Borealis Exploration Limited
Consolidated Financial Statements
For the years ended March 31, 1999 and 1998
  Contents:
Auditors’ Report 
Comments by Auditors for US Readers on Canada-US
Reporting Differences 2
Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations and Deficit 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 13

 
Auditors’ Report
To the Shareholders of Borealis Exploration Limited

We have audited the consolidated balance sheets of Borealis Exploration Limited as at March 31, 1999 and 1998 and the consolidated statements of operations and deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards in Canada. 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, 1999 and 1998 and the results of its operations and cash flows for the years then ended, in accordance with generally accepted accounting principles as applied in the United States.

"BDO Dunwoody LLP"
Chartered Accountants
Calgary, Alberta
August 17, 1999

Comments by Auditors for US Readers on Canada-US Reporting Differences

In the United States, reporting standards for auditors would require the addition of an explanatory paragraph following the opinion paragraph when the financial statements are affected by a significant uncertainty such as referred to in Note 1 regarding the Corporation’s ability to continue as a going concern. Our report to the shareholders dated August 17, 1999 is expressed in accordance with Canadian reporting standards which do not permit a reference to such uncertainties in the auditors’ report when the uncertainties are adequately disclosed in the financial statements.

"BDO Dunwoody LLP"
Chartered Accountants
Calgary, Alberta
August 17, 1999

Borealis Exploration Limited
Consolidated Balance Sheets (in US Dollars)
As at March 31 1999   1998
      (Restated—Note 2)
Assets      
       
Current      
Cash $ 20,969   $ 5,588
       
Mining and other equipment (Note 4) 38,305   52,247
       
Patents (Note 5) 63,592   50,396
       
  $ 122,866   $ 108,231
       
       
Liabilities and Shareholders' Deficiency      
       
Current      
Accounts payable (Note 6) $ 1,421,443   $ 891,503
Loans payable (Note 7) -   17,205
Due to certain shareholders 17,532   721,439
  1,438,975   1,630,147
       
Deposits on share issue (Note 8) 2,527,013   1,138,550
       
Royalty payable (Note 9) 1,874,675   1,874,675
  5,840,663   4,643,372
       
Share capital (Note 10) 24,290,979   24,022,596
       
Due to directors (Note 11) 398,295   -
       
Contributed surplus 4,611,583   4,611,583
       
Cumulative translation adjustment 168,005   24,081
       
Deficit (35,186,659)   (33,193,401)
  (5,717,797)   (4,535,141)
       
  $ 122,866   $ 108,231
       
 
Approved on behalf of the Board:
Director
Director

Borealis Exploration Limited
Consolidated Statements of Operations and Deficit (in US Dollars)
For the years ended March 31 1999   1998
      (Restated-Note 2)
Expenses      
Salaries and fees for services $ 1,553,701   $ 1,209,794
Office, travel and miscellaneous 243,239   163,505
Legal and accounting 174,770   27,141
Amortization 13,755   7,534
Interest 6,604   28,032
Mineral property expenditures 3,669   20,243
  1,995,738   1,456,249
       
Other items      
Gain on settlement of debts 2,480   -
Contract revenue -   999
  2,480   999
       
Net loss for the year (1,993,258)   (1,455,250)
       
Deficit, beginning of year (33,193,401)   (31,738,151)
       
Deficit, end of year $ (35,186,659)   $ (33,193,401)
       
     
Basic loss per share $ (0.43) (0.40)   $ (0.31)
       
Weighted average number of shares 4,971,910   4,624,166
 

Borealis Exploration Limited
Consolidated Statements of Cash Flows (in US Dollars)
For the years ended March 31 1999   1998
      (Restated-Note 2)
Cash provided (used) by:      
     
Operating activities      
Operations      
Net loss for the year $ (1,993,258)   $ (1,455,250)
Items not involving cash      
Amortization 13,755   7,534
Compensation for services provided by deposits(Note 13) 90,750   -
  (1,888,753)   (1,447,716)
Changes in non-cash working capital balances      
Accounts payable 1,059,390   828,449
Foreign exchange on working capital items 143,934   14,930
  (685,429)   (604,337)
       
Financing activities      
Issue of share capital 283,383   -
Deposits on issue of shares by subsidiary, cash received (Note 13) 151,950   459,585
Financing costs applied against deposits (103,512)   -
Advances (to) from shareholders 918   176,021
Loans payable (17,205)   (24,500)
Proceeds raised from shares advanced by directors 398,295   -
  713,829   611,106
       
Investing activities      
Mining and other equipment and patent additions (13,019)   (11,028)
       
Increase (decrease) in cash 15,381   (4,259)
       
Cash, beginning of year 5,588   9,847
       
Cash, end of year $ 20,969   $ 5,588
       
       
 
1. Development Stage Operations and Going Concern

The Company has been in the development stage since its inception.

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 its operations the business of conducting basic industrial research for which it has patents issued or pending. In 1999 substantially all of the Company’s expenses relate to its research activities.

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, 1999, the Company had a deficit of $35,186,659 (1998 - $33,193,401) and a working capital deficiency of $1,418,006 (1998 - $1,624,559). 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. The financial statements do not contain any adjustments which might be necessary if the Company is unable to continue as a going concern.

On October 19, 1998, the Company successfully completed a continuance out of Canada into Gibraltar. Accordingly the Company received a Certificate of Discontinuance from Industry Canada and a Certificate of Reconciliation of a Company from the Register of Companies in Gibraltar. This move was consistent with the fact that most of the Company’s technology research was already being managed in Europe.

 2. Significant Accounting Policies During 1999 the Company’s management adopted accounting for their operations in accordance with accepted accounting principles in the United States ("US GAAP") in US dollars. The comparative financial statements have been restated to comply with US GAAP and for reporting in US dollars. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements have, in management’s opinion, been properly prepared using careful judgement with reasonable limits of materiality and within the framework of the significant accounting policies summarized below.
  (a) Principles of Consolidation
The consolidated financial statements include the accounts of Borealis Exploration Limited and its wholly owned subsidiaries, Borealis Exploration Incorporated, Borealis Gold Limited, Borealis Technical Limited, Borealis Cool Manufacturing Limited, Borealis Power Manufacturing Limited, Borealis Motor Manufacturing Limited and Roche Bay Mining Company Limited (See Note 8). All significant intercompany transactions have been eliminated upon consolidation.

(b) Reporting Currency
The Company’s financial statements are presented in US dollars, which is the functional currency for consolidated operations. Any amounts designated in Canadian dollars have been clearly identified as such (CDN$).
 

 (c) Mineral Properties
The Company is in the exploration stage with respect to its mineral properties. All property acquisition, general prospecting, evaluation, exploration and expenditures for the development and definition of mineralization are expensed as incurred until proved and probable reserves established are confirmed with independent engineers and financing is available to economically produce these reserves. Once proved and probable reserves of a property are confirmed by independent engineers and financing is committed, the Company will thereafter capitalize the related costs of the property.

In accordance with FAS 121, management is required to review the net carrying value of each exploration and development project on a periodic basis. Management would assess the future recoverability of capitalized costs, based on estimated future cash flows, using estimated prices and operating, capital and reclamation costs for estimated contained mineralization expected to be classified as proven and probable reserves upon completion of a feasibility or engineering study. Reductions in carrying value of each property would be recorded to the extent that the Company’s carrying value in each property exceeds its estimate of future net cash flows.

As all acquisition, general prospecting, evaluation, exploration and related costs have been expensed to date, no evaluation is currently required for the properties as no amount has been capitalized to the balance sheet at March 31, 1999.

(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
At the transaction date, each asset, liability, revenue or expense is translated into US dollars by using the then prevailing exchange rate. At the year end, all assets and liabilities are translated into US dollars by using the exchange rate in effect at that date. Adjustments resulting from the translation of financial statements into US dollars are included in the cumulative translation adjustment component of shareholders’ equity.

(f) Research and Development Costs
The Company is incurring costs related to research and development of basic industrial technology. These costs are expensed as incurred.

(g) Financial instruments
The Company carries various financial instruments. 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) Loss Per Share
SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and warrants and other convertible securities. As the Company’s stock options and warrants are antidilutive for all periods presented, only basic EPS is presented. At March 31, 1999, outstanding options to purchase 200,000 shares (1998 — 330,121 shares) of the Company’s common stock were not included in the computation of diluted EPS as their effect would be antidilutive.

(i) Income Taxes
Income taxes are provided based on the liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." Under this approach, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amount at each year end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by SFAS No. 109 to allow recognition of such an asset.

(j) Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS"), effective for all fiscal quarters beginning after June 15, 1997. In June 1999, the FASB issued SFAS 137 which further amends SFAS 133 and defers the implementation of SFAS 133. These statements address accounting and valuation derivatives and other hedging activities. The Company will adopt these statements as required and does not anticipate that the adoption of these will have a material effect on its financial statement presentation and disclosures.

In October 1998 FASB issued SFAS No. 134 and subsequently issued SFAS No. 135 in February 1999, and SFAS No. 136 in June 1999. These are statements issued for enterprises in industries other than those applicable to the industries in which the Company operates in.
 

 3. Mineral Properties As per Note 2(c), all mineral property expenditures incurred to date have been expensed since proven and probable reserves have not been conformed with independent engineers and the fact that there is no financing available to develop these reserves.

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 21 year leases expire in 2000 and 2019 and are all expected to be renewed. The leases and claims are located in the Baffin Mining District of Nunavut. In 1998 these mineral rights were transferred to the Company’s wholly owned subsidiary, Roche Bay Mining Company Limited.

 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 Nunavut. Claims were staked on these permits in 1992. The Company retains a 100% interest in the FB 1 through FB 6 claims. These 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 CDN in fines and penalties of $25,000 CDN related to the Company’s failure to clear up the Fat Lake mine site. Approximately $152,000 (1998 - $146,000 CDN) of the fine and penalties has been paid to date, and the remaining fine of $23,000 and an estimate of the clean up cost of $30,000 CDN (1998 - $35,000 CDN) 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, it is anticipated that the Seizure Notice will be lifted.

 4. Mining and Other Equipment
 
 
1999
  
1998
   
Accumulated
  
Accumulated
 
Cost
Amortization
Cost
Amortization
         
Mining and geological equipment $ 406,071 $ 401,448 $ 431,406 $ 424,458
Camp equipment 217,722 198,563 231,305 205,862
Office equipment 44,317 31,402 47,082 29,361
Drilling equipment 32,015 30,407 34,013 31,878
         
  $ 700,125 $ 661,820 $ 743,806 $ 691,559
Net Book Value $38,305 $52,247

5. Patents
 
   
1999
  
1998
   
Accumulated
  
Accumulated
 
Cost
Amortization
Cost
Amortization
         
Patents $ 70,386 $ 6,794 $ 54,623 $ 4,227
Net Book Value $63,592 $50,396
 
6. Accounts Payable

At March 31, 1999, 10,200 (1998 — 10,200) shares related to outstanding accounts payable of $22,950 CDN (1998 - $22,950 CDN) have not been accepted by creditors. These shares were issued and accounted for as a settlement of these payables. No further action has been initiated by these creditors in the current year. 7. Loans Payable The loans were unsecured, bore interest at 3% and were due on demand. In the current year these loans have been settled.
  8. Deposits on Share Issue From 1997 to 1999, the Company’s subsidiaries have received deposits for the issue of shares by wholly-owned subsidiaries, Borealis Cool Manufacturing Limited, ("Borealis Cool") and Borealis Power Manufacturing Limited, ("Borealis Power"). The deposits represent a reduction of the Company’s holdings by approximately 28% (1998-28%) of each company as of March 31, 1999. Additionally in 1999, the Company received deposits for the issue of shares of Borealis Motor Manufacturing Limited ("Borealis Motor"), another wholly-owned subsidiary. The deposits for shares of Borealis Motor represent a reduction of the Company’s holdings by approximately 4% as at March 31, 1999. These shares have not been issued. In 1999 total financing fees of $103,512 US to agents who assisted in the raising of these funds have been accrued and netted against the deposits. These deposits have been reflected as a liability as the Company may be obligated to return these funds upon demand if a demand is made prior to issue of shares by the subsidiaries. 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 shares of Borealis Exploration Limited and a $1,874,675 USD 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 mineral properties. As security for payment of the royalty, the Company gave an assignment of all receivables derived from its mineral properties. To date, US$2,625 has been paid to Boston Safe. In 1995, Boston Safe assigned its interest to its nominee, Mitlock Limited Partnership. 10. Share Capital (a) Authorized
5,000,000 common shares without par value
  (b) Issued  
  1999   1998
  Number of   Number of  
  Shares Amount Shares Amount
Balance, beginning of year 4,869,879 $ 24,061,365 4,014,653 $ 22,208,672
Issued during the year:        
Shares issued to settle accounts payable - - 855,226 1,852,693
Shares exercised under option 130,121 268,373 - -
  5,000,000 24,329,748 4,869,879 24,061,365
Less shares held by the Company (17,395) (38,769) (17,395) (38,769)
  4,982,605 $ 24,290,979 4,852,484 $ 24,022,596
  As at March 31, 1999, Borealis Gold Limited owned 16,895 (1998 — 16,895) common shares of the Company and the Company owned 500 (1998 — 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. Prior to 1998 the Company granted options 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. These options are still outstanding at the end of the current year. In addition 130,121 options granted in 1995 to acquire shares of the Company at a price of $3.00 per share before April 30, 1998 were outstanding as of March 31, 1997 and 1998. These 130,121 options were exercised in the current year. No further opotions were issued in either 1998 or 1999.

Currently the Company has issued common shares up to the authorized limit of 5,000,000 shares. Therefore it is management’s view that further disclosures about stock options under SFAS No. 123, Accounting for Stock Based Compensation, does not currently provide meaningful information.
 

 11. Due to Directors During the current year, certain directors of the Company have entered into an arrangement to loan a maximum of 350,000 common shares (the "loaned shares") to Borealis Technical Limited, a wholly owned subsidiary. As at March 31, 1999 a total of 234,031 shares had been loaned to the Company and were sold for total proceeds of $601,585CDN ($395,295US). These loaned shares have been sold privately and on the open market and the proceeds were used to finance the current year’s operations. As per the agreement with these directors, the Company has an obligation to return the loaned shares once the Company is able to return these shares either by the issue of additional shares or the acquisition of the Company’s shares on the open market. This commitment of the directors has been reflected as a separate component of the Company’s shareholders equity as the Company can settle the obligation via the issue of additional shares solely at the option of the Company. The amount due to directors has been recorded at the realized carrying values with no adjustment being made for the change in the trading prices of the shares. The fair value of the obligation based on trading prices in effect at March 31, 1999 would be approximately $ 936,000CDN ($620,000US). 12. 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. The Company has filed countersuits against these parties. A hearing has been scheduled for a later date. 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.

The Company is currently negotiating the settlement of payment of services provided to one of the its subsidiaries. The service provider and the Company have not agreed to an amount. As the amount of liability is currently not determinable this amount has not been accrued in the financial statements.

 13. Statement of Cash Flows Supplemental cash flow information:

1999
Deposits on share issues (Note 8) increased as a result of the following non-cash transactions in the year:
Settlement of accounts payable $ 544,450
Settlement of loans to shareholders 704,825
In exchange for services provided 90,750

$1,340,025

1998
The Company issued 855,226 common shares for $1,852,693 in settlement of various accounts payable (Note 10(b)).

 14. Related Party Transactions During the year ended March 31, 1999, management fees totalling approximately $198,000 (1998 - $192,000) have been paid to a Partnership controlled by the Chief Executive Officer of the Company.

Travel, promotion, rent and other expenses totalling approximately $87,000 (1998 - $95,000) have been charged to the Company by the Chief Executive Officer and a Partnership controlled by the Chief Executive Officer of the Company.

 15. Income Taxes Under Canadian Income Tax Law, mining development and exploration expenditures are subject to certain restrictions in deductibility. The Company had total expenditures of approximately $8,294,000 CDN available as at March 31, 1998 to reduce future taxable income. The Company had total estimated Canadian and US non-capital loss carryforwards of approximately $6,493,000 CDN which may be carried forward to reduce future taxable income. The availability of these amounts was subject to confirmation by the relevant tax authorities.

As at March 31, 1999 there are approximately $2,665,000 CDN of total mining development and exploration expenditures to reduce future taxable income for a subsidiary company that owns a mining property in Canada. During 1999 the Company completed an internal reorganization as detailed in Note 1. The status of some of the available tax pools available in North America is currently not determinable. It is management’s estimate that $ 1,900,000US of loss carryforwards remain available to shelter future taxable income in the US. As per Note 2(i), no deferred tax assets have been setup since they are offset by a valuation allowance.

 16. Segmented Information As discussed in Note 1, the Company has two reportable operating segments. The Company’s mining exploration operations are conducted on properties in Canada. The only assets under this business segment are the mining and other equipment. All other assets relate to the Company’s other reportable operating segment, being the business of conducting basic industrial research with the intent to commercialize these technologies. While the technical rights and/or patents are housed in Gibraltar, the research activities are carried out in various locations around the world. 17. Canadian GAAP Reconciliation The financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles ("US GAAP"). The financial statements confirm in all material respects with generally accepted accounting principles in Canada ("Canadian GAAP") except for the following:

(a) Foreign currency translations

Under US GAAP, all revenues and expenses are translated into the reporting currency at the transaction date rate. At year end, all assets and liabilities are translated into the reporting currency by using the exchange rate in effect at that date. Resulting foreign exchange gains and losses are reflected as a separate component of shareholders equity.

Under Canadian GAAP, non-monetary assets and liabilities would be translated at historical exchange rates. Given that mining and other equipment and patents are the only non-monetary items held by the Company, this difference is not material to the financial statements.

            (b) Mineral properties

Under US GAAP, junior mining companies expense all property acquisition, general prospecting, evaluation, exploration and expenditures for the development and definition of mineralization as incurred until proved and probable reserves are established. Once proved and probable reserves of a property are confirmed by independent engineers and financing is committed, capitalization of related costs would commence. This is significantly different from the accounting policy allowed under Canadian GAAP.

Under Canadian GAAP, companies in the exploration stage follow 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 writedown to net realizable value is required. Under Canadian GAAP, 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.

Under Canadian GAAP, exploration costs for mineral properties that would have been capitalized are as follows:

  
For each of the years ended March 31,
1999
1998
     
Mineral exploration costs
$ 3,669
$ 20,243
  In addition, under Canadian GAAP the total exploration costs for mineral properties that would be capitalized as at March 31, 1999 would be approximately $3,511,000 (1998 - $3,726,000). 19. Uncertainty Due to 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 failure 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.