More annual reports from Karelian Diamond Resources:
2023 Report2007 Annual Report and Financial Statements 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 7 8 9 11 13 14 15 16 18 Chairman’s Statement Dear Shareholder, I have great pleasure in presenting your Company’s Annual Report and Financial Statements for the year ended 31 May 2007. Professor Richard Conroy Chairman Your Company was established with the objective ancient crustal rocks or cratons that are found only of finding commercial diamond deposits in Finland, in certain parts of the world. Diamonds are brought a country that is a relative newcomer to diamond to the surface in volcanic rocks, predominantly exploration. Finland hosts the same geological kimberlites, that erupt from those great depths. structure in which two world-class diamond deposits have been found over the border in Russia. Since geology recognises no country or political boundary, the logic for seeking similar diamond deposits in Finland is very clear. Having the “right geological address” is therefore all important for a diamond explorer and it is for this reason that your Company is focussing its efforts on Finland, a politically stable country with a long mining tradition. A large part of Finland Successful diamond exploration requires a is comprised of the ancient Karelian craton. systematic approach and painstaking attention This craton extends across the border into to detail. It also requires expertise, energy and Russia where it hosts two of the world’s largest enthusiasm, all of which your Company has in and richest diamond discoveries – the Grib abundance. We hold the largest diamondiferous and Arkhangelskaya kimberlite pipes. kimberlite pipe found so far in Finland and will continue our drilling and evaluation programme on it this winter. We are also in the process of following up numerous kimberlite indicator mineral (“KIM”) trains which are bringing us closer to the kimberlites which are the primary source of those minerals. Clearly, our diamond search is now entering an advanced and exciting stage. Though larger than Canada’s Slave Craton, in which the rich Ekati and Diavik diamond mines are located, the Finnish section of the Karelian Craton remains relatively under-explored for diamonds. The availability of high-quality basic geoscientific data and technical services in Finland and the country’s excellent infrastructure have enabled your Company’s diamond exploration programme to proceed somewhat more expeditiously than would As your Company continues to advance its search be the case in other regions. Despite Finland’s for world-class diamond deposits in Finland, I think relatively short diamond exploration history, that it is opportune for me to use this year’s annual more than 20 kimberlites have been discovered report to appraise shareholders of the reason we there to date. A very high proportion of these are exploring in Finland, as well as commenting on are diamondiferous, including your Company’s the progress achieved to date and outlining our Seitaperä pipe in the Kuhmo area. plans and expectations for the year ahead. With a surface area of 4.2ha, Seitaperä is the One of the rarest of minerals, diamonds are formed largest known kimberlite pipe in Finland. We have under conditions of great pressure and temperature recently exposed fresh kimberlite just beneath the which occur beneath thick blocks (+200km) of surface in a number of trenches excavated across Annual Report and Financial Statements 007 Karelian Diamond Resources The Arkhangelskaya diamond mine under development. The Arkhangelsk area is a prime example of world class diamond deposits hosted within the Karelian Craton. the pipe. Over two tonnes of kimberlite have been Demand for diamonds continues to rise, but mine collected, and several 100kg samples have been production is declining, few new diamond mines sent for micro-diamond analysis at SGS Lakefield are in the pipeline and world inventories of mined Laboratories in Canada. Results are expected by the diamonds are depleted. Clearly a major new end of the year. discovery by your Company would be welcomed by We have successfully outlined the surface the world diamond markets. expression of the pipe and selected a number of Your Company’s diamond exploration programme sites for drill-testing during the coming winter. Our in Finland has, by world standards, made great work to date has also indicated a possible south- progress in a very short period. We have an west extension to the pipe which could increase its exciting year ahead of us, with further significant overall size, and this will be further investigated in progress expected at Seitaperä. With regard to the coming year. Elsewhere in Finland, your Company has continued its exploration on several locations where previously identified KIM trains are now known to converge with a series of aeromagnetic anomalies. This convergence is particularly exciting as it suggests possible multiple kimberlite sources in the area. other exploration activities, we look forward to our ongoing work bringing us closer to new kimberlite sources, of which there could be several. Your Company is steadily progressing towards meeting its objective of finding one or more major diamond deposits. Annual Report and Financial Statements 007 Karelian Diamond Resources Chairman’s Statement Financials The loss after taxation for the year ended 31 May 2007 was €125,334 (31 May 2006: Loss €135,952) and the net assets as at 31 May 2007 were €2,641,737 (31 May 2006: €2,742,471). Subsequent to year end the Company raised £1,025,000 (€1.5m) through the issue of 15,770,000 ordinary shares of €0.01 each at 6.5p sterling together with one warrant, exercisable at 10p sterling during the three years following admission of the Placing Shares, for every three shares allotted. entitlements or fees and have agreed to waive the amounts accruing up to 30 November 2007. The amount due for the period up to 30 November 2007 would be €518,750 making the total amount waived €601,933 (£416,779). After careful consideration, and discussions with the Company’s advisors, the Board has decided, subject to ratification by the shareholders at the Annual General Meeting, to issue a total of 12,852,377 warrants to the individual directors for nil consideration exercisable over 10 years at a subscription price of €0.10 (Stg7p per share). A resolution to this effect has therefore been The directors have also considered the build-up included in the agenda for the AGM. of current liabilities. These liabilities arise mainly from the accrual of unpaid directors’ fees and remuneration since incorporation. By foregoing payment of their fees and remuneration, the directors effectively allowed the Company’s exploration work on the ground to proceed on a greater and more effective scale with the funds available to the Company. The directors have agreed to waive their entitlement to all fees accrued up to 31 August 2005 amounting to €83,183. Since 1 September 2005, the date of Admission to AIM, the non-executive directors fees have been paid on a current basis. The executive directors have not taken their salary The number of warrants proposed to be issued to each director is as follows: Name of Warrant Holder Number of Warrants R.T.W.L. Conroy M.T.A. Jones J.P. Jones S.P. FitzPatrick L.J. Maguire R.I. Chaplin 5,521,049 4,191,275 2,604,389 232,201 232,201 71,262 Annual Report and Financial Statements 007 Karelian Diamond Resources I welcome this action by the directors as it Auditors represents a strong vote of confidence in your Company and its prospects. In the light of the excellent exploration results achieved to date, your directors are considering how best to fund your Company's activities going forward. Options being studied include I would like to take the opportunity of thanking the partners and staff of Deloitte & Touche for their services to your Company during the course of the year. Directors, Consultants and Staff joint venture and farm-out, as well as such other arrangements as may be appropriate for advancing I would like to express my deep appreciation of the support and dedication of the directors, the interests of your Company. consultants and staff, which has made possible the very considerable progress and success which your Electronic Communication Company has achieved. An amendment to the Articles of Association is proposed to enable electronic communication to become another method of communication for the Company in so far as the law permits. Shareholders will continue to be entitled to ask the Company to Future Outlook The Company will continue with its exploration programme with a view to developing its diamond interests in Finland in order to generate shareholder provide a paper copy of any information which has value. been provided electronically. Professor Richard Conroy Annual Report and Financial Statements 007 Karelian Diamond Resources Annual Report and Financial Statements 007 Karelian Diamond Resources Company Information Directors Auditors Broker Professor Richard Conroy Deloitte & Touche City Capital Corporation Limited Chairman* Chartered Accountants Sion Hall 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 56 Victoria Embankment Charlotte Quay Limerick London EC4Y 0DZ Registrars Capita Registrars Unit 5 Manor Street Business Park Manor Street Dublin 7 Legal Advisors William Fry Solicitors Fitzwilton House Wilton Place Dublin 2 www.capitaregistrars.ie Roschier-Holmberg Nominated Adviser Keskuskatu 7A 00 100 Helsinki John East & Partners Ltd Finland 10 Finsbury Square London EC2A 1AD Head Office Karelian Diamond Resources PLC 10 Upper Pembroke Street Tel: 353-1-661 8958 Fax: 353-1-662 1213 www.kareliandiamondresources.com Annual Report and Financial Statements 007 Karelian Diamond Resources 7 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 2 billion assets under management. He is Chairman of Young’s Bluecrest Limited, and was Chairman of 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 Annual Report and Financial Statements 007 Karelian Diamond Resources Directors’ Report For the year ended 31 May 2007 The directors present their annual report together with the audited financial statements of Karelian Company recorded a loss for the financial year of €125,334 (2006: loss €135,952). Diamond Resources Plc (‘the Company’) for the year ended 31 May 2007. Important Events since the Year End Principal Activities and Business Review The Company was incorporated on 1 March 2004 as an exploration company and is currently involved in On 17 July 2007 the Company raised £1,025,000 (€1.5m) through the issue of 15,770,000 ordinary shares of €0.01 each at 6.5p sterling and granted one warrant, exercisable at 10p sterling during the development of mineral exploration opportunities, the three years following admission of the Placing principally in Finland. The Company has exploration Shares, to the allottees for every three shares rights for certain areas and an extensive exploration allotted in the placing. programme has been undertaken. Future Development of the Business The directors who served during the year are as Directors It is the intention of the directors to continue to follows: develop the activities of the Company. Risks and Uncertainties The Company’s activities are directed towards the discovery, evaluation and development of diamond and other mineral deposits. Exploration for and development of mineral deposits is speculative. Whilst the rewards can be substantial, there is R.T.W.L. Conroy M.T.A. Jones J.P. Jones L.J. Maguire S.P. FitzPatrick R.I. Chaplin In accordance with the Company’s Articles of no guarantee that exploration on the Company’s Association, Miss Maureen Jones and Mr. James properties will lead to the discovery of commercially Jones will retire by rotation and, being eligible, extractable mineral deposits. The future net asset will offer themselves for re-election at the Annual value is therefore, inter alia, dependent on the General Meeting. 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. Directors’ and Secretary’s Shareholdings and Other Interests 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 2006 and 31 May 2007 were as follows: At 31 May 2006 At 31 May 2007 Ordinary shares Ordinary shares of €0.01 each Warrants of €0.01 each Warrants Results for the Year and State of Affairs at 31 May 2007 R.T.W.L. Conroy 28,531,701* 1,000,000 28,531,701* 1,000,000 M.T.A. Jones 125,836 750,000 125,836 750,000 J.P. Jones 58,335 500,000 58,335 500,000 The profit and loss account for the year ended R. I. Chaplin 20,000 200,000 20,000 200,000 31 May 2007 and the balance sheet at that date S.P. FitzPatrick 666 200,000 666 200,000 are set out on pages 13 and 14 respectively. The L.J. Maguire 51,668 200,000 51,668 200,000 Annual Report and Financial Statements 007 Karelian Diamond Resources Directors’ Report For the year ended 31 May 2007 * Of the 28,531,701 (2006: 28,531,701) Ordinary n prepared the financial statements on the Shares beneficially held by Professor Richard going concern basis unless it is inappropriate Conroy, 27,815,030, (2006: 27,815,030) are held to 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 excercisable 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 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 The measures which the directors have taken to ensure that proper books of account are kept are financial statements comply with the Companies Acts, 1963 to 2006 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 adoption of suitable policies for recording concern basis. 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, 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 19 November 2007 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; 10 Annual Report and Financial Statements 007 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 2006 and the European ended 31 May 2007 which comprise the Profit and Communities (Companies: Group Accounts) Loss Account, the Balance Sheet, the Cash Flow Regulations, 1992. We also report to you whether Statement, the Statement of Accounting Policies in our opinion: proper books of account have and the related notes 1 to 20. These financial been kept by the Company; whether, at the statements have been prepared under the balance sheet date, there exists a financial situation accounting policies set out in the Statement requiring the convening of an extraordinary of Accounting Policies. general meeting of the Company; and whether 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 to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by 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 of account. law, we do not accept or assume responsibility We also report to you if, in our opinion, any to anyone other than the Company and the information specified by law or the rules of Company’s members as a body, for our audit work, the London Stock Exchange for the Alternative for this 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 responsibility, as independent auditors, is 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 consider 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 007 Karelian Diamond Resources 11 Independent Auditors’ Report to the Shareholders of Karelian Diamond Resources PLC preparation of the financial statements and of whether the accounting policies are appropriate to realisation of intangible assets of €3,617,723 included in the balance sheet is dependent on the the circumstances of the Company, and the group, successful further development and ultimate consistently applied and adequately disclosed. production of the mineral reserves 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 books sufficient evidence to give reasonable assurance 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. Opinion In our opinion the financial statements: n give a true and fair view, in accordance with Generally Accepted Accounting Practice in Ireland, of the state of affairs of the Company as at 31 May 2007 and of the loss for the year then ended; and n have been properly prepared in accordance with the Companies Acts, 1963 to 2006, and the European Communities (Companies: Group Accounts) Regulations 1992. In our opinion the information given in the directors’ report is consistent with the financial statements. 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 2007 a financial situation which, under Section 40(1) of the Companies (Amendment) Act, 1983, would require the convening of an extraordinary general meeting of the Company. Deloitte & Touche Chartered Accountants and Registered Auditors Mineral Interests – Emphasis of Matter Limerick Without qualifying our opinion we draw your attention to the disclosures made in Notes 1 and 7 in the financial statements which indicate that the 19 November 2007 1 Annual Report and Financial Statements 007 Karelian Diamond Resources Profit and Loss Account For the year ended 31 May 2007 Operating Expenses Other income Loss for the Financial Year Loss per ordinary share Note 2007 € 2006 € 3 (125,404) (139,599) 70 3,647 4 5 (125,334) (135,952) €0.0028 €0.0032 All recognised gains and losses for both the current year and the previous period are included in the profit and loss account. 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 19 November 2007 13 Balance Sheet As at 31 May 2007 Fixed Assets Mineral interests Tangible assets Financial assets Current Assets Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Net Current Assets/(Liabilities) Total Assets less Current Liabilities Note 2007 € 2006 € 7 8 9 10 11 3,617,723 1,341 4 3,541,406 1,509 4 3,619,068 3,542,919 2,324 115,402 13,661 112,791 117,726 (63,759) 126,452 (442,117) 53,967 (315,665) 3,673,035 3,227,254 Creditors: Amounts falling due after more than one year 12 (1,031,298) (484,783) Net Assets Capital and Reserves Called up share capital Share premium account Profit and loss account Share based payments reserve Shareholders’ Funds – all equity 2,641,737 2,742,471 447,716 2,529,648 (360,227) 24,600 447,716 2,529,648 (234,893) - 2,641,737 2,742,471 14 14 15 16 16 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 19 November 2007 14 Cash Flow Statement For the year ended 31 May 2007 Net Cash (Outflow)/Inflow from Operating Activities Capital Expenditure and Financial Investments Net Cash Outflow before Financing Financing Increase in Cash Note 17A 17B 17B 17C 2007 € (305,458) 2006 € 53,753 (263,046) (657,252) (568,504) (603,499) 571,115 716,287 2,611 112,788 The accompanying notes and statement of accounting policies form an integral part of this statement. R.T.W.L. Conroy Director J.P. Jones Director Approved by the Directors on 19 November 2007 15 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 2006 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 with in 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. Tangible Assets Tangible 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 Assets Financial 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. 16 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. H. Share Based Payments For equity-settled share based payment transactions (i.e. the granting of share options and share warrants), the Company measures the services and the corresponding increase in equity at fair value at the measurement date (which is the grant date) using a recognised valuation methodology for the pricing of financial instruments (Binomial Lattice Model). Given that the share options and warrants granted do not vest until the completion of a specified period of service the fair value is determined on the basis that the services to be rendered by employees as consideration for the granting of share options and warrants will be received over the vesting period, which is assessed as the grant date. The expense in the income statement in relation to the share options and warrants represents the product of the total number of options and warrants expected to vest and the fair value of those options and warrants. The resulting amount is allocated to accounting periods over the vesting period. 17 Notes to the Financial Statements For the year ended 31 May 2007 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 P.l.c., 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 Management services and operating expenses Transfer to Mineral Interests (Note 7) 2007 € 211,583 (86,179) 2006 € 393,435 (253,836) 125,404 139,599 Subsequent to the year-end, the directors agreed that unpaid directors fees due at 31 August 2005 (date of admission to AIM) and remuneration due to the executive directors up to 30 November 2007 be waived. The amount due at 31 May 2007, was €484,777 of which €233,411 had been accrued in the previous year. The waiver is reflected in the management services and operating expenses charge for the year. 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: Auditors’ remuneration Directors’ emoluments - fees - other remuneration Depreciation 2007 € 8,500 2006 € 8,500 30,000 17,528 71,075 112,500 168 168 The directors’ remuneration charged during the year included stock option costs of €17,528. 18 5. Loss per ordinary share The calculation of the loss per ordinary share of €0.0028 (2006 – €0.0032) is based on the loss for the financial year of €125,334 (2006 – Loss €135,952) and the weighted average number of ordinary shares on a basic and fully diluted basis during the year of 44,771,676 (2006 – 42,271,676). Share options and warrants are not included in the calculation of fully diluted shares since the Company incurred a loss in 2007 and 2006 which results in these potential shares being anti-dilutive. 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 2007 (2006: Nil). 7. Mineral Interests Costs held outside cost pool: Cost At 31 May 2006 Expenditure during the period - licences and appraisal - other operating costs (Note 3) - write back of directors remuneration (Note 11) At 31 May 2007 2007 € 2006 € 3,541,406 2,885,831 176,867 86,179 (186,729) 401,739 253,836 - 3,617,723 3,541,406 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 Assets Office Equipment Cost 1 June 2006 Additions 31 May 2007 Accumulated Depreciation 1 June 2006 Charge for year 31 May 2007 Net Book Value 31 May 2007 31 May 2006 19 2007 € 1,677 - 2006 € - 1,677 1,677 1,677 168 168 336 - 168 168 1,341 1,509 1,509 - 9. Financial Assets Investment in subsidiaries 2007 € 4 2006 € 4 Financial 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. 10. Debtors VAT recoverable 11. Creditors: Amounts falling due within one year Trade creditors and accruals 2007 € 2,324 2006 € 13,661 2,324 13,661 2007 € 63,759 2006 € 442,117 63,759 442,117 Subsequent to the year-end the directors considered the financial position of the Company and in particular the level of current liabilities which mainly arose from the accrual of unpaid directors’ fees and executive directors’ remuneration since incorporation. The relevant individual directors agreed to waive their entitlement to all amounts accruing up to 30 November 2007, amounting to €601,933, of which €484,777 was due at 31 May 2007. The net amount that had been allocated to the exploration programme, €186,729 was credited to mineral interests (Note 7) and the balance was credited to the profit and loss account. 12. Creditors: Amounts falling due after more than one year Due to Conroy P.l.c. Shareholders’ loans 2007 € 354,518 676,780 2006 € 296,045 188,738 1,031,298 484,783 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. Subsequent events On 17 July 2007 the Company issued 15,770,000 ordinary shares of €0.01 each at 6.5p sterling. This resulted in funds of £1,025,000 (€1,500,000) being raised. The Board has decided, subject to ratification by shareholders at the Annual General Meeting, to issue a total of 12,852,377 warrants to individual directors for nil consideration exercisable over 10 years at a subscription price of €0.10 (Sterling 7p per share). 20 14. Called up Share Capital and Share Premium Authorised: 500,000,000 ordinary shares of €0.01 each Issued and Fully Paid: 2007 € 5,000,000 2006 € 5,000,000 Share Capital € Share Premium € Number At start of year and end of year 44,771,676 447,716 2,529,648 44,771,676 447,716 2,529,648 The share price at 31 May 2007 was 8.5p sterling. During the year the price ranged from 3p to 8.5p sterling. 15. Profit and Loss Account At 1 June 2006 Loss for the financial year At 31 May 2007 16. Reconciliation of Movement in Shareholders’ Funds At 1 June 2006 Shares issued, net Loss for financial year/period Share based payments reserve At 31 May 2007 17. Notes to the Cash Flow Statement A. Reconciliation of Loss to Net Cash (Outflow)/Inflow from Operating Activities: Operating Loss Depreciation Write back of directors’ remuneration – credited to mineral interests (Decrease)/Increase in Creditors Derease/(Increase) in Debtors 2007 € (234,893) (125,334) 2006 € (98,941) (135,952) (360,227) (234,893) 2007 € 2,742,471 - (125,334) 24,600 2006 € 2,488,751 389,672 (135,952) - 2,641,737 2,742,471 2007 € (125,334) 168 186,729 (378,358) 11,337 2006 € (135,952) 168 - 202,538 (13,001) Net Cash (Outflow)/Inflow from Operating Activities (305,458) 53,753 21 B. Analysis of Cash Flows: Capital expenditure and Financial Investment Investment in mineral interests Purchase of tangible fixed assets Financing Shareholders’ loans Issue of share capital Share issue expenses Share based payments reserve 2007 € 2006 € (263,046) - (655,575) (1,677) (263,046) (657,252) 546,515 - - 24,600 326,615 730,000 (340,328) - 571,115 716,287 C. Analysis and Reconciliation of Net Funds: Cash at bank 18. Commitments and Contingencies 1 June 2006 112,791 Cash Flow 2,611 31 May 2007 115,402 At 31 May 2007 there were no capital commitments or contingent liabilities. 19. Share Based Payments The Company elected to estimate the fair value of employee stock options and warrants awards using the Binomial Lattice Model. The determination of the fair value of share based payment awards on the date of grant using the Binomial Lattice Model is affected by Karelian Diamond Resources Plc stock price as well as assumptions regarding a number of subjective variables. These variables include the expected term of the awards, the expected stock price volatility over the term of the awards, the risk free interest rate associated with the expected term of the awards and the expected dividends. In 2007, the Company’s Binomial Lattice option model included the following weighted average assumptions for the Company’s employee stock option and warrants. Dividend yield Expected volatility Risk free interest rate Expected life (in years) Stock options 0% 70% 4.2% 10 Stock warrants 0% 70% 4.1% 10 20. Approval of Financial Statements These financial statements were approved by the Board on 19 November 2007. 22 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 Westbury Hotel, Grafton Street, Dublin 2 on Monday 17th December 2007 at 3.30 p.m. for the purposes of transacting the following business: 1. To receive and consider the Financial Statements for the year ended 31 May 2007 together with the Directors’ and Independent Auditors’ Reports thereon (Resolution No. 1). 2. To re-elect as Directors the following persons: Miss Maureen Jones (Resolution No.2 (a)) Mr James Jones (Resolution No.2 (b)) 3. To authorize 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 the grant of the following warrants to subscribe for Ordinary Shares of €0.01 each in the capital of the Company at a subscription price of €0.10 (Stg. 7p) per share effected by the directors on 16 November 2007 be and are hereby confirmed and ratified.” Name of Warrant Holder Number of Warrants R T W L Conroy M T A Jones J P Jones S P FitzPatrick L J Maguire R I Chaplin 5,521,049 4,191,275 2,604,389 232,201 232,201 71,262 5. To consider and, if thought fit, pass the following resolution as an Ordinary Resolution (Resolution No.5): “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 16 December, 2012 unless previously renewed, varied or revoked by the Company.” 6. To consider and, if thought fit, pass the following resolution as a Special Resolution (Resolution No.6): “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.” 7. To consider and, if thought fit, pass the following Resolution as a Special Resolution: “That the Articles of Association of the Company be altered in the manner set out below: i By the insertion of “"Electronic Communication", the meaning given to such expression in section 2 of the Electronic Commerce Act, 2000.” after the definition of “Directors” in Article 1(b); ii by the insertion of the words “Electronic Communication,” after the word “lithography” in Article 1(c)(iii). iii By the insertion of a new Article 11 (b) in place of the existing Article 11 (b) as follows:- “11(b) (in addition to the authority conferred by paragraph (a)), the allotment of equity securities (including, without limitation, any shares purchased by the Company pursuant to the provisions of the 1990 Act and held as Treasury Shares) up to a maximum aggregate nominal value of fifty per cent of the issued Ordinary share capital of the Company at the date of the adoption of these Articles or, in respect of any renewal of this authority, at the close of business on the date on which such renewal shall be granted”. 23 iv by the insertion of the following paragraph into Article 15 as Article 15 (e): “The Company may, if and to the extent the law for the time being so permits, send or supply share certificates to members of the Company by means of Electronic Communication.” v by the insertion of the words “Electronic Communication” after the words “by post” in Article 69(b). vi by the insertion of the words “Electronic Communication” after the word “telefax” to replace the words “electronic mail” in Article 93(b). vii by the insertion of the words “Electronic Communication” after the word “telefax” to replace the words “electronic mail” in Article 94(b). viii by the insertion of the words “or by way of Electronic Communication” after the words “in writing” in Article 119. ix By the insertion of the following as an additional paragraph in Article 119: “The Company may, if and to the extent the law for time being so permits, send or convey or supply all types of notices, documents, share certificates or information to the members by means of electronic equipment for the processing (including digital compression), storage and transmission of data, employing wires, radio optical technologies or any other electromagnetic means including without limitation, by sending such notice, documents or information by Electronic Communication or by making such notices, documents or information available on a website.” x by the insertion of the following as new sub paragraph (iv) of Article 120(a) of the Articles of Association: “(iv) by sending the same by Electronic Communication in the manner or form approved by the Directors to the address of the member notified to the Company by the member for such purpose (or if not so notified to the address of the member last known to the Company).” xi by the insertion of the following as new Article 120(d) and the subsequent redesignation of the existing Articles 120(d), (e), (f), (g) and (h) as Articles 120 (e), (f), (g) (h) and (i) respectively: “(d) Where a notice or document is given, served or delivered pursuant to sub-paragraph (a)(iv) of this Article, the giving, serving or delivery thereof shall be deemed to have been affected at the expiration of twelve hours after its despatch. In proving such delivery or service, it shall be sufficient to prove that such Electronic Communication was sent to the address notified by the member to the Company for such purpose.” xii by the inclusion of the words “and (iv)” after the word “(ii)” in the newly numbered Article 120(f). xiii by the deletion of the words “electronic mail” after the word “telefax” in the newly numbered Article 120(g). xiv by the insertion of the words “(in electronic form or otherwise)” before the words “or printed” in Article 123. xv by the insertion of the words “or notification” after the word “document” and the insertion of the words “thereof in any manner or, in the case of Electronic Communication, the deletion” after the word “disposal” in Article 128(c). 8. To transact any other business. By Order of the Board Dated this 19 day of November 2007 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 Registrars, 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. Pursuant to Regulation 14 of the Companies Act 1990 (Uncertificated Securities) Regulations 1996, the Company specifies that only those holders of Ordinary Shares registered in the register of members of the Company as at 6:00 p.m. on 15 December 2007 shall be entitled to attend and vote at the Annual General Meeting in respect of the number of Ordinary Shares registered in their name at that time. Changes to entries on that register after that time and date shall be disregarded in determining the rights of any person to attend and vote at the meeting. 24 10 Upper Pembroke Street Dublin 2 Tel: 353-1-661 8958 Fax: 353-1-662 1213 For further information visit the Company’s website at: www.kareliandiamondresources.com or contact: City of London PR Triton Court, Finsbury Square London EC2A 1BR Tel: 44-20-7628-5518
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