Arrow Prospectus - PGS

ARROW SEISMIC ASA – INITIAL PUBLIC OFFERING
2.2.8 Competition
The markets Arrow serves are highly competitive. Arrow may face competition from certain companies within
the seismic industry as well as other shipowners. Furthermore, overcapacity in the seismic market would have a
negative effect on the operating results of Arrow.
2.2.9 Uncertainty of future contract awards, risks of contract cancellation and other contractual risks
There is a risk that Arrow will be unable to attain employment for all of its vessels and/or that contracts will be
at levels materially below Arrow’s expectations. There exists a possibility that contracts can be cancelled by
Arrow’s counterparties due to sustained operational misperformance or that Arrow’s counterparties can
experience financial difficulties and bankruptcy. Arrow is party to contracts under which certain conditions have
to be met in order for the contracts to become effective between the parties thereto. Thus, the eventuality of nonfulfilment
of such conditions represents a risk factor for the Company.
2.2.10 Exchange rate risk
A change in the USD/NOK and EUR/USD exchange rates will influence Arrow. Arrow has most of its income
in USD, while the newbuild contracts are denominated in EUR. To reduce currency exposure, Arrow will seek to
have the majority if its debt denominated in USD. In addition, Arrow will regularly evaluate hedging of
anticipated future net cash flows in EUR, NOK and other relevant currencies. This is achieved primarily by
entering into forward contracts.
2.2.11 Credit risk
Several of the Company’s contracts are long-term, and there can be no guarantees that the financial position of
the Company’s major partners will not materially change during the contracted period. Given the limited number
of major partners of the Company and the significant portion they represent of the Company’s income, the
inability of one or more of them to make full payment on any of the Company’s contracted units may have a
significant adverse impact on the financial position of the Company.
2.2.12 Purchase agreements and purchase options
Arrow has entered into a contract with WesternGeco for the first state-of-the-art high capacity seismic new
building (Newbuild 532) to be delivered in Q1 2008. The contract comprises a charter for a fixed period of three
years and a purchase agreement under which ownership of the vessel will be transferred to WesternGeco upon
expiry of the charter period. Furthermore, Arrow and WesternGeco are in the process of finalising a similar
contract for the second new building (Newbuild 533) to be delivered in Q4 2008. This contract is intended to
comprise a charter for a fixed period of six years and a purchase agreement under which ownership of the vessel
will be transferred to WesternGeco upon expiry of the charter period. Arrow has also entered into a non-binding
letter of intent for Newbuild 534 with CGGVeritas, for a bareboat charter party for a fixed 12 year period, after
which Arrow and CGGVeritas may exercise options to sell and purchase the vessel.
The use of purchase agreements and purchase options may result in decreased revenue and cash flows for the
Company from having fewer vessels operating in its fleet.
ASI II and ASI III hold the vessels Newbuild 532 and Newbuild 533, which are currently under construction and
due to be completed in 2008. There are specific leasing and sale arrangements which relate to these companies
and vessels with a third party. It is understood that the two companies will bring these vessels into use once they
are complete and will thus be subject to UK tonnage tax. Income from the operation of qualifying vessels will be
subject to UK tonnage tax rules as outlined in section 9.7 (“UK Tax status), where it is not subject to these
tonnage tax rules it will be subject to standard UK corporation tax regulations.
As Newbuild 532 and Newbuild 533 are under a binding commitment to be sold to WesternGeco at the end of
the charter party, there may be a risk that these vessels may be considered outside the Tonnage Tax ring-fence,
which could lead to ordinary UK corporation tax on profits from the sale.
With respect to Newbuild 534 the ASI V has entered into a non-binding Letter of Intent with CGGVeritas for a
firm 12 year bare boat charter. A bare boat charter may lead to so called NOKUS taxation of Arrow Seismic
ASA, i.e. that income in ASI V will be subject to 28% tax in Norway paid by Arrow Seismic ASA.
2.2.13 Management and supervision
Arrow’s future business prospects are to a large degree dependent on its ability to meet changing customer
needs, to anticipate and respond to technological changes and to develop effective and competitive relationships
with its customers and suppliers. Arrow’s commercial, financial and general management, as well as building
17