EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Consolidated Financial Statements

For the years ended June 30, 2003, 2002 and 2001

(Expressed in Canadian Dollars)

 

Contents

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Auditors' Report

 

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To the Shareholders of

EnerNorth Industries Inc.

We have audited the consolidated balance sheets of EnerNorth Industries Inc. as at June 30, 2003 and 2002 and the consolidated statements of loss and deficit and consolidated statements of cash flows for the years ended June 30, 2003, 2002 and 2001. 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 audits.

We conducted our audits in accordance with Canadian and U.S. 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 June 30, 2003 and 2002 and the results of its operations and its cash flows for the years ended June 30, 2003, 2002 and 2001 in accordance with Canadian generally accepted accounting principles.

(signed) BDO Dunwoody LLP

Chartered Accountants

Toronto, Ontario

September 5, 2003 (except Note 18, 21 and 23(b), as of October 16, 2003)

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Comments by Auditor for U.S. Readers

on Canada-U.S. Reporting Difference

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In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company's financial statements, such as the changes described in Note 5 to the financial statements. Our report to the shareholders dated September 5, 2003 (except Note 18, 21 and 23(b), as of October 16, 2003) is expressed in accordance with Canadian reporting standards which do not require a reference to such a changes in accounting principles in the Auditors' Report when the change is properly accounted for and adequately disclosed in the financial statements.

 

(signed) BDO Dunwoody LLP

Chartered Accountants

Toronto, Ontario

September 5, 2003 (except Note 18, 21 and 23(b), as of October 16, 2003)

 

 

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On behalf of the Board:

  

(signed)  Sandra J. Hall     _    Director

 

(signed)  Milton Klyman     _   Director

The accompanying summary of significant accounting policies and notes are an integral part of these financial statements
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For the years ended June 30		2003			2002			2001
Revenue		$	25,969,465		$	22,010,321		$	19,083,808
Cost of sales and oil and gas operating costs
(including amortization of capital assets, site
restoration and depletion $628,293; 2002 -
$574,208; 2001 - $258,629)			22,356,431			19,037,135			16,571,162
Gross profit			3,613,034			2,973,186			2,512,646
Expenses
Administrative expenses			5,143,760			4,191,316			2,626,513
Amortization of goodwill			-			-			261,258
Amortization of capital assets			105,267			124,405			157,111
Interest			223,736			78,334			165,965
Interest on long term debt			49,922			57,675			90,523
			5,522,685			4,451,730			3,301,370
Loss from continuing operations before
the following undernoted items			(1,909,651	)		(1,478,544	)		(788,724	)
Other income (Note 12)			208,510			1,258,677			66,218
Oakwell claim (Note 21)			(5,900,000	)		-			-
Write down of inactive capital assets			-			(316,668	)		(1,500,000	)
Net loss from continuing operations before
income taxes			(7,601,141	)		(536,535	)		(2,222,506	)
Income taxes (Note 11)
Current			3,035			(39,765	)		-
Future			443,300			634,600			(1,248,100	)
			446,335			594,835			(1,248,100	)
Net loss from continuing operations			(8,047,476	)		(1,131,370	)		(974,406	)
Loss from discontinued operations (Note 20)			-			-			(2,660,510	)
Net loss for the year			(8,047,476	)		(1,131,370	)		(3,634,916	)
Deficit , beginning of year			(24,038,050	)		(20,849,848	)		(17,214,932	)
Transitional impairment loss (Note 5)			-			(2,056,832	)		-
Deficit , beginning of year, as restated			(24,038,050	)		(22,906,680	)		(17,214,932	)
Deficit , end of year		$	(32,085,526	)	$	(24,038,050	)	$	(20,849,848	)
Net loss from continuing operations
per share (Note 16)		$	(2.11	)	$	(0.51	)	$	(0.69	)
Net loss for the year per share (Note 16)		$	(2.11	)	$	(0.51	)	$	(2.56	)

   

The accompanying summary of significant accounting policies and notes are an integral part of these financial statements
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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Consolidated Statements of Cash Flows

(Expressed in Canadian Dollars)

See supplementary cash flow information (Note 13 (a))

The accompanying summary of significant accounting policies and notes are an integral part of these financial statements
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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Summary of Significant Accounting Policies

(Expressed in Canadian Dollars)

June 30, 2003, 2002 and 2001

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Nature of Business

and Principles

of Consolidation       EnerNorth Industries Inc. (the "Company") is a corporation amalgamated under the laws of the Province of Ontario. The Company's business is to explore and develop oil and gas reserves. These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries M&M Engineering Limited ("M&M") and its wholly-owned subsidiary M&M Offshore Limited ("MMO"), 10915 Newfoundland Limited, 11123 Newfoundland Limited and the proportionate share of its interests in joint ventures whose business focus is construction mechanical contracting and steel fabrication in Newfoundland.

Pursuant to Articles of Amendment dated February 11, 2003 the Company changed its name from Energy Power Systems Limited to EnerNorth Industries Inc.

During fiscal 2001 the Company discontinued efforts to act as a developer of independent power projects. The Company intends to monetize its investment in the Andhra Pradesh Project. This segment has been treated as discontinued operations for accounting purposes (see Note 20). As such the operations of the Company's Power Division have been excluded from the consolidated statement of loss and deficit from continuing operations in 2001. There have been no operations in the Power Division since 2001.

These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada.

Oil and Gas

Properties       The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities.

Costs capitalized, together with the costs of production equipment, are depleted on the unit-of-production method based on the estimated gross proved reserves. Petroleum products and reserves are converted to equivalent units of natural gas at approximately 6,000 cubic feet to 1 barrel of oil.

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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Summary of Significant Accounting Policies

(Expressed in Canadian Dollars)

June 30, 2003, 2002 and 2001

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Properties -

(Continued)

Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations.

Proceeds from a sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion. Alberta Royalty Tax Credits are included in oil and gas sales.

In applying the full cost method, the Company performs a ceiling test which restricts the capitalized costs less accumulated depletion and amortization from exceeding an amount equal to the estimated undiscounted value of future net revenues from proved oil and gas reserves, as determined by independent engineers, based on sales prices achievable under existing contracts and posted average reference prices in effect at the end of the year and current costs, and after deducting estimated future general and administrative expenses, production related expenses, financing costs, future site restoration costs and income taxes.

Royalties        As is normal to the industry, the Company's production is subject to crown, freehold and overriding royalties, and mineral or production taxes. These amounts are reported net of related tax credits and other incentives available.

Environmental and

Site Restoration

Costs        A provision for environmental and site restoration costs is made when restoration requirements are established and costs can be reasonably estimated. The accrual is based on management's best estimate of the present value of the expected cash flows. Site restoration costs increase the carrying amount of the oil and gas properties and are amortized on the same basis as the properties.

Accounting

Estimates      The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material.

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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Summary of Significant Accounting Policies

(Expressed in Canadian Dollars)

June 30, 2003, 2002 and 2001

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Revenue

Recognition               Industrial and Offshore Division

Revenue from construction and fabrication contracts is recognized on the percentage of completion method. The percentage of completion method recognizes revenue and unbilled accounts receivable by assessing the value of the work performed in relation to the total estimated cost of the contract based on the contract value. Contract costs include all direct material and labour costs and those indirect costs related to contract performance such as supplies, tools and repairs. Administrative and general overheads are charged to expense as incurred. Contract losses are provided for in full in the year in which they become apparent.

Revenue on the sale of products and short term contracts is recognized when risk and title passes to the customer, which is generally upon shipment of product.

Oil and Gas Division

Oil and gas revenue is recognized on actual production, and upon delivery of the product to the customer based on the operators' reports.

Cash and Cash

Equivalents    Cash and cash equivalents consist of cash on hand, bank balances and investments in money market instruments with maturities of three months or less.

Marketable

Securities       Marketable securities are valued at the lower of cost or market on a portfolio basis.

Investment     The investment in Konaseema EPS Oakwell Power Limited ("KEOPL") is recorded at expected net recoverable amount. The actual recoverable amount is dependent on future events including the foreign exchange rates at the time of ultimate recovery and could differ materially from the actual amount recovered.

Inventories     Inventories of finished goods are valued at the lower of cost and net realizable value. Raw materials are valued at the lower of cost and replacement cost.

Joint Ventures     The Company uses the proportionate consolidation method to account for its non oil and gas joint ventures.

The majority of the Company's petroleum and natural gas exploration activities are conducted jointly with others. These financial statements reflect only the Company's proportionate interest in such activities.

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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Summary of Significant Accounting Policies

(Expressed in Canadian Dollars)

June 30, 2003, 2002 and 2001

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Capital Assets          Capital assets consist primarily of fabrication buildings, office equipment, and manufacturing equipment. These assets are recorded at cost less accumulated amortization and write down for impairment.

Capital assets are amortized on the declining balance basis over their estimated useful lives at the following rates:

Buildings 3%

Manufacturing equipment 20%

Tools and equipment 20%

Office equipment 20%

Vehicles 30%

Paving 7%

Equipment under capital leases 20%

Goodwill         Goodwill represents the excess purchase price paid for business combinations over the value assigned to identifiable net assets acquired. Goodwill is tested for impairment at least annually and an impairment loss is recognized when the carrying amount of the goodwill of a reporting unit exceeds the fair value of the goodwill. The fair value of the reporting unit is obtained using the present value of expected cash flows.

Marketing and

Promotion Cost   Marketing and promotion costs for new business opportunities are charged to administrative expenses as incurred.

 

Foreign Currency

Translation    Foreign currency accounts are translated to Canadian dollars as follows:

At the transaction date, each asset, liability, revenue or expense is translated into Canadian dollars by the use of the exchange rate in effect at that date. At the year end date, monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at that date and the resulting foreign exchange gains and losses are included in income in the current period.

Income Taxes    The Company accounts for income taxes under the asset and liability method. Under this method, future income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available loss carryforwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such tax assets will not be realized.

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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Summary of Significant Accounting Policies

(Expressed in Canadian Dollars)

June 30, 2003, 2002 and 2001

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Stock Based

Compensation          The Company has established a stock option plan (the "Plan") for directors, officers, employees, consultants and service providers. The Company does not record compensation expense for stock options granted to directors, officers and employees. However, additional disclosure of the effects of accounting for stock based compensation to directors, officers and employees as compensation expense, using the fair value method estimated using the Black-Scholes Option Pricing Model, is disclosed as pro-forma information. Any consideration paid by directors, officers and employees on exercise of stock options or purchase of stock is credited to share capital. Stock options issued to non-employees are recorded at their fair value at date of issuance.

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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Notes to Consolidated Financial Statements

(Expressed in Canadian Dollars)

June 30, 2003, 2002 and 2001

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1.     Accounts Receivable

Receivables consist of the following:

 

2.         Investment

Investment consists of the following:

 

 

The Company owns 11,348,200 ordinary equity shares of Rs. 10 each, of Konaseema EPS Oakwell Power Limited ("KEOPL") (the "KEOPL Shares"), a company incorporated in India, which is developing the Andhra Pradesh Project. Pursuant to a Revised Agreement ("the Revised VBC Agreement") dated August 10, 2000 between the Company, VBC Ferro Alloys Ltd. ("VBC"), KEOPL's parent company, and KEOPL, VBC shall purchase the Company's investment in KEOPL for INR 113,482,000 (approximately Cdn. $3,500,000) on or before June 30, 2002 if the Company offers its KEOPL Shares to VBC prior to June 30, 2002.

On May 3, 2002, the Company, pursuant to the Revised VBC Agreement, offered and tendered the KEOPL Shares to VBC for purchase on or before June 30, 2002. On July 1, 2002, VBC raised a dispute regarding the purchase and sale of the KEOPL shares.

The Company is pursuing legal remedies against VBC to effect the purchase and sale of the KEOPL shares to VBC (see Note 18). The Company estimates that the carrying amounts of the investment in KEOPL will be fully recovered. The actual recoverable amount is dependent upon future events, foreign exchange fluctuations and subject to certain sovereign risks such as political instability and economic conditions, and could differ materially from the amount estimated by management.

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EnerNorth Industries Inc.

(Formerly Energy Power Systems Limited)

Notes to Consolidated Financial Statements

(Expressed in Canadian Dollars)

June 30, 2003, 2002 and 2001

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3.   Oil and Gas Properties

The Company acquired various working interests in producing and non producing oil and gas properties in Alberta, Ontario and Prince Edward Island. These properties are carried at cost set out below:

Petroleum and natural gas properties and equipment

 

 

As at June 30, 2003, costs of acquiring unproved properties in the amount of $5,270 (2002 - $1,186,516) were excluded from depletion calculations.

The Company is required to fund its share of costs and expenses. Failure to fund expenditures will in some cases result in a dilution of its interests.

4.         Capital Assets

Capital assets consists of the following:

 

 

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		2003			2002			2001
Reported net loss from continuing
operations per US GAAP		$	(8,047,476	)	$	(2,441,721	)	$	(1,357,753	)
Add back:Goodwill amortization			-			-			-261,258
Adjusted net loss from continuing
operations per US GAAP		$	(8,047,476	)	$	(2,441,721	)	$	(1,096,495	)
Basic and diluted net loss per share from
continuing operations per US GAAP
Reported net loss from continuing
operations per US GAAP		$	(2.11	)	$	(1.10	)	$	(0.96	)
Goodwill amortization			-			-			0.18
Adjusted net loss from continuing
operations		$	(2.11	)	$	(1.10	)	$	(0.78	)
Basic and diluted net loss per share
per US GAAP:
Reported net loss per US GAAP		$	(2.11	)	$	(2.03	)	$	(2.83	)
Goodwill amortization			-			-			0.18
Adjusted net loss for the year
per US GAAP		$	(2.11	)	$	(2.03	)	$	(2.65	)

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