Annual Report 2007 - Investis...
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Annual Report 2007 DrivenbyEnergy Rising Above Expectations
Transcript of Annual Report 2007 - Investis...
Annual Report 2007
DrivenbyEnergy
Rising Above Expectations
About the Cover
Topaz will always consider the interest of the people and societies that make its operations possible. One such community support effort is the 3 Poles Challenge, in which Topaz was a major sponsor. Spearheaded by Adrian Hayes, shown on the cover, the project involves reaching the summit of Everest and walking to both the North and South Poles. His efforts will be used to both make an impact on, and raise awareness about, selected United Arab Emirates (UAE) charities.
The project will benefit UAE based Friends of Cancer Patients, as well as the International Children’s Foundation. He completed his North Pole trek in March of this year.
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Contents
About Topaz
Board of Directors
Chairman’s Report
CEO’s Report
Corporate Highlights
Operations
Oil and Gas
Offshore Vessel Operations
Ship Repair and Boat Building
HSE Report
Corporate Governance Report
Consolidated Financials
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Contents
Auditors Ernst & YoungBankers Standard Chartered Bank, ABN-Amro Bank, National Bank of Dubai,National Bank of Fujairah psc, Mashreq Bank psc, HSBC, Halifax Bank of Scotland, Lloyds TSBLegal Advisors Clyde & Co, HBJ Gately Wareing LLP
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Topaz Energy and Marine Ltd. is one of the leading marine and oil and gas fabrication companies in the Middle East, with over 30 years expe-rience in the region. Operating throughout the Middle East, Caspian and Southeast Asia, Topaz employs over 5,000 employees.
About Topaz
Topaz Energy and Marine Ltd. Corporate Office: PO Box 12068, Dubai, United Arab EmiratesPhone: +971 4 339 1351 Fax: +971 4 339 1352 Email: [email protected], www.topazworld.com
Kazakhstan 3
Board of Directors
Yeshwant C. DesaiDirector
Ali bin Hassan SulaimanDirector
Sunder GeorgeDirector
Samir J. FancyChairman
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HH Sayyid Tarik binShabib bin TaimurDirector
Colin RutherfordDirector
Rishi Ajit KhimjiDirector
Maj. Gen. Saif Abdullah Ali Al-ShafarDirector
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Chairman’s Report
This was another record-breaking year. 2007
marked completion of the first year of our
three-year business plan engineered to stra-
tegically grow value, relationships and op-
portunities in an aggressive and sustainable
manner. Adherence to this plan, paired with
growth opportunities in a number of markets,
came together to help us exceed perfor-
mance goals and position us well for 2008.
Topaz once again broke records for both
revenue and profit, performing at 42%, and
61% above last year respectively. A number
of factors contributed to our financial suc-
cess this year including a resilient oil and gas
sector, strong occupancy and day rates in
our offshore support vessel (OSV) division,
growth opportunities in the ship repair and
oil & gas business and increased strategic
alliance advantages and synergies resulting
from the diversity, breadth and maturity of
our business mix.
A strong world economy, which contin-
ued rapid expansion worked in favor of our
growth. Regional economic development
helped fuel industry investment in the com-
pany’s core operating areas due to healthy
oil revenues, strong activity in and around
the Caspian, and robust GDP expansion in
the GCC.
The global oil and gas market remained
buoyant in 2007, with solid commodity prices
and forecasted 2008 prices similarly strong
even by the most conservative of industry
estimations. This translated into increased
project and product demand in the com-
pany’s core markets and new opportunities
to stretch conventional capabilities.
Not content to rely on only market dynam-
ics and a superior business plan for our com-
petitive advantage, we also continued to
invest in our own organizational equity from
people to knowledge to the most progres-
sive technology.
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Bridging the gap between the marketplace
and our organization, we’ve furthered in-
vestment in joint venture partnerships, espe-
cially within the Caspian. These are impor-
tant geographical areas for our organization
and the industry at large, and these new in-
vestments will serve us well—demonstrating
our long-term commitment to the region.
Next year will serve as our 10th anniversary
of Topaz Energy and Marine which was ini-
tially born out of an IPO in 1998. While the
heritage of our Company dates back to
1947 when the first Nico Company was es-
tablished in Gothenberg, Sweden and the
present day Nico was established in Dubai in
1973, the groups comprising today’s Topaz,
have built a long legacy of service in the re-
gion. This 10 year milestone still holds both
strategic significance and a tremendous
amount of pride for what we have accom-
plished.
In today’s energy and marine environment,
merely doing a good job is not enough. True
distinction, true advantage, takes drive. It
takes a drive that turns adversity into advan-
tage; a drive that wastes no opportunity or
resource. A drive that demands more.
It is not for everyone. But those who have
made the company what it is today have
an inherent drive that now permeates every
endeavor new and old. And for that, I am
grateful—and confident that 2008 will be
another of the best years in our history.
Samir J. FancyChairman
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CEO’s Report
2007 was a year of strong performance, as the company’s divisions both performed well individually and as an intelligently diver-sified aggregate making the most of oppor-tunities for the company as a whole.
Each part of the company continues to en-able its record-breaking performance not by chasing contracts and projects, but by focusing on the fundamentals. Focusing on improvement. Focusing on ourselves.
As an organization, the whole of our com-pany adds increasingly more value than the sum of its parts. Across the board, each busi-ness unit and its people contributed to this year’s record-breaking performance in its own way, from successful business develop-ment ventures to creating new operational efficiencies.
Nico Middle East Ltd. (NMEL) and BUE Ma-rine Ltd.(BUE) each came in above expec-tations, with revenues exceeding previous years’ volumes by 6% and 15%, respectively.
These enterprises continued to strengthen the company’s competitive position in ves-sel operations by securing significant global-class contracts, growing the company’s op-erational footprint and achieving excellent asset utilization.
Orders for new build vessels were robust, and included BUE Kazakhstan’s 15 specialty ice-class barges by Agip Kazakhstan North
Caspian Operating Company, BUE Caspi-an’s investment of US$80M in platform supply vessels and over US$25M of new build orders for anchor-handling tugs for our Dubai based fleet. In all, our offshore vessel operations exceeded business expectations by securing US$300M in new business by year end.
While we continue to rank among the larg-est offshore fleets in the world, the com-pany’s fleet has not been the investment that helped us build our reputation in these markets during 2007; it was the people and process we refined throughout the year that helped this business unit consistently turn capital into competitive advantage.
This year continued the progression of our Adyard Abu Dhabi LLC (Adyard) fabrication business to a more strategic-level player in the energy sector, performing105% above last year’s revenue. Having achieved its an-nual target for new business by mid-year, it continues to move up the value chain by securing more sophisticated contracts from blue-chip customers that leverage Topaz as-sets and expertise for superior returns.
Customers are demanding an increasingly consultative role whereby Adyard experts can find innovative ways to capture value for the customer across asset and project lifecycles, which supports future market share growth. This continued development of project scope brings increased value and efficiencies for all parties.
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Stephen R. ThomasCEO
Adyard also continues to pioneer new mile-stones. As a result of its 2006 acquisition of a major contract from Atlantis Holding Nor-way AS, the company built and delivered its first ever offshore jacket. This enables new growth opportunities in the offshore space. Adyard also strengthened its global pres-ence, performing major contracts for assets in the North Sea and Africa. These projects will help extend Adyard’s client base be-yond its core business in the region.
Nico International delivered solid perfor-mance, coming in 67% over last year with annual revenues of US$81.6M. The company continued with plans to expand into Kazakh-stan through its new joint venture facility in the port of Bautino, where the company will service a range of vessels operating in the Caspian.
Unprecedented demand for crew boat ves-sels in the Middle East saw the NicoCraft yard launch its first vessel in Fujairah, UAE. The company’s investment in the facility last year brings more capacity and competition to the region’s specialty vessel market, and additional revenue streams to the company.
The business has further expanded into tank farm construction, receiving a number of prestigious contracts this year, including a contract in excess of US$24M from a major U.A.E. based terminal operator, to fabricate and construct an oil storage terminal in Jeb-el Ali Free Zone, Dubai.
In the arena of safety, we are sad to report the tragic loss of a worker at one of the com-pany’s sites. This event underscores the ne-cessity for constant vigilance in this arena, and reinforces our drive to continually refine safety measures throughout the group. The organization as a whole has seen real prog-ress on this front, having reached a mile-stone with over 8 million man-hours without a loss time incident.
Moving forward, and on a personal note, I’d like to thank every Topaz employee for an exceptional performance this year—from the crews on our OSV vessels, engine spe-cialists in our workshops, our engineers in our fabrication yards, to the corporate head-quarters in Dubai. There is no organizational excellence without individual excellence, and I would like to extend my appreciation for your hard work as we move into another phase of growth and development in 2008.
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Corporate Highlights
Marine Vessels
Equipment and Machinery
Buildings
Motor Vehicles
Jetty & Floating Dock
291,171 M
4,536M829K
6,282M15,999M
376
Growth in Assets in USD
S t e p p i n g i t U p
in USD
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
425
1996 1997
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Topaz reported record results in 2007 with revenue up from US$ 212 million to
US $ 301 million and profit after tax (PAT) and minority interests up from US 17$ million to
US$ 27 million, a US$ 10 million increase from the previous year. Profit from opera-
tions grew from US$ 29million to US$ 40 million.
Carl G. RolastonChief Strategic Officer
William Ali MillsChief Operating Officer
Pramod BalakrishnanChief Financial Officer
1998 1999 2000 2001 2002 2003 2004 2005 2006
30 30
45
49
45
50
52
59
65
137
Growth in Sales - Total Revenue in USD
S t e p p i n g i t U p
2007
212
301
1996 1997
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Oil and Gas
Adyard’s 200,000-square-meter facility with
over 110 meters of waterfront load out ca-
pability in Mussafah, Abu Dhabi provides
total engineering solutions to the oil & gas
sector. From design engineering, fabrica-
tion installation, and start up to operations
and maintenance, Adyard’s offshore and
onshore engineering capabilities include
process modules and skids, pressure vessels,
fabrication of heavy structures, rig refurbish-
ment, site construction, maintenance ser-
vices and project management.
Setting a Higher Standard
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Jim Masterton AdyardGeneral Manager
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Roy DonaldsonGeneral Manager
BUE Caspian
Offshore Vessel Operations
The company’s ship owning division, Nico
World and BUE Marine Ltd., ranks amongst
the leading offshore support vessel fleet
owners and operators in the world. Its geo-
graphical footprint covers the Middle East,
Southeast Asia and the Caspian Sea. The
company’s diverse fleet of over 80 ves-
sels supports the offshore oil & gas industry
with anchor-handling vessels, work barges,
platform supply vessels, and specialized ice
class vessels.
T a k i n g P e r f o r m a n c e t o N e w H e i g h t s
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Roy DonaldsonGeneral Manager
BUE Caspian
Richard SteelGeneral ManagerBUE Kazakhstan
Ronald Clark General ManagerNico World
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Ship Repair and Boatbuilding
Established in 1973, Nico International is rec-
ognized by the shipping industry as one of
the top afloat ship repair companies in the
world. With operations in Dubai, Fujairah,
Salalah, Bautino and Baku, Nico Internation-
al’s capabilities range from repairs to refur-
bishments including: major conversion and
refurbishment works, engine reconditioning,
turbocharger overhaul, boiler services, au-
tomation and instrumentation, fuel injection
services , transmission , marine gearbox over-
hauls and building specialized aluminum
work boats/vessels catering to the growing
offshore vessel market in the GCC.
Smal l Steps , B ig Rewards
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Fazel Fazelbhoy Nico InternationalGeneral Manager
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HSE Report
Topaz is committed to safeguarding the
health and safety of its workforce and those
around it. We take the responsibility of HSE
very seriously, considering it an integral part
of the culture of the company. We contin-
ue to improve our safety management pro-
cesses and procedures through example,
training, induction programs and safety drills
aiming to further improve our overall HSE re-
cord.
Common HSE objectives and standards are
applied throughout the Group to ensure we
meet the highest standards in the industry
and a uniformed HSE performance stan-
dard is applied throughout our Offshore Ves-
sel Operations.
A notable achievement in 2007 was the
recognition by BP of BUE Caspian’s record
5 million man hours without a Lost Time
Incident (LTI).
Our commitment to lowering and eliminat-
ing accidents in the workplace remains a
key objective for the Group and we con-
tinue to see sustainable improvement in our
safety performance record throughout all
our operating divisions.
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Consolidated Financial Statements 2007
Corporate Governance Report
Auditors’ Report on Financial Statements
Consolidated Income Statements
Consolidated Balance Sheet
Consolidated Statement of Cash Flow
Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial Statements
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Corporate Governance Report
Company’s Philosophy
Corporate Governance at Topaz Energy and Marine Ltd. commits the Company towards the attainment of high levels of transparency, accountability and business propriety with the ul-timate object of increasing long term value for shareholders while guarding the needs and interests of major stakeholders long term value.
The Company is committed to adopting the best practices of Corporate Governance and fully supports the guidelines on Corporate Governance as practiced by its parent, Renaissance Services SAOG, a publicly traded company on the Oman Stock Exchange.
Board of Directors
The Board is responsible for ensuring that the Company is managed in a manner that protects and enhances the interests of its shareholders taking account of the interests of employees, customer, suppliers and the local community.
The Board is responsible for the Company’s corporate governance which includes:
• Determining the strategic direction of the company, reviewing operational plans and measuring performance against approved strategies and plans.• Adopting operating budgets at the commencement of each financial year and monitoring progress on a regular basis against budget by key performance indicators.• Ensuring that policies and compliance procedures are in place. These include internal con trols, environment and risk management and compliance in public reporting. The Board also ensures that the Company and its officers act legally, ethically and responsibly in all matters.• Monitoring and overseeing the Company’s financial position and determining satisfactory arrangements are in place for auditing the Company’s financial affairs.
As at year-end 2007, the Company had eight Directors all of whom are independent. The com-position of the Board conforms to the policy of appointing Directors with an appropriate range of backgrounds, skills and experience.
As a wholly owned subsidiary of Renaissance Services SAOG, Topaz Board meetings are held under the auspicious of the Renaissance Board which comprise of seven of the eight Topaz Board Directors. The Renaissance Board met four times on 2007. The dates of the Board meetings were: January 9 , February 28, June 14th and September 16, 2007.
NAME OF DIRECTOR POSITION COMPANY
Samir J. Fancy * Chairman Non-ExecutiveAli Bin Hassan Sulaiman * Vice Chairman Non-ExecutiveYeshwant Desai * Director Non-ExecutiveSunder George * Director Non-Executive Rishi Ajit Khimji * Director Non-Executive H.H. Sayyid Tarik Bin Shabib Bin Taimur * Director Non-Executive Colin Rutherford * Director Non-Executive Maj. Gen. Saif Abdullah Ali Al-Shafar Director Non Executive
* Renaissance Services SAOG Board Directors
Consolidated Financial Statements 2007
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In order to facilitate good governance the following information, amongst others, is provided to the Board:
• Review of operating plans of business, capital budgets and updates.• Quarterly results of the Company and its business segments.• Quarterly performance on Health, Safety, Security and Environment (“HSSE”).• Reports of fatal, serious accidents or dangerous occurrences.• Minutes of the Audit and Management Committee.• Issues involving possible public or product liability claims of substantial nature.• Any significant industrial relations problems; policies/procedures as are deemed important to place before the Board and• Related party transactions.
Company Secretary
The Board appoints a secretary at the meetings and the secretary records minutes of every Board meeting whereby decisions are noted and action items are identified.
The Company has an induction program for Directors, which covers the business environment and the Company’s businesses as well as specific corporate governance elements (e.g. code of conduct and confidentiality).
There have been no materially significant related party transactions, pecuniary transactions or relationships between the Company and its Directors that may have potential conflict of inter-est of the Company at large.
The Company formally documents specific “Related Party Transaction Procedures” to comply with the Corporate Governance guidelines. The procedure defines the categories and ap-proval and the related party transactions.
Specific related party transactions conducted during the year are disclosed and prior approv-al is taken where necessary.
The Compensation Committee
The Compensation Committee was formed as a Board Committee to lay-down and update the parameters for assessment and compensation of key personnel, undertake their perfor-mance assessment and report to the Board on the compensation & personnel policies.
The philosophy for the remuneration is “to attract and retain high quality staff at all levels and motivate them towards exceptional performance”.
The remuneration package of Executives is made of the basic salary, the annual bonus and additional allowances and prerequisites. Senior Management contracts are open-ended with a 3-6 months notice period. The contracts are governed by local Labor Law provisions.
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Audit Committee Members
Mr. Yeshwant Desai Director Mr. Sunder George Director Mr. Ali Hassan Sulaiman Director
The Board has set up an Audit Committee. The Committee comprises of 3 non-executive di-rectors. The Audit Committee Chairman is Mr. Yeshwant Desai.
The Committee monitors internal control policies and procedures designed to safeguard the Company’s assets and ensure the integrity of financial reporting.
The main responsibilities of the Audit Committee are as follows:• Reviewing the annual audited financial statements and the Auditor’s Report on the financial statements prior to submission to the Board for approval;• Reviewing and approving the interim financial statements prior to public release and filing;• Reviewing the scope of external and internal audits;• Reviewing and discussing accounting and reporting policies and changes in accounting principles;• Assessing the effectiveness of the Company’s internal control systems and procedures and the process for identifying principal business risks;• Reviewing compliance with the Code of Conduct;• Meeting with the internal and external auditors independently of management of the Company;• Periodic review and approval related party transactions.
The Company employs two full time internal auditors in compliance with the corporate gov-ernance guidelines.
Audit and Internal Control
The Audit Committee has reviewed, on behalf of the Board, the effectiveness of internal con-trols by meeting the internal auditors, reviewing the internal audit reports and recommenda-tions and meeting the external auditor, reviewing the audit findings report and the manage-ment letter.
The present audit firm Ernst & Young provides audit and assurance services to the Company. In accordance with the Corporate Governance Code, the services of Ernst & Young are not used where a conflict of interest might occur.
Profile of the Statutory Auditor
Ernst & Young is one of the most recognized and established accounting firms in the world.
Ernst & Young’s Middle East practice, comprises of 95 partners and nearly 1600 professionals in 17 offices throughout the region. The Middle East practice is a member firm of Ernst & Young Global, operating in more than 140 countries with approximately 103,000 personnel world-wide.
Company Status
Topaz Energy and Marine Ltd. is a wholly owned subsidiary of Renaissance Services SAOG, a publically traded company on the Oman Stock Exchange. As a wholly owned subsidiary of a public company, Topaz adheres to the corporate governance standards of a public company.
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INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF TOPAZ ENERGY AND MARINE LIMITED
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Topaz Energy and Marine Limited (“the Company”) and its subsidiaries (collectively referred to as “the Group”), which comprise the consolidated balance sheet as at 31 December 2007 and the consoli-dated income statement, consolidated cash flow statement and consolidated statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and the applicable provisions of the Offshore Companies Regulations 2003 pursuant to Law No. 1 and 4 of 2001 concerning the formation of offshore companies in the Jebel Ali Free Zone. This respon-sibility includes: designing, implementing and maintaining internal control relevant to the prep-aration and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the con-solidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropri-ate for the circumstances, but not for the purpose of expressing an opinion on the effective-ness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by manage-ment, as well as evaluating the overall presentation of the consolidated financial statements.
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We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2007 and its consolidated fi-nancial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.
Report on Other Legal and Regulatory Requirements
We also confirm that in our opinion proper books of account have been kept by Topaz Energy and Marine Limited in accordance with the provisions of the Offshore Companies Regulations 2003 pursuant to Laws No. 1 and 4 of 2001 concerning the formation of offshore companies in the Jebel Ali Free Zone. We have obtained all the information and explanations which we re-quired for the purpose of our audit and, to the best of our knowledge and belief, no violations of the Offshore Companies Regulations or of the articles of association of Topaz Energy and Marine Limited have occurred during the year ended 31 December 2007 which would have had a material effect on the business of Topaz Energy and Marine Limited or on its financial position.
20 February 2008
Dubai
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Consolidated Income StatementYear ended 31 December 2007
Revenue Direct costs
GROSS PROFIT
Other income
Finance costs
Administrative expenses Amortisation of intangible assets
Share of results of associates
PROFIT BEFORE INCOME TAX
Income tax
PROFIT FOR THE YEAR
Attributable to: - Shareholders of the parent - Minority interest
212,746
(147,608)
65,138
7,204
(11,891)
(36,544)
(213)
445
24,139
(6,375)
17,764
17,347417
17,764
301,045
(215,181)
85,864
7,567
(12,233)
(45,372)
(215)
892
36,503
(7,920)
28,583
26,5662,017
28,583
2007USD’000
2006USD’000
5
6
7
11
12
8
9
Notes
The attached notes 1 to 36 form part of these consolidated financial statements.26
Consolidated Balance SheetYear ended 31 December 2007
ASSETSNon-current assetsProperty, plant and equipmentIntangible assetsInvestments in associatesDeferred tax
Current assetsInventoriesWork in progressAccounts receivable and prepaymentsDue from related partiesBank balances and cash
TOTAL ASSETS EQUITY AND LIABILITIESEquityShare capitalProposed increase in capitalStatutory reserveExchange reserveRetained earnings
Minority interest
Total Equity
Non-current liabilitiesTerm loansObligations under Ijarah-fil-ThimmaLoans due to holding companyFinance lease obligationsEmployees’ end of service benefitsAccounts payable and accruals
Current liabilitiesAccounts payable and accrualsBank overdraftsTerm loansObligations under Ijarah-fil-ThimmaLoans due to holding companyFinance lease obligationsDue to related partiesDividend payableIncome tax payable
Total liabilitiesTOTAL EQUITY AND LIABILITIES
252,993 30,044
3,9482,920
289,905
3,0126,783
69,2101,3335,767
86,105
376,010
67,73826,602
313315
25,644120,612
1,363
121,975
131,143-
10,625643
4,02414,395
160,830
51,1372,805
28,145-
2,500363405
- 7,850
93,205
254,035376,010
The financial statements were authorised for issue in accordance with a resolution of the directors on 20 February 2008.
2007USD’000
2006USD’000Notes
318,81729,829
2,4154,167
355,228
4,67416,12786,748
1,65532,083
141,287
496,515
127,323-
883528
45,140173,874
11,175
185,049
130,83718,632
8,125263
5,2549,873
172,984
90,112-
31,6812,2582,500
380244
6,5004,807
138,482
311,466496,515
10111229
1314152716
171819
212223242526
26162122232427208
The attached notes 1 to 36 form part of these consolidated financial statements.27
24,139
(445)23,373
213(888)1,066
(1,202)11,891
258,149
(669)(4,177)
(16,055)(14)272
12,689(629)
49,566(11,891)
(594)(2,121)
34,960
(55,918)4,4451,202(706)
(1,560)798
(51,739)
- -
40,396(30,976)
(348)-
(15,548)19,102
12,626
(4,153)7,115
2,962
2007USD’000
2006USD’000Notes
36,503
(892)28,129
215(3,327)
1,778(1,662)12,233
-72,977
(1,662)(8,273)
(17,538)(322)
- 34,453
(161)
79,474(12,233)
(548)(12,210)
54,483
(101,702)10,005
1,6622,638
- -
(87,397)
32,9837,795
32,653(29,423)
(363)20,890(2,500)
-
62,035
29,1212,962
32,083
1210116256711
25
10
1212
16
CONSOLIDATED CASH FLOW STATEMENTAt 31 December 2007
OPERATING ACTIVITIESProfit before income taxAdjustments for:Share of results of associateDepreciationAmortisation of intangible assetsProfit on disposal of property, plant and equipmentProvision for employees’ end of service benefitsInterest incomeFinance costLoss on disposal of intangibles
Working capital changes:InventoriesWork in progressAccounts receivable and prepayments Due from related partiesShort term loan to a related partyAccounts payable and accrualsDue to related parties
Cash from operationsInterest paidEmployees’ end of service benefits paidIncome tax paid
Net cash from operating activities
INVESTING ACTIVITIESPurchase of property, plant and equipmentProceeds from disposal of property, plant and equipmentInterest receivedNet movement in investments in associateAcquisition of intangible assetsDividend received
Net cash used in investing activities
FINANCING ACTIVITIESCapital introducedFunds introduced by minorityNew term loansRepayment of term loansRepayment of capital element of finance leaseObligations under Ijarah-fil-ThimmaLoan due to holding companyProposed increase in capital
Net cash from financing activities
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSCash and cash equivalents at 1 January
CASH AND CASH EQUIVALENTS AT 31 DECEMBER
The attached notes 1 to 36 form part of these consolidated financial statements.28
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29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At 31 December 2007
1 - ACTIVITIES
Topaz Energy and Marine Limited (“the Company”) is a limited liability company incorporated on 9 May 2005 in accordance with the Offshore Companies regulations of the Jebel Ali Free Zone Authority. The address of the registered office of the Company is P.O. Box 9275, Dubai, United Arab Emirates. The ultimate holding company is Renaissance Services SAOG, (“Holding Company”) a joint stock company incorporated in the Sultanate of Oman.
The principal activities of the Company and its subsidiaries (collectively referred to as “the Group”) are the provision of ship repair and fabrication and maintenance services for the oil and gas industry and marine vessel charter.
30
A) Subsidiary of Topaz Energy and Marine Limited
Nico Middle East Limited Bermuda 100% 100% Ship repair service
2 - SUBSIDIARIES, ASSOCIATES AND JOINTLY CONTROLLED ENTITIES
B) Subsidiaries of Nico Middle East LimitedNico World II Limited Vanuatu 100% 100% Charter of marine vessels
Nico World S.A. Panama 100% 100% Charter of marine vessels
Nico Far East PTE. Limited Singapore 100% 100% Charter of marine vessels
TEAM I Limited Vanuatu 100% 100% Charter of marine vessels.
TEAM II Limited St. Vincent 100% 100% Charter of marine vessels
TEAM III Limited St. Vincent 100% 100% Charter of marine vessels.
TEAM IV Limited St. Vincent 100% 100% Charter of marine vessels.
TEAM V Limited St. Vincent 100% 100% Charter of marine vessels.
TEAM VI Limited St. Vincent 100% 100% Charter of marine vessels.
TEAM VII Limited St. Vincent 100% 100% Charter of marine vessels.
TEAM VIII Limited St. Vincent 100% 100% Charter of marine vessels.
TEAM IX Limited St. Vincent 100% 100% Charter of marine vessels.
TEAM X Limited St. Vincent 100% 100% Charter of marine vessels.
BUE Marine Limited United Kingdom 100% 100% Charter of marine vessels.
Dart Automation Inc. Panama 100% 100% Marine and onshore automation
Topaz BUE Limited United Arab Emirates 100% 100% Charter of marine vessels
Adyard Abu Dhabi LLC(“Adyard)
Off shore and onshore projects and fabrication
United Arab Emirates 49% 49%
Nico International Limited United Arab Emirates 100% 100% Charter of marine vessels, ship repair and fabrication
Nico Craft LLC (Previously known as Mezon Technical Trading LLC )
United Arab Emirates 100% 100% Boat building
Country of
Registered percentageshareholding
Principal activities
Company Incorporation 2007 2006
Caspian Fortress Limited St. Vincent 100% - Charter of marine vessels
Kyran Holdings Ltd. St. Vincent 100% - Engineering
Topaz Doha Holdings I Ltd. St. Vincent 100% - Charter of marine vessels
Topaz Doha Holdings II Ltd. St. Vincent 100% - Charter of marine vessels
Nico International LLC Sultanate of Oman 100% - Ship repair
Caspian Pride Limited St. Vincent 50% - Charter of marine vessels
Caspian Baki Limited St. Vincent 50% - Charter of marine vessels
Caspian Citadel Limited St. Vincent 50% - Charter of marine vessels
31
C) Subsidiaries of BUE Marine Limited
2 - SUBSIDIARIES, ASSOCIATES AND JOINTLY CONTROLLED ENTITIES (continued)
Country of
Registered percentageshareholding
Principal activities
Company Incorporation 2007 2006
D) Associates
Darium Thai Offshore Limited Thailand 49% 49% Charter of marine vessels
Mezon Stainless Steel FZCO United Arab Emirates 20% 20% Trading in stainless steel
E) Jointly controlled entities
Nico Dopet Doosan Babcock(previously known as Nico Mitsui Babcock) United Arab Emirates 50% 50% Marine boiler repair
BUE Caspian Limited Scotland 100% 100% Vessel Management
BUE Kazakhstan Limited Scotland 100% 100% Vessel Management
BUE Cygnet Limited Scotland 100% 100% Vessel Management
BUE Bulkers Limited Scotland 100% 100% Vessel Management
BUE Shipping Ltd Scotland 100% 100% Vessel Management
Roosalka Shipping Ltd Scotland 100% 100% Vessel Management
BUE Azerbaijan LLC Azerbaijan Dissolved 100% Dormant Company
Fortress LLC Azerbaijan 100% 100% Vessel Management
BUE Aktau LLP Kazakhstan 100% 100% Vessel Management
BUE Bautino LLP Kazakhstan 100% 100% Vessel Management
BH PSV Limited Cayman Islands 100% 100% Dormant Company
BH Jura Limited Cayman Islands 100% 100% Dormant Company
BH Standby Limited Cayman Islands 100% 100% Dormant Company
Roosalka Shipping Limited Cayman Islands 100% 100% Dormant Company
BH Bulkers Limited Cayman Islands 100% 100% Vessel Management
BH Islay Limited Cayman Islands 100% 100% Dormant Company
Bue Kyran Limited Scotland 100% - Vessel Management
32
2 - SUBSIDIARIES, ASSOCIATES AND JOINTLY CONTROLLED ENTITIES (continued)
In addition to the 49% ownership interest in Adyard, the Group has a beneficial interest in a further 33.48 % (2006: 33.48%) shareholding in Adyard. The Group also has the power to gov-ern the financial and operating policies of Adyard under the terms of an agreement with the other shareholders of Adyard. Accordingly, Adyard has been dealt with as a subsidiary in these consolidated financial statements.
Also, in addition to its interest in the results of operations arising from its interest in Adyard, as disclosed above, the Group is entitled to a further share in the profits of Adyard, in the form of management fees, calculated as a percentage of the profit for the year.
Nico Craft LLC, incorporated in the UAE, has been dealt with as a wholly owned subsidiary, in these consolidated financial statements, as the Group has the power to govern the financial and operating policies of Nico Craft LLC under a management agreement with the share-holders of Nico Craft LLC. The shareholders of Nico Craft LLC, through an agreement, have assigned the rights to the results of operations, assets and liabilities in Nico Craft LLC to the Group. The Group does not have any shareholding in Nico Craft LLC.
Nico International LLC, incorporated in the Sultanate of Oman, has been dealt with as a wholly owned subsidiary, in these consolidated financial statements, as the Group has the power to govern operating and financial policies of the Company, under a management agreement. The partners, as per the management agreement, have assigned the rights to the results of operations, assets and liabilities in Nico International LLC to the Group. Under a separate agreement, the partners have waived their rights to the net assets of the Company in favour of Nico Middle East Limited. Accordingly, Nico Middle East Limited is deemed as the immedi-ate holding company and the financial results and position of the Company are consolidated in the financial statements of Nico Middle East Limited.
Caspian Pride Limited, Caspian Baki Limited and Caspian Citadel Limited, have been dealt with as subsidiaries as the Group has the power to govern the financial and operating policies of these subsidiaries under management agreements with the shareholders of these subsidiaries.
BUE Caspain Limited also owns the entire issued share capital of BUE Maritime Services Limited and BUE Marine Turkmenistan Limited, companies incorporated and registered in Scotland.
One of the Group’s subsidiaries operates in the Azeri region through an alliance agreement with KMNF, the marine shipping arm of the Azeri state oil company. Under the Alliance agree-ment, responsibilities have been allocated between KMNF, BUE and the Alliance. The Group accounts for its own assets and liabilities and for the costs and revenues on transactions that it enters into with the Alliance.
The jointly controlled entity is an unincorporated entity and is operating under the trade li-cense of the Company’s Dubai Branch.
33
3 - BASIS OF PREPARATION
Accounting conventionThe consolidated financial statements are prepared under the historical cost convention modi-fied to include the revaluation of property, plant and equipment and the measurement at fair value of derivatives.
The consolidated financial statements have been prepared in United States Dollars rather than in the currency of the Company’s country of incorporation as a significant proportion of the transactions of the Group enterprises are undertaken in United States Dollars.
Statement of complianceThe consolidated financial statements have been prepared in accordance with International Financial Reporting Standards.
The consolidated financial statements are not the statutory financial statements of the entities included in this consolidation. Separate statutory financial statements are required to be pre-pared for each of the limited liability companies.
Basis of consolidationThe consolidated financial statements include the financial statements of the Company and each of the entities that it controls (the Group – see note 2) together with its interest in associ-ates and jointly controlled entities referred to in note 2.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the group obtains control, and continue to be consolidated until the date that such control ceases.
All significant inter-company balances, transactions and unrealized profits arising from dealings between the entities referred to in note 2 have been eliminated on consolidation.
Minority interest represents the portion of profit or loss and net assets not held by the Group and are presented separately in the consolidated income statement and within equity in the con-solidated balance sheet, separately from parent shareholders’ equity. Acquisitions of minority interest are accounted for using the parent entity extension method, whereby the difference between the consideration and the book value of the share of the net assets acquired is rec-ognised as goodwill.
Changes in accounting policiesThe accounting policies are consistent with those used in the previous year.
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretation did not have any effect on the financial performance or position of the Group. They did however give rise to additional disclosures:
• IFRS 7 Financial Instruments: Disclosures• IAS 1 Amendment - Presentation of financial statements
The principal effects of these changes are as follows:
IFRS 7 Financial Instruments Disclosures This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group’s financial instruments and the nature and extent of risks arising out of those financial instruments. The new disclosures are included throughout the financial statements.
34
IAS 1 Presentation of financial statementsThis amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the Group’s objectives, policies and processes for managing capital. These new disclosures are shown in note 34.
IASB Standards and Interpretations issued but not adoptedThe Group has not adopted the new accounting standards or interpretations that have been issued but are not yet effective. These standards and interpretations except for revised IAS 1, are not likely to have any significant impact on the consolidated financial statements of the Group in the period of their initial application.
The Group has not adopted the revised IAS 1 “Presentation of Financial Statements” which will be effective for the year ending 31 December 2009. The application of this standard will result in amendments to the presentation of the consolidated financial statements.
The Group has not adopted the revised IAS 23 “Borrowing costs” which will be effective for the year ending 31 December 2009. The standard has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the standard, the Group will adopt this as a prospective change. Accordingly, borrowing costs will be capitalised on qualifying assets with a commencement date after 1 January 2009. No changes will be made for borrowing costs incurred to this date that have been expensed.
4 - SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Ship repair and oil and gas servicesRevenue comprises amounts derived from ship repair, provision of mechanical, electrical and instrumentation services, fabrication and maintenance services, turbocharger services and marine boiler repairs. Revenue is recognised under the percentage of completion method and is stated net of discounts and allowances. Where the outcome of a contract can be as-sessed with reasonable certainty, a prudent estimate of attributable profit is recognised in the consolidated income statement. Full provision is immediately made for all known or expected losses on individual contracts, when such losses are foreseen.
Marine charterRevenue comprises operating lease rent from charter of marine vessels, revenue from provision of on-board accommodation, catering services and sale of fuel and other consumables.
Lease rent income is recognised on a straight line basis over the period of the lease. Revenue from provision of on- board accommodation and catering services is recognised over the pe-riod of hire of such accommodation while revenue from sale of fuel and other consumables is recognised when delivered.
InterestInterest revenue is recognised as the interest accrues.
35
Work in progress
Work in progress comprises:
(i) Direct costs plus attributable profit less provision for foreseeable losses, if any; less(ii) Progress payments received or receivable.
On those contracts where (ii) exceeds (i), the excess is shown as progress billings in excess of work in progress.
Income tax
Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the bal-ance sheet date.
Deferred tax Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Deferred income tax assets are recognised for all deductible temporary differences and carry-forward of unused tax assets and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised.
Property, plant and equipment
Property, plant and equipment is stated at cost or valuation less accumulated depreciation and any impairment in value. Cost of marine vessels includes registration costs and major main-tenance and dry-docking costs incurred at the time of acquisition and significant rebuild ex-penditure incurred during the life of the asset.
Depreciation is provided on a straight-line basis at rates calculated to write off the cost or valu-ation, less any estimated residual value, of each asset, excluding vessels under construction, over its expected useful life as follows:
Buildings 5 to 15 yearsPlant, machinery, furniture, fixtures and office equipment 3 to 15 yearsMarine vessels revalued (from the date of latest revaluation) 10 yearsMarine vessels acquired 15 to 25 yearsExpenditure on marine vessel dry docking (included as a component of marine vessels) 3 yearsJetty and land development 25 yearsFloating dock 25 yearsMotor vehicles 3 years
Capital work in progress is not depreciated. Assets in the course of construction are depreci-ated from the date that the related assets are ready for commercial use. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such
36
indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount, being the higher of their fair value less costs to sell and their value in use.
Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property, plant and equipment. All other ex-penditure is recognised in the consolidated income statement as the expense is incurred.
Dry docking costs
The expenditure incurred on vessel dry docking, a component of property, plant and equip-ment, is amortised over the period from the date of dry docking, to the date on which the management estimates that the next dry docking is due.
Vessel Refurbishment Costs
Leased assets
Costs incurred in advance of charter to refurbish vessels under long term charter agreements are capitalised within property, plant and equipment in line with the use of the refurbished vessel. Where there is an obligation to incur future restoration costs under charter agreements which would not meet the criteria for capitalisation within property, plant and equipment, the costs are accrued over the period to the next vessel re-fit to match the use of the vessel and the period over which the economic benefits of its use are realised.
Owned assets
Cost incurred to refurbish owned assets are capitalised within property, plant and equipment and then depreciated over the shorter of the estimated economic life of the related refurbish-ment or the remaining life of the vessel.
Goodwill
Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the iden-tifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is mea-sured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespec-tive of whether other assets and liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:
• represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
• is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with IAS 14 Segment Reporting.
37
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisi-tion. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the in-tangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic ben-efits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement in the expense category consistent with the function of the intangible asset.
Computer software costs represent expenditure incurred on implementing an ERP solution for the Group. Amortisation is charged on a straight line basis over a period of five years, from the date of completion.
Impairment and uncollectibility of financial assets
An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impair-ment loss is recognised in the consolidated income statement. Impairment is determined as follows:
(a) For assets carried at fair value, impairment is the difference between cost and fair value, less any impairment loss previously recognised in the consolidated income statement;(b) For assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial asset;(c) For assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective interest rate.
Investments in subsidiaries
Subsidiary companies are those entities which are controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The activities of the subsidiaries are consolidated with the financial results and position of either of the entities within the Group that controls the subsidiaries. The financial results and position of the subsidiaries are consolidated from the date that control commences until the date control ceases.
Transactions and balances between the entities within the Group and their subsidiaries, includ-ing any resulting profit or losses, are eliminated in full.
38
Investments in associates
The Group’s investments in associates are accounted for under the equity method of account-ing. Associates are entities over which the Group exercises significant influence and which are neither subsidiaries nor joint ventures. Investments in associates are carried in the consolidated balance sheet at cost, plus post-acquisition changes in the Group’s share of net assets of the associate, less any impairment in value. The consolidated income statement reflects the Group’s share of the results of its associates. Unrealised profits and losses resulting from transac-tions between the Group and its associate are eliminated to the extent of the Group’s interest in the associate.
Investments in jointly controlled entities
Investments in the jointly controlled entities are accounted for under the proportionate consoli-dation method whereby the Group accounts for its share of the non-current and current assets and liabilities, income and expenses in the jointly controlled entity.
Jointly Controlled Operations
Where the Group participates in jointly controlled operations as defined in International Ac-counting Standard 31 the Group accounts only for its own share of assets and liabilities, income and expenditure.
Inventories
Inventories are stated at the lower of cost and net realisable value after making due allow-ance for any obsolete or slow moving items. Costs are those expenses incurred in bringing each product to its present location and condition on a weighted average basis. Net realis-able value is based on estimated selling price less any further costs expected to be incurred to completion and disposal.
Accounts receivable
Accounts receivable are stated at original invoice amount less a provision for any uncollect-ible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when there is no possibility of recovery.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash in hand, bank balances, and short-term deposits with an original maturity of three months or less, net of outstanding bank overdrafts, if any.
Accounts payable and accruals
Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.
Provisions
Provisions are recognised when the Group has an obligation (legal or constructive) arising from a past event, and the costs to settle the obligation are both probable and able to be reliably measured.
39
Leases
Group as a lesseeFinance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the 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 against income.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight-line basis over the lease term. Group as a lessorLeases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as lease rental income. Contingent rents are recognised as revenue in the period in which they are earned.
Employees’ end of service benefits
The Group provides end of service benefits to its employees. The entitlement to these benefits is based upon the employees’ salary and length of service, subject to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment.
Retirement Benefit Costs
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.
Term loans
Term loans are carried on the balance sheet at the fair value of the consideration received less directly attributable transaction costs. Installments due within one year are shown as a current liability. Interest expense is accrued on a time-proportion basis with unpaid amounts included in accounts payable and accruals.
Ijarah-fil-Thimma
Ijara-fil-Thimma is an agreement whereby the Group as a lessee, leases the asset from banks and financial institutions for a specified rental over a specific period. The duration of the lease, as well as the basis for rental, are set and agreed in advance. The risks and benefits incidental to ownership of the leased item are transferred to the Group. The Group capitalises the leased item at the inception of the lease at the fair value of the leased property or, if lower, at the present value of 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 over the remaining balance of the liability. Finance charges are reflected in profit or loss.
Capitalised lease assets are depreciated over the shorter of the estimated useful life of the as-set or the lease term.
40
Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the consolidated income statement.
On consolidation, assets and liabilities of subsidiaries, associate and jointly controlled entities denominated in foreign currencies, are translated at the rate of exchange ruling at the bal-ance sheet date. The income and expenses of subsidiaries, associate and jointly controlled entities are translated at the average exchange rate. Foreign exchange differences arising on translation at closing rates of the opening net investments in these entities are dealt with in equity as exchange reserves.
Derivatives
Derivatives are stated at fair value.
For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; and (b) cash flow hedges which hedge exposure to variability in cash flows of a recognised asset or liability or a forecasted transaction.
In relation to effective fair value hedges any gain or loss from remeasuring the hedging instru-ment to fair value, as well as related changes in fair value of the item being hedged, are rec-ognised immediately in the consolidated income statement.
In relation to effective cash flow hedges, the gain or loss on the hedging instrument is recogn-ised initially in equity and either transferred to the consolidated income statement in the period in which the hedged transaction impacts the consolidated income statement, or included as part of the cost of the related asset or liability. For hedges which do not qualify for hedge accounting, any gains or losses arising from chang-es in the fair value of the hedging instrument are taken directly to the consolidated income statement for the year. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. For fair value hedges of financial instruments with fixed maturities any adjustment arising from hedge accounting is amortised over the remaining term to maturity. For cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the hedged transaction occurs. If the hedged transaction is no longer expected to occur, the net cumulative gain or loss rec-ognised in equity is transferred to the consolidated income statement.
41
5 - REVENUES 2007 2006 USD’000 USD’000
Vessel chartering 146,887 128,794
Offshore and onshore engineering 84,678 40,862
Ship repairing 69,480 43,090
301,045 212,746
6 - OTHER INCOME 2007 2006 USD’000 USD’000
Profit on disposal of property, plant and equipment 3,327 888
Gain from settlement of derivative instruments 3,028 -
(Loss) gain on fair valuation of derivative instruments (1,417) 41
Interest income 1,662 1,202
Excess provision for insurance claim written back 368 593
Unclaimed balances written back - 548
Gain on sale of vessels to an associate realised - 706
Claims received - 2,530
Management fee income - 39
Miscellaneous income 599 657
7,567 7,204
7 - FINANCE COSTS 2007 2006 USD’000 USD’000
Interest expense 12,233 11,891
8 - INCOME TAX
Tax expense relates to corporation tax payable on the profits earned by the subsidiaries, as adjusted in accordance with the taxation laws and regulations in United Kingdom, Singapore and Qatar on remittances from the subsidiaries and the associates, as follows:
42
2007 2006 USD’000 USD’000
Current taxation
Foreign tax 9,138 5,576
Corporation tax 29 365
Total current tax 9,167 5,941
Deferred tax
Current year 1,871 (199)
Prior year (3,118) 633
Total deferred tax (1,247) 434
Tax expense for the year 7,920 6,375
Tax liabilities 4,807 7,850
UK Corporation tax is calculated at 30% of the estimated assessable profit for the financial period. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
The charge for the period can be reconciled to the profits of the Group attributable to entities in the United Kingdom, Singapore and Qatar as follows: 2007 2006 USD’000 USD’000
Profit before income tax 35,880 24,139
Less: Profit from non taxable jurisdictions (19,752) (4,512)
Taxable profit included in the profit for the year 16,128 19,627
Tax at the applicable average rate of 30% (2006: 21%) 4,867 4,069
Tax effect of expenses that are not deductible in determining taxable profit 235 564
Effect of different tax rates of subsidiaries operating in other jurisdictions 5,337 1,831
Tax effect of allowances for tax 298 (107)
Non corporation tax items 21 (617)
Prior year movement on deferred tax (3,118) 635
Others 280 -
Tax expense for the year 7,920 6,375
9 - PROFIT FOR THE YEARThe profit for the year is stated after charging:
2007 2006 USD’000 USD’000
Staff costs 87,726 32,380
Rental-operating leases 27,183 22,003
43
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45
Certain of the buildings and plant and machinery were revalued at 31 December 1994. The valuations were carried out by professionally qualified and independent valuers. Certain of the marine vessels were revalued at 31 December 2003, based on independent valuations un-dertaken by professionally qualified valuers. The independent valuations were based on open market basis for existing use. The net book value of revalued assets was USD 33,324,000 (2006: USD 37,744,000). Had these assets been carried at cost less depreciation, the net book values would have been USD 26,454,000 (2006: USD 29,340,000).
Marine vessels with a net book value of USD 209,098,000 (2006: USD 181,542,000) and plant and machinery with a net book value of USD 6,808,000 (2006: USD 4,759,000) are pledged against bank loans obtained. Buildings with a net book value of USD 2,796,000 (2006: USD 1,388,000) are pledged against bank overdrafts.
The net carrying value of marine vessels includes an amount of USD 622,000 (2006: USD 982,000) in respect of assets held under finance leases.
Certain vessels are subject to commercial agreements with a third party whereby that third party has a call option to purchase each of the relevant vessels owned by the Group at a price related to the US dollar borrowing remaining outstanding against those vessels. The Group has not been notified of any intention to exercise such a call option and consequently the call op-tion and associated implications are not reflected in these financial statements.
Capital work in progress includes progress payments for the construction of new vessels. This will not be depreciated until the vessels are fully complete and fit for operational use.
The depreciation charge has been allocated in the consolidated income statement as follows:
2007 2006 USD’000 USD’000
Cost of sales 26,572 22,183
Administrative expenses 1,557 1,190
28,129 23,373
11 - INTANGIBLE ASSETS Computer Computer Goodwill software Total Goodwill software Total
At 1 January 29,551 493 30,044 28,051 648 28,699
Additions - - - 1,500 60 1,560
Disposals - - - - (2) (2)
Amortization - (215) (215) - (213) (213)
At 31 December 29,551 278 29,829 29,551 493 30,044
Cost (gross carrying amount) 29,551 1,071 30,622 29,551 1,071 30,622
Accumulated amortization - (793) (793) - (578) (578)
Net carrying amount 29,551 278 29,829 29,551 493 30,044
2007 2006USD’000 USD’000
46
Goodwill comprises:
a) goodwill relating to Nico Middle East Limited taken over from TEAM SAOG as at 1 January 2005.
b) goodwill arising from the acquisition of BUE Marine Limited with effect from 1 July 2005.
c) goodwill arising from the excess of the cost of acquisition over the fair value of identifiable assets of Marine and Industrial Division of Fujairah Marine Services acquired by the Fujairah Branch of the Company with effect from 1 January 2005.
Goodwill has been allocated to three individual cash-generating units for impairment testing as follows:
• Nico Middle East Limited,• BUE Marine cash-generating unit; and• Fujairah Marine Services cash-generating unit.
As mentioned above, the Group acquired BUE Marine Limited with effect from 1 July 2005. As per the purchase agreement for acquisition of BUE Marine Limited, the Group assumed liability for certain taxation in Kazakhstan up to an amount of USD 1,500,000 in the event of a claim from the tax authorities. No provision had been made for this amount as the likelihood of the claim arising was uncertain and the amount of any potential claim could not be quantified. During the previous year, the Group received a claim from the tax authorities for such taxation and has, accordingly, adjusted the amount of goodwill.
Carrying amount of goodwill at 31 December allocated to each of the cash-generating units:
2007 2006 USD’000 USD’000
Carrying amount of goodwill:
Nico Middle East Limited Unit 10,494 10,494
BUE Marine Limited Unit 18,383 18,383
Fujairah Marine Services Unit 674 674
29,551 29,551
The recoverable amount of each cash-generating unit is determined based on a value in use calculation, using cash flow projections based on financial budgets approved by senior management. The key assumptions of the value in use calculations are those regarding dis-count rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates that reflect current market assessments of the time value of money and the risks specific to each cash-generating unit. The growth rates are based on management estimates having regard to industry growth rates. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.
Sensitivity to changes in assumptions:With regard to the assessment of value in use of the cash generating units, management be-lieves that no reasonably possible change in any of the key assumptions would cause the car-rying value of the unit to materially exceed its recoverable amount.
For the year ended 31 December 2007, there have been no events or changes in circum-stances to indicate that the carrying values of goodwill of the above three cash-generating units may be impaired.
47
12 - INVESTMENTS IN ASSOCIATES
The Group has the following investments in associates: Country of Ownership OwnershipAssociate incorporation interest interest 2007 2006
Darium Thai Offshore Limited Thailand 49% 49%
Mezon Stainless Steel Free Zone Company U.A.E. 20% 20%
Darium Thai Offshore Limited is involved in the charter of marine vessels, provision of on-board accommodation and catering services and sale of fuel and other consumables.
Mezon Stainless Steel Free Zone Company is engaged in the trading of stainless steel plates, pipes, fittings and flanges.
Movements in the investment in associates are set out below: 2007 2006 USD’000 USD’000
At 1 January 3,948 3,805
Share of income 892 445
Exchange loss transferred to translation reserve 213 496
Amounts received (2,638) (798)
At 31 December 2,415 3,948
During the current year, the shareholders of Darium Thai Offshore Limited resolved to dissolve the company and the dissolution was registered with the Ministry of Commerce on 24 August 2007.
During the previous year, Darium Thai Offshore Limited sold both the vessels and the profit was transferred to the consolidated income statement (note 6). 2007 2006 USD’000 USD’000
Share of associates’ balance sheet:Current assets 4,632 5,329Non current assets 218 253Current liabilities (612) (245)Non current liabilities (1,823) (1,389) Net assets 2,415 3,948 Share of associates’ revenues and results:Revenues 3,736 3,061
Result 892 445
48
13 - INVENTORIES 2007 2006 USD’000 USD’000
Stores, spares and consumables 5,992 4,265
Provision for slow moving inventories (1,318) (1,253)
4,674 3,012
14 - WORK IN PROGRESS 2007 2006 USD’000 USD’000
Costs incurred on contracts in progress 121,914 38,337
Attributable profits less recognised losses 4,025 499
125,939 38,836
Progress billings (109,812) (32,053)
16,127 6,783
15 - ACCOUNTS RECEIVABLE AND PREPAYMENTS 2007 2006 USD’000 USD’000
Trade accounts receivable 67,177 53,348
Provision for doubtful receivable (8,712) (8,225)
58,465 45,123
VAT recoverable 8,277 3,593
Prepaid expenses 4,570 6,176
Advance to suppliers 2,890 4,577
Insurance claims - 399
Accrued income 67 79
Other receivables 12,479 9,263
86,748 69,210
As at 31 December 2007, trade receivables at nominal value of USD 8,712,000 (2006: USD 8,225,000) were impaired. Movements in the allowance for impairment of receivables were as follows:
2007 2006 USD’000 USD’000
At 1 January 8,225 8,150
Charge for the year 1,305 208
Amounts written off (741) (133)
Unused amounts reversed (77) -
At 31 December 8,712 8,225
49
As at 31 December, the ageing of unimpaired trade receivables is as follows:
Neither past due <30 30-60 60-90 90-120 >120 Total nor impaired days days days days days USD’000 USD’000 USD’000 USD’000 USD’000 USD’000 USD’000
2007 58,465 32,710 14,610 4,923 2,218 2,314 1,690
2006 45,123 24,210 10,417 2,451 3,468 1,554 3,023
Unimpaired receivables are expected, on the basis of past experience, to be fully recoverable. It is not the practice of the Group to obtain collateral over receivables and the vast majority are, there-fore, unsecured.
16 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents included in the consolidated cash flow statement include the fol-lowing balance sheet amounts: 2007 2006 USD’000 USD’000
In fixed deposit accounts 14,363 126In call accounts 435 272In current accounts 17,058 5,238Cash on hand 227 131 32,083 5,767
Bank overdrafts - (2,805)
Cash and cash equivalents 32,083 2,962
Fixed deposits and call accounts are placed with commercial banks in the U.A.E. These are de-nominated in United Arab Emirates Dirhams and United States Dollars, short term in nature and carry interest rate ranging between 3% to 5.5%.
Bank overdrafts as at the previous year end relates to overdraft balances of Adyard.
17 - SHARE CAPITAL 2007 2006 USD’000 USD’000Authorised7,350,000 shares of AED 100 each (2006:3,500,000 shares of AED 100 each) 200,273 95,368
Issued and fully paid 4,672,756 shares of AED 100 each (2006:2,486,000 shares of AED 100 each) 127,323 67,738
18 - PROPOSED INCREASE IN CAPITAL
During the previous year, the holding company had advanced an amount of USD 26,602,000 to-wards a proposed increase in the share capital of the Company. During the current year, shares were issued for this amount and transferred to share capital.
Past due but not impaired
50
Past due but not impaired19 - STATUTORY RESERVEAs required by the Commercial Companies Law of 1984 (as amended) of the United Arab Emirates and the Articles of Association of subsidiaries in the United Arab Emirates, 10% of the profit for the year is required to be transferred to statutory reserve. Accordingly, the subsidiar-ies have transferred USD 570,000 (2006: USD 238,000) to statutory reserve during the year. The subsidiaries may resolve to discontinue such annual transfers when the reserve totals 50% of the paid up capital of the individual entities being consolidated.
20 - DIVIDEND PAYABLEDuring the year, dividend for the year 2007 of USD 6,500,000 at USD 1.39 per share was ap-proved by the shareholders.
21 - TERM LOANS 2007 2006 USD’000 USD’000
Term loan, at LIBOR plus 1.15% repayable by July 2009 2,006 3,671Vehicle finance loan, at a fixed rate of 4.5% p.a. repayable by October 2010 646 126Vehicle finance loan, at a fixed rate of 6.5% p.a. repayable by November 2009 249 591Short term loan, at 7.85%, repayable by February 2007 - 500Term loan, at LIBOR plus 1.2% repayable by October 2009 1,969 3,375Term loan, at EIBOR plus 2% repayable by March 2010 903 1,305Equipment finance loan, at fixed rate 4% repayable by November 2007 - 88Equipment finance loan, at EIBOR plus 2.5% repayable by January 2009 4 266Term loan, at EIBOR plus 2% repayable by December 2011 1,079 1,353Term loan, at LIBOR plus 1.15% repayable by July 2011 5,831 7,386Term loan, at LIBOR plus 1.25% repayable by December 2013 23,333 28,667Term loan, at LIBOR plus 1.25% repayable by March 2010 8,926 12,355Term loan, at LIBOR plus 1.1% repayable by June 2015 13,600 15,300Term loan, at 5.87% repayable by August 2014 9,855 11,333Term loan, at 5.9% repayable by March 2015 16,047 18,286Term loan, at 5.9% repayable by March 2015 16,047 18,286Term loan, at 7.37% repayable by September 2012 11,180 13,066Term loan, at 5.75% repayable by June 2012 2,761 3,444Term loan, at 4.5% repayable by August 2009 1,681 2,179Term loan, at LIBOR plus 1.10% repayable by February 2011 1,393 1,791Term loan, at LIBOR plus 1.03% repayable by October 2016 14,328 15,920Term loan, at 5.89% repayable by March 2015 8,750 - Term loan, at LIBOR plus 2% repayable by March 2013 1,280 - Vehicle finance loan, at 4.65% p.a. repayable by October 2010 19 - Equipment finance loan, at EIBOR plus 2.5% repayable by August 2012 2,413 - Equipment finance loan, at EIBOR plus 2.0% repayable by August 2009 377 - Equipment finance loan, at EIBOR plus 2.5% repayable by April 2012 191 - Term loan, at EIBOR plus 2% repayable by September 2011 475 - Term loan, at LIBOR plus 1.10% repayable by July 2016 17,175 -
162,518 159,288
Current portion (31,681) (28,145)
Non-current portion 130,837 131,143
The term loans are secured by a first preferred mortgage over selective assets of the Group, the assignment of marine vessel insurance policies, and in the event of default, the assign-ment of the marine vessel charter lease income. The equipment finance loan is secured against plant and machinery acquired with the proceeds of the loan.
51
The term and equipment finance loans are repayable as follows: 2007 2006 USD’000 USD’000 Due within one year 31,681 28,145Due between two to five years 93,335 84,209Due after five years 37,502 46,934 162,518 159,288 The borrowing arrangements include undertakings to comply with various covenants includ-ing an undertaking to maintain a minimum net worth which, at no time, shall be less than US$ 60 million for Nico Middle East Limited and its subsidiaries.
Net worth has been defined to mean the aggregate of the amount paid up on the issued share capital of the Group and the amount standing to the credit of its capital and revenue reserves (including any share premium accounts or capital redemption reserve but excluding revaluation reserve, and deducting any amounts attributable to intangible assets but adding back goodwill).
22 - OBLIGATIONS UNDER IJARAH-FIL-THIMMA 2007 2006 USD’000 USD’000Amounts payable under Ijarah-fil-Thimma:Due within one year 2,258 - Due between two to five years 9,034 - Due after five years 9,598 - 20,890 - Current portion (2,258) -
Non-current portion 18,632 -
The Ijarah-fil-Thimma balances represent funds advanced to the Group by a bank under an Islamic financing scheme. The Ijarah-fil-Thimma is payable in quarterly installments of USD 565,000 each and carries a profit rate of LIBOR plus 1.2% p.a.
23 - LOAN DUE TO HOLDING COMPANY 2007 2006 USD’000 USD’000
Term loan, at LIBOR plus 1.75% repayable by January 2011 10,625 13,125Current portion (2,500) (2,500)
Non-current portion 8,125 10,625
The loan is repayable as follows: 2007 2006 USD’000 USD’000Due within one year 2,500 2,500Due between two to five years 8,125 10,000Due after five years - 625 10,625 13,125
52
24 - FINANCE LEASE OBLIGATIONS 2007 2006 USD’000 USD’000
Total lease payment outstanding as at 31 December 643 1,006Less: Due within one year (disclosed as current liabilities) (380) (363)
Long term lease obligations 263 643
25 - EMPLOYEES’ END OF SERVICE BENEFITS
Movements in the provision recognised in the consolidated balance sheet are as follows:
2007 2006 USD’000 USD’000
Provision as at 1 January 4,024 3,552Provided during the year 1,778 1,066End of service benefits paid (548) (594)
Provision as at 31 December 5,254 4,024
An actuarial valuation has not been performed as the net impact of discount rates and future increases in benefits is not likely to be material.
26 - ACCOUNTS PAYABLE AND ACCRUALS 2007 2006 USD’000 USD’000
CurrentTrade payables 28,694 21,387Accrued expenses 32,038 19,127Advances from customers 11,772 4,340Deferred income 1,000 1,000Other payables 16,608 5,283 90,112 51,137
Non-currentDeferred income 3,904 6,318Advances from customers 5,969 8,077 9,873 14,395
53
27 - RELATED PARTY TRANSACTIONS
Related parties represent associated companies, major shareholders, directors and key man-agement personnel of the Group, and entities controlled, jointly controlled or significantly influ-enced by such parties. Pricing policies and terms of these transactions are approved by the Group’s management.
Transactions with related parties included in the consolidated income statement are as follows: 2007 2006
Compensation of key management personnelThe remuneration of directors and other members of key management during the year was as follows: 2007 2006 USD’000 USD’000
Short term benefits 1,762 2,077Employees’ end of service benefits 83 68 1,845 2,145
2007 2006 USD’000 USD’000Due from related partiesMermaid Offshore 1,169 1,252Doosan Babcock Energy Services 486 - Director - 13Kazmor Transflot - 25Darium Thai Offshore Limited - 43 1,655 1,333
2007 2006 USD’000 USD’000Due to related partiesRennaissance Services SAOG 185 177Imtac Technologies 22 26Tawoos 22 - United Media Services 11 - Mermaid Safety Services 4 - Doosan Babcock Energy Services - 201Inge Wernesson - 1 244 405
Fees for Fees for management management Revenue Purchases services Revenue Purchases services USD’000 USD’000 USD’000 USD’000 USD’000 USD’000
Associated companies - 88 - - 276 -
Other related parties 9,711 85 - 6,370 673 39
9,711 173 - 6,370 949 39
54
28 - INVESTMENTS IN JOINTLY CONTROLLED ENTITIES
The Group’s share of income, expenses, assets and liabilities in the jointly controlled entities described in note 2 at 31 December are set out below: 2007 2006 USD’000 USD’000Current assets 4,514 1,390Current liabilities (3,290) (864)
Net assets 1,224 526 Revenue 6,190 2,357Cost of sales (5,152) (1,940)Administrative expenses (340) (168)
Profit for the year 698 249
29 - DEFERRED TAX ASSET 2007 2006 USD’000 USD’000At 1 January 2,920 4,357Profit and loss account debit (credit) 1,247 (434) Deferred tax asset realised from previous owners of BUE Marine Limited - (1,003)
At 31 December 4,167 2,920 The deferred tax balance at 31 December 2007 comprises capital allowances in excess of depreciation of USD 4,047,000 (2006: USD 2,896,000) and short term timing differences of USD 120,000 (2006: USD 24,000).
30 - CONTINGENCIES
Contingent liabilities 2007 2006 USD’000 USD’000Letters of credit 1,976 1,404Letters of guarantee 20,963 8,174 22,939 9,578 The subsidiaries of BUE Marine Limited have entered into cross guarantees with the Com-pany’s bank and other providers of loan finance in respect of the borrowings of BUE Marine Limited. At 31 December 2007, the total contingent liability in respect of these guarantees was USD 94,249,000 (2006: USD 94,249,000) secured by a bond and floating charge over the assets of BUE Marine Limited and its subsidiaries.
Litigation
In December 2005, the Group entered into a contract with a customer to undertake clean-ing and repair work on a vessel. In 2007, the customer filed proceedings against the Group in the Court of First Instance in Abu Dhabi with claims for damages for failure to complete the work promptly. The Group denies liability for these claims and has filed both a statement of defense to the claim and a counter-claim for costs against the customer. In the opinion of management, it is unlikely that any material liability will arise in respect of this matter. Accord-ingly, no provision has been made in these financial statements relating to these claims.
55
31 - NON-CANCELLABLE LEASES
a) Operating leases - receivable
The Group leases its marine vessels under operating leases. The leases typically run for a pe-riod of ten years and are renewable for similar periods after the expiry date. The lease rental is usually renewed to reflect market rentals. Future minimum lease rentals receivable under non-cancellable operating leases are as follows as of 31 December:
2007 2006 USD’000 USD’000
Within one year 114,764 107,949Between one and five years 185,188 153,793More than five years 85,003 69,920 384,955 331,662 b) Operating leases - payable
The Group has future minimum lease payments under non-cancellable operating leases for marine vessels with payments as follows:
2007 2006 USD’000 USD’000
Within one year 15,734 20,687Between one and five years 19,368 11,977More than five years 4,502 7,381
39,604 40,045 c) Finance lease commitments
The Group has entered into non-cancellable finance lease commitments with monthly rentals payable as follows:
2007 2006 USD’000 USD’000 Within one year 380 363 After one year but not more than five years 263 643 643 1,006
32 - COMMITMENTS 2007 2006 USD’000 USD’000
Capital expenditure commitment: Purchase of property, plant and equipment 79,192 11,172
56
33 - DERIVATIVE FINANCIAL INSTRUMENTS
The table below shows the positive and negative fair values of derivative financial instruments, which are equivalent to the market values, together with the notional amounts analysed by the term to maturity. The notional amount is the amount of a derivative’s underlying asset, refer-ence rate or index and is the basis upon which changes in the value of derivatives are mea-sured. The notional amounts indicate the volume of transactions outstanding at year end and are neither indicative of the market risk nor credit risk.
31 December 2007: Notional amounts by term to maturity
Positive Negative Notional Over1 fair fair amount Within 1 year to Over 5 value value Total year 5 years years USD’000 USD’000 USD’000 USD’000 USD’000 USD’000
Interest rate swaps 38 1,256 85,611 20,000 65,611 - Forward foreign exchangecontracts 33 596 85,509 85,509 - -
Foreign exchange
options 364 - 7,000 7,000 - -
Total 435 1,852 178,120 112,509 65,611 -
31 December 2006: Notional amounts by term to maturity Positive Negative Notional Over1 fair fair amount Within 1 year to Over 5 value value Total year 5 years years USD’000 USD’000 USD’000 USD’000 USD’000 USD’000
Interest rate swaps 122 81 40,441 13,351 27,090 -
34 - RISK MANAGEMENT
The Group’s principal financial liabilities, other than derivatives, comprise bank loans and over-drafts, finance leases and trade payables. The main purpose of these financial liabilities is to raise finance for the Group’s operations. The Group has various financial assets such as trade receivables and cash and short-term deposits, which arise directly from its operations.
The Group also enters into derivative transactions, primarily interest rate swaps and forward cur-rency contracts. The purpose is to manage the interest rate and currency risks arising from the Group’s operations and its sources of finance.
It is, and has been throughout 2007 and 2006 the Group’s policy that no trading in derivatives shall be undertaken.
The main risks arising from the Group’s financial instruments are cash flow interest rate risk, liquid-ity risk, foreign currency risk and credit risk. The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below:
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Interest rate risk
The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with floating interest rates.
The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debts. The Group’s policy is to keep between 5% and 7% of its borrowings at fixed rates of inter-est. To manage this, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to hedge underlying debt obligations. At 31 December 2007, after taking into account the effect of interest rate swaps, approximately 75% of the Group’s borrowings are at a fixed rate of interest (2006: 70%).
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 (through the im-pact on floating rate borrowings). There is no impact on the Group’s equity.
Increase/decrease Effect on profit in basis points for the year USD’000 2007 +15 (190) -10 127
2006 +15 (176) -10 118
Credit risk
The Group seeks to limit its credit risk with respect to customers by setting credit limits for indi-vidual customers and monitoring outstanding receivables.
The Group’s ten largest customers account for 46% of outstanding accounts receivable at 31 December 2007 (2006: 55 %).
With respect to credit risk arising from the other financial assets of the Group, including cash and cash equivalents, and derivative instruments with positive values, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.
Liquidity risk
The Group limits its liquidity risk by ensuring bank facilities are available. The Group’s credit terms require the amounts to be paid within 90 days from the date of invoice. Accounts pay-able are normally settled within 90 days of the date of purchase.
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The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2007, based on contractual undiscounted payments.
At 31 December 2007 Less than 3 to 12 1 to 5 3 months months years >5 years Total USD’000 USD’000 USD’000 USD’000 USD’000
Accounts payables 45,302 12,772 9,873 - 67,947Term loans 8,049 24,919 117,603 47,252 197,823Loan due to holding company 636 1,973 10,400 - 13,009Ijarah financing 572 1,757 10,840 11,518 24,687Finance leases 95 285 263 - 643 Total 54,654 41,706 148,979 58,770 304,109
At 31 December 2006 Less than 3 to 12 1 to 5 3 months months years >5 years Total USD’000 USD’000 USD’000 USD’000 USD’000
Accounts payables 26,670 5,340 14,395 - 46,405Bank overdraft 2,805 - - - 2,805Term loans 7,151 22,138 106,104 62,187 197,580 Loan due to holding company 636 1,973 12,800 669 16,078Finance leases 91 272 643 - 1,006 Total 37,353 29,723 133,942 62,856 263,874 Currency riskTrade accounts payable include an amount of USD 5,289,809 (2006: USD 1,829,700) due in foreign currencies, mainly Euros, Pounds Sterling, Omani Rials and Qatari Rial.
The table below indicates the Group’s foreign currency exposure at 31 December, as a result of its monetary assets and liabilities. The analysis calculates the effect of a reasonably possible move-ment of the USD currency rate against the foreign currencies, with all other variables held constant, on the income statement (due to the fair value of currency sensitive monetary assets and liabilities).
Effect on profit before tax Increase/ decrease in respective currency rate to the USD’000
2007 +5% -5%
EUR (84) 84MNT (55) 55KZT (31) 31GBP (28) 28
2006 +5% -5%
EUR (128) 128MNT (26) 26KZT (24) 24GBP (26) 26
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Capital management
The primary objective of the Group’s capital management is to ensure that it maintains a healthy capital ratio in order to support its business and maximise shareholder value.
The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years end 31 Decem-ber 2007 and 31 December 2006.
The Group monitors capital using a gearing ratio, which is net debt, divided by total capital plus net debt. The Group’s policy is to keep the gearing ratio between 55% and 70%. The Group includes within net debt, interest bearing loans and borrowings, trade and other pay-ables, less cash and cash equivalents. Capital represents capital and reserves.
2007 2006 USD’000 USD’000
Interest bearing loans and borrowings 194,676 176,224Trade and other payables 99,985 65,532Less cash and short term deposits (32,083) (5,767) Net debt 262,578 235,989
Equity 180,374 120,612Net realised gains reserve (528) (315)
Total capital 179,846 120,297 Capital and net debt 442,424 356,286
Gearing ratio 59% 66%
35 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments comprise financial assets and financial liabilities.
Financial assets consist of cash and bank balances, investment and receivables. Financial liabilities consist of bank overdrafts, term loans, loans due to holding company, finance leases and payables.
The fair value of derivatives is set out in note 33. The fair values of other financial instruments are not materially different from their carrying values.
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36 - KEY SOURCES OF ESTIMATION UNCERTAINTY
Estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, 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.
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allo-cated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2007 was USD 29,551,000 (2006: USD 29,551,000). More details are given in note 11.
Impairment of accounts receivable
An estimate of the collectible amount of trade accounts receivable is made when collection of the full amount is no longer probable. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but which are past due, are assessed collectively and a provision applied according to the length of time past due, based on historical recovery rates.
At the balance sheet date, gross trade accounts receivable were USD 67,177,000 (2006: USD 53,348,000) and the provision for doubtful debts was USD 8,712,000 (2006: USD 8,225,000). Any difference between the amounts actually collected in future periods and the amounts ex-pected will be recognised in the consolidated income statement.
Impairment of inventories
Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is made of their net realisable value. For individually significant amounts this estimation is performed on an individual basis. Amounts which are not individu-ally significant, but which are old or obsolete, are assessed collectively and a provision ap-plied according to the inventory type and the degree of ageing or obsolescence, based on historical selling prices.
At the balance sheet date, gross inventories were USD 5,992,000 (2006: USD 4,265,000) with provisions for old and obsolete inventories of USD 1,318,000 (2006: USD 1,253,000). Any differ-ence between the amounts actually realised in future periods and the amounts expected will be recognised in the consolidated income statement.
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