DES.L Regulatory News (DES)

30 Apr 2007 07:01

Desire Petroleum PLC30 April 2007 Immediate Release 30 April 2007 Desire Petroleum plc ("Desire" or "the Company") Final Results Desire Petroleum plc (AIM: DES), the oil and gas exploration company focussed onthe North Basin in the Falkland Islands today announces its Final Results forthe year ended 31 December 2006. Dear Shareholder, The principal feature of the past year was the continuing, andwidely-publicized, world-wide tightness in the offshore drilling-rig market andthis tightness continues. This has been particularly frustrating for the Companyas all the necessary permissions and equipment for a three-well drillingprogramme in Tranches C and D in the North Falkland Basin have been in place forsome time. Your Board has continued with its strategy of identifying potentialpartners with access to a rig but the current high oil price has meant that mostcompanies are concentrating on drilling production rather than explorationwells. Despite the high oil price, there has been little or no increase inworld-wide exploration drilling. Nevertheless, substantive discussions aretaking place with potential partners. Further technical work, in particular geophysical work, is in the process ofbeing carried out on the prospect inventory with a view to de-risking theprospects and identifying the prime targets for drilling. If encouraging resultsare obtained from these studies, it is likely that at least one of the prospectsin Tranches I and L will be added to the list of potential targets to be drilledin the next campaign and preliminary work has begun on an Environmental ImpactAssessment for these Tranches. Your Board remains committed to and enthusiastic about the prospect of successin the North Falkland Basin, which is one of the few proven oil basins in theworld which is still largely undrilled. In addition to the Company's efforts toacquire a partner, collaboration continues with other Licensees in theFalklands, whose commitment matches our own, and it is a matter of when, ratherthan if, drilling takes place. The results for the year ended 31 December 2006 have been prepared under UKGenerally Accepted Accounting Practice (UK GAAP). The majority of the Company'sfunds are held in dollars, to match expected expenditure on the explorationprogramme, some of which was incurred on the purchase of long-lead-time casing,tubulars and wellheads required for the programme. The loss after tax was due toexchange losses, following the strengthening of the pound against the dollarsince the last year-end, and has reversed out the corresponding exchange gainmade in 2005. In accordance with Financial Reporting Standard 20, the Companyhas recognised a charge to the income statement representing the fair value ofoutstanding employee share options and other share-based payments. The fairvalue has been calculated using the Black-Scholes valuation model, and thisvalue is charged to the income statement over the relevant vesting periods. Thecharge for the period of £263,000 is a non-cash item. Not with standing thischarge, other administrative expenses remain amongst the lowest in the sectorand continue to be more than covered by interest received. For the financialyear commencing 1 January 2007 the Company will adopt International FinancialReporting Standards (IFRS) in accordance with the London Stock Exchange rulesfor AIM-listed companies. Preparation for the transition to IFRS issubstantially complete. There will be minimal impact on the Company's results in2006, and reconciliations between UK GAAP and IFRS income statement, cash flowand balance sheet will be included in the Company's 2007 Interim Report. Mycolleagues on the Board have been particularly effective during the year,providing, as they do, in-depth coverage of the sector and its technical,financial, legal and corporate requirements. I am grateful for their help andguidance and would like to thank them on behalf of all shareholders. It is with great sadness that I report the death, aged 73, of Dr. John Martin.John was one of the most distinguished exploration geologists of his generationand gave important service as a director of Desire over a number of years. Hehad been involved with the initial phase of exploration in the Falklands, sinceits inception, as adviser to the Falkland Island Government and had continued toassert his confidence in the Island's potential to the end. He will be muchmissed both as a colleague and a much-valued friend. Dr Colin Phipps For further information please contact: Desire Petroleum plc 020 7436 0423Dr Colin Phipps, ChairmanDr Ian Duncan, Chief Executive Officer Buchanan Communications 020 7466 5000Ben WilleyBen Romney The Directors submit their report and the audited financial statements for theyear ended 31 December 2006. Principal activity and business review The principal activity of the Group for the year continued to be that of oil andgas exploration. The Group produced a loss before taxation of £2,483,000 in theyear to 31 December 2006. The loss will be transferred to reserves. Dividends The Directors do not recommend payment of a dividend (2005:nil). Share capital During the year, options were exercised over 1,106,342 shares and these weresubsequently allotted on 18 July 2006. The option exercise raised £255,000. On27 February 2007, Dr C B Phipps exercised options over 478,239 shares and thesewere subsequently allotted. The exercise of the options raised £117,000. REPORT OF THE DIRECTORS Substantial shareholdings As at 9 March2007 the Company had been notified of the following holdings of 3%or more of its issued share capital: Number of % ordinary shares Phipps & Company Limited 30,582,633 13.71%Credit Suisse Securities 9,776,893 4.38%(Europe) LimitedBarclayshare Nominees 8,473,314 3.80%Limited TD Waterhouse Nominees 8,013,331 3.59%(Europe) Limited Corporate governance The Combined Code Principles of Good Governance and Code of Best Practice is notmandatory for companies traded on the Alternative Investment Market of theLondon Stock Exchange. However, the Directors are committed to applying therequirements of the Code where they are considered appropriate. This statementexplains how the Group has applied the principles of the Code throughout theyear. The Board meets regularly throughout the year and is responsible for theoverall Group strategy, acquisition and divestment policy, approval of majorcapital expenditure and consideration of significant financing matters. Itreviews the strategic direction of individual trading subsidiaries, their annualbudgets, their progress toward achievement of these budgets and their capitalexpenditure programmes. Status of non-executive directors None of the non-executive directors would be deemed independent under theCombined Code. However, the non-executive directors have considerable experiencein the Oil & Gas sector which the Company draws upon on a regular basis. Inaddition, the non-executive directors are sufficiently independent of managementso as to be able to exercise independent judgment and bring an objectiveviewpoint and, thereby, protect and promote the interests of shareholders. Audit Committee The Audit Committee was chaired by Mr E Wisniewski and included Mr A G Windhamand Mr D L Clifton. The Committee convenes twice a year and its terms ofreference include the review of the Annual and Interim Accounts, accountingpolicies of the Company and its subsidiaries, internal management and financialcontrols, and the planning, scope and results of the Auditors' programme. UHYHacker Young attend the meetings at the request of the Committee. Remuneration Committee and Nomination Committee The Remuneration Committee is chaired by Mr A G Windham and includes Mr EWisniewski and Mr D L Clifton as members. The Nomination Committee is chaired byMr D L Clifton and includes Mr E Wisniewski and Mr A G Windham as members. TheCommittees' responsibilities include the consideration and approval of the termsof service, nomination, remuneration and benefits of the Company's Directors.The Board, as a whole, determines the remuneration of the Non-ExecutiveDirectors (with Directors absenting themselves from discussions regarding theirown remuneration as appropriate). Internal control The Board, which presently comprises the Chairman, the Chief Executive Officerand Non-Executive Directors, meets formally on a regular basis. The Directorsare responsible for ensuring that the Group maintains adequate internal controlover the business and its assets. There is an agreed schedule of mattersrequiring referral to the Board. These matters include the Group's corporatestrategy, acquisitions and disposals, approval of major capital expenditure,treasury policy and risk-management policies. Procedures have been formalisedwhere the Directors may need to take independent professional advice. The auditcommittee has reviewed the necessity for the establishment of an internal auditfunction, but considers that due to the nature and size of the Group at presentit would not be appropriate for the Group to have its own internal auditdepartment. On the wider aspects of internal control, relating to operationaland compliance controls and risk management, as included in provision D.2.1 ofthe Code, the Board, in setting the control environment, identifies, reviews,and reports on the key areas of business risk facing the Group. These procedureshave been in place throughout the current financial year. There is closeday-to-day involvement by the Directors in all of the Group's activities. Thisincludes the comprehensive review of both management and technical reports, themonitoring of foreign exchange and interest rate fluctuations, commitment to theHealth, Safety and the Environment Management System, government and fiscalpolicy issues, employment and information technology requirements and cashcontrol procedures. Regular attendance at joint-venture meetings and frequentsite visits are made whenever appropriate. In this way, the key risk areas canbe monitored effectively and specialist expertise applied in a timely andproductive manner. Any system of internal control can provide only reasonable,and not absolute, assurance that the risk of failure to achieve businessobjectives is eliminated. The Directors, having reviewed the effectiveness ofthe system of internal controls and risk management, consider that the system ofinternal control operated effectively throughout the financial year and up tothe date the financial statements. Performance evaluation A formal performance evaluation of the Board, its Committees and its Directorswas not undertaken during the year due to the nature and size of the Group atpresent. The alternatives for performance evaluation are under review, but theBoard is satisfied that the Board and its Committees are operating in aneffective and constructive manner. Relations with shareholders The Group is active in communicating with both its institutional and privateinvestors. The Annual General Meeting, at which Directors are introduced andavailable for questions, provide further opportunities for dialogue. Creditor payment policy It is the policy of the Group to ensure that all of its suppliers of goods andservices are paid promptly and in accordance with contractual and legalobligations. At 31 December 2006 there were no (2005-nil) purchases remainingunpaid. Political contributions and charitable donations The Group made charitable donations during the year amounting to £500 (2005 -£1,100). Auditors In accordance with section 384 of the Companies Act 1985, a resolution is to beproposed at the Annual General Meeting for the re-appointment of UHY HackerYoung as the Auditors of the Company. Report Of The Remuneration And Nomination Committees Remuneration Committee and Nomination Committee The Committees both comprised three Non-Executive Directors and met as requiredduring the year. The Chairman and other Directors may also attend meetings butare not involved in any matter relating to themselves. The Group considers thatit has, to the extent appropriate given the Company's particular circumstances,applied the Combined Code throughout the year regarding remuneration committees.In formulating remuneration policy the Committees gives due consideration to thebest practice provisions section of the Code. Remuneration policy The remit of the Committees is to advise on all aspects of the remunerationpackages of Directors. The policy of the Committees is to ensure that theremuneration packages offered are competitive and designed to attract, retainand motivate Directors of a high calibre, with a significant proportion of theremuneration package linked to performance. The Directors' Service Contracts arefor an indefinite period but can be terminated with six-months' notice by eitherparty. The Directors' emoluments are not pensionable. Statement of Directors' Responsibilities in respect to the accounts The following statement, which should be read in conjunction with the Report ofthe Auditors and is made with a view to distinguishing for shareholders therespective responsibilities of the Directors and of the Auditors in relation tothe Accounts. The Directors have responsibility for ensuring that the Groupkeeps accounting records which disclose, with reasonable accuracy, the financialposition of the Group enabling them to ensure that the financial statementscomply with the Companies Act 1985. The Directors have a general responsibilityto take reasonable steps to safeguard the assets of the Group and to prevent anddetect fraud and other irregularities. In accordance with the Companies Act1985, the Directors are required to prepare accounts for each financial periodwhich give a true and fair view of the state of affairs of the Company and theGroup at the end of the financial period and of the profit or loss for thatperiod. The Directors consider that, in preparing the financial statements, theGroup has used appropriate accounting policies, consistently applied andsupported by reasonable and prudent judgments and estimates, and that allaccounting standards which they consider to be applicable have been followed.After making enquiries, the Directors have a reasonable expectation that theCompany and its subsidiaries have adequate resources to continue in operationalexistence for the foreseeable future. For this reason, they continue to adoptthe going-concern basis in preparing the Accounts. On behalf of the BoardDr C B PhippsChairman Independent report of the auditors Registered AuditorSt. James Building79 Oxford StreetManchester M1 6HT To the shareholders of Desire Petroleum Plc We have audited the Group and Parent Company financial statements ("thefinancial statements") of Desire Petroleum Plc for the year ended 31 December2006 which comprise the Profit and Loss Account, the Balance Sheet, the CashFlow Statement, the Directors' emoluments disclosure contained within the Reportof the Remuneration and Nomination Committees and the related notes. Thesefinancial statements have been prepared under the accounting policies set outtherein. This report is made solely to the Company's members, as a body, in accordancewith Section 235 of the Companies Act 1985. Our audit work was undertaken sothat we might state to the Company's members those matters we are required tostate to them in an auditors' report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyoneother than 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 Groupfinancial statements in accordance with applicable law and United KingdomAccounting Standards (United Kingdom Generally Accepted Accounting Practice) areset out in the Statement of Directors' Responsibilities. Our responsibility isto audit the financial statements and the part of the Report of the Remunerationand Nomination Committees to be audited in accordance with relevant legal andregulatory requirements and International Standards on Auditing (UK andIreland). We report to you our opinion as to whether the financial statementsgive a true and fair view and whether the financial statements and the part ofthe Report of the Remuneration and Nomination Committees to be audited have beenproperly prepared in accordance with the Companies Act 1985.We also report toyou if, in our opinion, the Directors' Report is not consistent with thefinancial statements, if the Company has not kept proper accounting records, ifwe have not received all the information and explanations we require for ouraudit, or if information specified by law regarding Directors' remuneration andother transactions is not disclosed. We read other information contained in theAnnual Report and consider whether it is consistent with the audited financialstatements. The other information comprises only Advisers, Chairman's Statement,Corporate Governance Statement and Report of the Remuneration and NominationCommittees. We consider the implications for our report if we become aware ofany apparent misstatements or material inconsistencies with the financialstatements. 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 includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the Parent Company financial statements and the part of theReport of the Remuneration and Nomination Committees to be audited. It alsoincludes an assessment of the significant estimates and judgments made by theDirectors in the preparation of the financial statements, and of whether theaccounting policies are appropriate to the Group's and Company's circumstances,consistently applied and adequately disclosed. We planned and performed ouraudit so as to obtain all the information and explanations which we considerednecessary in order to provide us with sufficient evidence to give reasonableassurance that the financial statements and the part of the Report of theRemuneration and Nomination Committees to be audited are free from materialmisstatement, whether caused by fraud or other irregularity or error. In formingour opinion we also evaluated the overall adequacy of the presentation ofinformation in the financial statements and the part of the Report of theRemuneration and Nomination Committees to be audited. Opinion In our opinion: • the Group financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company's affairs as at 31 December 2006; and• the Group financial statements have been properly prepared in accordance with the Companies Act 1985; and• the information given in the Directors' Report is consistent with the financial statements. UHY Hacker YoungRegistered AuditorChartered Accountants Consolidated Profit and Loss Account For the year ended 31 December 2006 Note As restated 2006 2005 £000 Administrative and other expenses 3 (574) (669)Charge for share-based payment (42) (263)Foreign exchange gain/(loss) 2,003 (2,686) Operating profit/(loss) 1,387 (3,618) Interest receivable 6 682 1,135 Profit/(loss) on ordinary activities beforetaxation 9 2,069 (2,483) Taxation 7 (185) (336) Profit/(loss) for the financial year 17 1,884 (2,819) Earnings/(loss) per ordinary share - Basic 8 0.90p (1.27p)Diluted 8 0.87p n/a Movements on reserves are shown in note 17 to these Accounts. There is no difference between the results as disclosed above and the results onan historical-cost basis. All operating income and operating gains and losses relate to continuingactivities. Consolidated Statement of Total Recognised Gains and Losses For the year ended 31 December 2006 As restated 2006 2005 £000 £000Profit/(loss) for the financial year 1,884 (2,819)Currency-translation difference on foreign currency, 1 -net investmentTotal recognised gains and losses for the year 1,885 (2,819) Reconciliation of movements in Group Shareholders' funds For the year ended 31 December 2006 As restated 2006 2005 £000 £000 Total recognised gains and losses for the year 1,885 (2,819)Provision for share-based payments 42 263New share capital subscribed 25,020 255Net increase/(decrease) in shareholders' funds 26,947 (2,301) Opening shareholders' funds 5,882 32,829Closing shareholders' funds 32,829 30,528 Balance Sheet At 31 December 2006 The Group The Company As restated 2006 As restated 2006 2005 2005 Note £000 £000 £000 £000Fixed assetsTangible fixed assets 10 3 10 3 10Intangible fixed assets 11 6,351 8,331 6,351 8,331 6,354 8,341 6,354 8,341 Current assetsDebtors due within one year 13 178 654 170 646Cash at bank and in hand 26,642 22,812 26,635 22,811 26,820 23,466 26,805 23,457 CreditorsAmounts falling due withinone year 14 (345) (1,279) (295) (1,226) Net current assets 26,475 22,187 26,510 22,231 Total assets less currentliabilities 32,829 30,528 32,864 30,572 Capital and reservesCalled-up share capital 16 2,214 2,225 2,214 2,225Share premium account 17 45,383 45,627 45,382 45,626Merger reserve 17 13,343 13,343 - -Profit and loss account 17 (28,111) (30,667) (14,732) (17,279)Equity shareholders' funds 32,829 30,528 32,864 30,572 These Accounts were approved by the Board on 27 April 2007 and signed on itsbehalf by:Dr C B PhippsChairman Consolidated Cash Flow Statement 2005 2006 Note £000 £000 Net cash outflow from operating activities 19 (a) (656) (985) Returns on investments and servicing 19 (b) 660 1,135of finance Taxation (6) (199) Capital expenditure and financial investment 19 (b) (845) (1,383) Cash outflow before financing (847) (1,432) Financing 25,020 255Issue of ordinary share capital (net of costs) Increase/(decrease) in cash in the year 19 (c) 24,173 (1,177) Reconciliation of net cash flow to movement in netfundsIncrease/(decrease) in cash in the year 19 (c) 24,173 (1,177) Exchange-rate movement 2,003 (2,686) Movement in net funds in the year 26,176 (3,863) Net funds at the beginning of the year 19 (c) 459 26,635 Net funds at the end of the year 19 (c) 26,635 22,772 Notes to the Financial Statements 1 Accounting policies The Accounts are based on the following policies which have been consistentlyapplied: Basis of preparation The Accounts have been prepared under the historical costs convention, theStatement of Recommended Practice 'Accounting for Oil and Gas Exploration,Development, Production and Decommissioning Activities' and in accordance withapplicable accounting standards. Basis of consolidation The Group accounts consolidate the accounts of the Holding Company and all itssubsidiary undertakings, all of which were made up to 31 December 2006. Goodwill Goodwill is defined as the excess of the consideration paid over the fair valueof net identifiable assets acquired. From 1 January 1997 goodwill is attributedto the separate licence interests acquired and amortised on a straight-linebasis over the expected remaining useful economic life of the related licences,currently ranging from 2 to 9 years. Where events or circumstances are presentwhich indicate that the carrying value of goodwill may not be recoverable, theCompany records a provision to write down goodwill to its estimated recoverableamount. Consortia and farm-out agreements In addition to holding licences on its own account, the Group is a member ofconsortia. As explained below, the Group's proportionate share of the consortiacosts are included in intangible fixed assets. During the year, the Groupcontinued a farm-out agreement with a third party in respect of certainlicences. The Groups proportionate share of the costs is included in intangiblefixed assets. Tangible fixed assets and depreciation Tangible fixed assets are stated at cost or valuation less depreciation.Depreciation is provided at rates calculated to write off the cost or valuation,less estimated residual value of each asset, over its expected useful life, asfollows: Equipment and fixtures 20% straight line basis Capitalisation of oil and gas expenditure The Group applies the full-cost method of accounting under which all expenditurerelating to the acquisition, exploration, appraisal and development of oil andgas interests, including an appropriate share of overheads, is capitalised.Capitalised costs are amortised on a unit of production basis. The Boardregularly reviews the carrying values of intangible assets and writes downcapitalised expenditure to levels it considers to be prudent. If no discoveriesare made, the accumulated capitalised costs will be written off through theprofit and loss account. Investments Investments in subsidiary undertakings are shown at cost less provisions forestimated impairments in value. Foreign currencies Transactions denominated in foreign currencies are translated at the exchangerate ruling at the transaction date or, if appropriate, at the rate in relatedforward-currency contracts. Monetary assets and liabilities denominated inforeign currencies are translated into Sterling at the exchange rates ruling atthe balance sheet date. Differences thereon are included in the profit and lossaccount. The balance sheets and results of overseas subsidiaries are translatedat the rate ruling at the balance sheet date. The resulting exchange differencesare taken to reserves. Taxation The charge for taxation is based on the results for the year and takes intoaccount taxation deferred because of timing differences between the treatment ofcertain items for taxation and accounting policies. Full provision is made forthe tax liability on all timing differences in accordance with FinancialReporting Standard 19. Deferred tax balances have not been subject todiscounting. Share-based payments During the period the Group has adopted FRS 20 and restated comparativesaccordingly. The impact of the restatement is disclosed in Note 17. The fairvalue of shares/options granted is recognised as an employee expense with acorresponding increase in equity. The fair value is measured at the grant dateand spread over the period during which the employee became unconditionallyentitled to shares/options. In accordance with the transitional provision of FRS20 no expense is recorded in respect of grants made prior to 27 November 2002 orwhich have vested by 1 January 2006. Financial instruments The Group uses certain financial instruments in its operating and investingactivities that are appropriate to its strategy and circumstances. Financialinstruments currently comprise cash and short-term debtors and creditors. TheGroup regularly reviews the funding opportunities available to it in order tofinance its operations, including considering the use of borrowings, as well asequity, to fund short-term cash requirements. The main risks arising from theGroup's present use of financial instruments are currently risk relating to theGroup's non-sterling cash resources. The addition of any borrowings to theGroup's portfolio of financial instruments will introduce interest-rate risk.The Group has taken advantage of the exemptions available under FinancialReporting Standard 13 for disclosures relating to short-term debtors andcreditors. 2 Production costs incurred Pre-production costs incurred, or provided, in Oil and GasExploration Activitiesfor the year ended31 December 2006 were as follows: Falkland Islands £000Acquisition of unproved properties:Licence Costs 137Exploration and appraisal costs 1,843Total costs (includes costs capitalised of£1,980,000) 1,980 3 Operating expenses 2005 2006 £000 £000Administrative and other expensesAuditors' remuneration -audit fees 22 30 -other services a) Taxation 1 1 b) Consultancy and review of 5 6 Interim AccountsDirectors' fees 202 230Wages and salaries 15 20Legal and professional fees 170 196Management fees 337 337Miscellaneous expenses 44 53Travel and entertaining 37 44Depreciation 2 3Recharge of administrative expenses (261) (251) 574 669 4 Directors 2005 2006 Fees Fees £000 £000The emoluments of the Directors were as followsDr C B Phipps 20 20Mr S L Phipps 15 15Dr A J Martin 6 -Dr I G Duncan 120 150Mr W I L Forrest 6 -Dr D H Quick 6 -Mr D L Clifton 10 15Mr A G Windham 10 15Mr E Wisniewski 9 15 202 230 Further information on the remuneration of Directors and their share awards canbe found in the Remuneration and Nomination Committee's report. Information on related-party transactions is disclosed in note 20 to theseAccounts. 5 Staff costs - Directors and employees 2005 2006 £000 £000Social security costs 15 20The average monthly number of employees, includingDirectors, during the year was as follows: 2005 2006 Number NumberDirectors 6 6 6 Interest 2005 2006 £000 £000Bank interest received 680 1,135Other interest received 2 - 682 1,135 7 Taxation 2005 2006(a) Analysis of charge in the period £000 £000Current tax:Current tax in the period 199 336In respect of previous years (14) - 185 336 (b) Factors affecting tax charge for the period 2005 2006 £000 £000The tax assessed for the period is different from thestandard rate of corporation tax in the UK of 30% (2005 - 30%)Profit/(loss) on ordinary activities 2,069 (2,483)Profit/(loss) on ordinary activities multiplied by thestandard rate of corporation tax in the UK of 30% (2005 - 30%) 621 (745) Effects of:Foreign exchange (601) 806Non-allowable expenses 12 79Expenses carried forward 167 196Adjustments for prior years (14) - 185 336 (c) Factors that may affect future tax chargesThe Company is carrying forward an amount of tax-deductible expenditure underthe assumption that it will have income from oil exploration in the future. Theamount currently available for offset against future revenue is estimated at £20million. No deferred tax is provided on this expenditure as it is not reasonablycertain that the income from this sourcewill materialise. 8 Earnings per shareThe calculation of basic earnings per ordinary share is based on a loss of£2,819,000 (2005:Profit £1,884,000) and on 221,934,920 (2005: 208,452,505)ordinary shares, being the weighted-average number of ordinary shares in issueduring the year. As the Group reports a loss for the year ended 31 December 2006then, in accordance with Financial Reporting Standard 14, the share options andshare appreciation rights in issue are not considered dilutive. Year end 31 December 2005 2005Basic weighted-average number of shares 208,452,505Dilutive potential ordinary shares:Dilution caused by options 7,088,264Diluted weighted-average number 215,540,769 9 Profit for the financial yearDesire Petroleum plc has not presented its own profit and loss account, aspermitted by section 230 of the Companies Act 1985. The loss for the financialyear dealt with in the accounts of the Holding Company amounts to £2,810,000(2005: profit £1,919,000). 10 Tangible fixed assets Equipment and fixtures £000The Group and CompanyCostAt 1 January 2006 5Additions 10At 31 December 2006 15DepreciationAt 1 January 2006 2Charges for the year 3At 31 December 2006 5Net book value at 31 December 2006 10Net book value at 31 December 2005 3 11 Intangible fixed assetsOil and Gas Goodwill Interests Total £000 £000 £000The GroupCostAt 1 January 2006 941 6,351 7,292Additions - 1,980 1,980At 31 December 2006 941 8,331 9,272AmortisationAt 1 January 2006 941 - 941Charges for the year - - -At 31 December 2006 941 - 941Net book value at 31 December 2006 - 8,331 8,331Net book value at 31 December 2005 - 6,351 6,351The Group's oil and gas interests all relate to the Falkland Islands. Oil and Gas Interests £000The CompanyCostAt 1 January 2006 6,351Additions 1,980At 31 December 2006 8,331Net book value at 31 December 2006 8,331Net book value at 31 December 2005 6,351The Group's oil and gas interests all relate to the Falkland Islands. 12 Investments 2006 £000The CompanyCost at 1 January 2006 and at 31 December 2006 1,088Provision at 1 January 2006 and at 31 December 2006 (1,088)At 1 January 2006 and at 31 December 2006 - Particulars of the subsidiary undertakingsat 31 December 2006 were as follows: Name of Holding Proportion Country of Nature ofsubsidiary of voting Incorporation business rights and shares heldGaelicResources plc Ordinary shares 100% Republic Holding company of IrelandEuropeanHydrocarbonsLimited Ordinary 100% Channel Non-trading shares** IslandsInteroilLimited Ordinary 99.80% England Non-trading shares*Gaelic Resources(Turkey) Limited Ordinary 100% British Virgin Non-trading shares* IslandsAngloScandinavianPetroleum plc Ordinary 100% England Non-trading shares*European HydrocarbonsHoldings Limited Ordinary 100% Channel Holding company shares* Islands * Held in the name of Gaelic Resources plc.**Held in the name of European Hydrocarbons Holdings Limited. 13 Debtors due within one year The Group The Company 2005 2006 2005 2006 £000 £000 £000 £000Other debtors 148 646 140 638Prepayments and accrued income 30 8 30 8 178 654 170 646 14 Creditors-Amounts falling due within one year The Group The Company 2005 2006 2005 2006 £000 £000 £000 £000Bank overdraft 7 40 7 40Corporation tax 199 336 199 336Other tax and social security creditors 7 7 7 7Other creditors 48 850 14 816Accruals 84 46 68 27 345 1,279 295 1,226 15 Derivatives and financial instruments Financial assetsThe Group has cash deposits and short-term debtors.The currency profile of the Group's cash depositsat 31 December 2006 was: Total £000CurrencyBritish Pound 2,836US Dollar 19,929Falkland Island Pound 47Financial liabilitiesThe Group has no financial liabilities other thanshort-term creditors. 16 Share Capital The Group and Company 2005 2005 2006 Number of 2006 Number of £000 shares £000 sharesAuthorisedOrdinary shares of 1p each 250,000,000 2,500 250,000,000 2,500 Allotted, called-up and Ordinary 1pfully-paid shares Number At 1 January 2006 221,431,762Issued in year 1,106,342At 31 December 2006 222,538,104 Ordinary 1p shares £000As at 1 January 2006 2,214Issued in year 11At 31 December 2006 2,225 During the year, options were excised over 1,106,342 shares and these weresubsequently allotted on 18 July 2006. The option exercise raised £255,000. On 27 February 2007 Dr C B Phipps exercised options over 478,239 shares andthese were subsequently allotted. The exercise of the options raised £117,000. Share optionsThe share options in issue at 31 December 2006 were as follows: Number of Number of Number of Exercise Exercise period shares at 1 shares January 2006 exercised in the year shares at price 31December2006Date ofgrants4 October 4,533,307 (1,079,358) 3,453,949 23.07p up to 81999 September 20077 May 3,108,555 - 3,108,555 20.11p up to 6 May2002 200926 June 4,857,119 - 4,857,119 17.92p up to 23 June2003 201027 May 2,146,492 - 2,146,492 21.74p 7 May 2007 to 72004 May 20111 June 550,000 - 550,000 33.00p 1 June 2008 to2005 1 June 201213 June 100,000 - 100,000 38.75p 13 June 2008 to2005 13 June 201221 July 1,500,000 - 1,500,000 39.50p 21 July 2008 to2005 21 July 2011 Share Appreciation Rights ('SARs')Further details relating to the SARs can be found on page 14 17 Reserves Merger Reserve Share Premium Revenue Reserve Share-based Total Profit Payment and Loss Account AccountThe Group £000 £000 £000 £000 £000 At 1January 13,343 45,383 (28,111) - (28,111)2006 - aspreviouslystatedPrior YearAdjustment - - (51) 51 - At 1January2006 - as 13,343 45,382 (28,162) 51 (28,111)restatedLoss forthe - - (2,819) - (2,819)yearShare Issuein - 244 - - -the yearShare-basedpaymentcharge- - - - 263 263At 31December 13,343 45,627 (30,981) 314 (30,667)2006 Following the implementation of Financial Reporting Standard 10, the former goodwill write-off reserve has been amalgamated with the profit and loss account. Share Premium Revenue Reserve Share-based Profit and Loss Account payment Reserve Account The Company £000 £000 £000 £000 At 1 January2006-aspreviouslystated 45,382 (14,732) - (14,732)Prior Yearadjustment - (51) 51 -At 1 January2006-asrestated 45,382 (14,783) 51 (14,732)Share issue inthe year 244 - - -Loss for theyear - (2,810) - (2,810)Share-basedpayment charge - - 263 263At 31 December2006 (45,626) (17,593) 314 (17,279) During the period the Group and Company has adopted Financial Reporting Standard20 and restated comparatives accordingly. The effect of this change inaccounting policy has been to increase the current year loss by £263,000 andreduce the previous years profits by £42,000. This has no cash impact. 18 Commitments Operating Leases 2005 2006Annual Group and Company obligations under operating Land and Land andleases as follows: buildings buildings £000 £000 ExpiringWithin 1 year 115 115Between 1 and 5 years - 16 19 Notes to Group cash flow statement a) Reconciliation of operating profit/(loss) to operatingcash flows As restated 2006 2005 £000 £000Operating profit/(loss) 1,387 (3,618)Increase in debtors (115) (288)(Decrease)/increase in creditors 30 (31)Share-based payment charge 42 263Charge for depreciation 2 3Foreign exchange (2,002) 2,686Net cash outflow from operating activities (656) (985) b) Analysis of cash flows 2005 2006 £000 £000 Returns on investments and servicing of finance 660 1,135Interest receivedNet cash flow from returns on investments and servicing offinance 660 1,135Capital expenditurePayments to acquire tangible fixed assets (2) (10)Payments to acquire intangible fixed assets (843) (1,373)Net cash outflow for capital expenditure (845) (1,383) c) Analysis of changes in net funds At 31 Cash Exchange At 31 movement December flows £000 December 2005 £000 2006 £000 £000Cash at Bank and in hand 26,642 (1,144) (2,686) 22,812Bank overdraft (7) (33) - (40)Net funds 26,635 (1,177) (2,686) 22,772 20 Related party transactions The Group entered into transactions with the followingcompanies in which certain of the Directors and formerDirectors were materially interested: Company Related PartyPhipps & Company Limited P Dr C B Phipps and Mr S L PhippsChase Energy Limited Dr I G DuncanMolard Financial Management Services SA Mr W I L ForrestQM Marketing Limited Dr D H QuickCopernicus Consultancy Limited Mr E WisniewskiByron Holdings Limited Mr D L Clifton The transactions Total 2005 Services as a Management Consultancy Total 2006with the Group Director services servicesduring theyear were asfollows: £000 £000 £000 £000 £000Phipps &CompanyLimited 372 35 337 - 372Chase EnergyLimited 17 - - - -MolardFinancialManagementServices SA 6 - - - -QM MarketingLimited 6 - - - -CopernicusConsultancyLimited 7 - - 5 5Byron HoldingsLimited 15 15 - - 15Mr A G Windham 18 15 - 5 20 At 31 December 2006 the following amounts were included increditors: 2005 2006 £000 £000Phipps & Company Limited 1 6Byron Holdings Limited 10 5Mr A G Windham 3 4 In addition, the Company paid £3,900 (2005 - £Nil) to Phipps and Company Limitedfor the rent of offices. 21 Capital commitments As part of the lease agreements with the Falkland Islands Government, theCompany has commitments for oil exploration before 2013 on Tranches C and D.During the year the company contracted for the supply of long-lead time items,including the casing, tubulars and wellheads required for the planned 3 welldrilling programme. Desire has now taken delivery of all of theseitems and they are stored at a location near Aberdeen. At the year end US $1.8million remainedundelivered. This information is provided by RNS The company news service from the London Stock Exchange