Financial Statement

Borealis Exploration Limited

(A Company in the Development Stage)

Consolidated Financial Statements March 31, 1996

(Expressed in Canadian Dollars)

Auditors' Report

To the Shareholders of Borealis Exploration Limited:

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)

Assets19961995
   
Current assets:  
Cash  3,343
Marketable securities 1,29512,545
 1,29515,888
Investment in shares (Note 4)1,7071,727
Mineral properties (Note 5)5,364,6018,151,274
 $5,367,603$8,168,889
Liabilities  
Current liabilities:  
Bank indebtedness410 
Accounts payable (Note 7)2,695,0571,986,460
Loans payable (Note 8)419,047430,546
Due to shareholders 1,145,251667,400
 4,259,7653,084,406
Royalty payable (Note 9)2,547,8712,619,827
 6,807,6365,704,233
Contingencies (Note 10)  
Subsequent event (Note 13)  
Shareholders' Equity  
Share capital (Note 11)23,000,53122,829,764
Contributed surplus4,786,7264,881,660
Deficit (29,227,290)(25,246,768)
 (1,440,033)2,464,656
 $5,367,603$8,168,889

Approved by the Board

Consolidated Statement of Contributed Surplus

For the Year Ended March 31, 1996

(Expressed in Canadian Dollars)
 19961995
   
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)

  
  
 19961995
   
Expenses:  
Salaries and fees for services1,040,984692,892
Office, travel and miscellaneous238,365263,674
Interest88,07027,881
Legal and accounting 49,071103,197
Foreign exchange loss50,49965,876
 1,466,9891,153,520
Other items:  
Write-down of mineral properties(2,825,967)(1,804,666)
Gain on settlement of debt227,978 
Foreign exchange gain (loss) on royalty payable75,081(29,458)
Contract revenue9,375 
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)

  
  
 19961995
Operating activities:  
Increase in deficit$(3,980,522)$(3,013,455)
Items not involving cash  
Write-down of mineral properties2,825,9671,804,666
Foreign exchange (gain) loss on royalty payable(75,081)29,458
Amortization9,9442,201
 (1,219,692)(1,177,130)
Changes in non-cash working capital balances  
Accounts payable708,597484,090
 (511,095)(693,040)
Financing activities:  
Advances from shareholders477,851366,538
Proceeds from sale of shares of Borealis Exploration Limited75,83360,393
Additions (reduction) to loans payable(11,499)191,892
Proceeds on disposal of marketable securities3,640 
Additions (reduction) to royalty payable3,125(3,694)
Proceeds on issuance of shares and options 63,000
 548,950678,129
Investing activities:  
Deferred exploration and development costs(41,608)(2,048)
Decrease in cash(3,753)(16,959)
Cash, beginning of year3,34320,302
Cash (bank indebtedness), end of year$(410)$3,343

1. Nature of Operations

The Company has changed its focus from developing its mining properties to conducting research in several technological areas for which it has patents issued or pending. The Company is in the process of trying to liquidate its remaining mining properties.

2. Continued Operations

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. As of March 31, 1996, the Company had a deficit of $29,227,290 (1995 - $25,246,768) and a working capital deficiency of $4,258,470 (1995 - $3,068,518) The operations of the Company were primarily funded by increased accounts payable and loans from shareholders. The continued operation of the Company is dependent on its ability to receive continued financial support from shareholders, complete sufficient equity financing or generate profitable operations in the future.

3. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of its wholly-owned subsidiaries, Borealis Exploration Incorporated, Borealis Gold Limited and Borealis Technical Incorporated Limited.

Mineral Properties

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%

Foreign Currency Translation

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.

Research and Development Costs

The Company is incurring costs related to research and development of new technologies. These costs are expensed as incurred.

 19961995
   
Arktos Resources Limited. - 3,118,030 shares$1,706$1,726
Faraway Gold Mines Ltd. - 972,280 shares11
 $1,707$1,727

4. Investment in Shares

Arktos Resources Limited 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 47% (1995 - 47%) of the outstanding shares of Arktos Resources Limited.

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.

5. Mineral Properties

 19961995
   
Roche Bay Magnetite Project  
Beginning of year$4,582,622$4,570,143
Additions during year52,39512,479
End of year4,635,0174,582,622
Freuchen Bay Property  
Beginning of year729,584729,584
Net change during year  
End of year729,584729,584
Fat Lake Property  
Beginning of year2,351,9333,349,566
Write-down during year(2,351,933)(997,633)
End of year 2,351,933
Padlei Property  
Beginning of year384,513609,013
Write-down during year(384,513)(224,500)
End of year 384,513
Mauna Property  
Beginning of year102,622117,622
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

Roche Bay Magnetite Project

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.

Freuchen Bay Property

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.

Fat Lake Property

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.

Padlei Property

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.

Mauna Property

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.

Pistol Bay Property

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.

6. Mining and Other Equipment

 19961995
  

Cost

Accumulated

Amortization

Cost

Accumulated

Amortization

Mining and geological equipment613,330594,334613,330587,519
Camp equipment328,847273,333328,847260,690
Drilling equipment48,35643,69848,35642,637
Office equipment57,64825,40222,68715,175
Patents21,9941,1236,068243
 $1,070,175$937,890$1,019,288$906,264
Net book value$132,285$113,024
The net book value of mining and other equipment is included with the respective mineral properties in the financial statements

7. Accounts Payable

In 1992, the Company issued 112,199 shares to some creditors in an attempt to settle debts. Some creditors did not accept the shares as settlement of debt. Other creditors sold the shares as settlement of the amounts outstanding. At March 31, 1996, 10,200 of these shares remained outstanding. Of the 10,200 outstanding shares, 3,700 shares continue to be held by creditors and the remaining 6,500 shares are being held by the Company until an agreement can be reached. The 6,500 shares held by the Company on behalf of creditors are issued in the name of the creditors.

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.

8. Loans Payable

In 1994 and 1995, the Company received loans from individuals. The loans bear interest at 3%. During the year, most of the lenders have agreed to accept shares of Borealis Exploration Limited in settlement of the debt. These shares were issued on June 17, 1996.

9. Royalty Payable

In 1993, the Company renegotiated its loan with Mr. G. Gillet, which had been assigned to Boston Safe Deposit & Trust Company. Under the terms of the agreement with Boston Safe Deposit & Trust Company the loan was converted into 10,000 common shares of Borealis Exploration Limited and a $1,875,000 U.S. royalty. The royalty is to be paid from 25% of the net proceeds from the lease, sale or other disposition, or production on or from its real property. As security for payment of the Royalty the Company gave an assignment of all receivables derived from its real property. To date, $2,625 U.S. has been paid to Boston Safe Deposit & Trust Company. In 1995, Boston Safe Deposit & Trust Company assigned its interest to its nominee Mitlock Limited Partnership.

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.

10. Contingencies

Certain creditors have initiated legal proceedings to receive payment for amounts which have been recorded in these financial statements. In conjunction with this action, the creditors have had liens registered against certain of the Company's mineral properties.

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.

11. Share Capital

Authorized - 5,000,000 common shares without par value
     
Issued and outstanding -    
 19961995
     
 Number of SharesAmountNumber of SharesAmount
Balance, beginning of year3,232,498$23,084,0593,187,498$22,971,559
Issued during the year - Stock options exercised during the year    
  45,000112,500
 3,232,49823,084,0593,232,49823,084,059
Less - Shares held by the Company 

(17,395)

 

(83,528)

 

(41,312)

 

(254,295)

Balance, end of year3,215,103$23,000,5313,191,186$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.

12. Related Party Transactions

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.

13. Subsequent Event

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.