LEFROY EXPLORATION LIMITED — Annual Report 2004

Aug 30, 2004

U.S. MASTERS HOLDINGS LIMITED ABN 052 123 930

Appendix 4E

Preliminary Final Report
For the year ending 30 June 2004

Results for announcement to the market	30 June 2004 \$'000s		30 June 2003 \$*000s
Revenues from ordinary activities	Down 175.5%	(34)	45
Profit/(loss) from ordinary activities after tax attributable to members	Down 526.7%	(94)	(15)
Net profit/(loss) for the year attributable to members	Down 526.7%	(94)	(15)
Dividends (distributions)	Amount per security		Franked amount per security
Final dividend	NIL		NIL
Interim dividend	NIL		NIL

Statement of financial performance
for the year ended 30 June 2004
Expressed in thousand of U.S. Dollars

	Note	2004 \$000	2003 \$000
Investment income
Net realised gain/(loss) on sale of		(44)	43
investments Net change in unrealised loss on	3	6	(6)
investments Interest and dividend income (net of withholding taxes)	4	4	8
Total investment income		(34)	45
Expenses
Directors' fees		I	I
Investment advisory fees	1(b)	9 48	$12 \,$ 46
Legal and professional fees Sundry expenses		2	I
Total expenses		60	60
Loss for the year		(94)	(15)
Opening accumulated deficit		(11, 727)	(11,712)
Closing accumulated deficit		(11, 821)	(11, 727)
Loss per share (Dollars)		(?)	0.01

Statement of financial position
At 30 June 2004
Expressed in thousands of U.S. Dollars

	Note	2004 \$000	2003 \$000
Assets
Cash and cash equivalents		966	1,122
Investments		110	42
Total assets		1,076	1,164
Liabilities
Accrued expenses		27	21
Total liabilities		27	21
Net assets		1,049	1,143
Total shareholders' interests
2,429,826 (2003:2,429,826) ordinary shares
with a par value of \$0.50 per share	5	1,215	1,215
Share premium reserve	6	11,655	11,655
Accumulated deficit		(11, 821)	(11, 727)
Total shareholders' interests		1,049	1,143
Net asset value per share (Dollars
excluding treasury stock)		0.43 --------------------------------------	0.47 --------------------------------------

Statement of Cash Flows

for the year ended 30 June 2004
Expressed in thousands of U.S. Dollars

	2004 \$000	2003 \$000
Operating activities
Purchase of investments	(3,701)	(6,282)
Proceeds from sale of investments	3,596	6,307
Interest and dividends received	4	8
Expenses paid	(55)	(69)
Cash flows from operating activities	(156)	(36)
Net increase/(decrease) in cash and cash equivalents	(156)	(36)
Cash and cash equivalents at beginning of year	1,122	1,158
Cash and cash equivalents at end of year	966	1,122
Cash and cash equivalents comprise:
Cash at bank	(0)	(0)
Money market funds	966	1,122
Cash and cash equivalents	966	1,122
	.

U.S. MASTERS HOLDINGS LIMITED Statement of Assets/Investments at 30 June 2004 Expressed in thousands of U.S. Dollars

	Quantity	Average Cost \$000	Market Value \$000
Equities
Rydex Fund Venture	1,932.20	94	93
100 Winmill $& Co., Inc.$	2,000	4	8
Apple Computer Inc.	100	3	3
Collins & Aikman Corp	1,000	3	6
Total equities		104	110

Notes to the statements for the vear ended 30 June 2004 Expressed in thousands of U.S. Dollars

1. THE FUND

(a) General information

U.S. Masters Holdings Limited (the "Fund") was incorporated under the laws of the British Virgin Islands on 14 May 1990 under the International Business Companies Act (Cap. 291). The liability of the members is limited by shares. The Fund maintains its Registered office in the British Virgin Islands. The Fund is a closed-end investment company.

The financial statements are presented in thousands of United States Dollars.

The Fund was formed as an investment company to permit shareholders to participate in the accumulation of capital on a pooled basis from the professionally managed trading of predominantly United States investments.

(b) Investment advisory fees

Under the terms of an Investment Advisory Agreement dated 1 January 1998, J. Randolph Updyke has agreed to provide investment advisory services to the Fund.

As compensation for his services, J. Randolph Updyke receives from the Fund:

• a management fee payable semi-annually equal to 0.5% (1% annualised) of $i)$ the Fund's Net Asset Value at the end of such semi-annual period; and,
• an incentive fee payable equal to 20% of the appreciation, if any, in Net Asset $\ddot{\mathbf{n}}$ Value on a fiscal year basis.

Notes to the statements for the year ended 30 June 2004 Expressed in thousands of U.S. Dollars

2. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies adopted in the preparation of the Fund's financial statements are set out below:

(a) Basis of preparation

The financial statements of U.S. Masters Holdings Limited, have been prepared in accordance with International Financial Reporting Standards. They have been prepared under the historical cost accounting convention and, except where stated, do not take into account changes in either the general purchasing power of the Dollar or in the prices of specific assets.

The accounting policies have been consistently applied by the Fund and are consistent with those of the previous year.

(b) Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and balances with banks and brokers with maturities of three months or less.

(c) Investments

Investments are carried at market value. Any increases or decreases in carrying values are recognised in the statement of operations and accumulated deficit as an unrealised gain or loss.

Investments in securities and securities sold short traded on a United States national securities exchange are valued at the last reported sales price on the day of valuation or, if there has been no sale on such exchange on the date on which valuation is being made, then at the mean between the closing bid and asked prices on such exchange on such date.

Securities traded in the over-the-counter market are valued at the last sales price if the security is reported by NASDAO's System, or, if not reported, at the mean between the last bid and asked prices. Restricted securities and other securities for which quotations are not readily available are valued at fair value as determined in good faith by the Investment Manager.

Notes to the statements for the vear ended 30 June 2004 Expressed in thousands of U.S. Dollars

(d) Investment transactions and income recognition

Investment transactions are accounted for on the trade date (the date on which the order to buy or sell is executed). Gains or losses arising from the sale of investments are determined using the average cost basis. Income from investments is recorded on the accrual basis.

Interest income is recorded as earned and dividend income is recorded on the ex-dividend date.

(e) Foreign currency

Transactions in currencies other than the Fund's reporting currency are converted at the rate of exchange ruling at the transaction date. Foreign currency monetary assets and liabilities, other than those covered by forward exchange contracts, are translated at the rate of exchange ruling at the reporting date. Resulting exchange differences are recognised in the result for the year.

3. NET CHANGE IN UNREALISED GAIN ON INVESTMENTS

	2004 \$000	2003 \$000
Market value of investments	110	42.
Investments at average cost	103	41
Closing unrealised gain/(loss) on investments		Į
Opening unrealised (loss)/gain on investments		6
Net change in unrealised gain/(loss) on investments	6	(5)

4. TAXATION

The Fund is exempt from all forms of taxation in the British Virgin Islands and Australia including income, capital gains and withholding taxes. United States withholding tax has been deducted at source on certain dividends and interest paid, with respect to securities of United States issuers, at the rate of 30% of gross income. There are no other taxes applicable to the Fund.

Notes to the statements

for the year ended 30 June 2004
Expressed in thousands of U.S. Dollars

5. SHARE CAPITAL

	2004 \$000	2003 \$000
Authorised
$2,000,000,000$ ordinary shares of \$0.50 par value each	1,000,000	1,000,000
Issued and fully paid 53,036,510 (2003: 53,036,510) ordinary shares of \$0.50	26,518	26,518
Treasury stock:
Opening balance (50,606,684 shares, 2003: 50,606,684 shares)	25,303	25,303
Acquired during the year (Nil shares, 2003:Nil shares)	$\theta$	0
Closing balance (50,606,684 shares, 2003:50,606,684 shares)	25,303	25,303
Net share capital (2,429,826 shares, 2003: 2,429,826 shares)	1,215	1,215

Each ordinary share carries the right to one vote at annual and general meetings and is entitled to participate in any dividends or other distributions of the Fund.

6. SHARE PREMIUM RESERVE

	2004	2003 \$000
	\$000
Gross premium on issue of shares	37,965	37,965
Transfer to Redomicile Reserve - 1991	(25,000)	(25,000)
Net premium on purchase of treasury stock	(1.310)	(1,310)
Opening balance	11,655	11,655
Discount on purchase of treasury stock during the year	O)	€
Closing balance	11,655	11,655
	.	.

Notes to the statements for the vear ended 30 June 2004 Expressed in thousands of U.S. Dollars

7. TREASURY STOCK

The Fund holds treasury stock in itself which was purchased pursuant to an on-market buybackscheme on the Australian Stock Exchange.

	2004 \$000	2003 \$000
50,606,684 (2003:50,606,684) ordinary shares at cost	26,613	26,613

8. RELATED PARTY TRANSACTIONS

The Fund had the following commercial dealings with its directors and their associates:

(a) A director of the Fund, is also the Investment Advisor. Pursuant to an Investment Advisory Agreement between the Fund and J. Randolph Updyke, J. Randolph Updyke is entitled to a semi-annual management fee and an annual incentive fee as disclosed in note 1(b) of the financial statements. A management fee of $$9,115 (2003 : $11,550)$ and an incentive fee of \$Nil (2003:\$Nil) were earned during the year. Accrued expenses include \$6,316 (2003:\$2,874) in relation to these fees.

• (b) One of the directors earned fees of $$1,000$ (2003: $$1,000$ ) during the year.
• (c) J. Randolph Updyke and M. Carol Updyke, directors of the Fund, each held 1,219,550 (2003: 1,219,550) and 55,000 (2003:55,000) shares in the Fund, respectively, at the end of the year.

9. CONTINGENT LIABILITIES

The directors are not aware of any contingent liabilities of the Fund at the year end. The Fund has given a guarantee in respect of the creditors of its former subsidiaries as at 9 May 1991 pursuant to the Schemes of Arrangement to redomicile the former group to the British Virgin Islands.

Notes to the statements for the vear ended 30 June 2004 Expressed in thousands of U.S. Dollars

10. FINANCIAL INSTRUMENTS

Financial assets of the Fund include cash and cash equivalents, investments and interest and dividends receivable. Financial liabilities comprise accrued expenses. Accounting policies for financial assets and liabilities are set out in note 2.

(a) Fair values

The carrying amounts of cash and cash equivalents, interest and dividends receivable and accrued expenses approximate their fair value due to the relatively short period to maturity of these instruments. Investments are carried at market value.

(b) Credit risk

Substantially all securities transactions are cleared through, and held in custody by two financial institutions. The Fund is subject to credit risk to the extent that these institutions may be unable to return the Fund's securities or to repay amounts owed. Securities Insurance Protection Corporation (SIPC) provides insurance on bank and security balances in the event a U.S. Broker files for bankruptcy, but given their high credit ratings, management does not expect any counterparty to fail to meet its obligations.

At the year end there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset.

(c) Interest rate risk

The interest rates on the bonds held are disclosed in the statement of investments. There is an inherent risk that during the period to maturity these rates, to the extent that they are fixed, may be lower than the prevailing market rate.

11. STATUS OF AUDIT

This report is based on accounts which have not yet been audited or reviewed.

Review of Operations For the year ended 30 June 2004 Expressed in U.S. Dollars

The NAV of U.S. Masters Holdings Limited was \$1,049,000 at 30,06,04.

NAV per share was \$0.43 at 30.06.04.

The loss was $\$(94,000)$ for the fiscal year 30.06.04 or a loss of $8.2\%$ .

There was no dilution, and no share buybacks during the year.

The expenses associated with operating the Fund continued to be the most significant feature contributing to the operating performance, as well as our perception that the $\overline{U.S.}$ stock market remains overvalued.

The fund has been invested in equities up to 70% of assets during the period. We have recently been using a trading model that has produced 26% returns historically to attempt to capture profits from swings in market volatility. Also, shares of selected companies have been purchased when a significant price decline occurs, due to factors we believe to be relatively temporary. Both of these strategies have been modestly profitable.

We continue to anticipate a significant decline in U.S. share prices, and would hope to purchase shares cheaply should such an event occur.

So as to reduce the expenses of the Fund, the Investment Advisor has decided to waive the Investment Advisor fees until further notice, subsequent to the 30 June date.

J. Randolph Updyke Investment Advisor Director