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ASSET MANAGEMENT During 2007, turnover within Crosby’s asset management businesses increased from US$7.3 million to US$39.3 million and AUM rose from US$1.2 billion to US$2.5 billion. Whilst the financial results were driven by an exceptional performance at Crosby Wealth Management (“CWM”), the growth in AUM was more broadly based, with the increase in CWM’s AUM being complemented by the launch of a single-manager hedge fund (the Crosby Active Opportunities Fund - “CAOF”) and the acquisition of the investment management contracts of Forsyth Partners fund-of-funds business. Crosby Wealth Management 2007 was an exceptional year for CWM. Although assets under management increased steadily, both turnover and profits significantly exceeded budget due to increased client trading within portfolios. To a large extent this increased trading activity reflected the buoyant market conditions that prevailed within the Asian stock markets during much of 2007. It is, therefore, anticipated that there will be a slowdown in activity in 2008, following increased market uncertainty. In December, Crosby increased its shareholding in CWM from 44.44% to 56.14%. CWM’s business strategy is to build a comparative advantage relative to the wealth management divisions of the major global investment banks and, in doing so, ensure that CWM remains well positioned to benefit from the long-term secular increase in wealth throughout the Asia-Pacific region. CWM’s comparative advantage is based on its ability to deliver value to clients through offering independent advice tailored to the individual needs of the client, whilst benefiting from a competitive cost structure and the operating infrastructure of a major global bank with an A+ credit rating. Crosby Forsyth In September 2007, Crosby successfully concluded negotiations with the Administrators of Forsyth Partners Limited and Forsyth Partners (Europe) Limited (together "Forsyth"). As a result, Crosby was appointed as the investment manager of the Forsyth range of fund-of-funds. Concurrently, Crosby hired Forsyth's UK-based investment management, research, distribution and administration teams, and, separately, certain of the non-UK distribution staff. As at 31 December 2007, the Forsyth funds had approximately US$900 million of assets under management in a broad range of fund-of-fund products covering equities, bonds and alternative strategies, US$300 million in fund-of-funds advisory mandates and a market-leading fund ratings and research business. Between the conclusion of the deal and the end of the year, AUM declined by approximately 10% through a combination of falls in fund net asset values, broadly in line with the underlying markets, and client redemptions. However, the decline in AUM due to client redemptions was significantly smaller than was anticipated in September. Since the completion of the transaction, the business has been undergoing a significant restructuring to re-engineer the cost base, streamline the product range and refocus the sales effort. In response to these changes, in March 2008, the business was rebranded Crosby Forsyth. Crosby Active Opportunities Fund The Crosby Active Opportunities Fund (“CAOF”) was established in December 2006 to capitalise on the Group’s expertise and network, and complement the activities of the Merchant Banking team. The fund targets absolute unleveraged net returns in excess of 25% per annum in a broad range of Asian and Australasian activist and event-driven opportunities. The Fund’s investment philosophy expands upon the Group’s successful track record of identifying undervalued companies and assets that require pro-active restructuring to unlock intrinsic value. Since CAOF’s launch in December 2006, the Fund has made 14 investments, including Leed Petroleum, Orchard Petroleum and Pocketmail. Four of these investments have been fully and profitably exited (including the investment in Leed). The net asset value of the fund as at the end of 2007 was US$1,198.73 per share, up 19.87% since inception and 19.54% in 2007. SW1 Capital On 27 February 2008 (after the period under review), Crosby announced that it had taken a 25% founding partnership interest in SW1 Capital LP, (“SW1”). SW1 is a newly formed asset management partnership that brings together a diverse team of experienced investment banking, asset management and technology professionals with an extensive track record of developing new business initiatives. SW1 has been established as a response to the significant and continuing changes to the structure of the asset management industry. The initial focus will be on completing a number of transactions, that will create the risk management and operating infrastructure on which a comprehensive suite of alpha and beta generating products can be built. SW1 currently has no investments or interests. In addition to their current responsibilities at Crosby, Simon Fry, Crosby CEO, and Johnny Chan, Crosby’s Group Managing Director responsible for Asset Management in Asia, will be joining SW1 as Limited Partners and will have an economic interest in the partnership. The partnership interests have been approved by the Board and Remuneration Committee of Crosby in lieu of any compensation the partners may otherwise have received from Crosby in relation to Crosby’s revenues, profits and activities due to Crosby’s stake in SW1. MERCHANT BANKING In 2007 Crosby’s Merchant Banking team continued to use its corporate finance and financial structuring expertise to uncover undervalued assets and develop strategies to monetise the undervaluation. During the year, in addition to sourcing new deals, the Merchant Banking team focused on the monetisation of past deals and providing corporate finance advice to Crosby’s investee companies. Orchard
In April 2007, a Crosby-led consortium completed the US$130 million takeover of ASX-listed Orchard Petroleum Ltd. (“Orchard”, ASX code: OPL). The acquisition was financed by a combination of senior debt and convertible preference shares provided by a small group of investors including the Crosby Active Opportunities Fund. Crosby has earned a significant stake in the privatised company and once the acquisition finance has been repaid will own approximately 22.23% of the company. Orchard is a fast growing, project rich upstream oil and gas company focused exclusively on production, exploration, exploitation and development of oil and gas properties in California's San Joaquin & Sacramento Basins. Orchard's highclass asset portfolio consists of approximately 70,000 acres in six major project areas with the potential to deliver in excess of 300MMboe in reserves. The company has an inventory of 41 wells with 29 of them currently on production, 7 being completed for production and 5 other wells at various stages of appraisal. Further details of Orchard’s portfolio and operations can be found at: www.orchardpetroleum.com. Since the acquisition, Orchard has implemented a targeted drilling programme to migrate existing reserves from 3P to 2P and 1P, and has worked to consolidate its asset portfolio with the overall objective of securing an updated reserve audit to facilitate a refinancing of the acquisition debt. Since completion of the takeover, the drilling programme has seen a total of 13 wells drilled in the Belridge acreage, with a success rate of 100% including a new discovery in the Monterey formation, and daily production increase from 308 boeppd to 523 boeppd. In addition to the Belridge acreage, Orchard has acreage at Belgian Anticline, Turk Anticline and SE Lost Hills. The reserve audit was completed in January 2008 and showed a substantial increase in 2P reserves. Fermiscan
On 16 February 2007, the Dragon Fund Inc., a fund managed by Crosby Asset Management and owned by Techpacific Capital Limited, subscribed for 8.5 million new ordinary shares in ASXlisted Fermiscan Holdings Limited (“Fermiscan”, ASX code: FER) at A$1.50 per share. On 26 April 2007, Crosby announced that it had signed a memorandum of understanding covering the commercialisation of Fermiscan’s test for breast cancer in the Japanese market. Fermiscan has an exclusive, worldwide patent to commercialise a test for breast cancer based on analysing the molecular structure of a person’s hair. The test is far less invasive than alternative procedures using mammograms and ultra-sound. Fermiscan intends to commercialise the test after the completion of a 2000 patient trial currently being run in Australia. It is expected that the trial will be completed in the first half of 2008. White Energy
On 10 May 2007, White Energy Company (“White Energy”, ASX code: WEC) announced that BHP Billiton, the world's largest diversified resources company, plans to use its coal upgrade process for its vast sub-bituminous reserves. Additionally, BHP agreed to provide US$35 million in convertible loan financing that will enable White Energy to accelerate the roll out of its patented coal technology and to act as White Energy's exclusive global marketing agent for upgraded export coal produced at its coal technology plants. On 15 October 2007, White Energy issued a A$45 million unsecured convertible note. The capital raised will supplement the US$35 million in convertible loan financing provided by BHP. Crosby acted as White Energy’s financial advisor during the transaction and, in addition to cash fees of A$900,000, Crosby earned 1.25 million options with an exercise price of A$2.50 each. As at 31 December 2007, Crosby also has 1,356,296 White Energy shares. White Energy owns the worldwide license to a coal briquetting process that increases the energy efficiency of low quality coal. Pocketmail
On 8 October 2007, Pocketmail Group Limited (“Pocketmail”, ASX code: PKT) announced that it had appointed Crosby as its adviser to assist in its development. In consideration, Pocketmail agreed to grant to Crosby 5 million options with an exercise price of A$0.06 per share on or before 30 November 2011 and a further 5 million options with an exercise price of A$0.065 per share on or before December 2011. The Crosby Active Opportunities Fund also has a stake in Pocketmail. Pocketmail, through its wholly-owned subsidiary Adavale Minerals Pty Ltd, undertakes uranium exploration activities focusing on sedimentary uranium deposits. The focus of exploration activities is currently in the Marree Area, South Australia, where a drilling program has shown the existence of widespread anomalous radioactive zones, mostly at shallow depths. On 14 February 2008, shareholder approval was received for Pocketmail to be renamed Adavale Resources to reflect its uranium exploration focus. Following the shareholders meeting, Pocketmail’s share capital will be consolidated on a 3:1 basis. As a result of the adjustment, Crosby will subsequently own 357,143 shares and 2,976,190 options with an exercise price of A$0.21 per share. Indago
In March 2007, Indago Petroleum (“Indago”, AIM code: IPL) announced that it was disposing of 100% of its production and development assets and 50% of its exploration assets to RAK Petroleum for a total cash consideration of £194,235,267. On completion of the sale, Indago announced a special dividend of 60p per share. This resulted in a payment of approximately US$16.8 million of cash to Crosby in April 2007. Following the disposal and special dividend, Indago became a pure exploration company with sufficient cash to complete its exploration programme. During the remainder of 2007, Crosby generated a further US$5 million through the monetisation of its holding. IB Daiwa
IB Daiwa Corporation (“IB Daiwa”, JASDAQ code: 3587) is a JASDAQ listed natural resource asset trading company. During 2007, IB Daiwa began a significant strategic shift to diversify its business away from the US oil and gas sector and to restructure its balance sheet to provide a sound base from which to raise capital to fund new business opportunities and exploit the opportunities within its existing portfolio. In the latter respect, the year saw three major developments: in August, IB Daiwa’s US oil and gas subsidiary Leed Petroleum undertook an IPO on the AIM market of the London Stock Exchange, in September, Bayerische Hypo- und Verinsbank AG ("HVB") provided a US$20 million loan facility to IB Daiwa to fund Lodore's oil and gas exploration programme, and on 26 December 2007 IB Daiwa was released from the “Kanri Post” on the JASDAQ stock exchange to resume normal trading. Darcy/Leed
In February 2007, Darcy raised US$18 million through a placement of new shares representing 13.4% of the then enlarged share capital. The fundraising provided capital to expand and develop Darcy’s asset portfolio. On 25 June 2007, IB Daiwa announced that Darcy had commenced procedures for the initial public offering of Darcy on the AIM market of the London Stock Exchange. On 24 July 2007, Darcy changed its name to Leed Petroleum (“Leed”) and was admitted to AIM on 15 August 2007 (AIM code: LDP). The IPO raised approximately US$100 million of new capital. At the offer price of 47p, Leed had a market capitalisation of approximately US$239 million. Following Leed’s admission to AIM IB Daiwa has a 41.7% shareholding in Leed. At the offer price, IB Daiwa’s initial equity investment of US$10.2 million increased by approximately 880% to US$100 million. As a result, IB Daiwa booked a gain on deemed disposal of about US$32 million. Leed commenced drilling of the Eugene Island A-6 development well on 16 September 2007 and penetrated the sandstone of the primary target at a measured depth of 15,112 feet by early January 2008. Based on the competent person report at Leed’s admission to AIM, the primary zone is estimated to have 2P reserves of 824,000 barrels of oil and 4.8 billion cubic feet of gas. Based on current evaluation of the logs, Leed estimates that the post-drill reserve estimate for the primary zone exceeds this by one third. After production, Leed’s independent reserve auditor is expected to move a substantial portion of the pre-drill estimated 2P reserves into the 1P category. Leed was also awarded additional leases at Main Pass and Ship Shoal in January 2008. Lodore
During 2007, Lodore had a single producing well - Kami - operating onshore in Louisiana in the US. Having produced steadily throughout the year, Kami saw increased water production in the latter part of the year that reduced production volumes. Remedial work is currently being undertaken. 2007 saw further delays and cost over-runs in Lodore’s high risk/high impact deep gas drilling programme. At the Endeavor prospect, drilling encountered challenging conditions with progress being delayed on three separate occasions due to well control events caused by high pressure kicks which necessitated the drilling of sidetracks. The costs related to these events were largely covered by insurance. On 26 November 2007, IB Daiwa announced that drilling had reached a true vertical depth of 19,003 feet and that, as the well had not reached its primary target of the Planulina sandstone, the joint venture partners had agreed to deepen the well to 20,000 feet. However, drilling had been suspended while the JV seeks new insurance coverage. At the date of this report, new insurance coverage had not been obtained and drilling remained suspended. In the remainder of Lodore’s drilling programme, the delays at Endeavor had a knock-on effect at North West Kaplan as, subject to Lodore obtaining financing, drilling is now scheduled to commence in the first quarter of 2008, whilst drilling at Manzano has also been delayed due to availability of rigs. The Manzano well was spudded in February 2008. Lodore has rights in the deep target zones (below a true vertical depth of 10,500 feet). If commercial hydrocarbons are encountered in the shallow section, the well will be completed in these shallow zones for an extended production test: if no commercial hydrocarbons are encountered above 10,500 feet, the well will be deepened to approximately 15,100 feet (true vertical depth) to test the deeper primary target. Subject to the availability of finance, Lodore will elect to participate in the deeper zones based on the drilling results from the shallower zones. New business initiative
After release from the Kanri post, IB Daiwa made progress on its strategy to diversify its portfolio into other natural resources areas through the subscription and purchase of 21,333,334 shares of Adavale Resources Limited (formerly known as Pocketmail Group Limited) in January 2008, representing a 11.6% stake in Adavale.
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