EX-99.1 2 v055271_ex99-1.htm Unassociated Document
VIKING PETROLEUM UK LIMITED
1

VIKING PETROLEUM UK LIMITED

DIRECTORS’ REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED
31 DECEMBER 2005

Company Registered Number - 4946049


 

VIKING PETROLEUM UK LIMITED 
 2

CONTENTS

 
Page
   
Directors’ report
3 - 5
   
Independent auditors’ report
6 - 7
   
Consolidated profit and loss account
8
   
Group balance sheet
9
   
Company balance sheet
10
   
Consolidated cash flow statement
11
   
Notes to the financial statements
12 - 22
 

 

VIKING PETROLEUM UK LIMITED 
3

DIRECTORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2005

The directors present their report and the audited financial statements of Viking Petroleum UK Limited for the year ended 31 December 2005.

Principal activities

The principal activity of the company continued to be that of gas exploration and production in the United Kingdom. The company also operates an electricity generating power station at Knapton, North Yorkshire, on behalf of Scottish Power PLC.

Review of the business

On 15 March 2005 the group was re-organised. Viking International Petroleum PLC reduced it’s 100% stake in the Company to 26% in exchange for the cancellation of debt guarantees, share pledges and warrants of the group. 99 new shares were issued on 15 March 2005 to the various lenders of the group and management.

As a result of the 15 March 2005 re-organisation, Viking Petroleum BV (a Dutch funding company) became a subsidiary of the Company.

In August 2005 the group received further funding of $5 million via loan notes, in exchange for issue of 5 additional ordinary shares.

For the whole of 2005 the group was looking for extra funding, which was achieved in 2006. No significant development occurred on the gas fields during the year.

Future Developments

The group acquisition by US Energy Systems Inc (a NASDAQ listed company) was completed on 7 August 2006. This acquisition resulted in a significant restructuring in the group’s funding, with all external debt repaid. US Energy Systems Inc brings in significant funds to be in a position to develop the gas fields further.

Results and dividends

The results for the period are set out on page 8.

The directors do not recommend the payment of a dividend.

Going concern

The company has made significant loses in the year and will require additional funding to develop the gas fields to improve gas production. The Directors believe that the Group is a going concern owing to the additional funding available from US Energy Systems Inc.


 

VIKING PETROLEUM UK LIMITED 
4

DIRECTORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2005

Directors

The following directors have held office since 1 January 2005:

·
Mr. J.B. Boffardi
(appointed 18 September 2006)
·
Mr. G.G. Emms
(resigned 28 February 2005, re-appointed 18 September 2006)
·
Mr. J.A. Lobban
(appointed 18 September 2006)
·
Mr. A.D. Greene
(appointed 15 August 2006, resigned 18 September 2006)
·
Mr. A. Fogel
(appointed 15 August 2006, resigned 18 September 2006)
·
Mr. H.N. Schneider
(appointed 7 August 2006, resigned 18 September 2006)
·
Mr. G. Neus
(appointed 7 August 2006, resigned 18 September 2006)
·
Mr. L.D.J. Erasmus
(resigned 7 August 2006)
·
Mr. R.D. McVeigh
(resigned 7 August 2006)
·
Mr. T.Mehlberg
(appointed 15 March 2005, resigned 7 August 2006)
·
Mr. R.B.Thomas
(appointed 14 March 2005, resigned 7 August 2006)

Share and warrant issues

Owing to the reorganisation of the group funding and cancellation of various debt guarantees, share pledges and warrants, 99 Ordinary shares were allotted on 15 March 2005 at a nominal value of £1 for a consideration of £1 each.

On 15 August 2005 an extra loan facility of $5 million was made available and 5 Ordinary shares were allotted at a nominal value of £1 for a consideration of £1 each and as this loan facility was drawn down between 15 August 2005 and 6 December 2005, 25 warrants were issued giving the right to one Ordinary share each. 7 further warrants were issued on 6 March 2006. All the warrants in issue were cancelled post year end once the loan facilities were repaid.

Directors’ interests

The directors’ beneficial interests in the shares of the company were as stated below:

   
Ordinary shares of £1 each 
 
   
31 December 2005
 
1 January 2005
 
Mr. J.A. Lobban
   
2
       
Mr. L.D.J. Erasmus
   
8
   
-
 

Beneficial interests of directors in the shares of the company’s previous ultimate parent undertaking, Viking International Petroleum PLC (“VIP”), are set out below. On 15 March 2005, a reorganisation occurred whereby VIP exchanged 74% of the equity in its subsidiaries to its debt providers in exchange for the cancellation of its debt guarantees, shares pledges and warrants with Trust Company of the West (TCW):

   
Ordinary shares of 0.25p each
 
 
Percentage holding
 
   
31 December 2005
 
1 January 2005
 
31 December 2005
 
1 January 2005
 
Mr. G.G. Emms
Mr. R.D. McVeigh
Mr. L.D.J. Erasmus
   
0
0
0
   
5,500,000
1,000,000
1,000,000
   
0.00
0.00
0.00
   
17.16
3.12
3.12
 


 

VIKING PETROLEUM UK LIMITED 
5

DIRECTORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2005

Policy and practice on payment of creditors

The Group’s policy in respect of its suppliers is to establish terms of payment when agreeing the terms of business transactions and to abide by the terms of payment.
 
Change of auditors

PriceWaterhouseCoopers resigned as auditors on 21 June 2006. The board agreed to appoint Baker Tilly as the new auditors on 25 July 2006 in accordance with section 385 of the Companies Act 1985, a resolution proposing that they be re-appointed will be put to the Annual General Meeting.
 
Directors’ responsibilities

The directors are responsible for preparing the financial statements in accordance with applicable law and United Kingdom Accepted Accounting Practice.

Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to:

·
Select suitable accounting policies and then apply them consistently;
·
Make judgements and estimates that are reasonable and prudent;
·
Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

By order of the board
 
       
/s/ G. G. Emms     October 23, 2006

G. G. Emms
Director
   
Date
  

 
 
VIKING PETROLEUM UK LIMITED 
6

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF VIKING PETROLEUM UK LIMITED

We have audited the financial statements on pages 8 to 22.

This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
 
The directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the Directors’ Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion
 
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.


 

VIKING PETROLEUM UK LIMITED 
7

Opinion
 
In our opinion the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group’s and parent company’s affairs as at 31 December 2005 and of the group’s loss for the year then ended and have been properly prepared in accordance with the Companies Act 1985.

BAKER TILLY
Registered Auditor
Chartered Accountants
2 Bloomsbury Street
London WC1B 3ST

20 October 2006 


 

VIKING PETROLEUM UK LIMITED 
8

CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2005

   
 
Notes
 
2005
 £
 
2004
£
 
TURNOVER
   
2
   
903,226
   
1,381,135
 
                     
Cost of sales
         
(1,785,527
)
 
(2,710,291
)
                     
GROSS LOSS
         
(882,301
)
 
(1,329,156
)
                     
Administrative expenses
         
(2,866,989
)
 
445,977
 
                     
OPERATING LOSS
   
3
   
(3,749,290
)
 
(883,179
)
                     
Amounts due from former group company waived
   
4
   
(1,155,223
)
 
-
 
Negative goodwill: Viking Petroleum BV written-off
         
140,379
   
-
 
                     
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST
         
(4,764,134
)
 
(883,179
)
                     
Interest receivable
         
4,754
   
10,534
 
Interest payable
   
5
   
(1,945,066
)
 
(1,596,147
)
                     
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
         
(6,704,446
)
 
(2,468,792
)
                     
Tax on loss on ordinary activities
   
8
   
244,888
   
(250,000
)
                     
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION
   
17
   
(6,459,558
)
 
(2,718,792
)

The profit and loss account has been prepared on the basis that all operations are continuing operations.

The Group has no other recognised gains or losses other than those passing through the profit and loss account.


 

VIKING PETROLEUM UK LIMITED 
9

CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2005

   
Notes
 
2005
£
 
2004
£
 
FIXED ASSETS                    
Tangible assets
   
9
   
12,726,571
   
12,751,239
 
           
12,726,571
   
12,751,239
 
CURRENT ASSETS
                   
Stocks
   
11
   
163,352
   
163,738
 
Debtors
   
12
   
439,007
   
3,267,290
 
Cash at bank and in hand
         
281,508
   
43,235
 
           
883,867
   
3,474,263
 
                     
CREDITORS: amounts falling due within one year
   
13
   
(2,037,655
)
 
(3,133,433
)
                     
NET CURRENT (LIABILITIES)/ASSETS
         
(1,153,788
)
 
340,830
 
TOTAL ASSETS LESS CURRENT LIABILITIES
         
11,572,783
   
13,092,069
 
                     
CREDITORS: amounts falling due after more than one year
   
14
   
(20,018,519
)
 
(14,828,351
)
                     
PROVISIONS FOR LIABILITIES AND CHARGES
   
15
   
(854,400
)
 
(1,104,400
)
                     
NET LIABILITIES
         
(9,300,136
)
 
(2,840,682
)
                     
CAPITAL AND RESERVES
                   
Called up share capital
   
16
   
105
   
1
 
Profit and loss account
   
17
   
(9,300,241
)
 
(2,840,683
)
SHAREHOLDERS’ DEFICIT
   
18
   
(9,300,136
)
 
(2,840,682
)
(equity interests)
                   

The financial statements were approved and authorised for issue by the board of directors on 10/23/06 and were signed on its behalf by:
 
       
/s/ G. G. Emms     October 23, 2006

G. G. Emms
Director 
   
Date
 
 

 

VIKING PETROLEUM UK LIMITED 
10

COMPANY BALANCE SHEET
AS AT 31 DECEMBER 2005

   
Notes
 
2005
£
 
2004
£
 
FIXED ASSETS                    
Tangible assets    
9
    6,094,401     6,107,291  
Investments
   
10
   
4,849,145
   
4,849,145
 
           
10,943,546
   
10,956,436
 
CURRENT ASSETS
                   
Stocks
   
11
   
65,341
   
65,495
 
Debtors
   
12
   
1,575,229
   
3,495,234
 
Cash at bank and in hand
         
253,077
   
25,761
 
           
1,893,647
   
3,586,490
 
                     
CREDITORS: amounts falling due within one year
   
13
   
(2,096,398)
)
 
(771,311
)
                     
NET CURRENT (LIABILITIES)/ASSETS
         
(202,751
)
 
2,815,179
 
TOTAL ASSETS LESS CURRENT LIABILITIES
         
10,740,795
   
13,771,615
 
                     
CREDITORS: amounts falling due after more than one year
   
14
   
(20,018,519
)
 
(14,828,351
)
                     
PROVISIONS FOR LIABILITIES AND CHARGES
   
15
   
(341,800
)
 
(591,800
)
                         
NET LIABILITIES
         
(9,619,524
)
 
(1,648,536
)
                     
CAPITAL AND RESERVES
                   
Called up share capital
   
16
   
105
   
1
 
Profit and loss account
   
17
   
(9,619,629
)
 
(1,648,537
)
SHAREHOLDERS’ DEFICIT
   
18
   
(9,619,524
)
 
(1,648,536
)
(equity interests)
                   
 
The financial statements were approved and authorised for issue by the board of directors on  10/23/06 and were signed on its behalf by:
 
       
/s/ G. G. Emms     October 23, 2006

G. G. Emms      
Director 
   
Date
 

 

VIKING PETROLEUM UK LIMITED 
11

CONSOLIDATED CASH FLOW STATEMENT
AS AT 31 DECEMBER 2005

   
Notes
 
2005
£
 
2004
£
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
   
19a
   
(4,355,738
)
 
851,592
 
                     
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
                   
Interest received
         
4,754
   
10,534
 
Interest paid
         
(1,945,066
)
 
(1,596,147
)
NET CASH FLOWS FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
         
(1,940,312
)
 
(1,585,613
)
                     
TAXATION
         
(1,114
)
 
-
 
                     
INVESTING ACTIVITIES
                   
Acquisition of fixed assets
   
9
   
(108,085
)
 
(4,084,348
)
NET CASH FLOWS FROM INVESTING ACTIVITIES
         
(108,085
)
 
(4,084,348
)
                     
FINANCING ACTIVITIES
                   
Net proceeds from issue of ordinary share capital
   
16
   
104
   
-
 
Increase in long-term borrowings
   
14, 19
   
6,643,418
   
2,569,214
 
NET CASH FLOWS FROM FINANCING ACTIVITIES
         
6,643,522
   
2,569,214
 
                     
INCREASE/(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
         
238,273
   
(2,249,155
)
                     

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

   
2005
£
 
2004
£
 
(Increase)/decrease in cash
   
(238,273
)
 
2,249,155
 
Increase in long term borrowings
   
6,643,418
   
2,569,214
 
Opening net debt
   
14,785,116
   
9,966,747
 
Closing net debt
   
21,190,261
   
14,785,116
 
               


 

VIKING PETROLEUM UK LIMITED 
12

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005

1. Accounting policies

1.1 Basis of preparation of the financial statements
 
The financial statements have been prepared under the historical cost convention and in accordance with the Companies Act 1985 and applicable accounting standards.

The company has made significant loses in the year and will require additional funding to develop the gas fields to improve gas production.

The financial statements have been prepared on a going concern basis since the ultimate parent company, US Energy Systems Inc., has agreed to provide financial support as necessary to enable the company to meet its liabilities as they fall due. Should the parent undertaking be unable to provide continuing financial support, adjustments would have to be made to reduce the value of assets to their realisable amount, to provide for any further liabilities which might arise and to reclassify fixed assets as current assets.

Having reviewed the future plans and projections for the business, the directors believe that the parent company and its subsidiary undertakings have adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report.

1.2 Consolidation
 
The Group accounts consolidate the accounts of Viking Petroleum UK Limited and all its subsidiary undertakings drawn up to 31 December 2005. The group acquired Viking Petroleum BV on 15 March 2005.

Subsidiaries and quasi subsidiaries acquired during the year are consolidated using the acquisition method. Their results are incorporated from the date that control passes. The difference between the cost of acquisition of shares in subsidiaries and the fair value of the separable net assets acquired is capitalised and written off on a straight line basis over its estimated economic life. Provision is made for impairment.

As permitted by s230 Companies Act 1985, the company has not presented its own profit and loss account. The company made a loss of £7,971,092 (2004: £1,568,194).

1.3 Turnover
 
Turnover represents the invoiced sales values (excluding VAT) of the Group’s petroleum products to a third party customer. The Group sells all of its gas produced at the Semay-A gas fields under a long-term supply contract to Scottish Power in the UK at a fixed price that is not reflective of gas prices traded on the International Petroleum Exchange.

1.4 Fixed assets

i. Exploration and Development Discovery Fields
 
(a)
Capitalisation of petroleum expenditure: The Group follows the full cost method of accounting under which all expenditure relating to the acquisition, exploration, appraisal and development of petroleum interests is capitalised.
 
(b)
Depreciation: Amortisation of capitalised expenditure is provided using the unit of production method based on entitlement to proved and probable reserves of gas and estimated future development expenditure expected to be incurred to access these reserves. Depreciation on other fixed assets is provided on a straight line basis to write them off over their estimated useful lives.
 

 

VIKING PETROLEUM UK LIMITED 
13

1. Accounting policies (continued)

1.4 Fixed assets (continued)

(c)
Impairment of value: An estimate of the discounted future net revenues is made where there are indications of impairment and compared to the net capitalised expenditure. Where, in the opinion of the directors, there is impairment, tangible asset values are written down accordingly through the profit and loss account.

(d)
Decommissioning: Provision for decommissioning is recognised in full at the commencement of production. The amount recognised is the present value of the estimated future expenditure. A corresponding tangible fixed asset is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. The discount applied to the anticipated site restoration liability is subsequently released over the life of the field and is charged to interest expense.

ii. Other fixed assets
 
Tangible fixed assets are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost of fixed assets less their estimated residual value, over their expected useful lives on the following basis:
Motor Vehicles  
25% Straight line
Fixtures, fittings & equipment   
33.3% Straight line
  
1.5 Investments
 
Fixed asset investments are stated at cost less provision for diminution in value.

1.6 Stock
 
Stock comprises spare parts for the maintenance of the gas turbine at the Knapton generating station and also tubulars and drilling equipment. Stock is valued at the lower of cost or net realisable value.

1.7 Leasing and hire purchase commitments
 
Rentals payable for assets under operating leases are charged to the profit and loss account on a straight line basis over the lease term.

1.8 Translation of foreign currencies
 
Transactions denominated in foreign currencies are translated into sterling at actual exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported at the rates of exchange prevailing at the year end. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the profit and loss account.

For the purpose of consolidation the closing rate method is used under which translation gains and losses on the opening net assets of overseas undertakings are shown as a movement in the reserves. Profit and loss accounts of overseas undertakings are translated at the average exchange rate for that period. Exchange differences on foreign currency loans, to the extent that they relate to investments in operations accounted for in foreign currencies, are taken to reserves.

1.9 Pensions
 
The Group operates a defined contribution pension scheme and the pension charge represents the amounts payable by the Group to the fund in respect of the year.


 

VIKING PETROLEUM UK LIMITED 
14

1. Accounting policies (cont)

1.10 Deferred tax
 
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date which will result in an obligation to pay more, or a right to pay less, tax.

Deferred tax assets are recognised only to the extent that the directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

1.11 Changes in estimates
 
The effects of changes in estimated costs and commercial reserves or other factors affecting the unit of production calculations for depletion and site restoration costs do not give rise to prior year adjustments and are dealt with prospectively over the estimated remaining commercial reserves of each field. While the Group uses its best estimates and judgements, actual results could differ from these estimates.

2. Turnover

All of the Group’s sales occur within the United Kingdom.

3. Operating profit

   
2005
£
 
2004
£
 
Operating profit is stated after charging / (crediting):
             
Auditors’ remuneration - audit services
   
30,000
   
20,000
 
Auditors’ remuneration - non-audit services
   
-
   
18,334
 
Depreciation: Exploration and Development Discovery Fields
   
120,098
   
188,880
 
Depreciation: Motor vehicles
   
12,062
   
4,107
 
Depreciation: Fixtures, fittings & equipment
   
593
   
-
 
Impairment of tangible fixed assets
   
-
   
721,263
 
Difference on foreign exchange
   
1,750,454
   
(945,166
)

4. Amounts due from former group company waived

   
2005
£
 
2004
£
 
Amount due from Viking International Petroleum PLC owed to Viking Petroleum UK Limited
   
(3,581,084
)
 
-
 
Amount owed to Viking International Petroleum PLC due from Viking UK Gas Limited
   
2,425,861
   
-
 
     
(1,155,223
)
 
-
 

Of the net loan waiver balance of £1,155,223, an amount of £1,945,976 is not deductible for tax purposes.


 

VIKING PETROLEUM UK LIMITED 
15

5. Interest payable

   
2005
£
 
2004
£
 
On amounts owed to group undertakings
   
284,639
   
1,596,072
 
Loan notes
   
1,631,865
   
-
 
Other
   
28,562
   
75
 
     
1,945,066
   
1,596,147
 

6. Employee costs

   
2005
£
 
2004
£
 
Wages and salaries     614,974     474,498  
Social security costs     66,559     48,030  
Other pension costs
   
25,524
   
24,967
 
     
707,057
   
547,495
 

The average number of employees, excluding directors, during the year was as follows:
 
   
2005
 
2004
 
Management and administrative
   
3
   
4
 
Technical and operations
   
12
   
12
 
     
15
   
16
 

7. Directors’ remuneration

   
2005
£
 
2004
£
 
Emoluments
   
268,959
   
-
 

   
2005
£
 
2004
£
 
Company pension contributions to money purchase pension schemes
   
7,425
   
-
 

During the year retirement benefits were accruing to one director (2004 - none) in respect of money purchase pension schemes.


 

VIKING PETROLEUM UK LIMITED 
16

8. Tax on profit on ordinary activities

   
2005
£
 
2004
£
 
Current tax:              
UK corporation tax at the rate of 30%
   
-
   
-
 
Foreign Tax     5,112     -  
Withholding tax    
(250,000
)
 
250,000
 
               
     
(244,888
)
 
250,000
 
Deferred tax:
   
   
 
UK tax    
-
   
-
 
Tax on profit on ordinary activities
   
(244,888
)
 
250,000
 

Factors affecting tax charge are as follows:-
   
2005
£
 
2004
£
 
Loss on ordinary activities before tax
   
(6,704,446
)
 
(2,468,792
)
               
Loss on ordinary activities at the UK tax rate of 30%
   
(2,011,334
)
 
(740,638
)
Effect of:-
             
Expenses not deductible for tax purposes
   
696,436
   
1,093
 
Accelerated capital allowances and other timing differences
   
38,690
   
(150,501
)
Withholding tax
   
(250,000
)
 
250,000
 
Tax losses carried forward
   
1,569,993
   
1,080,830
 
Supplementary corporation tax at the rate of 10%
   
(270,695
)
 
(190,784
)
Higher rate tax on overseas earnings
   
(17,979
)
 
-
 
Current tax charge for the period
   
(244,888
)
 
250,000
 

The company has a deferred tax asset at 31 December 2005 of £4.1 million (2004 - £2.5 million) consisting of tax losses and accelerated capital allowances. This asset has not been recognised under FRS19, as it is not likely that the company will have sufficient taxable profits in the foreseeable future for these to be utilised.

The supplementary charge applicable to the group’s oil and exploration activities has increased to 20% (previously 10%) for profits arising from 1 January 2006. This charge is in addition to the standard rate of corporation tax in the UK of 30%. The deferred tax asset has therefore been calculated at 50%, the rate at which the deferred tax assets would reverse in the future.


 

VIKING PETROLEUM UK LIMITED 
17

9. Tangible fixed assets

Group
 
Exploration and Development Discovery Fields
£
 
 
Motor Vehicles
£
 
 
Fixtures,
fittings & equipment
£
 
 
 
Total
£
 
Cost                
 
       
At 1 January 2005
   
13,659,163
   
46,413
   
-
   
13,705,576
 
Additions    
83,932
   
21,984
   
2,169
   
108,085
 
At 31 December 2005
   
13,743,095
   
68,397
   
2,169
   
13,813,661
 
Depreciation                          
At 1 January 2005
   
950,230
   
4,107
   
-
 
954,337
 
Charge for the year    
120,098
   
12,062
   
593
   
132,753
 
At 31 December 2005
   
1,070,328
   
16,169
   
593
   
1,087,090
 
                           
Net book amount at 31 December 2005
   
12,672,767
   
52,228
   
1,576
   
12,726,571
 
                           
Net book amount at 31 December 2004
   
12,708,933
   
42,306
   
-
   
12,751,239
 

 
Company
 
Exploration and Development Discovery Fields
£
 
Fixtures,
fittings & equipment
£
 
 
 
Total
£
 
Cost
             
At 1 January 2005     6,526,352    
-
   
6,526,352
 
Additions    
33,573
   
2,169
   
35,742
 
At 31 December 2005
   
6,559,925
   
2,169
   
6,562,094
 
Depreciation                    
At 1 January 2005
   
419,061
   
-
   
419,061
 
Charge for the year    
48,039
   
593
   
48,632
 
At 31 December 2005
   
467,100
   
593
   
467,693
 
                     
Net book amount at 31 December 2005
   
6,092,825
   
1,576
   
6,094,401
 
                     
Net book amount at 31 December 2004
   
6,107,291
   
-
   
6,107,291
 
 
During 2004 the Group impaired a recently acquired compressor due to the lack of funds available within the group for it to be installed. Following the Group’s post year end acquisition by US Energy Systems Inc, funds have subsequently become available to install the compressor. The impairment of £721,263 will be reversed in 2006.


 

VIKING PETROLEUM UK LIMITED 
18

10. Fixed asset investments

Company
   
£ 
 
Shares in group undertakings
   
 
 
At 1 January 2005
   
4,849,145
 
Shares received for £Nil consideration on 15 March 2005
   
-
 
31 December 2005
   
4,849,145
 

Investments in Group undertakings are stated at cost.

The following are subsidiary undertakings of the company, where 100% of the ordinary share capital is directly held:
 
Name of company
 
Country of incorporation
Viking UK Gas Limited
Production and marketing
England
Viking Petroleum BV
Finance company
Holland

As a result of the 15 March 2005 re-organisation, Viking Petroleum BV (a Dutch funding company) became a subsidiary of the Company.

The net assets of Viking Petroleum BV at 15 March were £140,379 which resulted in negative goodwill being generated. The negative goodwill has been written off in the period.

11. Stock

Group
 
2005
£
 
2004
£
 
Spare parts for gas turbine
   
86,722
   
82,368
 
Tubulars and drilling equipment
   
76,630
   
81,370
 
     
163,352
   
163,738
 

Company
 
2005
£
 
2004
£
 
Spare parts for gas turbine
   
34,689
   
32,947
 
Tubulars and drilling equipment
   
30,652
   
32,548
 
     
65,341
   
65,495
 

12. Debtors

Group
 
2005
£
 
2004
£
 
Trade debtors
   
101,023
   
57,794
 
Amounts owed by group undertakings     -     3,025,253  
Other debtors     87,741     -  
Prepayments and accrued income    
250,243
   
184,243
 
     
439,007
   
3,267,290
 

Company
 
2005
£
 
2004
£
 
Trade debtors
   
17,816
   
16,113
 
Amounts owed by group undertakings     1,375,488     3,409,760  
Other debtors     87,741     -  
Prepayments and accrued income    
94,184
   
69,361
 
     
1,575,229
   
3,495,234
 
 

 

VIKING PETROLEUM UK LIMITED 
19

13. Creditors: amounts falling due within one year

Group
 
2005
£
 
2004
£
 
WNAC loan note
   
1,453,250
   
-
 
Trade creditors
   
340,977
   
271,063
 
Social security costs and other taxes     21,332     13,926  
Amounts owed to group undertakings     -     2,439,927  
Accruals and deferred income    
222,096
   
408,517
 
     
2,037,655
   
3,133,433
 

Company
 
2005
£
 
2004
£
 
WNAC loan note
   
1,453,250
   
-
 
Trade creditors
   
253,958
   
223,096
 
Amounts owed to group undertakings     339,459     220,473  
Accruals and deferred income    
49,731
   
327,742
 
     
2,096,398
   
771,311
 

An additional loan facility $2.5 million was arranged and drawn down in the year from Western Nevada Acceptance Company LLC (WNAC). Interest on the total utilised amount of the loan is payable quarterly in arrears and total repayment of the principal is due by 31 December 2006. Interest is charged at 10 % up to 31 December 2005, from 1 January 2006 interest will be charged at 15%. The loan is secured by liens in favour of the lender over all of the Group’s assets and gas reserves of the Semay-A gas fields.

On 16 February 2006 the Western Nevada Acceptance Company LLC loan was assigned to Viking LLC.

14. Creditors: amounts falling due after more than one year

Group
 
2005
£
 
2004
£
 
Amounts owed to subsidiary undertaking
   
-
   
14,828,35
 
10% loan note from TCW due 2011    
20,018,519
   
-
 
     
20,018,519
   
14,828,351
 

Company
 
2005
£
 
2004
£
 
Amounts owed to subsidiary undertaking
   
20,018,519
   
14,828,351
 
     
20,018,519
   
14,828,351
 

The 10% loan note represents the utilised amount of the guaranteed loan facility of US$ 34.4 million from Trust Company of the West (TCW), through its investments vehicle, TCW Global Project Fund II Limited, comprising the initial advance of US$ 21 million plus subsequent additional advances. Interest on the total utilised amount of the loan is payable quarterly in arrears and repayment of the principal commences quarterly from 15 March 2007 at 5% of the outstanding principal with full repayment by 15 December 2011. The loan is secured by perfected first priority liens in favour of the senior lender over all of the Group’s assets and gas reserves of the Semay-A gas fields.

The group’s acquisition by US Energy Systems Inc was completed on 7 August 2006. This acquisition resulted in a significant restructuring in the group’s funding, with all amounts owing on the loans from TCW and WNAC being repaid. US Energy Systems Inc brings in significant funds to be in a position to develop the gas fields further.


 

VIKING PETROLEUM UK LIMITED 
20

14. Creditors: amounts falling due after more than one year (continued)

Maturity of the borrowings:
   
Group
 
Company
 
   
2005
£
 
2004
£
 
2005
£
 
2004
£
 
Borrowings analysed by maturity:
                         
Amounts falling due:
                         
Within one year
   
1,453,250
   
-
   
1,453,250
   
-
 
In more than one year but not more than two years
   
4,004,127
   
-
   
-
   
-
 
In more than two years but not more than five years
   
12,011,265
   
8,897,169
   
-
   
-
 
In five years or more by instalments
   
4,004,127
   
5,931,182
   
-
   
-
 
Total borrowings
   
21,471,769
   
14,828,351
   
1,453,250
   
-
 

15. Provisions for liabilities and charges

Group
 
2005
£
 
2004
£
 
Decommissioning costs
   
854,400
   
854,400
 
Withholding tax (note 8)
   
-
   
250,000
 
     
854,400
   
1,104,400
 

Company
 
2005
£
 
2004
£
 
Decommissioning costs
   
341,800
   
341,800
 
Withholding tax (note 8)
   
-
   
250,000
 
     
341,800
   
591,800
 

The provision for decommissioning costs relates to the Semay-A gas fields, these costs are provisionally expected to be incurred in the period to 2016.

16. Share capital
 
   
 2005
£
 
   2004
£
 
Authorised              
1,000,000 Ordinary shares of £1 each     1,000,000     1,000,000  
Allotted, called up and fully paid              
105 (2004: 1) Ordinary shares of £1 each              105     1  
                    
Owing to the reorganisation of the group funding and cancellation of various debt guarantees, share pledges and warrants 99 Ordinary shares were allotted on 15 March 2005 at a nominal value of £1 for a consideration of £1 each
 
On 15 August 2005 an extra loan facility of $5 million was made available and 5 Ordinary shares were allotted at a nominal value of £1 for a consideration of £1 each and as this loan facility was drawn down between 15 August 2005 and 6 December 2005, 25 warrants were issued giving the right to one Ordinary share each. 7 further warrants were issued on 6 March 2006. All the warrants in issue were cancelled post year end once the loan facilities were repaid.


 

VIKING PETROLEUM UK LIMITED 
21

17. Reserves

Group
 
Profit & loss account
£
 
At 1 January 2005
   
(2,840,683
)
Retained loss for the year
   
(6,459,558
)
At 31 December 2005
   
(9,300,241
)

Company
 
Profit & loss account
£
 
At 1 January 200
   
(1,648,537
)
Retained loss for the year
   
(7,971,092
)
At 31 December 2005
   
(9,619,629
)
 
18. Shareholders’ deficit

Group
 
2005
£
 
2004
£
 
Loss for the year
   
(6,459,558
)
 
(2,718,792
)
Proceeds from issue of shares
   
104
   
-
 
Net depletion in shareholders’ funds
   
(6,459,454
)
 
(2,718,792
)
Opening shareholders’ deficit
   
(2,840,682
)
 
(121,890
)
Closing shareholders’ deficit
   
(9,300,136
)
 
(2,840,682
)

Company
 
2005
£
 
2004
£
 
Loss for the year
   
(7,971,092
)
 
(1,568,194
)
Proceeds from issue of shares
   
104
   
-
 
Net depletion in shareholders’ funds
   
(7,970,988
)
 
(1,568,194
)
Opening shareholders’ deficit
   
(1,648,536
)
 
(80,342
)
Closing shareholders’ deficit
   
(9,619,524
)
 
(1,648,536
)
 
19. Cash flow from operating activities

a) Reconciliation of operating profit to net cash flow from operating activities:

   
2005
£
 
2004
£
 
Operating loss
   
(3,749,290
)
 
(883,179
)
Depreciation charge
   
132,753
   
192,987
 
Impairment charge
   
-
   
721,263
 
Write back of goodwill
   
140,379
   
-
 
Decrease/(increase) in stocks
   
386
   
(84,678
)
(Increase)/decrease in debtors
   
(322,324
)
 
78,429
 
(Decrease)/increase in creditors
   
(557,642
)
 
64,342
 
(Decrease)/increase in provisions (non-tax)
   
-
   
762,428
 
Net cash (outflow)/inflow from operating activities
   
(4,355,738
)
 
851,592
 
 

 

VIKING PETROLEUM UK LIMITED 
22

19. Cash flow from operating activities (continued)

b) Analysis of net debt:
   
1 January 2005
£
 
Cash flow
£
 
Non cash flow movements
 
31 December 2005
£
 
Amounts falling due within one year:
                         
Loans
   
-
   
1,453,250
   
-
   
1,453,250
 
Amounts falling due after one year:
                         
10% loan note due 2011
   
-
   
5,190,168
   
14,828,351
   
20,018,519
 
Amounts due to group company
   
14,828,351
   
-
   
(14,828,351
)
 
-
 
Total borrowings
   
14,828,351
   
6,643,418
   
-
   
21,471,769
 
Cash:                          
Cash at bank and in hand
   
43,235
   
238,273
   
-
   
281,508
 
     
43,235
   
238,273
   
-
   
281,508
 
Net debt
   
14,785,116
   
6,405,145
   
-
   
21,190,261
 
 
20. Pension commitments

The Group's subsidiary undertaking, Viking UK Gas Limited, operates an occupational pension scheme, which is administered by a Board of Trustees comprising the directors of the subsidiary undertaking. The scheme is a contracted-in money purchase scheme arranged and managed by Scottish Equitable PLC. All employees are eligible to join the scheme. The employer's contribution to this scheme is 9% of gross basic salary and the employee contributes a minimum of 4% of his/her basic salary. In the year ended 31 December 2005, the employer made a total contribution of £25,524 (2004 - £24,967).

21. Related party transactions

During the year Viking International Petroleum PLC charged management fees of £416,186 to the group companies (2004 - £478,272). Viking International Petroleum PLC was the former parent of Viking Petroleum UK Limited. At the year end no amounts were owed by Viking International Petroleum PLC to the group of companies (2004 - £805,799). During 2005 the whole outstanding balance to the group of companies of £1,155,223 was written-off (2004 - £Nil).
 
22. Ultimate parent company

Viking International Petroleum PLC relinquished 74% of its shares in the company on 15 March 2005, the directors consider that from this date there is no immediate or ultimate parent company.

The directors consider that there is no ultimate controlling party.
 
23. Post balance sheet events

The group acquisition by US Energy Systems Inc (a NASDAQ listed company) was completed on 7 August 2006. This acquisition resulted in a significant restructuring in the group’s funding, with all external debt repaid. US Energy Systems Inc brings in significant funds to be in a position to develop the gas fields further.