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Consolidated Financial Statements of

CANARC RESOURCE CORP.

(expressed in thousands of United States dollars)

Six Months Ended June 2002 and 2001


        G. Ross McDonald*

                 Chartered Accountant

                                                                                                                                               

                    *Denotes incorporated professional                                                                              Suite 1402, 543 Granville Street

                                                                                                                                                                                           Vancouver, B.C.  V6C 1X8

                                                                                                                                                                                           Tel:   (604) 685-8646

                                                                                                                                                                                            Fax:  (604) 684-6334

NOTICE TO READER

I have compiled the consolidated balance sheet of Canarc Resources Corp. as at June 30, 2002 and consolidated statements of operations and deficit and cash flows for the period then ended from information provided by the Company.  I have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information.  Readers are cautioned that these statements may not be appropriate for their purposes.

�G. Ross McDonald� (signed)

G. Ross McDonald
Chartered Accountant

Vancouver, British Columbia
August 9, 2002



CANARC RESOURCE CORP.

CONSOLIDATED BALANCE SHEETS

(expressed in thousands of United States dollars)

(Unaudited � See Notice to Reader)

 

June 30, 2002

December 31, 2001

 

 

ASSETS

 

 

Current assets

 

      Cash and cash equivalents

$

298

$

70

 

      Marketable securities (Note 3)

324

300

 

      Due from related parties (Note 7)

11

11

 

      Receivables

26

93

 

 

     

659

474

 

 

Resource properties (Note 4)

10,953

16,408

 

 

Capital assets (Note 5)

201

199

 

 

$

11,813

$

17,081

 

 

Liabilities and Shareholders� Equity

 

 

Current liabilities 

 

      Accounts payable and accrued liabilities

$

55

$

108

 

 

Non-controlling interest in subsidiary

116

136

 

 

Shareholders� equity

 

      Share capital (Note 6)

 

            Authorized: 

 

                  100,000,000 common shares

 

            Issued:

 

                  45,613,321 common shares

44,768

44,491

 

 

DEFERRED STOCK-BASED COMPENSATION

5

-

 

 

Deficit

(33,131)

(27,654)

 

 

11,642

16,837

 

 

$

11,813

$

17,081

 

 

Going concern (Note 1)

 

Commitments and contingencies (Note 4)

 

 

See accompanying notes to consolidated financial statements.

 

 

Approved by the Directors 

�Bradford J. Cooke�

�Stephen Peck�

Director

Director


CANARC RESOURCE CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

(expressed in thousands of United States dollars)

(Unaudited � See Notice to Reader)

Three Months Ended June 30,

Six Months Ended June 30,

2002

2001

2002

2001

REVENUE

    Investment and other income

$

196

$

(2)

$

206

$

4

COSTS AND EXPENSES

    General and administrative

54

61

102

109

    Property investigation

5

11

12

48

    Amortization

2

1

3

3

    Corporate development

1

1

1

1

    Travel

3

1

3

1

    Shareholder relations

1

(1)

1

-

    Write-down of resource properties

5,516

(13)

5,516

39

5,582

61

5,638

201

LOSS BEFORE THE UNDERNOTED

5,386

63

5,432

197

    Stock-based compensation

60

-

65

-

    Non-controlling interest

(19)

(1)

(20)

(23)

LOSS FOR THE PERIOD

5,427

62

5,477

174

DEFICIT, BEGINNING OF PERIOD

27,704

24,106

27,654

23,994

DEFICIT, END OF PERIOD

$

33,131

$

24,168

$

33,131

$

24,168

WEIGHTED AVERAGE NUMBER OF

    SHARES OUTSTANDING

44,169,966

41,724,911

44,036,459

41,263,372

LOSS PER SHARE

$

0.12

$

-

$

0.12

$

0.01


CANARC RESOURCE CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of United States dollars)

(Unaudited � See Notice to Reader)

Three Months Ended June 30,

Six Months Ended June 30,

2002

2001

2002

2001

CASH PROVIDED FROM (USED FOR):

OPERATING ACTIVITIES:

    Loss for the period

$

(5,427)

$

(62)

$

(5,477)

$

(174)

    Items not involving cash:

        Write-down of resource properties

5,516

(13)

5,516

39

        Gain on sale of marketable securities

(195)

2

(203)

(1)

        Non-controlling interest

(19)

(1)

(20)

(23)

        Amortization

2

1

3

3

        Stock-based compensation

60

-

65

-

    Changes in non-cash operating working capital:

            Due from related parties

5

(13)

-

(19)

            Receivables

(10)

(1)

67

16

            Accounts payable and accrued liabilities

(37)

(59)

(40)

(99)

(105)

(146)

(89)

(258)

FINANCING ACTIVITIES

    Shares issued for cash

217

293

217

293

INVESTING ACTIVITIES

    Purchase of capital assets

(5)

-

(6)

-

    Proceeds from sale of capital assets

1

2

1

2

    Purchase of marketable securities

(222)

-

(232)

-

    Proceeds from sale of marketable securities

341

13

398

28

    Resource properties, net of recoveries

(56)

(12)

(61)

44

59

3

100

74

INCREASE IN CASH AND CASH EQUIVALENTS

171

150

228

109

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

127

57

70

98

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

298

$

207

$

298

$

207


1.         Going concern

            The Company is in the mineral exploration business and has not yet determined whether its resource properties contain reserves that are economically recoverable.  The recoverability of amounts capitalized for resource properties is dependent upon the existence of economically recoverable reserves in its resource properties, the ability of the Company to arrange appropriate financing to complete the development of its properties, confirmation of the Company�s interest in the underlying properties (Note 4(f)), the receipt of necessary permitting and upon future profitable production or proceeds from the disposition thereof.

            The Company has incurred significant operating losses and has an accumulated deficit of $33,131,000 at June 30, 2002.  Furthermore, the Company has working capital of $604,000 as at June 30, 2002, which is not sufficient to achieve the Company�s planned business objectives.  These financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business.  The Company�s ability to continue as a going concern is dependent on continued financial support from its shareholders and other related parties, the ability of the Company to raise equity financing, and the attainment of profitable operations, external financings and further share issuances to meet the Company�s liabilities as they become payable.  These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary, should the Company be unable to continue as a going concern. 

2.         Significant accounting policies

            (a)        Basis of presentation

                        These consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned except for Sara Kreek Resource Corporation N.V., in which the Company holds an 80% interest, and Minera Aztec Silver Corporation, in which the Company holds a 63% interest at June 30, 2002.  All significant intercompany transactions and balances have been eliminated.

                        These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles. 

                        The accompanying unaudited interim consolidated financial statements are prepared in accordance with generally accepted accounting principles (�GAAP�) in Canada.  They do not include all of the information and disclosures required by Canadian GAAP for annual financial statements.  In the opinion of management, all adjustments considered necessary for fair presentation have been included in these financial statements.  The interim consolidated financial statements should be read in conjunction with the Company�s consolidated financial statements including the notes thereto for the year ended December 31, 2001. 


2.         Significant accounting policies  (continued)

            (b)        Change in accounting policy

                        On January 1, 2002, the Company adopted the new accounting standard of the Canadian Institute of Chartered Accountants for accounting for stock-based compensation expense.  Under this standard, compensation expense on stock options granted to non-employees is recorded as an expense in the period the options are vested using the fair value method estimated using the Black-Scholes Option Pricing Model. 

                        The Company has elected to follow the intrinsic value method of accounting for stock options granted to directors and employees whereby no compensation expense is recognized when stock options are granted if the exercise price of the stock options are granted at market value.  Any consideration paid by directors and employees on exercise of stock options or purchase of shares is credited to share capital.  However, additional disclosure of the effects of accounting for stock-based compensation to directors and employees as compensation expense, using the fair value method estimated using the Black-Scholes Option Pricing Model, is disclosed as pro-forma information. 

3.         Marketable securities

June 30,

2002

Investment in shares of companies, at cost

$

462

Cumulative write-downs

(323)

139

Short-term bonds

185

$

324

            The quoted market value of marketable securities is approximately $428,900 at June 30, 2002.  Included in investment in shares of  companies is shares of Skinny Technologies Inc. (formerly Consolidated Magna Ventures Ltd.), (�Skinny�), a company which until April 2, 2002, had certain directors in common.  During 2002, the Company transferred 100,000 shares of Skinny that it held to a related party in settlement of Cdn $20,000 of the amounts due to a related party.


4.         Resource properties

June 30, 2002

Acquisition
costs

Exploration/
development

Total

British Columbia:

  New Polaris (Note 4(a)(i)):

$

3,605

$

-

$

3,605

  Eskay Creek (Note 4(a)(ii)):

188

14

202

Costa Rica:

  Bellavista (Note 4(b)):

90

-

90

Suriname:

  Sara Kreek (Note 4(c)(i))

1,567

3,434

5,001

  Benzdorp (Note 4(c)(ii))

151

1,890

2,041

Mexico:

  Clara (Note 4(d)(i))

-

14

14

$

5,601

$

5,352

$

10,953

            (a)        British Columbia

                        (i)         New Polaris:

                                    The New Polaris property, which is located in the Atlin Mining Division, British Columbia, is 100% owned by the Company subject to a 15% net profit interest which may be reduced to a 10% net profit interest within one year of commercial production by issuing 150,000 common shares to Rembrandt Gold Mines Ltd.   During fiscal 2002, the Company wrote-down the property by $5,467,841 to reflect management�s estimate of the property�s recoverable value. 

                        (ii)        Eskay Creek:

                                    The Company owns a one-third carried interest in the Eskay Creek property, Skeena Mining Division, British Columbia, pursuant to a joint venture with Barrick Gold Corp. (formerly Homestake Canada Inc.).  The property is subject to a 2% net smelter return in favour of a related company.

            (b)        Bellavista, Costa Rica

                        The Company owns an 18.3% carried interest in this property, which is located near San Jose, Costa Rica.  A property agreement giving Wheaton River Minerals Ltd. (�Wheaton�) the right to earn a 100% working interest in the property calls for pre-production payments to be made to the Company in the amount of $117,750 annually up to and including the year commercial production commences.  During 2001, in addition to the cash pre-production payment for 2001, Wheaton made the pre-production payments due for the years ending December 31, 2002 and 2003 by paying cash of $58,875 and issuing 529,000 common shares of Wheaton. 


4.         Resource properties (continued)

             (c)       Suriname:

                        (i)         Sara Kreek:

                                    The Company holds 80% of the shares of Sara Kreek Resource Corporation N.V., the company that holds the Sara Kreek concession.  The Company may be required to issue an additional 200,000 shares to the vendor upon completing a feasibility study and commencing commercial production of the underground deposits.

                        (ii)        Benzdorp:

                                    In April 1996, the Company entered into an option agreement to earn up to an 80% interest in the Benzdorp property by making cumulative cash payments of $750,000 and property expenditures totalling $5 million over a four year period. The agreement provides for escalated advance royalty payments commencing in October 2000 in connection with the timing of completion of a feasibility study.  The Company has earned a 40% interest in the Benzdorp property, but has exercised its right not to expend any further monies or to make any further payments until the property owner transfers the exploration rights on the property to the corporate entity contemplated in the agreement, as provided under the terms of the agreement. 

            (d)        Mexico

                        (i)         Clara:

                                    In March 2001, pursuant to a Letter of Intent with Teck Cominco Limited, the Company�s 63% owned subsidiary, Minera Aztec Silver Corporation (�Aztec�) was granted an option to acquire a 100% interest in two mineral claims located in Mexico in consideration of incurring exploration expenditures on the property in the aggregate of $500,000 and issuing an aggregate of 500,000 shares of Aztec over a four year period.  If Aztec is not listed on a stock exchange within two years, then Aztec will have the option to pay a series of cash payments totalling $185,000 over a four year period.  The optionor will retain a 2% net smelter return royalty of which 50% may be purchased by the Company for $1,000,000.  Completion of this Letter of Intent is subject to a due diligence review and the signing of a formal agreement. 

                        (ii)        Lobo: 

                                    The Company held a 100% interest in the Lobo Properties, Mexico, which had been written-off as at December 31, 2000 upon the cessation of exploration activity.  In 2002, the Company paid $49,000 for additional costs related to the properties. 

            (e)        Expenditure options:

                        To maintain the Company's interest and to fully exercise the options under various property agreements covering the properties located in British Columbia, Suriname and Mexico, the Company must incur exploration expenditures on the properties and make payments in the form of cash and/or shares to the optionors as follows:


4.         Resource properties  (continued)

Option/Advance

Royalty Payments

Expenditure

Commitment

Shares

Benzdorp (Note 4(c)(ii))

                                   2002  (i)

$

150

$

-

               -

                                   2003

200

-

               -

                                   2004

250

3,500

               -

                                   2005

250

-

               -

                                   2006

250

-

               -

                                    2007

500

-

               -

Sara Kreek (Note 4(c)(i))

    On commercial production

-

-

    200,000

New Polaris (Note 4(a)(i))

    Net profit interest buyout

-

-

    150,000

Clara (Note 4(d)(i))         2002

-

50

      50,000   (ii)

                                   2003

-

100

      50,000   (ii)

                                   2004

-

150

    100,000   (ii)

                                   2005

-

200

    300,000   (ii)

$

1,600

$

4,000

    850,000

                        (i)    The timing of these option/advance royalty payments is dependent upon the owner transferring the exploration rights to the Benzdorp property to the corporate entity contemplated under the agreement.  Should this transfer not occur in 2002, these payments and the expenditure commitment, will each be extended by one year. 

                        (ii)    Shares of the Company�s subsidiary, Minera Aztec Silver Corporation, to be issued. 

            These amounts may be reduced in the future as the Company determines which properties to continue to explore and which to abandon. These amounts do not include future cash payments payable to the Company and related exploration expenditures on properties optioned to third parties.

            (f)         Resource properties contingencies

                        The Company has diligently investigated rights of ownership of all of the resource properties/concessions to a level which is acceptable by prevailing industry standards with respect to the current stage of development of each property/concession in which it has an interest and, to the best of its knowledge, all agreements relating to such ownership rights are in good standing.  However, all properties/concessions may be subject to prior claims, agreements or transfers, and rights of ownership may be affected by undetected defects.


5.         Capital assets

June 30, 2002

Cost

Accumulated
amortization

Net book
value

Mining equipment

$

142

$

-

$

142

Vehicles

15

-

15

Office furniture and equipment

152

108

44

$

309

$

108

$

201

6.         Share capital

            (a)        Issued

Number of

Shares

Amount

Balance at December 31, 2001

43,834,801

$

44,491

     Private placement

1,150,000

133

     Exercise of warrants

375,000

84

     Exercise of share appreciation rights

253,520

60

Balance at June 30, 2002

45,613,321

$

44,768

            (b)        Stock option plan

                        The Company has a stock option plan that allows it to grant options to its employees, officers and directors to acquire up to 7,956,450 common shares.  The exercise price of each option equals the high/low average price for the common shares on the Toronto Stock Exchange based on the last five trading days before the date of the grant.   At the discretion of the Board, certain option grants provide the holder the right to receive the number of common shares, valued at the quoted market price at the time of exercise of the stock options, that represent the share appreciation since granting the options.  Options have a maximum term of ten years and terminate 30 days following the termination of the optionee�s employment, except in the case of death, in which case they terminate one year after the event.  Vesting of options is made at the discretion of the Board at the time the options are granted.

                        The continuity of stock options for the period ended June 30, 2002 is as follows:

Number of

Shares

Weighted Average Exercise Price

(Cdn)

Outstanding, December 31, 2001

2,549,000

$

0.45

Granted

1,500,000

0.17

Exercised

-

-

Expired/cancelled

(370,000) *

0.17

Outstanding, June 30, 2002

       3,679,000 

$

0.37

Exercise price range (Cdn)

$

0.17 - $0.92

                        * cancelled pursuant to the exercise of share appreciation rights
6.         Share capital  (CONTINUED)

            At June 30, 2002, the options outstanding are all exercisable and expire at various dates from March 27, 2005 to June 23, 2010 with a weighted average remaining life of approximately 6 years.

            Pursuant to the new CICA policy of accounting for stock-based compensation, compensation expense on stock options granted to directors and employees using the fair value method is disclosed as pro-forma information. 

            The fair value of stock options used to calculate compensation expense is estimated using the Black-Scholes Option Pricing Model with the following assumptions:   

Risk-free interest rate

3.62%

Expected dividend yield

-

Expected stock price volatility

71.62%

Expected option life in years

4.5

                        The pro forma effect on net loss and loss per share for the period ended June 30, 2002 of the actual results had the Company accounted for the stock options granted to directors and employees using the fair value method is as follows: 

Net loss for the period

      Reported

$

(5,477)

      Pro forma

$

(5,569)

Basic and diluted loss per share

      Reported

$

(0.12)

      Pro forma

$

(0.13)

                        Option pricing models require the input of highly subjective assumptions including the expected price volatility.  Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company�s stock options. 

            (c)        Warrants:

Maturity Dates

Exercise Prices

Warrants

Issued pursuant to private placements:

May 17, 2003/2004

Cdn $0.18/$0.20

3,000,000

April 8, 2004

Cdn $0.21

1,080,000

Outstanding, June 30, 2002

4,080,000

                        Each warrant entitles the holder to purchase one common share of the Company.


6.         Share capital (continued)

             (d)       Shares reserved for issuance

Number of shares

Outstanding, June 30, 2002

45,613,321

Property agreements (Note 4(e))

350,000

Stock options (Note 6(b))

3,679,000

Warrants (Note 6(c))

4,080,000


Fully diluted, June 30, 2002

53,722,321

            (e)        Shareholder rights plan

                        On October 25, 1995, the shareholders of the Company approved a shareholders rights plan (the �Plan�).  The Plan became effective on November 14, 1995.

                        The Plan is intended to ensure that any entity seeking to acquire control of the Company makes an offer that represents fair value to all shareholders and provides the board of directors with sufficient time to assess and evaluate the offer, to permit competing bids to emerge, and, as appropriate, to explore and develop alternatives to maximise value for shareholders.  Under the Plan, each shareholder at the time of the Plan�s adoption was issued one Right for each common share of the Company held.  Each Right entitles the registered holder thereof to purchase from treasury one common share at Cdn$25, subject to certain adjustments intended to prevent dilution.  The Rights are exercisable after the occurrence of specified events set out in the Plan generally related to when a person, together with affiliated or associated persons, acquires, or makes a take-over bid to acquire, beneficial ownership of 20% or more of the outstanding common shares of the Company.  The Rights expire in November 2003.

7.         Related party transactions

            At June 30, 2002, amounts due from related parties comprise balances owing from companies with certain common directors.  The amounts were for reimbursement of costs in the normal course of business.   

            General and administrative and property investigation costs include Cdn $60,000 of consulting fees charged by a company controlled by a director of the Company.

8 .        Segment disclosures

            The Company has one operating segment, being mineral exploration, and substantially all assets of the Company are located in Canada except for certain resource properties as disclosed in Note 4 and $58,000 of mining equipment and vehicles which are located in Suriname. 


9.         Supplemental disclosure with respect to cash flows

             

June 30,

2002

Significant non-cash financing and investing activities: 

   Settlement of accounts payable with marketable securities

$

13

   Stock-based compensation

     - exercise of share appreciation rights

60

            Supplemental cash flow information: 

Income taxes paid

$

-

Interest paid

-

Interest received

3


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