. A seller s credit of USD 22 mill has been agreed and the net sales proceeds are USD 104 mill. A gain from the sale of vessels to Ship Finance International Ltd. of USD 61 mill has been deferred in the balance sheet as a long term liability and will amortised over the lease term which is 12 years. In the balance sheet the seller s credit is deducted from the gross long term debt related to the leasing transaction. The term is 12 years with several purchase options. In the event that a vessel is sold to a third party, then the Group will be liable to pay the current balance of interest rate swaps entered into by Ship Finance International Ltd. CIRR loan During the year ended 31 December 2008 the Group has applied for two Commercial Interest Reference Rate (CIRR) loan from the Norwegian Export Credit Agency. The amount of the loans was NOK 132 mill (USD 19 mill) and NOK 216 mill (USD 31 mill). The duration of the loans is 12 years and the cash proceeds from the loans have been deposited in fixed deposit account with a Norwegian bank at a higher interest rate than that of the loans. The agreed period of the deposits is identical with the one of the loans. The loans and the interest thereof will be repaid from that account and the difference has been recognised as deferred gain and will be amortised over the period of the life of the asset. 45

48 15. Income tax expense Current tax 3,110-12,843 The remaining one third of the untaxed profits will be waived by the tax authorities, unless distributed, if an amount equal to the related tax is spent on qualifying environmental investments within 15 years. The Norwegian Government had stated its intention that this arrangement should not create a tax liability, but the legislation and the secondary regulations issued by the Finance Ministry were not clear and the Company recognized a liability of USD 12.9 million at 31 December The Norwegian Parliament and Government further clarified the interpretation of the legislation during 2008 and based on this the Ministry of Finance acknowledged that there was a conflict between the transition rules enacted by the Parliament and secondary regulations issued by the Ministry of Finance. As a consequence of this, the Ministry of Finance announced on 20 January 2009 that the 15 year time limit would be withdrawn so that no tax liability exists at This clarification means that the remaining one third of untaxed equity will not be taxed unless it is distributed. The liability of USD 3.3 million has been derecognised at 31 December The Group's uncertain tax positions are reassessed by management at every balance sheet date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretations of tax laws that have been enacted or substantively enacted by the balance sheet date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management's best estimate of the expenditure required to settle the obligations at the balance sheet date. Tax issue 2006 The Norwegian tax authorities have raised questions about the 2006 tax return for the subsidiary Deep Sea Supply ASA related to the sales price of the shipbuilding contracts that were sold to Cyprus subsidiaries later the same year and claiming that the sales price should have been higher. The Company has explained and provided background for the terms of the sale and strongly disagree with the Tax Authorities view. 46

49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT

50 16. Provisions for other liabilities and charges Bonus agreement All employees of Deep Sea Supply Management AS and Deep Sea Supply Management (Cyprus) Ltd. have performance bonus agreements with the Group based on comparison with peer group companies. The bonus is calculated annually with a maximum payment equal to the annual salary for the CEO, 50% of the annual salary for the CFO and COO and 25% of the salary for other employees. The weighted average fair value of the bonus payment granted during the period determined using the multi dimensional Geometrical Brownian Motion Monte Carlo valuation model was NOK 1,348,320 equivalent to 32% bonus payment. The significant inputs into the model were average volatility of the peer group of 41%, dividend yield of 2,5% and an expected correlation matrix for the peer group between 0,57 and 1,00. The volatility of the peer group is measured at the standard deviation of continuously compounded share returns based on statistical analyses of daily share prices over the last two years. 17. Other (losses)/gains - net Change in value of financials derivatives -7,712 7,839 Interest rate swap on sale and leaseback (Note 2.32) -1, Change in financial assets at fair value through profit and loss -8,192 0 Impairment of other receivables (Note 26) -11,032 0 Impairment of trade receivables Gain on sale of vessels 20,225 0 Deferred gain amortized in the period 9,215 1,518 Total 708 8, Employee benefit expense Wages and salaries 2,316 2,183 Social security costs Pension costs defined contribution plans 0 0 Pension costs defined benefit plans (Note 7) Other benefits Total 2,908 3,019 Number of employees as per year-end The above excludes crew payroll expenses which are included in operating expenses vessels (Note 20) 19. Expenses by nature Depreciation, amortisation and impairment charges (Note 6) 30,277 16,561 Operating expenses vessels (specified below) 60,199 40,176 Payroll expenses administrative employees (Note 18) 2,908 3,019 Other administration costs 5,063 2,933 Total 98,447 62,689 48

51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Operating expenses vessels Crew expenses 34,264 21,314 Insurance 3,715 1,005 Rep.&maintenance, provisions, stores, lubrication oil, administration of operations and miscellaneous 22,220 17,857 Total 60,199 40, Finance costs Financial expenses -41,545-19,878 Financial income 2,122 2,616 Realised exchange gain/(losses) 536-1,441 Unrealised currency exchange gains/(losses) -3,487-3,094-42,374-21, Earnings per share Basic Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. During 2007, The Company has acquired own shares, and these are not included in the weighted average number of shares. Also, in September 2007 all outstanding warrants were exercised, and hence the total number of shares increased by Total number of outstanding shares as per year-end 2008 was , including the own shares Profit attributable to equity holders of the company 53,404 57,705 Weighted average number of ordinary shares (thousands) 126, ,608 Basic earnings per share (USD per share) Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company s only category of dilutive potential to ordinary sharesis the share options. Share options have been granted to Board of Directors and management, and per year-end 2008 there were totall 2,382,500 share options outstanding. The share options are included in the diluted number of shares depending on whether or not they were in the money per year-end Profit attributable to equity holders of the company 53,404 57,705 Weighted average number of ordinary shares diluted (thousands) 126, ,707 Diluted earnings per share (USD per share)

52 23. Cash generated from operations Profit for the period 53,404 57,705 Adjustments for: -Tax 0 12,843 -Depreciation 30,276 16,561 -Gain from sale of assets -20,225-1,518 -Interest expense 41,545 21,797 -Effect from financial derivatives 9,016-10,773 -Effect from available for sale assets 8, Effect from receivables impairment 11, Exchange (gains)/losses on borrowings -14,087 4,535 Changes in working capital (excluding the effects of acquisition and exchange differences on consolidation) -Inventories 889-1,181 -Trade and other receivables -6,235-24,608 -Trade and other payables 12,111 3,049 -Other accruals Cash generated from operations 126,463 79, Credit quality The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. All trade receivables at year end are considered as not impaired based on historical information since they have had no previous cases of default. The ratings for the banks where the Group holds it cash at bank and short-term bank deposits are as follows: Credit Rating Amount A/A-1 24,267 AA- 8,090 A-1+ 1,442 Total 33,

53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT Related-party transactions Key management compensation An agreed upon salary to the Managing Director of the Group equals to USD 329 (NOK 2.06 mill) per year. In addition to the agreed annual salary come a bonus scheme and a share options scheme approved by the Board and Annual general meeting in May Salary and bonus to the Managing Director of the Group amounted to USD 633 thousand (NOK 3.96 million) as of 31 December The corresponding amount as of 31 December 2007 was USD 714 (NOK 2.4 million). The Managing Director has no other form of compensation, except salary, share options scheme mentioned in note 12 and the bonus agreement mentioned in note 16. There are no loans to the employees of the Group as per 31 December 2007 and per 31 December Borrowings The company borrowed USD 12 mill from a company related to the main shareholder (Hemen Holding Ltd) and repaid the loan in full before year-end. The interest charged and paid was USD 141 thousand. Remuneration to the board Suggested remuneration to the Board in 2008 is USD 152 (NOK 0.95 mill), whereof USD 56 (NOK 0.35 mill) is suggested to the Chairman. In 2007 payment to the Board was USD 138 (NOK 0.75 mill), whereof USD 55 (NOK 0.3 mill.) was payment to the Chairman. Sale and leaseback As per 31 December 2008 the Group has entered into the second sale and leaseback transaction with Ship Finance International Ltd for 2 of its supply vessels. The major shareholder of Ship Finance International Ltd is Hemen Holding Ltd who is also the major shareholder of the Group. (Note 6). 51

54 26. Other short term receivables Other short term receivables include USD 1,000 (2007: 12,405) as sellers credit from disposals of the shipbuilding contracts in 2nd quarter of 2006 to Scan Geophysical ASA ( Scan ). In 2006 Deep Sea Supply Management AS sold three shipbuilding contracts at ABG Shipyard to SCAN Geophysical ASA (SCAN). DESSC had a claim on outstanding payments of USD 12.4 million. The claim was to be settled upon delivery of the three vessels. As it it unlikely that Scan would take delivery of all vessels, DESSC made an allocation for losses of USD8 mill. in 4Q08 accounts anticipating that Scan will take delivery of 1 vessel from ABG. Scan has later cancelled all deliveries from ABG Shipyard. On 16 March 2009, Scan and DESSC settled the issues by an agreement whereby SCAN shall pay USD 1 million to DESSC and hence, in the 2008 financial statements, the allocation for losses increased from USD 8 mill. to USD 11 mill. 27. Auditors remuneration Remuneration to the auditors expenses in the financial statement for 2008 equals USD 160 thousand (2007: USD 163 thousand) for audit services and USD 321 thousand (2007: USD 262 thousand) for non-audit services. 28. Events after the balance sheet date On 2nd March 2009, the Company cancelled the newbulding contract for the Sea Hawk 1 from Jaya Shipbuilding & Engineering Ltd., Singapore due to an announced delay in the delivery of the vessel. As a consequence of the cancellation, the Shipyard will repay USD3,6 mill. to the Company and the Company s future capital expenditures will reduce by USD32,5 mill. In 2006 Deep Sea Supply Management AS sold three shipbuilding contracts at ABG Shipyard to SCAN Geophysical ASA (SCAN). DESSC had a claim on outstanding payments of USD 12.4 million upon delivery of the vessels. The claim was to be settled upon delivery of the three vessels. As it is unlikely that Scan would take delivery of all vessels, DESSC made an allocation for losses of USD8 mill. in 4Q08 accounts anticipating that Scan will take delivery of 1 vessel from ABG. Scan has later cancelled all deliveries from ABG Shipyard. On 16 March 2009, Scan and DESSC settled the issues by an agreement whereby SCAN shall pay USD 1 million to DESSC and hence, in the 2008 financial statements, the allocation for losses increased from USD 8 mill. to USD 11 mill. 29. Financial instruments by category Setting out below is a comparison by category for carrying amounts and fair values of all of the group s financial instruments that are carried in the financial statements. Group Loans and receivables Assets at fair value trough the profit and loss Available for sale Total 31 December 2008 Assets as per balance sheet Financial assets at fair value through profit and loss 6,335 6,335 Trade and other instruments 57,173 57,173 CIRR Deposits 48,943 48,943 Cash and cash equivalents 33,799 33,799 Total 139,915 6, ,250 Liabilities at fair value trough the profit and loss Other financial liabilities Total Liabilities as per balance sheet Borrowings 531, ,419 CIRR Loans 48,943 48,943 Derivative financial instruments 5,522 5,522 Total 5, , ,884 52

55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ANNUAL REPORT 2008 Group Loans and receivables Assets at fair value trough the profit and loss Available for sale Total 31 December 2007 Assets as per balance sheet Derivative financial instruments 6,003 6,003 Trade and other instruments 60,612 60,612 Cash and cash equivalents 31,396 31,396 Total 92,008 6,003-98,011 Liabilities at fair value trough the profit and loss Other financial liabilities Total Liabilities as per balance sheet Borrowings 401, ,750 Derivative financial instruments - - Total - 401, , Contingencies (a) Tax legislation The Company is subject to taxes in several jurisdictions, where significant judgement is required in calculating the tax provision for the Company. There are many transactions for which the ultimate tax determination is uncertain and for which the Company makes provisions based on an assessment of internal estimates, tax treaties and tax regulations in the different countries where the Company is operating, and appropriate external advice. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such difference will impact the tax charge in the period in which the outcome is determined. (b) Recent volatility in global financial markets. The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other things, a lower level of capital market funding and higher interbank lending rates. The uncertainties in the global financial market have also led to bank failures and bank rescues in the United States of America, Western Europe and in Russia. Such circumstances could affect the ability of the Company to obtain new borrowings or re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. The debtors or borrowers of the Company may also be affected by the lower liquidity situation which could in turn impact their ability to repay their amounts owed. Deteriorating operating conditions for debtors or borrowers may also have an impact on Management's cash flow forecasts and assessment of the impairment of financial and nonfinancial assets. To the extent that information is available, Management has reflected revised estimates of expected future cash flows in its impairment assessments. Management is unable to reliably estimate the effects on the Company's financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and growth of the Company s business in the current circumstances. 31. Sale and leaseback effect The impact from the sale and leaseback transactions (including the bareboat of Sea Ocelot until acquired and refinanced) on the profit and loss and balance sheet is as follows: Profit and loss impact (in USD millions) for the year ending 31 December: Interest paid Deferred gain recognized in profit and loss Depreciation charge of leased vessels Balance sheet value of assets and liabilities under sale and leaseback Cost of leased vessels Sale and leaseback debt - long term Sale and leaseback debt - short term Deferred gain - long term Deferred gain - short term

56 54

57 INDEPENDENT AUDITORS REPORT ANNUAL REPORT

58 SHAREHOLDERS REGISTERED IN VPS THE LARGEST SHAREHOLDERS AS PER 31 DECEMBER 2008 Citizen No. of shares: % HEMEN HOLDING LIMITED CYP 44,583, % SVENSKA HANDELSBANKEN SWE 4,876, % SKANDINAVISKA ENSKILDA BANKEN SWE 4,000, % ORKLA ASA NOR 3,779, % J.P. MORGAN CHASE BANK GBR 2,799, % DNB NOR BANK ASA NOR 2,387, % MLPF&S NORWEGIAN USA 2,361, % SEB ENSKILDA ASA NOR 2,318, % SEB LONDON SWE 2,099, % CITIBANK USA 1,858, % STICHTING SHELL PENSIOENFONDS GBR 1,136, % J.P. MORGAN CHASE BANK GBR 1,069, % TERRA SPAR NOR 1,030, % CARNEGIE NOR 1,000, % CITIBANK USA 926, % DNB NOR SMB NOR 905, % BANK OF NEW YORK BEL 782, % BANKENES SIKRINGSFOND GBR 759, % J.P. MORGAN CHASE BANK GBR 754, % TERRA NORGE NOR 670, % Total 20 largest shareholders: 80,096, % Total shares owned by Deep Sea Supply Plc 3,101, % Total other shareholders: 46,767, % Total number of shares: 129,964, % 56

59 SHAREHOLDERS ANNUAL REPORT 2008 SHAREHOLDERS REGISTERED IN VPS THE LARGEST SHAREHOLDERS AS PER 24 MARCH 2009 Citizen No of shares % HEMEN HOLDING LIMITED CYP 44,583, % SVENSKA HANDELSBANKEN SWE 4,795, % SKANDINAVISKA ENSKILDA BANKEN SWE 4,000, % ORKLA ASA NOR 3,779, % J.P. MORGAN CHASE BANK GBR 2,799, % DNB NOR MARKETS NOR 2,653, % SEB ENSKILDA ASA NOR 2,235, % CITIBANK USA 1,719, % DNB NOR SMB NOR 1,500, % MLPF&S NORWEGIAN USA 1,487, % NATIXIS BLEICHROEDER INC. USA 1,304, % J.P. MORGAN CHASE BANK GBR 1,241, % STICHTING SHELL PENSIOENFONDS GBR 1,136, % TERRA SPAR NOR 1,030, % CARNEGIE ASA NOR 1,000, % BANK OF NEW YORK BEL 782, % J.P. MORGAN CHASE BANK GBR 754, % STATE STREET BANK USA 674, % CITIBANK USA 665, % CITIBANK GBR 661, % Total 20 largest shareholders: 78,801, % Total shares owned by Deep Sea Supply Plc 3,101, % Total other shareholders: 48,062, % Total number of shares: 129,964, % 57

60 The Company s vision is to become one of the leading offshore supply vessel companies on a global basis. 58

61 CORPORATE GOVERNANCE ANNUAL REPORT 2008 CORPORATE GOVERNANCE Deep Sea Supply Plc ( DESSC or the Company on a consolidated basis) principles for Corporate Governance are based on the Norwegian Recommendation for Corporate Governance issued on 28 November 2006, which is a revised version of the recommendations issued on the 8th December Listed companies are expected to practice Corporate Governance that regulates the division of roles between Shareholders, the Board of Directors and the Executive Management more comprehensively than is required by the legislation. The code of practice intends to strengthen the confidence in listed companies providing the highest possible value creation benefiting shareholders, employees and others. As long as DESSC is a Cyprus registered company, "Norwegian Recommendation for Corporate Governance" can only be adopted as long as the recommendation is in accordance with Cyprus Companies Act. The Board of the Company is not aware of any differences between the content of the "Norwegian Recommendation for Corporate Governance" and Cyprus Companies Act. The Board will below present its Corporate Governance. DESSC s management has presented The Norwegian Code of practice for Corporate Governance for the Board. The following elements underpin the Company s Corporate Governance Policy: DESSC will maintain an open and reliable communication with the public about its business activities and conditions related to corporate governance. DESSC s Board will be autonomous and independent of the Company s Management. DESSC will attach importance to avoid conflicts of interest between the owners, the Board and the Management. DESSC will have a clear division of responsibilities between the Board and the Management. All shareholders will be treated equally. In 2006 the Company completed its own corporate Code of Ethics. Compliance with and follow up of the Code of Ethics have been discussed and presented thoroughly in-house. For more detailed information about the Company s Code of Ethics, please see our corporate website at Business The Company s business objective is defined in Section 3 of the Memorandum of Association, and includes, inter alia, the following; To engage and invest, directly or indirectly, by itself or through subsidiaries or part-owned companies, partnerships or other forms of entities, in the international offshore anchor handling and supply vessel business, and to do all such acts and things as are related thereto, including without limitation the acquisition, construction, leasing, chartering, operation and manning of such vessels and everything incidental thereto. In 2005 the Company acquired a fleet of modern second hand AHTS (Anchor Handling Tug Supply vessels) built in Norway in 1998/99. The vessels are operating in the North Sea and internationally. In April 2006 the Company entered into a contract to purchase 22 newbuildings, whereof 8 PSVs (Platform Supply Vessels) and 14 AHTS. The Company acquired in 2006 and 2007 another 4 shipbuilding contracts, one second hand vessel and bareboat chartered in (and later acquired) one vessel. In 2006, the Company furthermore sold three shipbuilding contracts. The Company intends to become one of the leading owners and operators of supply vessels on a global basis. DESSC will primarily seek to obtain and maintain a chartering profile with a combination of spot, medium and long term contracts for the large AHTS vessels operating in the North Sea and in other areas of the world. For the PSVs and the small AHTS vessels, DESSC will seek to obtain medium to long term contracts. The Company s primary aims are to meet the demand from markets that require modern and advanced supply vessels. DESSC seeks investments in the perspective of providing financial returns to its shareholders. The Company will actively consider possibilities to participate in industry consolidation, mergers and acquisitions, and will position itself to be part of such consolidation. The Company has, and will continue to have, a small team of dedicated staff focusing on core activities such as chartering, finance, investor relations, accounting and monitoring external suppliers. Other services like technical management, crew management, construction supervision are outsourced to well-qualified professional suppliers of such services. Company background Deep Sea Supply Plc was established on 7 November 2006 for the purpose of acquiring all shares of Deep Sea Supply ASA following an initiative by the Board of Deep Sea Supply ASA to change the domicile of the ultimate parent company to Cyprus. Cyprus is expected to afford more stable, attractive and competitive conditions over time compared to the Norwegian regime. It was also considered vital that Cyprus is a member of the EU. 59

62 Equity and dividend Equity The Company s book equity as per 31 December 2008 was USD 112,2 mill. The Board considers this to be an acceptable level. The Board evaluates continuously the Company s equity in light of the overall goals, strategy, risk profile and market. Dividend policy The Company will actively use the capital market when doing investments, and does not intend to hold significant liquid reserves for investments. Retained earnings will, to the extent permitted under operational constraints, financial covenants and with due regard to appropriate working capital requirements and, more recently, the uncertainties deriving from the current financial crises, be paid out as dividends. The General Meetings stipulates the annual dividend, based on the Board s recommendation. Distributions to shareholders for 2008 have been evaluated quarterly. For the financial year 2008 the Board has distributed quarterly dividend payments for 1st and 2nd quarter of USD 0,13 and NOK 1,00 respectively. For the 3rd and 4th quarter, no dividend distributions were made due to possible impacts on the market for AHTS and PSVs from the recent financial turmoil and the lack of visibility in the equity markets. Purchase of treasury shares The Board has been granted an authorization to acquire treasury shares, including acquisition of security rights s authorization to acquire treasury shares is based on the assumption that acquisitions will be conducted at normal market conditions. DESSC owns 3,101,000 own shares acquired in The shares were acquired in the market. International financial turmoil Late 2008, the world experienced a financial turmoil with significant impact on the stock markets, the oil price, the banking sector etc. Such financial turmoil has by year end 2008 had limited impact on the offshore supply companies, but may have a negative impact on the future rate levels achieved by the vessels, the market values of the vessels, the ability for companies to finance its vessels, newbuildings etc. The financial turmoil may also impact the supply of vessels as owners may cancel shipbuilding contracts and shipyards may have severe financial problems. DESSC has financed all 7 newbuildings at ABG and has a 15 months bareboat agreement for its newbuilding from Jaya from delivery of the vessel. Equal treatment of shareholders and transactions with related parties Class of shares DESSC s shares are all equal. The Articles of Association place no restrictions on voting rights or rights of receiving dividends. Trading in treasury shares The Board s authorization to acquire treasury shares is based on the assumption that acquisitions will be conducted at normal market conditions. Transactions between related parties Related parties are considered to be the Board (including associated companies) and the Management (including associated companies). Ship Finance International Limited ( SFI ) DESSC has entered a sale and leaseback transaction with SFI for 5 offshore supply vessels in 2007 (of which one is now sold) and another two AHTS vessels in SFI s largest shareholders is Hemen Holding Ltd. who is also DESSC s largest shareholder. Tidewater Marine DESSC has an agreement related to technical management of some of the offshore supply vessels with Tidewater Marine. DESSC acquired 6 AHTS vessels from Tidewater in Hemen Holding Limited / Metrogas Holdings Inc. In connection with the Company s change of domicile from Norway to Cyprus, Metrogas Holdings Inc issued in January 2007 a short term loan facility to DESSC which amounted to USD 25,6 mill. The purpose of the loan was to make relevant deposit for the purpose of conducting the mandatory bid for all of the shares in Deep Sea Supply ASA. Metrogas Holdings Inc is a Greenwich Holding Ltd subsidiary and sister company of Hemen Holding Ltd, the owner of 99,9 percent of shares in Metrogas Holding Inc and the owner of 34,30% of the shares in the DESSC. The loan agreement is entered into on an arms-length-basis. The loan was fully repaid in mid March In 2008, DESSC borrowed USD 12 mill. from Metrogas Holdings Inc (a company controlled by DESS- C s largest shareholder) and repaid the loan in full prior to year-end

63 CORPORATE GOVERNANCE ANNUAL REPORT 2008 Freely negotiable The shares are freely negotiable. General meetings By virtue of the Annual General Meeting (AGM), the shareholders are guaranteed participation in the Company s supreme governing body. The AGM adopts the Articles of Association. Shareholders representing at least 10 per cent of the shares can call for an extraordinary general meeting. The AGM shall be held at the place of establishment of the Company (Cyprus). Convening letter The notifications to the AGM are distributed to all shareholders minimum 21 days in advance. It is considered important that the documents contain all relevant documentation so that the shareholders can take a position on all items up for discussion. The Finance Calendar is published on the Company s web page and distributed via Oslo Børs Participation It is possible to register for the AGM by post, telefax or . The Board and at least one member of the Nomination Committee will attend the AGM. As a minimum, the management is represented by the CEO and the CFO. Agenda and execution The agenda is set by the Board, and the main items are specified in the Company s Articles of Association. The Chairman of the Board will chair the AGMs. Nomination Committee In accordance with the Articles of Association, the Company shall have a nomination committee consisting of the Chairman of the Board and two members elected by the AGM. In connection with the election of Directors and election of the members to the Nomination Committee, the Nomination Committee shall in connection with the summons for the General Meeting provide its recommendations for candidates. The nomination committee shall also propose the remuneration of the Board. The Board has establishing an audit committee who had its first meeting related to 4Q08 figures. The meeting was held with the Management and the auditors. Board of Directors - composition and independence The DESSC Board consists of four board members. Election of the Board of Directors The Board members are elected by the AGM based on a recommendation prepared and presented by the Nomination Committee. The recommendation is distributed to the shareholders along with the convening letter to the AGM. Decisions on the composition of the Board require a simple majority. Directors are elected for two-year terms and can be re-elected. Composition of the Board Emphasis is made on selecting board members with relevant competence. According to the Articles of Association, the Board shall have from three to seven board members. The Company s CEO is not member of the Board. The Board s autonomy The Board considers itself autonomous and independent of the Company s executive management and main shareholders. Emphasis is made that there should exist no conflicts between owners, the Board, the Management and the Company s shareholders. The corporate Code of Ethics discusses the topic under the heading of conflict of interest. Director s ownership of shares By year-end 2008, the members of the Board either owned shares in the Company or represented significant shareholders. Reference is furthermore made to the separate presentation of the Board Members in the Annual Report. Board work Board responsibilities The Board bears the ultimate responsibility for running the Company and supervising routine management and business activities. The Board primarily looks after the interests of all the shareholders, but is also responsible for the Company s other stakeholders. The Board has made an annual plan for the board meetings. The Board s main tasks are developing and determining the Company s strategy, performing the required control functions and advice the executive management. The Board is responsible for employing the Company s CEO and to draw up his/her job description. The Board members receives a fixed compensation and has a total of 900,000 stock options. Stock options were deemed necessary in order to attract good foreign board members. DESSC s Board of Directors consist of 1 Cyprus, 1 Norwegian and 2 UK Citizens. Remuneration to leading employees The remuneration for the CEO is decided by the Board. Each year, the Board undertakes a thorough review of salary and other remuneration to the CEO. An incentive scheme for the employees is established which is linked to a combination of stock options and a bonus scheme. The bonus scheme is linked to the development of the stock price of the Company based on comparison with peer company companies. The terms are described in the notes of the annual financial statements Remuneration to the members of the Board The AGM stipulates the Board s remuneration each year. The suggested remuneration to the Board in 2008 breaks down as follows: NOK 350,000 for the Chairman and NOK 200,000 for each Director. In addition, each board member has stock options (300,000 for the chairman and 200,000 for each Director). No Director is engaged in any paid consultancy work or other assignments for the Company. 61

64 Change of control The share options for the board and the share options and certain other benefits for the management will come into effect at a change of control in the Company (in excess of 33%). Information and communication The Company considers an open and frequent communication as important to its shareholders and other related parties. The Company s Financial Calendar is published on the Company s website and communicated via Oslo Børs. Monthly information about vessel revenues, medium and long term charters, delivery of vessels etc are provided via Oslo Børs. The web-site contains financial and other information relevant for its shareholders and related parties. Open presentations are arranged to present quarterly financial statements. Present at these presentations are the CEO and the CFO. The presentations are simultaneously made available on the Company s web-site. It is considered essential to keep owners and investors informed about the Company s progress and financial status. Emphasis is made on presenting the same information to the entire equity market at the same time. Take-over There are no defense mechanisms against take-over bids in the Company s Article of Associations, nor has the Company implemented other measures to limit the opportunity to acquire shares in the Company. The Company s Articles of Association includes takeover provisions under which a person who directly or indirectly becomes the owner of shares representing more than 40% of the capital interest or the voting rights in the Company is required to make an unconditional public offer at a fair price for all issued and outstanding shares. The 40% is suggested to be reduced to 33,33% in the Company s AGM in May 2008 for the purpose of adjusting to Norwegian rules as the Company is listed on Oslo Stock Exchange. Auditor The Company emphasizes a frequent and open dialogue between the Company and its auditor. The Company s auditor participates in the board meetings where the annual financial statements are discussed. At such meetings, the auditor is briefing the Board on the annual accounts and any other issues of particular concern to the auditor. At least once a year the auditor presents to the Board a written report of the Company s accounting policies, risk areas and internal control routines. The auditor submits the main features of the plan for the audit of the Company to the Board annually. The auditor annually presents for the Board a written confirmation that the auditor continues to satisfy the requirements for independence. At least one meeting a year will be held between the auditor and the Board without the presence of the CEO or other executive managers. The Company s auditor is Pricewaterhouse Coopers (PwC). There has been no change in audit firm after the Company was established in

65 The Company will focus on acknowledged Safety Standards developed during recent years within the Offshore Marine Industry world wide, and in particular in the North Sea area.

66 The Company s primary aims are to meet the demand from the markets that require modern and advanced offshore vessels. 64

67 DEEP SEA SUPPLY PLC ANNUAL REPORT 2008 REPORT FROM THE BOARD OF DIRECTORS The Board of Directors presents its report together with the audited financial statements of the Company for the year ended 31 December Principle activities Deep Sea Supply PLC s ( the Company ) principal activities is the holding of investments. Principle risks and uncertainties As the Company s main income is dividend received from its subsidiaries, the Company is exposed to the performance of those subsidiaries. The Company s subsidiaries operate in the international offshore supply vessel business and hence exposed to charter rate risk. Results, review of developments, position and performance of the Company s business The main income for the period was dividend received from the subsidiaries of the Company (USD 59 million). The other (losses)/gains comprises mainly from fair value loss on financial assets at fair value through profit and loss; The Company has throughout 2008 acquired shares in an offshore supply company classified as financial assets at fair value through profit and loss. The shares have reduced in value and caused an unrealized loss of -USD8,2 mill. in The Company s net result for the year is set out at page 69. Dividends Dividend policy and distributions made in 2008 The Company intends to actively use the capital market when doing investments, and does not intend to hold liquid reserves for significant investments. Retained earnings will, to the extent permitted under operational constraints, financial covenants and with due regard to appropriate working capital requirements, be distributed to shareholders as dividend. Share capital The share capital of the company was reduced from USD 2,639 thousand to USD 2,599 thousand. The reduction of USD 40 thousand was due to the cancelation of shares held by the Company and non traded. Treasury shares At year end 2008 the Company held 3,101,000 own shares, all purchased during 2007 for a consideration of USD 9,787. Board of directors The members of the Board of Directors at 31 December 2008 and at the date of this report are shown on page 8. All of them were members of the Board throughout the year In accordance with the Company s Articles of Association the members of the Board of Directors retire at 08 May 2009 and, being eligible, offer themselves for re-election. Events after the balance sheet date There were no material events which occurred after the end of the financial year. Auditors The Independent Auditors, PricewaterhouseCoopers Limited, have expressed their willingness to continue in office. A resolution giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting. The following distributions to shareholders were made in 2008; Dividend Q USD 0,40 (NOK 2.00) Ex. Dividend date Dividend Q USD 0,13 (NOK 0.68) Ex. dividend date Dividend Q NOK 1,00 Ex. dividend date The distribution from Q407 was made by way of reducing the share premium fund. Distributions from Q108 and Q208 were from retained earnings. For Q308 and Q408, no dividend payments were made due to the recent international financial crises and the possible negative impacts on the market for offshore supply vessels and the lack of visibility in the financial markets. 65

68 66

69 DEEP SEA SUPPLY PLC ANNUAL REPORT 2008 Responsibility statement: In accordance with Article 9, sections (3)(c) and (7) of the Transparency Requirements (Securities for Trading on Regulated Market) Law of 2007 ( Law ), we the members of the Board of Directors and the other responsible persons for the financial statements of the Company for the year ended 31 December 2008 we confirm that, to the best of our knowledge: a) The annual financial statements that are presented on pages 68 to 83: i. were prepared in accordance with the International Financial Reporting Standards as adopted by the European Union, and in accordance with the provisions of Article 9, section (4) of the Law, and ii. give a true and fair view of the assets and liabilities, the financial position and the profit or losses of the Company, and b) the director s report gives a fair view of the developments and performance of the business as well as the financial position of the Company, together with a description of the principal risks and uncertainties that they are facing. Limassol, Cyprus 2 April 2009 The Board of Deep Sea Supply Plc Svein Aaser Bjørn Giæver Frixos Savvides Chairman Anna Cecilie Holst Odd Brevik Finn Amund Norbye Chief Executive Officer Chief Financial Officer 67

70 BALANCE SHEET - Deep Sea Supply Plc (Parent Company) (all amounts in thousands of United States Dollars) 31 December 31 December Note ASSETS Non-Current Assets Investments in subsidiaries 4 116, ,584 Total non current assets 116, ,584 Current assets Financial assets at fair value through profit and loss 5 6,335 0 Amounts due from related parties , ,567 Financial derivatives 5 0 6,901 Cash and cash equivalents 6 8,750 1,283 Total current assets 190, ,749 Total assets 307, ,333 EQUITY Capital and reserves attributable to equity holders of the company Share Capital 7 2,599 2,639 Share premium 139, ,334 Treasury shares -9,787-9,787 Other paid in capital 1, Retained earnings 6, Total equity 139, ,678 LIABILITIES Non-current liabilities Borrowings ,168 Total non current borrowings 0 36,169 Current Liabilities Non-current liabilities Amounts due to related parties ,807 3,853 Other short term payables 10 14, Dividends payable 0 50,746 Total current liabilities 167,346 55,487 Total liabilities 167,346 91,655 Total equity and liabilities 307, ,333 68

71 DEEP SEA SUPPLY PLC ANNUAL REPORT 2008 INCOME STATEMENT - Deep Sea Supply Plc (Parent Company) Period from 7 November 2006 (all amounts in thousands of United States Dollars) Year ending 31 ending Note December December 2007 Dividend income 59,261 0 Administrative expenses 13-3,782-2,613 Other (losses)/gains - net 11-11,549 7,463 Operating profit 43,930 4,850 Financial income 12 15,649 3,026 Financial expenses 12-14,102-7,615 Finance costs - net 1,547-4,589 Profit before income tax 45, Income tax 0 0 Profit for the year / period 45, Earnings per share for profit attributable to the equity holders of the Company, expressed in USD per share USD per share USD per share -Basic Diluted

72 STATEMENT OF CHANGES IN EQUITY - (Parent Company) Share Share premium Treasury Other paid-in Retained Minority Capital reserves shares equiy earnings interest Total Result for the period Total income recognised for the period from 7 November 2006 ending 31 December Paid in capital from incorporation in November Reclassification of equity related to share swap 2, , ,696 Issuance of new shares in January 2007 from mandatory offering ,856 16,972 Issuance of new shares in August 2007 relating to exercise of share warrant agreement 36 3, ,184 Value of share option scheme, issued in December Buy back of own shares -9,787-9,787 Payment of dividend -179, ,919 Balance at 31 December , ,334-9, ,678 Balance at 1 January , ,334-9, Result for the year 45,478 45,478 Total income recognised for the year ended 31 December ,478 45,478 Cancelation of own shares (non traded) Value of share option scheme, issued in December ,011 1,011 Payment of dividend -50,746-39,404-90,150 Balance at 31 December , ,589-9,787 1,242 6, ,980 70

73 DEEP SEA SUPPLY PLC ANNUAL REPORT 2008 CASH FLOW STATEMENT - (Parent Company) Period from 7 November 2006 (all amounts in thousands of United States Dollars) Year ending 31 ending NOTE December December 2007 Cash flows from operating activities Profit for the year 45, Fair value losses on financial derivatives 3,357-7,463 Fair value losses on financial assets at fair value through profit and loss 8,192 0 Currency gains/(losses) ,720 Changes in working capital Trade and other receivables -31, ,666 Trade and other payables 162,606-4,740 Cash genereated from operations 187, ,888 Cash flow from investing activities Acquisitions of shares in wholly owned subsidiaries ,584 Cash flow from investing activities ,584 Cash flows from financing activities Payment of dividend to shareholders -140, ,173 Proceeds from issuance of shares 0 370,947 Proceeds from borrowings 0 36,768 Repayments of borrowings -39,338 0 Cash flow from acquisition of own shares 0-9,787 Net cash from financing activities -180, ,755 Total changes in liquidity in the year 7,467 1,283 Cash and cash equivalents at beginning of year 1,283 0 Cash and cash equivalents at end of the year 6 8,750 1,283 71

74 1. General information Deep Sea Supply PLC s ( the Company ) principal activities are to engage and invest, directly or indirectly, by itself or through subsidiaries or part-owned companies, partnerships or other forms of entities, in the international offshore supply vessel business. The Company was incorporated as a public limited liability company on 7 November 2006 in Cyprus in accordance with the provisions of the Companies Law, Cap The Company was established for the purpose of acquiring all shares of Deep Sea Supply ASA. Deep Sea Supply PLC presented on the 4 December 2006 a voluntary exchange offer to acquire all issued and outstanding shares in Deep Sea Supply ASA. The offer price presented was 1 Deep Sea Supply PLC share for each owned share in Deep Sea Supply ASA, and the offer period was from 5 December 2006 until 18 December Regarding the exchange offer Deep Sea Supply PLC received acceptances representing approximately 93.8% of the total issued shares in Deep Sea Supply ASA. Settlement under the exchange offer was completed on the 22 December The shares in Deep Sea Supply PLC were delivered to the tendering shareholders of Deep Sea Supply ASA on the 27 December 2006, and the first trading day of Deep Sea Supply PLC shares on Oslo Børs was on the 28 December Following the voluntary exchange offer, the Board presented on 4 January 2007 a mandatory offer for purchase of the remaining 6.2% of the shares of Deep Sea Supply ASA. At the same time, the Board of Directors resolved to exercise Deep Sea Supply PLC s right of compulsory acquisition of all remaining shares of Deep Sea Supply ASA. The offer period under the mandatory offer was from 5 January 2007 to 2 February The rights to the shareholders of Deep Sea Supply ASA in relation to the mandatory offer and ompulsory acquisition were 1 share in Deep Sea Supply PLC, for each owned share in Deep Sea Supply ASA, or to receive a cash consideration of NOK 18 per share in Deep Sea Supply ASA. Under the mandatory offer, Deep Sea Supply PLC received acceptance representing approximately 4.9% of the issued shares in Deep Sea Supply ASA, whereof approximately 4.5% were tendered under the share alternative and 0.4% under the cash alternative. The shareholders of Deep Sea Supply ASA, who remained passive, or did not take any action, representing approximately 1.2% of the total number of outstanding shares of Deep Sea Supply ASA, were treated as bound to receive the offered redemption amount (i.e. NOK 18 per share in Deep Sea Supply ASA). Settlement did take place in mid March, and after that, Deep Sea Supply PLC owns 100% of the issued and outstanding shares in Deep Sea Supply ASA. The Company has its primary and only listing on the Oslo Stock Exchange. These financial statements have been approved for issue by the Board of Directors on 2 April The Company has also prepared consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU for the Company and its subsidiaries (the Company ). The consolidated financial statements can be obtained from the Company s registered office. Users of these parent s separate financial statements should read them together with the Company s consolidated financial statements as at and for the year ended 31 December 2008 in order to obtain a proper understanding of the financial position, the financial performance and the cash flows of the Company and the Company. 2. Accounting principles 2.1 Statement of compliance and basis of preparation These financial statements have been prepared in accordance with, and comply with, International Financial Reporting Standards as adopted by the EU and the requirements of the Cyprus Companies Law, Cap The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities, including derivative instruments at fair value through profit or loss. The financial statement has been prepared under the assumption that the company is a going concern. A summary of the principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process applying the Company s accounting policies. There are no areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements. All International Financial Reporting Standards issued by the International Standards Board (IASB) and effective as of 1 January 2008 have been adopted by the EU through the endorsement procedure established by the European Commission, with the exception of certain provisions of IAS39 "Financial Instruments: Recognition and Measurement" 72

75 DEEP SEA SUPPLY PLC ANNUAL REPORT 2008 relating to portfolio hedge accounting. IFRIC 12 "Service Concession Arrangements" has been endorsed by the EU on 26 March 2009 and its mandatory effective date was changed from annual periods beginning on or after 1 January 2008 in IFRIC 12 to an entity's first financial year starting after 29 March 2009 in the EU-endorsed version, but with earlier adoption permitted. Standards issued not yet effective: "At the date of approval of these financial statements the following accounting standards were issued by the International Accounting Standards Board but were not yet effective: Standard / Interpretation Effective for annual periods beginning on or after (i) Adopted by the European Union Improvements to IFRSs January 2009 Amendments to IFRS 1 and International Accounting Standard (IAS) 27 Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate 1 January 2009 Amendment to IFRS 2 Share Based Payment: Vesting Conditions and Cancellations 1 January 2009 IFRS 8 Operating Segments 1 January 2009 IAS 1 (Revised) Presentation of Financial Statements 1 January 2009 IAS 23 (Revised) Borrowing Costs 1 January 2009 Amendments to IAS 32 and IAS 1 Puttable Financial Instruments and Obligations arising on Liquidation 1 January 2009 International Financial Reporting Interpretation Committee (IFRIC) 12 Service Concession Arrangements 29 March 2009 International Financial Reporting Interpretation Committee (IFRIC) 13 Customer Loyalty Programmes 1 July 2008 (ii) Not adopted by the European Union IFRS 1 (Revised) First Time Adoption of International Financial Reporting Standards 1 January 2009 IFRS 7 (Amendments) - Financial Instruments: Disclosures: Improving disclosures about financial instruments" 1 January 2009 IFRS 3 (Revised) Business Combinations 1 July 2009 IAS 27 (Revised) Consolidated and Separate Financial Statements 1 July 2009 Amendment to IAS 39 Eligible Hedged Items 1 July 2009 Amendment to IAS 39 Reclassification of Financial Assets: Effective date and Transition 1 July 2008 IFRIC 15 Agreements for the Construction of Real Estate 1 January 2009 IFRIC 16 Hedges of a Net Investment in a Foreign Operation 1 October 2008 IFRIC 17 Distributions of Non cash Assets to Owners 1 July 2009 IFRIC 18 Transfers of Assets from Customers 1 July 2009 The Board of Directors expects that the adoption of these accounting standards in future periods will not have a material effect on the financial statements of the Company except from the application of IAS 1 (Revised) Presentation of Financial Statements which will have a material effect on the presentation of the financial statements and the application of IFRS 7 (Amendments) - Financial Instruments: Disclosures: Improving disclosures about financial instruments which will enhance disclosures about fair value measurements and liquidity risk. 73

76 2.2 Underlying concepts The financial statements are prepared on the going concern basis using accrual accounting. Assets and liabilities and income and expenses are not offset unless specifically permitted by an accounting standard. Financial assets and financial liabilities are offset and the net amount reported only when a legally enforceable right to set off exists and the intention is either to settle on a net basis or to realize the asset and settle the liability simultaneously. Changes in accounting policies are accounted for in accordance with the transitional provisions in the IFRS standards. If no such guidance is given, they are applied retrospectively, unless it is impracticable to do so, in which case they are applied prospectively. 2.3 Investments in subsidiary undertakings Subsidiaries are those entities in which the Company has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies. Investments in subsidiary undertakings are stated at cost and provision is only made where, in the opinion of the Directors, there is an impairment in their value. 2.4 Revenue recognition Dividend income Dividend income is recognised when the right to receive payment is established. Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. 2.5 Recognition of assets and liabilities Assets are only recognized if they meet the definition of an asset, it is probable that future economic benefits associated with the asset will flow to the Company and the cost or fair value can be measured reliably. Liabilities are only recognized, if they meet the definition of a liability, it is probable that future economic benefits associated with the liability will flow from the entity and the cost or fair value can be measured reliably. 2.6 Valuation and classification of assets and liabilities Assets intended for long-term ownership or use is classified as non-current. Other assets are classified as current. Receivables due to be repaid within one year are classified as current assets. Non-current assets are stated at historic cost price, but written down to recoverable amount when the fall in value is considered to be permanent. Such write-downs are reversed when the reason for the write-down no longer applies. 2.7 Foreign exchange translation Foreign currency translation (i) Functional and presentation currency Items included in the Company's financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The financial statements are presented in United States dollars (US$), which is the Company's functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. 2.8 Financial assets The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management, and they meet certain criteria (IAS 39.9).Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realized within 12 months of the balance sheet date. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and 74

77 DEEP SEA SUPPLY PLC ANNUAL REPORT 2008 receivables are classified as trade and other receivables in the balance sheet. (c) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of financial assets are recognized on the trade-date, the date on which the Company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss, are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the income statement within other (losses)/gains net, in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Company s right to receive payment is established. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (2) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or (3) hedges of a net investment in a foreign operation (net investment hedge). As of 31 December 2008 and 2007, the Company did not have any derivative transactions that qualified for hedge accounting under IAS 39. Changes in the fair value of these derivative instruments are recognized immediately in the income statement. When the Company provides guarantees for any losses suffered in derivatives due to breach of contract, a provision is made when the loss becomes probable. 2.9 Cash and cash equivalents Cash and cash equivalents, includes cash in hand and deposits held at call with banks Share capital Ordinary shares are classified as equity. Costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method Taxation The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity. In this cases, the tax is also recognised in equity. The current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the country where the Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. 75

78 2.14 Provisions Provisions represent liabilities of uncertain timing or amount. Provisions are recognised when the Company has a present legal or constructive obligation, as a result of past event, for which it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made for the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense Dividend income Dividend income is recognised when the right to receive payment is established Dividend distribution Dividend distribution to the Company s shareholders is recognised as a liability in the Company s financial statements in the period in which the dividends are approved by the Company s shareholders until payment is made Earnings per share Earnings per share are calculated by dividing the net profit/loss for the Company by the average weighted number of outstanding shares over the period in question. Diluted earnings per share include the effect of the assumed conversion of potentially dilutive instruments such as stock options. The impact of share equivalents is computed using the treasury stock method for share options Statement of cash flow The statement of cash flow is presented in accordance with the indirect method Derivative financial instruments of assets Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (2) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or (3) hedges of a net investment in a foreign operation (net investment hedge). As of 31 December 2008 and 2007, the Company did not have any derivative transactions that qualified for hedge accounting under IAS 39. Changes in the fair value of these derivative instruments are recognized immediately in the income statement. When the Company provides guarantees for any losses suffered in derivatives due to breach of contract, a provision is made for the fair value of the derivative when the loss becomes probable Comparatives Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. 3. Financial risk management The Company s normal business exposed it to various financial risks. Currency rate risk The main risk is the currency rate risk. The Company is exposed to this risk mainly due to the amounts due to and form related parties. The main currency that the company is exposed to Norwegian Kroner (NOK). A variation of +/- 10% in the rate of exchange of USD/NOK would affect the Company by USD 250 thousand in 2008 (2007: USD 471 thousand). Interest rate risk The Company is exposed to interest rate risk but since the Company does not intend to hold material liquid reserves and has no borrowings the effect of interest rate movements is immaterial. 76

79

80 4. Investments in subsidiaries Cyprus based companies DESS Cyprus Ltd 2 2 DESS PSV Ltd 2 2 Deep Sea Supply Management (Cyprus) Ltd 15 0 Norwegian companies Deep Sea Supply AS 116, ,580 Total 116, ,584 The Company owns 100% of the share capital and voting rights for all of its subsidiaries. 5. Financial derivatives and assets at fair value through profit and loss Currency exchange rate swap 6,901 Financial assets at fair value through profit and loss Listed securities - held-for-trading 6,335 0 The fair value of all equity securities is based on their current bid prices in an active market. 6. Cash and cash equivalents Cash at bank and in hand 8,750 1,283 Short-term bank deposits 0 0 Total bank deposits 8,750 1,283 The carrying amounts of cash approximate fair value. Currently, there is no credit facility for the Company. 7. Share capital Deep Sea Supply PLC, located in Cyprus, became the parent company of the Company with effect from 28 December Deep Sea Supply ASA, located in Norway, was the parent company of the Company until 28. December The relocation of parent company was conducted trough a 1:1 share swap offering. As per 31. December 2006, Deep Sea Supply PLC owned of the shares in Deep Sea Supply ASA and the remaining shares in Deep Sea Supply ASA were held by other shareholders (minority interest). Following the voluntary exchange offer, where 93,8% of the Deep Sea Supply ASA shareholders accepted to swap their Deep Sea Supply ASA shares into Deep Sea Supply PLC shares, the Board presented 4 January 2007 a mandatory offer and a compulsory acquisition to purchase the remaining 6,2% Deep Sea Supply ASA shares. Through the mentioned mandatory offer and through the compulsory acquisition, Deep Sea Supply PLC has during February and March become a 100% owner of Deep Sea Supply ASA. In connection with the Company`s change of domicile from Norway to Cyprus, Metrogas Holdings Inc (a sistercompany of Hemen Holding Ltd.) issued in January 2007 a short term loan facility to Deep Sea Supply PLC which amounted to USD 25,6 mill. The purpose of the loan was to provide security and to finance the mandatory bid for the remaining 6,2% shares in Deep Sea Supply ASA. The loan was fully repaid in mid March. 78

81 DEEP SEA SUPPLY PLC ANNUAL REPORT 2008 Number of Shares Share Share Other paid (thousands) Capital premium in-equity Total Incorporation at 7 November , Issuance of new shares relating to share swap with Deep Sea Supply ASA 122,374 2, , ,696 Issuance of new shares in January 2007 from mandatory offering 5, Reclassification of minority interest 0 16,856 16,856 Issuance of new shares in August 2007 relating to exercise of share warrant agreement 1, , ,184 Valuation of share option scheme, issued in September Payment of dividend 0-179, ,919 At 31 December ,965 2, , ,204 Opening balance as at 1 January ,965 2, , ,204 Payment of dividend from share premium 0-50,746-50,746 Valuation of share option scheme 1,011 1,011 Cancelation of own shares (non traded) -2, At 31 December ,965 2, ,589 1, ,431 In August 2007 the Company received an exercise notice from the holders of warrants in Deep Sea Supply PLC, Drawbridge Special Opportunities Fund LP of New York and DB Special Opportunities LLC of New York, by which the two funds request that their warrants are converted into shares for an exercise price of NOK 10 per shares. Drawbridge Special Opportunities Fund LP of New York is the holder of warrants, and DB Special Opportunities LLC of New York is the holder of warrants. The total authorised number of ordinary shares as per 31 December 2007 is shares with a par value of USD 0.02 per share, of which shares are hold by the company. All issued shares are fully paid. The equity structure (share capital and share premium) presented above reflects equity structure of the legal parent including the equity instruments issued to reflect the combination together with the issued equity of the legal subsidiary immediately before the business combination and the cost of the business combination is settled. Share option scheme EMPLOYEES: The Board of Deep Sea Supply PLC has approved a share option scheme for all employees. By year-end 2007, 1,328,500 share options were granted to management and employees of the Company. Initial share options to the management and employees were granted at an exercise price equal to the closing price on June 11, 2007 increased by 5% or NOK per share. These share options may be exercised with one third after one, two and three years, respectively and all options must be exercised within 5 years. The strike price shall be reduced, on a USD for USD basis, by the amount of all dividends declared by the Company in the period from the date of grant until the date the subsisting options is exercised. Subsequent share options have been granted to new employees based on the same principle. By year end 2008, a total of 1,412,500 options were granted at the following (December 2008) strike prices; Strike price No of options: (as per ): 1,100, , , , Board: The Extraordinary General Meeting of Deep Sea Supply PLC awarded 300,000 stock options to the Chairman of the Board, and 200,000 stock options to each of the Directors of the Company, totally 900,000 stock options were awarded. The exercise price is the closing price on July increased by 5%, or NOK per share. This stock option award is a part of the Company`s incentive program and with the aim to attract qualified international directors. By year end 2008, a total of 900,000 options were granted at the following (December 2008) strike prices; Strike price No of options: (as per ): 900, Change of control The share options for the board and the share options an certain other benefits for the employees will come into effect at change of control in the Company (in excess of 33%). 79

82 8. Borrowings As at 31 As at 31 December December Borrowings Non-current 0 36,168 Current 0 0 Total Borrowings 0 36,168 The outstanding loan of the Company's borrowings are denominated in the following currencies As at 31 As at 31 December December NOK 0 36, ,168 The outstanding loan of the Company's borrowings are denominated in the following currencies As at 31 As at 31 December December Borrowings Between 1 and 2 years 0 0 Between 2 and 5 years 0 36,168 Over 5 years ,168 The Company issued a 5 years NOK 200 mill (USD 39m) bond in January The Company has exercised the issuer s call option for early settlement of the bond, in Quarter 3, The early call option included a 5% premium on the NOK 200 mill which has been recognised in the financial expenses. 9a. Credit quality of financial assets The credit rating if financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information and counterparty default rates. The ratings for the banks where the Company holds its cash are as follows: Credit Rating Amount AA- 8,090 A/A Total 8,750 80

83 DEEP SEA SUPPLY PLC ANNUAL REPORT b. Financial instruments by category Assets at fair value through Loans and profit and Available for Company Receivables loss sale Total 31 December 2008 Assets as per balance sheet Financial assets at fair value through profit and loss 6,335 6,335 Trade and other receivables 175, ,642 Cash and cash equivalents 8,750 8,750 Total 184,392 6, ,727 Liabilities at fair value through the profit and Other Financial loss liabilities Total Liabilities as per balance sheet Borrowings - - Trade and other payables - 167, ,346 Total , ,346 Assets at fair value through Loans and profit and Available for Company Receivables loss sale Total 31 December 2007 Assets as per balance sheet Derivative financial instruments 6,901 6,901 Trade and other receivables 150, ,567 Cash and cash equivalents 1,283 1,283 Total 151,849 6, ,749 Liabilities at fair value through the profit and Other Financial loss liabilities Total Liabilities as per balance sheet Borrowings 36,168 36,168 Trade and other payables - 4,740 4,740 Total ,908 40,908 81

84 10. Other short term payables Trade payables Other payables 14,527 0 Accrued interest payable Total 14, Fair value of trade and other payables equal their carrying amounts. 11. Other (losses)/gains net Period from 7 November 2006 Year ending 31 ending 31 December 2008 December 2007 Change in value of financial derivatives -3,357 7,463 Change in financial assets at fair value through profit and loss -8, ,549 7, Finance income and expenses Period from 7 November 2006 Year ending 31 ending 31 December 2008 December 2007 Financial expenses -4,955-2,697 Financial expenses with related parties -8, Financial income Financial income with related parties 15,624 2,836 Unrealized exchange gains/(losses) ,720 1,547-4, Administrative expenses Period from 7 November 2006 Year ending 31 ending 31 December 2008 December 2007 Audit fees Consultancy fees Management fees from subsidiaries 2,212 1,569 Other administration expenses ,782 2,613 82

85 DEEP SEA SUPPLY PLC ANNUAL REPORT Related party transactions Amounts due from related parties Deep Sea Supply AS 172, ,803 Deep Sea Supply Management AS 714 2,506 Deep Sea Supply Shipowning AS 2, DESS PSV Ltd 0 6,187 Shareholders receivables 0 40 Total 175, ,567 The amounts are payable on demand, not secured, carrying an in interest rate of 8%. Amounts due to related parties DESS Cyprus Ltd 72,027 3,853 DESS PSV Ltd 75,322 0 Total 147,349 3,853 The amounts are payable on demand, not secured, carrying an in interest rate of 8%. Management fees For 2008, the Company recognised management fees charged from subsidiaries that amounted to USD 2,212 (2007: USD 1,569) Period from 7 November 2006 Year ending 31 ending 31 Interest on intercompany balances December 2008 December 2007 Interest income 15,624 2,836 Interest expense -8, Total 6,984 2, Contingencies Recent volatility in global financial markets. The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other things, a lower level of capital market funding and higher interbank lending rates. The uncertainties in the global financial market have also led to bank failures and bank rescues in the United States of America, Western Europe and in Russia. Such circumstances could affect the ability of the Company to obtain new borrowings or re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. The debtors or borrowers of the Company may also be affected by the lower liquidity situation which could in turn impact their ability to repay their amounts owed. Deteriorating operating conditions for debtors or borrowers may also have an impact on Management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, Management has reflected revised estimates of expected future cash flows in its impairment assessments. Management is unable to reliably estimate the effects on the Company's financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and growth of the Company s business in the current circumstances 16. Events after the balance sheet date There were no material events which occurred after the end of the financial year. 83

86 84

87 DEEP SEA SUPPLY PLC ANNUAL REPORT

88

89

90 The Company has in 2008 taken several initiatives towards more environmentally friendly vessels and made significant investments to the benefit of the environment.

91