MILLSTREAM MINES LTD.

FINANCIAL STATEMENTS

 AUGUST31, 1999
 

LITVACK, ADELMAN

CHARTERED ACCOUNTANTS

UNIT 1

146 WEST BEAVER CREEK ROAD

RICHMOND HILL, ONT., CANADA L4B 1C2

TELEPHONE: 905-731-1353 FAX: 905-731-4240

HARRY LITVACK, CA.

RICHARD ADELMAN, CA.

AUDITORS' REPORT

To the Shareholders of
Millstream Mines Ltd.
 

We have audited the Balance Sheet of Millstream Mines Ltd. as at August 31,1999 and August31, 1998 and the Statements of Income and Deficit and Changes in Financial Position for the years 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 an 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 financial statements present fairly, in all material respects, the financial position of the company as at August 31,1999, and as at August 31,1998 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles.
 

Richmond Hill, Ontario

 January 14, 2000 Chartered Accountants



MILLSTREAM MINES LTD.

(INCORPORATED UNDER THE LAWS OF THE PROVINCE OF NEW BRUNSWICK)

BALANCE SHEET

AS AT AUGUST 31,1999


 
1999
1998
ASSETS
    
CURRENT    
Bank
$8,219
$5,462
GST receivable
35,441
91,380
 
43,660
96,842
OIL AND GAS INTERESTS (Note 1)
1
1
MINING CLAIMS AND DEFERRED EXPLORATION EXPENDITURES (Note 2)
10,805,198
5,306,417
 
10,805,199
5,306,418
 
$ 10,848,859
$ 5,403,260
     
LIABILITIES
    
CURRENT    
Accounts payable and accrued liabilities
$5,000
$12,531
Due to related parties (Note 3)
3,107,298
1,241,639
 
3,112,298
1,254,170
LONG TERM    
Due to related parties
-
819,763
 
3,112,298
2,073,933
     
SHAREHOLDERS' EQUITY
    
ISSUED CAPITAL    
Authorized Issued    
Unlimited 29,599,043 Common shares (Note 4)
10,286,236
5,668,576
CONTRIBUTED SURPLUS
123,928
123,928
DEFICIT
(2,673,603)
(2,463,177)
 
7,736,561
3,329,327
 
$ 10,848,859
$ 5,403,260

 

Approved on behalf of the Board:

____________________________________                                         ______________________________________

Ernest Harrison                                                                                                 Edward Harrison
 
 

SEE ACCOMPANYING NOTES
 
 

MILLSTREAM MINES LTD.

STATEMENT OF INCOME AND DEFICIT

FOR THE YEAR ENDED AUGUST 31,1999


 
1999
1998
REVENUE    
Oil and gas sales (net)
$ 1,257
$ 1,376
Interest earned
60
9
 
1,317
1,385
EXPENSES    
Commissions
122,150
223,369
Corporate services
7,200
7,200
Office and general
1,221
3,678
Interest on loan
38,667
-
Operating expenses
652
569
Professional fees
5,785
13,343
Shareholder information
29,683
249,430
Transfer agent fee
4,885
8,505
Travel
1,500
-
 
211,743
506,092
LOSS BEFORE DISCONTINUED OPERATIONS
(210,426)
(504,707)
NET LOSS FROM DISCONTINUED OPERATIONS (Note 2a),b))
-
(639,245)
NET LOSS
(210,428)
(1,143,952)
DEFICIT, beginning of year
(2,463,177)
(1,319,225)
DEFICIT, end of year
$(2,673,603)
$(2,463,177)
LOSS per common share
$ .01
$ .05
Fully diluted earnings per share (Note 6)    
 
SEE ACCOMPANYING NOTES
 
MILLSTREAM MINES LID.

STATEMENT OF CHANGES IN FINANCIAL POSITION

FOR THE YEAR ENDED AUGUST 31,1999

 
1999
1998
CASH PROVIDED BY (USED FOR)    
OPERATIONS    
Net loss
$ (210,426)
$ (1,143,952)
Net change in operating working capital
1,094,304
(63,950)
 
883,878
(1,207,902)
FINANCING    
Issued common shares
4,617,660
2,713,761
INVESTMENT    
Mining claims and deferred exploration
(5,498,781)
(1,503,221)
INCREASE (DECREASE) IN CASH
2,757
2,638
CASH - beginning of year
5,462
2,824
CASH - end of year
$ 8,219
$ 5,462

MILLSTREAM MINES LTD

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED AUGUST 31,1999


 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations
 
  The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern which presumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business.

The Company is in the process of exploring its resource properties and has not yet determined whether the properties contain economically recoverable reserves. The recovery of the amounts shown for resource properties and the related deferred expenditures is dependent upon the existence of economically recoverable reserves, confirmation of the Company's interest in the underlying mining claims, the ability of the Company to obtain necessary financing to complete the development, upon future profitable production arid the support of the Company's trade creditors.

The financial statements do not give effect to any adjustments to the amount of assets and liabilities that might be necessary should the Company be unable to continue as a going concern and therefore, be required to realize its assets and discharge its liabilities in other than the ordinary course of business.

 Mining Claims
 
  Mining claims are carried at cost until they are brought into production at which time they are depleted on a unit-of-production basis.

Exploration expenditures relating to mining claims are deferred until the properties are brought into production at which time they are amortized on a unit-of-production basis.

The cost of claims abandoned or sold and the deferred exploration costs relating to claims abandoned or sold are charged to operations in the current year.
 
 

 Administrative Expenses  
                Administrative expenses are charged to operations in the year incurred.               Oil and Gas Interests
  The Company follows the successful efforts method of accounting for oil and gas interests whereby all costs relating to the acquisition, exploration and development of petroleum and natural gas reserves are capitalized until their economic status has been evaluated.

All costs of successful wells are amortized over their useful lives.
 

1.  OIL AND GAS INTERESTS
 

The Company holds a 6.25% interest in a producing well in Canadian County, Oklahoma, U.S.A. with royalty interests not exceeding 25%. The well is recorded on the books of the Company at the nominal value of $1.
 

2.  MINING CLAIMS AND DEFERRED EXPLORATION EXPENDITURES
     
     
    Opening
    Additions
    Closing
    a) Gold properties, Czech Republic      
    Acquisition $ 800,000 $ - $ 800,000
    Exploration
    1,581,092
    260,476
    1,841,568
    b) Potter Mine, Ontario      
    Acquisition
    50,000
    4,610,000
    4,660,000
    Exploration
    2,471,978
    505,691
    2,977,669
    c) Falconbridge Twp. Airport Property      
    Exploration
    139,011
    -
    139,011
    d) Tamarack, Montana      
    Acquisition
    231,088
    -
    231,088
    Exploration
    33,246
    122,614
    155,862
     
    $ 5,306,417
    $ 5,498,781
    $ 10,805,198

     

    a) Gold properties, Czech Republic

    The company holds a 65% interest in 5 gold properties located in the Czech Republic, formerly part of Czechoslovakia.
     
     

    b) Potter Mine, Ontario

    The company holds 100% interest in the Potter Mine Property with all purchase transactions ratified in the annual and special shareholders' meeting held May 4,1999. An officer and shareholder of the company has a declared minority 10% interest in Harrison Mining and Engineering Corporation, the vendor of the property. The vendor retains a 2.5% net smelter return royalty on the property which the company may purchase at any time for $3,000,000. A $1,600,000 promissory note was issued by the company to the vendor as part of the purchase consideration and remains outstanding to date.

    On June 1,1999 the company entered into an agreement with Hunter Dickinson Group Inc. Of Vancouver, B.C. (farmee), granting to the farmee an exclusive farmout right to earn interests in the property by incurring approved phased exploration expenditures on the property. Upon completing each phase of expenditure, the company has the right to reacquire the interests so earned. Failing such exercise to reacquire the parties will form a joint venture to coordinate further exploration and development of the properly. The maximum earnable interest must be achieved in each phase to have the right to proceed to the following phase as.

    phase I - terminating December 31,1999, maximum 30% earnable interest for $4,000,000 of expenditures

    phase 2 - term' mating December 31, 2000, maximum 25% earnable interest for $10,000,000 of expenditures', and,
    phase 3 - terminating December 31, 2001, maximum 5% earnable interest for $5,000,000 of expenditures.

    In September, 1999, the farmee acknowledged insufficient funds had been accrued and a deficit existed regarding the approved work program. That further raising of money was being undertaken to fund the existing deficit and the continuation of work on site. As of December 31,1999, the farmee had not raised nor supplied any additional monies and remained in default within the terms of the agreement.

    On December 16, 1999, with the acknowledgement of Hunter Dickinson Group Inc., the company entered into an agreement with Teck Corporation, a major mining entity, granting a First-Right of Refusal to purchase, in whole or in part, its interest in the Potter Mine Property. In consideration, Teck Corporation will supply assistance, reviews, recommendations, guidance and written comments on technical reports at no charge to the company. Additionally, Teck will provide verbal advice and comments to the company in sourcing and securing funds to continue programs on the property.

    c) Falconbridge Twp. Airport Property

    On September 23, 1997 the company entered into an Agreement to purchase a 50% interest in the Falconbridge Twp. Airport Property located in Ontario. The property consists of 46 mining claims. The acquisition price of $60,000 is not due until March 31,.2000. The company has agreed to:

    a) pay a 2.5% net smelter return royalty on all production from this property,

    b) fund exploration expenditures of $550,000 by March 31, 2000 and thereafter on a 50/50 basis, and

    c) to pay an advance royalty to the other 50% owner of $40,000 per year to a maximum of $400,000 or until a production decision is taken, whichever comes first, commencing April 1, 2000. The company is in the process of negotiating an extension to the above dates.

    d) Tamarack, Montana

    Pursuant to a Memorandum of Understanding dated April 19,1998, the company acquired a 50.5% undivided interest in the Tamarack property for $161,500 US ($231,088 Cdn). The company has agreed to supply further funding for planned exploration and exploitation and shall be entitled to 80% of all revenues until funding provided by the company has been recaptured and 50.5% thereafter.
     

    3.   RELATED PARTY TRANSACTIONS
     

An officer and shareholder of the Company is also a shareholder of the entities within The Harrison Group of Companies.  
 
The Harrison Group of Companies 
  $ 193,868
An officer and shareholder of the Company is also a declared minority (10%)
shareholder of Harrison Mining and Engineering Corporation.
 
 
Harrison Mining & Engineering Corp.
a)   demand loan  $ 1,274,763
b)   promissory note (principle)  $1,600,000                                                                2,874,763
promissory note accrued interest 
38,667   
$ 3,107,298
a) This loan was due September 1,1999. No demand has yet been made and no terms for interest have been determined on this loan.

b) This promissory note bears interest at the rate of the Toronto Dominion Bank prime plus 1 % per annum, compounded annually, and due on April 3, 2000, provided that a commercial production decision has been announced on or before that date.
 

 The following related party transaction occurred during the year: - deferred exploration provided by entities within The Harrison Group of Companies amounted to $762,587. 4. COMMON SHARES During the year 6,797,204 common shares were issued for $4,617,660.

Warrants outstanding at August 31 1999 are as follows:

  Options outstanding at August 31, 1999 are as follows:                 5. SUBSEQUENT EVENTS  On November 9,1999, 330,332 options @ $0.25 were set aside but not yet allotted.

6. FULLY DILUTED EARNINGS PER SHARE

  Fully diluted earnings per share have not been reported, as required by generally accepted accounting principles, for the fiscal years ended August 31,1998 and 1999 because the calculation would result in an increase in loss per share.