Final Results - Part 2

LEPCO plc 20 June 2001 PART 2 1 Accounting policies The principal accounting policies, all of which have been applied consistently throughout the year and the preceding year, are set out below: a. Basis of accounting The financial statements are prepared under the historical cost convention, and in accordance with applicable accounting standards. b. Going concern Since the disposal of the Forties interest in late 1998 the Group has had no significant source of revenue. The Group's principal asset is its 98.5% equity interest (net 89.5% after carried interests) in licence P.775, covering acreage on block 47/9c in the UK Southern Gas Basin which contains a potentially commercial gas discovery. Since the approval of the 1999 financial statements, the Group has taken a number of steps to realise the potential value of the licence to the Group and to acquire revenue producing assets on behalf of the Group. The directors have previously advised shareholders that in the absence of achieving either of these objectives, the Group would have to raise additional funding. Details of the steps taken to realise the potential value of licence P.775 are provided in note 12c). In addition, on 26 October 2000, the Company announced that it had entered into a letter of intent with DNO ASA ('DNO') to acquire oil assets in the Republic of the Yemen from DNO, the consideration for which was to be ordinary shares in LEPCO. DNO also provided LEPCO with a £250,000 Term Loan Facility to fund the Company during the course of completing the transaction. The Company started to draw down the loan in January 2001 and by March 2001 the loan was fully drawn. During negotiations, DNO changed the proposed transaction substantively. Ultimately DNO withdrew from the deal when it became apparent that major shareholders in the Company would not support the revised transaction. Following the termination of this transaction, the Company announced in April 2001 that it was in discussions with its major shareholders to resolve the Company's financial situation. Agreement was reached on 29 May 2001 with Park Resources Limited ('Park'), the general partner of Endeavour Oil & Gas Limited Partnership ('Endeavour'), for Park to underwrite an open offer with full clawback of £990,200 before expenses at 4 pence per share. All existing shareholders will have full rights to subscribe to the open offer in proportion to their existing shareholding. Each share taken up under the open offer will also receive a warrant entitling the holder to subscribe for a further ordinary share of 1p par at 6p per share. To achieve this open offer, the Company proposes to restructure its share capital by dividing each existing 10p par ordinary share into 1 new ordinary share of 1p par and 1 new deferred share of 9p par. The deferred shares will carry no significant rights. The above refinancing, including the share reorganisation, is subject to a number of requirements, the most significant of which is shareholder approval. The directors are confident that such approval will be obtained. The directors, Endeavour and certain of Endeavour's related parties have given irrevocable undertakings, representing 40.38% of the eligible votes, to support, where able, the necessary resolutions at the forthcoming Extraordinary General Meeting. To fund the Company's immediate requirements, Park has granted a facility to the Company to lend it up to £300,000, repayable from the proceeds of the open offer. To date, £50,000 of this loan has been drawn down. A standby facility of up to a further £300,000 has also been made available. In relation to the £250,000 Term Loan Facility with DNO, the Company has given notice to DNO that it has elected to repay the £250,000 drawn down through the allotment of ordinary shares to DNO, as permitted under certain circumstances under the terms of that Term Loan Facility. DNO has notified the Company that LEPCO is, in DNO's opinion, in default under the Term Loan Facility and has called for repayment in cash. The Company disputes this and the directors are seeking authority from shareholders to enable them to allot the necessary shares to satisfy the Term Loan Facility. Based on the plans and relevant actions outlined above, and assuming that the refinancing of the Group that has been underwritten by Park as outlined above obtains the necessary shareholder approvals and is completed, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and for this reason the going concern basis has been adopted in preparing these financial statements. The directors have taken the period to 30 June 2002 as being the foreseeable future for this purpose. The financial statements do not include any adjustments that would result should the proposed refinancing not take place. c. Consolidation The Group accounts consolidate the accounts of LEPCO plc and its subsidiary undertakings. The results of subsidiaries acquired are consolidated for the periods from which control passed. Acquisitions are accounted for under the acquisition method with goodwill, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, being capitalised within intangible assets and amortised over its estimated useful economic life. d. Turnover Turnover represents the invoiced value of the Group's share of hydrocarbon production in the year. e. Consortium accounting The Group's exploration, development and production activities are generally conducted as co-licensee in joint operations with other companies. The financial statements reflect the relevant proportions of production, capital expenditure and operating costs applicable to the Group's interests. f. Oil and gas interests The Group accounts for oil and gas exploration under the full cost basis as set out in the Statement of Recommended Practice 'Accounting for oil and gas exploration, development, production and decommissioning activities' published by the Institute of Petroleum on behalf of the UK Oil Industry Accounting Committee ('the SORP'). Licence acquisition costs, geographical and geophysical costs, costs of drilling exploration, appraisal and development wells, and an appropriate share of overheads (including appropriate directors' costs) are capitalised and accumulated in full cost pools within tangible fixed assets on a geographical basis. The Group's oil and gas assets are currently held in three cost pools, the UK, Netherlands and North America. Costs relating to the exploration and appraisal of oil and gas interests which the directors consider to be unevaluated are initially held outside the cost pool as intangible fixed assets. These costs are reassessed at each year end and when there are indications of impairment or at the conclusion of an appraisal programme the related costs are transferred to the full cost pool within tangible fixed assets. An impairment test is carried out at each balance sheet date to assess whether the net book value of the capitalised costs in each pool is covered by the associated recoverable amount, as outlined in FRS 11 'Impairment of Fixed Assets and Goodwill'. Impairment losses are recognised in the profit and loss account. Depletion is provided on balances held in each cost pool, plus the expected future costs to extract all commercial oil and gas reserves, using the unit of production method. Commercial oil and gas reserves are proven and probable oil and gas reserves as defined in the SORP. Depletion is not provided on interests held outside the cost pool. g. Depreciation of other tangible fixed assets Depreciation on other tangible fixed assets is provided at rates estimated to write off the cost, less estimated residual value, of each asset over its expected useful life as follows: Computer equipment - 33% straight line h. Foreign currencies Transactions denominated in foreign currencies are translated into sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated into sterling at the rate of exchange ruling at the end of the financial year. All exchange differences are dealt with in the profit and loss account. The results of overseas operations are translated at the average rates of exchange during the period and their balance sheet at the rates ruling at the balance sheet date. Exchange differences arising on translation of the opening net assets and results of overseas operations are dealt with through reserves. i. Corporation tax Corporation tax payable is provided on taxable profits at the current rate. Deferred corporation tax is accounted for under the liability method in respect of the taxation effects of all timing differences which are expected to reverse in the foreseeable future, calculated at the rate at which it is estimated that tax will be payable. j. Royalties Royalties, net of allowances for conveying and treating costs, are charged to cost of sales during the period in respect of which they are payable. k. Investments Fixed asset investments are shown at cost less provision for impairment. l. Operating leases Rentals under operating leases are charged on a straight-line basis over the lease term, even if the payments are not made on such a basis. 2 Segment information The Group operates in one business segment, the exploration for and production of oil and gas. The Group has interests in three geographical segments, the UK, Netherlands and North America as follows: UK Netherlands North America Group 2000 1999 2000 1999 2000 1999 2000 1999 £ £ £ £ £ £ £ £ Turnover* - - - - 32,318 37,125 32,318 37,125 (Loss) profit (260,052) (310,939) (150,048) (15,940) 19,254 (6,830)(390,846) (333,709) before taxation Net assets 871,247 1,099,450 15,730 166,295 12,889 15,341 899,866 1,281,086 *All turnover is sold to third parties within the segment of origin. 3 Cost of sales 2000 1999 £ £ Operating costs 4,417 9,507 Royalty 2,067 4,346 Depletion and amounts written off tangible fixed 3,294 32,777 assets Forties settlement costs (see below) - 64,362 __________ __________ 9,778 110,992 __________ __________ The Group disposed of its interest in the Forties field in late 1998. Computation of the final settlement figures within the contractual terms resulted in additional costs being incurred which, together with directly related administrative costs, amounted to £64,362. These costs were recorded within discontinued cost of sales in 1999. 4 Investment income 2000 1999 £ £ Interest receivable and similar income 12,591 24,936 __________ __________ 5 Interest payable and similar charges 2000 1999 £ £ Bank overdraft - 462 __________ __________ 6 Loss on ordinary activities before taxation In addition to the amounts shown in note 3, loss on ordinary activities before taxation is stated after charging the following amounts: 2000 1999 £ £ Depreciation of tangible fixed assets 8,013 8,477 Amounts written off intangible fixed assets 214,554 83,382 Auditors' remuneration - audit fees 8,000 8,000 - non-audit 24,849 23,520 Operating lease rentals 26,730 23,750 __________ __________ 7 Employee information The average monthly number of employees (including executive directors) during the year was 4 (1999 - 4). Due to the small size of the Company there is no formal classification of duties. Employee costs during the year amounted to: 2000 1999 £ £ Wages and salaries 145,993 191,619 Social security costs 11,775 17,922 __________ __________ 157,768 209,541 __________ __________ Included within wages and salaries above is £29,470 (1999 - £33,900) which has been capitalised. 8 Directors' remuneration Aggregate remuneration Directors' remuneration for the year comprised emoluments of £107,370 (1999 - £145,404). Emoluments included £28,400 (1999 - £30,000) that has been capitalised. The Company does not provide pension arrangements to its directors. The directors' emoluments shown above, all of which relate to basic salaries and fees, consist of the following: 2000 1999 £ £ Executive director P. K. Wilde 58,392 87,588 Non-executive directors P.J. Bassett 10,000 15,000 Dr E. J. Butler 24,978 21,816 Prof. A. M. Lees 6,667 10,000 J. G. West 7,333 11,000 __________ __________ Aggregate emoluments 107,370 145,404 __________ __________ Details of directors' interests in the shares of the Company are shown in the directors' report. In addition to the foregoing, the directors irrevocably waived a proportion of the emoluments that they were entitled to during 2000, as follows: 2000 £ P.J. Bassett 5,000 Dr E. J. Butler 7,667 Prof. A. M. Lees 3,333 J. G. West 3,667 P.K. Wilde 30,780 __________ Aggregate emoluments waived 50,447 __________ No emoluments were waived by the directors during 1999. Directors' share options Details of options to acquire ordinary shares in the Company held by the directors at 31 December 2000 are as follows: Number P.J. Bassett 160,000 Dr. E.J. Butler 191,000 Prof. A.M. Lees 80,000 J.G. West 50,000 P.K. Wilde 200,000 __________ Total 681,000 __________ Options for 17,500 shares held by P.J. Bassett lapsed during the year. No other options were granted, exercised or lapsed during the year. In addition to the above, the estate of the late J.C. Bassett, in which P.J. Bassett has a non-beneficial interest as an Executor and Trustee, held 2,500 options at the start of the year, which lapsed during the year, with no options granted or exercised. The options are exercisable at any time within 7 years of the agreement being formally granted and executed. The mid-market price of the ordinary shares at 31 December 2000 was 15p (1999: 18.5p) and the range during the year was 14p to 18.5p (1999 - 10.5p to 21.5p). Subsequent to year end, as part of the proposed refinancing scheme described in note 1b), all the above options have been cancelled. 9 Taxation There is no provision for current or deferred tax at 31 December 2000 (1999 - £nil). Deferred tax not provided for is as follows: 2000 1999 £ £ Accelerated capital allowances 219,339 202,186 Less: corporation tax losses carried forward (384,970) (344,903) __________ __________ Deferred tax asset (165,631) (142,717) __________ __________ 10 Loss attributable to LEPCO plc The loss for the financial year dealt with in the accounts of LEPCO plc was £ 235,364 (1999 - loss of £282,021). As provided by s230 of the Companies Act 1985, no profit and loss account is presented in respect of LEPCO plc. 11 Earnings per share The calculation of basic earnings per share is based on the loss for the financial year of £390,846 (1999 - loss of £333,709) and on 9,879,400 (1999 - 9,832,733) ordinary shares, being the weighted average number of ordinary shares in issue. Diluted earnings per share is the same as basic earnings per share in both years as the effect of potential ordinary shares is antidilutive. 12 Intangible fixed assets Group Company Unevaluated Unevaluated oil and gas oil and gas interests interests £ £ Net book value At 31 December 1999 877,434 729,510 Additions 252,268 249,573 Abortive acquisition/deal costs written off (66,906) (66,906) (see a) below) Amounts written off assets in the Netherlands (147,648) - (see b) below) Exchange adjustment (150) - __________ __________ At 31 December 2000 914,998 912,177 __________ __________ a) Due to the termination of the proposed deal with DNO subsequent to the year end (see note 1b), costs incurred prior to 31 December 2000 in relation to this proposed deal, amounting to £51,493, have been written off, in addition to £15,413 relating to the costs of abortive acquisitions. b) In view of the operator's decision during the year to defer development of the Donkerbroek field in the Netherlands this asset has been written down by £147,648 and is now carried at a nominal value of NLG 10,000 (approximately £2,820 at the year end exchange rate of 3.55 NLG/£) in the books of LEPCO Oil & Gas Netherlands B.V. c) The Company's principal unevaluated oil and gas interest as at 31 December 2000 is its 98.5% equity interest in licence P.775 (net 89.5% after carried interests) covering acreage on block 47/9c in the UK Southern Gas Basin. During 2000 the Group, which has operated the block since November 1999, completed a full evaluation of the block and concluded that the licence contains a potentially commercial gas discovery. Since September 2000 the Group has taken a number of steps to realise the value of this asset, including seeking farm-in partners to drill an appraisal well on the block. The Group has now agreed with the Department of Trade and Industry that it will pay the licence fee for the period up to at least June 2002 to enable the Group to advance this objective. The board of directors has fully reviewed and considered the potential value of the Company's interest in licence P.775 and the likely opportunities for realising that value and have concluded that, on the assumption that the proposed refinancing outlined in note 1b) is completed and that the block is subsequently either farmed out or sold, the likely value is in excess of its net book value. 13 Tangible fixed assets Oil and Computer Total gas interests equipment Group £ £ £ Cost At 31 December 1999 50,293 31,996 82,289 Additions 716 - 716 __________ __________ __________ At 31 December 2000 51,009 31,996 83,005 __________ __________ __________ Depreciation At 31 December 1999 36,851 26,906 63,757 Charge for the year 3,294 4,719 8,013 __________ __________ __________ At 31 December 2000 40,145 31,625 71,770 __________ __________ __________ Net book value At 31 December 1999 13,442 5,090 18,532 __________ __________ __________ At 31 December 2000 10,864 371 11,235 __________ __________ __________ Oil and Computer Total gas interests equipment Company £ £ £ Cost At 31 December 1999 5 31,996 32,001 and 2000 __________ __________ __________ Depreciation At 31 December 1999 5 26,906 26,911 Charge for the year - 4,719 4,719 __________ __________ __________ At 31 December 2000 5 31,625 31,630 __________ __________ __________ Net book value At 31 December 1999 - 5,090 5,090 __________ __________ __________ At 31 December 2000 - 371 371 __________ __________ __________ 14 Fixed asset investments Cost and net book value There was no movement in the Company's fixed asset investments during the year, all of which relate to subsidiary undertakings. Principal investments The parent company has investments in the following subsidiary undertakings: Country of Class of Proportion of voting incorporation shares rights held Nature of held business LEPCO Oil & USA Ordinary 100% Exploration Gas USA Inc. for and production of oil and gas LEPCO Oil & Canada Ordinary 100% Exploration Gas Canada for and Ltd. production of oil and gas LEPCO Oil & Netherlands Ordinary 100% Exploration Gas for and Netherlands production B.V. of oil and gas 15 Debtors Group Company 2000 1999 2000 1999 Amounts falling due £ £ £ £ within one year: Trade debtors - 2,023 - - Amounts owed by - - 235,047 232,207 subsidiary undertakings VAT 3,348 5,475 3,334 5,267 Prepayments and accrued 27,126 15,756 27,334 15,756 income __________ __________ __________ __________ 30,474 23,254 265,715 253,230 __________ __________ __________ __________ 16 Creditors: Amounts falling due within one year Group Company 2000 1999 2000 1999 £ £ £ £ Trade creditors 20,599 31,130 16,526 23,809 Taxation and social 8,142 8,249 8,142 8,249 security Other creditors 9,935 - 9,935 - Accruals and deferred 66,120 34,993 63,364 34,549 income ________ __________ __________ __________ 104,796 74,372 97,967 66,607 __________ __________ __________ __________ 17 Called-up equity share capital 2000 1999 £ £ Authorised: 15,000,000 (1999 - 15,000,000) ordinary shares of 1,500,000 1,500,000 10p each __________ __________ Called-up, allotted and fully paid 9,902,733 (1999 - 9,832,733) ordinary shares of 990,273 983,273 10p each __________ __________ During the year the Company allotted 70,000 ordinary shares with a nominal value of £7,000 and at a premium of £3,000 in settlement of amounts owed to a trade creditor of the Company. 18 Reserves Group Share Profit premium Other and loss account reserves account Total £ £ £ £ At 31 December 1,669,145 35,618 (1,406,950) 297,813 1999 Premium on 3,000 - - 3,000 shares issued (see note 17) Loss for the - - (390,846) (390,846) year Loss on foreign - (374) - (374) currency translation __________ __________ __________ __________ At 31 December 1,672,145 35,244 (1,797,796) (90,407) 2000 __________ __________ __________ __________ Company Share Profit premium and loss account account Total £ £ £ At 31 December 1999 1,669,145 (1,283,082) 386,063 Premium on shares issued (see 3,000 - 3,000 note 17) Loss for the year - (235,364) (235,364) __________ __________ __________ At 31 December 2000 1,672,145 (1,518,446) 153,699 __________ __________ __________ 19 Reconciliation of movements in Group shareholders' funds 2000 1999 £ £ Loss for the year (390,846) (333,709) Other recognised gains and losses relating to the (374) 526 year __________ __________ (391,220) (333,183) Shares issued 10,000 - __________ __________ Net deduction from shareholders' funds (381,220) (333,183) Opening shareholders' funds 1,281,086 1,614,269 __________ __________ Closing shareholders' funds 899,866 1,281,086 __________ __________ 20 Financial commitments Annual commitments under non-cancellable operating leases are as follows: Land and Land and Buildings Buildings 2000 1999 £ £ Operating lease which expires within one 30,360 26,400 year __________ __________ Capital commitments 2000 1999 £ £ Contracted for but not provided for in the 11,713 28,504 financial statements __________ __________ In addition, as a party to certain exploration licences, the Company is committed to its share of future exploration and appraisal costs associated with those licences. 21 Notes to the cash flow statement a) Gross cash flows 2000 1999 £ £ Returns on investments and servicing of finance Interest received 12,591 24,936 Interest paid - (462) __________ __________ 12,591 24,474 __________ __________ Capital expenditure Purchase of intangible fixed assets (255,729) (189,345) Purchase of tangible fixed assets (716) (36,173) Sale of tangible fixed assets - 887,849 __________ __________ (256,445) 662,331 __________ __________ Proceeds from the sale of tangible fixed assets in 1999 includes £876,709 in connection with the disposal of Forties in late 1998 (see note 3). 21 Notes to the cash flow statement (continued) b) Reconciliation of net cash flow to movement in net funds 2000 1999 £ £ (Decrease)/increase in cash before exchange (388,283) 488,771 differences Exchange differences - - __________ __________ (Decrease)/increase in cash after exchange (388,283) 488,771 differences Net funds/(debt) at beginning of period 436,238 (52,533) __________ __________ Net funds at end of period 47,955 436,238 __________ __________ c) Analysis of net funds At 1 January Cash flow At 2000 £ 31 December £ 2000 £ Cash at bank and in hand, 436,238 (388,283) 47,955 representing net funds __________ __________ __________ 22 Derivatives and other financial instruments This note provides the narrative and numerical disclosures required by FRS 13 'Derivatives and Other Financial Instruments: Disclosures'. As permitted by FRS 13, short term debtors and creditors have been excluded from the disclosures, other than the currency disclosures. Objectives and policies The Group's objective and policy is to use financial instruments to manage its risk profile commensurate with the complexity of its underlying operations. During the year, the Group had available the following financial instruments: * Cash at bank and in hand * Short term loan facility with DNO ASA These are used to manage the working capital requirements of the Group. The Group does not use derivative financial instruments. Interest rate profile At 31 December 2000 the Group had no financial assets other than sterling denominated cash at bank and in hand of £47,955 which is part of the working capital financing arrangements of the Group. This cash balance comprises deposits placed with banking institutions that are available on demand. There was no drawdown on the short term loan facility at 31 December 2000. The facility carries interest at 4% above the UK base rate, is secured by a floating charge over the Company and is repayable by 30 April 2001. Further details of the current status of this loan are provided in note 1b). Currency exposures The Group does not currently have any significant currency exposures, as its monetary assets and liabilities are materially denominated in the operating (or 'functional') currency of the operating unit involved. Fair values The fair values of the Group's financial assets and liabilities at 31 December 2000 are materially equivalent to their carrying value.

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