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POLARCUSLIMITED ANNUALREPORT2011

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CONTENT 04.KEY FIGURES 06.MAKING THE RIGHTCHOICES 08.LETTER FROM CHAIRMAN 10.SERVICE OFFERING 12.VISION 14.POLARCUS FLEET 16.BOARD OF DIRECTORS 18.EXECUTIVE MANAGEMENT 20.BOARD OF DIRECTORS REPORT 30.SHARE INFORMATION 32.CONSOLIDATED FINANCIAL STATEMENT 76.PARENT COMPANY FINANCIAL STATEMENT 92.AUDITORS REPORT 94.ADDRESSES

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KEYFIGURES ALL NUMBERS IN USD

298.6 76.3 15.5

REVENUE

4

EBITDA

M

EBIT

M

M


FLEETEXPANSION

3

FROM

6

TO

VESSELS

FLEETUTILIZATION Multi-Client 12%

Transit 18% Seismic Contract 67%

Yard stay (including shakedown) 3%

FLEET UTILIZATION EXCLUDING V.TIKHONOV

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MAKING THE RIGHTCHOICES During 2011 Polarcus doubled its operational fleet from three to six high-end 3D seismic vessels. The Company further delivered significant improvements in technical performance and at year-end secured its first true Arctic 3D contract award, vindicating the Company’s investment in differentiating Arctic and environmentally clean technologies.

3 Mar

Polarcus took delivery of POLARCUS SAMUR, the Company’s fourth seismic vessel and the first of the ULSTEIN SX133 design. The vessel transited to Namibia for her maiden charter, for HRT Participações em Petróleo S.A. and UNX Energy Corp.

Polarcus announced term sheet for a USD 410 million bank facility with DnB Bank ASA and DVB Bank SE, Nordic Branch, together with Garanti-instituttet for Eksportkreditt (GIEK) and Eksportfinans ASA. The facility was secured for the refinancing of existing bank debt, refinancing of bonds related to POLARCUS SAMUR and to finance the Company’s two newbuilds under construction in Norway. 21 Jul

22 Mar

Polarcus took delivery of POLARCUS ALIMA, the Company’s fifth seismic vessel and the second of the ULSTEIN SX134 design. The vessel transited to India for her maiden charter, for Reliance Industries Limited.

12 Apr Polarcus announced the successful placement of a USD125 million senior secured convertible bond issue. The bonds, with a maturity date of April 2016, are convertible into common shares of Polarcus with an annual coupon of 2.875% at a conversion price of USD 1.9345.

24 Mar Polarcus launched its debut multi-client project with strong industry prefunding, a 2,000 square kilometer high density 3D seismic survey in the UK Central North Sea over and around the recently discovered Catcher oil discoveries in Block 28/9. The survey was undertaken through a joint venture with Sabaro Investments Limited.


Polarcus signed a five year Bareboat Charter Party Agreement with a company within OAO Sovcomflot of Russia for POLARCUS SELMA, the Company’s sixth seismic vessel and the second of the ULSTEIN SX133 design. The vessel was subsequently named Vyacheslav Tikhonov in a ceremony on 16 September attended by then Prime Minister of the Russian Federation, now President Vladimir Putin.

Polarcus announced its first 3D seismic acquisition contract award in the Arctic frontier, offshore Greenland. The project is scheduled for acquisition in summer 2012 using the high ice class vessel, POLARCUS ASIMA. 28 Dec

11 Aug

Polarcus announced the successful completion of a NOK 230 million senior unsecured bond issue with maturity November 2014. The bonds were issued with a coupon of 14.00% p.a. 27 Oct

16 Aug

Polarcus announced the awards of two projects offshore New Zealand signaling the expansion of Polarcus’ global operational footprint, a significant milestone for the Company. POLARCUS ALIMA transited to New Zealand via the Northern Sea Route offshore Russia, the first known passage of any 3D seismic vessel, saving eight days of transit compared to the shortest alternative route via the Suez Canal.

11 Oct

Polarcus completed a directed private equity placement to Sabaro Investments Limited, generating gross proceeds of NOK 230 million.


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DEARSHAREHOLDERS 2011 was a year marked by significant developments within Polarcus as we continued the transition to becoming a top tier seismic company. We doubled our fleet from three to six vessels, launched our first multi-client project and successfully expanded our activities to Australia and New Zealand. Operationally, we improved performance consistently throughout the year culminating, in the fourth Quarter, in our best achievement for the year in minimizing technical downtime. Financially, we in April issued US$125 million of convertible bonds and in July secured a US$410 million fleet bank facility. This substantially completed funding of our planned capital expenditure, reduced the Groups average interest cost and extended the maturity of a significant portion of Group debt. In October, we completed a NOK 230 million private placement of equity to Sabaro Investments and issued NOK 230 million of unsecured debt in the public bond markets. Sabaro joins our other major shareholders in their commitment to the development of Polarcus’ organic growth and long term strategy. Strategically, we entered into a long term bareboat charter of Polarcus Selma (now renamed Vyacheslav Tikhonov) to Russia’s Sovcomflot, one of the world’s leading ship owners and an acknowledged specialist on Arctic maritime operations. The seismic industry is not for the faint hearted, but it is exciting, rewarding and vital to our future energy supply. Within this space Polarcus has sought to carve out a niche as the environmentally friendly Arctic-ready service provider, the pioneering seismic company in an industry where the frontiers of seismic exploration are responsibly expanded without harm to our world. Despite 2011’s challenging financial and business environment, we are confident that we shall be able to generate long term returns for our shareholders, be the seismic provider of choice for our customers and be a great place to work for our crew members and onshore employees.

We have continued to take a measured approach to our capital spending by making sound value-adding investments that we believe will position Polarcus well for the long term. We have two additional vessels under construction, both environmentally friendly true ice class vessels able to serve the frontier areas of exploration. We have continued to build on our low-cost culture to maximize asset utilisation and invest capital where there is an immediate and sustainable return. In 2011 this included laying the ground for a growing multi-client business with two successful projects carried out during the summer season. With oil prices rising and the oil companies’ increased interest in exploration of the Arctic and other frontier areas, we believe Polarcus’s newly built, environmentally friendly fleet with true ice class specification will position us for continued success. We have been fortunate to have enjoyed the support and steadfast commitment of our employees throughout all our early years of operation and to them we owe a huge debt of gratitude. You, our shareholders large and small, have supported us through the unprecedented combination of difficult financial and seismic market conditions which 2011 represented and to you we are also truly grateful. We are clear in our strategies and in our ambition and we look forward to an improving seismic market in 2012. With the continued support of our employees and shareholders we relish the challenge yet to come in meeting the goals we have set. Yours sincerely

Chairman, Polarcus

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SERVICEOFFERING Polarcus is at the forefront of maritime and seismic innovation, well positioned to meet the current and future demands of the industry.

Contract and multi-client Polarcus has two principal business activities, Contract Seismic Services and Multi-Client Projects, supported by the youngest and most sophisticated marine seismic fleet in the industry. In conjunction with these services Polarcus provides world-class geophysical solutions to effectively and efficiently align survey design with the geological and geophysical objectives of the client.

Full range The Company offers the full range of marine acquisition contract seismic services including 3D, high-density 3D, 4D, multi-azimuth and wide-azimuth data acquisition. The Polarcus fleet has through 2011 operated primarily along the Atlantic margins, from 75 degrees North in the Barents Sea to 55 degrees South in the Falkland Islands. Beyond the Atlantic margins the Company has also penetrated new markets in the Asia-Pacific region commencing first contract seismic operations offshore India and offshore New Zealand. The Company has also made its debut in 2011 in multi-client projects with the launch of two important projects in the UK and Norway. Multi-client projects are surveys designed and acquired by the Company on its own account, with the resultant processed data subsequently licensed to oil and gas companies on a non-exclusive basis. The Company has ownership of the data or in certain jurisdictions is granted an exclusive licence to market and sell the data by the applicable State authority. Multi-Client Projects can constitute a highly profitable business line that combined with Contract Seismic Services also provides for greater flexibility in vessel scheduling and market entry as well as generating steady income in all phases of the seismic life cycle. To develop world-class multi-client projects the Company has an exclusive cooperation agreements in place for NW Europe and Africa with an experienced and well-networked partner GeoPartners Limited, possessing local geologic and petroleum systems knowledge.

New frontiers The Company is placing a high focus on the Arctic, in line with the Company’s Arctic Frontiers Strategy and in order to generate value from the vessels’ significant differentiation that specifically benefits such operations. Polarcus is presently the sole operator of 3D seismic vessels combining the high ice class notation, ICE-1A, with a double hull, DP2, and other environmental and safety features, providing a unique competitive advantage for the Company in Arctic operations and in preparation has developed a comprehensive set of Arctic / Cold Weather operational procedures to support such activities. The Company is actively pursuing opportunities for operations within the Arctic and in 2011 entered into a strategic alliance with OAO Sovcomflot of Russia, chartering one of the Company’s ice-class vessels to the Russian company under a five year bareboat charter party agreement. Polarcus is the first seismic company in the industry to receive a Statement of Qualification from Det Norske Veritas (DNV) qualifying Polarcus’ Arctic operating procedures according to industry best practice and relevant standards. The Company has received significant interest from a number of major oil companies active in the Arctic and in late 2011 was awarded its first true Arctic contract offshore Greenland, with operations to commence in Summer 2012. The Company has already successfully undertaken contract seismic operations in 2010 within the Barents Sea, offshore northern Norway.

Advanced data processing In line with the Company’s pure play strategy, Polarcus has entered into an agreement with a reputable and non-aligned processing company GX Technology Corporation (GXT) in order to offer a ‘full service’ operation to clients. Under this agreement GX Technology provides seismic data quality control and data processing services onboard the Polarcus vessels, and advanced onshore seismic data processing capacity and services at one of their global Data Processing Centers as and when such services are part of the scope of surveys awarded to or required by the Company. The synergies from the partnership have been recognized in a number of projects, both Contract Seismic Services and MultiClient Projects, where the seamless project execution over the full acquisition and data processing cycle has delivered important value benefits for the clients. 10


Cleaner and safer The expansion of the industry into frontier and other environmentally sensitive sea areas is driving calls for a much higher level of environmental compliance worldwide as new requirements on emissions to air and water are adopted, either through legislation or as a condition of tender. The Polarcus fleet is purpose-designed for such clean and safe operations in areas of environmental sensitivity ranging from the tropics to the Arctic. Design features such as DP2 dynamic positioning, a double hull, selective catalytic reduction (SCR) technology, bilge water cleaning and ballast water treatment systems, and the CLEAN DESIGN class notation all contribute to substantially reduce the vessels environmental footprint.

Global Considerable attention has been placed on the Company’s sales and marketing efforts with regional Polarcus marketing offices now open, in Houston, Rio de Janeiro, London and Singapore, staffed by senior experienced industry professionals. The Company has also engaged a number of commercial agents worldwide to assist in the development of regional markets such as Brazil, India, and some of the African and Asian countries where such agents are a normal requirement for business development. Polarcus is a core member of the International Association of Geophysical Contractors (IAGC) and the Company’s CEO is a member of the IAGC Board of Directors. Polarcus has been successfully audited by a number of leading international oil and gas companies and is pre-qualified to tender on acquisition services by the vast majority of oil and gas companies worldwide. The Company is an approved supplier under the Achilles joint supplier qualification system for Norway and a Verified Supplier within the FPAL (First Point Assessment) supplier database for the United Kingdom.

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Our Vision

Goal

To be a pioneer in an industry where the frontiers of seismic exploration are responsibly expanded without harm to our world.

The Company’s corporate goal is “by 2012 to be the most environmentally responsible towed marine seismic service provider, with a strong focus on risk management and specializing in the high end 3D market and the Polar Regions whilst achieving 40% EBITDA margin, 10% market share and long term shareholder value”.

Our Mission Our mission is to deliver superior performance and shareholder value in marine acquisition services whilst demonstrating leadership in environmental responsibility. Our core values are the foundation stone for achieving this goal, and we are seeking to build on these values by attracting the best industry talent to join us. Our Values

Strategy To achieve the Company’s corporate goal a seven point business strategy has been defined comprising the following key elements:

One of our key strengths is our people. We are recruiting the highest talent into our company, and we are committed to implementing many of the latest industry lessons learned around crew welfare, health, safety, security, and general well-being so that we can protect and retain our workforce.

Pioneer the environmental agenda

Optimize fleet configuration and composition

Recruit, develop and retain the highest caliber industry professionals

Develop a world-class service offering

Responsibility – for our actions, for each other, and for the environment and the world around

Maximize operational performance

Develop and maintain an effective marketing and sales organization

Build a strong risk management culture and ensure adoption in key decision making processes

Secure and optimize start-up financing requirements

Establish an optimal organizational structure and cost control programs

Innovation – in business and in operations Excellence – in delivery for shareholders and clients alike

Corporate Structure as of 31 Dec 2011

Polarcus Limited Cayman Islands

Sabaro Investments Ltd.

50% Polarcus Seismic Limited Cayman Islands

Polarcus DMCC Dubai 70%

3 0%

1%

Polarcus Egypt Ltd.

Polarcus 1 Ltd. Cayman Islands

12

99%

Polarcus Norway AS Norway

Polarcus US Inc. USD

Polarcus Do Brasil Ltda.

Hull 292

Polarcus 2 Ltd. Cayman Islands

Hull 293

Polarcus Samur Ltd. Cayman Islands

“Polarcus Samur”

Polarcus Selma Ltd. Cayman Islands

“Polarcus Selma”

Polarcus 6 Ltd. Cayman Islands

Polarcus UK Limited United Kingdom

Polarcus Multi-Client (CY) Limited Cyprus

Polarcus Nadia AS Norway

Polarcus Naila AS Norway

“Polarcus Nadia”

“Polarcus Naila”

Polarcus Asima AS Norway

Polarcus Alima AS Norway

“Polarcus Alima”

“Polarcus Asima”

50%

Polarcus MC Ltd. Cayman Islands


The Company’s business is defined in the Articles clause 3: “The objects for which the Company is established are to carry on, undertake, engage or invest, directly or indirectly, by itself or through subsidiaries or part-owned companies, partnerships or other forms of entities, on a worldwide basis, in any commercial activity within the international oil and oil services business, including oil and gas exploration, production and participation, seismic data services and general offshore energy related business, and whatever else may be considered incidental or conductive thereto, including without limitation the acquisition, construction, equipment, leasing, chartering, operation, agency and manning of any kind of vessels and everything incidental thereto, and the Company shall have full power and authority to carry out any other object not prohibited by the Companies Law of the Cayman Islands (as amended) (the “Law”).”

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POLARCUSFLEET Polarcus Nadia & Polarcus Naila

12 streamer Arctic-ready 3D/4D seismic vessels

Delivered in December 2009 and February 2010 respectively, POLARCUS NADIA and POLARCUS NAILA are 12 streamer 3D seismic vessels built to the ULSTEIN SX124 design. These vessels are capable of towing up to 12 streamer cables of 8,000m length with a lateral separation of up to 75m, or 10 streamer cables of 8,000m length with a lateral separation of 100m. POLARCUS NADIA and POLARCUS NAILA, whose names derive from the Arabic meaning ‘the beginning, first’ and ‘the acquirer, one who succeeds’ respectively, have an LOA of 88.8m, a draft of 6.6m and a maximum speed of 15 knots, and carry the ICE-C class notation enabling them to operate in light ice conditions. The vessels are amongst the most environmentally sound seismic vessels in the market with diesel-electric propulsion, high specification catalytic convertors, a double hull and advanced bilge water cleaning systems.

Delivered in August 2010 and March 2011 respectively, POLARCUS ASIMA and POLARCUS ALIMA are both Arctic-ready 12 streamer 3D seismic vessels built to the ULSTEIN SX134 design and capable of towing up to 12 streamer cables of 8,000m length with a lateral separation of 100m. POLARCUS ASIMA and POLARCUS ALIMA, whose names derive from the Arabic meaning ‘protector’ and ‘wise’ respectively, have an LOA of 92.0m, a draft of 7.5m and a maximum speed of 15 knots, and carry the high ice class notation, ICE-1A, enabling them to operate with the utmost safety in the Arctic Ocean. The vessels are also amongst the most environmentally sound seismic vessels in the market with diesel-electric propulsion, high specification catalytic convertors, a double hull and advanced ballast water treatment / bilge water cleaning systems.

Polarcus Samur & V. Tikhonov

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Polarcus Asima & Polarcus Alima

12 streamer 3D/4D seismic vessels

Polarcus Amani & Polarcus Adira

8 streamer Arctic-ready 3D/4D seismic vessel

12-14 streamer Arctic-ready 3D/4D seismic vessels

Delivered Q1 and Q3 2011 respectively POLARCUS SAMUR and V. Tikhonov are Arctic-ready 8 streamer 3D vessels built to the ULSTEIN SX133 design and capable of towing both conventional and wide tow spreads, including the Polarcus First Pass™ 3D technique requiring lateral streamer separations of 200m. POLARCUS SAMUR, whose name derives from the Arabic meaning ‘swift’ and V. Tikhonov has an LOA of 84.2m, a draft of 6.7m and a maximum speed of 17 knots, and carries the high ice class notation, ICE-1A, enabling operations with the utmost safety in the Arctic Ocean. The vessels are also amongst the most environmentally sound seismic vessels in the market with diesel-electric propulsion, high specification catalytic convertors, double hull and advanced ballast water treatment / bilge water cleaning systems.

Launching in H1 2012, POLARCUS AMANI and POLARCUS ADIRA will both be 14 streamer 3D seismic vessels built to the ULSTEIN SX134 design and will be capable of towing up to 14 streamer cables of 8,000m length with a lateral separation of 100m. POLARCUS AMANI and POLARCUS ADIRA, whose names derive from the Arabic meaning ‘aspirations, wishes, desires’ and ‘strong, majestic, mighty’ respectively, will have an LOA of 92.0m, a draft of 7.5m and a maximum speed of 16 knots, and will carry the super-high ice class notation, ICE-1A*, enabling them to operate with the utmost safety in the Arctic Ocean.


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BOARDOFDIRECTORS

Peter M. Rigg

Tore Karlsson

Peter (born 1948) has an extensive background in investment banking with 21 years experience working in Asia and Europe, principally for Credit Suisse First Boston as a Worldwide Managing Director responsible for Asian Equity Capital Markets. Peter is a qualified Solicitor. He is also an independent non-executive Director of Shroder’s Oriental Income Fund Limited, and of two private equity funds specializing in Asia.

Deputy chair man of the board

Shareholding in Polarcus: 284,000 Independent of the Company and management and independent of major hareholders

Shareholding in Polarcus: 405,814 Independent of the Company and management and independent of major shareholders

Carl-Gustav Zickerman

Jogeir Romestrand

Carl-Gustav (born 1948) has substantial experience in the seismic industry gained from his involvement in the startup of Eastern Echo Ltd where he was also a Member of the Board and prior to that, as Director and Partner with SeaBird Exploration Ltd.

Jogeir (born 1961) is owner and Director of Norwegian private investment firm Rome AS. He has over 20 years experience within marine technology and has previously worked in various management capacities within the ODIM Group since 1985, where he attained the position of CEO and President of ODIM ASA from 2003 to 2009.

Chairman of the Board

Non-Executive Director

Shareholding in Polarcus: 40,571,476 Warrants: 7,500,000 Representing Zickerman Holding Ltd

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Non-Executive Director, Tore (born 1953) is an independent consultant, a partner/ in MemeTree Ltd, and co-founder and partner in MoVa AS and GeoPublishing Limited. Tore has held senior roles within the seismic industry encompassing line management, strategy, marketing and geophysics. He was Chairman of the Board of Eastern Echo Ltd prior to its acquisition by Schlumberger Ltd in 2007.

Non-Executive Director

Shareholding in Polarcus: 548,880 Independent of the Company and management and independent of major shareholders

Hege Sjo

Non-Executive Director Hege (born 1968) is a senior advisor for Hermes Investment Management Ltd. Prior to this she headed Hermes’ European governance and engagement programs and before that held senior roles with the Oslo Bors. Hege is a non-executive director at Wilh Wilhelmsen ASA, Marine Harvest ASA and Det norske oljeselskap ASA. Shareholding in Polarcus: 349,880 Independent of the Company and management and independent of major shareholders


Carl-Peter Zickerman

Kitty Hall

Carl-Peter (born 1972) holds valuable experience in the seismic industry, gained from his prior start-up ventures, Eastern Echo Ltd, and GeoBird Ltd. At present he is working in the capacity of Executive Vice President & Head of Strategic Investments at Polarcus.

Katherine (born 1956) has over 30 years experience within the geophysics industry and is currently President of ARKeX Ltd, where she is also a founding shareholder. Katherine was a Member of the Board of Eastern Echo Ltd.

Shareholding in Polarcus: 22,948,081 Warrants: 7,500,000 Part of the Executive Management team of the Company and representing Zickerman Group Ltd

Shareholding in Polarcus: 387,880 Independent of the Company and management and independent of major shareholders

Ali A. bin Towaih Al Suwaidi

Mohammad Rizal

Executive Director

Non-Executive Director

Ali A. bin Towaih Al Suwaidi has over 18 years experience within the oil and gas industry and is currently Vice President of Business Development, Strategy and Administration at Drydocks World - Dubai. Prior to this he has held several senior positions at major companies in the region operating within the oil and gas sector. Ali holds a degree in Electronics Engineering Technology from the Wentworth Institute of Technology in Boston.

Non-Executive Director

Non-Executive Director

Erik Henriksen

Non-Executive Director

Mohammad Rizal Bin Abdullah has over 32 years of experience in shipbuilding and ship repair and is currently Production Director at Drydocks World - Dubai. Mohammad has prior to this held several senior positions within the shipbuilding and ship repair sector.

Erik Henriksen holds considerable experience from the shipping and offshore industry. He has founded several companies both in UK and Norway including Trader Navigation and Discoverer ASA. He has also been involved in developing various companies, including Telecomputing ASA and Intelecom ASA. Mr Henriksen Mr Rizal resigned from the board of holds a diploma in International Shipdirectors as of 24 November 2011. ping from the London School of Foreign Trade. Mr Henriksen joined the board of directors as of 24 November 2011.

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EXECUTIVEMANAGEMENT Rolf Rønningen

Eirin M. Inderberg

Rolf (born 1957) has over 30 years of seismic industry experience and has held senior positions at GECO and PGS, most notably as the President of Marine Acquisition at PGS Geophysical AS. Most recently he held the position of CEO of Eastern Echo Ltd. His experience covers both technical and operational management of towed streamer seismic vessels and seabed operations.

Eirin (born 1968) has over 16 years experience as a lawyer and was formerly General Counsel of Eastern Echo Ltd. Prior to this she worked for the law firm Wikborg Rein & Co. in Oslo and London, and as a lawyer at the Oslo Stock Exchange. Her expertise includes Norwegian securities law, company law and ship financing.

Chief Executive Officer

Duncan Eley

Senior VP Marine Acqusition Duncan (born 1972) has over 13 years of experience in the seismic industry. He worked with WesternGeco for 10 years supporting marine seismic operations in Europe, West Africa and North America. He also held positions in technology development and support in WesternGeco. Prior to joining Polarcus in 2009, Duncan worked for several years with strategy consultancy firm, L.E.K. Consulting, across the energy, transport and natural resources sectors.

Tom Henrik Sundby Chief Financial Officer

Tom Henrik (born 1967) has over 18 years financial management and business development experience gained from the consulting services and commodities industries. He started his career with KPMG Norway, first as an auditor and then as a management consultant. Tom then joined TINE Norway, a top 25 industrial company in Norway, where he was Head of Controlling department and Head of M&A. Most recently he was Managing Director of TINE UK Limited, based in London.

Carl-Peter Zickerman

Christian Fenwick

Carl-Peter (born 1972) holds valuable experience in the seismic industry, gained from his prior start-up venture, Eastern Echo Ltd where he held the position of Executive Vice President Business Development. Prior to this he was the Managing Director and founder of GeoBird Ltd., a marine seismic service provider, later sold to SeaBird Exploration Ltd. His experience covers both maritime and seismic operations, including vessel conversions and new builds. Carl-Peter is a Member of the Board of Polarcus Ltd.

Christian (born 1960) has over 29 years of industry experience and has held senior positions at Merlin Geophysical, Schlumberger Geco-Prakla, Schlumberger Information Solutions, and most recently was the Vice President Multi Client & Business Development at Eastern Echo Ltd. His experience covers business development, marketing, sales, operations and project management.

Executive VP & Head of Strategic Investments

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General Counsel

Senior VP Corporate Marketing & Multi Client

Christopher Griffin

VP Environment, Health, Safety & Quality Christopher (born 1961) has over 25 years of industry experience both onshore and offshore with Western Geophysical, Horizon Exploration, PGS and, most recently with Eastern Echo Ltd where he held the position of Vice President Environment, Health, Safety & Quality. His experience covers both onshore operations and project management, including 12 years in the field and 6 years in EHS&Q management.

Paul Lionel Hanna

Senior VP Human Resources Paul (born 1964) has over 24 years of industry experience and has held senior positions in various divisions of the Schlumberger group, including Connectivity Services Manager and Career Planning Manager for Schlumberger Information Solutions, London, UK; Data Services Business Manager for Data Consulting Services, Cairo, Egypt; and Area/Vessel Operations Manager for WesternGeco Gatwick, UK. His experience includes the technical, personnel and operational management of marine seismic vessels.

Trygve Reksten

Senior VP Contract Sales Trygve (born 1963) has over 19 years of industry experience and held several management positions at PGS, most recently as Head of Contract Sales Asia Pacific Region, prior to joining Eastern Echo Ltd as Senior Vice President Contract Sales. His experience covers onboard technical roles, operations, sales, business development, procurement and market analysis.


Phil Fontana

Magnus Oberg

Phil (born 1952) has over 33 years of experience in the field of marine geophysics. During that time he has held several senior level technical positions in marine seismic data acquisition at Western Geophysical, WesternGeco, Veritas DGC, and CGGVeritas. His experience includes design and evaluation of marine acquisition technologies including seismic sources, towed streamers, ocean bottom systems, and navigation and positioning systems. He has also managed regional and global geophysical and navigation support groups. Prior to joining Polarcus in December of 2008, Phil held the position of Geophysical Manager for CGGVeritas’ marine acquisition product line.

Magnus (born 1970) has over 22 years of experience managing IT systems in large and medium size maritime companies. He joined Polarcus from Eastern Echo where he was VP Information Technology, and prior to that he held several senior management positions within Gulf Agency Company before becoming the Group IT Research & Development Manager based in Dubai. His expertise includes networking, security, and high-availability infrastructure solutions.

Chief Geophysisist

VP IT

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BOARDOFDIRECTORSREPORT Polarcus (OAX: PLCS) is a pure play marine geophysical company with a pioneering environmental agenda, specializing in high-end towed streamer data acquisition from Pole to Pole. Polarcus operates a fleet of high performance 3D seismic vessels incorporating an innovative design and advanced maritime technologies for improved safety and efficiency. Polarcus offers contract seismic surveys and multi-client projects worldwide and employs over 500 professionals. The Company’s principal office is in Dubai, United Arab Emirates. For more information, visit www.polarcus.com

1. Key developments 2011 • • • • • • •

Revenues of USD 298.6 million, EBITDA of USD 76.3 million and operating profit of USD 15.5 million Positive net cash flow from operating activities of USD 47.6 million Doubled the fleet from 3 to 6 vessels Growing client list inclusive of oil supermajors and strategic Arctic awards Strong operational performance Secured fleet bank facility Secured strategic 5 year bareboat charter with Russia’s OAO Sovcomflot

2. Environmental, health, safety and quality (EHSQ) EHSQ is at the core of Polarcus’ activities and its risk management commitments have been important factors in enabling the Company to become a major player in the marine seismic acquisition market. 2011 proved to be another active year with a strong focus being given to assuring a robust EHSQ performance as the Company took delivery of POLARCUS SAMUR, POLARCUS ALIMA and POLARCUS SELMA. POLARCUS SAMUR is an ultra-modern and Arctic-ready 8 streamer 3D seismic vessel of the ULSTEIN SX133 design. POLARCUS ALIMA is an ultra-modern and Arctic-ready 12 streamer 3D seismic vessel of the ULSTEIN SX134 design. POLARCUS SELMA, also to the Arctic ready Ulstein SX133 design, was placed immediately on delivery into a 5 year bareboat charter with OAO Sovcomflot of Russia as part of a developing strategic relationship. As part of the charter agreement POLARCUS SELMA was subsequently renamed M/V Vyacheslav Tikhonov in a naming ceremony attended by Prime Minister Vladimir Putin, now President of the Russian Federation. After achieving certification in 2010 to International Standards for EHSQ Management, the Company was able in April 2011 to receive a Statement of Qualification from Det Norske Veritas (DNV) qualifying the Company’s Arctic operating procedures according to industry best practice and relevant standards. The Statement of Qualification was presented to the Company at the 7th Annual Arctic Shipping Summit in Helsinki, Finland. With the doubling of Polarcus’ fleet in 2011, the Company also doubled its EHSQ exposure. However, recordable injury statistics were reduced by almost 70% compared to 2010. During 2011 Polarcus also maintained the “Zero Spills” objective with regards to potential oil pollution of the marine environment. IAGC Reporting Categories

Additional Categories

Lost Time Incidents (LTI): Medical Treatment Case (MTC): Restricted Work Case (RWC):

1 1 0

Lost Time Incident Frequency (LTIF): True Recordable Case Frequency (TRCF):

0.36 0.72

First Aid Cases (FAC): 47 Non-Conformance-Corrective Action-Preventive Action (NCCAPA): 8847 Near Miss (NM): 243 Improvement Suggestions (IS): 3321

Also in 2011 POLARCUS ALIMA was able to effectively utilize her high Ice Class 1A rating to secure a permit to transit to the Asia-Pacific Region via the Northern Sea Route. The vessel departed from Hammerfest in Norway after completion of seismic operations in the Barents Sea, transiting a 3,000 nautical mile route along the northern coast of Russia, to Cape Dezhnev in the Bering Straits. This was the first known passage of a 3D seismic vessel along the Northern Sea Route and was achieved through careful planning and the expertise of our Arctic- experienced Master and Crew. The 20


transit enabled the Company to save between 8 and 13 days compared to the normal transit routes between Europe and Asia-Pacific, further reducing the environmental footprint of the passage POLARCUS ALIMA was thereby placed into the highly visible and demanding region of the Southern Oceans around New Zealand where environmental, health and safety issues are at the forefront of every project. Whilst operating in this region the vessel has continued to perform to the highest standards. Polarcus believes that the Company’s focus on its Arctic credentials has subsequently been a major contributor to securing certain key Arctic projects in environmentally sensitive areas for execution in 2012.

3. Operations and markets During 2011, Polarcus doubled its operational fleet from three to six high-end 3D seismic vessels. The Company delivered significant improvements in technical performance throughout the year resulting in technical downtime of just 5.8% by year end. The vessel utilization on contract of 79% is lower than the Company’s aspirations but with two vessels being delivered from the yard in 2012 and a fleet size closer to critical mass, utilization is expected to improve going forward. Polarcus has increased its market share amongst all client segments including super-majors. Being a newcomer in a flat seismic market where clients seek a proven track record is always a challenge but the Company nevertheless succeeded in adding more than thirty customers to its client list. The Company’s outstanding quality of delivered data has been commented on by a number of clients. Whilst POLARCUS SELMA (now M/V Vyacheslav Tikhonov) was for strategic reasons placed on a 5 year bareboat charter agreement with Russian shipping company OAO Sovcomflot the rest of the Company’s 5 vessels presently in operation are active in the global contract market where they compete with five main seismic companies in the high-end market segment. Seismic operations in general are split between contract seismic, where data is acquired exclusively for an oil company, and multi-client, where seismic companies plan and undertake a survey for its own account, subsequently marketing the final fully processed project data to multiple customers on a non-exclusive license basis. Unlike the contract model, the seismic companies own the acquired data, or are granted exclusive marketing rights for it, for a period of ten or sometimes more years. In Q3 2011 Polarcus launched its inaugural 3D multi-client project in UK Quad 28, completing seismic acquisition in November 2011 and the subsequent data processing in Q1 2012. The survey, named the “Catcher project”, encompasses the recent significant Catcher oil discovery and several adjacent open blocks that are on offer in the current UK 27th Round that opened in January 2012. The project has attracted strong industry interest and saw increasing prefunding commitments through the year. The survey was undertaken through a 50/50 joint venture with Sabaro Investments Limited. Polarcus saw contract prices being stable in H1 2011, despite the disruptions seen post Macondo in the Gulf of Mexico a year earlier, that also coincided with new vessel capacity entering the market. However, in Q3 2011 implied day rates on new contracts signed were higher than day rates previously achieved. The Company believes this reflected a strengthening of certain regional markets. Following this slight strengthening in Q3 2011 the market environment for seismic became highly competitive again in Q4 2011 as an estimated 23 vessels transited from NW Europe at the end of the traditional operating season. With a limited number of new contract opportunities immediately available at that time there was consequently renewed pressure on day rates. During 2011 the Company announced projects in Asia-Pacific that broadened the global footprint of the Polarcus fleet, a key strategic objective. Further, included in the current backlog are two Arctic projects secured offshore Greenland for three vessels in 2012. These three vessels all have the high ICE 1A or 1A* class and the contracts are considered by the Company to be a strong endorsement of the investment it has made into leading-edge Arctic technologies, systems and procedures.

21


4. Financial results for 2011 The consolidated financial statements of Polarcus Limited as well as the financial statements for the parent company are prepared in accordance with International Financial Reporting Standards. The increased activity reflected in the 2011 figures compared to 2010 is mainly a reflection of the increase of three vessels in operation in 2011 compared to 2010. Operating revenues increased by 148% to USD 295.3 million in 2011 compared to USD 119.3 million in 2010, mainly driven by the increased fleet of vessels. 2011 was the first year with multi-client revenues which amounted to USD 20.6 million or approximately 7% of operating revenues. In addition, the Company recorded other income of USD 3.2 million in 2011 compared to USD 3.5 million in 2010 related to insurance claims. Vessel operating expenses increased by 182% to USD 188.9 million in 2011, compared to USD 67.1 million in 2010. Again, the increase is largely due to the increased fleet but operating costs were also higher in 2011 compared to 2010 when all vessels were new from the yard and thus benefited from lower operating expenses during the first few quarters of operation. Operating expenses fluctuate significantly depending on geographical location of vessels. These geographic fluctuations reflect regional operational requirements and generally also reflect increased revenue. Sales, general and administrative costs increased by 33% to USD 33.3 million in 2011 from USD 25.1 million in 2010, as a result of increased headcount to meet growth. The workforce increased from 373 to 536 employees during the year. EBITDA was USD 76.3 million in 2011, up 151% from USD 30.5 million in 2010. EBITDA margin in 2011 was 25.5%, up from 24.9% in 2010. The slightly increased EBITDA margin for the year was impacted positively by multi-client sales and negatively by increased operating costs. Depreciation and Amortization amounted to USD 60.8 million in 2011 compared to USD 26.8 million in 2010. The increase was mainly due to the expansion of the fleet and amortization of the multi-client projects library. Amortization of the multi-client library in 2011 of USD 10.5 million reflects an average 50% amortization of multi-client revenue for the two projects in 2011. Total operating profit in 2011 was USD 15.5 million compared to USD 2.6 million in 2010. Total interest expense increased to USD 53.5 million in 2011 from USD 38.4 million in 2010 largely as a function of additional net interest bearing debt and a reduction in interest capitalized to vessels under construction. The total finance cost for the full year 2011 is further increased by a higher unrealized exchange loss due to devaluation of NOK funds held in cash as the NOK depreciated against the USD between the financing carried out in October 2011 and year end 2011. Total finance income was USD 5.8 million in 2011 compared to USD 4.6 million in 2010. The increase is mainly due to an unrealized exchange gain on devaluation of the NOK bond as a result of depreciation in the NOK against the USD. The increased finance cost has partly been offset by changes to the fair value of financial instruments which has resulted in a gain of USD 6.7 million in 2011 compared to a loss of USD 3.6 million in 2010. This fair value change is a non-cash item and relates to the gain on revaluation of the liability for warrants to founding shareholders. At year end 2011 the total value of this financial instrument is USD 48,000. In 2011 tax expenses were USD 24,000 related to a Norwegian subsidiary. The Company has chosen to hold the vessels in companies taxable under the Norwegian tonnage tax system. The tonnage tax is classified as an operational expense. As a function of its multinational operations the Company is subject to taxation in many jurisdictions around the world with increasingly complex tax laws and interpretations. The Company recognizes liabilities for anticipated tax issues based on estimates of whether it is probable that additional taxes will be due. The total net loss for 2011 amounted to USD 31.5 million compared to USD 28.3 million in 2010. Total assets increased to USD 1,108 million in 2011 from USD 974 million in 2010. Total liabilities increased to USD 678 million in 2011 from USD 582 million in 2010. Total equity increased to USD 430 million in 2011 from USD 392 million in 2010. At year end 2011 the equity ratio had fallen slightly to 39% from 40%. Net interest bearing debt at year end 2011 was USD 619 million up from USD 523 million in 2010. 22


The Board confirms that the 2011 consolidated financial statements have been prepared based on the assumption of going concern and that the assumption of going concern is appropriate.

5. Allocation of the parent Company’s loss for 2011 The parent company loss for the period was USD 3.4 million for 2011 compared to a loss of USD 6.7 million in 2010. The Board proposes to allocate the 2011 loss for the period to retained earnings/loss. Terms of certain of the financing agreements include restrictions on dividend payments from the Company resulting in no dividend currently being available for distribution.

6. Cash flows from operating activities and liquidity During 2011, net cash flow from operating activity was USD 47.6 million, up from USD 11.7 million in 2010. Cash and cash equivalents as of 31 December 2011 were USD 60.3 million compared to USD 86.8 million at year end 2010. During 2011, the Company secured long term financing of its new build program, and with the private placement completed in March 2012, the Board of Directors believes that the Company’s liquidity position is adequate. Please refer to note 1.1 Financing of the consolidated financial statements for a further description of the financing of the Company.

7. New build program Polarcus took delivery of three new vessels in 2011. After being upgraded from an original six streamer arrangement to an eight streamer configuration, POLARCUS SAMUR was delivered on 02 March 2011 with a total capital expenditure of USD 133 million, inclusive of 6 x 6,000 meter seismic streamers. POLARCUS ALIMA was reacquired in October 2010 after a successful fundraising and was delivered on 21 March 2011 with a total capital expenditure of USD 169 million including 12 x 6,000 meter seismic streamers. Polarcus Selma Ltd, a member of the Polarcus Group, took delivery on 08 August 2011 of the vessel subsequently named M/V Vyacheslav Tikhonov, the sixth 3D seismic vessel to date to join the Polarcus fleet. The vessel is the sister ship of POLARCUS SAMUR, delivered to the Polarcus Group in March 2011. In November 2010, Polarcus signed shipbuilding contracts with Ulstein Verft AS for two additional high-end 3D seismic vessels for delivery in March and June 2012 respectively. The two new builds are being constructed to the ULSTEIN SX134 design. The vessels will be capable of towing up to 14 seismic streamers in various configurations. POLARCUS AMANI will be delivered 29 March 2012 with a total capital expenditure of USD 170 million including 12 x 6,000 meter seismic streamers. Construction of POLARCUS ADIRA remains on schedule, with delivery expected in June 2012. The Company has a separate site team on location overseeing the building of these two vessels. After taking delivery in 2012, the Company’s fleet will comprise eight vessels.

8. Capital investments and financing In April 2011, Polarcus exercised its option to repurchase POLARCUS SELMA (M/V Vyacheslav Tikhonov) after raising USD 125 million in a convertible bond issue with a coupon of 2.875% and a conversion premium of 32.5%. The reference price for the conversion is USD 1.46. In October 2011 the Company entered into a loan facility of USD 410 million with DNB and DVB Bank SE, Nordic Branch, together with Garanti-instituttet for Eksportkreditt (GIEK) and Eksportfinans ASA (the “Fleet Bank Facility”). The Company also entered into an amended and restated bond agreement for the Polarcus Alima AS 10/15 12.5% USD 80 million second lien bond issue (ISIN: NO0010590300) (the “Bond Issue”) and entered into an inter-creditor agreement coordinating the security interests between the Fleet Bank Facility and the Bond Issue. The Fleet Bank Facility will be drawn down in five tranches and used to refinance existing debt related to POLARCUS ALIMA, POLARCUS ASIMA and POLARCUS SAMUR and to partly finance the new buildings POLARCUS AMANI and POLARCUS ADIRA. The drawing of the tranches will happen sequentially:

• Tranche 1 and Tranche 2 were drawn on 15 November 2011. This triggered a repayment of the earlier USD 80 • • •

million loan facility and the USD 55 million bank loan facility granted by DVB Bank SE, Nordic Branch, together with GIEK and Eksportfinans ASA. Tranche 3 will be drawn upon delivery of POLARCUS AMANI on 29 March 2012 and will be used to partly finance the vessel. Tranche 4 will be drawn upon delivery of POLARCUS ADIRA expected to take place in Q2 2012 and will be used to partly finance the vessel. Tranche 5 will partly refinance the USD 55 million 13.0% Senior Secured Callable Bond (ISIN NO 0010445935), expected to take place in Q2/Q3 2012. 23


In respect of the drawdown of Tranche 3, Tranche 4 and Tranche 5 in the Fleet Bank Facility, a capital structure satisfactory to the lending banks is a condition precedent to drawdown. The new financing from Eksportfinans ASA included in the Fleet Bank Facility has a fixed interest rate of 2.85% in addition to 2.75% guarantee commission to GIEK and the commercial banks. When the Fleet Bank Facility is fully drawn, the average nominal interest rate for Polarcus will be approximately 7.5%. On 11 October 2011 the Company issued 57,500,000 new shares through a private placement to Sabaro Investments Limited. The new shares were subscribed for at a price of NOK 4.00 per share. Total gross proceeds from the Private Placement amounted to NOK 230 million (USD 41.1 million). Following the Private Placement, the Company had 467,196,179 shares outstanding at 31 December 2011. On 27 October 2011 the Company issued NOK 230 million of unsecured bonds with maturity in November 2014. The bonds were issued with a coupon of 14.00% p.a. On 14 March 2012 the Company issued 40,000,000 new shares through a private placement. The new shares were subscribed for at a price of NOK 5.80 per share. Total gross proceeds from the Private Placement amounted to NOK 232 million (USD 40.7 million). Following the Private Placement, the Company has 507,196,179 shares outstanding.

9. Strategy The Company’s maritime and technology strategy is now yielding positive results. Polarcus set an ambitious environmental agenda at launch that aimed to minimize the Company’s environmental footprint. Consequently it invested in new-build high-end, ice-class vessels incorporating clean technology and advanced seismic and navigation systems intended to ensure that the fleet is at the forefront of the industry. Recent project announcements in the Arctic for three of the Company’s Ice-Class 1A/1A* vessels mark another milestone in becoming the preferred supplier to the industry in new frontier and environmentally sensitive sea areas. The move into the multi-client business is intended take advantage of attractive opportunities in the market, to improve the balance of the Company’s business and to provide increased operational flexibility. During 2011, Polarcus signed a five year Bareboat Charter Party Agreement (BBCP) with a subsidiary of OAO Sovcomflot (SCF) of Russia. Under the terms of the BBCP Sovcomflot is chartering M/V Vyacheslav Tikhonov, previously POLARCUS SELMA, inclusive of an eight streamer seismic equipment package, from Polarcus at a rate of USD 69,500 per day. The Company will work to develop further its relationship with Sovcomflot based on the success of its pioneering Arctic and environmental offering.

Going green demands global solutions The challenges of climate change, sustainable development and the protection of species have become global concerns. Whilst alternative energy solutions are sought, our world remains dependent on energy from hydrocarbons. Our industry has a key stewardship role to play in making every effort to operate in an environmentally responsible manner. Regulators and other stakeholders are demanding new levels of environmental performance, reflecting the increasing world-wide concern for both the local and global environment. Polarcus approaches this from the perspective of a concerned citizen and the Company as a whole seeking global solutions. The Company believes that we must be willing to invest now in order to avoid negative future consequences of inaction. There is a significant opportunity within the maritime sphere of the seismic industry to perform operational work in a cleaner and greener fashion. The Company believes its strategy has demonstrated that making the necessary investment can create a real and lasting competitive advantage.

Polarcus fleet 2011 full year emission report: The Company’s seismic vessels are all constructed according to DNV’s CLEAN-DESIGN notation, not to be confused with the more common but less stringent CLEAN notation. The CLEAN-DESIGN notation recognizes that the Company has systems in place to control and limit operational emissions and discharges to air and water. It also recognizes our investment in defensive design elements such as a double hull. Polarcus estimates its annual fleet emissions as follows; CO2 121,753 t SOx 134 t NOx 719 t Black Carbon 24

approximately 14% less than industry average 85% below the IMO ECA legislative areas one third of the level permitted by IMO regulations reduced by ~ 20 - 30%


10. Organization Polarcus’ headquarters are in Dubai, United Arab Emirates and at year end 2011 the Company also had additional marketing offices in Houston, London, Rio de Janeiro, and Singapore. At end 2011 Polarcus had 536 employees from over 40 different nationalities. Approximately 420 of these work in the field as seismic and maritime crew onboard the vessels. 10% of the workforce is female (30% office and 3% field) and of the nine Directors on the Board, two are female. The number of days lost due to illness in the office in 2011 was 352 days, which represents an absence rate of 1.5%. Polarcus is committed to being the employer of choice in the marine seismic business and to maintaining a human resource system that is open and fair. Polarcus aims to be a workplace with equal opportunities and has included in its policies regulations to prevent discrimination regarding salary, promotion and recruiting.

11. Risk 11.1 Financial risk factors Financial leverage and breach of covenants The financial leverage of the Group or any breach of covenants (or other circumstances which entail loans falling due prior to their final maturity date) may have several adverse consequences, including the need to refinance, restructure, or dispose of certain parts of the Group’s businesses in order to fulfill the Group’s financial obligations. Fluctuations in Exchange rates and currency risks The Group’s costs are primarily in USD and to a lesser extent NOK, GBP and EUR. The majority of revenues are in USD and revenues are expected to be higher than costs. A depreciation of the USD will probably have a negative impact on margins as the Group is expected to have higher revenues than expenses denominated in USD. The new-build POLARCUS ADIRA has a total estimated project capital cost, based on a USDNOK exchange rate of 6.0, of USD 168 million; including seismic equipment but excluding capitalized interest costs. The project is slightly below budget, however some risk of a negative currency effect remains. A change of NOK 0.1 from NOK 6.0 in the USDNOK exchange rate will have a capital expenditure effect of approximately USD 2.0 million. Except for a Bond issue of NOK 230 million (USD 40.6 million), the long term financing of the Group is in USD. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the Company’s functional currency, which is USD. The Company’s shares are traded in NOK. The NOK trading price is affected by the underlying activities of the Group which are primarily denominated in USD. Currency fluctuations relative to the NOK of an investor’s currency of reference may also adversely affect the value of an investor’s investments. Interest rate risk The Group has interest-bearing assets which results in the Group’s income and operating cash flows being dependent on changes in market interest rates. The interest-bearing assets with variable interest rates expose the Group to cash flow interest rate risk. Interest earned and received on these balances fluctuates with changes in market interest rates. During the period, the Group’s financial assets at variable rates were denominated in USD and NOK. The Group is subject to interest rate risk on debt, including capital leases. The risk is managed using a combination of fixed and variable rate debt. Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and having availability of funding through an adequate amount of committed credit facilities. Management constantly reviews the forecast of the Group’s liquidity reserve on the basis of expected cash flows. The Group may require additional capital in the future due to unforeseen liabilities or in order for it to take advantage of opportunities for acquisitions, joint ventures, exercise of options or other business opportunities that may present themselves. Any negative development in sales, gross margins or sales processes may lead to a strained liquidity position and the potential need for additional funding through equity financing, debt financing or other means. Any additional equity financing may be dilutive to existing shareholders.

25


11.2 Operational Risks Variability of operating results The Company’s revenue may vary from month to month and year to year due to changes in oil companies’ exploration and production spending. There is no guarantee that Polarcus will be able to secure contracts at profitable rates. In addition, the Group may experience significant off-hires on transit periods between charters. Supply and Demand risks Demand for offshore geophysical services depends on the demand / supply balance for oil and gas and on the investments by oil and gas companies in exploration and development projects. Low demand or oversupply of oil and gas can lead to reduced capital expenditures by oil and gas companies that in turn may reduce the demand for the Group’s products and services. Other factors that may reduce the demand for the Group’s products and services include, but are not limited to, fluctuations in productions levels and disappointing exploration results. If the Group fails to obtain short or long term contracts for one or more of the vessels, it could incur financial losses due to there being fewer operating vessels to allocate fixed costs to. Future contract awards As is customary in the industry, contracts for Polarcus’ services are occasionally modified by mutual consent and in certain instances they may be cancelled by the customer at short notice without penalty. Consequently, Polarcus’ backlog as of any particular date may not be indicative of actual operating results for any succeeding period. Operating and financial history The Company was formed in 2008 and has a limited period of operating history and limited historical financial information for clients and investors to evaluate prior or future performance. Access to personnel The Group’s development and business success are largely dependent upon the continued services and performance of its senior management and other key personnel. Securing and retaining qualified crews are also of significant importance. There is no guarantee that the Group will be able to attract and retain personnel required for a successful operation, which might have negative effects on the Group’s operating results and financial condition. Dependence on few assets If the Group fails to obtain short or long term contracts for one or more of the vessels, it could incur financial losses due to less operating vessels to allocate fixed costs to. Insurance protection Although Polarcus has insurance coverage normal for its lines of business, such insurance arrangements will not fully cover all its operating risks. An incident involving any of the Group’s assets could result in loss of earnings, fines or penalties, higher insurance costs and damage to the reputation of the Group. The Group has established a loss of income insurance. However the loss, or lasting unavailability, of a vessel could have an adverse effect on the Group as the loss of income insurance will have a significant deductible and limited time span and will not cover all eventualities.

11.3 Other Risks Polarcus is also exposed to other risks including but not limited to vessel construction risk, liquidity risk and credit risk. Please see the risk chapter in the notes to the Financial Statements for further description of these risk factors.

12. Internal Control The Group has established appropriate internal control routines to cater for the operation of the Company. Polarcus management follows up its financial status on a daily basis leading into a formal monthly management report including critical factors relating to financial covenants, cash flow, comparison to budget and other key figures. The quarterly financial statements are presented and approved by the Board of Directors with a detailed comparison year on year. The Company has implemented an electronic invoice control system, a detailed authority matrix for financial dispositions and payment routines. In order to sufficiently manage accounts receivables, monthly invoicing routines and weekly monitoring are in place. The Company’s costs are monitored monthly and necessary accruals made. The Company has expanded its organization to include personnel with responsibility for ensuring compliance with international, national and local tax, fees and filing requirements.

26


13. Corporate Governance The Company believes that focus on corporate governance is critical to its success and long-term growth. Polarcus is committed to maintaining high standards of corporate governance. The governance structure of Polarcus is designed to ensure sound and efficient decision making and to be appropriate to shareholders’ expectations and to the size, business and history of the Polarcus Group. It also is designed to adhere to the Norwegian Code of Practice for Corporate Governance (the “Code”) at any time applicable, Cayman Islands law and practice and the Memorandum and Articles of Association of Polarcus. A report on Corporate Governance in accordance with the Norwegian Accounting Act 3-3b and details regarding Polarcus’ compliance with the Code are provided in the document “Corporate Governance Report for the year 2011 input the exact link reference. The Board of Directors has issued separate Terms of Reference that in detail set out the authorities, responsibilities and duties of the Board, the chairman, the deputy chairman, a director, the company secretary and board committees. Furthermore, job descriptions have been prepared for the CEO and all members of the executive management team. In accordance with its Terms of Reference, the Board has established a plan for its work for 2012 and has carried out an evaluation of its performance and expertise in 2011. The Board has appointed a deputy chairman who normally will chair agenda items in which the chairman has been actively involved. The Board of Directors has held five physical meetings, five phone meetings and executed four written resolutions in 2011. The attendance of the board meetings in 2011 by the various directors is reflected in the table below:

Board Member

No. of Physical Meetings

No. of Phone Meetings

Peter Rigg

5

5

Tore Karlsson

5

5

Ali Bin Towaih

4

2

Kitty Hall

5

5

Carl Gustav Zickerman

4

5

Mohammad Rizal

4

2

Carl Peter Zickerman

5

5

Hege Sjo

4

5

Jogeir Romestrand

5

5

Three committees have been established by the Board; (i) a corporate governance and remuneration committee, (ii) a nomination committee and (iii) an audit committee. Corporate Governance and Remuneration Committee The corporate governance and remuneration committee consists of Mr. Tore Karlsson, Mrs. Hege Sjo and Mrs. Katherine Hall. The committee is mandated to regularly review and update the Company’s governance commitments and structure and to review proposals from the executive management on bonus schemes and other benefits as well as general principles for the Group’s salary and allowance program. Nomination Committee The current nomination committee consists of Mr. Morten Garman, Mrs. Hege Sjo and Mr. Thomas Raaschou. The committee is mandated to evaluate and submit a recommendation to the AGM on the composition of the Board of Directors, nominees for election as members and possibly alternate members of the Board and the Chairman and remuneration of the Board and the members of committees and amendments to the committees’ terms of reference. The 2011 AGM approved the appointment of the members of the nomination committee and the relevant Terms of Reference Audit Committee The audit committee consists of Mr. Jogeir Romestrand, Mrs. Hege Sjo, Ms. Marika Svardstrom and Mr. Peter Rigg. The committee is mandated to regularly review the Company’s proposals for quarterly accounts and various issues related to the accounts, review new and changes to existing accounting principles, supervise the budget process, review and evaluate the Company’s internal financial control and on behalf of the Board of Directors liaise with the Company’s auditor.

27


Corporate Social Responsibility (CSR) Polarcus has defined its vision and core values as well as a set of commitments for its business operation (the “Commitments”) and this material constitutes the foundation of Polarcus’ CSR. Polarcus’ vision is:

“to be a pioneer in an industry where the frontiers of seismic exploration are responsibly expanded without harm to our world”. The vision is rooted in the Company’s core values of Responsibility, Commitments and Excellence. The core values are reflected in the Company’s commitments consisting of sixteen overriding commitments within the following areas: (i) environment sustainability, (ii) health, safety and security, and (iii) ethics in business and the respect and promotion of human rights. To ensure compliance with the Polarcus Commitments, Polarcus has developed procedures, checklists and manuals, which provide the necessary reference, standards and instruction for responsibly carrying out daily tasks. All these tools are included in the Company’s management system, in order to ensure a well-functioning operation, and elements are included in evaluation of employees.

14. Outlook The market environment for seismic was highly competitive in Q4 2011, with an estimated 23 vessels transiting from NW Europe at the end of the traditional operating season. With a limited number of new contract opportunities tendered in Q4 there has been a consequent pressure on day rates. This situation has continued into Q1 2012 but increased tendering activity and recent awards signal a strengthening market from Q2 2012, with demand outstripping supply. Despite the current challenging market environment in Q1 2012 the Company believes that average day rates in 2012 will be higher than 2011. This is further supported through various announcements that both national and international oil companies are further increasing their E&P budgets for 2012. As the correlation between oil price and demand for seismic activity is strong, the continued high oil price may further strengthen the demand for seismic contract work in general, and specifically for work in new frontier areas. With the expanded Polarcus technology offering and the industry recognition of the company’s capabilities, the Board believes Polarcus is well positioned in a seismic sector expected to recover.

28


29


SHAREINFORMATION Shares in Polarcus are listed on the Oslo Axess under the ticker symbol ‘PLCS’. During the year of 2011, a total of 704 million Polarcus shares were traded at a value of NOK 3.9 billion. This means that 170 percent of the total number of shares outstanding in Polarcus were traded during the period and more than 123 thousand share transactions were completed in Polarcus shares. At the end of the year 2011, Polarcus had a market capitalization of NOK 1.3 billion.

Share capital As of 31 December 2011 the issued share capital of Polarcus amounted to USD 9,343,923.58 divided into 467,196,179 shares of par value USD 0.02 each. All shares are of the same class and carry equal rights in all respects and each share carries one vote.

Polarcus shareholders

9.00

50

8.00

45

7.00 6.00

40 35 30

5.00 25 4.00 20 3.00 2.00

30

15 10

1.00

5

0.00

0

Millions

At year-end 2011 Polarcus had 2175 shareholders. The company’s largest shareholder is Sabaro Investments Limited with 17 percent. The 20 largest shareholders at year end 2011 held 62 percent of the shares in Polarcus.


31


POLARCUS LIMITED AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2011 Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flow Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements

32


Consolidated Statement of Comprehensive Income 01 January - 31 December (In thousands of USD) Revenues Contract revenue Multi-client revenue Other income Total Revenues

Notes

2011

2010

5 5

274,757 20,571 3,248 298,577

119,256 3,478 122,734

26 27 28

(188,932) (33,327) (60,802) -

(67,134) (25,141) (26,849) (1,000)

(283,061)

(120,124)

15,516

2,610

(59,472) 5,761 6,720 (46,991)

(31,983) 4,594 (3,561) (30,950)

Profit/(loss) for the period before tax Income tax expense Profit/(loss) for the period

(31,475) (24) (31,499)

(28,341) (28,341)

Other comprehensive income Other comprehensive income/(loss) for the period Total comprehensive income/(loss) for the period

(31,499)

(28,341)

(0.075) (0.086)

(0.100) (0.100)

Operating Expenses Vessel Operating expenses Sales, general and administrative costs Depreciation and amortization Impairment of vessels under construction Total Operating Expenses Operating profit/(loss) Financial Expenses Finance costs Finance income Changes in fair value of financial instruments Net Financial Expenses

29 30 31

Profit/(Loss) per share for loss attributable to the equity holders during the period (In USD) - Basic - Diluted

32 32

33


Consolidated Statement of Financial Position (In thousands of USD)

Notes

31-Dec-11

31-Dec-10

ASSETS Non-Current Assets Property, plant and equipment

6

866,922

478,544

Vessels under construction

7

5,291

200,531

-

19,907

Vessels buyback options Vessel prepayments

7

28,060

28,060

Multi-client data library

8

10,470

-

Intangible assets

9

712

2,633

911,454

729,675

Total Non-Current Assets Current Assets Prepaid expenses

10

4,792

2,440

Other current assets

11

52,189

26,052

Accounts receivable

55,425

18,357

Restricted cash - short term

12

23,683

110,749

Cash and bank

13

60,336

86,836

196,425

244,435

1,107,879

974,110

Total Current Assets TOTAL ASSETS EQUITY and LIABILITIES Equity Issued share capital

14

9,344

8,194

Share premium

14

463,692

423,822

Other reserves

16

37,981

9,308

Retained earnings/(loss)

(81,261)

(49,762)

Total Equity

429,756

391,563

Non-Current Liabilities Senior bonds

17

168,145

130,850

Convertible bonds

18

131,110

31,269

Long-term finance lease

19

170,603

194,407

Other long-term debt

20

110,992

72,953

Liability for warrants

14, 31

48

6,768

27

333

292

581,231

436,540

9,072

8,766

Employee pension accrual Total Non-Current Liabilities Current Liabilities Interest payable

21

Employee accruals and payables

22

4,245

6,586

Other accrued expenses

23

16,946

7,166

-

59,874

24,943 13,331 28,355 96,892

22,388 10,936 30,291 146,008

1,107,879

974,110

Deferred payments to vendors Long-term finance lease current portion Other long-term debt current portion Accounts payable Total Current Liabilities TOTAL EQUITY and LIABILITIES

34

19 20


Consolidated Statement of Cash Flows 01 January - 31 December (In thousands of USD) Cash flows from operating activities Profit/(loss) for the period Adjustment for: Depreciation and amortization Impairment of vessels under construction Changes in fair value of financial instruments Stock Options compensation provision Interest expense Interest income Working capital adjustments: Decrease/(Increase) in current assets Increase in trade and other payables and accruals Net cash flows from operating activities Cash flows from investing activities Decrease/(Increase) in restricted cash Payments for property, plant and equipment Payments for multi-client data library Payments to acquire intangible assets Interest income Net cash flows used in investing activities Cash flows from financing activities Proceeds from the issuance of ordinary shares Transaction costs on issuance of shares Proceeds from the issuance of senior bonds Proceeds from the issuance of convertible bonds Transaction costs on issuance of bonds Receipt from sale lease-back fund Net receipt from loans Repayment of lease liabilities Repayment of other long-term debt Interest paid Other finance costs paid Interest income Net cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

Notes

28 31 14 29 30

12 8

14 14 17 18

20 19 20 11 30

2011

2010

(31,499)

(28,341)

60,802 (6,720) 2,069 53,528 (251)

26,849 1,000 3,561 2,053 26,844 (157)

(59,418) 29,050 47,561

(31,406) 11,337 11,741

87,066 (303,579) (17,282) (219) (234,013)

(74,224) (207,621) (443) 10 (282,278)

41,117 (96) 40,634 125,000 (5,292) 53,695 (22,769) (13,227) (53,222) (6,139) 251 159,951

129,672 (6,503) 80,000 (3,071) 22,255 76,081 (14,904) (3,981) (37,660) 157 242,048

(26,501) 86,836 60,336

(28,489) 115,323 86,836

35


Consolidated Statement of Changes in Equity (In thousands of USD except for number of shares) Balance as at 31 December 2009

Number of Shares

Share Premium (Note: 14)

Retained Earnings/ (Loss)

Total Equity

303,582

7,255

(21,422)

294,678

Profit/(loss) for the period

-

-

-

(28,340)

(28,340)

Other comprehensive income/(loss) for the period

-

-

-

-

-

Total comprehensive income/(loss) for the period

-

-

-

(28,340)

(28,340)

Employee stock options

-

-

2,053

-

2,053

67,421,359

1,348

59,063

-

-

60,411

73,400,000

1,468

62,876

-

-

64,344

5,700,000

114

4,803

-

-

4,917

-

(6,503)

-

-

(6,503)

409,696,179

8,194

423,821

9,307

(49,762)

391,561

Profit/(loss) for the period

-

-

-

(31,499)

(31,499)

Other comprehensive income/(loss) for the period

-

-

-

-

-

Total comprehensive income/(loss) for the period

-

-

-

(31,499)

(31,499)

Issue of convertible bonds

-

-

26,604

-

26,604

Employee stock options

-

-

2,069

-

2,069

57,500,000

1,150

39,967

-

-

41,117

-

(96)

-

-

(96)

467,196,179

9,344

463,692

37,981

(81,261)

429,756

Balance as at 31 December 2010

Issue of share capital 21 October 2011 at NOK 4.00 (USD 0.72) per share Transaction costs on issue of shares Balance as at 31 December 2011

The accompanying notes are an integral part of the consolidated financial statements.

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Other Reserves (Note: 16)

5,263

Issue of share capital 19 October 2010 at NOK 5.15 (USD 0.90) per share 24 November 2010 at NOK 5.30 (USD 0.93) per share 21 December 2010 at NOK 5.15 (USD 0.86) per share Transaction costs on issue of shares

263,174,820

Issued Share capital (Note: 14)


Notes to the Consolidated Financial Statements

1 General information and financing

The consolidated financial statements of Polarcus Limited (the “Company”) and its subsidiaries (together the “Group”) for the period ended 31 December 2011 were authorized for issue in accordance with a resolution of the Board of Directors on 28 March 2012. Polarcus Limited is a pure play marine geophysical company with a pioneering environmental agenda, specializing in high-end towed streamer data acquisition from Pole to Pole. Polarcus Limited is incorporated in the Cayman Islands with its registered office at Walker House, 87 Mary Street, George Town, Grand Cayman, Cayman Islands. The Group has its main administration office in Dubai, United Arab Emirates which is the domicile of the Group. The Group has six high end 3D vessels, Polarcus Nadia, Polarcus Naila, Polarcus Asima, Polarcus Samur, Polarcus Alima and Vyacheslav Tikhonov that are currently operational. Shipbuilding contracts have been signed for a further two vessels, Polarcus Amani and Polarcus Adira, with delivery in the first half of 2012.

1.1 Financing

In October 2011 the Company entered into a loan facility of USD 410 million with DNB and DVB Bank SE, Nordic Branch, together with Garanti-instituttet for Eksportkreditt (GIEK) and Eksportfinans ASA (the “Fleet Bank Facility”). The Company also entered into an amended and restated bond agreement for the Polarcus Alima AS 10/15 12.5% USD 80 million second lien bond issue (ISIN: NO0010590300) (the “Bond Issue”) and entered into an inter-creditor agreement coordinating the security interests between the Fleet Bank Facility and the Bond Issue. The Fleet Bank Facility will be drawn down in 5 tranches and used to refinance existing debt related to Polarcus Alima, Polarcus Asima and Polarcus Samur and to partly finance the new buildings Polarcus Amani and Polarcus Adira. The drawing of the tranches will happen sequentially:    

Tranche 1 and Tranche 2 were drawn on 15 November 2011. This triggered a repayment of the earlier USD 80 million loan facility and the USD 55 million bank loan facility granted by DVB Bank SE, Nordic Branch, together with GIEK and Eksportfinans ASA. Tranche 3 will be drawn upon delivery of Polarcus Amani expected to take place on 29 March 2012 and will be used to partly finance the vessel. Tranche 4 will be drawn upon delivery of Polarcus Adira expected to take place in Q2 2012 and will be used to partly finance the vessel. Tranche 5 will partly refinance the USD 55 million 13.0% Senior Secured Callable Bond (ISIN NO 0010445935), expected to take place in Q2/Q3 2012.

In respect of the drawdown of Tranche 3, Tranche 4 and Tranche 5 in the Fleet Bank Facility, a capital structure satisfactory to the leading banks is a condition precedent to drawdown. The new financing from Eksportfinans ASA included in the Fleet Bank Facility has a fixed interest rate of 2.85% in addition to 2.75% guarantee commission to GIEK and the commercial banks. When the Fleet Bank Facility is fully drawn, the average nominal interest rate for Polarcus will be approximately 7.5%. The new-build POLARCUS ADIRA has a total estimated project capital expenditure, based on a USDNOK exchange rate of 6.0, of USD 168 million; including seismic equipment but excluding capitalized interest costs. The project is slightly below budget, however some risk of a negative currency effect remains. A change of NOK 0.1 from NOK 6.0 in the USDNOK exchange rate will have a capital expenditure effect of approximately USD 2.0 million. On 11 October 2011 the Company issued 57,500,000 new shares through a private placement to Sabaro Investments Limited. The new shares were subscribed for at a price of NOK 4.00 per share. Total gross proceeds from the Private Placement amounts to NOK 230 million (USD 41.1 million). Following the Private Placement, the Company had 467,196,179 shares outstanding as of 31 December 2011 On 27 October 2011 the Company issued NOK 230 million unsecured bond with maturity in November 2014. The bonds were issued with a coupon of 14.00% p.a. On 14 March 2012 the Company issued 40,000,000 new shares through a private placement. The new shares were subscribed for at a price of NOK 5.80 per share. Total gross proceeds from the Private Placement amounts to NOK 232 million (USD 40.7 million). Following the Private Placement, the Company has 507,196,179 shares outstanding.

37


2 Summary of significant accounting policies

The principle accounting policies applied in the preparation of these consolidated financial statements are set out below .

2.1 Basis of preparation

These consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value and financial liabilities measured at amortized cost. The consolidated financial statements are presented in USD and all values are rounded to the nearest thousand (USD 000) except when otherwise indicated.

2.2 Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

2.3 Changes in accounting policies 2.3.1

Current changes in accounting policies and disclosures

The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of 01 January 2011: IAS 24 Related Party Disclosures (amendment) effective 01 January 2011 IAS 32 Financial Instruments: Presentation (amendment) effective 01 February 2010 IFRIC 14 Prepayments of a Minimum Funding Requirement (amendment) effective 01 January 2011 Improvements to IFRSs (May 2010) The adoption of the standards and interpretations listed above had no significant impact on the financial statements or performance of the Group.

2.3.2

Future changes in accounting policies and disclosures

Certain new standards, amendments and interpretations of existing standards have been published that are mandatory for the Group’s accounting period beginning on 01 January 2012 or later periods but which the Group has not early adopted. The new standards, amendments and interpretations are not expected to have a significant impact on the financial position of performance of the Group, except as listed below; IFRS 9 Financial Instruments IFRS 9 as issued reflects the first phase of the IASBs work on replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. According to IFRS 9 financial assets with basic loan features shall be measured at amortized cost, unless one opts to measure these assets at fair value. All other financial assets shall be measured at fair value. The classification and measurement of financial liabilities under IFRS 9 is a continuation from IAS 39, with the exception of financial liabilities designated at fair value through profit or loss (fair value option), where change in fair value relating to own credit risk shall be separated and shall be presented in other comprehensive income. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption could potentially impact the classification and measurement of the Group’s financial assets and financial liabilities. The Group will quantify the effect in conjunction with the other phases of the new standard, when issued, to present a comprehensive picture. IFRS 9 is effective for annual periods beginning on or after 01 January 2015, but the standard is not yet approved by the EU. The Group expects to apply IFRS 9 as of 01 January 2015. IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method.

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The application of this new standard will impact the financial position of the Group. This is due to the cessation of proportionate consolidation of the joint venture in Polarcus MC Limited (refer to Note 24 Interest in joint venture) and replacement by the equity method of accounting for this investment. This standard becomes effective for annual periods beginning on or after 01 January 2013, but is not yet approved by the EU. The Group expects to apply IFRS 11 as of 01 January 2013. IFRS 12 Disclosure of Involvement with Other Entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. This standard becomes effective for annual periods beginning on or after 01 January 2013, but is not yet approved by the EU. The Group expects to apply IFRS 12 as of 01 January 2013. IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Group is currently assessing the impact that this standard will have on the financial position and performance. This standard becomes effective for annual periods beginning on or after 01 January 2013, but is not yet approved by the EU. The Group expects to apply IFRS 13 as of 01 January 2013.

2.4 Consolidation 2.4.1

Subsidiaries

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition costs incurred are expensed and included as sales, general and administrative costs. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at fair value at the acquisition date and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether it measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in sales, general and administrative costs. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or a liability will be recognized in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it will not be remeasured. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. 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

39


units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit 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. Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated but considered as an impairment indicator of the asset transferred.

2.4.2

Interest in joint venture

Joint venture is a contractual arrangement whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of a venture. The arrangement requires unanimous agreement for financial and operating decisions among the venturers. The Group recognizes its interest in joint ventures using the proportionate consolidation method. The Group combines its proportionate share of each of the assets, liabilities, income and expenses of joint ventures with similar items, line by line, in its consolidated financial statements. The financial statements of joint ventures are prepared for the same reporting period as the Group. Adjustments are made where necessary to bring the accounting policies in line with those of the Group. In the Group’s consolidated financial statements the Group’s share of intra-group balances, transactions and unrealized gains and losses on such transactions between the Group and its jointly controlled entities are eliminated. Losses on transactions are recognized immediately if the loss provides evidence of a reduction in the net realizable value of current assets or an impairment loss. Joint ventures are proportionately consolidated until the date on which the Group ceases to have joint control. Upon loss of joint control the Group measures and recognizes its remaining investment in the joint venture at its fair value. Any difference between the carrying amount of the former jointly controlled entity upon loss of joint control and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss. When the remaining investment constitutes significant influence, it is accounted for as an investment in an associate.

2.5 Foreign currency translation 2.5.1

Functional and presentation currency

2.5.2

Transactions and balances

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in USD, (the presentation currency). The parent and all the subsidiaries have USD as their functional currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges. Translation differences on non-monetary financial assets and liabilities such as equity instruments held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss.

2.6 Revenue recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable for the sale of services in the ordinary course of the Group’s activities. Revenue is presented net of discounts, rebates, returns and sales taxes or duty. The Group defers the unearned component of payments received from customers for which the revenue recognition requirements have not been met. The Group’s revenue recognition policy on different types of revenue is described below;

40


2.6.1

Sales of Multi-Client projects library

Pre-funding arrangements

The Group obtains funding from a limited number of customers before a seismic project is commenced. In return for the prefunding, the customer typically gains the ability to direct or influence the project specifications and access data as it is being acquired at discounted prices. The Group recognizes pre-funding revenue as the services are performed on a proportional performance basis. Progress is measured in a manner generally consistent with the physical progress on the project, and revenue is recognized based on the ratio of the project's progress to date, provided that all other revenue recognition criteria are satisfied.

Late sales

The Group grants a license to a customer, which entitles the customer to have access to a specifically defined portion of the multiclient data library. The customer's license payment is fixed and determinable and typically is required at the time that the license is granted. The Company recognizes revenue for late sales when the customer executes a valid license agreement and has received the underlying data or has the right to access the licensed portion of the data and collection is reasonably assured.

2.6.2

Proprietary sales/contract sales

2.6.3

Other services

The Company performs seismic services under contract for a specific customer, whereby the seismic data is owned by that customer. The Company recognizes proprietary/contract revenue as the services are performed and become chargeable to the customer on a proportionate performance basis over the term of each contract. Progress is measured in a manner generally consistent with the physical progress of the project, and revenue is recognized based on the ratio of the project's progress to date, provided that all other revenue recognition criteria are satisfied.

Revenue from other services is recognized as the services are performed, provided all other recognition criteria are satisfied.

2.7 Property, Plant and Equipment

Property, Plant and Equipment are stated at cost less accumulated depreciation and impairment charges. Cost includes expenditure that is directly attributable to the acquisition, construction or installation of the items, including borrowing costs capitalized according to the Group’s policy which is described further below.

2.7.1

Useful life and depreciation

Depreciation is calculated on a straight-line basis over the useful life of the asset once the asset is ready for use. The estimated useful life of major assets is as follows: Seismic vessels

30 Years

Seismic equipment

3-30 Years

Maritime equipment

5-30 Years

Furniture and fixtures

3-5 Years

Office IT equipment

3-5 Years

Each component of the vessels with a cost significant to the total cost is separately identified and depreciated on a straight-line basis over that component’s economic life. Subsequent expenditures and major renovations and inspections are included in the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. Dry-docking and classification costs for vessels are capitalized and depreciated over the period until the next expected dry-docking, normally 30 months. When vessels are acquired or constructed a proportion of the acquisition cost is capitalized as dry-docking and depreciated over the period until next expected dry-docking. The assets’ residual values and useful lives are reviewed and adjusted if appropriate at least every balance sheet date. Adjustments, where applicable, are made on a prospective basis. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are presented net in the income statement.

2.7.2

Vessels under construction

Vessels under construction are carried at cost, less any impairment loss. Cost includes project related overheads capitalized and for qualifying assets, the borrowing costs capitalized in accordance with the Group’s accounting policy as described below. Depreciation of these vessels commences when the vessels are ready for their intended use.

41


2.8 Leases

The determination whether an arrangement is or contains a lease is based on the substance of the arrangement at the inception date and whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

2.8.1

Group as a lessee

Finance leases, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased asset, are capitalized at the commencement of the lease at the fair value of the leased asset or, if lower, at the present value of minimum lease payments. Lease payments are apportioned between 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 recognized in the income statement. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and lease term. Operating lease payments are recognized as an expense in the income statement on a straight line basis over the lease term.

2.8.2

Group as a lessor

Leases 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 recognized over the lease term on the same bases as rental income.

2.9 Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement or capitalized in accordance with the accounting policy for borrowing costs as mentioned below, over the period of the borrowings using the effective interest method. Interest payable on borrowings is classified as a current liability unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

2.9.1

Convertible bonds

Convertible bonds are separated into a debt liability and an equity component based on the terms of the contract. On issuance of the convertible bonds, the fair value of the debt liability excluding conversion option is measured at the fair value of expected cash flows at inception and is recorded under non-current liabilities in the balance sheet. The debt liability component is amortized to the redemption value over the bond life, accruing interest at the effective rate. The rest of the convertible bond issue proceeds are recorded as equity. Transaction costs are apportioned between the debt liability and equity components of the convertible bonds based on the allocation of the proceeds of the debt liability and equity components when the instruments are initially recognized.

2.10 Borrowing costs

Borrowing costs are recognized as an expense in the period in which they are incurred, except for borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset. Such borrowing costs are capitalized as part of the cost of that asset. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset is determined as the actual borrowing costs incurred from the borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining qualifying assets, the amount of borrowing costs eligible for capitalization is determined by applying a capitalization rate to the expenditures on those assets. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period does not exceed the amount of borrowing costs incurred during that period.

42


2.11 Transit costs

Transit costs are costs related to moving a vessel from one location to another. The transit costs related to multi-client survey are capitalized as part of the multi-client projects library. Transit costs on exclusive surveys are deferred and charged to expense based upon the percentage of completion of the project. Both for multi-client and exclusive projects, the estimated probable future economic inflows which are documented at inception should cover the costs that are capitalized or deferred. If the projects are not able to cover all of the costs which could be capitalized or deferred, only the costs that are recoverable are capitalized or deferred.

2.12 Multi-client projects library

The multi-client projects library comprises seismic surveys to be licensed to customers on a nonexclusive basis. All costs directly incurred in acquiring, processing and otherwise completing seismic surveys are capitalized into the multi-client projects library. Also included are transit costs (moving a vessel from one location to another) and capitalized borrowing costs, when applicable. Multi-client data is valued at cost less accumulated amortization, or at recoverable amount, if lower. The Group reviews the multiclient projects library for potential impairment at each balance sheet date at the relevant level. When establishing amortization rates for the multi-client projects library, management bases its views on estimated future sales of each individual project. Sales estimates are adjusted over time in relation to the development of the market. The principle on which the multi-client project is amortized is based on the assumption that the cost of the project will be recoverable by future revenue earned from the future sale of the data licenses. The amortization rate is calculated by dividing the net costs (net book value plus expected future costs) of the project by the expected future revenues from sales of the data licenses. Each project is placed into one of four amortization categories with amortization rates of 90%, 75%, 60% or 45% as per the table below. Calculated amortization rate

Amortization category

>76% 61%-75%

90% 75%

46%-60%

60%

<45%

45%

A project remains in the same amortization category unless subsequent changes to the amount of expected future revenue from a project would result in a different amortization rate becoming appropriate, in which case the project is moved to the relevant category. The Group also applies a minimum amortization policy. This policy specifies the maximum net book value allowed for a project as a percentage of its original book value at the end of each calendar year following completion. All surveys have a 5-year amortization profile starting in the year after completion, as shown below: Year after survey completion Maximum net book value Year 0 * 100% Year 1 80% Year 2 60% Year 3 40% Year 4 20% Year 5 0% * Year 0 is the calendar year in which the project is completed.

2.13 Intangible assets

Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Computer software development costs recognized as assets are amortized over their estimated useful lives once the individual asset is available for use (not exceeding three years). Computer software not yet available for use is tested annually for impairment.

43


2.14 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents that are restricted for the Group’s use are disclosed separately in the consolidated balance sheets and are classified as current or non-current depending on the nature of the restrictions. For the purpose of the cash flow statements, changes in restricted cash are disclosed as part of the “Investing activities”.

2.15 Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds.

2.16 Trade payables

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

2.17 Provisions

A provision is recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable (i.e. more likely than not) that there is an outflow of resources embodying economic benefits and a reliable estimate can be made of the amount of the obligation.

2.18 Employee benefits 2.18.1 Pension Plan

The Group has set up a pension scheme for majority of its employees under which the Group on a monthly basis contributes 8% of an employee’s base salary to the pension fund. No mandatory contribution is required from the employees. The amount contributed to the scheme is ring-fenced in favor of the employees through a trust. The vesting period of the fund is 5 years and each applicable employee is enrolled into the scheme at the end of his/her probation period. The employees may contribute own funds to the scheme and the Company will match such contributions with an additional maximum 2%. For employees who are not enrolled into the above pension scheme, the Group recognizes a provision for pensions payable to the employees based on the contractual obligation between each employee and the Group. The accrued pension liability calculated based on the contractual obligation varies from 21 days to 1 month’s basic salary for each year completed pro rata based on date of joining of each employee.

2.18.2 Bonus plans

The Group recognizes a provision for bonuses where bonuses are a contractual obligation or where there is a past practice that has created a constructive obligation. The Group recognizes a liability and an expense for bonuses prescribed in the employment contracts.

2.18.3 Share-based compensation

The Group has a share option plan. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted measured at grant date. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

2.19 Derivative financial instruments and hedging

The Group uses derivative financial instruments to reduce risk exposure related to fluctuations in foreign currency rates and interest rates. Such derivative financial instruments are initially recognized in the consolidated balance sheet at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Any gains or losses arising from changes in fair value on derivatives during the year that do not qualify for hedge accounting and any ineffective hedges are taken directly to the income statement. The Group applies either fair value or cash flow hedge accounting when a transaction meets the specified criteria. To qualify for hedge accounting, the instrument should be designated as a hedge at inception of a hedge relationship. At the time a financial instrument is designated as a hedge, the Group documents the relationship between the hedging instrument and the hedged item. Documentation includes risk management objectives and strategy in undertaking the hedge transaction, together with the methods

44


that will be used to assess the effectiveness of the hedging relationship. Accordingly, the Group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been â&#x20AC;&#x153;highly effectiveâ&#x20AC;? in offsetting changes in the fair value or cash flows of the hedged item. Hedge accounting will be discontinued when (a) the Company determines that a derivative is not, or has ceased to be, highly effective as a hedge, (b) the derivative expires, or is sold, terminated or exercised, (c) the hedged item matures or is sold or repaid, or (d) a forecast transaction is no longer deemed highly probable.

2.19.1 Fair value hedges

The Group applies fair value hedges whilst hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk). The change in fair value of the hedging instrument is recognized in the consolidated income statement. The change in fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognized in the consolidated income statement. When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in the consolidated income statement.

2.19.2 Cash flow hedges

Cash flow hedging is applied to hedge the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment. The effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive income (OCI), while any ineffective portion is recognized immediately in the consolidated income statement. Amounts recorded in OCI are transferred to the consolidated income statement when the hedged transaction affects profit or loss. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken into OCI are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognized in OCI are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in OCI remain in OCI until the forecast transaction or firm commitment occurs.

2.20 Financial assets and liabilities

Financial assets and liabilities are recognized when the Group becomes party to the contractual obligations of the instrument and are initially recognized at fair value. Financial assets and liabilities are classified as per below.

2.20.1 Financial assets and liabilities measured at fair value in profit or loss

This includes the financial assets and liabilities held for trading and financial assets and liabilities measured at fair value upon initial recognition with change in fair value recognized through the consolidated income statement. Subsequent to initial recognition, financial assets and liabilities in this category are measured at fair value at the end of each reporting period with unrealized gains and losses being recognized through profit or loss. Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling in the near future. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains and losses on financial assets held for trading are recognized in profit or loss.

2.20.2 Financial assets and liabilities measured at amortized cost

This category includes loans and receivables and other non-derivative financial assets and liabilities with fixed or determinable payments that are not quoted in an active market. Financial assets and liabilities in this category are initially recognized at fair value, with addition for directly attributable transaction costs. After initial measurement financial assets and liabilities in this category are subsequently carried at amortized cost using the effective interest method less any allowance for impairment.

2.20.3 Financial assets and liabilities measured at fair value through other comprehensive income

This category includes financial assets and liabilities that are non-derivatives and are either designated as available-for-sale or not classified in any of the other categories. After initial measurement, financial assets and liabilities in this category are measured at fair value with unrealized gains or losses being recognized in other comprehensive income. When the asset or liability is disposed of, the cumulative gain or loss previously recorded in other comprehensive income is recognized in profit or loss. The fair values of quoted financial assets and financial liabilities are based on current bid/ask prices. If the market for a financial instrument is not active, the Company establishes fair value by using valuation techniques. These include the use of recent armâ&#x20AC;&#x2122;s length transactions, discounted cash flow analysis and option pricing models.

45


The Company assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity instruments designated as available-for-sale, a significant or prolonged decline in the fair value of the instrument below its cost is considered as an indicator that the instrument is impaired. If any such evidence exists for availablefor-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit and loss – is removed from shareholders’ equity and recognized in profit or loss. Impairment losses recognized in profit and loss on equity instruments are not reversed through the profit or loss. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value through the profit or loss.

2.21 Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or Cash Generating Unit’s (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale. This is the case for the vessels under construction.

2.22 Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Company and held as treasury shares. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. For diluted earnings per share, diluted potential ordinary shares are determined independently for each period presented. When the number of ordinary shares outstanding changes (e.g. share split) the weighted average number of ordinary shares outstanding during all periods presented is adjusted retrospectively.

2.23 Consolidated statement of cash flows

The Company’s consolidated statement of cash flows is prepared using the indirect method. Cash flows from operating activities are incorporated as a part of the cash flow statement and the cash flows are divided into operating activities, investing activities and financing activities.

2.24 Accounts receivable

Receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment if any. A provision for impairment of accounts receivables is made when there is objective evidence that the Group will not be able to collect all amounts due according to original terms of receivables. The amount of such provision is the difference between accounts receivable’s carrying amount and the present value of estimated future cash inflows, discounted at the effective interest rate. The carrying amount of the accounts receivable is reduced through a loss being recognized in the income statement. If an accounts receivable becomes uncollectible, it is written off through the income statement. Subsequent recoveries of amounts previously written off are credited to the income statement.

2.25 Taxation

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax is provided using the liability method and temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The Norwegian subsidiaries are taxed in compliance with the tonnage tax regime for shipping companies in Norway. This scheme entails no tax on profits or tax on dividends from companies within the scheme. Tonnage tax paid under the tonnage tax regime is

46


classified as an operational expense. Net finance income for companies taxed under the tonnage tax regime is adjusted in accordance with the regime regulations and taxed at a rate of 28%.

3 Financial risk management 3.1 Financial risk factors

The Group is exposed to but not limited to a variety of financial market risks, operational risks and construction risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.

3.1.1

Financial market risk

Financial leverage and breach of covenants The financial leverage of the Group or any breach of covenants (or other circumstances which entail loans falling due prior to their final maturity date) may have several adverse consequences, including the need to refinance, restructure, or dispose of certain parts of the Group’s businesses in order to fulfill the Group’s financial obligations.

Fluctuations in Exchange rates and currency risks The Group’s costs are primarily in USD, though there are also some smaller costs in foreign currencies, particularly NOK, GBP and EUR. The majority of revenues are in USD and revenues are expected to be higher than costs. A depreciation of the USD will probably have a negative impact on margins as the Group is expected to have higher revenues than expenses denominated in USD. However, the impact of a reasonably possible change in the USD exchange rate, with all other variables held constant, on the Group’s financial performance and financial position are not expected to be significant. The new-build POLARCUS ADIRA has a total estimated project capital expenditure, based on a USDNOK exchange rate of 6.0, of USD 168 million; including seismic equipment but excluding capitalized interest costs. The project is slightly below budget, however some risk of a negative currency effect remains. A change of NOK 0.1 from NOK 6.0 in the USDNOK exchange rate will have a capital expenditure effect of approximately USD 2.0 million. Except for a loan of NOK 230 million (USD 40.6 million), the long term financing of the Group is in USD. Except for cash deposits of NOK 134.93 million (USD 22.5 million) and EUR 2.33 million (USD 3 million), the cash deposits are in USD. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency, which is USD. The company’s shares are traded in NOK. The NOK trading price is affected by the underlying activities of the Group which are primarily denominated in USD. Currency fluctuations relative to the NOK of an investor’s currency of reference may also adversely affect the value of an investor’s investments.

Interest rate risk

The Group has interest-bearing assets which results in the Group’s income and operating cash flows being dependent on changes in market interest rates. The interest-bearing assets with variable interest rates expose the Group to cash flow interest rate risk. Interest earned and received on these balances fluctuates with changes in market interest rates. During the period, the Group’s financial assets at variable rates were denominated in USD and NOK.

47


The Group is subject to interest rate risk on debt, including capital leases. The risk is managed using a combination of fixed and variable rate debt. 31-Dec-11

(In thousands of USD)

31-Dec-10

Total interest bearing debt

619,124

522,678

Interest bearing debt with variable interest rates

121,413

76,292

20%

15%

% of interest bearing debt with variable interest rates

As the portion of the overall debt that is subject to a variable interest rate is small the Group’s exposure to interest rate risk is reduced and any reasonably possible change to the variable interest rate are not expected to have a significant impact on the Group’s financial performance or position. The interest rate and maturity analysis of the Group’s borrowings as per the reporting date are shown in the table below: Effective interest rate (%)

Maturity

31-Dec-11

Deferred payments to the shipyard

7

15-Mar-11

-

59,874

Liability for streamer systems (refer to Note: 20)

8

15-Nov-12

2,911

7,596

2,911

67,470

(In thousands of USD)

31-Dec-10

Current

Total current Non-current 13% Senior Secured Bonds (refer to Note: 17)

14.49

30-Jul-13

54,246

53,846

12.5% Senior Secured Bonds (refer to Note: 17)

14.04

15-Oct-15

77,190

77,004

14% Senior Unsecured Bond (refer to Note: 17)

16.53

14-Nov-14

36,709

-

8.5% Convertible Bond (refer to Note: 18)

13.39

30-Jul-13

32,567

31,269

2.875% Convertible Bond (refer to Note: 18)

9.05

27-Apr-16

98,542

-

Long-term finance lease for vessels (refer to Note: 19)

12.19

Q4 2019

170,904

175,323

8

Q3 2013

24,641

41,472

Fleet bank facility Tranche 1 (refer to Note: 20)

8.05

31-Aug-22

47,901

52,431

Fleet bank facility Tranche 1 (refer to Note: 20)

6.4

31-Aug-22

22,189

23,861

Fleet bank facility Tranche 2 (refer to Note: 20)

5.76

21-Mar-23

51,322

-

616,213

455,207

Long-term finance lease for streamer systems (refer to Note: 19)

Total non-current

Shifts in market interest rates will impact the fair value of the warrants to shareholders and hence impact the Group’s income statement. The susceptibility of the value of warrants to a possible shift in the risk-free market interest rate is disclosed in Note 4.3 Warrants.

3.1.2

Risk factors particular to the vessels construction project

Construction risk

The Company has entered into two shipbuilding contracts with Ulstein Verft AS for the construction of Polarcus Amani and Polarcus Adira. Any material delays related to the construction contracts for these vessels or other contracts of importance for the construction and equipment of these vessels might have a material adverse effect on the Company and its financial position. Furthermore, cost overruns and technical problems might be experienced during construction and testing of the vessels which might impact the expected delivery time of the vessels as well as the expected financial performance. A potential default or delay by the shipyard or other counterparties will have an adverse effect on the Company and its financial position. The Group is dependent on the ability of sub-contractors to provide key seismic equipment which meets the specifications, quality standards and delivery schedules of the Company. Failure to meet these requirements might have a material adverse impact on the Company’s operating results and financial position.

48


3.1.3

Credit risk

Credit risk is managed on a Group basis. The Group’s credit risk arises mainly from trade receivables, cash and cash equivalents deposited with banks and financial institutions and from advance payments made to the suppliers. The Group provides its services only to recognized, credit worthy clients who are primarily multinational oil and gas companies, including companies owned in whole or in part by governments. It is Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. Receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. For banks and financial institutions, only independently rated parties with a minimum rating of investment grade or higher are accepted by the Group. The Group’s maximum exposure to credit risk for the components of the balance sheet is shown in the table below: 31-Dec-11

(In thousands of USD) Financial assets Cash and short-term deposits Accounts receivable Vessel prepayments Total

3.1.4

31-Dec-10

60,510 55,425 28,060 143,995

197,804 18,357 28,060 244,221

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and having availability of funding through an adequate amount of committed credit facilities. Management constantly manages the forecast of the group’s liquidity reserve on the basis of expected cash flows. The Group may require additional capital in the future due to unforeseen liabilities or in order for it to take advantage of opportunities for acquisitions, joint ventures, exercise of options or other business opportunities that may be presented to it. Any negative development in sales, gross margins or sales processes may lead to a strained liquidity position and the potential need for additional funding through equity financing, debt financing or other means. Any additional equity financing may be dilutive to existing shareholders. The table below analyses the Group’s financial liabilities broken into different maturity groups based on the remaining period from 31 December 2011 to the date of contractual maturity. The amounts disclosed in the table are the contractual undiscounted cash flows. Between

Between

1 - 2 Years

3 - 5 Years

-

90,000

243,387

-

333,387

Interest payment on bond loan borrowings

29,093

48,061

15,391

-

92,544

Finance lease liabilities (refer to Note: 19)

24,943

16,697

24,467

129,439

195,545

(In thousands of USD) Bond loan borrowings (refer to Note 17 and 18)

Less than 1 Year

Over 5 Years

Total

Interest payment on finance lease liabilities

21,790

39,211

52,253

26,306

139,560

Other long term liabilities (refer to Note: 20)

13,982

22,619

33,929

58,839

129,369

7,000

12,257

13,530

9,647

42,433

58,618

-

-

-

58,618

155,425

228,845

574,569

224,231

1,183,070

Interest payments on other long term liabilities Trade and Other payables Total

As of 31 December 2011 the Group had six vessels under operation. Two additional vessels, Polarcus Amani and Polarcus Adira will be delivered in the first half of 2012. The vessels are expected to generate revenues to support the Group’s operations and service the debts. On 14 March 2012 the Company issued 40,000,000 new shares through a private placement. The new shares were subscribed for at a price of NOK 5.80 per share. Total gross proceeds from the Private Placement amounts to NOK 232 million (USD 40.7 million).

49


3.2 Capital management

Capital includes equity attributable to the equity holders of the parent company. The Group’s objectives when managing capital are to maximize shareholder value by maintaining an optimal capital structure which will reduce the cost of capital and safeguard the Group’s ability to continue as a going concern. In order to maintain or adjust the capital structure, the Group may (i) return capital to shareholders, (ii) issue new shares or (iii) sell assets to reduce debt. The Company is subject to dividend restrictions under certain of its financing arrangements. Due to these dividend restrictions and the current phase of the Company, Polarcus will not propose any dividends to the shareholders for the fiscal year 2011. The Group is subject to externally imposed capital requirements as part of certain financing arrangements. The covenants of some of the financing arrangement require the Group to maintain minimum absolute levels of equity as well as minimum book equity ratios. Management ensures that the Group has complied with the requirements during the period The Group aims to have equity capital of a level appropriate to its objectives, strategy and risk profile. The Group monitors its capital structure on the basis of total equity to total assets ratio. As of 31 December 2011 the Group has a book equity ratio of 39%. It is the Group’s objective that the said ratio shall be approximately 40% during its current early growth stage.

4 Critical accounting estimates, assumptions and judgments

The preparation of financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates due to changes in general economic conditions, changes in laws and regulations, changes in the Group’s future operating plans and the inherent imprecision associated with estimates. Certain amounts included in or affecting the financial statements and related disclosure must be estimated, requiring the Group to make assumptions with respect to values or conditions which cannot be known with certainty at the time the financial statements are prepared. A ‘‘critical accounting estimate’’ is one which is both important to the portrayal of the Group’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The management evaluates such estimates on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods considered reasonable in the particular circumstances, as well as forecasts as to how these might change in the future. The following is a summary of which estimates and judgments could have a material effect on the Group’s financial statements.

4.1

The Group assesses long-lived assets for possible impairment upon the occurrence of indicators. Events that can trigger assessments for possible impairments include, but are not limited to (a) significant decreases in the market value of an asset, (b) significant changes in the extent or manner of use of an asset, and (c) a physical change in the asset. Estimating undiscounted future cash flows requires the management to make judgments about long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain as they require assumptions about demand for our products and services, future market conditions and future technological developments. Significant and unanticipated changes in these assumptions could require a provision for impairment in a future period.

4.2

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. Management uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date. The primary assumptions used in the valuations are interest rates, share price, expected life of instruments, volatility and likelihood of certain events happening. The employee stock options are priced using a Black Scholes formula for equity options. For the simulation of “Change of Control”, the events are drawn from a uniform distribution in the simulations.

50


4.3 Warrants

The Group has issued 21,250,000 warrants where the strike price might vary dependent upon circumstances outside of the control of the Group. The warrants are classified as a liability and measured at fair value through profit or loss. No cash outflows will arise in relation to the warrants. Financial instruments carried at fair value include warrants issued to founding shareholders. Assumptions used in the calculations of fair value of the financial instrument that are more sensitive are the following:

-

Market price of the Companyâ&#x20AC;&#x2122;s shares (warrants) Volatility of the share price (warrants) Probability of change of control event (warrants)

As of 31 December 2011, the value of the warrants was calculated to be USD 48,346 using 67% volatility and a share price of USD 0.47 (NOK 2.8 at USD exchange rate of 5.96). The table below presents a calculation of the sensitivities related to the valuation of warrants. The table shows the effect on net income based on 10% change (plus or minus) in volatility, share price and risk-free market interest rate. The fair value of the warrants, and consequently the liability relating to the change of control clause, is strongly dependent on the value and the volatility in the shares.

(In thousands of USD except for share price) Volatility used at 31-Dec-2011 67%

Effect of

Share Price

Effect of

Interest Rate

Effect of

-10%

10%

used at 31.12.2011

-10%

10%

used at 31.12.2011

-10%

10%

10

(60)

$0.47

-

-

0.75%

-

-

The effect of change in fair value of the warrant liability on net income is not linear to changes in the share price. The table below shows the effect on net income based on increased share price in NOK 3 increments.

(In thousands of USD except for share price) Share price used at 31-Dec-2011 NOK 2.80 ($0.47)

Effect of share price being NOK 6 (3,227)

NOK 9 (13,518)

NOK 12 (28,009)

4.4

The useful life of different components of the vessels is based on management estimates of the expected useful lives and expected residual values of the assets. These estimates may change due to future changes in market conditions.

4.5

For the purpose of applying the Companyâ&#x20AC;&#x2122;s accounting policies, management is required to exercise a judgment as to whether lease arrangements should be considered an operating or finance lease. Current lease arrangement for vessels and seismic equipment as a lessee are determined to be financial leases and current lease arrangement for vessels and seismic equipment as a lessor is determined to be operating lease.

4.6 Amortization of the multi-client projects library In determining the annual amortization rates applied to the multi-client projects library, management considers expected future sales and market developments and past experience. The estimates of future sales depend on variables such as political risk, license periods, geographic location, general economic conditions, etc. Changes in these variables may potentially affect the estimated future sales and the amortization rates significantly from year to year. To the extent that such revenue estimates prove to be higher than actual revenue, for example due to reliance on too optimistic assumptions, the Groupâ&#x20AC;&#x2122;s subsequent operations will reflect lower profitability resulting from increased amortization rates applied to the multi-client projects library in later years, or from the multi-client projects library being subject to minimum amortization and/or impairment.

51


5 Segment information

The Group provides its marine towed streamer seismic data acquisition services to customers worldwide. All activities of the Group are conducted and monitored as one business segment, thus in accordance with IFRS 8, no further operating segment information has been disclosed in these consolidated financial statements.

5.1 Geographic information

The Group’s revenue is earned from external customers worldwide are grouped as per below based on the territory of services provided; Years ended (In thousands of USD) 31-Dec-11 31-Dec-10 Africa 85,642 42,421 South America 24,195 6,226 Europe 145,964 70,610 Asia Pacific 39,527 Total revenue 295,328 119,256 At the end of the period reported, the property, plant and equipment and the vessels under construction were geographically located as per below: (In thousands of USD) Africa South America Middle East Europe Asia Pacific Total

31-Dec-11 435,323 122,472 1,173 138,455 174,790 872,213

31-Dec-10 134,566 282,993 261,516 679,075

The Group had six vessels in operation during the year ended 31 December 2011 and included in the property, plant and equipment as of 31 December 2011. All six vessels were located in different jurisdictions due to the location of the contracts. Other non-current assets included in the property, plant and equipment are furniture and fixtures, office equipment and were all located at the Group’s office in Dubai, United Arab Emirates. The two vessels under construction at the period end were located at the shipyard in Norway.

5.2 Revenues from key customers

During the year ended 31 December 2011, the Group provided its services to 34 different customers worldwide (10 in 2010). Revenue earned from largest two of these customers amounted to 20% of the Group’s total revenue earned during the year: (In thousands of USD) Customer 1 Customer 2 Other customers Total revenue

52

Years ended 31-Dec-11 31-Dec-10 36,146 43,173 22,214 24,656 236,968 51,427 295,328 119,256


Groupâ&#x20AC;&#x2122;s total revenue earned during the year ended 31 December was from contract sales and multi-client sales as per below; (In thousands of USD) Year ended 31-Dec-11 Contract revenues

31-Dec-10

274,757

119,256

20,571

-

-

-

295,328

119,256

Multi-client revenue - Prefunding - Late sales Total

53


6 Property, plant and equipment (In thousands of USD)

Seismic vessels and equipment

Furniture and fixtures

Office and IT equipment

Balance as of 01 January 2010

159,692

551

647

160,890

Additional capital expenditures

185,132

1,142

61

186,335

Assets under finance leases

157,383

-

-

157,383

(2,433)

(57)

-

(2,490)

499,774

1,636

708

502,118

Total

Year ended 31 December 2010 Costs

Retirement and disposals Balance as of 31 December 2010 Depreciation and impairment losses Balance as of 01 January 2010

417

149

165

731

22,646

227

142

23,015

(172)

-

-

(172)

22,891

376

307

23,574

As of 01 January 2010

159,275

402

482

160,159

As of 31 December 2010

476,883

1,260

401

478,544

Carrying amounts held under finance lease as of 31 December 2010

274,822

-

-

274,822

Depreciation for the period Retirement and disposals Balance as of 31 December 2010 Carrying amounts

Year ended 31 December 2011 Costs Balance as of 01 January 2011

499,774

1,636

708

502,118

Additional capital expenditures

441,568

43.91

-

441,612

Additions under finance leases

1,519

-

-

1,519

(3,908)

(1)

-

(3,909)

938,953

1,679

708

941,339

Balance as of 01 January 2011

22,891

376

307

23,574

Depreciation for the period

50,741

391

139

51,271

(427)

-

-

(427)

73,205

766

446

74,417

As of 01 January 2011

476,883

1,260

401

478,544

As of 31 December 2011

865,748

912

262

866,922

Carrying amounts held under finance lease as of 31 December 2011

253,500

-

-

253,500

Pledged assets as of 31 December 2011

863,833

-

-

863,833

Retirement and disposals Balance as of 31 December 2011 Depreciation and impairment losses

Retirement and disposals Balance as of 31 December 2011 Carrying amounts

54


On 3 March 2011, the Group took delivery of Polarcus Samur. The cost of the vessel incurred up to delivery was USD 133.08 million. Polarcus Samur is pledged as security for a 13% USD 55 million senior secured bond and interest accrued thereon. Also refer to Note 7 Vessels under construction and Note 17 Senior bonds. On 21 March 2011, the Group took delivery of Polarcus Alima. The cost of the vessel incurred up to delivery was USD 140.03 million. Polarcus Alima has been pledged as a 1st priority security towards a USD 80 million loan facility and a USD 55 million loan facility together with Polarcus Asima. Also refer to Note 7 Vessels under construction and Note 20 Other long term debt. Polarcus Alima and Polarcus Asima are furthermore pledged as 2nd priority security for a 12.5% USD 80 million senior secured bond and interest accrued thereon. Also refer to Note 17 Senior bonds. On 8 August 2011, the Group took delivery of Vyacheslav Tikhonov (previously Polarcus Selma). The cost of the vessel incurred up to delivery was USD 135.64 million. Vyacheslav Tikhonov has been pledged as a 1st priority security towards a 2.875% USD 125 million senior secured convertible bond and interest accrued thereon. Also refer to Note 7 Vessels under construction and Note 18 Convertible bonds.

55


7 Vessels under construction

(In thousands of USD) Vessel Name Vessel Type

Year ended 31 December 2010 Balance as at 01 January 2010 Additions during the year: Vessel and equipment Project Overheads Project Financing costs Disposals Transfers to property, plant & equipment Payments treated as advance to suppliers Work in progress value per vessel as of 31 December 2010

Polarcus Naila SX 124

Polarcus Asima SX 133

Polarcus Samur SX 133

Polarcus Alima SX 134

Polarcus Selma SX 133

Polarcus Amani SX 134

Polarcus Adira SX 134

94,033

92,458

71,990

-

-

3,769

3,769

266,019

16,674 561 3,598 (114,866) -

54,362 2,933 3,125 (152,878) -

21,555 3,416 8,010 -

84,442 1,252 9,866 -

-

10,760 (500) (14,029)

10,760 (500) (14,029)

198,555 8,162 24,598 (1,000) (267,744) (28,059)

-

-

104,971

95,560

-

-

-

200,531

-

-

26,503 193 1,412 (133,080)

41,370 548 2,553 (140,030)

126,024 1,617 8,001 (135,642)

1,940 614 -

2,123 614 -

197,960 3,586 11,966 (408,752)

-

-

-

-

-

2,554

2,737

5,291

Total

Year ended 31 December 2011 Additions during the year: Vessel and equipment Project Overheads Project Financing costs Disposals Transfers to property, plant & equipment Work in progress value per vessel as of 31 December 2011

The vessel Polarcus Samur was delivered on 03 March 2011. Refer to Note 6 Property, Plant and Equipment for further details. The vessel Polarcus Alima was delivered on 21 March 2011. Refer to Note 6 Property, Plant and Equipment for further details. The vessel Vyacheslav Tikhonov (previously Polarcus Selma) was delivered on 08 August 2011. In addition to the project overheads capitalized for vessels Polarcus Amani and Polarcus Adira as per above, the Group has made advance payments of USD 28.06 million (USD 14.03 per vessel) to the shipyard for construction of these vessels. The remaining commitments for these vessels under construction as of 31 December 2011 are USD 146.64 million for Polarcus Amani and USD 141.61 million for Polarcus Adira, all payable within one year from the reporting date.

56


8 Multi-client projects library

31-Dec-11

(In thousands of USD)

Balance as of 01 January

31-Dec-10 -

Cash investments Capitalized depreciation * Amortization * Balance as of 31 December

-

17,282

-

3,734

-

(10,545)

-

10,470

-

*Also refer to Note 28 Depreciation and Amortization.

9 Intangible assets (In thousands of USD)

ERP System

Industry specific applications

Industry specific applications under development

Consideration for vessel buyback options

Total

Year ended 31 December 2010 Costs Balance as at 01 January 2010 Additions Buyback option exercised Capitalized during the year Balance as at 31 December 2010

344 199 543

743 743

609 170 (743) 36

3,400 (1,700) 1,700

4,353 1,111 (1,700) (743) 3,021

Amortization and impairment losses Balance as at 01 January 2010 Amortization for the period Balance as at 31 December 2010

74 134 208

180 180

-

-

74 314 388

Carrying amounts As at 01 January 2010 As at 31 December 2010

270 334

563

609 36

3,400 1,700

4,279 2,633

Costs Balance as at 01 January 2011 Additions Buyback option exercised Capitalized during the year Balance as at 31 December 2011

543 53 596

743 42 785

36 123 160

1,700 (1,700) -

3,021 219 (1,700) 1,540

Amortization and impairment losses Balance as at 01 January 2011 Amortization for the period Balance as at 31 December 2011

208 185 394

180 256 435

-

-

388 441 829

Carrying amounts As at 01 January 2011 As at 31 December 2011

334 202

563 350

36 160

1,700 -

2,633 712

Year ended 31 December 2011

57


The useful lives of ERP system and industry specific applications are considered to be finite and these assets are amortized over three years from the date when these assets are ready for its intended use.

10 Prepaid expenses (In thousands of USD) Prepaid rent Prepaid insurance Other prepaid miscellaneous expenses Total

11 Other current assets (In thousands of USD) Inventories onboard the vessels Deferred transit cost Insurance claims Accrued revenue Deposits Advance to employees Withholding taxes VAT claimable Advance to suppliers Investment in shares Financing costs paid in advance Total

12 Restricted cash - short term (In thousands of USD) Letter of credit Escrow account to secure payment to suppliers Senior secured bond loan escrow account Long term loan installment retention account Other short term deposits Total

31-Dec-11 292 3,884 616 4,792

31-Dec-10 295 1,787 357 2,440

31-Dec-11 7,248 4,773 5,127 20,699 174 1,078 3,837 39 2,546 529 6,139 52,189

31-Dec-10 5,668 3,292 4,106 6,387 218 1,130 9 4,713 529 26,052

31-Dec-11 514 5,360 17,809 23,683

31-Dec-10 344 91,550 18,856 110,749

Other short term deposits consist of USD 12 million cash collateral pledged in favor of lenders. The remaining amount is deposited as cash collateral to secure different bank guarantees including performance guarantees in favor of customers.

13 Cash and cash equivalents

Cash and cash equivalents include cash-in hand, deposits held at call with banks, other short-term highly liquid investments. (In thousands of equivalent USD) USD EUR NOK GBP Other currencies Total

58

31-Dec-11 32,895 3,024 22,521 959 937 60,336

31-Dec-10 56,357 4,585 10,300 361 15,233 86,836


14 Share capital, share options and warrants 14.1 Share capital

The Companyâ&#x20AC;&#x2122;s authorized share capital is USD 13,190,000 divided into 659,500,000 shares at par value of USD 0.02. The total issued share capital of the Company as of 31 December 2011 is USD 9,343,924 divided into 467,196,179 shares at par value of USD 0.02. All issued shares have been paid in as of 31 December 2011. As of 31 December 2010 the Company had issued and paid-in share capital of USD 8,193,924 divided into 409,696,179 shares at par value of USD 0.02. On 11 October 2011 the Company issued 57,500,000 shares in connection with a private placement at par value of USD 0.02. These shares were fully paid in on 21 October 2011. (In thousands of USD except for number of shares)

203,571,855 203,571,855

Issued share capital 2,036 2,036

(101,785,928) 3.50 161,388,889 263,174,820 67,421,359 73,400,000 5,700,000 409,696,179 57,500,000 467,196,179

3,228 5,264 1,348 1,468 114 8,194 1,150 9,344

Number of shares Proceeds from shares issued Transaction cost of share issue Warrants to founding shareholders Balance as at 31 December 2008 Consolidation of share capital (on 11 September 2009 at 2:1 from USD 0.01 to USD 0.02 per share) Shares issued to avoid fractional shares after consolidation Proceeds from shares issued Transaction cost of share issue Balance as at 31 December 2009 Proceeds from shares issued on 19 October 2010 Proceeds from shares issued on 24 November 2010 Proceeds from shares issued on 21 December 2010 Transaction cost of share issue Balance as at 31 December 2010 Proceeds from shares issued on 11 October 2011 Transaction cost of share issue Balance as at 31 December 2011

Share premium

Total

209,936 (2,578) (18,716) 188,642

211,972 (2,578) (18,716) 190,678

121,397 (6,456) 303,583 59,063 62,876 4,803 (6,503) 423,822 39,967 (97) 463,692

124,625 (6,456) 308,847 60,411 64,344 4,917 (6,503) 432,016 41,117 (97) 473,036

Assuming full conversion of convertible bond loan, warrants and share options, the total number of Shares issued would increase by 110,418,649 Shares. Dilutive Instrument Shares associated with convertible debt Shares associated with the warrants Shares associated with the stock options Total

Number of equivalent shares 75,418,649 21,250,000 13,750,000 110,418,649

Apart from potential shares that could be issued under the terms of the share warrants, stock option plan or convertible bonds, the board of directors have no restrictions on issuing remaining authorized share capital. The holders of ordinary shares are entitled to receive dividends as and when declared by the Company. All ordinary shares carry one vote per share without restriction.

14.2 Warrants

The Group has issued 21,250,000 warrants to the founding shareholders, each giving the right to subscribe for one new ordinary share. All the warrants were issued on 14 March 2008 and no further warrants were issued during the year ended 31 December 2011. The warrants are exercisable at a price of USD 0.02 on or before 31 December 2012 and can only be exercised if the shares

59


of the Company being traded on an internationally recognized marketplace or stock exchange at a volume weighted average price per share of at least NOK 22.00 (or equivalent) for more than 30 trading days. In the event of a change of control of the Company prior to the warrant expiration date, the shareholders may, regardless of whether or not the previous conditions are met, exercise the warrants at a price per share of; -

NOK 11 if the shares trade at an average price of less than NOK 22.00 for the 10 consecutive business days following such change of control or if the validity period of the offer is less than 10 trading days. USD 0.02 if the shares trade at an average share price of above NOK 22.00 for the 10 consecutive business days following such change in control.

The warrants have been determined to be a liability because they fail to meet the IAS 32 classification requirements for equity instruments as they are not exchangeable for a fixed amount of cash or fixed amount of the Company’s own shares. Consequently, the fair value of the warrants at the issue date of USD 18.7 million has been recorded as a distribution to shareholders directly in Equity. Subsequent to issuance, the liability is recorded at fair value at each balance sheet date and the resulting change in fair value is recognized in the income statement within changes in fair value of financial instruments – net. A gain of USD 6.7 million has been recorded during the year ended 31 December 2011. During the year 2010 a loss of USD 3.6 million was recorded. Also refer to Note 31 Changes in fair value of financial instruments. As of 31 December 2011 no warrants were exercisable.

14.3 Stock options

The Company in 2008 implemented an employee share option scheme under which 6,250,000 shares may be issued to employees of companies within the Group. As of 31 December 2011 the Group has issued 6,065,000 options under this scheme of which 695,000 were issued during the year ended 31 December 2011. The exercise price of options is based on the weighted average price of the shares for the 30 days prior to acceptance of employment offer. The options vest three years after grant date and can be exercised up to five years after the grant date. The exercise of the options is conditional on the employee completing three years of service (the vesting period) and being an employee of the Group at the exercise date. The options are only available for settlement in equity. The total fair value of options granted up to 31 December 2011 under the 2008 scheme is USD 4.89 million calculated using the Black-Scholes model, assuming all options will be exercised. As of 31 December 2011 3,560,000 options under this scheme were exercisable however none of them were exercised. The following table shows the number, weighted average exercise price (WAEP) of and movements in the share options under 2008 scheme; 2008 Stock option plan Outstanding at 01 January Granted during the year Forfeited during the year Outstanding as of 31 December Exercisable as at 31 December Exercised during the year

Year ended 31-Dec-2011 WAEP Number (USD) 5,585,000 1.65 695,000 1.28 (215,000) 6,065,000 1.63 3,560,000 2 -

Year ended 31-Dec-2010 WAEP Number (USD) 4,525,000 1.86 1,245,000 0.92 (185,000) 5,585,000 1.65 -

The range of exercise prices for options outstanding under 2008 Scheme as of 31 December 2011 is USD 0.61 – USD 2.60. The weighted average remaining contractual life as of 31 December 2011 is 2.25 years.

60


The following table lists the inputs to the models used for the valuation of 2008 share option plan; 31-Dec-11 Dividend yield (%)

31-Dec-10 -

-

Expected volatility (%)

58%

60.7%

Risk-free interest rate (%)

4.1%

2.67%

5

5

1.28

0.87

Expected life of option (years) Weighted average share price (USD)

In the 2010 annual general meeting, a new employee share option scheme was approved under which a total of 7,500,000 shares may be issued to employees within the Polarcus Group. The program has a 6-year duration with part exercise possibility at the first, second and third anniversary after the grant of the options. The exercise price for each option is set to the volume weighted average price for which the shares have been traded at Oslo Stock Exchange in the period of 30 trading days immediately prior to the date options are granted plus 10% for options exercisable after one year, plus 20% for options exercisable after two years and 30% for options exercisable thereafter. The aggregate number of options granted to a particular employee when multiplied by the volume weighted average trading price 30 days prior to the grant date cannot exceed 150% of the employee’s base salary each year and 300% of base salary in aggregate during the duration of the plan. The options are exercisable upon a change of control event (above 50%). As of 31 December 2011 the Group has issued 7,500,000 options under this plan. The total fair value of options granted up to 31 December 2011 under the 2010 scheme is USD 3.97 million calculated using the Black-Scholes model, assuming all options will be exercised. As of 31 December 2011 1,737,133 options under this scheme were exercisable however none of them were exercised. 2010 Stock option plan Outstanding at 01 January Granted during the year Forfeited during the year Outstanding as of 31 December Exercisable as at 31 December Exercised during the year

Year ended 31-Dec-2011 WAEP Number (NOK) 5,211,400 7.29 2,306,000 9.32 (17,400) 7,500,000 7.91 1,737,133 6.68 -

Year ended 31-Dec-2010 WAEP Number (NOK) 5,211,400 7.29 5,211,400 7.29 -

The range of exercise prices for options outstanding under the 2010 Scheme as of 31 December 2011 is NOK 6.68 to NOK 10.1 (USD 1.12 – USD 1.69). The weighted average remaining contractual life as of 31 December 2011 is 4.63 years. The following table lists the inputs to the models used for the valuation of 2010 share option plan; Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life of option (years) Weighted average share price (NOK)

31-Dec-11

56.8% 4.29% 6 7.15

31-Dec-10

59% 3.98% 6 6.73

The value of the options under both 2008 and 2010 plans is estimated by a tree implementation of the Black Scholes formula for the pricing of equity call options. The expected life of the options is based on the maturity date and is not necessarily indicative of exercise patterns that may occur. The expected volatility is based on the historical volatility of the share price since the Company shares were available for public purchase and reflects the assumption that historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily be the actual outcome. For the year ended 31 December 2011, the Group has expensed USD 2.07 million (2010 – USD 2.05 million) towards stock options granted as employee compensation.

61


15 Other financial assets and liabilities 15.1 Financial assets and liabilities at fair value and amortized cost Financial assets measured at amortized cost are as per below; (in thousands of USD) Vessels prepayments Accounts receivables Total assets measured at amortized cost

31-Dec-11 28,060 55,425 83,485

31-Dec-10 28,060 18,357 46,417

31-Dec-11

31-Dec-10 6,768 6,768

Financial liabilities measured at fair value through profit or loss are as per below; (in thousands of USD) Liability for warrants (refer to Note: 14 and 31) Total financial liabilities at fair value through profit and loss

48 48

Financial liabilities measured at amortized cost are as per below; (in thousands of USD) Bond loans 13% Senior Secured Bonds (refer to Note: 17) 12.5% Senior Secured Bonds (refer to Note: 17) 14% Senior Unsecured Bond (refer to Note: 17) 8.5% Convertible Bonds (refer to Note: 18) 2.875% Convertible Bond (refer to Note: 18) Total bond loans Other long-term debt Eksportfinans loan - USD 80 million (refer to Note: 20) Eksportfinans loan - USD 55 million (refer to Note: 20) Other debt for streamer systems (refer to Note: 20) Total other long-term debt Other financial liabilities Finance lease liabilities (refer to Note: 19) Deferred payments to vendors Accounts Payable Total other financial liabilities Total financial liabilities measured at amortized cost Also refer to Note 3.1.4 Liquidity risk.

62

31-Dec-11

31-Dec-10

54,246 77,190 36,709 32,567 98,542 299,255

53,846 77,004 31,269 162,119

70,091 51,322 2,911 124,323

76,292 7,597 83,889

195,545 28,355 223,900 647,478

216,796 59,874 30,291 306,961 552,969


15.2 Fair values (in thousands of USD) Financial assets Cash and deposits (refer to Note: 12 and 13) Vessel prepayments (refer to Note: 7) Accounts receivables Total Financial liabilities Accounts payable Liability for warrants (refer to Note: 14 and 31) 13% Senior secured bonds (refer to Note: 17) 12.5% Senior secured bonds (refer to Note: 17) 14% Senior Unsecured Bond (refer to Note: 17) 8.5% Convertible bonds (refer to Note: 18) 2.875% Convertible Bond (refer to Note: 18) Finance lease liabilities (refer to Note: 19) Other long-term debt (refer to Note: 20) Deferred payments to vendors Total

31-Dec-11 Carrying Fair value Amount

31-Dec-10 Carrying Fair value Amount

84,019 28,060 55,425 167,504

84,019 28,060 55,425 167,504

197,586 28,060 18,357 244,003

197,586 28,060 18,357 244,003

28,355 48 54,246 77,190 36,709 32,567 98,542 195,545 124,323 647,527

28,355 48 60,363 77,200 36,468 32,813 90,625 195,545 124,323 647,835

30,291 6,768 53,846 77,004 31,269 216,796 83,889 59,874 559,737

30,291 6,768 59,675 81,800 31,325 216,796 83,889 59,874 570,418

Cash and deposits, accounts receivables and payable, prepayments and deferred payments to vendors approximate their carrying amounts largely due to the short-term maturities of these instruments. The fair values of senior secured and convertible bonds are measured at a rate prescribed by The Norwegian Securities Dealers Association based upon the secondary market prices of the respective securities. The carrying value of the liability for warrants is measured at fair value, see Note 31 Changes in fair value of financial instruments for more information. The fair value of finance lease liabilities and other long-term debt approximates their carrying amounts as there have been no significant changes in the market rates for similar debt financing between the date of securing the debt financing and the yearend.

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. As of 31 December 2011, the Group held the following financial instruments measured at fair value: (in thousands of USD) Financial liabilities at fair value through profit & loss: Warrants (Refer to Note: 14) Level 1 Level 2 Level 3 Total

31-Dec-11

48 48

31-Dec-10

6,768 6,768

63


During the year ended 31 December 2011, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. Reconciliation of opening and closing balances of Level 3 financial liabilities is as per below; (in thousands of USD) Balance at 01 January Value of warrants recognized in equity on recognition Recorded in profit and loss in the year Balance at 31 December

16 Other reserves

(In thousands of USD) Issue of convertible bonds - fair value of equity component (refer to Note: 18) Employee stock options provision (refer to Note: 14) Total

31-Dec-11 (6,768) (6,720) (48)

31-Dec-10 (3,207) (3,561) (6,768)

31-Dec-11 31,629 6,352 37,981

31-Dec-10 5,024 4,284 9,308

17 Senior bonds

On 30 July 2008, the Company had issued 550 senior secured callable bonds at par value of USD 100,000 each, totaling USD 55 million, bearing interest of 13% per annum. The net proceeds of the issue were employed to part-finance the construction of the vessel Polarcus Samur. The interest for this loan is payable semi-annually in arrears on 30 January and 30 July each year. The bonds will mature five years from the date of issue at their nominal value. The bonds, including accrued interest and expenses, are secured a first priority mortgage on the vessel Polarcus Samur, an assignment of insurances related to the vessel, the pledge of shares in Polarcus Samur Ltd (formerly known as Polarcus 3) as well as the up-stream guarantee form Polarcus Samur Ltd, a 100% owned subsidiary of Polarcus Limited. On the date of issue, net proceeds of USD 53,075,000 were booked under Non-Current Liabilities. Issue costs amortized and interest accrued for the above bond loan are as per below;

Years ended (In thousands of USD) Issue costs amortized Interest payable expensed Actual interest paid

31-Dec-11 400 7,150 7,150

31-Dec-10 349 7,150 7,150

Accumulated from inception

31-Dec-11 1,171 24,429 21,450

31-Dec-10 771 17,279 14,300

On 27 October 2010, the Group issued 800 senior secured callable bonds at par value of USD 100,000 each, totaling USD 80 million, bearing an interest of 12.5% per annum. The net proceeds of the issue were employed to part-finance the construction of the vessel Polarcus Alima through the vessel owning subsidiary Polarcus 6. The interest for this loan is payable semi-annually in arrears on 29 April and 29 October each year. The bonds will mature five years from the date of issue at their nominal value. On 05 October 2011 the Company entered into an amended and restated bond loan agreement for the above mentioned loan and entered into an inter-creditor agreement coordinating the security interests between the Fleet Bank Facility (refer to note 1.1 Financing) and the above bond loans. The net proceeds of USD 76,579,481 were recorded under Non-Current Liabilities. Issue costs amortized and interest accrued for the above bond loan are as per below;

64


Years ended (In thousands of USD) Issue costs amortized Interest payable expensed Actual interest paid

31-Dec-11 536 10,000 10,000

31-Dec-10 75 1,667 -

Accumulated from inception

31-Dec-11 611 11,667 10,000

31-Dec-10 75 1,667 -

As of 31 December 2011 the Group complies with the covenants set out in this loan agreement. On 27 October 2011, the Group issued 460 senior unsecured bonds at par value of NOK 500,000 each, totaling NOK 230 million (USD 40.6 million), bearing an interest of 14% per annum. The interest for this loan is payable semi-annually in arrears on 14 May and 14 November each year. The bonds will mature five years from the date of issue at their nominal value. On the date of issue, net proceeds of USD 38,817,049 (NOK 219.95 million) were recorded under Non-current liabilities. Issue costs amortized and interest accrued for the above bond loan are as per below;

Accumulated from inception

Years ended (In thousands of USD) Issue costs amortized Interest payable expensed Actual interest paid

31-Dec-11 40 457 -

31-Dec-10

-

31-Dec-11 40 457 -

31-Dec-10

31-Dec-11 54,246 77,190 36,709 168,145

31-Dec-10 53,846 77,004 130,850

-

The balance sheet value the above three loans are as below; (In thousands of USD) 13% Senior secured callable bonds 12.5% Senior secured callable bonds 14% Senior unsecured bonds Total

18 Convertible bonds

On 30 July 2008 the Company had issued 350 subordinated unsecured callable convertible bonds at a par value of USD 100,000 each totaling USD 35 million, bearing 8.5% interest per annum. The interest is payable semi-annually in arrears on 30 January and 30 July each year. The bonds mature five years from issue date at their nominal value of USD 35 million or can be converted into a total of 10,802,470 shares at the holders’ option at a conversion price of USD 3.24 per share. The conversion price is subject to adjustment upon certain changes of the Company’s share capital and in case of mergers and de-mergers. On 27 April 2011 the Company issued 1250 senior secured convertible bonds at par value of USD 100,000 each totaling USD 125 million, bearing 2.875% interest per annum. The interest is payable semi-annually in arrears on 27 April and 27 October each year. The bonds mature five years from issue date at their nominal value of USD 125 million or can be converted into a total of 64,616,180 shares at the holders’ option at a conversion price of USD 1.9345 per share. The conversion price is subject to adjustment upon certain changes of the Company’s share capital and in case of mergers and de-mergers. Furthermore, the conversion price is subject to a particular adjustment on 27 October 2012 in the event the arithmetic average of the volume weighted average price of the shares for 20 consecutive days prior to 27 October 2012 is lower than the reference price, with a maximum of 20%. The convertible bonds have been accounted for in two separate components – the value of the liability component has been recognized at its fair value and the remaining part as equity. In measuring fair value of the liability component, an estimated market rate for a similar debt without a conversion right has been used in discounting the cash flow under the loan agreement. The estimated market rate was based on valuations of the interest rate for a non-convertible bond at the date of drawing the loan. There will be no re-measuring of the fair value of the liability and equity components.

65


At the issue dates, the following amounts were recognized in the financial statements for each of the above convertible bonds; (In thousands of USD) 8.5% Unsecured bonds

2.875% Secured bonds

Fair value of liability component

28,751

95,271

Fair value of equity component

5,024

26,604

Net proceeds on the issue dates

33,775

121,875

Issue costs amortized and interest accrued for the above two convertible bond loans are as per below;

Accumulated from inception

Years ended (In thousands of USD) USD 35 million 8.5% Convertible bonds Issue costs amortized Interest payable expensed Actual interest paid USD 125 million 2.875% Convertible bonds Issue costs amortized Interest payable expensed Actual interest paid

31-Dec-11

31-Dec-10

31-Dec-11

31-Dec-10

1,298 2,975 2,975

1,139 2,975 2,975

3,817 10,165 8,925

2,519 7,190 5,950

3,272 2,396 1,797

-

3,272 2,396 1,797

-

19 Long-term finance lease

Upon delivery from the shipyard, the vessels Polarcus Nadia and Polarcus Naila were sold to GSH2 Seismic Carrier I AS (the ‘lessor’) according to the sale and lease-back financing arrangement entered into on 30 June 2008 as amended on 29 July 2009. The purchase price of USD 90 million each per vessel (total USD 180 million) is fully paid by the lessor to the Group in installments throughout the vessel construction period. Immediately upon the sale of the vessels, the Group leased back the vessels from the lessor at a fixed charter rate of USD 35,000 per day, payable in arrears throughout the duration of the charter period. This arrangement falls under the category of finance lease as described under IAS 17. Accordingly at the inception of the lease USD 180 million has been recorded as a liability. The Company has entered into lease agreements with Sercel Inc, Houston to acquire marine acquisition equipment (the “streamer systems”). The duration of each lease is 30 months and the Company has an option to purchase the streamer systems at any time during the lease period. As of 31 December 2011, streamer systems worth USD 56,166,181 were leased under this arrangement. The relevant streamer systems have been pledged as security for the arrangement. Payments made towards these lease arrangements during the period reported are as follows; (In thousands of USD) Lease payments made for vessel Polarcus Nadia Lease payments made for vessel Polarcus Naila Lease payments made for streamer systems Total

Year ended 31-Dec-11 Principal 2,221 2,198 18,350 22,769

Interest 10,554 10,577 2,764 23,895

Total 12,775 12,775 21,114 46,664

Year ended 31-Dec-10 Principal 1,967 1,947 10,990 14,904

Interest 10,808 10,828 2,511 24,147

Total 12,775 12,775 13,502 39,052

The outstanding liability under the above mentioned arrangements are disclosed in the Group’s balance sheet as ‘Long-term finance lease’ which is further classified into long-term and short-term portions as below (Also refer to Note 3.1.4 Liquidity risk); (In thousands of USD) Finance lease non-current Finance lease current Total

31-Dec-11

31-Dec-10

170,603

194,407

24,943

22,388

195,545

216,796

Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows;

66


31-Dec-11

(In thousands of USD)

Within one year After one year but not more than five years More than five years Total minimum lease payments Less amounts representing finance charges Present value of minimum lease payments

Minimum payments 46,732 132,628 155,745 335,106 (139,560) 195,545

Present value of payments 42,930 73,344 79,272 195,545 195,545

31-Dec-10 Minimum payments 46,186 152,575 181,295 380,056 (163,261) 216,795

Present value of payments 41,882 90,689 84,225 216,796 216,796

20 Other long-term debt

The Group on 14 September 2009 entered into a facility agreement with Eksportfinans ASA and DVB Bank SE for a USD 80 million loan facility. The Eksportfinans tranche of the facility (USD 55 million) relates to financing of Norwegian equipment onboard the vessels Polarcus Samur and Polarcus Asima. This has been guaranteed by the Norwegian Guarantee Institute for Export Credits (GIEK). The DVB Bank tranche (USD 25 million) relates to financing of the vessel Polarcus Asima. The vessels Polarcus Asima and Polarcus Alima have been pledged as security for this loan facility. The facility was drawn on 31 August 2010 post delivery of the vessel Polarcus Asima from the shipyard. As of 31 December 2011 the Group has made total repayments of USD 6,250,000 under this loan facility. A similar loan facility of USD 55 million was entered into in January 2011 and was drawn on 21 March 2011 post delivery of Polarcus Alima. The Eksportfinans tranche of the facility (USD 33 million) relates to financing of Norwegian equipment on-board the vessels Polarcus Alima which has been guaranteed by the Norwegian Guarantee Institute for Export Credits (GIEK). The DVB Bank tranche (USD 22 million) relates to financing of the vessel Polarcus Alima. The vessels Polarcus Asima and Polarcus Alima have been pledged as security for this loan facility. As of 31 December 2011 the Group has made total repayments of USD 2,291,667 under this loan facility. On 15 November 2011, the outstanding liability under the above two loans were refinanced by Tranche 1 and Tranche 2 of the USD 410 million fleet bank facility from DNB and DVB Bank SE, Nordic Branch, together with GIEK and Eksportfinans ASA. Also refer to Note 1.1 Financing. The Company has acquired some of its streamer systems from Sercel Inc, Houston by way of a 40% down payment. The remaining 60% of the purchase price is payable through 36 monthly installments including interest at 8% per annum. The affected streamer system has been pledged as security for this arrangement. The total value of equipment acquired under this arrangement is USD 22,631,523. As of 31 December 2011, the Company has paid USD 19,720,932 against its liability under this arrangement. The net outstanding liability at the period end is USD 2,910,591.

67


Payments made towards principal and interest for the above loans during the period reported are as follows; (In thousands of USD) Fleet bank facility Tranche 1 Fleet bank facility Tranche 2 Liability for streamer systems Total

Year ended 31-Dec-11 Principal 6,250 2,292 4,686 13,227

Interest 5,095 973 438 6,506

Total 11,345 3,265 5,124 19,734

Year ended 31-Dec-10 Principal 4,327 4,327

Interest 797 797

Total 5,124 5,124

The outstanding liability under the above mentioned arrangements is disclosed in the Group’s balance sheet as ‘Other long-term debt’ which is further classified in to long-term and short-term portions as per below (Also refer to Note 3.1.4 Liquidity risk); (In thousands of USD) Installments due after 12 months from the balance sheet date Installments due within 12 months from the balance sheet date Total

31-Dec-11

31-Dec-10

110,992

72,953

13,331

10,936

124,323

83,889

21 Interest payable

Interest payable under current liabilities includes; (In thousands of USD) Interest accrued on senior bonds (refer to Note: 17) Interest accrued on convertible bonds (refer to Note: 18) Interest accrued on other long term debt (refer to Note: 20) Interest accrued on deferred payments to the shipyard Total

22 Employee accruals and payables (In thousands of USD) Accrued salaries Accrued bonuses Unused balance of crew welfare fund Total

23 Other accrued expenses (In thousands of USD) Accrued vessel operating expenses Accrued taxes payable Accrued miscellaneous expenses Consideration for vessel buyback options Total

68

31-Dec-11 5,103 1,839 2,130 9,072

31-Dec-10 4,645 1,240 1,730 1,150 8,766

31-Dec-11 2,961 1,235 50 4,245

31-Dec-10 1,136 5,401 49 6,586

31-Dec-11 8,263 8,195 487 16,946

31-Dec-10 3,560 1,906 1,700 7,166


24 Interest in joint venture

The Group has 50% interest in Polarcus MC Limited, an entity jointly controlled by the Group and Sabaro Investments Ltd (also refer to Note: 33.2). Polarcus MC Limited is engaged in one of the Groupâ&#x20AC;&#x2122;s multi-client projects since June 2011 and as of 31 December 2011. The Groupâ&#x20AC;&#x2122;s share of assets and liabilities as of 31 December 2011 and income and expense for the year ended on the same date in the joint venture is proportionately consolidated in the consolidated financial statements as per below;

24.1 Share in joint ventureâ&#x20AC;&#x2122;s statement of financial position (In thousands of USD) Current assets Non-current assets Current liabilities Non-current liabilities Equity

24.2 Share of joint ventures revenue and profit (In thousands of USD) Revenue Cost of sales

Administrative expenses Finance costs Profit before tax Income tax expense Profit for the year from continuing operations

31-Dec-11 6,200 9,361 (5,006) 10,555

31-Dec-10

-

Years ended 31-Dec-11 31-Dec-10 11,983 (5,392) (722) (2)

-

5,867

-

5,867

-

25 Operating lease - Group as lessor

The Group has entered into a commercial vessel lease for hire out of one of its vessels, Vyacheslav Tikhonov. The non-cancellable lease is for five years. Future minimum rental receivables (undiscounted) under non-cancellable operating leases at 31 December are as follows; (In thousands of USD) Within one year After one year but not more than five years More than five years Total

31-Dec-11 25,368 92,157 117,525

31-Dec-10

-

26 Vessel operating expenses Vessel operating expenses consist of the following; (In thousands of USD) Crew salaries and other benefits Other vessel operating expenses Total

Years ended 31-Dec-11 31-Dec-10 59,056 20,517 129,876 46,617 188,932 67,134

69


27 Sales, general and administrative costs Sales, general and administrative costs consist of the following; (In thousands of USD) Salaries and other employee benefits Other general and administrative expenses Total

27.1 Salaries and other employee benefits (In thousands of USD) Salaries and bonus Social security costs Pension costs Other benefits Crew travel related costs Crew salaries and benefits included in Vessel operation expenses (refer to Note: 26) Project related personnel costs capitalized Total

Years ended 31-Dec-11 31-Dec-10 23,059 17,558 10,267 7,583 33,327 25,141 Years ended 31-Dec-11 31-Dec-10 50,864 28,424 380 230 3,053 1,515 19,089 9,713 10,748 3,766 (59,056) (20,517) (2,018) (5,573) 23,059 17,558

The Group offers a fixed base salary to all employees. Employees are also provided with a housing allowance and car allowance based on their location of employment and grades. Refer to Note 33.3 Key management compensation. The Group has an element of variable compensation through a performance-related bonus scheme. Based on overall performance of the Company against certain pre-defined metrics together with performance against individual and team-specific goals, the employees can benefit from a variable compensation in the range of 8% to 60% of annual base salary where the bonus level depends upon the employee’s grade. In addition, the Group has a retention bonus scheme for the key offshore employees who accepted a position in the Company between 1 May 2008 and 31 December 2011. This loyalty bonus is designed to help retain highly experienced crew that is essential for field operations. All employees of the Group are offered a comprehensive employee health protection plan. The Company has implemented a share option program for key employees whose performance will have a significant positive impact on the overall success of the Company. Please find more details about the share option program in Note 14.3 Stock options. The Group has set up a pension scheme for majority of its employees under which the Group on a monthly basis contributes 8% of an employee’s base salary to the pension fund. No mandatory contribution is required from the employees. The amount contributed to the scheme is ring-fenced in favor of the employees through a trust. The vesting period of the fund is 5 years and each applicable employee is enrolled into the scheme at the end of his/her probation period. The employees may contribute own funds to the scheme and the Company will match such contributions with an additional maximum 2%. During the year ended 31 December 2011 the Group has contributed USD 3.35 million to the pension scheme, the full amount of which is expensed as employee benefits. Total contribution made to the pension scheme during year 2010 was USD 1.73 million. For employees who are not enrolled in the above pension scheme, the Group recognizes a provision for pensions payable to the employees based on the contractual obligation between each employee and the Group. The accrued pension liability calculated based on the contractual obligation varies from 21 days to 1 month’s basic salary for each year completed pro rata based on date of joining of each employee. As of 31 December 2011 the Group has recognized a liability of USD 0.33 million towards such pension payable.

70


27.2 Remuneration of the auditors

The total fee incurred by the Company to its auditors for the periods reported are as per below; (In thousands of USD) Audit fees Audit related services Tax advisory services Total

31-Dec-11 177 80 84 341

31-Dec-10 126 53 275 454

28 Depreciation and amortization (In thousands of USD)

Year ended 31-Dec-11 Depreciation of seismic vessels and equipment Depreciation of office equipment Amortization of multi-client data library Amortization of other intangible assets Retirement and disposals

31-Dec-10

50,741

22,317

530

368

10,545

-

441

314

2,278

3,850

Depreciation capitalized to multi-client projects library

(3,734)

-

Total

60,802

26,849

29 Finance costs (In thousands of USD)

Year ended 31-Dec-11 Interest expenses on senior bond (refer to Note: 17)

31-Dec-10

18,574

9,235

9,940

4,114

329

3,773

23,896

22,629

7,929

7,348

Interest expenses capitalized to vessels under construction

(7,140)

(18,651)

Net interest expenses

53,528

28,447

Realized currency exchange loss

1,507

1,373

Unrealized currency exchange loss

4,397

1,587

Interest expenses on convertible bond (refer to Note: 18) Interest expenses on deferred payments to the shipyard Interest expenses on lease arrangements (refer to Note: 19) Other interest expenses

Other financial losses Total

40

576

59,472

31,983

71


30 Finance income (In thousands of USD)

Year ended 31-Dec-11 Interest income from deposit with banks

167

-

(10)

251

157

Interest income offset against capitalized interest expenses Net interest income

31-Dec-10

251

Realized exchange gain

1,439

2,669

Unrealized exchange gain

4,071

1,768

Total

5,761

4,594

The realized currency gain or loss represents the effect of foreign currency payments made and the unrealized currency gain or loss represents the effect of revaluation of foreign currency financial assets other than those treated as cash flow hedging instruments.

31 Changes in fair value of financial instruments

The changes in fair value of financial instruments represent the profit or loss on revaluation of liabilities on warrants issued. Also refer to Note 14.2 Warrants. The fair value of the warrant liability at each balance sheet date and the profit or loss on revaluation for the periods reported are as per below; (In thousands of USD) Year ended 31-Dec-11 Warrant liability at fair value on the balance sheet dates Profit/(loss) on revaluation of the fair value of warrant liability

31-Dec-10 48

6,768

6,720

(3,561)

32 Earnings per Share 32.1 Basic

Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares issued during the period. (In USD) Loss attributable to equity holders of the Company Weighted average number of ordinary shares issued Basic earnings per share

32.2 Diluted (In USD) Loss attributable to equity holders of the Company Loss/(Gain) related to warrants issued Net loss attributable to potential equity holders of the Company Weighted average number of ordinary shares issued Share with dilutive effect for warrants issued Weighted average number of diluted ordinary shares Diluted earnings per share

Years ended 31-Dec-11 31-Dec-10 (31,499,208) (28,339,889) 421,038,645 284,657,233 (0.075) (0.100) Years ended 31-Dec-11 31-Dec-10 (31,499,208) (28,339,889) (6,719,558) 3,561,315 (38,218,766) (24,778,574) 421,038,645 284,657,233 20,799,641 20,795,341 441,838,286 305,452,573 (0.086) (0.081)

The share options that have been granted to selected employees as of the end of reporting period (refer to Note: 14.3) and the convertible bonds giving the bond holders a right to convert the bonds to equity shares (refer to Note: 18) have not been included in the calculation of diluted EPS as they have an anti-dilutive effect for the reporting period.

72


On 14 March 2012 the Company issued 40,000,000 new shares through a private placement. Following the Private Placement, the Company has 507,196,179 shares outstanding.

33 Related-party transactions 33.1 Subsidiaries

This set of consolidated financial statements includes the financial statements of Polarcus Limited and the subsidiaries listed in the following table; Name of the Subsidiary

Country of Incorporation

Polarcus DMCC Polarcus 1 Limited Polarcus 2 Limited Polarcus Samur Limited Polarcus Selma Limited (formerly known as 'Polarcus 4') Polarcus MC Limited (formerly known as ' Polarcus 5') Polarcus 6 Limited Polarcus Seismic Limited Polarcus UK Limited Polarcus US Inc. Polarcus Egypt Polarcus Nadia AS Polarcus Alima AS Polarcus Asima AS Polarcus Naila AS Polarcus Alima AS Polarcus Norway AS Polarcus Multi-Client(CY) Limited Polarcus do Brazil Ltda

UAE Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands Cayman Islands United Kingdome USA Egypt Norway Norway Norway Norway Norway Norway Cyprus Brazil

Equity interest as at 31-Dec-2011 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

33.2 Transactions with related parties Zickerman Holding Limited and Zickerman Group Limited (together “ZL”) hold 10.56% paid-in share capital of the Company as of 31 December 2011. Carl-Gustav Zickerman and Carl-Peter Zickerman represent ZL in the Board of Directors of the Company. Carl-Peter Zickerman is also a member of executive management of the Group. In April 2011, the Company exercised the option of repurchasing Polarcus Selma from ZL. The Company paid USD 3.5 million to ZL towards the purchase price of shares in Polarcus Selma Ltd (formerly known as ‘Polarcus 4’), owning the rights to vessel Vyacheslav Tikhonov (previously Polarcus Selma), equal to the payments advanced by ZL in relation to the vessel.

73


Drydocks World Dubai (“DWD”) holds 8.03% of paid-in share capital of the Company as of 31 December 2011. Below is a summary of major transactions between DWD and the Group during the year ended 31 December 2011; Years ended 31-Dec-11 31-Dec-10 29,960 40,775 145,957 33,732 10,514 2,235 186,431 76,742

(In thousands of USD) Payments made under ship building contracts Payments made under the deferred payment arrangement Interest paid Total payments made during the year Payments included in Accounts payable at the period end Payable under the deferred payment arrangement at the period end Total payable

-

13,737 59,874 73,612

Sabaro Investments Ltd (“Sabaro”) holds 17.04% of paid-in share capital of the Company as of 31 December 2011. Mr. Erik Henriksen who acts as an advisor to Sabaro became member of the Board of Directors of the Company on 24 November 2011. In June 2011, the Group entered into a joint venture agreement with Sabaro Investments Limited ("Sabaro") in relation to its first multi-client project. The gross investment made by Sabaro in to the joint venture is USD 4.7 million.

33.3 Key management compensation

The salaries and other benefits paid and accrued as payable to key management personnel for the periods reported are shown in the table below; (In thousands of USD) Year ended 31-Dec-11

Rolf Ronningen Chief Executive Officer Tom Henrik Sundby Chief Financial Officer Carl Peter Zickerman EVP & Head of Strategic Investment Other members of executive management

Salary

Other Allowances

Pension

432 315 416 1,773 2,936

126 116 174 1,099 1,515

35 25 33 155 248

Share based payments 133 96 96 518 843

Total salary and allowances 725 552 719 3,545 5,541

(In thousands of USD) Year ended 31-Dec-10

Rolf Ronningen Chief Executive Officer Tom Henrik Sundby Chief Financial Officer Carl Peter Zickerman EVP & Head of Strategic Investment Other members of executive management Total

Salary

Other Allowances

Pension

400 300 396 1,806 2,902

340 249 346 1,740 2,674

32 24 32 145 232

Share based payments 167 101 113 755 1,136

Total salary and allowances 939 674 886 4,446 6,945

The members of the Group’s key management team have entered into agreements with the Company related to provision of benefits upon the Company’s termination of employment limited to three months’ severance payment, with the exception of the CEO who has been granted 18 months of severance payment and the right to maintain granted share options and the CFO and General Counsel who each have been granted 12 months of severance payment and the right to maintain granted share options.

74


33.4 Board remuneration

The total remuneration paid by the Company to its Board of Directors for the periods reported is as per below; (In thousands of USD) Director since

Director until

Paid for the year 2011

Paid for the year 2010

Peter M. Rigg, Chairman

20-Jun-08

119

103

Carl-Gustav Zickerman

17-Dec-07

47

-

Carl Peter Zickerman

09-Feb-08

Alan Locker

20-Jun-08

Hege Sjo Katherine J. Hall

47

-

15

51

20-Jun-08

64

54

20-Jun-08

61

51

Tore Karlsson

20-Jun-08

60

51

Jogeir Romestrand

12-Sep-09

64

48

Ali A bin Towaih Al Suwaidi

27-Apr-11

31

-

Mohammed Rizal bin Abdullah

27-Apr-11

31

-

Erik Henriksen

24-Nov-11

-

-

537

358

27-Apr-11

24-Nov-11

Total

34 Events after the balance sheet date

On 14 March 2012 the Company issued 40,000,000 new shares through a private placement. The new shares were subscribed for at a price of NOK 5.80 per share. Total gross proceeds from the Private Placement amounts to NOK 232 million (USD 40.7 million). Following the Private Placement, the Company has 507,196,179 shares outstanding. These shares were fully paid in on 20 March 2012.

35 Authorization of financial statements

The consolidated financial statements for the year ended 31 December 2011 were authorized for issue in accordance with a resolution of the directors on 28 March 2012.

Peter Rigg

Tore Karlsson

Ali A. bin Towaih Al Suwaidi

Erik Henriksen

Carl-Peter Zickerman

Kitty Hall

Carl-Gustaf Zickerman

Hege Sjo

Jogeir Romestrand

75


POLARCUS LIMITED PARENT COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2011 Statement of Comprehensive Income Statement of Financial Position Statement of Cash Flows Statement of Changes in Equity Notes to the Financial Statements

76


Statement of Comprehensive Income (Unconsolidated Parent Company)

01 January â&#x20AC;&#x201C; 31 December (In thousands of USD) Revenues

Notes

2011

2010

2

62,308

38,336

Cost of sales

12

(43,249)

(14,597)

Sales, general and administrative costs

13

(10,690)

(12,211)

Depreciation and amortization

14

(8,435)

(9,595)

-

(1,000)

(62,374)

(37,403)

(66)

933

Operating expenses

Impairment of vessels under construction Total Operating expenses Operating profit/(loss) Financial expenses Finance costs

15

(20,394)

(16,937)

Finance income

16

10,339

12,848

Changes in fair value of financial instruments

17

6,720

(3,561)

Net financial income/(expenses)

(3,335)

(7,650)

Profit/(Loss) for the period before tax

(3,401)

(6,717)

-

-

(3,401)

(6,717)

Income tax expense Profit/(Loss) for the period/Comprehensive income/(loss) after tax

77


Statement of Financial Position (Unconsolidated Parent Company) (In thousands of USD)

Notes

31-Dec-11

31-Dec-10

ASSETS Non-current assets Property, plant and equipment Vessels buyback options Intangible assets Long-term loan to subsidiaries Investment in Subsidiaries Total non-current assets Current assets Prepaid expenses Other current assets Short-term loan to subsidiaries Receivable from subsidiaries Accounts Receivable Restricted cash - Short term Cash and bank Total current assets

3 18 4 18 5

56,751 227,557 9,185 293,493

54,819 19,907 1,716 273,467 54 349,963

1,066 1,017 241,236 167,501 20,614 16,133 28,540 476,107

42 3,399 28,200 132,851 30,709 28,351 23,274 246,826

769,600

596,789

1 1 1

9,344 463,693 37,980 (6,060) 504,957

8,194 423,822 9,307 (2,659) 438,664

1, 8 1, 8 9 1, 8 13

90,955 131,109 4,702 48 221 227,035

53,846 31,269 23,503 6,768 150 115,536

10 11

5,275 4,275 27 19,939 2,466 5,626 37,608

4,219 4,001 2,905 17,969 8,867 4,628 42,589

769,600

596,789

6 18 18 18 7

TOTAL ASSETS EQUITY and LIABILITIES Equity Issued share capital Share Premium Other reserves Retained earnings/(loss) Total equity Non-current liabilities Senior bonds Convertible bonds Long-term finance lease Liability for warrants Employee pension accrual Total non-current liabilities Current liabilities Interest payable Employee accruals and payables Other accrued expenses Long-term finance lease current portion Payable to subsidiaries Accounts payable Total Current Liabilities TOTAL EQUITY and LIABILITIES

78

9 18 18


Statement of Cash Flows (Unconsolidated Parent Company) (In thousands of USD) Cash flows from operating activities Profit/(loss) for the period Adjustment for: Depreciation and amortization Impairment of vessels under construction Changes in fair value of financial instruments Stock Options compensation provision Interest expense Interest income Working capital adjustments: Decrease/(Increase) in current assets Increase/(Decrease) in trade and other payables and accruals Net cash flows from operating activities

Notes

01 January â&#x20AC;&#x201C; 31 December 2011 2010 (3,401)

(6,717)

8,435 (6,720) 2,035 17,033 (6,938)

9,595 1,000 3,561 2,053 6,552 (1,177)

11,453 1,865 23,762

(25,504) 6,366 (4,271)

Cash flows from investing activities Decrease/(Increase) in restricted cash Purchases of property, plant and equipment Payments to acquire intangible assets Investment in subsidiaries Decrease/(increase) in intercompany receivables Net cash flows used in investing activities

12,218 (8,832) (9,131) (188,270) (194,015)

6,782 12,374 (16) (145) (201,195) (182,200)

Cash flows from financing activities Proceeds from the issuance of ordinary shares Transaction costs on issue of shares Proceeds from the issuance of senior bonds Proceeds from the issuance of convertible bonds Transaction costs on issuance of bonds Repayment of long term debt Repayment of lease liabilities Interest paid Interest income Net cash flows from financing activities

41,117 (96) 40,634 125,000 (4,942) (18,350) (14,782) 6,938 175,520

129,672 (6,503) (3,606) (10,990) (13,300) 114 95,387

5,266 23,274 28,540

(91,084) 114,358 23,274

Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

14 17 15

9

79


Statement of Changes in Equity (Unconsolidated Parent Company)

(In thousands of USD except for number of shares) Balance as at 31 December 2009

Number of Shares 263,174,820

Issued Share capital

Share Premium

Other Reserves

Retained Earnings/ (Loss)

Total Equity

5,264

303,582

7,255

4,058

320,159

Profit/(loss) for the period

-

-

-

(6,717)

(6,717)

Other comprehensive income/(loss) for the period

-

-

-

-

-

Total comprehensive income/(loss) for the period

-

-

-

(6,717)

(6,717)

Issue of share capital

-

19 October 2010 at NOK 5.15 (USD 0.90) per share

67,421,359

1,348

59,063

60,411

24 November 2010 at NOK 5.30 (USD 0.93) per share

73,400,000

1,468

62,876

64,344

21 December 2010 at NOK 5.15 (USD 0.86) per share

5,700,000

114

4,803

4,917

-

(6,503)

Transaction costs on issue of shares Employee stock options

-

-

-

-

2,053

-

2,053

8,194

423,822

9,307

(2,659)

438,664

Profit/(loss) for the period

-

-

-

(3,401)

(3,401)

Other comprehensive income/(loss) for the period

-

-

-

-

-

Total comprehensive income/(loss) for the period

-

-

-

(3,401)

(3,401)

1,150

39,967

-

-

41,117

-

(96)

Balance as at 31 December 2010

409,696,179

Issue of share capital 21 October 2011 at NOK 4.00 (USD 0.72) per share

57,500,000

Transaction costs on issue of shares Issue of convertible bonds Employee stock options Balance as at 31 December 2011

467,196,179

9,344

The accompanying notes are integral part of the consolidated financial statements.

80

(6,503)

463,693

(96) 26,604

26,604

2,069

2,069

37,980

(6,060)

504,957


Notes to the financial statements (Unconsolidated Parent Company)

1. General information and summary of significant accounting principles

Polarcus Limited (the “Company”) is a holding company. In addition to owning the subsidiaries, the Company conducts a part of the external debt financing of the Group and provides loans to Group companies. The Company owns and rents in-sea equipment to its subsidiaries and also employs offshore personnel who work onboard the vessels owned by other Group companies. The Company’s accounting principles are consistent to the accounting principles of the Group, as described in Note 2 of the Group’s consolidated financial statements for the year ended 31 December 2011. Note disclosures for the Company that is similar to information in the consolidated financial statements are not repeated in these financial statements. This relates in particular to the notes in the consolidated financial statements on issued share capital and share premium (both Note 14), other reserves (Note 16), senior bonds (Note 17), convertible bonds (Note 18) and the liability for warrants (Note 14). Shares in the subsidiaries and receivables from and loans provided to the subsidiaries are evaluated at the lower of cost and fair value. When the value of estimated future cash flows is lower than the carrying value in the subsidiaries, the Company recognizes impairment charges on investments in subsidiaries and intercompany receivables. If and when estimated recoverable amounts increase, impairment charges are reversed. There is no fixed plan for repayment of long-term intercompany receivables.

2. Revenues

The Company’s revenues are earned mainly from leasing seismic equipment and provision of offshore employees’ services to other Group companies. (In thousands of USD) Crewing services provided to Group companies In-sea equipment leased to Group companies Miscellaneous income Total

Years ended 31-Dec-11 31-Dec-10 44,064 17,355 12,628 12,290 5,616 8,691 62,308 38,336

81


3. Property, Plant and Equipment (In thousands of USD)

Seismic equipment Year ended 31 December 2010 Costs Balance at 01 January 2010 Additional capital expenditures Assets under finance leases Disposals Balance as of 31 December 2010

45,235 5,766 32,130 (24,094) 59,036

Depreciation and impairment losses Balance at 01 January 2010 Depreciation for the period Disposals Balance as of 31 December 2010

140 6,770 (2,692) 4,218

Carrying amounts As of 01 January 2010 As of 31 December 2010 Carrying amounts held under finance leases as of 31 December 2010

45,096 54,819 49,053

Year ended 31 December 2011

82

Costs Balance at 01 January 2011 Additional capital expenditures Assets under finance leases Disposals Balance as of 31 December 2011

59,036 9,989 1,519 (1,135) 69,409

Depreciation and impairment losses Balance at 01 January 2011 Depreciation for the period Disposals Balance as of 31 December 2011

4,218 8,516 (75) 12,658

Carrying amounts As of 01 January 2011 As of 31 December 2011 Carrying amounts held under finance leases as of 31 December 2011

54,819 56,751 42,121


4. Intangible assets (In thousands of USD)

Industry specific applications under development

Consideration for vessel buyback options

Total

16 16

3,400 (1,700) 1,700

3,400 16 (1,700) 1,716

Amortization and impairment losses Balance at 01 January 2010 Amortization for the period Disposals Balance as of 31 December 2010

-

-

-

Carrying amounts As of 01 January 2010 As of 31 December 2010

16

3,400 1,700

3,400 1,716

16 16

1,700 (1,700) -

1,716 (1,700) 16

(16) (16)

-

(16) (16)

16 -

1,700 -

1,716 -

Year ended 31 December 2010 Costs Balance at 01 January 2010 Additions Disposals Balance as of 31 December 2010

Year ended 31 December 2011 Costs Balance at 01 January 2011 Additions Disposals Balance as of 31 December 2011 Amortization and impairment losses Balance at 01 January 2011 Amortization for the period Disposals Balance as of 31 December 2011 Carrying amounts As of 01 January 2011 As of 31 December 2011

83


5. Investment in subsidiaries 31-Dec-11

(In thousands of USD) Unquoted equity shares at cost

31-Dec-10

9,185

54

The Companyâ&#x20AC;&#x2122;s direct investment in different subsidiaries as of 31 December 2011 is as per below; (In thousands of USD) Name of the Subsidiary

Country of Incorporation

Polarcus DMCC Polarcus 1 Ltd

Cayman Islands

Polarcus 2 Ltd

Cayman Islands

Polarcus Samur Limited

Cayman Islands

Polarcus Selma Limited (formerly known as 'Polarcus 4') Polarcus MC Limited (formerly known as ' Polarcus 5')

Administrative services Seismic vessel operator Seismic vessel operator Seismic vessel operator

UAE

Seismic vessel operator

Cayman Islands Cayman Islands

Polarcus 6 Ltd

Cayman Islands

Polarcus Seismic Limited

Cayman Islands

Polarcus UK Limited

United Kingdome

Polarcus Norway AS

Norway

Polarcus Multi-Client (CY) Ltd

Cyprus

Book value as of 31-Dec-11

Book value as of 31-Dec-10

100%

54

54

100%

-

-

100%

-

-

100%

3,649

-

100%

-

-

50%

4,700

-

100%

760

-

100%

-

-

100%

-

-

100%

22

-

100%

-

-

9,185

54

Equity interest as of 31-Dec-11*

Principal activities

Seismic vessel operator Seismic vessel operator Administrative services Seismic vessel operator Seismic vessel operator Administrative services

Total

The Company is the ultimate parent company for the subsidiaries of directly owned subsidiaries. The non-direct subsidiaries as of 31 December 2011 is as per below; (In thousands of USD) Name of the Subsidiary Polarcus Egypt Polarcus Nadia AS Polarcus Asima AS Polarcus Naila AS Polarcus Alima AS Polarcus do Brazil Ltda Polarcus US Inc.

Country of Incorporation Egypt Norway Norway Norway Norway Brazil USA

Principal activities

Equity interest

Administrative services Seismic vessel operator Seismic vessel operator Seismic vessel operator Seismic vessel operator Administrative services Administrative services

*Voting rights are equivalent to shareholding for all companies. Polarcus US Inc. was incorporated during the year 2011. For details of transactions and balances with subsidiaries see Note 18 Related parties.

84

as of 31-Dec-11* 100% 100% 100% 100% 100% 100% 100%

Equity interest as of 31-Dec-10 100% 100% 100% 100% 100% 100% -


6. Other current assets (In thousands of USD) Insurance claims Other current assets Total

7. Restricted cash

(In thousands of USD) Senior secured bond loan escrow account Other short term deposits Total

31-Dec-11 862 155 1,017

31-Dec-10 3,391 8 3,399

31-Dec-11

16,133 16,133

31-Dec-10 14,346 14,005 28,351

31-Dec-11 48 48

31-Dec-10 6,768 6,768

31-Dec-11

31-Dec-10

8. Other financial assets and liabilities Financial liabilities measured at fair value through profit or loss are as per below;

(in thousands of USD) Liability for warrants (refer to Note 14.2 in the consolidated financial statements ) Total financial liabilities at fair value through profit and loss Financial liabilities measured at amortized cost are as per below; (in thousands of USD) Bond loans 13% Senior Secured Bonds (refer to Note 17 in the consolidated financial statements ) 14% Senior Unsecured Bond (refer to Note 17 in the consolidated financial statements ) 8.5% Convertible Bonds (refer to Note 18 in the consolidated financial statements ) 2.875% Convertible Bond (refer to Note 18 in the consolidated financial statements ) Total financial liabilities measured at amortized cost

8.1 Fair values (in thousands of USD) Financial assets Cash and deposits Accounts receivables Receivable from subsidiaries Long-term loan to subsidiaries Short-term loan to subsidiaries Total Financial liabilities Accounts payable Liability for warrants 13% Senior secured bonds 14% Senior Unsecured Bond 8.5% Convertible bonds 2.875% Convertible Bond Finance lease liabilities Payable to subsidiaries Total

31-Dec-11 Carrying Amount Fair value

54,246 36,709 32,567 98,542 222,065

53,846 31,269 85,115

31-Dec-10 Carrying Amount Fair value

44,673 20,614 167,501 227,557 241,236 701,581

44,673 20,614 167,501 227,557 241,236 701,581

51,625 30,709 132,851 273,467 28,200 516,852

51,625 30,709 132,851 273,467 28,200 516,852

5,626 48 54,246 36,709 32,567 98,542 24,641 2,466 254,847

5,626 48 60,363 36,468 32,813 90,625 24,641 2,466 253,049

4,628 6,768 53,846 31,269 41,472 8,867 146,850

4,628 6,768 59,675 31,325 41,472 8,867 152,735

Cash and deposits, accounts receivables and payable, and short-term payables, receivables and loans to subsidiaries approximate their carrying amounts largely due to the short-term maturities of these instruments. The fair value of long-term loans from subsidiaries approximate their carrying amounts as the interest rates charged on the loans are at floating rates based on the prevailing market rate.

85


The fair values of senior secured and convertible bonds are measured at a rate prescribed by The Norwegian Securities Dealers Association based upon the secondary market prices of the respective securities. The carrying value of the liability for warrants is measured at fair value, see Note 14.2 in the consolidated financial statements for more information. The fair value of finance lease liabilities approximates their carrying amounts as this relates to recently secured external debt financing and there have been no significant changes in the market rates for similar debt financing between the date of securing the debt financing and the yearend. Fair value hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. As of 31 December 2011, the Company held the following financial instruments measured at fair value: (in thousands of USD) Financial liabilities at fair value through profit & loss: Warrants (Refer to Note: 14) Level 1 Level 2 Level 3 Total

31-Dec-11

48 48

31-Dec-10

6,768 6,768

During the year ended 31 December 2011, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. Reconciliation of opening and closing balances of Level 3 financial items is as per below: (in thousands of USD) Balance at 01 January Value of warrants recognized in equity on recognition Recorded in profit and loss in the year Balance at 31 December

86

31-Dec-11 (6,768) (6,720) (48)

31-Dec-10 (3,207) (3,561) (6,768)


9. Long–term finance lease

The Company has entered into lease agreements with Sercel Inc, Houston to acquire marine acquisition equipment (the “streamer systems”). The duration of each lease is 30 months and the Company has an option to purchase the streamer systems at any time during the lease period. As of 31 December 2011, streamer systems worth USD 56,166,181 were leased under this arrangement. The relevant streamer systems have been pledged as security for the arrangement. The outstanding liability under the above mentioned arrangements are disclosed in the Company’s statement of financial position as ‘Long-term finance lease’ which is further classified into long-term and short-term portions as below; 31-Dec-11

(In thousands of USD) Finance lease – non current

31-Dec-10

4,702

23,503

Finance lease – current

19,939

17,969

Total

24,641

41,472

Payments made towards these lease arrangements during the year ended 31 December 2011 as follows; (In thousands of USD) Lease payments made for streamer systems Total

Year ended 31-Dec-11 Principal 18,350 18,350

Interest 2,764 2,764

Total 21,114 21,114

Year ended 31-Dec-10 Principal 10,990 10,990

Interest 2,511 2,511

Total 13,502 13,502

Future minimum lease payments under finance leases together with present value of the net minimum lease payments are as follows; (In thousands of USD)

Within one year After one year but not more than five years More than five years Total minimum lease payments Less amounts representing finance charges Total minimum lease payments

31-Dec-11 Minimum payments 21,112 4,808 25,921 (1,279) 24,641

Present value of payments 20,093 4,548 24,641 24,641

10. Interest payable (In thousands of USD) Interest accrued on senior secured bonds Interest accrued on convertible bonds Total

31-Dec-10 Minimum payments 20,648 24,673 45,321 (3,849) 41,472

31-Dec-11 3,436 1,839 5,275

Present value of payments 19,108 22,365 41,472 41,472

31-Dec-10 2,979 1,240 4,219

Interest charged and accrued on the convertible and senior secured bonds is calculated using the amortized cost method.

11. Employee accruals and payables (In thousands of USD) Accrued salaries Accrued bonuses Other employee accruals and payable Total

31-Dec-11 2,959 1,198 118 4,275

31-Dec-10 1,112 2,889 4,001

87


12. Cost of sales (In thousands of USD) Crew salaries and other benefits Other vessel operating expenses Total

Years ended 31-Dec-11 31-Dec-10 42,633 14,595 616 2 43,249 14,597

13. Sales, general and administrative costs (In thousands of USD) Salaries and other employee benefits Other general and administrative expenses Total

13.1 Salaries and other employee benefits (In thousands of USD) Salaries and bonus Social security costs Pension costs Other benefits Crew travel related costs Crew salaries and benefits included in cost of sales (refer to Note: 12) Total

Years ended 31-Dec-11 31-Dec-10 5,390 6,593 5,300 5,618 10,690 12,211 Years ended 31-Dec-11 31-Dec-10 36,903 17,410 269 129 2,246 900 6,553 2,568 2,052 181 (42,633) (14,595) 5,390 6,593

The Company offers a fixed base salary to all employees. Employees are also provided with a housing allowance and car allowance based on their location of employment and grades. The Company has an element of variable compensation through a performance-related bonus scheme. Based on overall performance of the Company against certain pre-defined metrics together with performance against individual and team-specific goals, the employees can benefit from a variable compensation in the range of 8% to 60% of annual base salary where the bonus level depends upon the employeeâ&#x20AC;&#x2122;s grade. In addition, the Company has a retention bonus scheme for the key offshore employees who accepted a position in the Company between 1 May 2008 and 31 December 2011. This loyalty bonus is designed to help retain highly experienced crew that is essential for field operations. All employees of the Company are offered a comprehensive employee health protection plan. The Company has implemented a share option program for key employees whose performance will have a significant positive impact on the overall success of the Company. Please find more details about the share option program in Note 14.3 Stock options in the consolidated financial statements. The Company has set up a pension scheme for the majority of its employees under which the Company, on a monthly basis, contributes 8% of an employeeâ&#x20AC;&#x2122;s base salary to the pension fund. No mandatory contribution is required from the employees. The amount contributed to the scheme is ring-fenced in favor of the employees through a trust. The vesting period of the fund is 5 years and each applicable employee is enrolled into the scheme at the end of his/her probation period. The employees may contribute funds to the scheme and the Company will match such contributions with an additional maximum 2%. During the year ended 31 December 2011 the Company has contributed USD 2.43 million to the pension scheme, full amount of which is expensed as employee benefits. Contributions made to the pension scheme during year 2010 were USD 1.02 million. For employees who are not enrolled into the above pension scheme, the Company recognizes a provision for pensions payable to the employees based on the contractual obligation between each employee and the Company. The accrued pension liability calculated based on the contractual obligation varies from 21 days to 1 monthâ&#x20AC;&#x2122;s basic salary for each year completed pro rata based on date of joining of each employee. As of 31 December 2011 the Company has recognized a liability of USD 0.22 million towards such pension payable. Liability recognized as of 31 December 2010 was 0.15 million.

88


14. Depreciation and amortization (In thousands of USD)

Depreciation of seismic equipment Disposal of seismic equipment Total

Year ended 31-Dec-11 31-Dec-10 8,516 6,770 (81) 2,825 8,435 9,595

15. Finance costs (In thousands of USD)

Year ended 31-Dec-11

31-Dec-10

Interest expenses on senior bond

6,732

7,499

Interest expenses on convertible bond

7,443

4,114

Interest expenses on lease arrangements

2,764

2,759

94

664

Other interest expenses Realized currency exchange loss Unrealized currency exchange loss

157

362

3,204

963

-

576

20,394

16,937

Other financial losses Total

16. Finance income (In thousands of USD)

Year ended 31-Dec-11 Interest income from deposit with banks

31-Dec-10

177

114

6,761

9,547

Other financial gains

174

247

Realized exchange gain

124

1,447

3,103

1,493

10,339

12,848

Interest income from subsidiaries

Unrealized exchange gain Total

The realized currency gain or loss represents the effect of foreign currency payments made and the unrealized currency gain or loss represents the effect of revaluation of foreign currency financial assets other than those treated as cash flow hedging instruments.

17. Changes in fair value of financial instruments

The changes in fair value of financial instruments represent the profit or loss on revaluation of liabilities on warrants issued. Also refer to Note 14.2 Warrants in the consolidated financial statements. The fair value of the warrant liability at each period end date and the profit or loss on revaluation for the periods reported are as per below; (In thousands of USD) Year ended 31-Dec-11 Warrant liability at fair value Profit/(loss) on revaluation of the fair value of warrant liability

31-Dec-10

48

6,768

6,720

(3,561)

89


18. Related-parties 18.1 Receivable from subsidiaries (In thousands of USD) Polarcus 1 Ltd Polarcus 2 Ltd Polarcus Selma Ltd Polarcus 5 Polarcus Multi-Client (CY) Ltd Polarcus US Inc. Polarcus 6 Ltd Polarcus Do Brazil Ltda Polarcus Naila AS Polarcus UK Limited Polarcus Alima AS Polarcus Seismic Ltd Polarcus Nadia AS Polarcus DMCC Total

31-Dec-11 3,921 4,635 282 19 4 1,203 60 519 2,296 154,562 167,501

31-Dec-10

20,994 135 9,722 14 119 8,057 93,810 132,851

The above receivables are mainly for vendor payments made by the Company on behalf of its subsidiaries which are receivable within 12 months from 31 December 2011.

18.2 Loans to subsidiaries

(In thousands of USD) Polarcus 1 Ltd (short term, interest free) Polarcus 2 Ltd (short term, interest free) Polarcus Samur Ltd (short term, interest free) Polarcus Nadia AS (short term, interest at LIBOR+4%) Polarcus Naila AS (short term, interest at LIBOR+4%) Polarcus Alima AS (long term, interest at LIBOR+4%) Polarcus Asima AS (long term, interest at LIBOR+4%) Polarcus UK Limited (short term, interest free) Polarcus Selma Ltd (long term, interest at LIBOR+4%) Total

18.3 Accounts receivable

(In thousands of USD) Polarcus Nadia AS Polarcus Naila AS Polarcus UK Limited Polarcus Asima AS Polarcus Alima AS Polarcus Seismic Ltd Polarcus Samur Ltd. Polarcus US Inc. Polarcus Selma Ltd Polarcus DMCC Receivable from external customers Total

90

31-Dec-11 14,030 14,030 130,774 26,060 6,142 30,230 71,500 50,200 125,827 468,793

31-Dec-10 14,030 14,030 89,298 33,083 21,296 30,230 71,500 28,200 301,667

31-Dec-11 7,102 728 5,001 2,100 1,456 262 2,260 1,706 20,614

31-Dec-10 12,772 11,422 586 4,652 1,277 30,709


18.4 Payable to subsidiaries

31-Dec-11

(In thousands of USD) Polarcus 5 Polarcus 6 Polarcus Asima AS Polarcus Seismic Ltd Polarcus DMCC (included in Accounts Payable)* Total

805 1,661 5,230 7,696

31-Dec-10 1,846 7,021 2,745 11,612

Payable Polarcus DMCC included in accounts payable is towards invoices received for administrative services. Payable to other subsidiaries are towards payments made by these subsidiaries on behalf of the Company.

18.5 Transactions with subsidiaries

The Company is a holding company for the Polarcus Group and also earns revenues from leasing seismic equipment and providing offshore employee services to its subsidiaries. See Note 2 for information regarding revenues earned from subsidiaries. Additionally, during the year ended 31 December 2011, Company’s initial investment of USD 19.9 million in vessel Polarcus Selma (later renamed as ‘Vyacheslav Tikhonov’) was transferred to Polarcus Selma Ltd at net book value.

19. Authorization of financial statement

The unconsolidated financial statements of the parent company Polarcus Limited for the year ended 31 December 2011 were authorized for issue in accordance with a resolution of the directors on 28 March 2012.

Peter Rigg

Tore Karlsson

Ali A. bin Towaih Al Suwaidi

Erik Henriksen

Carl-Peter Zickerman

Kitty Hall

Carl-Gustaf Zickerman

Hege Sjo

Jogeir Romestrand

91


Statsautoriserte revisorer Ernst & Young AS

To the Annual Shareholders’ Meeting of Polarcus Limited

Dronning Eufemias gate 6, NO-0191 Oslo Oslo Atrium, P.O.Box 20, NO-0051 Oslo Foretaksregisteret: NO 976 389 387 MVA Tlf.: +47 24 00 24 00 Fax: +47 24 00 24 01 www.ey.no Medlemmer av Den norske Revisorforening

AUDITOR’S REPORT We have audited the accompanying financial statements of Polarcus Limited, comprising the financial statements of the Parent Company and the Group. The financial statements of the Parent Company and the Group comprise the statements of financial position as of December 31, 2010, the statements of comprehensive income, cash flows and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory information. The Board of Directors’ and Chief Executive Officer’s Responsibility for the Financial Statements The Board of Directors and Chief Executive Officer are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 financial statements of Polarcus Limited present fairly, in all material respects, the financial position of the Parent Company and the Group as of December 31, 2011, and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards.

Oslo, 28 March 2012 ERNST & YOUNG AS

Anders Gøbel State Authorised Public Accountant (Norway)

A member firm of Ernst & Young Global Limited

92


NOTES

93


ADDRESSES Polarcus Limited:

Polarcus 6 Ltd:

Reg. No: WK 201867 Registered Address: Walker House, 87 Mary Street George Town, Grand Cayman KYI – 9001 Cayman Islands

Reg. No: WK- 203972 Registered Address: Walker House, 87 Mary Street George Tow, Grand Cayman KYI – 9001 Cayman Islands

Polarcus 1 Ltd: Reg. No: WK- 204062 Registered Address: Walker House, 87 Mary Street George Town, Grand Cayman KYI – 9001 Cayman Islands

Polarcus 2 Ltd: Reg No: WK- 203939 Registered Address: Walker House, 87 Mary Street George Town, Grand Cayman KYI – 9001 Cayman Islands

Polarcus Samur Ltd: Reg. No: WK- 204064 Registered Address: Walker House, 87 Mary Street George Town, Grand Cayman KYI – 9001 Cayman Islands

Polarcus Selma Ltd: Reg. No: WK- 204020 Registered Address: Walker House, 87 Mary Street George Town, Grand Cayman KYI – 9001 Cayman Islands

Polarcus MC Ltd: Reg. No: WK- 204065 Registered Address: Walker House, 87 Mary Street George Town ,Grand Cayman KYI – 9001 Cayman Islands 94

Polarcus DMCC: License No: 30852 Registered Address: Almas Tower, Level 32 Jumeirah Lakes Towers Dubai United Arab Emirates Correspondence Address: PO Box 283373, Dubai United Arab Emirates

Polarcus Seismic Limited: Reg. No: WK- 213496 Registered Address: Walker House, 87 Mary Street George Town, Grand Cayman KYI – 9001 Cayman Islands

Polarcus UK Ltd: Reg. No: 7068161 Registered Address: St. James House 13 Kensington Square London W8 5HD U.K.

Polarcus Egypt Ltd: Reg. No: 41735 Cairo Registered Address: 10 Abdel Azim Ashmawy Street Al-Nozha Cairo, Egypt


Polarcus do Brasil Ltda:

Polarcus Norway AS:

Reg. No: 11.428.425/0001-12 Matriz Registered Address: Av Nilo Peçanha, 50 – group 2817, Centro, Rio de Janeiro, Brasil

Reg. No: 996 798 305 Registered Address: c/o Wikborg, Rein & Co PO Box 1513 Vika 0117 Oslo Norway

Polarcus Nadia AS: Reg. No: 994 063 901 Registered Address: C/O Wikborg, Rein & Co P.O.Box 1513 Vika 0117 Oslo Norway

Polarcus Naila AS: Reg. No: 995 097 893 Registered Address: c/o Wikborg, Rein & Co PO Box 1513 Vika 0117 Oslo Norway

Polarcus US Inc. EIN No: 80-0716980 Registered Address: c/o Capitol Services Inc 615 South DuPont Highway, Dover, Kent County Delaware 19901 USA

Polarcus Amani AS: Reg. No: 998 025 966 Registered Address: c/o Kjelstrup & Wiggen AS Henrik Ibsen Gate 20 0255 Oslo Norway

Polarcus Shipholding AS:

Polarcus Asima AS:

Reg. No: 995 542 846 Registered Address: c/o Wikborg, Rein & Co PO Box 1513 Vika 0117 Oslo Norway

Reg. No: 998 025 877 Registered Address: c/o Kjelstrup & Wiggen AS Henrik Ibsen Gate 20 0255 Oslo Norway

Polarcus Multi-Client (CY) Ltd:

Polarcus Adira AS:

Reg. No: HE 267816 Registered Address: c/o Ernst & Young Spyrou Kyprianou, 27, Ernst & Young House, P.C. 4001, Limassol, Cyprus

Reg. No: 998 026 016 Registered Address: c/o Kjelstrup & Wiggen AS Henrik Ibsen Gate 20 0255 Oslo Norway

Polarcus Alima AS:

Polarcus Samur AS:

Reg. No: 995 963 426 Registered Address: c/o Wikborg, Rein & Co PO Box 1513 Vika 0117 Oslo Norway

Reg. No: 898 025 942 Registered Address: c/o Kjelstrup & Wiggen AS Henrik Ibsen Gate 20 0255 Oslo Norway

95


POLARCUS LIMITED c/o Polarcus DMCC Almas Tower, Level 32, Jumeirah Lakes Towers, PO Box 283373, Dubai, United Arab Emirates 96


Polarcus Annual Report 2011