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2023 ReportANNUAL REPORT AND FINANCIAL STATEMENTS 2006 Karelian Diamond Resources PLC Contents Chairman’s Statement Company Information Board of Directors Directors’ Report Independent Auditors’ Report Profit and Loss account Balance Sheet Cash Flow Statement Statement of Accounting Policies Notes to the Financial Statements 2 5 6 7 9 11 12 13 14 16 Chairman’s Statement I have great pleasure in presenting your Company’s Annual Report and Financial Statements for the year ended 31 May 2006, the first results since your Company’s shares were admitted to trading on AIM in September 2005. Professor Richard Conroy Chairman During the year encouraging progress has been with 49 claims, including those covering a known made in the exploration of the Company’s licences diamondiferous pipe at Seitaperä and the 16 other in the Karelian Craton of Finland. diamond indicator mineral anomalies found by your The Company’s licences cover part of a block of Company as a result of till sampling. ancient crustal rocks occupying much of eastern The presence of the Seitaperä kimberlite pipe and northern Finland, extending over the border shows that the right geochemical conditions to host into Russia where the Craton hosts a number of diamonds occur in the Kuhmo area. Furthermore, significant diamond deposits, including the world because your Company has identified other class Lomonosova and Grib discoveries. diamond indicator mineral anomalies elsewhere Your directors believe that the Finnish sector of the Craton has the potential to host similar world- class deposits and, given its size and potential, it is under-explored by comparison with other diamond producing regions of the world. In selecting exploration areas in Finland, your Company has made use of extensive aeromagnetic and electromagnetic data available in Finland to identify geophysical anomalies that might represent kimberlite pipes. Interpretation of the geophysical data has been followed by regional till sampling in the target areas, some of which have yielded kimberlitic and diamond indicator minerals, including G9 and G10 garnets that form at similar temperatures and pressures to diamonds. Your Company now holds 58 diamond claims in Finland, mostly over targets that were identified using the above strategy. The claims are grouped geographically into four blocks, each of which has been independently assessed as “highly prospective for diamonds”. The Kuhmo block is the largest on the Claim block, the significance of this pipe is now much greater than at the time of its discovery. When linked to the fact that kimberlite pipes typically occur in clusters, it suggests that multiple sources of diamonds may be present at Kuhmo. For this reason, it is the focus of your Company’s initial exploration programme. In the current year this programme will include further drilling of the Seitaperä pipe, which has a surface area of 4 hectares, and systematic evaluation of the other 16 known diamond indicator mineral anomalies to determine if they warrant drilling. Till sampling will also continue, as will work on your Company’s three other highly prospective claim blocks. Your Company’s management has established a close working relationship with the Geological Survey of Finland (GTK) and is able to draw on its expertise, extensive knowledge of the country’s geology and excellent technical and laboratory services. Your Company employs GTK staff as local consultants and to undertake fieldwork, and Annual Report and Financial Statements 006 Karelian Diamond Resources Riihivaara drilling it has benefited greatly from this relationship. Karelian can also call on its senior consultant, Dr exclusive survey results and significant portfolio of claims transferred into your Company will Bert Gerryts, an internationally respected diamond provide it with a significant advantage in its future geologist who pioneered the use of indicator operations”. minerals and geophysics in diamond exploration. The Company has begun a follow up of its Kuhmo Karelian’s admission documents included an targets with a trenching programme designed independent assessment of its diamond exploration to expose bedrock in an attempt to explain the properties and information portfolio prepared observed magnetic anomalies by The CSA Group, a worldwide exploration management consultancy. Amongst other things, this noted that Conroy Diamonds and Gold P.l.c, and Conroy P.l.c. (whose Finnish diamond interests were transferred into Karelian) had been active in diamond exploration in the Karelian Craton since 1994. CSA’s assessment commented that “These companies had carried out a large amount of work and gained extensive exploration experience in the region, and the comprehensive data package, This work is also being carried out by the GTK. At the same time, additional basal till samples have been collected to further evaluate the diamond prospectivity of the potential drilling targets. The first phase of the trenching programme is complete and results achieved to date are encouraging. One of the four trenches contains what is believed to be narrow anastomosing dikelets of kimberlitic material at the edges of an Annual Report and Financial Statements 006 Karelian Diamond Resources 3 Seitaperä Kimberlite Core Samples 8m wide “hole” in the bedrock surface caused Financials by differential glacial scouring of weathered, soft material. Two other trenches also revealed similar “holes” in the bedrock which are further examples of preferential glacial removal of intensely altered rock types. The loss after taxation for the year ended 31 May 2006 was €135,952 (1 March 2004 to 31 May 2005: €98,941) and the net assets as at 31 May 2006 were €2,742,471 (31 May 2005: €2,488,751). The bedrock surface in these “holes” is too deep for the excavator to reach, but information gained Auditors from the trenching has considerably improved the On 2 June 2006 Deloitte & Touche were appointed selection of drill sites to test for the presence of as auditors to the Company. wider kimberlite bodies. Directors, Consultants and Staff. I would like to express my deep appreciation of the support and dedication of the directors, consultants and staff, which has made possible the continued progress and success which your Company has achieved. Future Outlook The Company will continue with its exploration programme with a view to developing the diamond interests in Finland in order to generate shareholder value. Professor Richard Conroy Annual Report and Financial Statements 006 Karelian Diamond Resources Company Information Directors Auditors Broker Professor Richard Conroy Deloitte & Touche City Capital Securities Ltd Chairman* Chartered Accountants 2 John Carpenter Street Roger I Chaplin Non-Executive Director§ Seamus P FitzPatrick Non-Executive Director+§ Maureen T.A Jones Managing Director* James P. Jones FCA Finance Director*+ Louis J. Maguire Non-Executive Director*+§ * Member of the Executive Committee + Member of the Remuneration Committee § Member of the Audit Committee Company Secretary and Registered Office James P. Jones FCA 10 Upper Pembroke Street Dublin 2 Deloitte & Touche House London EC4Y 2AH Charlotte Quay, Limerick Registrars Capita Corporate Registrars P.l.c Unit 5 Legal Advisors William Fry Solicitors Fitzwilton House Wilton Place Dublin 2 Manor Street Business Park Roschier-Holmberg Manor Street Dublin 7 Keskuskatu 7A 00 100 Helsinki www.capitacorporateregistrars.ie Finland Nominated Adviser Head Office John East & Partners Ltd Karelian Diamond Crystal Gate 28-30 Worship Street London EC2A 2AH Resources PLC 10 Upper Pembroke Street Dublin 2 Drilling at Seitaperä Annual Report and Financial Statements 006 Karelian Diamond Resources 5 Board of Directors Professor Richard Conroy has been involved in natural resources for many years. He established Trans-International Oil in 1974. He also founded Conroy Petroleum and Natural Resources, which in 1986 discovered the Galmoy zinc deposit in Co. Kilkenny, Ireland, which is now in production as a major base metals mine. Conroy Petroleum was also a founding member of the Stoneboy Consortium, an exploration group that discovered the POGO gold field in Alaska. He is chairman of Conroy Diamonds and Gold P.l.c. Maureen Jones has over 20 years experience of the natural resources industry. She was a member of the board of ARCON International Resources from 1986-1994. She was one of the founders of Conroy Diamonds and Gold, an AIM listed company and remains Managing Director of that company. James Jones is a chartered accountant. He became Company Secretary of Conroy Petroleum at its foundation and subsequently Finance Director from 1980-1994. He is also a founding Director of Conroy Diamonds and Gold and remains Finance Director of that company. Louis Maguire is an Auctioneer by profession and a land valuation expert with particular expertise in the purchase of mineral rights and in land acquisition for mining. He is also a Director of Conroy Diamonds Louis Maguire Non-Executive Director and Gold. Seamus FitzPatrick has worked in both corporate finance and private equity in London and New York with Morgan Stanley, JP Morgan and Banker’s Trust. In 1999 he co-founded CapVest, which has over 1.2 billion assets under management. He is chairman of Young’s Bluecrest Limited, and Vaasan & Vaasan OY in Finland. Roger Chaplin has some 25 years experience in mining analysis, gained initially in a major South African mining house and latterly in the City of London. Mr Chaplin was senior Vice President and Mining Analyst at T. Hoare and Co/Canaccord Capital (Europe) Limited in London from 1993- 2003 and has a particular interest in precious metals and diamonds. Seamus FitzPatrick Non-Executive Director Roger Chaplin Non-Executive Director Professor Richard Conroy Chairman Maureen Jones Managing Director James Jones Finance Director 6 Annual Report and Financial Statements 006 Karelian Diamond Resources Directors’ Report For the year ended 31 May 2006 The Directors present their annual report together are set out on pages 11 and 12 respectively. The with the audited financial statements of Karelian Diamond Resources plc (‘the Company’) for the Company recorded a loss for the financial year of €135,952 (2005: €98,941). year ended 31 May 2006. Principal Activities and Business Review Important Events since the Year End No significant events affecting the Company have The Company was incorporated on 1 March taken place between 31 May 2006 and the date of 2004 as an exploration company and is currently the Board approval of these financial statements. involved in the development of mineral exploration opportunities, principally in Finland. The Company Directors has exploration rights for certain areas and an extensive exploration programme has been undertaken. Future Development of the Business It is the intention of the Directors to continue to develop the activities of the Company. Risks and Uncertainties The Directors who served during the year are as follows: R.T.W.L. Conroy M.T.A. Jones J.P. Jones L.J. Maguire S.P. FitzPatrick R.I. Chaplin The Company’s activities are directed towards the In accordance with the Company’s Articles of discovery, evaluation and development of diamond Association, Mr S.P. Fitzpatrick and Mr R.I. Chaplin and other mineral deposits. Exploration for and development of mineral deposits is speculative. will retire by rotation and, being eligible, will offer themselves for re-election at the Annual General Whilst the rewards can be substantial, there is Meeting. no guarantee that exploration on the Company’s properties will lead to the discovery of commercially extractable mineral deposits. The future net asset Directors' and Secretary's Shareholdings and Other Interests value is therefore, inter alia, dependent on the success or otherwise of the Company’s future exploration programmes. Whether a mineral deposit will be commercially viable in a mining operation depends on a number of factors, such as the grade of the deposit, prices of the commodities being exploited, currency fluctuations, proximity to infrastructure, financing costs and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, import and export regulations and environmental protection. Results for the Year and State of Affairs at 31 May 2006 The profit and loss account for the the year ended 31 May 2006 and the balance sheet at that date The interests of the Directors and Secretary, all of which were beneficially held, in the ordinary share capital and warrants of the Company at 31 May 2005 and 31 May 2006 were as follows: At 31 May 2005 At 31 May 2006 Ordinary shares Ordinary shares of €0.01 each Warrants of €0.01 each Warrants R.T.W.L. Conroy M.T.A. Jones J.P. Jones R. I. Chaplin S.P. FitzPatrick 25,231,701* 125,836 58,335 - 666 L.J. Maguire 51,668 - - - - - - 28,531,701* 1,000,000 125,836 750,000 58,335 500,000 20,000 200,000 666 200,000 51,668 200,000 Annual Report and Financial Statements 006 Karelian Diamond Resources Directors’ Report For the year ended 31 May 2006 *Of the 28,531,701 (2005: 25,231,701) Ordinary n prepared the financial statements on the going Shares beneficially held by Professor Richard concern basis, unless it is inappropriate to Conroy, 27,815,030, (2005: 24,515,030) are held presume that the Company will continue in by Conroy P.l.c., a company in which Professor business. Conroy has a controlling interest. All the warrants were granted on 18 August 2005 accounting records which disclose with reasonable and are exercisable at any time up to 1 September accuracy at any time the financial position of the 2015 at a subscription price of 5p sterling. Company and to enable them to ensure that the The Directors are responsible for keeping proper Other than the subscription for shares in the placing during the year there have been no contracts or arrangements during the financial year in which a Director of the Company was materially interested and which were significant in relation to the Company's business. Political Donations The Company did not make any political donations during the year. Books of Account financial statements comply with the Companies Acts, 1963 to 2005 and the European Communities (Companies: Group Accounts) Regulations, 1992. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. As explained in Note 1 to the financial statements, the Directors have reviewed internal budgets and other relevant information and are satisfied that the Company will be able to continue in operation for the foreseeable future. Accordingly, the financial statements have been prepared on the going The measures which the Directors have taken to concern basis. ensure that proper books of account are kept are the adoption of suitable policies for recording transactions, assets and liabilities, the employment of suitably qualified staff and the use of computer and documentary systems. The Company’s Books of Account are kept at 10 Upper Pembroke Street, Dublin 2. Auditors The auditors, Deloitte and Touche, Chartered Accountants, were appointed during the year and have expressed their willingness to continue in office in accordance with Section 160 (2) of the Companies Act, 1963. Directors' Responsibility Statement On behalf of the Board Company law requires the Directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs R.T.W.L. Conroy Director J.P. Jones Director of the Company and of the profit or loss of the 15 November 2006 Company for that period. In preparing the financial statements, the Directors have: n selected suitable accounting policies and then applied them consistently; n made judgements and estimates that are reasonable and prudent; Annual Report and Financial Statements 006 Karelian Diamond Resources Independent Auditors’ Report to the Shareholders of Karelian Diamond Resources PLC We have audited the financial statements of in accordance with Irish statute comprising the Karelian Diamond Resources P.l.c. for the year Companies Acts, 1963 to 2005 and the European ended 31 May 2006 which comprise the Profit Communities (Companies: Group Accounts) and Loss Account, the Balance Sheet, the Cash Regulations 1992. We also report to you whether Flow Statement, the Statement of Accounting in our opinion: proper books of account have been Policies and the related notes 1 to 18. These kept by the company; whether, at the balance sheet financial statements have been prepared under date, there exists a financial situation requiring the the accounting policies set out in the Statement of convening of an extraordinary general meeting of Accounting Policies. This report is made solely to the company's members, as a body, in accordance with Section 193 of the Companies Act 1990. Our audit work has been undertaken so that we might state to the company’s members those matters we are required the company; and whether the information given in the directors' report is consistent with the financial statements. In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit and whether the company's balance sheet and its profit and loss account are in agreement with the books to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by of account. law, we do not accept or assume responsibility to We also report to you if, in our opinion, any anyone other than the company and the company’s information specified by law or the rules of members as a body, for our audit work, for this the London Stock Exchange for the Alternative report, or for the opinions we have formed. Investment Market regarding directors' Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report, including as set out in the Statement of Directors’ Responsibilities, the preparation of the financial statements in accordance with applicable law and accounting standards issued by the Accounting Standards Board and published by the Institute of Chartered Accountants in Ireland (Generally Accepted Accounting Practice in Ireland). Our responsibilities, as independent auditors, are to audit the financial statements in accordance with relevant legal and regulatory requirements, the rules remuneration and directors' transactions is not disclosed and, where practicable, include such information in our report. We read the other information contained in the Annual Report and considered whether it is consistent with the audited financial statements. The other information comprises only the Report of the Directors and the Chairman’s Statement. We consider the implications for our report if we become aware of any apparent misstatement or material inconsistency with the financial statements. Our responsibilities do not extend to other information. Basis of audit opinion of the London Stock Exchange for the Alternative We conducted our audit in accordance with Investment Market and International Standards on International Standards on Auditing (UK and Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view, in accordance with Generally Accepted Accounting Practice in Ireland, and are properly prepared 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 Annual Report and Financial Statements 006 Karelian Diamond Resources Independent Auditors’ Report to the Shareholders of Karelian Diamond Resources PLC preparation of the financial statements and of n have been properly prepared in accordance whether the accounting policies are appropriate to with the Companies Acts, 1963 to 2005 and the circumstances of the company, and the group, the European Communities (Companies: Group consistently applied and adequately disclosed. Accounts) Regulations 1992. We planned and performed our audit so as to We have obtained all the information and obtain all the information and explanations which explanations we considered necessary for the we considered necessary in order to provide us with purposes of our audit. In our opinion proper sufficient evidence to give reasonable assurance books of account have been kept by the company. that the financial statements are free from material The company’s balance sheet and its profit and misstatement, whether caused by fraud or other loss account are in agreement with the books of irregularity or error. In forming our opinion we account. evaluated the overall adequacy of the presentation of information in the financial statements. Mineral Interests In our opinion the information given in the directors' report is consistent with the financial statements. In forming our opinion we have considered the adequacy of the disclosures made in the financial statements concerning the valuation of mineral interests of €3,451,406 included in the balance sheet. The realisation of the mineral interests by the The net assets of the company, as stated in the balance sheet are more than half the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 31 May 2006 a financial situation which, under Section 40(1) of the company is dependent on successful development Companies (Amendment) Act, 1983, would require of economic reserves. We draw attention to further the convening of an extraordinary general meeting details given in Notes 1 and 7. Our opinion is not of the company. qualified in this respect. Opinion In our opinion the financial statements: n give a true and fair view, in accordance with Deloitte & Touche Chartered Accountants and Registered Auditors Limerick Generally Accepted Accounting Practice in 15 November 2006 Ireland, of the state of affairs of the company as at 31 May 2006 and of the loss for the year then ended; and 10 Annual Report and Financial Statements 006 Karelian Diamond Resources Profit and Loss Account For the year ended 31 May 2006 Operating Expenses Other income Notes Year 15 month Ended period ended 31 May 31 May 2005 2006 € € 3 (139,599) (98,941) 3,647 - Loss for the Financial Year/Period Loss per ordinary share 4 5 (135,952) (98,941) €0.0032 €0.0028 There are no recognised gains or losses other than the loss for the year. The above all result from continuing operations. The accompanying notes form an integral part of this profit and loss account. R.T.W.L. Conroy Director J.P. Jones Director Approved by the Directors on 15 November 2006 11 Balance Sheet For the year ended 31 May 2006 Fixed Assets Mineral interests Tangible fixed assets Financial assets Current Assets Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Net Current Liabilities Total Assets less Current Liabilities Notes 2006 € 2005 € 7 8 9 10 11 3,541,406 1,509 4 2,885,831 - 4 3,542,919 2,885,835 13,661 112,791 660 3 126,452 (442,117) 663 (397,747) (315,665) (397,084) 3,227,254 2,488,751 Creditors: Amounts falling due after more than one year 12 (484,783) - Net Assets Capital and Reserves Called up share capital Share premium account Profit and loss account Shareholders’ Funds – all equity 2,742,471 2,488,751 13 13 14 15 447,716 2,529,648 (234,893) 347,716 2,239,976 (98,941) 2,742,471 2,488,751 The accompanying notes form an integral part of this balance sheet. R.T.W.L. Conroy Director J.P. Jones Director Approved by the Directors on 15 November 2006 12 Cash Flow Statement For the year ended 31 May 2006 Net Cash Inflow from Operating Activities Capital Expenditure and Financial Investments Net Cash Outflow before Financing Financing Increase in Cash Notes 16A 16B 16B 16C Year 15 month Ended period ended 31 May 31 May 2005 2006 € € 53,753 139,978 (657,252) (225,835) (603,499) (85,857) 716,287 85,860 112,788 3 The accompanying notes and statement of accounting policies form an integral part of this cash flow statement. R.T.W.L. Conroy Director J.P. Jones Director Approved by the Directors on 15 November 2006 13 Statement of Accounting Policies The financial statements have been prepared under the historical cost convention in accordance with applicable accounting standards generally accepted in Ireland and Irish statute comprising the Companies Acts, 1963 to 2005 and the European Communities (Companies: Group Accounts) Regulations, 1992. The Company's principal accounting policies are set out below. All of these policies have been applied consistently throughout the year and the previous period. A. Mineral Interests (i) Exploration, appraisal and development expenditure The Company accounts for mineral expenditure under the 'full cost' method of accounting. Exploration, appraisal and development expenditure is incurred on acquiring, exploring or testing exploration prospects. All lease, licence and property acquisition costs, geological and geophysical costs and other direct costs of exploration, appraisal and development are capitalised. The amount capitalised includes other operating expenses directly related to these activities. (ii) Cost Pools Costs relating to the exploration and appraisal of mineral interests which the Directors consider to be unevaluated are initially held outside the cost pool. Costs held outside the cost pool are reassessed at each period end. When a decision to develop these interests is taken, or if there is evidence of impairment, the related costs will be transferred to the cost pool or amortised to the profit and loss account as necessary. Costs will be capitalised within geographic cost pools which initially comprise Finland and the rest of the world. Proceeds from any disposal of part or all of an interest which is outside the cost pool will be credited to that interest with any excess being credited to the cost pool. (iii) Ceiling Test When a decision to develop mineral interests is taken, and the related costs are transferred to the cost pool a ceiling test will be carried out at each balance sheet date to assess whether the net book value of capitalised costs in the pool, together with the future costs of development of undeveloped reserves, is covered by the discounted future net revenues from the reserves within the pool, calculated at prices prevailing at the period end. Any deficiency arising will be provided for to the extent that, in the opinion of the Directors, it is considered to represent a permanent diminution in the value of the related asset, and where arising, will be dealt within the profit and loss account as additional depreciation. (iv) Depreciation Expenditure within the cost pool will be depreciated using the unit of production method based on commercial reserves. Costs used in the unit of production calculation will comprise the net book value of capitalised costs plus the anticipated future costs of development of the undeveloped reserves at current year end unescalated prices. Changes in cost and reserve estimates are dealt with prospectively. B. Other Tangible Fixed Assets Other tangible fixed assets are stated at cost, net of depreciation. Depreciation is provided on a straight line basis to write off the cost (net of estimated residual value) over the expected useful economic lives. C. Financial Fixed Assets Financial fixed assets are stated at cost, less provision for any permanent diminution in value. D. Foreign Currency Transactions denominated in foreign currencies are recorded at actual exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rates of exchange prevailing at the balance sheet date. 14 E. Issue Expenses and Share Premium Account Issue expenses arising on the issue of equity securities are written off, in the first instance, against the share premium account, with any issue expenses in excess of the balance on the share premium account being written off to the profit and loss account. F. Taxation The charge for taxation is based on the result for the year. Deferred taxation is calculated on the differences between the company’s taxable profits and the results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those that are recognised in the financial statements. G. Consolidation These financial statements present information about the Company as an individual undertaking and not about its group. The subsidiary undertakings have not been consolidated as their inclusion is not material for the purpose of giving a true and fair view. 15 Notes to the Financial Statements for the year ended 31 May 2006 1. Operations and Going Concern The Company, which was incorporated on 1 March 2004, is currently involved in the development of mineral exploration opportunities principally in Finland. On the basis of the capital funding achieved to date and existing commitments for future capital funding together with their review of projected cash flow information and taking into account the high potential of the acreage under licence and the continued support of the major shareholder, the Directors consider it appropriate to prepare the financial statements on a going concern basis. 2. Related Party Transactions The Company shares accommodation with Conroy Diamonds and Gold Plc., which has certain common shareholders and directors. The Company bears its appropriate share of the related costs directly. The Company has been financed during the year by advances from its principal shareholder, Conroy P.l.c. and other shareholders (Note 12). 3. Operating Expenses Notes Management services and operating expenses Transfer to Mineral Interests (Note 7) Year 15 month Ended period ended 31 May 31 May 2005 2006 € € 393,435 (253,836) 182,246 (83,305) 4. Loss on Ordinary Activities before Taxation The loss on ordinary activities before taxation is arrived at after charging the following items, which are stated at amounts prior to the re-allocation to mineral interests: 139,599 98,941 Notes Auditors' remuneration Directors' emoluments - fees - other remuneration Depreciation All losses arose from continuing operations. 5. Loss per ordinary share Year 15 month Ended period ended 31 May 31 May 2005 2006 € € 8,500 8,500 71,075 112,500 65,683 - 168 - The calculation of the loss per ordinary share of €0.0032 (2005 – €0.0028) is based on the loss for the financial year of €135,952 (2005 – €98,941) and the weighted average number of ordinary shares on a basic and fully diluted basis during the year of 42,271,676 (2005 – 34,771,676). Share options and warrants are not included in the calculation of fully diluted shares since the Company incurred a loss in 2006 and 2005 which results in these potential shares being anti-dilutive. 16 6. Tax on loss on Ordinary Activities No taxation charge arises in the financial year due to tax losses incurred. There was no unprovided deferred taxation at 31 May 2006 (2005: Nil). 7. Mineral Interests Costs held outside cost pool: Cost At 1 June 2005 Diamond interests acquired Expenditure during the period - licences and appraisal - other operating costs (Note 3) At 31 May 2006 2006 € 2005 € 2,885,831 - - 2,660,000 401,739 253,836 142,526 83,305 3,541,406 2,885,831 The Directors have considered the proposed work programmes for these mineral interests, presently held outside the cost pools. They are satisfied that there are no indications of impairment, but recognise that future realisation of the mineral interests, held outside the cost pools, is dependent on further successful exploration and appraisal activities and the subsequent economic production of the mineral reserves. 8. Tangible Fixed Assets Cost At 1 June 2005 Additions 31 May 2006 Accumulated Depreciation At 1 June 2005 Depreciation charge 31 May 2006 Net Book Value 31 May 2005 31 May 2006 9. Financial Fixed Assets Investment in subsidiaries Office Equipment € - 1,677 1,677 - 168 168 - 1,509 2005 € 4 2006 € 4 Financial fixed assets represent investments of €2 in each of the Company’s wholly owned subsidiary undertakings, Karelian Diamonds Limited and Nordic Diamonds Limited. The net assets of each entity is €2. Certain diamond claims in Finland are held in the name of the Company’s subsidiaries. 17 10. Debtors VAT recoverable 11. Creditors: Amounts falling due within one year Trade creditors and accruals Due to Conroy P.l.c. 12. Creditors: Amounts falling due after more than one year Due to Conroy P.l.c. Shareholders’ loans 2006 € 13,661 13,661 2005 € 660 660 2006 € 442,117 - 2005 € 239,579 158,168 442,117 397,747 2006 € 296,045 188,738 484,783 2005 € - - - Together with the placing on the admission of the Company on the Alternative Investment Market, the immediate funding requirements of the Company have been financed by advances from the principal shareholder, Conroy P.l.c. and other shareholders. 13. Called up Share Capital and Share Premium Authorise: 500,000,000 ordinary shares of €0.01 each Issued and Fully Paid: Start of year Share issue Issue expenses 2006 € 5,000,000 2005 € 5,000,000 Share Capital € Share Premium € Number 34,771,676 10,000,000 - 347,716 100,000 - 2,239,976 630,000 (340,328) 44,771,676 447,716 2,529,648 Pursuant to the admission of the Company on the Alternative Investment Market on 1 September, 2005 10,000,000 ordinary shares of €0.01 were issued for a consideration of 5p sterling per share to fund further mineral exploration. This realised €0.073 per share resulting in a premium of €0.063 per share. The share price at 31 May 2006 was 6.5p sterling. During the year the price ranged from 4.0p to 8.5p sterling. 18 14. Profit and Loss Account Notes At 1 June 2005 Loss for the financial year/period At 31 May 2006 15. Reconciliation of Movement in Shareholders’ Funds At 1 June 2005 Shares issued, net Loss for financial year/period At 31 May 2006 16. Notes to the Cash Flow Statement A. Reconciliation of Loss to Net Cash Inflow from Operating Activities: 2006 € (98,941) (135,952) 2005 € - (98,941) (234,893) (98,941) 2006 € 2,488,751 389,672 (135,952) 2005 € - 2,587,692 (98,941) 2,742,471 2,488,751 Notes Operating Loss Depreciation Increase in Creditors Increase in Debtors Net Cash Inflow from Operating Activities B. Analysis of Cash Flows: Notes Capital expenditure and Financial Investment Investment in mineral interests Purchase of tangible fixed assets Financing Shareholders’ loan Issue of share capital Share issue expenses C. Analysis and Reconciliation of Net Funds: Cash at bank 17. Commitments and Contingencies Year 15 month Ended period ended 31 May 31 May 2005 2006 € € (135,952) 168 202,538 (13,001) (98,941) - 239,579 (660) 53,753 139,978 Year 15 month Ended period ended 31 May 31 May 2005 2006 € € (655,575) (1,677) (225,835) - (657,252) (225,835) 326,615 730,000 (340,328) 158,168 - (72,308) 716,287 85,860 1 June 2005 Cash Flow 31 May 2006 3 112,788 112,791 At 31 May 2006 there were no capital commitments or contingent liabilities. 18. Approval of Financial Statements These financial statements were approved by the Board on 15 November 2006. 19 Notice of Annual General Meeting NOTICE is hereby given that the Annual General Meeting of Karelian Diamond Resources plc (the “Company”) will be held at the Conrad Hotel, Earlsfort Terrace, Dublin 2 on Friday 8 December 2006 at 4.00pm for the purposes of transacting the following business: 1 To receive and consider the Financial Statements for the year ended 31 May 2006 together with the Directors’ and Independent Auditors’ Reports thereon (Resolution No. 1). 2 To re-elect as Directors the following persons: Mr Seamus P. Fitzpatrick (Resolution No.2 (a)) Mr Roger I. Chaplin (Resolution No.2 (b)) 3 To authorise the Directors to fix the remuneration of the Auditors (Resolution No.3). 4 To consider and, if thought fit, pass the following resolution as an Ordinary Resolution (Resolution No.4): “That, in accordance with the provisions of Section 20 of the Companies (Amendment) Act, 1983, the directors of the Company be generally and unconditionally authorised to allot 'relevant securities' (as defined by Section 20(10) of the Companies (Amendment) Act, 1983) up to the amount of the authorised but unissued share capital of the Company at the date of this resolution and to allot and issue any shares purchased by the Company pursuant to the provisions of the Companies Act, 1990 and held as treasury shares and that the authority hereby granted shall, subject to Section 20(3) of the said Act, expire on the 7 December, 2011 unless previously renewed, varied or revoked by the Company.” 5 To consider and, if thought fit, pass the following resolution as a Special Resolution (Resolution No.5): “That, for the purposes of Section 24 of the Companies (Amendment) Act, 1983 and subject to the Directors being authorized pursuant to Article 10 of the Articles of Association of the Company, the Directors be empowered to allot equity securities for cash pursuant to and in accordance with Article 11 of the Articles of Association of the Company. The authority hereby conferred shall expire at the close of business on the date of the next Annual General Meeting of the Company unless previously revoked or renewed in accordance with the provisions of the Companies (Amendment) Act, 1983.” 6 To transact any other business. By Order of the Board Dated this 15th day of November 2006 James P Jones Secretary Registered Office 10 Upper Pembroke Street Dublin 2 Notes: The holders of the Ordinary Shares are entitled to attend and vote at the above General Meeting of the Company. A holder of Ordinary Shares may appoint a proxy or proxies to attend, speak and vote instead of him/her. A proxy need not be a member of the Company. A Form of Proxy is enclosed for use by shareholders unable to attend the meeting. Proxies to be valid must be lodged with the Company’s Registrars, Capita Corporate Registrars Plc, Unit 5, Manor Street Business Park, Manor Street, Dublin 7 not less than 48 hours before the time appointed for the holding of the meeting. 20 10 Upper Pembroke Street Dublin 2 Tel: 353-1-661 8958 Fax: 353-1-662 1213 Email: info@kareliandiamondresources.com
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