Borealis Exploration Limited 

Consolidated Financial Statements

For the years ended March 31, 1998 and 1997

 

 

 

 

 

 

 

Contents

 

Auditors’ Report 2

Consolidated Financial Statements

Consolidated Balance Sheet 3

Consolidated Statement of Operations and Deficit 4

Consolidated Statement of Changes in Financial Position 5

Notes to Consolidated Financial Statements 6 - 12

 

 

 

 

 

 

 

 

 

 

 

 

 

Auditors’ Report

 

 

 

 

 

To the Shareholders of

Borealis Exploration Limited

 

 

We have audited the consolidated balance sheet of Borealis Exploration Limited as at March 31, 1998 and the consolidated statement of operations and deficit and changes in financial position for the year then ended. These consolidated financial stateme nts 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 inclu des 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 fi nancial 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, 1998 and the results of its operations and the changes in its financial position for the year then e nded, in accordance with generally accepted accounting principles.

 

The comparitive financial statements included herein for the year ended March 31, 1997 were audited by another firm of chartered accountants (Note 15).

 

 

 

 

 

Chartered Accountants

 

 

Calgary, Alberta

July 17, 1998

 

 

Borealis Exploration Limited

Consolidated Balance Sheet

 

As at March 31

1998

 

1997

       

Assets

     
       

Current

     

Cash

$ 7,944

 

$ 13,632

       

Mineral properties and other assets (Note 4)

5,371,933

 

5,351,013

       

Patents (Note 5)

71,648

 

41,613

       
 

$ 5,451,525

 

$ 5,406,258

       
       

Liabilities and Shareholders' Deficiency

     
       

Current

     

Accounts payable (Note 6)

$ 1,267,449

 

$ 2,652,160

Deposits on share issue (Note 7)

1,618,677

 

939,959

Loans payable (Note 8)

24,461

 

57,736

Due to shareholders

1,025,670

 

755,076

 

3,936,257

 

4,404,931

       

Royalty payable (Note 9)

2,665,225

 

2,595,300

 

6,601,482

 

7,000,231

       

Share capital (Note 10)

27,452,393

 

24,886,715

       

Contributed surplus

4,786,726

 

4,786,726

       

Deficit

(33,389,076)

 

(31,267,414)

 

(1,149,957)

 

(1,593,973)

       
 

$ 5,451,525

 

$ 5,406,258

       

 

 

Approved on behalf of the Board:

 

Director

 

 

Director

 

 

 

 

Borealis Exploration Limited

Consolidated Statement of Operations and Deficit

For the year ended March 31

1998

 

1997

       

Expenses

     

Salaries and fees for services

$ 1,695,815

 

$ 2,034,129

Office, travel and miscellaneous

229,192

 

290,600

Legal and accounting

38,044

 

158,167

Interest

39,294

 

36,253

Foreign exchange loss (gain)

40,231

 

(71,513)

Amortization

10,561

 

10,666

 

2,053,137

 

2,458,489

       

Other items

     

Gain on settlement of debts

-

 

443,785

Contract revenue

1,400

 

22,012

Foreign exchange loss on royalty payable

(69,925)

 

(47,429)

 

(68,525)

 

418,368

       

Net loss for the year

(2,121,662)

 

(2,040,121)

       

Deficit, beginning of year

(31,267,414)

 

(29,227,293)

       

Deficit, end of year

$ (33,389,076)

 

$ (31,267,414)

       

     

Basic loss per share

$

(0.46)

 

$ (0.54)

       

 

 

 

 

Borealis Exploration Limited

Consolidated Statement of Changes in Financial Position

 

For the year ended March 31

1998

 

1997

       

Cash provided (used) by:

     

     

Operating activities

     

Operations

     

Net loss for the year

$ (2,121,662)

 

$ (2,040,121)

Items not involving cash

     

Foreign exchange loss on royalty payable

69,925

 

47,429

Amortization

10,561

 

10,666

 

(2,041,176)

 

(1,982,026)

Changes in non-cash working capital balances

     

Accounts payable

(1,384,711)

 

(39,898)

 

(3,425,887)

 

(2,021,924)

       

Financing activities

     

Issue of share capital

2,565,678

 

1,886,184

Deposits on share issue

678,718

 

939,959

Advances (to) from shareholders

270,594

 

(390,175)

Additions to royalty payable

(33,275)

 

(361,311)

 

3,481,715

 

2,074,657

       

Investing activity

     

Mineral property expenditures and other asset additions

(61,516)

 

(38,691)

       

Increase (decrease) in cash

(5,688)

 

14,042

       

Cash (bank indebtedness), beginning of year

13,632

 

(410)

       

Cash, end of year

$ 7,944

 

$ 13,632

       
       

 

 

 

1. Nature of Operations

 

 

The Company was primarily a junior mining company in prior years. While the Company intends to retain its remaining properties for future development, it has also added to it’s operations the business of conducting research in several technological are as for which it has patents issued or pending.

 

In 1998 substantially all of the Company’s expenses relate to its research activities.

 

 

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 busines s rather than through a process of forced liquidation. As of March 31, 1998, the Company had a deficit of $ 33,389,076 (1997 - $31,267,414) and a working capital deficiency of $3,928,313 (1997 - $4,391,299). The operations of the Company were primarily fu nded 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 operat ions in the future.

 

 

3. Significant Accounting Policies

 

 

(a) Principles of Consolidation

 

The consolidated financial statements include the accounts of Borealis Exploration Limited and its subsidiaries, Borealis Exploration Incorporated, Borealis Gold Limited, Borealis Technical Incorporated Limited, Borealis Technical Limited, Borealis Cool Manufacturing Limited, Borealis Power Manufacturing Limited and Roche Bay Mining Company Limited. All significant intercompany transactions have been eliminated upon consolidation.

(b) 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, abandoned or management determines that a write-down to net realizable value is required. 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 legislatio n, 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 successfully acquisition of an interest in or an agreement on a mineral property are expensed in the year incurred.

 

 

 

 

3. Significant Accounting Policies - Continued

 

 

(c) Valuation of Mineral Properties

 

Mineral properties are valued at the lower of cost and net realizable amount. The values for the mineral properties represent costs to date, net of any write-downs, and are not intended to reflect present or future values.

 

(d) Amortization

Capital assets are amortized using the straight line method at the following rates:

 

Mining and geological equipment 30%

Other equipment 20%

Patents are amortized on the straight-line method at a rate of 4% per year.

 

(e) 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 rate of exchange in effect at the date of the transaction. Gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the year.

 

(f) Research and Development Costs

 

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

 

(g) Financial instruments

 

The Company carries a number of financial instruments as detailed on the balance sheet. It is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted.

 

(h) Uncertainty due to the Year 2000 Issue

 

The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than that date. The effects of the Year 2000 Issue may be experienced before, on or after January 1, 2000.

 

If the Year 2000 Issue is not addressed by the Company and its major customers, suppliers and other third party business associates, the impact on the Company’s operations and financial reporting may range from minor errors to significant systems f ailure which could affect the Company’s ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers or other third parties, will be fully resolved.

 

 

4. Mineral Properties and Other Assets

 

 

 

1998

 

1997

Roche Bay Magnetite Project

     

Beginning of year

$ 4,621,429

 

$ 4,596,995

Additions during year

20,920

 

24,434

End of year

4,642,349

 

4,621,429

       

Freuchen Bay Property

     

Beginning of year

729,584

 

729,584

Additions during year

   

-

End of year

729,584

 

729,584

       
 

$ 5,371,933

 

$ 5,351,013

 

The recoverability of the amounts shown for mineral properties and related deferred costs is dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete their developme nt and upon future profitable production.

 

Roche Bay Magnetite Project

In 1968, the Company acquired mineral rights, by permit, which have been converted to a 100% working interest in various mineral leases and claims located near Roche Bay. These leases expire in 2000 and 2019. The leases and claims are located in th e 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 royalties based on 18.75% of the crown royalty.

 

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. These cla ims 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 clear up the Fat Lake mine site. Approximately $125,500 (1997 - $108,000) of the fine has been paid to date, and the remaining fine and an estimate of the clean up cost of $35,000 (1997 - $25,811) have been recorded as liabilities in these financial statements. The Company has made arrangements to complete payment of the fine and ensure the site is cleaned up. When this has been completed, the Seizure Notice will be lifted.

 

 

 

 

4. Mineral Properties - Continued

 

 

Mining and Other Equipment

 

1998

 

1997

   

Accumulated

 

Accumulated

 

Cost

Amortization

Cost

Amortization

         

Mining and geological equipment

$ 613,330

$ 603,452

$ 613,330

$ 599,341

Camp equipment

328,847

292,674

328,847

283,631

Office equipment

66,936

41,742

66,936

34,287

Drilling equipment

48,356

45,321

48,356

44,562

         
 

$ 1,057,469

$ 983,189

$ 1,057,469

$ 961,821

 

Net Book Value $74,280 $95,648

 

The net book value of mining and other equipment is included with the respective mineral properties in the financial statements.

 

 

5. Patents

 

 

   

1998

 

1997

   

Accumulated

 

Accumulated

 

Cost

Amortization

Cost

Amortization

         

Patents

$ 77,658

$ 6,010

$ 44,517

$ 2,904

 

Net Book Value $71,648 $41,613

 

 

6. Accounts Payable

 

 

In 1992, the Company issued 112,199 common shares to certain creditors in an attempt to settle debts. Certain of these creditors refused to accept the shares as full settlement of their outstanding accounts and returned the shares to the Company. The C ompany then held the shares until the market price reached a point where the creditors would accept them in full payment of the outstanding amount.

 

At March 31, 1998, 10,200 (1997 – 10,200) shares related to outstanding accounts payable of $22,950 (1997 - $22,950) have not been accepted by creditors.

 

 

 

 

 

 

 

 

 

 

7. Deposits on Share Issue

 

 

During 1998 and 1997, the Company received deposits for the issue of shares of its wholly-owned subsidiaries, Borealis Cool Manufacturing Limited and Borealis Power Manufacturing Limited. The deposits represent a reduction of the Company’s holdings by approximately 28% (1997-14%) of each company as at March 31, 1998. These shares have not been issued.

 

 

8. Loans Payable

 

 

The loans are unsecured, bear interest at 3% and are due on demand.

 

 

9. Royalty Payable

 

 

In 1993, the Company renegotiated its loan with Mr. G. Gillet, which had been assigned to Boston Safe Deposit & Trust Company ("Boston Safe"). Under the terms of the agreement with Boston Safe, the loan was converted into 10,000 common sh ares of Borealis Exploration Limited and a $1,875,000 US 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 Com pany gave an assignment of all receivables derived from its real property. To date, US$2,625 has been paid to Boston Safe. In 1995, Boston Safe assigned its interest to its nominee, Mitlock Limited Partnership. As a result of this US dollar denominated lo an the Company is exposed to foreign currency risk. All related foreign currency losses on this loan resulting from exchange rate fluctuations have been expensed in the current year.

 

 

 

10. Share Capital

 

 

(a) Authorized

5,000,000 common shares without par value

 

(b) Issued

 

1998

 

1997

 

Number of

 

Number of

 
 

Shares

Amount

Shares

Amount

Balance, beginning of year

4,014,653

$ 24,970,243

3,232,498

$ 23,084,059

Issued during the year:

       

Shares issued to settle accounts

payable

 

855,226

 

2,565,678

 

782,155

 

1,886,184

 

4,869,879

27,535,921

4,014,653

24,970,243

Less shares held by the Company

(17,395)

(83,528)

(17,395)

(83,528)

 

4,852,484

$ 27,452,393

3,997,258

$ 24,886,715

 

As at March 31, 1998, Borealis Gold Limited owned 16,895 (1997 – 16,895) common shares of the Company and the Company owned 500 (1997 – 500) shares of itself.

 

 

10. Share Capital - Continued

 

 

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. The Company has granted optio ns expiring March 29, 2002 to a director and officer to acquire a total of 200,000 shares of the Company for a price of $5.00 per share and an additional 121,121 options to acquire shares of the Company at a price of $3.00 per share, expiring on April 30, 1998.

 

 

11. 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.

 

In 1996, statements of claim were filed by the Attorney General of Canada, the Kilvalliq Inuit Association and the Baffin Region Inuit Association for failure to clean up sites in Fat Lake, Roche Bay and near Naguak Lake. At the present time, the resul t 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.

 

 

12. Related Party Transactions

 

 

During the year ended March 31, 1998, management fees totalling approximately $269,000 (1997 - $234,000) have been paid to a Partnership controlled by the president of the Company.

 

Travel, promotion, rent and other expenses totalling approximately $133,000 (1997 - $110,000) have been reimbursed to the president and a Partnership controlled by the president of the Company.

 

 

13. Income Taxes

 

 

Under Canadian Income Tax Law, development and exploration expenditures are subject to certain restrictions in deductibility. The Company has total expenditures of approximately $6,000,000 available as at March 31, 1998 to reduce future taxable income. The Company has total estimated Canadian and US non-capital loss carryforwards of approximately $5,900,000 which may be carried forward to reduce future taxable income. The availability of these amounts is subject to confirmation by the relevant tax aut horities.

 

 

14. Subsequent Event

 

 

Subsequent to year end an additional 121,121 common shares of the Company were issued at $3.00 per share on exercise of stock options.

 

 

 

15. Comparative Figures

 

 

The prior year’s financial statements were audited by another firm of Chartered Accountants. Certain comparative figures have been reclassified to conform with the current year’s presentation.