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Important message to any person not authorized to have access to this report.
Any person who is not an addressee of this report or who has not signed and returned to PricewaterhouseCoopers Russia B.V a Release Letteris not authorized to have access to this report.
Should any unauthorized person obtain access to and read this report, by reading this report such person accepts and agrees to the followingterms:
1. The reader of this report understands that the work performed by PricewaterhouseCoopers Russia B.V was performed in accordance withinstructions provided by our addressee client and was performed exclusively for our addressee client's sole benefit and use.
2. The reader of this report acknowledges that this report was prepared at the direction of our addressee client and may not include allprocedures deemed necessary for the purposes of the reader.
3. The reader agrees that PricewaterhouseCoopers Russia B.V, its partners, principals, employees and agents neither owe nor accept any duty
or responsibility to it, whether in contract or in tort (including without limitation, negligence and breach of statutory duty), and shall not beliable in respect of any loss, damage or expense of whatsoever nature which is caused by any use the reader may choose to make of thisreport, or which is otherwise consequent upon the gaining of access to the report by the reader. Further, the reader agrees that this report isnot to be referred to or quoted, in whole or in part, in any prospectus, registration statement, offering circular, public filing, loan, other
agreement or document and not to distribute the report without PricewaterhouseCoopers Russia B.V.'s prior written consent.
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Transaction Services
12 March 2008
Project BearFinancial and Tax Due Diligence
Strictly Private and Confidential
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FLC West Holding S.a.r.l.15, Boulevard RooseveltL-2450 Luxemburg
12 March 2008
Dear Sirs,
In accordance with your instructions as confirmed in our contract 365/01/08/TS dated 17 January 2008 (theContract - Appendix 1), we report on current operations of:
AY Group in Ukraine (represented by the company Aker Yards Ukraine Holding AS (the Company) andits subsidiaries Aker Yards Ukraine BV, Aker Yards Design CJSC, Okean BV, Damen Shipyard OkeanOJSC); and
AY Group in Germany (represented by the company Aker MTW Werft GmbH and its subsidiaries AkerWarnemnde Operations GmbH, Aker Warnemnde Real Estate GmbH, Aker MTWGrundstcksverwaltung GmbH, Arctic Personaldienstleistung GmbH and Warnow Design GmbH).
The companies listed above are referred to together as the Group.
This report has been prepared for the purposes of the proposed acquisition by FLC West Holding S.a.r.l. from AkerYards Holding AS (the Vendors) of a 70% stake in the Company that at the completion date will own directly orindirectly the legal entities listed above (refer to page 6) (the Transaction).
We draw your attention to important comments regarding the scope and process of our work, set out immediatelyafter Table of contents.
You may not make copies of this report available to other persons except as described in the Contract, and subjectto the conditions described therein. We will not accept any duty of care (whether in contract, tort (includingnegligence) or otherwise) to any person other than you, except under the arrangements described in the Contract.
Yours faithfully
PricewaterhouseCoopers Russia B.V.
Kosmodamianskaya Nab. 52, Bld. 5
115054 Moscow
Russia
Telephone +7 (495) 967 6000
Facsimile +7 (495) 967 6001
www.pwc.ru
Matthias Buehler
Senior ManagerE mail: matthias.buehler@de.pwc.comTelephone: +49 69 9585 5886Mob ile : +49 1 51 1 67 63 978Fax: +49 69 9585 956325
Dmitry Rembovsky
Director
E mail: dmitry.rembovsky@ru.pwc.comTelephone: +7 495 232 5736Mob ile : +7 9 03 96 1 20 11Fax: +7 495 967 6016
Doug Miller
PartnerE mail: doug.r.miller@ru.pwc.comTelephone: +7 495 967 6301Mob ile : +7 9 05 5 43 09 17Fax: +7 495 967 6016
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Table of contents
Page
1 Executive Summary 1
1.1 Business overview 3
1.2 Key deal issues
Financial
7
1.3 Key deal issues Tax 21
2 Group overview 33
2.1 Business overview 34
2.2 Standalone issues 44
2.3 Quality of earnings
analysis
51
2.4 Pro forma combined
financial statements
55
2.5 Working capital and net
debt
58
2.6 Management and Staff 63
3 Historical trading 67
3.1 Germany 69
3.2 Ukraine 77
3.3 Past budgeting accuracy 84
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Table of Contents
Page
4 Business Plan 93
4.1 Business Plan
Germany
104
4.2 Business Plan Ukraine 119
5 Net assets 127
5.1 Germany 128
5.2 Ukraine 131
6 Cash flows 135
7 Taxation 137
7.1 Taxation Ukraine 138
7.2 Taxation Germany 148
7.3 Taxation Netherlands 158
7.4 Taxation Norway 166Appendices
1 Contract 172
2 Group Overview 188
2.1 Business Overview 189
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Table of Contents
Page
2.2 Pro forma combined
financial statements -Germany
201
2.3 Pro forma combined
financial statements -Ukraine
209
2.4 Working Capital and NetDebt - Ukraine 214
2.5 Other Matters 219
3 Past Budgeting accuracy 225
4 Business Plan 234
4.1 Business Plan - Germany 235
5 Key outstanding
information
242
6 Glossary 246
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Summary of important due diligence process and information matters
Access to management According to Term sheet signed between Aker Yards Holding AS and FLC West HoldingS.a.r.l. our access to management was limited to interviews and management presentationsgenerally conducted by the Vendors upon our request and were attended and minuted bytheir legal advisors Wikborg Rein & Co., Oslo. Such restrictions comprise a common practice
in the dataroom situation. According to AY Group management our access to managementwas limited to prevent leakage of information that may impact AY ASA shares listed at Oslostock exchange.
We primarily obtained information from:
The documents included in the physical dataroom from 14 January 2008 through to 29February 2008; including answers provided to our questions asked in Question Log;
In addition, we were provided with management comments and explanations: during several management presentations and meetings in Oslo (Norway); during a meeting with local management of DSO in Odessa (Ukraine) on 24
January 2008. Various conference calls with German, Ukrainian and AY Group headquarters
management.
Overall, available information provided a basis to analyse the significant drivers and issues of
the business. However, we have not yet received certain important information as detailed inAppendix 5. Our work was impacted by delays caused by the way dataroom proc ess was
organised. Answers generated in the Q&A process and other important documents weredelivered with significant delays. In general, no documents besides the final Business Plan
were provided in electronic versions which negatively affected efficiency of our work. Inaddition, shortly before finalising our report we received some individual documents inelectronic form.
We draw to your attention that the level of comfort that can be gained from a dataroom due
diligence within a limited time frame may be significantly less than that which could beobtained with no limitations on access to the target and their management. As aconsequence, it is possible that, despite our best efforts, some issues relevant to yourdecisions a) may not be identified or b) may be identified but not addressed due to the
absence of relevant information or c) may be identified but mis-analysed.
Access to information
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Summary of important due diligence process and information matters
Access to auditors We also had telephone discussions with the Group's auditors, Ernst & Young (E&Y), on 7
March 2008 (E&Y Ukraine) and 10 March 2008 (E&Y Germany) and discussed the audit ofthe Group reporting packages for 2006 and 2007. We have not reviewed their respectiveworking papers.
Historically, the Group entities have been and are functioning as a part of a AY Group, andproduces a substantial amount of financial information for internal and external reporting
requirements. We understand that the Group entities reporting systems cannot be readilymapped to the Groups standalone operating structure which forms the basis of theprojections. Accordingly, it can be difficult to obtain robust explanations of the Group at abusiness unit level and compare the historical performance with budgeted performance. The
information provided to us including management comments and explanations has allowed usto gain insight and understanding into some of the more significant risks, trends, and issues. Itshould be noted however that we have been provided with different sets of financialstatements (local management accounts, audited financial statements of individual
companies, Business Plan) which could not be readily reconciled to each other and thereforelimited our ability to analyse certain aspects in depth. Furthermore, the Business Plan hasbeen reworked during our dataroom phase and we have not been provided with details of theinitial Business Plan.
Clarity of information
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Summary of important due diligence process and information matters
Significant scope matters Management did not provide any detailed assumptions underlying the Business Plan. A full
reconciliation of segmental trading to the management accounts is also outstanding. The duediligence process is slowed down by the way the dataroom is organised, information is providedto us and questions and answers are handled by the Vendors side.
We point out that the scope of our work did not include:
The legal compliance of the Group;
The external marketplace (market size), segmentation, growth trends, the competitiveenvironment (key competitors, market shares) and the Groups strategic positioningstrategies;
The appropriateness or sufficiency of the Groups insurance arrangements;
Any environmental exposures of the Group or the adequacy of the Groups system foridentifying and controlling such exposures;
The nature and adequacy of the Groups pension arrangements; and Operational due diligence.
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There are three main sources of financial information on the Groups business andthose have been used in this report
Key features Used in the report for CommentsSource
Audited financialstatements
Management
accounts
Some reconciliation items on aline-by-line item basis are stilloutstanding
EBITDA and equity could bereconciled
Due to reclassification andnetting we could not reconcile allline items in the incomestatements and balance sheets
Since bottom line results couldbe reconciled we consider theprovided management accountsas a reliable source althoughsome analysis was limited
Pro forma analysis
Balance sheet analysis
Reconciliation to management accounts
Project analysis
Order backlog Project revenues and results
Cash flow analyses (also derived fromBusiness Plan)
Local GAAP: Clean auditopinions for FY05 and FY06;FY07 not received yet. (Auditedby Ernst & Young)
No audited IFRS financialstatements for individual Group
companies Projections and future strategy
Vessel type analysis
Reconciliation to management accountsand audit reports
Business Plan Financial models do not containa detailed description of theunderlying assumptions
High level assumptions weremade available in presentationbut could not always be linked toBusiness Plan
Consolidated Group P&L wasnot provided
Different models for Germanyand Ukraine
Business Plan contains onlyprofit and loss statements toEBT level from FY08 to FY12with 3 years of historical figures(FY05-FY07)
Prepared monthly by localmanagement in accordance with
IFRS Contains profit and loss
statement and balance sheet(only at quarter end)
Project reconciliation
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Important note on sources of information for AY Ukraine
There are several sources of financial information provided in
the dataroom in respect of AYU used for our analysis: Statutory accounts of DSO and AYDU prepared in
accordance with Ukrainian GAAP,
Quarterly internal reports of DSO prepared inaccordance with IFRS for the purposes of AY Groupreporting. The Internal reports comprise Balance Sheet,
Income Statement and breakdowns of certain majoritems. It should be noted that we have not beenprovided with Group reporting packages of DSO underIFRS.
Balance Sheet and Income Statement of AYDUextracted from Group reporting packages.
We used Internal reports as the main source of financial
information about DSO position and operations. Our analysiswas performed at the following levels:
Net debt at consolidated AY Ukraine Holding level,
Balance Sheet, W orking capital at DSO and AYDUcombined level,
Trading results at DSO and AYDU combined level.
The Internal reports were prepared in Ukrainian Hryvnia(UAH) for your convenience we provide opposite theinformation on the exchange rates used to convert UAH intoEUR. Closing and average exchange rates were applied to
balance sheet and income statement amount respectively.
Historically, AYU did not prepare the consolidated financial
statements for AY Ukraine Holding. However, for thepurposes of the Transaction the management preparedconsolidated financial statements of AY Ukraine Holding for
FY06 and FY07. These consolidated statements, which theystated are prepared in accordance with IFRS, have not andwill not be audited, and will be attached to SPA as Schedules1B and 1C.
These financial statements, that include AY Ukraine HoldingAS, AYDU B.V., Okean B.V., DSO, AUDU, were prepared as
follows:
individual statements of each company were addedtogether,
the intercompany balances and operations wereeliminated,
certain consolidation and top-level adjustments weremade (elimination of investments, recognition ofgoodwill, recognition of Production Royalty liability to
Damen).
Ukrainian Hryvnia ( UAH) for 1 EUR FY05 FY06 FY07
Closing exchange rate 5.97 6.65 7.42
Average exchangerate 6.39 6.34 6.92
Source: NationalBankof Ukraine, ww w.bank.gov.ua
Summaryexchange rates
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Transaction Services
Section 1
Executive Summary
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The Group consists of two state-of-the-art German shipyards and one Ukrainianshipyard with a total revenue of786m and an EBITDA margin of 1.1% in FY07
2
3.5%
59%
CAGR
FY07-12
The Groupt consists of twoGerman and one Ukrainianshipyards with total steelcapacity of some 130,000t/p.a. and with approximately5,000 employees
Historical profitability ofGerman yards has been low,reflecting the intensecompetition for containervessels from Asian shipyards
Current orderbook:
Germany: 15 vessels withcontract value of1.48bnuntil FY10
Ukraine: 71m until FY09
Ongoing and post dealaccess to LNG (on exclusivebasis in respect of CIScountries) and Ice-classtechnologies within AY Group
6
5
7
1The two Germanshipyards have state-of-the-art facilitiesmodernized in the1990s
3
Significant profitability increase projected fromFY08 due to change in product mix for highervalue added vessels such as Arctic-line, Ice-class, Ro-Pax and LNG vessels
German shipyards functionquite independently. AkerYards ASA charged AYG2.8m and DSO 1m ofgroup charges in FY07
8
4
Significant operatingefficiency improvements areprojected for AYU, such asdecrease of fabrication hours
per ton steel by 35%
10
Actual profitability of Uk rainianoperations is unclear as most projectsare inter-company
9
The Groups EBITDAprojected in the BusinessPlan is sensitive to potentialchanges in direct materialand fabrication costs
11
Certain tax warranties andindemnities are included in
the draft SPA upon results oftax due diligence
12
The three yards account forapproximately 88% of theMerchant Vessel businesssegment of Aker Yards ASA
2
Source: Business Plan version 6.02.2008
Group - Total Revenues and EBITDA development
514588
786 755847
951 963 935
16.685.1
8.551.0 42.7 67.2 77.8
7.0
3.2%
1.2% 1.1%
6.8%
5.0%
7.1%
8.1%9.1%
-
200
400
600
800
1,000
1,200
FY05Act
FY06Act
FY07Act
FY08Plan
FY09Plan
FY10Plan
FY11Plan
FY12Plan
inmillions
0%
1%
2%
3%
4%
5%
6%
7%
8%9%
10%
T ot al Re ve nu es EB ITDA EB ITDA - ma rg in
Section 1 - Executive Summary
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Transaction Services
Section 1.1
Business overview
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The Group consists of three shipyards operating in Merchant vessel segment (1/2)
4
Source: Management presentation; DR Ref. 16.7.2
Aker Yards WismarEinar Brnlund
Damen Shipyards
UkraineTorben Levinsen
Aker YardsWarnemnde
Einar Brnlund
SubsidiariesWarnow design
Aker Yards DesignUkraine
The GroupThe Group is a part of Merchant Vessel segment of AY
Group, one of the worlds largest shipbuilders and the
largest one in Europe.
In FY06, the Merchant Vessel segment delivered22 vessels, of which 13 were delivered by two Germanshipyards of the Group (FY05: 10). In FY07, 15 vesselswere delivered.
Main products of the Group consist of container vesselsand arctic vessels. The orderbook also includes RoRo/Ro-
pax vessels.
The Group will have approximately 5,000 employees.
AYG has state-of-the-art production facilities andhistorically concentrated on construction and fabrication ofsmall- and middle-class container vessels with capacitiesbetween 1,700TEU and 2,700TEU. AYG currentorderbook consists of 15 vessels (and one section) at a
total contract value of approximately 1.48bn.
1,302
560,000m340 x 67 x 13.4m
395 x 155 x 72mup to 1000tup to 300,000dwt
55,000t/p.a.
Employees:
Area:Building dock:
Dock shop:Crane capacity:
Building capacity:
Steel capacity:
986
850,000m320 x 54 x 10.7m
165 x 125 x 47mup to 700tup to 200,000dwt
55,000t/p.a.
2,675
1,300,000m365 x 40 x 14m
140 x 21m (Floating dock)2 x 320t-
20,000t/p.a.
General cargo MPV*Ro-pax
Arctic container vessel Container vesselChemical tanker
* Multi Purpose Vessels
For further details on production facilities and company history please see Appendix.
Aker Yards Germany Aker Yards Ukraine
Section 1.1 - Business overview
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The Group consists of three shipyards operating in Merchant vessel segment (2/2)
5Source: Management presentation; DR Ref. 16.7.2
Aker Yards WismarEinar Brnlund
Damen Shipyards
UkraineTorben Levinsen
Aker YardsWarnemnde
Einar Brnlund
SubsidiariesWarnow design
Aker Yards DesignUkraine
The GroupDSO produces complete vessels and hulls as well as
modules and sections. The construction is carried out at
two main producing lines.
Most of the sales are made to Damen Group and AYGroup entities. The only external client is the Ukrainianshipping firm Ukrrichflot. AYU orderbook consists of 5vessels and 10 sections with a contract value of 71m.
Warnow Design and Aker Yards Design Ukraine provideengineering and design services for the shipyards.
1,302
560,000m340 x 67 x 13.4m
395 x 155 x 72mup to 1000tup to 300,000dwt
55,000t/p.a.
Employees:
Area:Building dock:
Dock shop:Crane capacity:
Building capacity:
Steel capacity:
986
850,000m320 x 54 x 10.7m
165 x 125 x 47mup to 700tup to 200,000dwt
55,000t/p.a.
2,675
1,300,000m365 x 40 x 14m
140 x 21m (Floating dock)2 x 320t-
20,000t/p.a.
General cargo MPV*Ro-pax
Arctic container vessel Container vesselChemical tanker
Aker Yards Germany Aker Yards Ukraine
* Multi Purpose Vessels
For further details on production facilities and company history please see Appendix.
Section 1.1 - Business overview
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For the Purpose of the Transaction German Entities will be consolidated under AYUkraine Holding
6
Aker Yards Ukraine Holding AS (to be renamed)
Aker MTWWerft GmbH
Aker WarnemndeReal Estate GmbH
Aker WarnemndeOperations GmbH
Arctic Personal-dienstleistung
GmbH (49%)
Aker MTWGrundstcks-
verwaltung GmbH
Source: Management reports
Aker Yards Holding AS FLC West Holding S.a.r.l.
30% 70%
Warnow DesignGmbH
Aker Yards DesignUkraine BV
Okean BV
Aker Yards DesignUkraine CJSC
AY SC- 1 B V AY AC- 1 B V AY SC- 2 B V AY AC -2 BV
Damen Shipyards Okean OJSC
1 share
If not otherwise stated, the entities own 100% of the subsidiaries.
Formed only due to legal reasons
Currently, Aker MTW Werft in Wismar and Aker Warnemnde RealEstate, Rostock as well as Aker Warnemnde Operations belongto German division (AYG) of the Norwegian shipbuilding company
Aker Yards ASA, Oslo. For the purposes of the Transaction Aker
MTW and Warnow Design will be transferred to AY UkraineHolding.
The operational parts of AYG are Aker MTW Werft GmbH inWismar and Aker Warnemnde Operations GmbH inWarnemnde.
Plant and property for Aker MTW Werft, Wismar is held by Aker
MTW Grundstcksverwaltung GmbH.
In case of Aker Warnemnde Operations, Aker Warnemnde Real
Estate GmbH owns the assets, which are rented for over 25 years(to expire on 23 April 2009).
Arctic Personaldienstleistung GmbH provides fabrication personnelto the operative entities.
Aker Yards Ukraine Holding AS has established four legal entities
AY SC-1 BV, AY AC-1 BV, AY SC-2 BV and AY AC -2 BV for legalpurposes only. Each of the four entities holds one share of Damen
Shipyards Okean OJSC.
Aker Yards Design Ukraine performs engineering and design tasksfor DSO and other yards in the AY Group (AY Floro and AMTW).
During 2000 2006, DSO was owned bythe Dutch shipbuilding group Damen. In
the middle of 2006, 50.01% shares inOkean B.V. were acquired by AY Groupvia AY Ukraine Holding AS. Theremaining 49.99% stake in Okean B.V.,
was transferred to AY Group in February2008.
Section 1.1 - Business overview
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Transaction Services
Section 1.2
Key deal issues Financial
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Business Plan
8
Issue Commentary Analysis
The Business
Plan provided to
us appears very
optimistic,particularly
considering
historical
performance andhistorical
forecasting
accuracy
The latest Business Plan was provided on 6 February 2008. TheBusiness Plan does not contain detailed description of the assumptionsunderlying the projected results. High level assumptions were madeavailable in a presentation but could not always be linked to BusinessPlan. Combined EBITDA margin of 1.1% (Germany : 2.0%, Ukraine7.4%) in FY07 is projected to increase significantly to 9.1% (Germany:9.3%, Ukraine 8.3%) in FY12 (Hockey-stick effect).
Due diligence comfort regarding revenue projections can be obtained toa certain extent from existing contracts in the order backlog for theyears until FY10. However, we identified significant man hours and
material overruns in the past that may adversely impact achievability ofbudgeted profitability.
The strategy for the Group, as stated by management, is based onchanges in the product mix (i.e. production of more complex vesselswith higher margins). It should be noted that the Group does not have atrack record for building most of the new vessels types over last threeyears, though, according to the management the Group has principaltechnologies for construction of these vessels. In addition, the Groupwill need to establish the necessary customer relationships in theseareas. In order to build up and increase the client base and marketpresence, management has started marketing and sales initiatives,which have to be implemented and enhanced after acquisition of the
Group. Significant profits are expected in FY08 from the construction of the Ice-
class vessels from the current Orderbook (32.4m project result meanscontribution to EBIT). The main profit contribution is projected to resultfrom 5 RoPax vessels and 6 Ice-class vessels delivered FY09 onwards.
Management stated at the end of February 2008 that they are stilloptimistic to achieve the budget for FY08, however we have not beenprovided with any details to support the statement.
Source: Business Plan version 6.02.2008
Group Total Sale s : Booked vs. New Sale s
728 512
- -
330884 960 931
63
22
-
200
400
600
800
1,000
1,200
FY08
Plan
FY09
Plan
FY10
Plan
FY11
Plan
FY12
Plan
Orderbook Bear New Sales Bear
Group - EBITDA Margin Development
2.0%
9.3%
-6.0%
-7.9%-7.4%
-4.8%
-0.3%
7.7%
8.9%8.3%
3.2%
1.2% 1.1%
6.8%
5.0%
7.1%
8.1%
9.1%
2.1%
4.4%
6.9%
7.8%6.0%
8.0%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
FY05
Act
FY06
Act
FY07
Act
FY08
Plan
FY09
Plan
FY10
Plan
FY11
Plan
FY12
Plan
EBITDA-margin Germany EBITDA-margin EBITDA-margin Group
Group - Revenue by Country
457.0 532.67 09 .7 6 79 .7 717.9 756.4 7 48 .7 7 27 .1
56.555.8
76.6 75.4128.6
1 94 .2 2 14 .8 207.8
0
200
400
600
800
1000
1200
FY05
Act
FY06
Act
FY07
Act
FY08
Plan
FY09
Plan
FY10
Plan
FY11
Plan
FY12
Plan
Total Revenues Germany Total Revenues Ukraine
Section 1.2- Key deal issues Financial
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Sensitivity analysis Impact on earnings by changes in operating costs
Sensitivity
analysis
illustrates
significantimpact of
changes in direct
material and
fabrication costson EBITDA
The graph presented opposite demonstrates a high sensitivity of
EBITDA regarding market driven changes in direct material costs or
process driven overruns in fabrication costs. The combined effect on
earnings (market and process driven) is illustrated in the adjacent table.
For further information we refer to the detailed analysis in the report.
In order to illustrate these impacts on the underlying earnings we
calculated two scenario cases (market driven and process driven)
based on the assumptions for the deviation of the main operating cost
positions. The assumptions were derived from the historical budget
accuracy analysis AYG and applied to the combined Group numbers inour analysis.
Source: Business Plan version 6.02.2008, PwC Analysis
Issue Commentary Analysis
Sensitivity analysis - EBITDA comparison to mgmt. Case
in millions
FY08
Plan
FY09
Plan
Y10
Plan
FY11
Plan
Y12
Plan
EBITD Aa s p e r Busi ne ss Pl an (Mg mt.ca se ) 5 1 .0 4 2 .7 6 7 .2 7 7 .8 8 5.1Cash Flow approximation as per BP*
EBITDA - opti mi stic ca se 66 .3 60 .0 8 6.6 97 .3 103 .4
EB ITDA c ha ng e t o mg mt . c as e 3 0. 0% 4 0. 4% 2 8. 8% 2 5 .0 % 2 1. 6%
EBITDA - pes sim is tic cas e 33 .1 22 .8 4 4.3 54 .4 64.0
EB ITDA c ha ng e t o mg mt . c as e -35 .1 % -46 .7 % -3 4. 2% -30 .2 % -2 4. 8%
Sensitivity EBITDA - comparison to mgmt.case
-
20.0
40.0
60.0
80.0
100.0
120.0
FY08
Plan
FY09
Plan
FY10
Plan
FY11
Plan
FY12
Plan
inmillions
EBITDA - Management case EBITDA - Opimistic case EBITDA - Pessimistic case
9
Section 1.2- Key deal issues Financial
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EBITDA Bridge FY06 - FY07 (reported)
14.2(9.6)(21.0)
(143.7)
20.9156.2
11.4
020406080
100120140160180200
FY06
sales
revenues
other
revenues
Direct
material
andother
costs
Fabriaction
anddesign
costs
Overheads
FY07
inmillions
EBITDA Bridge FY05-FY06 (reported)
11.4
(17.1)
(16.2)
(50.9)75.6
20.0
0
20
40
60
80
100
120
FY 05 To talrevenues
DirectMaterial andother costs
Fabricationand Design
costs
Overheads FY06
inmillions
Historical trading Germany
10
Issue Commentary Analysis
The historical
profitability in
Germany has
been rather low
The historical profitability in Germany has been rather low, reflectingthe low margins earned mainly on container vessels (38 containervessels were delivered between FY05 and FY07).
Even though the increase in revenues from FY05 to FY07 has beensignificant (+55%), the reported EBITDA decreased from 20m in FY05to 14.2m in FY07, which is mainly caused by strong increase of directmaterial and other direct costs (FY05 63.3%, FY07 70.2% of salesrevenues).
We understand from the management comments that the decrease ofthe profitability was partly due to a general situation in shipbuilding
industry affected by fast rising steel and equipment prices.
FY06 was mainly influenced by the growth of sales revenues of 16.5%to 532m. Major cost components increased proportionally with theexception of overhead cost. These costs were mainly affected by therecognition of provisions for the early retirement scheme (11.3m,considered a one-off-item).
In FY07, the Business Plan shows sales revenues from projects of689m. However, total operating costs (without depreciation) of 696mexceeded project revenues. This is mainly due to the increase inmaterial and fabrication costs for the container vessels CS1700 andCS2100 as a result of design errors by design divisions. Other
revenues of21m allowed AYG to achieve positive EBITDA of 14m.
Source: Business Plan version 6.02.2008, PwC Analysis
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Historical trading Ukraine
11
Issue Commentary Analysis
Historical trading
Ukraine
Based on information provided in the dataroom, it was not possible tounderstand the actual profitability of the Ukrainian shipyard mainlybecause most of the projects are inter-company. The majority of suchprojects were loss-making, while as represented by management ofDSO, the prices fixed for such projects are on arms length principle.
We requested, but were not provided with the figures representingprofit generated by AY Group outside Ukraine that relate to Ukrainiancontracts.
In addition, all projects carried out for Ukrrichflot, the onlyexternalcustomer of DSO, during FY05-FY07 were unprofitable (with negative
EBIT).
In FY07, DSO increased considerably the sales as new orders from AYGroup were received.
However, the EBITDA is still negative due to increased overheads (oneof the major components reinvoiced AY Group charges increasedby 2.4m).
Source: Business Plan version 6.02.2008, PwC Analysis
EBITDA Bridge FY05-06 (reported )
(4.2)
2
(4.7)
(2.1)
4.4
(0.7)(3.1)
-8
-6
-4
-2
0
2
F Y0 5 T ot al s al es D i re ct
materials
Fabrication
anddesign
costs
Other
project
costs
Overheads FY06
inmillions
EBITDA Bridge FY05-06 (reported )
(4.2)
2
(4.7)
(2.1)
4.4
(0.7)(3.1)
-8
-6
-4
-2
0
2
F Y0 5 T ot al s al es D i re ct
materials
Fabrication
anddesign
costs
Other
project
costs
Overheads FY06
inmillions
EBITDA Bridge FY06-FY07 (reported)
(5.3)(7.8)(4.2)
3.8
(3.5)(14.4)
20.8
-10
-5
0
5
10
15
20
F Y 0 6 T ot a l s al es D ir ec t
materials
Fabrication
and design
costs
Other
project
costs
Ov er heads FY07
inmillions
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Quality of earnings
12
Issue Commentary Analysis
Quality of
earnings: FY07
combined
EBITDA for non-recurring items
was 5.7m lower
than reported
Germany
Management of AYG provided us with certain one-off and non-operating items for FY05-FY07. We concur with proposed adjustmentsby management. As a result, reported EBITDA has been adjusted asfollows:
Reported EBITDA in FY05 and FY07 has been adjusteddownwards due to income considered to be one-off or non-operating by management. This income mainly relates to thereversal of accruals and allowances.
Reported EBITDA in FY06 has been negatively affected mainlyby the recognition of a provision for early retirement.
Ukraine
Reported EBITDA was adjusted for one-off and non-recurring itemsresult in lower EBITDA. As mentioned earlier, there is a potentialupside, should EBITDA be adjusted for profits generated outsideUkraine.
Source: DR Ref. 17.11.3.1, 17.11.3.2, 17.11.3.3, 3.1.2.2.1-3; 32.72, 68.1223,PwC Analysis
Qualityof Earnings
in millions
FY05
Act
FY06
Act
FY07
ct
AYG
EBITDA as re orted 0.0 11.4 14.2To ta l m an ag em en t a dj us tm en ts ( 3.0 ) 8 .8 ( 5.0 )
Adjusted EBITDA 17.0 0.2 .2
% of Sales
EBITDA 4.4% 2.1% 2.0%
Adjusted EBITDA 3.7% 3.8% 1.3%
AYU
EBITDA as reported (3.1) (4.2) (5.3)
To ta l m an ag em en t ad ju stm en ts - (3 .7 ) (0 .7 )
Adjusted EBITDA (3.1) (7.9) (6.0)
% of Sales
EBITDA -5.4% -7.2% -7.1%
Adjusted EBITDA -5.4% -13.5% -8.0%
Group
EBITDA Group 16.9 7.2 8.9
To ta l m an ag em en t a dj us tm en ts ( 3.0 ) 5 .1 ( 5.7 )
Adjusted EBITDA 13.9 12.3 3.2
% of Sales
EBITDA 3.3% 1.2% 1.1%
Adjusted EBITDA 2.7% 2.1% 0.4%
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Historical forecasting accuracy
13
Issue Commentary Analysis
The Group
historical
budgeting has
been inaccurate
The historical budgeting appears to be inaccurate, largely as a result offailure to predict and/or hedge against changes of steel and equipmentprices and frequent underestimation of fabrication cost/time, and theactual results in FY05-FY07 (adjusted as detailed on previous page)were significantly below the budget with an exception of AYG in FY05.The outperformance of the budget in FY05 for AYG by 19.2% is partlyattributable to one-off and non-operating items of 3.0m.
In FY06 and FY07, the budgets for AYG have been clearly missed. Theactual and especially the adjusted EBITDA for FY07 are significantlybelow the budget. We suppose that historical inaccuracy may impact
achievability of AYGs projections going forward. The remaining deviation between adjusted and budgeted results of
AYG is mainly caused by over recovery of costs in FY05 (3.6m) andunder recovery of costs in FY06 (-7.4m) and FY07 (-11.8m). In FY07the budget overrun mainly related to CS 2100 vessels (8m) affectedEBITDA negatively. AYGs management stated that additional cross-checking methodologies have been introduced in the design process.
AYU management did not provide us with detailed explanations ofvariations but major factors impacting underperformance in FY07 were:
increase of raw materials costs exceeded the growth ofrevenues,
salaries costs have increased significantly as result of salariesrises.
AY Group costs were recharged to DSO in full.
Source: DR, PwC Analysis
Source: DR Ref. 31.35 - 31.36, 68.1222 (replaces 31.37); 31.35- 31.36, 68.1222,
Business Plan version 6.02.208, PwC Analysis
EBITDA AYG - Past Budgeting Accuracy
in millions FY05 FY06 FY07
ctual 20.0 11.4 14.2
Adjusted EBITDA 17.0 20.2 9.2
Budget 13.7 26.7 31.6
Variance 3.3 (6.5) (22.4)
in % of adjusted EBITDA
Variance 19.2% -32.0% -242.9%
EBITDA - Past Budgeting Accuracy
in millions FY05 FY06 FY07
Actual (3.1) (4.2) (5.3)
Adjusted EBITDA (3.1) (7.9) (6.1)Budget 1.0 4.8 7.0Variance (4.1) (12.7) (13.1)
in % of adjusted EBITDA
Variance 131% 161% 215%
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AYG orderbook and profitability of individual vessel types
Project Results (based on Project ReportsFY05-FY07)
-10%
-5%
0%
5%
10%
15%
C S1 70 0 C S2 10 0 C S2 50 0 C S2 70 0 C S28 00 C S65 0 R oP ax
with subsidies without subsidies
Issue Commentary Analysis
Orderbook AYG
contains 15
vessels with a
contract value of1,482m as at 31
December 2007
The current AYG orderbook contains contract values of1,482m as at31 December 2007. Container vessels still show the highest share ofthe current order backlog (719m).
In FY07, 15 ships were delivered (contract volume 584m) and onecontract for 6 CS2800 container vessels (contract volume 257m) wasacquired. Financing for 4 of these vessels ( 150m) has not beensecured by the customer as of the end of February 2008.
The current orderbook contains vessels that will be delivered by Q1FY10. The projected revenues (fabrication capacities) are covered bythe current orderbook - 96% (99%) for FY08, 61% (67%) for FY09 and
7% (6%) for FY10. In addition we were informed by management thaton 20 February 2008, a contract for 2 Arctic Line vessels with Royal
Arctic Line, with a contract volume of82m was signed. The tenderwas included in the project hotlist and therefore is reflected in BusinessPlan.
Profitability of
individual vesseltypes
Container vessels, the main source of revenue in the periods underreview, generally generated low or negative project margins (i.e.between +3.3% for CS2700 (26 vessels) and -5.6% for CS2100 (5vessels)).
According to management, negative results for CS2100 vessels weremainly caused by steel weight overruns and a significantly higher
number of building pieces with higher fabrication costs. For some vessels, competition-aid subsidies had been granted until
Q1FY05 (Last payments will be received in FY08). Project resultswithout these subsidies would convert to negative figures for CS2500and CS2700. However, management stated that the customers wereaware of these subsidies and, therefore considered them in pricenegotiations.
The contracted RoPax and CS650 vessels show higher contractvolumes and profitabilities and mark the change in product mix.
rder backlog asa t Dec 31, 2007 -
Contract values (1,482 M)
48.5%
27.7%
22.4%
1.3%
Container ships RoPax Ice-class Hulls/ ships's sections
number of ships analysed
14 5 6 26 64 2
Source: Project Calculations, PwC Analysis
Source: DR Ref. 3.1.2.2.1-3, Business Plan version 6.02.2008
14
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YG: Project Hotlist as at Dec 31, 2007 -by vessel types
12%
16%
7%
18%
32%
15%
Container Arct ic line RoPax RoRo Gas Special
Totala pprox.value = 2,189 M
Potential projects under negotiation (project hotlist)
15
Current AYG
project hotlist
shows a volume
of2,189m as atJanuary 2008
RoRo, Arctic Line and Special vessels contribute 81% to the total
volume of2,189m. According to management, approximately 26% of
the hotlist projects are considered to be Priority 1 (564m) and are
expected to be contracted in the near future.
AYG project hotlist reflects its effort to enter into new market segments.
Container vessel comprise only some 12% of the total hotlist volume
but are not in the focus.
Source: Business Plan version 6.02.2008, PwC Analysis
Issue Commentary Analysis
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Standalone issues
16
Standalone
issues are not
clearly identified
As a part of larger AY Group the Groups entities received somesupport from headquarters and other companies of AY Group.
We were provided with current Management Services Agreements anda schedule summarising the effects on earnings, had the Groupoperated on a standalone basis for historical and future periods (FY08-FY10). For AYU, we were only provided with historical information forFY05-07. Additionally management submitted shortly before finalisingour report a detailed table of current group charges FY07 and a non-quantified opinion on the future development of these cost positions.However, we were not able to reconcile the total amount to the
information for the group charges provided for AYG and AYU in thedataroom (unreconciled difference of0.4m).
From our discussions with the local management of the Group weunderstand that they are actually not aware of the reason for thereconciling differences to the information in the dataroom.
In addition, management stated that other intercompany relationshipswith AY Group might exist that are not documented and therefore,current management may not be aware of them. According tomanagement associated costs should not be material.
Besides the Management services Agreement, the guaranteesprovided by the AY Group have to be replaced in the future.
We recommend to include a provision in thefinal SPA to limit additional costs that mayoccur after transaction and to disclose a fulllist of related parties to the Group andamounts involved for FY06 and FY07 as aseparate schedule to the SPA. We furtherrecommend to require the Vendors to makerespective representations in relation to thecompleteness of this information.
tand alone - Group charges
1.6
2.12.4
2.72.5
0.3 0.4
2.8 2.8
-
0.5
1.0
1.5
2.0
2.5
3.0
FY05
Act
FY06
Act
FY07
Act
FY08
Plan
FY09
Plan
FY10
Plan
inmillions
Germany Ukraine
Source: DR Ref. 46.505, 24.4.2, Question Log FDD No. 85, PwC Analysis
Issue Commentary Analysis
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Net debt definition
17
Issue Commentary Analysis
Net debt
definition Based on Net Debt definition included in the latest draft SPA net debt
totalled16.2m as at 31 December 2007, resulting in a purchase price
adjustment of11.3m. However, the Vendors calculation does not
include provisions for early retirement of17.4m and for jubilee 1.0m
that are recorded in the Vendors financial statements and represent
actual future cash outflows similar to debt. We think that these amounts
should be included in the net debt calculation, thereby increasing net
debt balance as at 31 December 2007 by 18.4m and the respective
component of price adjustment by 12.9m.
In addition, in the latest draft SPA, the Vendors proposed to convertinter-company loans of Aker Yards Ukraine Holding totalling ca. (
63.4m) into equity (price adjustment impact of44.3m). While the net
impact of this transaction is neutral, it may affect timing of cash flows
and financing arrangements. We understand that legal aspects of those
transactions are addressed in the course of your legal due diligence.
Source: SPA Schedule 12A.
Net debt - Group
in millions 1. Dec FY07
Germany
Cash and Cash equivalents 98.1
Interes t -bearing short-term debt (32.9)
Provisions for pensions (0.3)
Net debt reported 64.8
Ukraine
Cash and Cash equivalents 3.5
Loan payable to AY Group (41.5)
Loan payables to Damen Shipyards Cargo Vessel B.V. (0.4)
Long-term debt to Damen Group (20.0)
I nte re st- be ar in g s ho rt -te rm d eb t, i n te rn al ( 18 .0 )Interest accured to AY Group (1.8)
Provisions for pensions (2.8)
Net debt reported (81.0)
Total reported Net debt (16.2)
Adjustments:
Non current provisions (18.4)
Total adjusted Net debt (34.6)
Price adjustment (at 70%) (24.2)
Conversion of debt (at 70%) 44.3
Price Adjustment 20.1
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Working capital definition
18
Issue Commentary Analysis
Working capital
definition
Management did not provide us with the definition of working capitalother than current asset less current liabilities and with respectiveassumptions on benchmarking that are used for budgeting/control overworking capital.
For the purposes of SPA, price adjustments for the following definitionare currently being discussed with the Vendors: Net Working Capital isdefined as current assets excluding Cash less current liabilitiesexcluding Indebtedness, as exemplified in SPA Schedule 12A. Currentassets and current liabilities are classified according to IAS 1.57 and1.60. For the classification the following principles are emphasized:
realizing in the entitys normal operating cycle
held for trading
expected realization within 12 months*
In addition, we suggest VAT balance relating to Ukrainian operations beexcluded from working capital definition. The reason for the exclusionof this balance is that DSO currently cannot recover VAT in the normalcourse of operations due to on-going tax disputes and audits, whichresulted in significant balance accumulated as of 31 December 2007 of9.7m (net of provision of1.1m).
Management cannot estimate when this balance may be repaid while in
January-February FY08 around 1m of this balance was received fromUkrainian budget (and another1m became recoverable). Weunderstand that a specific warranty in relation to recoverability of thisbalance is included in the draft SPA.
Source: SPA Schedule 12A.
*excluding assets relating to fixed assets,
capital expenditure and investments, to theextent such fixed assets, capital expenditureor investments presented in the BalanceSheet as of 31 December 2007
Source: SPA 28.02.2008
Working Capital- Group
in millions 1. Dec FY07
GermanyTotal interest free short-term receivables,extern 218.6
Total interest free short-term receivables,internal 1.3
Interest-bearing short-term receivables, external 1.0
Total interest-free current l iabilities, external (252.7)
T otal i nteres t- free c urre nt l ia bi li ti es , i nterna l (4.1)
Net working capital Germany (35.9)
Ukraine
Total interest free short-term receivables,extern 49.3
Total interest free short-term receivables,internal 5.3
Interes t-be arin g s ho rt-term rec ei va bl es , e xterna l -
T otal i nteres t- free c urre nt l ia bi li ti es , e xterna l (35 .4 )T otal i nteres t- free c urre nt l ia bi li ti es , i nterna l (5.9)
Interest payable (Ukraine) (1.8)
Net working capital Ukraine 11.4
Total Net Working Capital (24.5)
Adjustments (at 70%):
Price Adjustment (17.1)
Total price adjustment (17.1)
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Subsequent events not included in the Business Plan and significant difference betweencash flow approximation and Vendors valuation
19
Issue Commentary Analysis
Subsequent
events which arenot included inthe Business
Plan
Before finalising this report, management of AYG informed us that in
early FY08 7 FTEs involved in specific LNG R&D activities of AYG willbe transferred to a German subsidiary of AY Technology AS, Oslo.Management also stated that the LNG technology under considerationwill most probably not be used by AYG in future and that other LNGtechnology and will be used for the ships included in the Business Plan(see comment opposite).
We understand this matter has been covered by
the LNG Technology Cooperation Agreemententered into by Aker Yards Technology AS andFLC West Holding S.a.r.l. The Agreement grantsto FLC West Holding S.a.r.l. the exclusivity inrespect of CIS countries.
Difference
between cash
flowapproximation
and Vendorsvaluation
Business Plan presented in the dataroom does not include cash flowforecast. Shortly before finalising our report, management provided uswith their updated cash flow approximation. The calculation wasproduced using EBITDA taken from Business Plan, revised capexprojections provided by management and taxes calculated by applying aGerman tax rate of 30% and Ukrainian tax rate of 25% to forecast EBTas per Business Plan.
For the purpose of the cash flow approximation management assumed a
working capital level of35m for the Group, which changes in line withthe revenue projections. This definition of working capital definition isdifferent to working capital stated in the respective SPA Schedule 12and information could not reconcile to historical data provided in thedataroom. Management stated that the assumed working capital for thecash flow projection is more representative expression of the WCamount that the Group needs in the ordinary course of business. Theresulting cash flow estimates are considerably lower than the initialvaluation presented by the Vendor during the discussions of the Termsheet that may result in decrease of the purchase price in the SPA.
Source: Business Plan version 6.02.2008, PwC Analysis
Group Combined Cash Flow Approximation
inm illions
Y07
ct
FY08
Plan
Y09
Plan
Y10
Plan
FY11
Plan
Y12
Plan
EBITDA Com bined 8.5 51.0 42.7 67.2 77.8 85.1
- C ap i ta l Exp en di tu re s (19 .6 ) (16 .7 ) (13 .4 ) (13 .0 ) (13 .0 ) (13 .0 )+/ - Wo rk in g C ap ita l c ha ng e - 1 .3 ( 5. 1) ( 5.9 ) (1 .0 ) 1 .4- Tax (2.2) (14.1) (10.6) (16.3) (19.3) (21.5)
CF approxima tion (13.3 ) 2 1.6 13 .6 3 2.1 44 .6 51.9
CF as pe r ven dor va lua ti on 2 8.1 20 .3 3 7.4 5 0.0 5 6. 2
Variance (6.5) (6.7) (5.3) (5.4) (4.3)
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Recoverability of input VAT, Konverse-invest claim, contingent liability and possibledispute in respect of the plot of land
20
Konverse-invest
claim
There is an old dispute involving a promissory note issued by DSO. We
understand that this dispute was settled, as provided by the settlementagreement between Damen Group and AY Group on 26 February 2008(see details in Section 2.7).
We recommend you to analyse this issue in the
course of your legal due diligence. We alsorecommend you to include in SPA specific
warranty in relation to this dispute.
Possible disputein respect of the
plot of land
According to information provided in the dataroom, there is possibility ofa dispute with Nikolaev city municipality regarding the plot of landacquired from the municipality in 2005. No documents have beenprovided in the dataroom in relation to this matter.
We understand that this issue has been
addressed in the course of your legal due
diligence. We also recommend to include
respective warranties and representations in the
SPA.
Recoverability of
input VAT
As of 31 December 2007 DSO has accumulated the VAT receivablebalance of10.8m. We understand that since 3Q07 DSO hasexperienced significant difficulties with recovery of VAT from Ukrainianbudget. We were informed by management that in FY08 DSO receivedfrom tax authorities around 1.0m. Management cannot estimate whenDSO will be able to recover the remaining amount.
We understand that a specific warranty in
relation to recoverability of this balance is
included in SPA.
Issue Commentary Recommendation
Contingent
liabilities
AYG has taken over surety for a couple of loans of Lubmin with a totalnominal amount of 17.0m.
We understand that specific warranties inrespect of sureties provided to third parties areincluded in the draft SPA.
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Transaction Services
Section 1.3
Key deal issues Tax
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Summary of Key tax issues (1 of 2)
22
in millions
Country ssue escription igh edium Low PA/deal recommendation
Ukraine
VAT recovery VAT receivable in the amount of EUR 10,522K may not be fully recoverable by DSOduring the next 12 months
- 10. 5 - C orres ponding w arrant y f or 90% of t he out st andingamount is provided in the current SPA draft
Potential withdrawal of tax privilegeavailable for shipbuilding companies
DSO may lose its right for the tax privilege available for Ukrainian shipbuilding entities n/a n/a n/a
Deduction of engineering and designexpenses
Deduction of engineering and design expenses and recovery of the respective input VATmay be challenged due to the lack of documentary support
- 0.1 - I f c onsidered mat erial, c onsider ask ing f or s peci fic t axindemnity; alternatively you should seek ways tomitigate the risk (eg getting additional documentation
from AYDU) post signing/closing
In case DSO is not able to prove that methodology applied did not lead to underestimationof CPT, additional CPT liabilities may b e assessed
- 1.4 8.2 C orres ponding w arrant y is inc luded int o t he c urrentSPA draft
Econically unjustified expenses Deduction of expenses incurred by DSO under loss-making contracts and recovery of therespective input VAT may be challenged as economically unjustified
- - 81. 8 C orres ponding w arrant y is inc luded int o t he c urrentSPA draft
Transfer pricing Application of transfer pricing rules to intra group transactions may trigger additional CPTand VAT obligations for DSO and AYDU
1) 1) 1) Corresponding warranty is included into the currentSPA draft
Subtotal - 12.0 90.1
Germany
Tax losses AMTW had significant tax losses as of the end of FY07, which are expected to be lost incase of change of ownership
n/a n/a n/a
Tax grouping Due to failure to observe formal legislation requirements the tax authorities could
challenge tax grouping
3.0 - - C orres ponding w arrant y is inc luded int o t he c urrent
SPA draft
Witholding tax in respect of royaltypayments
Additional withholding tax may be assessed due to failure to withhold taxes from royaltypayments in 2007
0.2 - - I f c onsidered mat erial, c onsider ask ing s peci fic t axindemnity
Improper tax treatment of interestincome
Improper tax treatment of interest income may entail additional tax assessments - 2) - If considered material, consider asking specific taxindemnity
Transfer pricing Prices charged under cross border intra-group transactions could be subject to transferpricing scrutiny
1) 1) 1)
Subtotal 3.2 - -
Netherlands
Deduction of interest expenses Interest expenses deducted by Okean BV in respect of a loan from Aker Yard Holding AScould be challenged based on the Dutch anti-base erosion rules
0.3 - - I f c onsidered mat erial, c onsider ask ing s peci fic t axindemnity
Revaluation of receivable from DSO Revaluation of the receivable from DSO (currently valued at zero) may entail adverse taxconsequences for Okean BV
2) 2) 2)
Corresponding warranty is included into the currentSPA draft
Subtotal 0.3 - -
Norway
Tax residency of Dutch subsidiariesin Norway
Dutch subsidiaries may be viewed as creating tax residency in Norway and, thus, besubject to taxation in Norway
2) 2) 2) If considered material, consider asking specific taxindemnity; additional effort to ensure proper tax
residency of Group companies post signing/closing isrequired
Subtotal - - -
TOTAL 3.5 12.0 90.1
Tax risk summary for FY05 - FY07
1)A detailed transfer pricing analysis / benchmarking study is required in order to quantify and assess this risk
Tax risks
Tax risks
(continued on the next page)
Tax risks
Tax risks
)Additional analysis is required to quantify and assess this risk
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Summary of Key tax issues (2 of 2)
23
(continued from the previous page)
Country Issue Description SPA/deal recommendation
Netherlands
Application of tax treaty
benefits may be
challenged
Application of the tax treaty bene fits b etween the N etherla nds and
Norwayand between the Netherlands and Ukraine may be challenged
by Norwegian and Ukrainian tax authorities
Additional effort to e ns ure prope r tax
residencyof Group companies post
signing/closing is required
Transparency of Ukrainian
subidiaries for Dutch taxpurposes
Ukrainian subsidiaries of Aker Yards Ukraine Holding AS could be
subje ct to taxation in the Netherlands b ased on the transparen cy rules
Verify that AYDU and DSO do not qualify
as partnership for Dutch tax purpose
Potential asses sment of
VAT liabilities
Additional VAT lia bilitie s may potentia lly be as se ss ed on the a mo unt o f
income received from the sale of vess els by Okean BV
Corresponding warranty is included into
the current SPAdraft
Norway
oint liability for taxrisks of
a VAT group
Aker Yards Ukrain e Ho ldin g AS cou ld potentia lly be h eld liabl e for VAT
risks of other Norvegian companies due to its registration as a part of
the VAT group
Corresponding warranty is included into
the current SPAdraft
1) Additional information is required to quantifya nd ass ess these risk areas
Other potential tax risk areas1)
Section 1.3- Key deal issues Tax
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Key deal issues Taxation (1 of 9)
24
Issue Commentary Conclusion / Recommendation
Tax issue
Ukraine
Recoverability ofVAT receivable
As of the end of FY07 DSO reported VAT receivable of
10.5m, which may not be fully recoverable from the budgetwithin the next 12 months.
Corresponding warranty for 90% of the
outstanding amount is provided in thecurrent SPA draft.
Tax issue
Ukraine
Potentialwithdrawal of taxprivileges for
shipbuilding
companies from
DSO
Potentially, there is a risk that DSOs may lose its right to enjoy
tax privilege (allowing to defer taxation of advance paymentsreceived under the ship building contracts, while postponing
deduction of respective expenses until the acts acceptance inrespect of ships are signed) on the basis that it was in a loss-
making position for more than 3 quarters.
Additionally, challenge by the tax authorities of methodologyapplied by DSO may cause tax risks in respect of past periods(please see below).
Tax issue
UkraineDeduction of
expensesincurred by DSO
under loss-
making
contracts
Deduction of expenses incurred by DSO under loss-making
contracts and recovery of the respective input VAT may bechallenged as economically unjustified. The estimated riskamount is 81.8m. We assess the risk as low.
Corresponding warranty is included into the
current SPA draft
Section 1.3- Key deal issues Tax
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Key deal issues Taxation (2 of 9)
25
Issue Commentary Conclusion / Recommendation
Tax issue
Ukraine
Improper
methodology oftax base
calculation
(DSO)
In its tax returns for FY05-FY07 DSO included in the taxable base
all expenses incurred in respective periods, while the amount ofexpenses, related to contracts under which advances weredeferred, were added back to tax base above the line asincrease of WIP (rather than reducing expenses). This
methodology may be interpreted as not being fully in line with therules prescribed in legislation, although if properly applied, isunlikely to lead to underestimation of the tax base.
According to management, methodology, applied by DSO, shouldnot result in underestimation of CPT. However, we cannot
exclude that the tax authorities may challenge its application and,
in case DSO will not be able to prove that the reflection ofrespective expenses in its tax returns did not result in reduction ofthe taxable base, the additional CPT liabilities may be assessed.
The level of the risk is assessed as medium in the amount of1.4m for general and administrative expenses not allocated to
WIP and low in the amount of8.2m for expenses allocated toWIP.
Corresponding warranty is included into the
current SPA draft
Tax issue
Ukraine
(continued)
Deduction of
engineering and
design expenses
/ VAT recovery
Deduction of engineering and design expenses and recovery ofthe respective input VAT may be challenged due to the lack ofdocumentary support. We estimate the risk as 0.1m. We assessthis risk as medium.
If considered material, consider asking forspecific tax indemnity; alternatively youshould seek ways to mitigate the risk (e.g.getting additional documentation from
AYDU) post signing/closing
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Key deal issues Taxation (3 of 9)
26
Issue Commentary Conclusion / Recommendation
Tax issue
Ukraine
(continued)
Transfer-pricing
issue
Should the tax authorities check the prices applied between DSO/ AYDU and the Groups companies (especially, noting that DSOand AYDU were in a loss making positions) and conclude they
are not at the arms length level, they may adjust tax base of DSOand AYDU based on relevant fair market prices. A special transferpricing analysis / benchmarking study is required to quantify andassess this risk.
Corresponding warranty is included into the
current SPA draft
Tax issue
Germany
Tax groupingbetween AMTWand its
subsidiaries
AWO, AWRE and
AMTWG may bechallenged
Tax grouping between AMTW and its subsidiaries AWO, AWRE
and AMTWG may be challenged by the tax authorities due tofailure to observe formal legislation requirements. As such,
additional corporation and trade tax liabilities in total amount of3.0m may be assessed. The risk is high.
Corresponding warranty is included into the
current SPA draft
Tax issue
Germany
Tax losses
available forcarry forward at
AMTW are to be
lost
Corporation and trade tax losses (in the amounts of36.9m and
38.8m respectively) available for carry forward at AMTW as ofthe end of FY07 are to be lost due to change in the direct orindirect shareholder.
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Key deal issues Taxation (4 of 9)
27
Issue Commentary Conclusion / Recommendation
Tax issue
Germany
Improper tax
treatment ofinterest income
Improper tax treatment of interest income may entail additional
tax assessments. We have no information to quantify the amountat risk. The risk is assessed as medium.
If considered material, consider asking
specific tax indemnity
Tax issue
Germany
Additional
liabilities may be
assessed due toapplication of
transfer pricing
rules
German tax authorities can scrutinize prices charged by/to
German companies on intra-group transactions and, in case the
conclude that these prices are not at arms length, they mayadjust prices applying transfer pricing rules and assess additionalcorporation tax, trade tax and dividend withholding tax liabilities.
A special transfer pricing analysis and benchmarking study isrequired to quantify and assess this risk.
Tax issue
Germany
Withholding tax
in respect of
royalty payments
Additional withholding tax and solidarity charge obligations in theamount of0.2m may be assessed due to failure to withholdtaxes from royalty payments in FY07. We assess the risk ashigh.
If considered material, consider askingspecific tax indemnity
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Key deal issues Taxation (5 of 9)
28
Issue Commentary Conclusion / Recommendation
Tax issue
Netherlands
Corporate profits
tax obligations
may potentiallyarise from the
application of
anti base erosionrules
Okean BV has taken up a loan of6.4m from Aker Yards Holding
AS to grant a loan to Damen Shipyards Okean OJSC. No interestwas charged by Okean BV, while interest expenses werededucted in full.
The tax authorities may take the position that the loan to DamenShipyards Okean OJSC should be considered as effectively
financing loss and should therefore be re-qualified as (informal)equity, since the Ukraine company is not a profitable position. Asa result, the interest expenses on the loan payable to Aker YardsHolding AS should not be deductible based on the anti-base
erosion rules.
We estimate the exposure to be 0.3m. The risk is assessed as
high.
If considered material, consider asking
specific tax indemnity
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Key deal issues Taxation (6 of 9)
29
Issue Commentary Conclusion / Recommendation
Tax issue
Netherlands
(continued)
Corporate profits
tax liabilitiesmay potentially
be assessed if
the amount ofreceivable is
more than zero
Okean BV has acquired its interest in DSO from a third party.
Upon the acquisition, the vendor had a receivable from DSO inthe amount of26.0m. This receivable was assigned to OkeanBV for free (as DSO was a loss-making entity, this receivable wasdeemed to have zero fair value at the moment of sale). Thus,
Okean posted zero in its books as initial value of this receivable.Respectively, Okean BV does not charge any interest to DSO inrespect of this outstanding debt.
For Dutch tax purposes, Okean BV is required to report its loanreceivable at the lower of nominal value and market value on an
annual basis. Okean BV should be able to demonstrate that themarket value of the receivable is nil.
If Okean BV cannot demonstrate this, the Dutch tax authoritiesmay take the position that the receivable should be revalued at ahigher amount (the nominal value of26.0m at the most) and forwhich additional taxable income should be recognized by Okean
BV. Additionally, Okean BV would be required to report an armslength interest to DSO in respect of this debt. Additional analysisis required to determine the fair market value of the loanreceivable and whether this will entail adverse tax consequences
for the companies.
Corresponding warranty is included into the
current SPA draft
4
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Key deal issues Taxation (7 of 9)
30
Issue Commentary Conclusion / Recommendation
Tax issue
Netherlands
(continued)
Potential non-application of
the double tax
treaty
According to management, Aker Yard Design BV, Okean BV,
Damen Okean SC-1 BV and Damen Okean SC-2 BV aremanaged by individuals who live outside of the Netherlands. Fortax treaty purposes, companies should be effectively managedand controlled in the Netherlands in order to qualify as a Dutch
tax resident. Even though the Dutch tax authorities wouldconsider these companies to be tax residents, there potentiallycould be the risk that the foreign tax authorities (e.g. Ukraine andNorway) could take the position that Aker Yard Design BV, Okean
BV, Damen Okean SC-1 BV, Damen Okean SC-2 BV are not
effectively managed and controlled in the Netherlands andtherefore the relevant tax treaty with the Netherlands should notapply. Additional information is necessary to determine whether
the companies used any double tax treaty benefits which may bechallenged by the tax authorities in this basis.
Additional effort to ensure proper tax
residency of Group companies postsigning/closing is required
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Key deal issues Taxation (8 of 9)
31
Issue Commentary Conclusion / Recommendation
Tax issue
Netherlands
(continued)
VAT maypotentially be
assessed on the
amount of
income receivedfrom the sale of
vessels
Okean BV purchased a vessel produced by Shipyards Okean
OJSC and subsequently sold it to a third party. We are not awareas to whether Okean BV charged output VAT on the amount ofincome received from the sale of this vessel. We are not awarewhere the factual supply of the vessel took place, to whom and
whether the above mentioned vessel was dispatched to or fromthe Netherlands. In case the vessel was dispatched from theNetherlands, the tax authorities may assess Okean BV withadditional VAT obligations. Additional information is necessary to
determine whether this risk actually exists.
Corresponding warranty is included into the
current SPA draft
Tax issue
Netherlands
Transparency ofUkrainian
subsidiaries for
Dutch tax
purposes
For Dutch corporate income tax purposes, foreign companies are
considered as an entity (opaque) or a partnership (transparent),provided certain conditions apply. In case AYDU and DSO qualifyas a partnership, their income/loss would be included in the Dutchtax base creating additional taxable income / loss. Additional
analysis is required to determine whether this risk actually exists.
Verify that AYDU and DSO do not qualify as
partnership for Dutch tax purpose
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Key deal issues Taxation (9 of 9)
32
Issue Commentary Conclusion / Recommendation
Tax issue
Norway
Joint liability fortax risks of a
VAT group
We understand that Aker Yards Ukraine Holding AS is registered
as a part of a VAT group with other Norwegian companies of thegroup.
According to Norwegian law, the participants of the VAT groupmay be held jointly liable for VAT obligations. Thus, in case other
participants have unsettled VAT liabilities, Aker Yards UkraineHolding AS may be held liable for such liabilities.
A detailed analysis of other companies of VAT group is necessary
to determine whether such risk can actually materialize.
Corresponding warranty is included into the
current SPA draft
Tax issue
Norway
Creation of
permanent
establishment byDutch
companies in
Norway
We understand that Okean BV, Damen Okean SC-1 BV and
Damen Okean SC-2 BV are being managed by Norwegianindividuals and thus could be deemed as tax residents in Norwayregardless of place of their incorporation. If so, the profits of therespective Dutch companies would be taxable in Norway, as
Norwegian tax resident companies are taxable to Norway on theirworld wide profits. A detailed analysis is required to quantify therisk amount. However, if the Dutch companies did not generatesignificant profits, any Norwegian taxes are not likely to be
substantial. The risk is assessed as high.
If considered material, consider asking
specific tax indemnity; additional effort toensure proper tax residency of Groupcompanies post signing/closing is required
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Transaction Services
Section 2
Group overview
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Transaction Services
Section 2.1
Business overview
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The Group consists of three shipyards operating in Merchant vessel segment (1/2)
35
Source: Management presentation; DR Ref. 16.7.2
Aker Yards WismarEinar Brnlund
Damen Shipyards
UkraineTorben Levinsen
Aker YardsWarnemnde
Einar Brnlund
SubsidiariesWarnow design
Aker Yards DesignUkraine
The GroupThe Group is a part of Merchant Vessel segment of AY
Group, one of the worlds largest shipbuilders and the
largest one in Europe. In FY06, the Merchant Vessel segment delivered
22 vessels, of which 13 were delivered by two Germanshipyards of the Group (FY05: 10). In FY07, 15 vesselswere delivered.
Main products of the Group consist of container vesselsand arctic vessels. The orderbook also includes RoRo/Ro-
pax vessels.
The Group will have approximately 5,000 employees.
AYG has state-of-the-art production facilities andhistorically concentrated on construction and fabrication ofsmall- and middle-class container vessels with capacitiesbetween 1,700TEU and 2,700TEU. AYG currentorderbook consists of 15 vessels (and one section) at a
total contract value of approximately 1.48bn.
1,302
560,000m340 x 67 x 13.4m
395 x 155 x 72mup to 1000tup to 300,000dwt
55,000t/p.a.
Employees:
Area:Building dock:
Dock shop:Crane capacity:
Building capacity:
Steel capacity:
986
850,000m320 x 54 x 10.7m
165 x 125 x 47mup to 700tup to 200,000dwt
55,000t/p.a.
2,675
1,300,000m365 x 40 x 14m
140 x 21m (Floating dock)2 x 320t-
20,000t/p.a.
General cargo MPV*Ro-pax
Arctic container vessel Container vesselChemical tanker
* Multi Purpose VesselsFor further details on production facilities and company history please see Appendix.
Aker Yards Germany Aker Yards Ukraine
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The Group consists of three shipyards operating in Merchant vessel segment (2/2)
36
Source: Management presentation; DR Ref. 16.7.2
Aker Yards WismarEinar Brnlund
Damen Shipyards
UkraineTorben Levinsen
Aker YardsWarnemnde
Einar Brnlund
SubsidiariesWarnow design
Aker Yards DesignUkraine
The GroupDSO produces complete vessels and hulls as well as
modules and sections. The construction is carried out at
two main producing lines.Most of the sales are made to Damen Group and AY
Group entities. The only external client is the Ukrainianshipping firm Ukrrichflot. AYU orderbook consists of 5vessels and 10 sections with a contract value of 71m.
Warnow Design and Aker Yards Design Ukraine provideengineering and design services for the shipyards.
1,302
560,000m340 x 67 x 13.4m
395 x 155 x 72mup to 1000tup to 300,000dwt
55,000t/p.a.
Employees:
Area:Building dock:
Dock shop:Crane capacity:
Building capacity:
Steel capacity:
986
850,000m320 x 54 x 10.7m
165 x 125 x 47mup to 700tup to 200,000dwt
55,000t/p.a.
2,675
1,300,000m365 x 40 x 14m
140 x 21m (Floating dock)2 x 320t-
20,000t/p.a.
General cargo MPV*Ro-pax
Arctic container vessel Container vesselChemical tanker
Aker Yards Germany Aker Yards Ukraine
* Multi Purpose VesselsFor further details on production facilities and company history please see Appendix.
Section 2.1 - Business overview
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For the Purpose of the Transaction German Entities will be consolidated under AYUkraine Holding
37
Aker Yards Ukraine Holding AS (to be renamed)
Aker MTWWerft GmbH
Aker WarnemndeReal Estate GmbH
Aker WarnemndeOperations GmbH
Arctic Personal-dienstleistung
GmbH (49%)
Aker MTWGrundstcks-
verwaltung GmbH
Source: Management reports
Aker Yards Holding AS FLC West Holding S.a.r.l.
30% 70%
Warnow DesignGmbH
Aker Yards DesignUkraine BV
Okean BV
Aker Yards DesignUkraine CJSC
AY SC- 1 B V AY AC- 1 B V AY SC- 2 B V AY AC -2 BV
Damen Shipyards Okean OJSC
1 share
If not otherwise stated, the entities own 100% of the subsidiaries.
Formed only due to legal reasons
Currently, Aker MTW Werft in Wismar and Aker Warnemnde RealEstate, Rostock as well as Aker Warnemnde Operations belongto German division (AYG) of the Norwegian shipbuilding company
Aker Yards ASA, Oslo. For the purposes of the Transaction Aker
MTW and Warnow Design will be transferred to AY UkraineHolding.
The operational parts of AYG are Aker MTW Werft GmbH inWismar and Aker Warnemnde Operations GmbH inWarnemnde.
Plant and property for Aker MTW Werft, Wismar is held by Aker
MTW Grundstcksverwaltung GmbH.
In case of Aker Warnemnde Operations, Aker Warnemnde Real
Estate GmbH owns the assets, which are rented for over 25 years(to expire on 23 April 2009).
Arctic Personaldienstleistung GmbH provides fabrication personnelto the operative entities.
Aker Yards Ukraine Holding AS has established four legal entities
AY SC-1 BV, AY AC-1 BV, AY SC-2 BV and AY AC -2 BV for legalpurposes only. Each of the four entities holds one share of Damen
Shipyards Okean OJSC.
Aker Yards Design Ukraine performs engineering and design tasksfor DSO and other yards in AY Group (AY Floro and AMTW).
During 2000 2006, DSO was owned bythe Dutch shipbuilding group Damen. In
the middle of 2006, 50.01% shares inOkean B.V. were acquired by AY Groupvia AY Ukraine Holding AS. Theremaining 49.99% stake in Okean B.V.,
was transferred to AY Group in February2008.
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Market overview of shipbuilding industry: worldwide and Russian markets
38
Based on information available from public sources (R.S. Platou), the
shipbuilding industry currently experiences a very strong general growthdriven by demand and evidenced by increased volumes and prices. In FY07,the demand for new ship significantly exceeded the delivery capacity and, as
a result, newshipbuilding prices are expected to continue the upward trend.
As an illustration of favourable market trend, the charts presented on this
page demonstrate the upward price dynamics for container ships andtankers, which constitute a notable part of the Groups projected portfolio.
The shipbuilding industry capacity has been increasing: in FY07, the yardsdelivered 15% more tonnage in CGT (compensated growth tons) terms thana year before. Orderbook has increased by over 50% in FY07.
We understand from your shipbuilding and shipping management team that itconsiders the growth potential in the Russian market as a major driver for the
Group business going forward. This growth is mainly attributable to theperspective development of oil and gas fields at Russian Arctic and Far Eastsea shelf.
As indicated in the Strategy of shipbuilding industry development till 2020and further adopted by the Russian Ministry of industry and energy, about 90
specialized transport vessel of ice-class, 140 auxiliary vessels, 12 ice-breakers will be needed by FY30 for the transportation of oil and gas fromRussian sea shelf. In addition, about 35 drilling rigs will be needed by FY15.
In total, the volume of civil shipbuilding market in Russia is estimated at $22bby FY15. We understand from you that due to situation on the Russianshipbuilding market you expect the Group to be able to get the significant
share of those orders.
We understand that currently you are negotiating the placement of futureorders at the Groups shipyards with various Russian clients. However, inspite of certain progress in this process we understand from you that nocommitted sales are expected before signing of SPA scheduled at the end of
March 2008.
Source: www.platou.com
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Management has evaluated the current strategic positioning of AYG: advanced vesselsand small series/tailor made production are existing strengths, whereas currently therelationships to customers are seen in weaker positions - except with container ships.
39
Source: DR 29.74
AYG: Current strategic positioning (evaluation by management)
Advanced
vessels
Small series,
tailor made
Track
record
Customer
relationship
Container
Arctic
RoRo / RoPax
Special vessels
LNG (ice-class)
Drilling rigs
Cruise ships
signif icant strength/ position no strength/position
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Group's Top 20 Customers: Contract value, profit margin (%) & numbe r of ships ordered by customer (Period FY05-
FY10 as of orderbook)
Knig & Cie
Norilsk Nickel
NSB
Hartmann
Genesis (Section)
MAB Lubmin
Stena Rederi
Laeisz
Schoeller
Thien & Heyenga
NDRG
Winter
Schulte
Rehder
AY Finland
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
(50) 50 150 250 350 450 550 650
Contract value in millions
Profitmargin
Top 20 customers
40
Source: dataroom information
Comment: For more detailed and further information please refer to the Appendix.
Future prospectsmight be weaker ascustomer iscurrently facingfinancial problems
Norilsk Nickel ordered allfour ice-class vessels,which are currently in theOrderbook
Stena Redericontractedthe twoRoPaxvessels
Laeisz ordered 6 containervessels CS2800 in FY07.Financing still need to besecured for 4 of these vessels(150m)
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Additional steel capacity through a contract with Lubmin block factory to secureadditional vessel orders
41
Source: DR Ref. 8.11.2.2, Management presentation
Lubmin is a block factory situated in north-east Germany, close tothe shipyards of Wismar and Warnemnde. AYG and Lubmin
signed a contract effective 1 August 2006 concerning theassembly of ship sections. The initially agreed fixed phase runsfrom 1 July 2007 to 30 June 2009.
For the fixed delivery period, AYG is committed to call the contractvolume of 48,000t (24,000t p.a.) completed weight of the vesselparts.
The contracted yearly volume will be in 12 parts (vessel sections
up to 2,000t per section) and the guarantee for each deliveredsection starts with the date of acceptance until 13 months afterdelivery of the ship to the shipping company (maximum 18 monthsafter date of acceptance).
Fixed prices (0.92 per kilogram) were agreed for the sections,which are subject to a quarterly review. In case of additional
services, the hourly wage rate of36.5 per hour will apply.
After the mentioned period, AYG has the right to prolong the period(running 01 July 2009 to 30 June 2014) for an option premium of20k per year and to call for 12,000t yearly.
AYG has to deliver complete detailed construction plans and isresponsible for equipment material. AYG is expected to put apermanent/temporary building supervision in place.
If AYG does not reach minimum contract volume, it has to pay a
contract penalty. In case AYG does not call for any steel, thepenalty would amount to 1.0m p.a.
Workshop dimensions:
Length 430 metres Width 34.5 metres Height 30 metres
Capabilities:
30,000t of steel capacity Maximum unit weight up to 700t Open water access (7m depth) 3 x 125t cranes
Hydraulic lifting capacity of 600t
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Contingent liabilities derive from the business relation with Lubmin. Liquidated damagesof maximum 1.0m out of a frame purchase agreement and the obligations as surety ofloans taken by Lubmin amount to 16.7m as at 31 December 2007
AYG has taken over surety for acouple of loans of Lubmin with atotal nominal amount of17.0m.
As we understand specialwarranties in respect of thesureties given to third parties areincluded in draft SPA.
AYG has partnered withLubmin in order tosecure additional steelworking capacity.
42
AYG: Off-balance sheet obligations as of 31. Dec FY07
T yp e o f o blig at io n b en ef iciary Eff ective D at e Exp iry D at e Am ou
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