(Expressed in Canadian Dollars)
We have audited the consolidated balance sheet of Borealis Exploration Limited as at March 31, 1996 and the consolidated statements of deficit, contributed surplus and changes in cash position for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 1996 and the results of its operations and the changes in its cash position for the year then ended in accordance with generally accepted accounting principles.
August 8, 1996
Kenway Mack Slusarchuk Stewart
Chartered Accountants
Consolidated Financial Statements
March 31, 1996
(Expressed in Canadian Dollars)
| Assets | 1996 | 1995 |
|---|---|---|
| Current assets: | ||
| Cash | 3,343 | |
| Marketable securities | 1,295 | 12,545 |
| 1,295 | 15,888 | |
| Investment in shares (Note 4) | 1,707 | 1,727 |
| Mineral properties (Note 5) | 5,364,601 | 8,151,274 |
| $5,367,603 | $8,168,889 | |
| Liabilities | ||
| Current liabilities: | ||
| Bank indebtedness | 410 | |
| Accounts payable (Note 7) | 2,695,057 | 1,986,460 |
| Loans payable (Note 8) | 419,047 | 430,546 |
| Due to shareholders | 1,145,251 | 667,400 |
| 4,259,765 | 3,084,406 | |
| Royalty payable (Note 9) | 2,547,871 | 2,619,827 |
| 6,807,636 | 5,704,233 | |
| Contingencies (Note 10) | ||
| Subsequent event (Note 13) | ||
| Shareholders' Equity | ||
| Share capital (Note 11) | 23,000,531 | 22,829,764 |
| Contributed surplus | 4,786,726 | 4,881,660 |
| Deficit | (29,227,290) | (25,246,768) |
| (1,440,033) | 2,464,656 | |
| $5,367,603 | $8,168,889 |
Approved by the Board
| 1996 | 1995 | |
|---|---|---|
| Contributed surplus, beginning of year | $4,881,660 | $4,905,723 |
| Decrease arising on the disposition of 23,917 (1995 - 7,500) shares held by subsidiaries at proceeds less than the average paid-up capital |
(94,934) |
(24,063) |
| Contributed surplus, end of year | $4,786,726 | $4,881,660 |
| Consolidated Statement of Deficit For the Year Ended March 31, 1996 (Expressed in Canadian Dollars) | ||
| 1996 | 1995 | |
| Expenses: | ||
| Salaries and fees for services | 1,040,984 | 692,892 |
| Office, travel and miscellaneous | 238,365 | 263,674 |
| Interest | 88,070 | 27,881 |
| Legal and accounting | 49,071 | 103,197 |
| Foreign exchange loss | 50,499 | 65,876 |
| 1,466,989 | 1,153,520 | |
| Other items: | ||
| Write-down of mineral properties | (2,825,967) | (1,804,666) |
| Gain on settlement of debt | 227,978 | |
| Foreign exchange gain (loss) on royalty payable | 75,081 | (29,458) |
| Contract revenue | 9,375 | |
| Site restoration expense | (25,811) | |
| (2,513,533) | (1,859,935) | |
| Increase in deficit | (3,980,522) | (3,013,455) |
| Deficit, beginning of year | (25,246,768) | (22,233,313) |
| Deficit, end of year | $(29,227,290) | $(25,246,768) |
| Basic increase in deficit per share | $(1.24) | $(0.94) |
| Consolidated Statement of Changes in Cash Position For the Year Ended March 31, 1996 (Expressed in Canadian Dollars) | ||
| 1996 | 1995 | |
| Operating activities: | ||
| Increase in deficit | $(3,980,522) | $(3,013,455) |
| Items not involving cash | ||
| Write-down of mineral properties | 2,825,967 | 1,804,666 |
| Foreign exchange (gain) loss on royalty payable | (75,081) | 29,458 |
| Amortization | 9,944 | 2,201 |
| (1,219,692) | (1,177,130) | |
| Changes in non-cash working capital balances | ||
| Accounts payable | 708,597 | 484,090 |
| (511,095) | (693,040) | |
| Financing activities: | ||
| Advances from shareholders | 477,851 | 366,538 |
| Proceeds from sale of shares of Borealis Exploration Limited | 75,833 | 60,393 |
| Additions (reduction) to loans payable | (11,499) | 191,892 |
| Proceeds on disposal of marketable securities | 3,640 | |
| Additions (reduction) to royalty payable | 3,125 | (3,694) |
| Proceeds on issuance of shares and options | 63,000 | |
| 548,950 | 678,129 | |
| Investing activities: | ||
| Deferred exploration and development costs | (41,608) | (2,048) |
| Decrease in cash | (3,753) | (16,959) |
| Cash, beginning of year | 3,343 | 20,302 |
| Cash (bank indebtedness), end of year | $(410) | $3,343 |
The consolidated financial statements include the accounts of its wholly-owned subsidiaries, Borealis Exploration Incorporated, Borealis Gold Limited and Borealis Technical Incorporated Limited.
The Company is in the exploration stage with respect to its mineral properties and accordingly follows the practice of capitalizing all costs related to exploration projects, until such time as the projects are put into commercial production, sold or abandoned. If commercial production commences, these capitalized costs will be amortized on a unit-of-production basis.
Exploration costs renounced due to "flow-through" share subscription agreements remain capitalized, however, for income tax purposes, the Company has no right to these expenses nor the related depletion allowance. Under Canadian income tax legislation, the Company has previously entered into share subscription agreements for "flow-through" shares whereby the Company agreed to incur a certain dollar amount of qualifying Canadian exploration costs and renounced these costs to the shareholders.
Property examination costs that do not result in the successful acquisition of an interest in or an agreement on a mineral property are allocated to the deficit in the year incurred.
Valuation of Mineral Properties
The values for the mineral properties represent costs to date and are not intended to reflect present or future values.
Amortization
Capital assets are amortized using the declining balance method at the following rates:
| Mining and geological equipment | 30% |
|---|---|
| Other equipment | 20% |
| Patents | 4% |
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Other assets, liabilities, and items affecting earnings are translated into Canadian dollars at rates of exchange in effect at the date of the transaction. Gains or losses arising from foreign currency transactions are included in the determination of increase in deficit.
The Company is incurring costs related to research and development of new technologies. These costs are expensed as incurred.
| 1996 | 1995 | |
|---|---|---|
| Arktos Resources Limited. - 3,118,030 shares | $1,706 | $1,726 |
| Faraway Gold Mines Ltd. - 972,280 shares | 1 | 1 |
| $1,707 | $1,727 |
Faraway Gold Mines Ltd. is no longer listed on a public stock exchange, consequently the investment is carried at a nominal value. At March 31, 1996, the Company owned approximately 23% (1995 - 23%) of the outstanding shares of Faraway Gold Mines Ltd.
| 1996 | 1995 | |
|---|---|---|
| Roche Bay Magnetite Project | ||
| Beginning of year | $4,582,622 | $4,570,143 |
| Additions during year | 52,395 | 12,479 |
| End of year | 4,635,017 | 4,582,622 |
| Freuchen Bay Property | ||
| Beginning of year | 729,584 | 729,584 |
| Net change during year | ||
| End of year | 729,584 | 729,584 |
| Fat Lake Property | ||
| Beginning of year | 2,351,933 | 3,349,566 |
| Write-down during year | (2,351,933) | (997,633) |
| End of year | 2,351,933 | |
| Padlei Property | ||
| Beginning of year | 384,513 | 609,013 |
| Write-down during year | (384,513) | (224,500) |
| End of year | 384,513 | |
| Mauna Property | ||
| Beginning of year | 102,622 | 117,622 |
| Write-down during year | (102,622) | (15,000) |
| End of year | 102,622 | |
| Pistol Bay Property | ||
| Beginning of year | 580,165 | |
| Net change during year | (580,165) | |
| End of year | $5,364,601 | $8,151,274 |
In 1968, the Company acquired mineral rights, by permit, which have been converted to a 100% interest in various mineral leases and claims located near Roche Bay. These leases expire in 1998 and 2000.
The leases and claims are located in the Baffin Mining District of the Northwest Territories.
By agreement dated March 1, 1979, the Company granted a royalty interest to a corporation based on 5% of the crown royalty interest on 10,973 acres of mining leases currently held by the Company.
On March 6, 1979, the Company granted two royalties both based on 18.75% of the crown royalty. One of the royalty agreements was repurchased on September 26, 1984.
In 1989, the Company acquired permits in the Freuchen Bay Area of the Keewatin Mining District of the Northwest Territories. Claims were staked on these permits in 1992. The Company retains a 100% interest in the FB 1 through FB 6 claims. The claims expire in 2002.
On July 24, 1995, the Attorney General of Canada filed a Notice of Seizure of Goods relating to these mineral properties due to the Company's failure to pay $150,000 in fines and penalties related to the Company's failure to clean up the Fat Lake mine site. The $150,000 fine and an estimate of the clean up costs of $25,811 have been recorded as liabilities in these financial statements. Subsequent to year end, the Company has made arrangements to pay the fines and ensure the site is cleaned up. When this has been completed the Seizure Notice will be lifted.
In 1985 and 1987, the Company acquired , by staking, a 100% interest in the mineral claims described as Susan Claim, Susan 2, Susan 3, Airstrip 1 to 3 and Gun 1 and 2 located in the Keewatin Mining District of the Northwest Territories. A portion of these claims expire in August 1998. The cost of these properties has been written off in the current year.
In 1988, the Company acquired, by staking, the mineral claim described as QPC 4 located in the Keewatin Mining District of the Northwest Territories. The cost of these properties has been written off in the current year.
Faraway Gold Mines Ltd. owns a 20% interest in the Padlei Property and the Company owns the remaining 80% interest.
In 1986, the Company acquired, by staking, the mineral claims described as Peter 1 and Peter 2 located in the Keewatin Mining District of the Northwest Territories. The cost of these properties has been written off in the current year.
In 1985, the Company acquired, by staking, the mineral claims described as Ant 1 through Ant 4 and Son 1 located in the Keewatin Mining District of the Northwest Territories. The cost of these properties was written off in 1995.
| 1996 | 1995 | |||
|---|---|---|---|---|
| Cost | Accumulated Amortization |
Cost | Accumulated Amortization | |
| Mining and geological equipment | 613,330 | 594,334 | 613,330 | 587,519 |
| Camp equipment | 328,847 | 273,333 | 328,847 | 260,690 |
| Drilling equipment | 48,356 | 43,698 | 48,356 | 42,637 |
| Office equipment | 57,648 | 25,402 | 22,687 | 15,175 |
| Patents | 21,994 | 1,123 | 6,068 | 243 |
| $1,070,175 | $937,890 | $1,019,288 | $906,264 | |
| Net book value | $132,285 | $113,024 | ||
The shares issued but not accepted by creditors have been recorded at the market value on the date of the issue. The share price will be adjusted to the settlement price on the day of sale by the creditor. The market price for most of the shares at the date of issue was $2.25.
The Company has also agreed not to issue more than 60,000 shares a year for other than full value received in cash without Boston Safe Deposit & Trust Company's written consent.
During the year, statements of claim were filed by the Attorney General of Canada, the Kilvalliq Inuit Association and the Baffin Region Inuit Associational for failure to clean up sites in Fat Lake, Roche Bay and near Naguak Lake. At the present time, the result of these claims and any potential cost to the Company is not determined and no liability for this has been recorded in these financial statements.
| Authorized - 5,000,000 common shares without par value | ||||
|---|---|---|---|---|
| Issued and outstanding - | ||||
| 1996 | 1995 | |||
| Number of Shares | Amount | Number of Shares | Amount | |
| Balance, beginning of year | 3,232,498 | $23,084,059 | 3,187,498 | $22,971,559 |
| Issued during the year - Stock options exercised during the year | ||||
| 45,000 | 112,500 | |||
| 3,232,498 | 23,084,059 | 3,232,498 | 23,084,059 | |
| Less - Shares held by the Company | (17,395) | (83,528) | (41,312) |
(254,295) |
| Balance, end of year | 3,215,103 | $23,000,531 | 3,191,186 | $22,829,764 |
As at March 31, 1996, Borealis Gold Limited owned 16,895 shares (1995 - 40,812 shares) of Borealis Exploration Limited and Borealis Exploration Limited owned 500 shares (1995 - 500 shares) of itself.
By authorization of the Company, the president, at his sole discretion, can authorize the issue of up to 12,000 shares in aggregate per annum to any individual as compensation for work done for or on behalf of the Company.
During the year ended March 31, 1996:
Management fees totalling $218,110 (1995 - $169,997) have been paid to a Partnership controlled by the President of the Company.
Travel, promotion, rent, and other expenses totalling $108,850 (1995 - $97,094) have been reimbursed to the President and a Partnership controlled by the President of the Company.
The President of the Company has pledged the following personal assets as security on Company debts:
i) A mortgage in the amount of $80,000 US on a specific property in the United States
owned by the president of the Company has been pledged as security to a creditor.
ii) An assignment of sale proceeds totalling $168,834, registered against certain properties
in the United States owned by the President of the Company, has been pledged as
security to specific creditors.
On June 17, 1996, the Company issued 915,847 common shares to various creditors as settlement of obligations totalling $2,261,931. The shares are to be held in trust for one year before being delivered to the creditors. This share issuance and corresponding reduction of liabilities has not been recorded in these financial statements.