Final Results - Part 1

26th Oct 2007 15:00

Max Petroleum PLC26 October 2007 MAX PETROLEUM PLC (AIM: MXP) 2007 PRELIMINARY RESULTS ANNOUNCEMENT AND RESULTS OF INTERNAL INVESTIGATION Max Petroleum Plc, an oil and gas exploration and development company focused inKazakhstan, today announced its audited results for the year ended 31 March 2007as well as the results of its investigation into actions of certain employeesand members of senior management. A summary of the Group's financial and operational highlights are as follows: Financial • Group loss for the period of $23.0 million (2006: $23.3 million), or $.075 per share (2006: $.136 per share). • Lifted a total of 82,000 barrels of crude oil test production through 31 March 2007, including 60,000 barrels sold principally on the domestic market generating turnover of $1.5 million (2006: Nil) and 22,000 barrels held as crude oil inventory at the end of the period. • Capital expenditures for oil and gas exploration costs totalling $46.4 million (2006: $7.2 million). • Cash balances of $28.8 million as of 31 March 2007 (2006: $18.7 million). • Completed a $75 million convertible bond offering in September 2006. • Entered into a $100 million mezzanine credit facility with Macquarie Bank Limited in June 2007, with an initial borrowing base of $20 million and $5 million drawn down to date. • Raised $29 million in net proceeds through the exercise of 17.2 million share options subsequent to 31 March 2007. Operational • First discovery in Block E - Zhana Makat oil field estimated to contain 9.8 million barrels of proved and probable reserves. • Drilled a total of 15 shallow wells in Block E to date, of which 10 were successfully completed. • Ongoing G&G programme resulting in 960 km2 of 3D seismic data, 2,758 km of 2D data and 1,709 km of reprocessed data acquired to date. • Competent person has identified in excess of 890 million barrels of oil equivalent in mean risked resources (2.6 billion of unrisked mean resources) from a total of 15 prospects from three blocks. • Obtained regulatory approval for three-year trial production project in August 2007 allowing 21 early production and appraisal wells to be drilled in Zhana Makat. Results of Internal Investigation Max Petroleum has completed its internal investigation, which is detailed in theaccompanying Directors' Report included as part of this release and in theGroup's 2007 Annual Report. Max Petroleum does not believe that any of thematters related to the investigation have had, or will have a material negativeimpact on the Group, its assets, licences, or financial position. The investigation was led by Barlow Lyde & Gilbert LLP, a leading internationallaw firm. The investigation primarily focused on certain related partytransactions, including the undisclosed receipt of beneficial interests inoptions over six million shares in Max Petroleum by certain employees andmembers of senior management, including the Group's COO, Mr. Ole Udsen, thatwere issued by the Company as partial consideration for the Astrakhanskiycontract area acquired in January 2006. At the time of the acquisition and upuntil the time of the investigation, the Board believed these options were forthe benefit of the vendors of the partnership that originally held theAstrakhanskiy licence. The investigation also uncovered evidence of breaches of employment contracts bycertain employees of the Company involving two oil and gas companiesoperating in Kazakhstan, in which Mr. Kappelle held equity interests that werenot disclosed to the Board. Further disclosure is available in the Group'sDirectors' Report included as part of this release. As a result of the investigation, the Group dismissed Messrs. Kappelle andUdsen, as well as five other employees, for breach of contract and, in certaincases, breach of fiduciary duty. The Board has hired Scott Fullerton as the Company's new drilling manager anddeputy COO based in Almaty, and has retained the executive search firm Preng &Associates to assist it in identifying a new CEO and other executives. Until theBoard has identified the other members of the new permanent management team, twodirectors, Bob Holland and Lee Kraus, will serve as interim CEO and COO,respectively. Resumption of trading of the Company's shares on AIM---------------------------------------------------- The Company's ordinary shares remain suspended pending the publication andposting to shareholders of the Company's annual report for the year ended 31March 2007. It is expected that the annual report will be published and postedto shareholders on 29 October 2007 and trading in the ordinary shares of the Companywill resume on the same day. Robert Holland, Interim Chief Executive Officer, commented: "Despite the distraction of the recent investigation our operations inKazakhstan have continued to perform well and we have made progress withdrilling and other exploration and development efforts. The prospectivity of ouracreage remains outstanding. Our strategy is to generate production and cashflow from low risk, low cost shallower prospects, while pursuing an aggressivegeological and geophysical campaign to identify high quality leads and prospectsover our extensive acreage. I believe the opportunity we have to grow ourbusiness in Kazakhstan is as great as ever." Jim Jeffs, Executive Chairman, commented: "The recent months have been a tumultuous period for Max Petroleum. We can nowturn our full attention back to running our business and implementing theCompany's strategy. It has been particularly reassuring to learn from theinvestigation that there has been no material negative impact on our licences orcore business. We want to thank our shareholders and bondholders for theirpatience through this difficult process." 26 October 2007 Enquiries: Max Petroleum PLC Michael B. Young T: +44 (0)20 7355 9590 Chief Financial Officer Peter Moss T: +44 (0)7834 572837 Investor Relations Manager Merlin Tom Randell T: +44 (0)20 7653 6620 David Simonson WH Ireland Ltd Daniel Bate T: +44 (0)161 819 8709 David Youngman Donald Dorn-Lopez, Petroleum Engineering and Geology Manager, is the qualifiedperson that has reviewed and approved the technical information contained inthis announcement. Mr. Dorn-Lopez, a senior geophysicist with over 27 years ofexperience, is a member of the Society of Exploration Geophysicists, theEuropean Association of Geoscientists and Engineers, the Society of PetroleumEngineers, and the American Association of Petroleum Geologists. CHAIRMAN'S STATEMENT Dear Shareholder, The financial year to March 2007 and the subsequent months through October havebeen a tumultuous period for Max Petroleum. The period saw substantialoperational developments and progress, but was also impacted significantly bythe global capital markets and unfortunate management turmoil. In August, aworldwide re-pricing of risk precipitated a substantial correction in theCompany's share price. Our stock market performance in the previous six monthsor so had been outstanding. Unfortunately, some part of the appreciation in ourshare price appears to have been fueled by leveraged speculation, which left thestock exposed to significant margin selling pressure when the correction began.As a result, the downward adjustment in Max Petroleum's share price was bothswift and severe. The August 2007 correction was preceded by the Board's receipt of a letter ofcomplaint from a founding, and at the time significant, shareholder regarding myrole in the Company. This led to the formation of a special committee of theBoard comprised of two non-executive directors, Robert Holland and Lee Kraus,who were considered to be independent with respect to the relevant issues andindividuals. The committee's mandate was to consider the matters raised in theshareholder's letter and make any recommendations it saw fit. As detailed in the accompanying Directors' Report, shortly after the specialcommittee began its work, it uncovered evidence that a significant portion ofthe Company's share options issued as partial consideration for the January 2006acquisition of the Astrakhanskiy licence were later transferred to MaxPetroleum's Chief Operating Officer ("COO") and a number of our employees. Thetransfers appear to have been made by the shareholder who authored the August2007 letter to the Board with the knowledge of the Company's Chief ExecutiveOfficer ("CEO"), but without disclosure to any other members of the Board. Thetransferring shareholder was a consultant to Max Petroleum at the time of theAstrakhanskiy acquisition as well and had not disclosed to the Board any form ofbeneficial interest in the share options issued in the Astrakhanskiy transactionprior to July 2007. The special committee also uncovered evidence that theCompany's CEO had "gifted" or promised to "gift" securities in two oil and gascompanies operating in Kazakhstan to Max Petroleum's COO and certain otheremployees. The evidence examined by the committee leads it to believe that efforts weremade to conceal all the above circumstances and activities from the Company'sBoard. Immediately upon becoming aware of these matters, the Board disclosed thecommittee's findings to our independent auditors, PricewaterhouseCoopers("PwC"), and WH Ireland, the Company's nominated advisor. As a result of itsdiscussions with PwC, the Board retained the leading international law firmBarlow Lyde & Gilbert LLP ("BLG"), renowned for its commercial litigationpractice, to conduct an investigation of the Astrakhanskiy acquisition and areview of all material contracts in which the CEO or COO had any significantinvolvement. PwC also required an independent valuation and independentassessment of the continuing legal validity of the Company's Astrakhanskiylicence as a condition to the release of our audited financial results for theyear ended 31 March 2007. Simultaneously with its notification to its auditors, the Board determined tosuspend the CEO and COO pending further investigation and consideration of thesematters. Trading in the Company's shares was suspended pending the results ofthe investigation. The BLG investigation (led by a former head of enforcement atthe Financial Services Authority) licence valuation and legal status review havenow been completed, resulting in the dismissal of the CEO, COOand five employees, as well as the release of the Company's audited results. Prior to its receipt of the shareholder's letter, the Board had considered theCompany's operating performance with a view to possible management enhancementsto position the Company for the next stage of its development. The reason forthe Board's consideration was unrelated to the matters raised in the letter orto any factors the Company believes caused the dramatic drop in its share price,but rather to lessons learned from the Company's operating performance to dateand anticipation of the Company's needs going forward. In that regard, the Board is pleased to announce that it has hired ScottFullerton as the Company's new drilling manager and deputy COO based in Almaty,and has retained the executive search firm Preng & Associates to assist it inidentifying a new CEO and other executives. Scott has 27 years' experience insenior management positions in the international drilling industry, mostrecently as operations manager for Pride International where hisresponsibilities included drilling operations for the BP Thunder Horsesemi-submersible platform, the largest of its kind ever constructed. Previously,he served as senior operations officer for Lukoil for their first well in thenorthern sector of the Caspian (a 5,000 metre discovery), Argentina generalmanager for Welltech, Inc. of Houston, Texas, general manager for NaborsDrilling in Gabon, drilling superintendent for Noble Drilling in Nigeria andGlobal Marine in the North Sea, and as a manager of drilling operations invarious capacities for Santa Fe Drilling in Latin America, the Middle East,Africa, South East Asia, and the North Sea. Until the Board has identified the other members of the new permanent managementteam, the Company will continue to be led by a combination of myself and the twomembers of the special committee, Bob Holland and Lee Kraus, who will serve asinterim CEO and COO, respectively. Bob and Lee bring extensive oil and gas operating experience to this task. Bobwas appointed CEO of Triton Energy, a NYSE listed international explorationcompany, in a crisis situation in 1998 and helped stabilise its operations andlay the base for a successful exploration programme and strategic outcome.Triton was eventually sold to Amerada Hess for $3.4 billion in 2001. Lee hasextensive energy investment banking experience, much of it in the CIS. Hecurrently runs his own boutique investment banking firm, Composite Capital, LLC,and previously has had more than 20 years' experience as an energy investmentbanker with Dresdner Kleinwort, Lazard Freres and Morgan Stanley. Bob and Lee have joined me in playing a hands-on role in the Company'smanagement since early September. The Company's production and cash flow areimproving and a programme to attract farm-out candidates for the Company's deepprospects is progressing. Our short-term objective is to ramp up production andbecome self-sustaining from internally generated operating cash flow. At thesame time, we will be intensifying efforts to establish farm-out relationshipsto exploit the Company's deep portfolio, which the Company continues to believeis among the best in the world. James A. JeffsExecutive Chairman OPERATIONAL OVERVIEW During the year ended 31 March 2007, Max Petroleum began its explorationdrilling programme and made significant progress in evaluating the potential ofthe Company's extensive onshore acreage position in the pre-Caspian basin inwestern Kazakhstan. The Group's first exploration well was drilled in August 2006 on Block E,resulting in a discovery that was immediately put on production and sales. TheGroup continued its extensive geological and geophysical programme across itsthree licence areas, providing further validation of the prospectivity of itsblocks and identifying high quality shallow, intermediate and deep drillingtargets. In response, the Company has taken steps to expand and accelerate itsexploration programme and has engaged in discussions with various potentialjoint venture partners in relation to the Company's deep prospects. Max Petroleum's activities during the financial year to 31 March 2007 consistedof three main elements in its three subsoil licences, including: (i) seismic andgeological studies; (ii) drilling of exploration wells; and (iii) the start oftest production. BLOCKS A & E The main focus of activity during the period was in Block E, although extensiveseismic evaluations covering large areas of both Blocks A & E were initiatedduring the second half of 2007. Seismic and geological studies The Company acquired 380 km2 of 3D seismic, 2,359 km of 2D seismic, andreprocessed 1,709 km of 2D data over Blocks A & E during the year. In addition apackage of data, including a 3D survey over the East Makat structure, well logsand other technical information, was obtained from KazMunaiGas Exploration &Production as part of a cooperation agreement entered into in February 2006.Exploration prospects were identified in several areas including Zhana Makat,Akatkol, Eskene, Kuzbak, Soltustik Teniz and Zharbas. Drilling A total of nine exploration wells were drilled in Block E between August 2006and the end of March 2007. Six wells were drilled in the Zhana Makat area, allof which encountered hydrocarbons in the Jurassic sands down to a vertical depthof 850 metres. Five wells in the Zhana Makat A structure were consideredcommercially successful and were production tested with daily rates up to 450barrels of oil per day ("bopd"). Whilst drilling the seventh well, an unexpectedshallow gas sand was encountered, which resulted in a gas inflow and wellcontrol problem. The situation was brought under control with some loss ofequipment but no injuries to personnel. An investigation was immediatelyconducted in cooperation with the Republic of Kazakhstan ("ROK") authorities,concluding that the presence of the gas sand was unpredictable and a forcemajeure situation had occurred beyond the control of the Company. After drillinga relief well in Zhana Makat, the Company was able to resume normal drillingoperations by the end of April 2007. One exploration well was drilled on the Zharbas A prospect as a Jurassic playbut was abandoned after reaching the objective without encounteringhydrocarbons. Another exploration well was drilled on the Eskene prospect,encountering hydrocarbons in the Jurassic formation. The reservoir quality waspoor, however, and the well did not flow. The Company intends to abandon thewell after recovering the downhole completion equipment. Test production In accordance with regulatory requirements, we placed five wells on the ZhanaMakat A structure on production for 3 month statutory test periods. A dedicatedtest production system was constructed to pre-process production from drilledand future wells in the field before deciding on which additional equipmentwould be required for full field development. One well produced up to 90 bopd ofdry oil initially, but water cut increased and the well was shut-in afterseveral weeks. The other four wells have produced commercially, with initialrates varying between 250 and 450 bopd with moderate water cut. As at 31 March2007, cumulative test oil production from the five wells was 82,000 barrels, ofwhich 60,000 had been sold generating net proceeds of approximately $1.5million. The Company completed its first export sale in March 2007, liftingapproximately 3,100 barrels at a net sales price of $50.45 per barrel. Following the Zhana Makat discovery a preliminary reserve report for theJurassic horizons was prepared and submitted to the State Reserves Committee("SRC"). Concurrently, a trial production project ("TPP") for Zhana Makat wasprepared for submission to the ROK authorities upon approval of the reserves.The Company received approval for the TPP in August 2007, allowing a total of 21early production and appraisal wells to be drilled in the field and placed oncontinuous production to evaluate the reservoir performance for a period of upto 3 years before entering the first phase of commercial development. Neocomianand Triassic horizons can also be explored during this period. As a result of the discovery of hydrocarbons in the Zhana Makat area, geologicalmodeling and simulation studies have also been initiated. EAST ALIBEK Drilling The first well in East Alibek was spudded in December 2006. It was decided todrill the upper part of the well with a medium capacity rig and change out for alarger capacity rig for the deeper section. The well was drilled to a depth of899 metres at which point drilling was suspended in February 2007. The Companyresumed drilling operations on the well in July 2007. ASTRAKHANSKIY Seismic and geological studies A 464 km 2D seismic survey was completed in November 2006. Data from abandonedwells in the block and in the adjacent Imashevskoye field were also studied andseveral sub-salt structures were identified with up to five possible initialwell locations. Further work is continuing, including an additional 3D seismicsurvey that was started during September 2007. The Company plans to apply for the necessary technical and environmentalapprovals for two deep well designs (5,500 metre target depth) during the fourthquarter of 2007. Well site preparation should commence in the second quarter of2008 for the wells, which are expected to commence drilling in the second halfof 2008. CURRENT DEVELOPMENTS As at 26 October 2007, Max Petroleum has drilled a total of 15 shallow wells inBlock E, of which nine wells are currently on production. There is one drillingrig currently in operation on Block E, which is being utilised to drillexploration and development wells in Zhana Makat, as well as test additionalshallow prospects in the block. The Group has contracted for a workover rig,which is expected to be in the field in early November 2007 to assist inoptimising production from existing wells and performing completions on newwells. The Group has drilled the East Alibek well to its total depth of 3,530 metres.The well has encountered oil shows in the KT-2 formation in non-commercialquantities and the Company has plugged and abandoned the well. The Group is currently capable of producing approximately 3,000 bopd from itsnine producing wells in the Zhana Makat field, but due to short-term facilityconstraints current production is limited to approximately 2,000 bopd. The Groupis accelerating the construction of additional production facilities to allowfor expanded export and domestic sales. Max Petroleum has expanded its seismic exploration programme to include threeseismic crews working simultaneously in Block A, Block E and Astrakhanskiy. Asat 26 October 2007, the Group has acquired a total of 960 km2 of 3D seismic dataand 2,758 km of 2D seismic data, of which 60% of the 3D data has been processedand 91% of the 2D data has been processed and interpreted. Furthermore, theGroup's competent person has identified approximately 890 million barrels of oilequivalent ("boe") in mean risked resources (2.6 billion boe of unrisked meanresources) from a total of 15 prospects, as well as 9.8 million barrels ofproved and probable reserves in the Zhana Makat discovery. Max Petroleum is in the early stages of development of its assets. The elevatedlevel of prospectivity is becoming increasingly clear. The next few years willsee a major exploration effort to convert that prospectivity into tangibleshareholder value, as well as concentrated development efforts to generateproved reserves, production and cash flow. CHIEF FINANCIAL OFFICER'S REVIEW The year ended 31 March 2007 was an eventful one for Max Petroleum (the"Group"). Max Petroleum began its exploratory drilling programme, generatedinitial production and revenue from its first discovery in Zhana Makat, andcompleted a $75 million convertible bond offering on favourable terms. While theGroup is at an early stage of its business development, it has a highlyprospective asset base with the potential to generate significant growth andvalue in the future for our shareholders. Results of operations The Group recognised a loss of $23.0 million, or $.075 per ordinary share, forthe year ended 31 March 2007, compared to a loss of $23.3 million, or $.136 perordinary share, during the prior period. The Group generated $1.5 million in turnover from the sale of 60,000 barrels ofcrude oil test production during the period. An additional 22,000 barrels ofcrude oil production was held as crude oil inventory as of the balance sheetdate. Crude oil was principally sold into the domestic market during the period,although the Group sold its first crude oil into the export market in March2007, lifting approximately 3,100 barrels at a net sales price of $50.45 perbarrel. The Group accounts for the sale of test production by crediting turnoverfor the proceeds, net of VAT, with an offsetting charge to cost of salesresulting in no net margin being recognised. The Group incurred total administrative expenses of $24.4 million for the yearended 31 March 2007, compared to administrative expenses of $22.9 million forthe prior period. Administrative expenses for both periods reflect costsincurred to staff up and run the Group's operations in the United Kingdom andKazakhstan. Administrative expenses for the current year include a non-cashshare based payment charge of $9.8 million, compared to a $6.6 million sharebased payment charge from the prior period. Liquidity and capital resources As at 31 March 2007, the Group's cash position was $28.8 million. Group net cashoutflow from operating activities during the period was $19.9 million comparedto $17.2 million for the prior period. In September 2006, the Group raised $75 million through the issuance offive-year convertible bonds, bearing interest at 6.75% per annum, payablesemi-annually, and with an initial conversion price of £1.33 per ordinary share,subject to certain anti-dilution adjustments. The Group allocated the proceeds,net of issuance costs, between long-term debt and equity reserve based upon theCompany's estimate of the value of the bonds without consideration of theirconversion feature. In June 2007, the Group entered into a $100 million revolving mezzanine creditfacility with Macquarie Bank Limited ("Macquarie Facility") to finance thedevelopment of Max Petroleum's oil and gas assets in Kazakhstan. The MacquarieFacility has a four year term and bears interest at a rate ranging from LIBORplus 4% to LIBOR plus 6.5%, depending upon the underlying value of the Group'soil and gas reserves. The Macquarie Facility has an initial borrowing base of$20 million, of which $5 million had been borrowed to date. During the year to 31 March 2007, Max Petroleum issued 3.9 million ordinaryshares upon the exercise of share options, generating $2.5 million in netproceeds. Subsequent to the balance sheet date, Max Petroleum issued 17.2million ordinary shares in respect to the exercise of share options, resultingin cash proceeds of $29.0 million. The Group expects to fund its exploration and development programme, as well asits administrative and operating expenses through calendar years 2007 and 2008using a combination of existing working capital, proceeds from the convertiblebond offering, borrowings from the Macquarie Facility, and expected proceedsfrom the sale of future oil and gas production. The Group will also considerraising capital through additional debt and/or equity issuances and throughfarm-out initiatives as required to more fully explore and develop its assetbase. The financial prospects for Max Petroleum are very promising. The Group isincreasing crude oil production, sales and cash flow from operations during atime when world oil market prices are at all time highs, a trend which isexpected to continue for the foreseeable future. Michael B. YoungChief Financial Officer DIRECTORS' REPORT The directors of Max Petroleum plc ("Max Petroleum" or the "Company") herebypresent their report together with the audited financial statements for the yearended 31 March 2007 for the Company and its subsidiaries (altogether the"Group"). Results of recent investigation into certain related party transactions Following the 6 September 2007 announcement that two of the Group's seniorexecutives were suspended in connection with potentially undisclosed shareoption grants, the Company engaged Barlow Lyde & Gilbert LLP ("BLG"), a leadinginternational law firm renowned for its commercial litigation practice, to leadan independent review of the facts and circumstances giving rise to thesuspensions and to report their findings to the Group's Audit Committee. Theprimary focus of BLG's investigation was into: • the negotiation and acquisition of the Astrakhanskiy licence (the " Astrakhanskiy Acquisition"); • the beneficial ownership of the share options granted by the Company as part of the consideration for the Astrakhanskiy Acquisition; • the nature and extent of the possible involvement of the Group's personnel with two oil and gas exploration and production companies operating in Kazakhstan; and • possible misconduct arising from the involvement of the Company's former Chief Executive Officer, Steve Kappelle, and former Chief Operating Officer, Ole Udsen, in procuring and/or negotiating significant transactions and contracts on the Group's behalf since October 2005. Except as set forth in the related party footnote to the Group's financialstatements, based on BLG's investigation and related advice from Max Petroleum'slocal Kazakhstan counsel, the Board does not believe that any of the foregoingwill have a material negative impact on the Group, and BLG found no evidence tosuggest a lack of integrity within the Group's reporting lines in relation toits accounts (namely, Max Petroleum's Executive Chairman, Chief FinancialOfficer, Country Chief Financial Officer and Company Secretary). The inquiryalso confirmed that, except as set forth below, there are no material issueswith respect to the Group's material contracts and procurement activities. Astrakhanskiy Acquisition (A) Background On 6 December 2005, the Company and FCI AG ("FCI"), entered into a sale andpurchase agreement (the "SPA") under which the Company acquired all of theoutstanding issued shares in the capital of Max Petroleum Astrakhanskiy HoldingLimited (formerly known as Kazgas Limited), a British Virgin Islands company ("MPAHL"). Under two separate purchase and sale agreements, MPAHL had the right toacquire a 100% direct and indirect interest in Alga CaspiyGas LLP ("ACG"), thepartnership awarded the Astrakhanskiy licence. In the overall transaction, FCIacted as the vendor to Max, representing the sellers of ACG: Toubacom Limited, aBritish Virgin Islands corporation ("Toubacom"), and three natural persons.After giving effect to the SPA and the underlying back-to-back sale and purchaseagreements among MPAHL, Toubacom and the natural persons, MPAHL owned a 100%interest in ACG, including 30% held directly and 70% held indirectly throughVasse Investments Limited, a 100% owned subsidiary of MPAHL. In accordance with the SPA, Max Petroleum was obliged to: (i) allot and issue toFCI, or its designates, a total of 3.5 million ordinary shares in the Company;(ii) grant to FCI, or its designates, a total of 50 million options to subscribefor ordinary shares in the capital of Max Petroleum at a subscription price ofone GBP (£1) per share; and (iii) pay cash in the amount of approximatelyUS$43.5 million. As reflected in the applicable option agreements, preparedpursuant to FCI's instruction, the 50 million share options were distributed asfollows: 12.5 million to Manty Investment Services Limited ("Manty"), 18.75million to Fantara Company, Inc. ("Fantara"), and 18.75 million to DiegoProduction Limited ("Diego") (collectively, the "Astrakhanskiy Options"). (B) Related party disclosure A primary focus of the investigation was whether consideration paid inconnection with the Astrakhanskiy Acquisition was received by certain seniormanagement and employees of the Group and, if it was received, properlydisclosed to the Board. It is now evident that certain employees of the Group inKazakhstan beneficially own 6 million Astrakhanskiy Options granted to Manty:(i) 2.1 million share options went, or were promised, to a number of the Group'sexpatriate employees in Kazakhstan, including 300,000 to the Group's formerChief Operating Officer, Mr. Udsen; and (ii) the Group's Kazakhstan partner, Mr.Garifolla Kachshapov received 5 million share options of which he allocated 1.1million to unrelated third party advisors, retaining 3.9 million of theAstrakhanskiy Options. The Group's Kazakhstan partner further allocated 1.95million to Mr. Dauren Myrzagaliyev, the Group's sole Kazakh non-executivedirector at the time of the Astrakhanskiy Acquisition, and retained 1.95 millionfor himself. Messrs. Kachshapov and Myrzagaliyev have cooperated with the investigation ledby BLG, and fully support the Board in the Group's effort to maintain thestandard of corporate governance, integrity, and ethical conduct expected of aUK listed company. The Board understands from Mr. Kappelle and others that Mr. David Rigoll wasresponsible for the grant of the Astrakhanskiy Options to the Group's personnel,with the assistance of Mr. Kappelle and Mr. David Risbey (a director of both FCIand Manty). Mr. Rigoll was one of the Company's founding shareholders, and atthe time of the allocation was working for the Company under a consultingagreement through Condor Investment & Trading Corporation. No beneficialinterest in any of the Astrakhanskiy Options had been disclosed by Mr. Rigoll tothe Board prior to July 2007, when it was disclosed that Mr. Rigoll was thebeneficial owner of 10 million shares resulting from the partial exercise ofDiego's Astrakhanskiy Options. The Group's former Chief Executive Officer, Mr. Kappelle, has denied receiving adirect or indirect beneficial interest in any of the Astrakhanskiy Options. Mr.Kappelle has stated that he declined to take any of the Astrakhanskiy Optionsthat were offered to him by Mr. Rigoll. Regardless of whether Mr. Kappelle holdsshare options beyond those granted under his employment arrangement, the receiptby certain employees of 2.1 million Astrakhanskiy Options was known to Mr.Kappelle, who arranged for and coordinated their allocation and never disclosedsuch facts to the Board. Furthermore, Mr. Udsen never disclosed to the Board hisreceipt or his subordinates' receipt of interests in 2.1 million of theAstrakhanskiy Options. As of 26 October 2007, there are 38 million Astrakhanskiy Options outstanding:18.75 million share options held by Fantara, 8.75 million share options held byDiego, and 10.5 million share options held by Manty. Of the 10.5 million shareoptions held by Manty, 6 million are known to be beneficially owned by relatedparties. The Company has secured a commitment from the holders of 4.2 million ofthe options held by related parties to forgo the exercise of those options. Theemployees holding the balance of 1.8 million share options have been dismissed,The Company reasonably believes that the remaining 32 million share options heldthrough Fantara, Diego and Manty are held by third parties, although the Companysuspects that Mr. Rigoll is possibly the beneficial owner of the remaining 8.75million share options held by Diego. As discussed below, the Company willtightly scrutinise any potential exercise of the Astrakhanskiy Options in thefuture. (C) Remedial action for related party Astrakhanskiy Options The Company's concerns surrounding the Astrakhanskiy Acquisition centre on; (i)Mr. Kappelle's negotiation and closing of the transaction; and (ii) the receiptby related parties of the Astrakhanskiy Options that the Board reasonablybelieved were going to third party vendors, and would not be held by relatedparties. The Company has received a fairness opinion from an internationally recognisedfinancial advisor substantiating the carrying cost of the Astrakhanskiy licencein the Group's financial statements. In addition, the Company's Kazakhstanpartner, Mr. Kachshapov, its former director Mr. Myrzagaliyev, and severallower-level expatriate employees have voluntarily agreed to amend the structurethrough which their beneficial interests in a total of 4.2 million AstrakhanskiyOptions are held, where they will remain until they expire under their terms inJanuary 2009. Mr. Myrzagaliyev has also voluntarily resigned his employment withthe Company. Possible diversion of corporate opportunities and conflicts of interest During the course of the investigation, the Audit Committee also discovered thatMessrs. Kappelle, Udsen and possibly others were engaged in the potentialdiversion of corporate opportunities and conflicts of interest relating to twooil and gas companies operating in Kazakhstan. Mr. Kappelle was and/or is ashareholder in both companies and "gifted" or promised to "gift" securities ineach company to Mr. Udsen and several of the Group's expatriate senior linemanagers in Kazakhstan. Pledge of share options In addition to the matters discussed above, in the course of the investigationit became evident that in May 2006, Mr. Kappelle entered into a £3 milliondemand loan with a third party secured by a legal charge over Mr. Kappelle's MaxPetroleum share option agreement dated 26 October 2005. Mr. Kappelle's shareoption agreement explicitly states that the underlying share option may not beassigned, transferred or charged. The demand loan bears interest at 15% perannum and becomes immediately due and payable in the event Mr. Kappelle: i)ceases his employment with the Company or ii) if the share price of theCompany's ordinary shares trades below £1 for more than five consecutive days.The pledge of Mr. Kappelle's share option agreement was not disclosed inaccordance with AIM Rule 17. Messrs. Kappelle and Udsen, and five other employees in Kazakhstan have beendismissed for breaches of contract, and in certain cases, fiduciary duty. TheCompany has reserved its right to pursue claims in relation to related partytransactions in the Astrakhanskiy Acquisition and possible diversions ofcorporate opportunity. Policy and procedure recommendations As a result of BLG's findings, the Group has put in place a procedural frameworkto scrutinise any potential exercise of the Astrakhanskiy Options in the future.In light of the results of the investigation, BLG has recommended that the AuditCommittee implement the following policies and procedures to strengthen theGroup's internal control structure: 1 Ensure clear guidance in staff handbook / training on the Group's policies regarding share dealings, anti-corruption policy, and other ethical policies (including conflicts of interest), including induction training for new recruits and regular refresher training for existing staff. 1.1 Establish clear reporting lines for compliance issues to specific Max Petroleum personnel for: (a) Kazakh staff; (b) London staff; and (c) Board members. 1.2 Ensure guidance is available and obtained from applicable compliance officer on possible "grey" areas, e.g. seeking approval to deal whilst in possession of potentially price-sensitive information. 2 Establish a confidential whistleblowing hotline for suspected wrongdoing. 3 Establish corporate governance and regulatory training (e.g. AIM Rules) for new directors and other new members of senior management, including refresher training for existing Board/senior management. 4 Establish a procedure for creating audit trail for dealings with other companies in the sector (e.g. potential or actual competitor companies). 4.1 Establish a threshold of permitted non-notifiable dealings with third parties. 4.2 Ensure written notification / obtaining written permission from Board or senior officer for notifiable dealings. The Audit Committee is reviewing the suggested procedural changes and intends toimplement them before 31 December 2007. In addition, the Board remains committed to developing and maintaining highstandards of corporate governance to ensure that Max Petroleum effectivelymanages risk and uses prudent management policies to develop and grow itsbusiness. Key factors in corporate governance include the Company's ability toproduce and deliver accurate and timely information to its shareholders andinternally for management decision making, as well as proper Board oversight ofthe Company with an appropriate balance between executive and non-executivedirectors. While the Company is not required to comply with the Combined Code it seeks todo so where practical. The Corporate Governance Section below gives details onthe corporate governance procedures adopted by the Company. Results and dividend The Group results are set out below and show a loss of $23.0 million forthe year ended 31 March 2007. The directors do not propose to pay a dividend. Principal activities, business review and future developments Max Petroleum was incorporated in the United Kingdom on 8 April 2005 and listedon the AIM on 27 October 2005. Max Petroleum operates through subsidiarycompanies as set out in note 14 to the accounts. The principal activity of theGroup is the exploration, development and production of oil and gas assetswithin the Republic of Kazakhstan. The Group owns rights over three contractareas consisting of four oil and gas blocks in the Pre-Caspian Basin, includingBlocks A & E, East Alibek, and Astrakhanskiy. The Company, through itssubsidiaries, owns an 80% interest in the A & E and East Alibek Blocks, and 100%of the rights to the Astrakhanskiy contract area. The Group's business strategy is to generate short-term production and cash flowfrom the exploration and development of shallow and intermediate prospects,while pursuing a comprehensive geological and geophysical exploration programmeto identify highly prospective, deeper targets. The highlights of the Group's activities for the fiscal year ended 31 March 2007are as follows: • Initiated shallow drilling programme in August 2006, drilling a total of nine shallow exploration wells in Block E, of which four were commercially successful. • Drilled three shallow prospects, generating one discovery (the Zhana Makat field) in Block E. Zhana Makat was estimated to contain 9.8 million barrels of proved and probable reserves as at 31 March 2007. • Drilled the top hole of the East Alibek No 1 well down to a depth of 899 metres. • Lifted a total of 82,000 barrels of crude oil test production during the period, including 60,000 barrels sold principally to the domestic market generating turnover of $1.5 million. An additional 22,000 barrels were held as crude oil inventory at the end of the period. • Continued an extensive geological and geophysical ("G&G") programme to further evaluate the Group's asset base, including acquiring in excess of 380 km2 of 3D seismic data, 2,512 km of 2D data, and reprocessing in excess of 1,700 km of existing 2D data. • The Group's competent person has identified in excess of 890 million barrels of oil equivalent in mean risked resources (2.6 billion boe of unrisked mean resources) from a total of 15 prospects from three blocks. • Completed a $75 million convertible bond offering in September 2006, further described in the Financial Review section of the Directors' Report. In June 2007, the Group entered into a $100 million revolving mezzanine creditfacility with Macquarie Bank Limited, with an initial borrowing base of $20million and repayable over four years. The Macquarie facility is furtherdescribed in the Financial Review Section of the Directors' Report. In August 2007, the Group received regulatory approval for its trial productionproject ("TPP") for the appraisal of its Zhana Makat discovery on Block E. TheTPP is valid for a period up to three years and allows a total of 21 earlyproduction and appraisal wells to be drilled and produced in the field in orderto gather additional data necessary to prepare a full field development plan. As at 26 October 2007, the Group has drilled a total of 15 shallow wells inBlock E, of which nine wells are currently on production. The Group has onedrilling rig currently in operation on Block E, which is being utilised to drillexploration and development wells in Zhana Makat, as well as test additionalshallow prospects in the block. The Group has contracted for a workover rig,which is expected to be out in the field in early November 2007 to assist inoptimizing production from the Group's existing wells and performing completionson new wells. The Group has drilled the East Alibek well to its total depth of 3,530 metres.The well encountered oil shows in the KT-2 formation in non-commercialquantities. The Group has plugged and abandoned the well. The Group is currently capable of producing approximately 3,000 barrels of oilper day ("bopd") from its nine producing wells in the Zhana Makat field. Due toshort-term facility constraints, current production is limited to approximately2,000 bopd. The Group is accelerating the construction of additional productionfacilities to allow for expanded export and domestic sales. The Group has expanded its G&G exploration programme to include three seismiccrews working simultaneously in Block A, Block E and Astrakhanskiy. As at 26October 2007, the Group has acquired a total of 960 km2 of 3D seismic data and2,758 km of 2D seismic data, of which 60% of the 3D has been processed and 91%of the 2D has been processed and interpreted. The Group's principal risk factors and uncertainties are set out in theFinancial Review Key Performance Indicators (KPIs) Given the nature of the business and that the Group is on a start-up phase ofoperations, the directors are of the opinion that analysis using KPIs is notappropriate for an understanding of the development, performance or position ofour business at this time. Directors The directors who served during the period were: --------------------------------------------------------------------------------James A Jeffs, Executive Chairman appointed 1 July 2005Steve J Kappelle, Chief Executive Officer *3 appointed 1 June 2005David R Belding, Non-executive appointed 29 September 2005Thomas R Fuller, Non-executive *1 appointed 29 September 2005, resigned 27 April 2006Dauren Myrzagaliyev, Non-executive *2 appointed 29 September 2005, resigned 10 October 2006Robert B Holland III, Non-executive appointed 27 April 2006Maksut Narikbayev, Non-executive appointed 10 October 2006-------------------------------------------------------------------------------- *1 Appointed to Advisory Committee on resignation from Board of Directors.*2 Appointed to management on resignation from Board of Directors. Resigned voluntarily as of October 2007. See results of investigation above.*3 Released from employment on 17 October 2007. See results of investigation above. Lee O Kraus, Jr. was appointed as a non-executive director on 10 June 2007. As a result of the suspension and subsequent dismissal of Messrs. Kappelle andUdsen, Messrs. Holland and Kraus have assumed certain executive levelresponsibilities on an interim basis. Messrs. Holland and Kraus are expected torevert back to the status of independent non-executive directors when themanagement issues of the Company are addressed in the near-term. The Company's directors appointed to the Board subsequent to the 2006 AnnualGeneral Meeting will stand for election at the next Annual General Meeting, aswell as one third of the then existing directors, who will retire by rotationand offer themselves for re-election in accordance with the Company's Articlesof Association. Directors' Interests The directors serving during the year had the following beneficial interests inthe shares of the Company: --------------------------------------------------------------------------------------------------- Share options Ordinary shares of 0.01p each Exercise price (p) 31 March 2007 31 March 2006 31 March 2007 31 March 2006 ------------ --------- --------- ---------- ---------- ----------James A Jeffs 35-120.5 10,281,271 10,281,271 50,000 -Steve J Kappelle 35-120.5 10,281,271 10,281,271 - -David R Belding 35 2,000,000 2,000,000 4,000,000 4,000,00Thomas R Fuller *1 35 1,500,000 2,000,000 - -Dauren Myrzagaliyev *2 25-100 400,000 650,000 - -Robert B Holland III 100 2,500,000 2,500,000 39,641 -Maksut Narikbayev 100 2,000,000 2,000,000 - ------------- --------- --------- --------- ---------- --------- *1 Reduced to 1,500,000 on resignation and appointment to Advisory Committee 27 April 2006. *2 Retained after resignation and appointment to management on 10 October 2006. Does not include beneficial interest in an additional 1.95 million Astrakhanskiy Options, which Mr. Myrzagaliyev has agreed will be allowed to expire by their terms in January 2009. In May 2006, Mr. Kappelle entered into a £3 million demand loan with a thirdparty secured by a legal charge over Mr. Kappelle's Max Petroleum share optionagreement dated 26 October 2005. Mr. Kappelle's share option agreementexplicitly states that the underlying share option may not be assigned,transferred or charged. The demand loan bears interest at 15% per annum andbecomes immediately due and payable in the event Mr. Kappelle: i) ceases hisemployment with the Company or ii) if the share price of the Company's ordinaryshares trades below £1 for more than five consecutive days. Substantial shareholders At 31 March 2007 the following parties had notifiable interests of 3% or greaterin the nominal value of the Company's issued 0.01p ordinary shares: 2007 Number of Shares Percentage HSBC Global Custody Nominee (UK) 32,962,567 10.75Vidacos Nominees Ltd 30,383,971 9.91Credit Suisse Securities (Europe) Ltd 29,933,820 9.76Chase Nominees Limited 25,422,310 8.29Credit Agricole Cheuvreux 25,382,174 8.27Eagle Point Investments Ltd 14,750,000 4.81Mellon Nominees (UK) Ltd 10,065,135 3.28Incomeborts Ltd *1 10,000,000 3.20Greenwood Nominees Limited 9,500,000 3.10 *1 Incomeborts is part of the total interests of G Kachshapov amounting to 15,000,000 or 4.89% at 31 March 2007 (2006: 15,000,000 4.95%). Options granted As at 31 March 2007, the Company had granted a total of 113,317,313 options(2006: 103,068,013) of which options over 4,460,000 shares (2006: 550,000) hadbeen exercised and 605,000 options (2006: nil) had been forfeited or cancelledunexercised. Interests in contracts There were no contracts or arrangements during the period in which a director ofthe Company was materially interested and which were significant in relation tothe business of the Group or the Company. Creditors payment policy and practice The Group aims to pay all its creditors promptly. For trade creditors, it is theGroup's policy to: (i) agree the terms of the payment at the start of business with that supplier; (ii) ensure that suppliers are aware of the terms of payment; and (iii) pay in accordance with contractual and other obligations. The number of days of average daily purchases included in trade creditors at 31March 2007 was 41 days (2006: 39 days). Political and charitable donations No political donations were made in the year. Charitable donations totaled$53,000 during the year. The Group contributes to social development funding inaccordance with the terms of its subsoil licences in the Republic of Kazakhstan Employment policies The Group is committed to pursuing an equal opportunities employment policy,covering recruitment and selection, training, development, appraisal andpromotion. The Group recognizes the diversity of its employees, its customers,and the community at large and seeks to use employees' talents and abilities tothe fullest. This approach extends to the fair treatment of people withdisabilities, in relation to their recruitment, training, and development. Fullconsideration is given to the retention of staff who become disabled duringemployment. Employee communication The Group is committed to effective communications, which it maintains throughregular information releases and staff briefings. Formal communications withemployees take place through these channels. With respect to the Group'soperations in Kazakhstan and recruitment of Kazakhstani employees,announcements, contracts, interviews, and advertisements are conducted inEnglish, Russian and Kazakh languages, as applicable. Health, safety and environment The Group's policy and practice is to comply with health, safety andenvironmental regulations and requirements of the countries in which itoperates, to protect its employees, contractors, assets and the environment. Share capital The authorised ordinary share capital of the Company was increased by ordinaryresolution at an Extraordinary General Meeting ("EGM") held on 25 August 2006,from £40,000 to £80,000. The Company's authorised ordinary share capital wasincreased to 800 million shares of 0.01p each. Further, a special resolution was passed by the shareholders at the EGMapproving the directors to issue and allot new ordinary shares on a nonpre-emptive basis. The directors have received authority to issue up to495,999,671 new ordinary shares with an aggregate nominal value of £49,600ranking pari passu with the existing issued ordinary shares of the Company. Thisauthority will expire on the conclusion of the 2007 Annual General Meeting. Adoption of IFRS Under a 2002 European Union ("EU") Regulation, publicly-listed companies in theEU will be required to prepare consolidated financial statements in accordancewith International Financial Reporting Standards ("IFRS"). This requirementextends to AIM companies for accounting periods commencing on or after 1 January2007. The Company will adopt IFRS for the fiscal year ended 31 March 2008, asrequired by the listing rules. The adoption of IFRS is not expected to have anymaterial impact on the Company's financial framework, strategy or underlyingcash flows. The Company has not yet made a determination of the impact on theprofit and loss account and balance sheet; however, it is not anticipated thatthere will be a material impact to these statements. Statement of disclosure of information to auditors As at the date of this report the serving directors confirm that: •so far as the directors are aware, there is no relevant audit information of which the Company's auditors are unaware; and •they have taken all steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information Auditors The Company's auditors, PricewaterhouseCoopers LLP, have indicated theirwillingness to continue in office and a resolution concerning theirreappointment will be proposed at the next Annual General Meeting. Statement of Directors' responsibilities Company law requires the directors to prepare financial statements for eachfinancial year (or period) which give a true and fair view of the state ofaffairs of the Group and of the Company and of the profit and loss of the Groupfor that year. In preparing those financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • prepare the financial statements on the going concern basis unless it is inappropriate to presume the Group will continue in business; and • state whether applicable accounting standards have been followed, subject to any material departures and explained in the financial statements. The directors are responsible for keeping proper accounting records whichdisclose with reasonable accuracy at any time the financial position of theGroup and to enable them to ensure the financial statements comply with theCompanies Act of 1985. They are also responsible for safeguarding of the assetsof the Group and hence for taking steps for the prevention and detection offraud and other irregularities. Electronic communications The maintenance and integrity of the Max Petroleum plc website is theresponsibility of the directors; the work carried out by the auditors does notinvolve consideration of these matters and accordingly, the auditors accept noresponsibility for any changes that may have occurred to the financialstatements since they were initially presented on the website. The Company's website is maintained in compliance with AIM Rule 26. Legislation in the United Kingdom governing the preparation and dissemination offinancial statements may differ from legislation in other jurisdictions. By order of the Board James A. JeffsExecutive Chairman26 October 2007 FINANCIAL REVIEW Results for the year The Group recorded a loss of $23.0 million for the year ended 31 March 2007(2006: $23.3 million). No dividends have been paid or proposed for the year(2006: none). Issue of share capital During the year to 31 March 2007, the Company issued 3.9 million shares upon theexercise of share options, generating $2.5 million in net proceeds (2006: $133.6million through various private and institutional placements). Convertible bond On 8 September 2006, the Group raised $75 million through the issuance offive-year convertible bonds, which bear interest at 6.75% per annum, payablesemi-annually, and have an initial conversion price of £1.33 per ordinary share,subject to certain anti-dilution adjustments. The Group allocated the proceeds,net of issuance costs, between long-term debt and equity reserve based upon theCompany's estimate of the value of the bonds without consideration of theirconversion feature. Cash flow Group net cash outflow from operating activities was $19.9 million (2006: $17.2million), consisting principally of general and administrative expenses incurredto staff up and run the Group's operations in the United Kingdom and inKazakhstan. As at 31 March 2007, the Group held cash balances of $28.8 million (2006: $18.7million). Subsequent to the fiscal year end, the Company raised an additional$29 million in proceeds through the exercise of share options totalling17,183,602 ordinary shares. In June 2007, the Group entered into a $100 million revolving mezzanine creditfacility with Macquarie Bank Limited ("Macquarie Facility") to finance thedevelopment of Max Petroleum's oil and gas assets in Kazakhstan. The MacquarieFacility has a four year term and bears interest at a rate ranging from LIBORplus 4% to LIBOR plus 6.5%, depending upon the underlying value of the Group'soil and gas reserves. The Macquarie Facility has an initial borrowing base of$20 million, of which $5 million had been borrowed at 26 October 2007. The Group intends to fund its operating expenditures using a combination of cashflow from operations, cash on hand, and borrowings under its Macquarie Facility.The Group will also consider raising capital through additional debt and/orequity issuances and through farm-out initiatives as required to more fullyexplore and develop its asset base. The Group is currently capable of producingapproximately 3,000 bopd from nine producing wells in the Zhana Makat field. Dueto short-term facility and processing constraints, however, current productionis limited to approximately 2,000 bopd. The Group is working to alleviate theserestrictions by accelerating the construction of additional productionfacilities to allow for expanded export and domestic sales. The Group'sproduction is being sold on both the export and domestic crude oil markets. The Group's financial statements are presented on the basis it is a goingconcern. Capital expenditure Capital expenditures for the year totalled $47.6 million before reclasses ofhistorical costs (2006: $195.3 million including acquisitions), comprised of$46.4 million in oil and gas exploration costs and $1.2 million in G&A assets. Total capital expenditures were comprised of $43.6 million in cash expenditures,$0.6 million in cash interest capitalised, and $3.4 million in non-cashconsideration, including $1.5 million in share based payments, $1.3 million innon-cash interest expense and $670,000 in decommissioning costs capitalised tooil and gas properties during the year. Turnover The Group generated $1.5 million in turnover from the sale of 60,000 barrels ofcrude oil test production during the period. An additional 22,000 barrels ofcrude oil production was held as crude oil inventory as of the balance sheetdate. Crude oil sales were principally made into the domestic market during theperiod, although the Group sold its first crude oil into the export market inMarch 2007, lifting approximately 3,100 barrels at a net sales price of $50.45per barrel. The Group accounts for the sale of test production by creditingturnover for the proceeds, net of VAT, with an offsetting charge to cost ofsales resulting in no net margin being recognised. Operating loss The operating loss for the year was $24.4 million (2006: $24.2 million) whichincludes charges relating to share based payments of $9.8 million (2006: $6.6million). Included in the previous period operating loss is an exceptional item arisingfrom the cash settlement of a legal claim, prior to the acquisition of, andrelating to, the Blocks A & E and East Alibek licences, of $1.4 million. Loss before and after tax and before minority interest The Group recognised a loss before and after tax and before minority interest of$24.8 million (2006: $23.7 million) including interest earned of $1.7 million(2006: $0.5 million) arising from the Group's management of cash reserves. Financial instruments The financial instruments of the Group are comprised of cash resources and tradecreditors arising directly from operational activity, as well as the Group'sconvertible bond described in Note 19 to the Group's financial statements. TheGroup's policy excludes transactions or instruments not directly associated withthe Group's underlying business. Risk factors The Group is subject to various risks relating to political, economic, legal,social, industry, business and financial conditions. The following risk factors,which are not exhaustive, are particularly relevant to the Group's businessactivities: Volatility of prices for oil and gas The supply, demand and prices for oil and gas are volatile and are influenced byfactors beyond the Group's control. These factors include global demand andsupply, exchange rates, interest and inflation rates and political events. Asignificant prolonged decline in oil and gas prices could impact the viabilityof some of the Group's exploration activities. Additionally, production fromgeographically isolated countries may be sold at a discount to current marketprices. Substantially all of the Group's revenues and cash flows will come from the saleof oil and gas. If oil and gas prices should fall below and remain below theGroup's cost of production for any sustained period, the Group may experiencelosses and may be forced to curtail or suspend some or all of the Group'sproduction, at the time such conditions exist. In addition, the Group would alsohave to assess the economic impact of low oil and gas prices on the Group'sability to recover any losses the Group may incur during that period and on theGroup's ability to maintain adequate reserves. While the Group does not currently hedge its crude oil production to reduce itsexposure to oil price volatility, Management expects that it will do so in thefuture as it increases its daily production sold into the export market. TheGroup would enter into price hedging contracts in order to achieve morepredictable cash flows from its future crude oil production and to comply withthe terms of its Macquarie Facility, if applicable. Exploration risk Whilst the Group will seek to apply the latest technology to assess explorationlicences, the exploration for, and development of, hydrocarbons is speculativeand involves a high degree of risk. These risks include the uncertainty that theGroup will discover sufficient oil or gas resources to exploit the discoveredresource. Environmental risk The oil and gas industry is subject to environmental hazards, such as oilspills, gas leaks, ruptures and discharges of petroleum products and hazardoussubstances. These environmental hazards could expose the Group to materialliabilities for property damages, personal injuries, or other environmentalharm, including costs of investigating and remediating contaminated properties.The Group is subject to stringent environmental laws in the Republic ofKazakhstan with regards to its oil and gas operations. Failure to comply withsuch laws and regulations could subject the Group to material administrative,civil, or criminal penalties or other liabilities. Additionally, compliance withthese laws may, from time to time, result in increased costs to the Group'soperations, impact production, or increase the costs of potential acquisitions.The Group did not incur any material costs relating to the compliance withenvironmental laws during the period. Risk of operating oil and gas properties The oil and gas business involves certain operating hazards, such as wellblowouts, cratering, explosions, uncontrollable flows of oil, gas or wellfluids, fires, pollution, and releases of toxic substances. Any of theseoperating hazards could cause serious injuries, fatalities, or property damage,which could expose the Group to liabilities. The settlement of these liabilitiescould materially impact the funds available for the exploration and developmentof the Group's oil and gas properties. The Group maintains insurance againstmany potential losses and liabilities arising from its operations in accordancewith customary industry practices, but the Group's insurance coverage cannotprotect it against all operational risks. Foreign currency risk The Group's operating costs are predominantly in US dollars and new funding hasbeen raised predominantly in US dollars. The Group's UK PLC office costs andshare consideration are in UK sterling. A significant share of costs are alsoincurred and settled in tenge, the local currency of the Republic of Kazakhstan.Any changes in the relative exchange rates among US dollars, tenge and sterlingcould positively or negatively affect the Group's results. The Group has reducedits dollar-sterling exposure by structuring further funds in US dollars. Business in Kazakhstan Amongst the risks that face the Group in conducting business and operations inKazakhstan are: •Economic instability, including in other countries or the global economy that could lead to consequences such as hyperinflation, currency fluctuations and a decline in per capita income in the Kazakh economy. •Insufficient or underdeveloped physical infrastructure. •Governmental and political instability that could disrupt, delay or curtail economic and regulatory reform, increase centralised authority or result in nationalisation. •Social instability from any ethnic, religious, historical or other divisions that could lead to a rise in nationalism, social disturbances or conflict. •Uncertainties in the developing legal and regulatory environment, including, but not limited to, conflicting laws, decrees and regulations applicable to the oil and gas industry and foreign investment. •Unlawful or arbitrary action against the Group and its interests by the regulatory authorities, including the suspension or revocation of their competitors. •Lack of independence and experience of the judiciary, difficulty in enforcing court or arbitration decisions and governmental discretion in enforcing claims. •Unpredictable federal and local tax systems. •Laws restricting foreign investment in the oil and gas industry. Legal systems Kazakhstan, and other countries in which the issuer may transact business in thefuture, have or may have legal systems that are less well developed than that inthe United Kingdom. This could result in risks such as: •Potential difficulties in obtaining effective legal redress in the court of such jurisdictions, whether in respect of a breach of contract, law or regulation, including an ownership dispute. •A higher degree of discretion on the part of governmental authorities. •The lack of judicial or administrative guidance on interpreting applicable rules and regulations. •Inconsistencies or conflicts between and within various laws, regulations, decrees, orders and resolutions. •Relative inexperience of the judiciary and courts in such matters. In certain jurisdictions, the commitment of local business people, governmentofficials and agencies and the judicial system to abide by legal requirementsand negotiated agreements may be more uncertain, creating particular concernswith respect to licences and agreements for business. These may be susceptibleto revision or cancellation and legal redress may be uncertain or delayed. Therecan be no assurance that joint ventures, licences, licence applications or otherlegal arrangements will not be adversely affected by the jurisdictions in whichthe Group operates. Liquidity risk The Group will require significant additional funding to explore and develop itscurrent oil and gas licences in Kazakhstan, towards which the Group has raised$75 million of additional convertible debt capital during the year andsubsequent to the balance sheet date entered into the Macquarie Facility, a $100million revolving mezzanine credit facility with an initial borrowing base of$20 million. The Group has also raised $29 million through the exercise of theCompany's share options since 31 March 2007. The Group expects to fund its exploration and development programme, as well asits administrative and operating expenses, through calendar years 2007 and 2008using a combination of existing working capital, proceeds from the convertiblebond offering, borrowings from the Macquarie Facility, expected proceeds fromthe sale of future oil and gas production, and the anticipated exercise ofoutstanding share options. If the Group is unsuccessful in generating enoughliquidity to fund its expenditures programmes, the Group's ability to executeits long-term growth strategy could be significantly affected. Post balance sheet events The Company has issued 17,183,602 ordinary shares in respect to the exercise ofshare options after 31 March 2007, resulting in cash proceeds of $29.0 million. In June 2007, the Group entered into a $100 million revolving mezzanine creditfacility with Macquarie Bank Limited, with an initial borrowing base of $20million of which $5 million has been drawn to date. In August 2007, the Group received regulatory approval for its trial productionproject for the appraisal of its Zhana Makat discovery on Block E in westernKazakhstan. All post balance sheet events are more fully described in Note 30 to the Group'sfinancial statements. DIRECTORS' REMUNERATION REPORT In common with the Board's commitment to compliance with the Combined Code, theCompany has adopted the Principles of Good Governance relating to directors'remuneration. The Company discloses certain information relating to directors'remuneration in this report, which is not audited. Compensation Committee The Company established a Compensation Committee in June 2006, as set out inCorporate Governance on pages 29 and 30. The Compensation Committee advises theBoard on Group compensation policy and may obtain advice from independentremuneration consultants appointed by the Company. The Compensation Committeemeets as required and executive directors do not vote on their own remunerationor incentives. Remuneration policy The Company's policy is to maintain levels of compensation for the Group thatare comparable and competitive with peer group companies, so as to attract andretain individuals of the highest calibre, by rewarding them as appropriate fortheir contribution to the Group's performance. Terms of appointment The terms of each director's appointment are set out in their service agreementwhich are effective for an indefinite period but may be terminated in accordancewith specified notice periods. Each service agreement sets out details of basic salary, fees, benefits-in-kindand share option grants. The directors do not participate in any Group pension scheme and theirremuneration is not pensionable. Details of directors' compensation are set out in Table 1. The directors are not eligible for payment of cash bonuses. Basic salaries The basic salary of each executive director is established by reference to theirresponsibilities and individual performance. The Company has received advicefrom Vivient Consulting in setting 2006/07 salary levels. Fees The fees paid to non-executive directors are determined by the Board andreviewed periodically to reflect current rates and practice commensurate withthe size of the Company and their roles. Share Options The Company operates a policy of granting share options to all employees anddirectors as a long-term incentive and retention plan. The share options areexercisable over varying periods and at varying strike prices. The right toexercise is not contingent upon any performance criteria but is subject to termsrelating to the respective individual's continued employment with the Group. The Company's share options granted in the year to 31 March 2007 wereindependently valued by a third-party consultant. The proportion of the profitand loss account charge under FRS20, which relates to directors' share options,amounts to $4.9 million (2006: $3.0 million). Details of directors' share options are set out in Table 3. Annual Remuneration of Directors Remuneration paid to the directors in the year to 31 March 2007 was as follows: Table 1---------------------- 2007 2006 ------- ------- ------- -------- ------- Salary Fees Benefit Total Total US$ US$ US$ US$ US$------------ -------------- ------- ------- ------- -------- -------J A Jeffs 406,650 - 15,292 421,942 201,595S J Kappelle *5 486,839 - 81,122 567,961 227,044D R Belding - 23,488 - 23,488 10,524R B Holland III - 44,696 - 44,696 -M S Narikbayev - 22,753 - 22,753 -D Myrzagaliyev *1 (Resigned 10 October 2006) - 12,702 - 12,702 10,524T R Fuller *2 (Resigned 27 April 2006) - - - - 10,524C Kyriakou *3 (Resigned 18 July 2005) - - - - 43,495D Rigoll *4 (Resigned 30 June 2005) - - - - 39,146------------ -------------- ------- ------- ------- -------- ------- 893,489 103,639 96,414 1,093,542 542,852 ------------ -------------- ------- ------- ------- -------- ------- *1 Entered into a managerial service agreement on 10 October 2006 and voluntarily resigned from the Company in October 2007.*2 Entered into an Advisory Board service agreement from 27 April 2006 at an annual fee of £25,000*3 Fees were paid to Capma Pty, a company whose registered address is in Australia*4 Fees were paid to Myrzaly Ltd, a company whose registered address is in Switzerland*5 Released from employment on 17 October 2007. Directors' interests in the share capital of the Company The interests of the directors who held office at 31 March 2007 were: Table 2-------------------------- ------------ ------------ 2007 2006 Ordinary Ordinary 0.01p shares 0.01p shares-------------------------- ------------ ------------J A Jeffs 50,000 -D R Belding 4,000,000 4,000,000R B Holland III 39,641 --------------------------- ------------ ------------ There has been no change in the interest of any director between 1 April 2007and the date of this report. Directors' interests in share option agreements The interests of the directors in office during the year to 31 March 2007 wereas follows: Table 3----------------------------------------------------------------------------------------------------------------- Grant Number at Number Number Number Number Number at Option date start of granted forfeited exercised not 31 March price period in period in period in period disclosed 2007 (pence) following resignation J A Jeffs 26.10.05 8,831,1711 - - - - 8,831,171 35.0p J A Jeffs 14.12.05 51,0002 - - - - 51,000 35.0pJ A Jeffs 06.01.06 1,280,1002 - - - - 1,280,100 120.5p J A Jeffs 29.03.06 119,0002 - - - - 119,000 118.5p S J Kappelle 26.10.05 8,831,1711 - - - - 8,831,171 35.0p S J Kappelle 14.12.05 51,0002 - - - - 51,000 35.0p S J Kappelle 06.01.06 1,280,1002 - - - - 1,280,100 120.5p S J Kappelle 29.03.06 119,0002 - - - - 119,000 118.5p D R Belding 26.10.05 2,000,000 - - - - 2,000,000 35.0p T R Fuller 26.10.05 2,000,0003 - 500,000 - 1,500,000 - 35.0p D Myrzagaliyev 26.10.05 500,000 150,000 - 250,000 400,000 - 25.0p R B Holland III 24.03.06 2,500,000 - - - - 2,500,000 100.0p M Narikbayev 10.10.06 - 2,000,000 - - - 2,000,000 100.0p ----------------------------------------------------------------------------------------------------------------- 27,562,542 2,150,000 500,000 250,000 1,900,000 27,062,542 ----------------------------------------------------------------------------------------------------------------- Date Expiry Realised Un-realised exercisable date gains gains *6 US$ US$-----------------------------------------------------------------------------------------------------------------J A Jeffs 26.10.06*4 26.10.15 - 15,901,351J A Jeffs 26.10.06*4 26.10.15 - 91,830J A Jeffs 26.10.06*4 26.10.15 - 157,012J A Jeffs 26.10.06*4 26.10.15 - 19,267S J Kappelle 26.10.06*4 26.10.15 - 15,901,351S J Kappelle 26.10.06*4 26.10.15 - 91,830S J Kappelle 26.10.06*4 26.10.15 - 157,012S J Kappelle 26.10.06*4 26.10.15 - 19,267D R Belding 26.10.06*5 26.10.15 - 3,601,188T R Fuller 26.10.06*5 26.10.12 - -D Myrzagaliyev 26.10.06*5 26.10.12 309,488 -R B Holland III 24.03.07 24.03.13 - 1,312,422M Narikbayev 10.10.07 10.10.13 - 1,049,938-------- ------ -------- ------- --------- 309,488 38,302,468-------- ------ -------- ------- ------- *1 Non-dilutable for 12 months; shares under option are increased by 3.4% of any issue of new ordinary shares within 12 months of the date of admission to AIM (27 October 2005) (excluding on exercise of options and on any capital reorganisation).*2 Arising under non-dilution on issue of new ordinary shares.*3 Reduced 27 April 2006 to 1,500,000 on resignation as non-executive director and appointment to Advisory Committee.*4 Exercisable 47.5% on first anniversary of date of grant and 12.5% on second, third and fourth anniversaries of date of grant.*5 Exercisable 40.0% on first anniversary of date of grant and 20.0% on second, third and fourth anniversaries of date of grant.*6 Fair value of outstanding options at difference between option price and closing market price at 31 March 2007. Upon his release from employment with the Company on 17 October 2007, Mr.Kappelle's unvested options totalling 5,397,669 shares expired without beingexercised. Furthermore, in May 2006, Mr. Kappelle entered into a £3 milliondemand loan with a third party secured by a legal charge over Mr. Kappelle's MaxPetroleum share option agreement dated 26 October 2005. Mr. Kappelle's shareoption agreements explicitly states that the underlying share option may not beassigned, transferred or charged. The demand loan bears interest at 15% perannum and becomes immediately due and payable in the event Mr. Kappelle: (i)ceases his employment with the Company; or (ii) if the share price of Company'sordinary shares trades below £1 for more than five consecutive days. In October 2007, Mr. Myrzagaliyev voluntarily resigned as an employee of theCompany, forfeiting 100,000 unvested options in the Company's common stock. Mr.Myrzagaliyev's disclosed interest above does not include beneficial interest inan additional 1.95 million Astrakhanskiy Options, which Mr. Myrzagaliyev hasagreed will be allowed to expire by their terms in January 2009. Mid-market prices of the Company's ordinary 0.01p shares during the year and at31 March 2007 were as follows:-------------------------------------------------------------------------------- 2007 2006 US$ Pence US$ Pence-------------------------------------------------------------------------------- High 2.49 127.9 2.66 153.3Low 1.61 82.0 0.56 32.4Closing 2.48 126.2 2.04 117.5-------------------------------------------------------------------------------- On behalf of the Board of Directors of Max Petroleum plc. David R BeldingChairman of the Compensation Committee26 October 2007 CORPORATE GOVERNANCE Although Max Petroleum PLC, as an AIM listed company, is not required to complywith the Combined Code on Corporate Governance, the Board of Directors arecommitted where practicable to developing and applying high standards ofcorporate governance appropriate to the Company's size. This statement sets out measures taken by the Board to apply the principles ofthe Code to the year ended 31 March 2007 and to the date of the Directors'Report. Board of Directors The Board is currently comprised of three executive directors and twonon-executive directors: -------------------------------------------------------------------------------- James A Jeffs Executive ChairmanRobert B Holland III Executive Director (interim CEO)Lee O Kraus (appointed 10 June 2007) Executive Director (interim COO)David R Belding Non-executiveMaksut Narikbayev Non-executive-------------------------------------------------------------------------------- Mr. Steve Kappelle, the former Chief Executive Officer of the Group, wasreleased from employment effective 17 October 2007, along with the Group's ChiefOperating Officer, Ole Udsen. As a result of the suspension and subsequentdismissal of Messrs. Kappelle and Udsen, two of the Company's non-executivedirectors, Messrs. Holland and Kraus, have assumed certain executive levelresponsibilities on an interim basis. Messrs. Holland and Kraus are expected torevert back to the status of independent non-executive directors when themanagement issues of the Group are addressed in the near term. All non-executive directors are considered to be independent of management andfree from any contractual relationships with the Group, thereby allowing them toexercise full independent judgment on any issue. There is a clear division fromthe responsibilities of the executive directors. All directors are permitted access to independent professional advice in thecourse of execution of their duties, at the Company's expense. The Board has established the following committees: Audit Committee The Audit Committee was appointed in June 2006 and is comprised of fourdirectors: Robert Holland, Lee Kraus (appointed June 2007), David Belding andthe Executive Chairman, James Jeffs. Mr. Holland is the Audit CommitteeChairman. This Audit Committee is responsible for selecting the Group's independentauditors, pre-approving all audit and non-audit related services, reviewing withmanagement and the independent auditors the Group's financial statements,significant accounting and financial policies and practices, audit scope andadequacy of internal audit and control systems. The Audit Committee appointed aspecial committee, consisting of Messrs. Holland and Kraus (two non-executivedirectors at the time), which supervised the Company's internal investigationinto certain related party transactions disclosed as part of this Directors'Report. Compensation Committee The Compensation Committee was also appointed in June 2006 and is comprised ofMessrs. Belding, Holland and Jeffs. The Compensation Committee is responsiblefor determining the terms and conditions of service of the executive directorsand of senior non-Board officers of the Group. The directors' remuneration report is set out on pages 26 to 28 Executive Committee Prior to the suspensions of Messrs. Kappelle and Udsen on 5 September 2007, theExecutive Committee was comprised of Messrs. Jeffs, Kappelle, Udsen, and Young.The Executive Committee is currently comprised of three directors: Messrs.Jeffs, Holland, and Kraus, and the Company's Chief Financial Officer, MichaelYoung. Messrs. Holland and Kraus are serving on the Executive Committee on aninterim basis pending resolution of the management issues of the Company in thenear term. This Executive Committee is responsible for the strategic and operationalmanagement of the Group. Advisory Committee The Advisory Committee is referred to in the Chairman's Statement on pages 4 to5. The committee is currently comprised of two independent internationaladvisors with extensive experience in, and knowledge of, the energy sector. The role of this committee is to provide financial, operational, geopoliticaland technical advice to the Board and to senior non-Board officers of the Group. Nominations Committee The directors have considered that the Company is not of a size for anominations committee to be appropriate at the current time. The Board willcontinue to monitor the situation. In the absence of a committee all futureappointments will be decided by the full Board. Board meetings The Board met eight times during the financial year (2006: seven times) with thefollowing attendance: 2007 2006J A Jeffs 8 7S J Kappelle 7 7D R Belding 8 6T R Fuller (resigned 27 April 2007) n/a 5D Myrzagaliyev (resigned 10 October 2006) 5 6R B Holland III (appointed 27 April 2006) 8 -M S Narikbayev (appointed 10 October 2006) 0 - Investor relations The Board is committed to provide regular communication with shareholders. Aninvestor relations manager was appointed in May 2006. Internal controls The Board acknowledges responsibility for maintaining appropriate internalcontrols systems and procedures to safeguard the shareholders' investments andthe assets, employees and business of the Group. The directors have recognised the changing requirements of the Group as it hasdeveloped from private company start-up, through re-registration as a publiccompany and listing on AIM, to a growing multi-asset and international operatingGroup. The Board has established and operates a policy of continuous review anddevelopment of appropriate financial controls, which cover expenditure approval,authorisation and treasury management, together with operating proceduresconsistent with the accounting policies of the Group. The Board has approved the Group budget and business plan. Performance againstbudget is monitored and reported to the Board. The directors confirm that the effectiveness of the internal control systemduring the accounting period has been reviewed by the Board. In light of theresults of the investigation discussed separately in the Directors' Report, theBoard will take additional steps to strengthen the Group's overall internalcontrol structure, including, but not limited to, expanding the training ofGroup personnel regarding the Group's applicable policies and proceduresrelating to share dealings, potential conflicts of interest, and businessethics. The Board does not consider it appropriate to the current size of the Group toestablish an internal audit function. INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF MAX PETROLEUM PLC We have audited the group and parent company financial statements(the''financial statements'')of Max Petroleum plc for the year ended 31 March2007 which comprise Consolidated Profit and Loss Account, the Consolidated and CompanyBalance Sheets, the Consolidated Cash Flow Statement and the related notes.These financial statements have been prepared under the accounting policies setout therein. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the Annual Report and thefinancial 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 is to audit the financial statements in accordance withrelevant legal and regulatory requirements and International Standards onAuditing (UK and Ireland). This report, including the opinion, has been preparedfor and only for the company's members as a body in accordance with Section 235of the Companies Act 1985 and for no other purpose. We do not, in giving thisopinion, accept or assume responsibility for any other purpose or to any otherperson to whom this report is shown or into whose hands it may come save whereexpressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a trueand fair view and are properly prepared in accordance with the Companies Act1985. We also report to you whether in our opinion the information given in theDirectors' Report is consistent with the financial statements. In addition we report to you if, in our opinion, the company has not kept properaccounting records, if we have not received all the information and explanationswe require for our audit, or if information specified by law regardingdirectors' remuneration and other transactions is not disclosed. We read other information contained in the Annual Report, and consider whetherit is consistent with the audited financial statements. This other informationcomprises only the Chairman's Letter, the Operations Review, the FinancialReview, the Directors' Remuneration Report and the Corporate Governance report.We consider the implications for our report if we become aware of any apparentmisstatements or material inconsistencies with the financial statements. Ourresponsibilities 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 financial statements. It also includes an assessment of thesignificant estimates and judgments made by the directors in the preparation ofthe financial statements, and of whether the accounting policies are appropriateto the group's and company's circumstances, consistently applied and adequatelydisclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Opinion In our opinion: • the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group's and the parent company's affairs as at 31 March 2007 and of the group's loss and cash flows for the year then ended; • the 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. PricewaterhouseCoopers LLPChartered Accountants and Registered AuditorsLondon26 October 2007 CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 March 2007 (in thousands of US$) Note Year ended Period from 31 March 2007 8 April 2005 to 31 March 2006-------------------------------------------------------------------------------- Turnover 3 1,502 -Cost of sales (1,502) ---------------------------------------------------------------------------------Gross profit - -Administrative expenses (24,423) (22,859)Exceptional items 2 - (1,389)-------------------------------------------------------------------------------- (24,423) (24,248)Other operating income - 57-------------------------------------------------------------------------------- Operating loss 4 (24,423) (24,191)Interest receivable andother income 5 1,729 553Interest payable and othercharges 5 (2,058) (28)-------------------------------------------------------------------------------- Loss on ordinary activitiesbefore taxation (24,752) (23,666)Tax on ordinary activities 9 - --------------------------------------------------------------------------------- Loss on ordinary activitiesafter taxation (24,752) (23,666)Minority interests 1,758 361-------------------------------------------------------------------------------- Loss for the period (22,994) (23,305)-------------------------------------------------------------------------------- Loss per share (US cents) 11 (7.5) (13.6)Diluted loss per share (UScents) 11 (7.5) (13.6)-------------------------------------------------------------------------------- The Group has no recognised gains or losses other than the results for theperiod as set out above. All financial results presented are from continuing operations. The Company has taken advantage of Section 230 of the Companies Act 1985 not topublish its own profit and loss account. No interim or final dividend has been paid or proposed during the period. CONSOLIDATED BALANCE SHEET As at 31 March 2007 (in thousands of US$) -------------------------------------------------------------------------------- Note As at As at 31 March 31 March 2007 2006-------------------------------------------------------------------------------- Fixed assetsIntangible assets 12 239,282 194,850Tangible assets 13 1,478 458-------------------------------------------------------------------------------- 240,760 195,308 Current assetsStocks 15 7,512 3Debtors 16 2,293 1,194Prepayments ($1.3 million falling due after oneyear 17 11,285 1,770(2006: $nil))Cash at bank and in hand 28,772 18,731-------------------------------------------------------------------------------- 49,862 21,698Creditors: Amounts falling due within one year 18 (13,204) (2,362)-------------------------------------------------------------------------------- Net current assets 36,658 19,336-------------------------------------------------------------------------------- Total assets less current liabilities 277,418 214,644Creditors: Amounts falling due after one yearConvertible bond 19 (62,253) -Provision for liabilities and other charges 20 (1,619) (1,006)-------------------------------------------------------------------------------- Net assets 213,546 213,638-------------------------------------------------------------------------------- Capital and reservesShare capital 21 7,919 7,918Share premium 22 196,636 194,114Other reserves 23 57,409 35,272Profit and loss reserve 24 (46,299) (23,305)-------------------------------------------------------------------------------- Total shareholders funds 24 215,665 213,999Minority interests (2,119) (361)-------------------------------------------------------------------------------- 213,546 213,638-------------------------------------------------------------------------------- COMPANY BALANCE SHEET As at 31 March 2007 (in thousands of US$) -------------------------------------------------------------------------------- Note As at As at 31 March 31 March 2007 2006-------------------------------------------------------------------------------- Fixed assetsTangible assets 13 138 96Investments 14 163,162 163,162-------------------------------------------------------------------------------- 163,300 163,258Current assetsDebtors 16 94,176 38,638Prepayments 17 890 491Cash at bank and in hand 26,473 14,499-------------------------------------------------------------------------------- 121,539 53,628Creditors: Amounts falling due within one year 18 (1,432) (1,060)-------------------------------------------------------------------------------- Net current assets 120,107 52,568Total assets less current liabilities 283,407 215,826Creditors: Amounts falling due after more than oneyearConvertible bond 19 (62,253) --------------------------------------------------------------------------------- Net assets 221,154 215,826-------------------------------------------------------------------------------- Capital and reservesShare capital 21 7,919 7,918Share premium 22 196,636 194,114Other reserves 23 57,409 35,272Profit and loss reserve 24 (40,810) (21,478)-------------------------------------------------------------------------------- Shareholders funds 24 221,154 215,826-------------------------------------------------------------------------------- The financial statements were approved by the Board of Directors on 26 October2007. James A Jeffs Michael B YoungExecutive Chairman Chief Financial officer CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 March 2007 (in thousands of US$) -------------------------------------------------------------------------------- Year ended Period from 31 March 2007 8 April 2005 to 31 March 2006-------------------------------------------------------------------------------- Reconciliation of operating loss to net cash flowfrom operating activities:Operating loss (24,423) (24,191)Increase in stocks (7,509) (3)Increase in debtors (1,099) (1,194)Increase in prepayments (7,692) (1,770)Increase in creditors 10,842 2,362Share based payments charge 9,846 6,642Depreciation 184 17Exceptional item (note 2) - 889-------------------------------------------------------------------------------- Net cash flow from operatingactivities (19,851) (17,248)-------------------------------------------------------------------------------- Returns on investments and servicing of financeInterest received 1,729 553Interest paid (2,532) (28)-------------------------------------------------------------------------------- Net returns on investments andservicing of finance (803) 525-------------------------------------------------------------------------------- Capital expenditure and financial investmentPurchase of tangible fixedassets (1,187) (477)Expenditure on intangibleassets (42,418) (97,999)-------------------------------------------------------------------------------- Net cash flow from capitalexpenditure and financialinvestment (43,605) (98,476)-------------------------------------------------------------------------------- FinancingProceeds from share issues 2,523 133,930Proceeds from convertible bondissue 71,777 --------------------------------------------------------------------------------- Net cash flow from financing 74,300 133,930-------------------------------------------------------------------------------- Increase in cash 10,041 18,731-------------------------------------------------------------------------------- Reconciliation of net cash flow to changes in netfunds/(debt)Opening net funds 18,731 -Increase in cash 10,041 18,731-------------------------------------------------------------------------------- Cash at bank 28,772 18,731-------------------------------------------------------------------------------- Movements in borrowings (60,970) -Other non-cash changes ( 1,283) --------------------------------------------------------------------------------- (62,253) --------------------------------------------------------------------------------- Closing net funds/(debt) (33,481) 18,731-------------------------------------------------------------------------------- See note 6 cash flow relating to major non-cash transactions. 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