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V. Business Risks
In carrying out its business the Company faces certain risks that may affect the business proceeds of the Company. The risks, which have been put in order from the highest until the lowest risk, are as follows:
1. Risk of Termination, Reduction of Tariffand Non-Renewal of Contracts
The majority of Company’s revenues is acquired from a number of material customers, none of which are related parties. For the six months ended 30 June 2010, the top 10 customers contributed 65.5 of the Company’s total revenues. Although the
Company believes in establishing a good relationship with its customers, however there is no guarantee that such customers will continue to use the Company’s offshore transportation vessels chartering services in the future with the same frequency
or on the same terms and conditions as they do currently. In several contracts with its customers, if the Company’s customer experiences a disruption in its business activities, such customer may determine a stand-by tariff which is lower than the tariff
stated in the contract, for a period set in the contract. If the Company is unable to carry out the requirements set in the contract, the Company may be imposed with a penalty. There is no guarantee that the Company will be able to retain its
primary customers or that the primary customers shall continue to renew their contracts or grant the Company new contracts. To the extent that the Company terminates its contracts or no longer acquires terms and conditions that are in favor of the
Company, this may have negative impact on the Company’s finances, namely decrease in income, profit, and thus causing the decrease in the Company’s performance.
2. Risk of Delays in Arrival of Newly Ordered Fleet
The Company’s expansion activities will need additional offshore supporting vessels. Any delay in delivery or completion of vessels due to default by the party building the vessels or other matters beyond the control of the party building the vessels,
to the extent that such losses cannot be compensated in accordance with contracts or replaced by the insurance companies, or the possibility of penalties being imposed on the Company, may adversely affect the Company’s income and financial
performance.
3. Risk of Dependency on the Offshore Oil and Gas Industry
The Company’s business activities are closely related to the offshore oil and gas industry, which is primarily influenced by the amount of capital expenses made by oil and gas companies. Capital expenditure made by these oil and gas companies will
determine the total numbers of new locations of new offshore oil and gas fields to be opened. The more offshore oil rigs that are deployed or begin operations, hips bridge are opened, the greater the need for offshore transportation vessels chartering
services provided by the Company, thus increasing the Company’s income and business performance. On the contrary, should the industry experience delay in or termination of exploration and exploitation process of oil and gas, it shall negatively
impact the Company’s business and performance, thus decreasing its total income.
4. Risk of Foreign Currency Exchange Rate and Loan Interest Rate
Transactions conducted by the Company mostly use foreign currency, including, the Company’s income, as most of the contracts use US Dollars, , including, the Company’s income, capital expenditure in the form of vessels imported from foreign
countries, and loan facilities from creditors. Thus, the fluctuation of exchange value of Rupiah to foreign currency and level of loan interest rate may affect the profit margin, which would negatively impact the Company’s business activities, decrease its
income and financial performance. Furthermore, the consolidated financial statements of the Company, along with the stan- dalone financial statements of the Issuer and its Subsidiaries, are also stated in Rupiah, so that the Company bears a risk of
foreign currency exchange rate in the presentation of its financial statements, wherein the report on consolidated net income constitutes the basis of distribution of dividend.
5. Risk of Dependency of the Company on Subsidiaries
The Issuer constitutes a holding company, most of income of which originates from its Subsidiaries. The Company assumes a risk of quite high dependency on the business activities of and income from the Subsidiaries. As such, should the business
activities and income of Subsidiaries experience a decrease, such shall affect the level of income of the Company as a whole.
6. Risk of Maritime Losses andor Accidents
The Company’s business activities are related to various risks of maritime losses andor accidents, which among others are caused by various matters, such as natural disasters, bad weather, very high wave, collision impact, vessels ashore, fire,
mechanical failure, human negligence, and spilling of cargo andor leaks causing pollution thus causing claims from third parties. In addition to such risks, vessel operations may be also disrupted as a result of accidents, social and political
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developments, labor disputes, strikes, acts of terrorism, war, smuggling of goods into the Company’s vessels, black trading by smugglers, piracy, and others.
Such occurrences may negatively impact the Company’s performance and may increase Operating Expenses and decrease Income, while the disasters related to environmental pollution may affect the Company’s reputation as a reliable and secure
owner and operator, which may ultimately affect its business, financial condition and performance. The Company has protected its vessels with adequate insurance, among others “Hull and Machinery”, “War Risk” and“
Protection and Indemnity” insurance. However, although the Company has protected its vessels with insurance, there may still exist situations where the Company is not able to be compensated for all lossesdamages it has suffered, namely:
i losses suffered from such disasters exceed the value of insurance owned by the Company and inadequate to cover the cost of damages it suffered, ii losses caused by a number of risks that cannot be insured, such risks of damages due to
biochemical or iii the insurance company it uses becomes insolvent. Should these matters occur and the Company not be able to protect its assets, acquire insurance protection, or pay the total legal liabilities, this may have significant negative
impact on the Company’s business income, cash flows, performance, and net income.
7. Risk of Damage to the Company’s Vessels
The vessels owned by the Company may experience damage at sea, thus causing repair costs and loss of potential income derived from such vessel operations. Such damage could occur either when the vessel is under the control of the Company
or a third party, such as when a vessel is at a shipyard or being towed by a third party. For example, one of the Companys oil barge vessels was severely damaged in 2010 by an explosion while at a shipyard, which resulted in the Company making an
insurance claim for total loss of the vessel. Should the vessels be under contract, therefore there is still a possibility that Company must charter a similar vessel from third parties to replace the damaged company’s vessel. The value of Charter for
the replacing Vessels from the third parties, depend on the market condition at the time, there is a possibility that the rate is higher than the contract and the Company shall have to bear these losses. The Company, aside from having to pay for repair
costs of the damaged vessel must also pay for the mobilization of the damaged vessel to the dockyard and return to the location after the repair. Should this occur, it would cause material losses on income and cash flows of the Company, which
would negatively impact the Company’s business.
8. Risk of Loss of Human Resources
Currently, the Company’s management and a number of senior employees have significant experience in company operations and shipping industry. Should the Company lose senior personnel and be unable to recruit competent
replacements, this may disturb the Company’s business activities and may have negative impact on the financial condition and proceeds from operations. Other than the management level, the Company is also very attentive towards the crew on
board the new vessels. Any inadequacies in vessel crews may disturb the Company’s operations. The Company believes that an important factor in the success of its business is the Company’s ability to retain competent,
high quality, and experienced employees, as well as vessel crews. Should the Company be unable to attract, retain and motivate its employees and crews, this would negatively impact the Company’s performance. Although the Company is able
to attract and retain such personnel, the competition to acquire employees may increase costs and compensation significantly, thus decreasing the Company’s net income.
9. Risk of Limited Funding for Expansion of Company Business
The expansion of the Company’s business activities requires significant funding, especially for building or purchasing vessels. The Company’s inability to acquire adequate funding for its expansion activities would limit the growth of its business, which
may affect the capability of the Company to compete in offshore supporting vessels industry. Furthermore, in the future the Company intends to seek funding through loans that may contain a covenant limiting the Company’s cash flows to finance its
expansion, working capital, or other needs, which may decrease the flexibility of the Company in conducting work plan in facing the development within the industry.
10. Risk of Business Competition
With the application of cabotage principle due to start in January 2011, the competitive landscape within the business industry of the Company will change significantly. Prior to the issuance and application of the cabotage principle, although
with less number of vessels, foreign companies with strong funding capability control the offshore supporting transportation services in Indonesia, especially the segment with higher margin. Vessels used in such segment generally have quite high
capability, technical specifications, and technology. With foreign vessels not in operation anymore, the Company sees an opportunity to take over the market segment left behind. The inability to meet the capital needed to procure vessels with the
appropriate specifications may cause the Company not being able to enter the market segment that shall be left behind by the vessels with foreign flag, thus losing business expansion potential.
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The supply of offshore supporting vessels in the market is affected by the needs of industry players and the availability of vessels. The surplus of estimation on the need for offshore supporting vessels may cause an oversupply in the market, which
may cause the decrease in Vessels Charter and also the market value of Company’s vessels. Should this occur, it would negatively influence the Company’s financial condition.
11. Risk of Revocation of Business License
In running its business, the Company refers to the prevailing regulations, along with all required permits, whether issued by the Department of Transportation of Republic of Indonesia or other institutions, especially those related to shipping. As
normally practiced in a shipping company, Letter of Permit for Shipping Business “SIUPAL” constitutes an absolute requirement to conduct its business activities. Should there be a failure or negligence in meeting the provisions prevailing in
Indonesia, such failure could lead to a temporary termination or revocation of the Company’s business license. Temporary termination or revocation of the Company’s business license would cause a negative impact on the Company’s business
performance and the continuity of the Company’s business.
12. Risk of Dependency on Long Term Contracts
Contracts in which the Company is engaged constitute time charter contracts for a period of several months in advance, with previously agreed terms and conditions. A change in the currency exchange value, manpower, and other costs may cause
the total income from the contracts to be lower than the costs. However, the Company remains obligated to continue to carry it out during the term of the contract. Such a situation would have a negative impact on the Company’s income from opera-
tions, net income, and performance.
13. Risk of Increase in Fuel Price
The price of oil based fuel for shipping is unpredictable and influenced by various economic and political factors beyond the Company’s control. Although several of the Company’s contracts contain a provision allowing the Company to pass any fuel
price increases to its customers, any increase in fuel occurring for a given shipping would affect the Company’s financial and cash flow condition, as the Company must pay for the customers’ fuel in advance before such expenses are indemnified by
the relevant parties. As such, the total fuel expenses imposed on the customers of the Company may not be at the previously agreed level, which may affect the long term relationship between the Company and its customers and ultimately
cause a decrease in the Company’s performance and business proceeds in the future.
14. Risk of Inability to Comply with the Prevailing Rules and Certification
The business sector in which the Company is carrying out its activities constitutes a sector, within national and international scope, in which the level of safety and security, whether from point of view of technical, environmental, individual, and
manpower involved, is thoroughly observed. The industry in the Company’s business sector has various prevailing rules and certifications to guarantee the implementation of safety and security procedures. The Company’s inability to meet and renew
the prevailing rules and certifications may influence Company’s income. Such inability may diminish the Company’s competitive advantage. Moreover, the Company faces the potential of losing its customers, which would decrease its income
and ultimately result in the Company’s inability to maintain or increase its income.
15. Risk of Capture of Company Vessels by Parties Filing Maritime Claim
According to maritime law in various jurisdictions and the international convention on capture of vessels in 1999, the crew, parties claiming for indemnification, parties claiming for violation of certain maritime contracts, parties providing loans,
suppliers of goods and services for vessels, transporters, and owners of cargoes, and other parties entitled on board the ves- sel, may exercise their rights by “detaining” the vessels through a process in court. In addition, in a number of jurisdictions, in
accordance with the accountability theory of “affiliated vessel”, the claiming parties are not only allowed to capture the concerned vessel, but also other vessels owned or controlled by the owner of such vessel. The vessels owned by the
Company may be captured by the parties submitting maritime claims. Should this occur, the capture of one or more of the Company’s vessels could cause the Company to pay a potentially significant amount to release them, which would cause
losses on the Company’s income, income from operations, and cash flows.
16. Risk of Government Policies Regulations
In general, the Company’s business activities highly depend on the policies of the Indonesian Government, whether directly or indirectly, and also on international maritime regulations, admiralty laws andor agreements with foreign governments. The
Indonesian Government may from time to time issue, amend, or apply new policies in shipping sector which related to various aspects such as taxation, diplomacy, security, laws concerning the environment or social, all of which are beyond the
Company’s control. If local and international regulations, including environmental regulations, applicable to the shipping industry become more stringent in the future, the Companys cost of doing business or compliance with such regulations
could increase. Should the policies rules be applied, the compliance with the laws, regulations, agreements, and undertakings may have material impact on the Company’s business or operations proceeds. Furthermore, the Company’s
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failure to apply or adjust to the Government’s policies regulations may cause increase in costs, sanction, penalty, or legal prosecution in the future, which would negatively impact the Company’s income from operations and net income.
17. Risk of Vessel Piracy at Sea
The Company’s ships face risks of piracy at sea. Should an attack by the pirates occur, the Company’s ships may be kept as hostage, destroyed, or damaged, thus affecting the Company’s financial condition. The Company is covered with insurance
for hull and machinery andor risks of war or similar risks for certain ships to protect itself from the risks that may occur due to piracy. In the event of an attack, damages or theft by pirates to the Company’s vessel may cause damages andor losses
exceeding the total coverage of the insurance company, which would have to be borne by the Company, thus affecting the Company’s operations and financial condition.
18. Risk of Potential Liabilities that may Occur due to Injuries or Deaths Caused by Accidents
The Company’s operations face risks of accidents, which may happen to employees or third parties in close proximity with the vessel at the time of operation. Such accident may be in the forms of fire, explosion, or other occurrences, which may
cause injuries, death, or damages to vessel. Although the Company has applied safety and health procedures for its em- ployees, the Company cannot guarantee that an accident will not happen. The Company may have liabilities, based on con-
tract or law, should an accident causing injuries or deaths occur. Should the accident be not covered by insurance of the total claim due to such occurrence exceeding the total coverage by the insurance company, such liabilities would be assumed by
the Company, thus affecting its financial condition.
19. Risk of Political Disturbance in Area of which Company’s Vessels are in Operation
Wars, unstable political conditions, riots, acts of terrorism, and government acts such as confiscation of vessels and limitation of importexport in countries in which the Company’s vessels are or may be operating, may delay the Company’s vessels to
dock in certain ports in such countries or affecting the capability of the Company to transport offshore supplies to customers operating in such countries. The occurrence of such condition may affect the capability of the Company’s customers in paying
their liabilities to the Company and significantly increase insurance premium on the Company’s vessels operating in such countries. Should this occur, it would adversely affect the Company’s operations and profitability.
20. Risk of Decrease in Market Value of Vessels
The market value of vessels fluctuates and depends on a number of factors, including age, specifications and condition of the vessels, economic conditions of the market influencing the industry generally, business competition, changes in the
constructions of new vessels, and other changes in the shipping industry. Should a decrease in the market value of the vessels occur, such decrease would have negative impact on the Company, in
the following ways: i
The possibility that a certain financial ratio, which the Company is obligated to meet in accordance with the provisions of the loan, is not fulfilled. Should this occur, the Company would be obligated to increase its assets with a certain
value to maintain the fulfillment of such provision from the bank. ii
The Company may face difficulties in gaining new funding or additional loan caused by the decrease in book value, along with the aging of the vessel.
iii Should the Company sell the vessel at a price below its book value, the Company shall acknowledge losses on de- crease in value in its statements of income.
The decrease in the market value of any vessel owned by the Company may negatively impact the Company’s cash flows, performance, and net income.
All anticipated business risks have been disclosed by the management of the Company in this Prospectus.
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VI. Significant Events after the Date of Independent Auditor Report
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