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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-21968
BRAZAURO RESOURCES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
BRITISH COLUMBIA 76-0195574
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
800 Bering, Suite 208
Houston, Texas 77057
(Address of Principal Executive Offices, including Zip Code)
(713) 785-1278
(Registrant's Telephone Number, Including Area Code)
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
X No___________
Shares of Registrant's Common Stock outstanding as of September 7, 2004:
37,775,542
BRAZAURO RESOURCES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2004
and July 31, 2004 (Unaudited). . . . . . . . . . . . . . . . . . . . . 1
Interim Consolidated Statements of Operations and Deficit Accumulated
During the Exploration Stage - Three and Six Months Ended
July 31, 2004 and 2003 (Unaudited) . . . . . . . . . . . . . . . . . . 2
Interim Consolidated Statements of Cash Flows - Three and Six Months
Ended July 31, 2004 and 2003 (Unaudited) . . . . . . . . . . . . . . . 3
Notes to Interim Consolidated Financial Statements (Unaudited) -
July 31, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.. . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . 12
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . 12
PART II. Other Information.
Item 1. Legal Proceedings.. . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
i
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
July 31, 2004 January 31, 2004
--------------- ------------------
(In Canadian Dollars)
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . $ 801,759 $ 1,982,536
Accounts receivable. . . . . . . . . . . . . . . 188,837 109,468
--------------- ------------------
Total current assets. . . . . . . . . . . . . . . . 990,596 2,092,004
--------------- ------------------
Property, plant and equipment, at cost:
Mineral properties and deferred
expenditures (Note 2) . . . . . . . . . . . . . 1,824,063 714,283
Equipment and other . . . . . . . . . . . . . . . 76,496 68,788
Accumulated depreciation. . . . . . . . . . . . . (69,150) (63,472)
--------------- ------------------
Total property, plant and equipment, at cost. . . . 1,831,409 719,599
--------------- ------------------
Other assets. . . . . . . . . . . . . . . . . . . . 7,845 7,826
--------------- ------------------
Total assets. . . . . . . . . . . . . . . . . . . . $ 2,829,850 $ 2,819,429
=============== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities. . . . . $ 553,313 $ 369,714
--------------- ------------------
Total current liabilities . . . . . . . . . . . . . 553,313 369,714
--------------- ------------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common share capital, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 37,410,792
(35,748,871 at January 31, 2004) (Note 5). . 36,140,909 35,622,793
Contributed surplus (Note 8). . . . . . . . . . . 1,065,553 54,403
Deficit accumulated during the exploration stage. (34,929,925) (33,227,481)
--------------- ------------------
Total shareholders' equity. . . . . . . . . . . . . 2,276,537 2,449,715
--------------- ------------------
Total liabilities and shareholders' equity. . . . . $ 2,829,850 $ 2,819,429
=============== ==================
See accompanying notes.
1
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE EXPLORATION STAGE (UNAUDITED)
Three Months Ended July 31, Six Months Ended July 31,
2004 2003 2004 2003
------------- ------------- ------------- -------------
(In Canadian Dollars)
Revenues:
Interest income. . . . . . . . . . . . . . . . $ 76 $ 273 $ 310 $ 851
Gains on sales of plant and equipment (Note 2) - - - 446,647
------------- ------------- ------------- -------------
76 273 310 447,498
Expenses:
General and administrative (Note 7). . . . . . 1,238,694 203,218 1,718,001 358,904
Finance charges. . . . . . . . . . . . . . . . 1,460 11,479 4,610 22,130
Interest expense . . . . . . . . . . . . . . . - 27,355 - 58,233
Translation (gains) losses . . . . . . . . . . 18,053 10,412 (19,857) 18,813
------------- ------------- ------------- -------------
1,258,207 252,464 1,702,754 458,080
------------- ------------- ------------- -------------
Loss before provision for income taxes . . . . . (1,258,131) (252,191) (1,702,444) (10,582)
Provision for income taxes . . . . . . . . . . . - - - -
------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . (1,258,131) (252,191) (1,702,444) (10,582)
Deficit accumulated during the exploration
stage at the beginning of the period . . . . . (33,671,794) (32,193,944) (33,227,481) (32,435,553)
------------- ------------- ------------- -------------
Deficit accumulated during the exploration
stage at end of the period . . . . . . . . . . $(34,929,925) $(32,446,135) $(34,929,925) $(32,446,135)
============= ============= ============= =============
Net loss per common share - basic and diluted. . $ (0.03) $ (0.01) $ (0.05) $ (0.00)
============= ============= ============= =============
Weighted-average common shares outstanding . . . 37,135,474 19,152,839 36,449,791 18,817,796
See accompanying notes.
2
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended July 31, Six Months Ended July 31,
2004 2003 2004 2003
------------ ---------- ------------ ----------
(In Canadian Dollars)
OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . $(1,258,131) $(252,191) $(1,702,444) $ (10,582)
Items not affecting cash:
Depreciation. . . . . . . . . . . . . . . 1,150 5,830 5,678 9,941
Interest expense. . . . . . . . . . . . . - 27,355 - 58,233
Gains on sales of plant and
equipment (Note 2) . . . . . . . . . . - - - (446,647)
Stock based compensation (Note 8) . . . . 855,880 - 1,011,150 -
Other . . . . . . . . . . . . . . . . . . 236 707 (19) 698
------------ ---------- ------------ ----------
(400,865) (218,299) (685,635) (388,357)
------------ ---------- ------------ ----------
Changes in noncash working capital:
Accounts receivable . . . . . . . . . . . (19,382) 14,068 (79,369) 38,328
Accounts payable and accrued liabilities. 118,080 29,636 183,599 (935)
------------ ---------- ------------ ----------
98,698 43,704 104,230 37,393
------------ ---------- ------------ ----------
Net cash used in operating activities . . . . (302,167) (174,595) (581,405) (350,964)
------------ ---------- ------------ ----------
INVESTING ACTIVITIES
Property acquisition and exploration. . . . . (627,926) (49,126) (1,039,780) (49,126)
Equipment and other . . . . . . . . . . . . . - - (7,708) -
------------ ---------- ------------ ----------
Net cash used in investing activities . . . . (627,926) (49,126) (1,047,488) (49,126)
------------ ---------- ------------ ----------
FINANCING ACTIVITIES
Proceeds from issuance of common shares . . . 385,616 - 448,116 -
Proceeds from sales of plant and
equipment (Note2) . . . . . . . . . . . . . - - - 521,978
------------ ---------- ------------ ----------
Net cash provided by financing activities . . 385,616 - 448,116 521,978
------------ ---------- ------------ ----------
Increase (decrease) in cash and temporary
cash investments. . . . . . . . . . . . . . (544,477) (223,721) (1,180,777) 121,888
Cash and temporary cash investments,
beginning of period . . . . . . . . . . . . 1,346,236 368,343 1,982,536 22,734
------------ ---------- ------------ ----------
Cash and temporary cash investments,
end of period . . . . . . . . . . . . . . . $ 801,759 $ 144,622 $ 801,759 $ 144,622
============ ========== ============ ==========
See accompanying notes.
3
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2004
1. BASIS OF OPERATIONS
Brazauro Resources Corporation ("the Company"), formerly Jaguar Resources
Corporation, is engaged in the business of exploring for and, if warranted,
developing mineral properties. The accompanying interim unaudited consolidated
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles and comply in all material respects with United
States generally accepted accounting principles except as discussed in Note 4.
The consolidated financial statements are presented in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the United States
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by Canadian and United States generally accepted accounting principles for
complete financial statements.
In the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended July 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ended January 31, 2005.
SIGNIFICANT ESTIMATES
The nature of the Company's operations results in significant expenditures for
the acquisition and exploration of properties. None of the Company's properties
have been proven to have economically recoverable reserves or proven reserves at
the current stage of exploration. Direct acquisitions, evaluation and
exploration expenditures are capitalized, reduced by sundry income, to be
amortized over the recoverable mineral reserves if a property becomes
commercially developed. When an area is disproved or abandoned, the acquisition
costs and related deferred expenditures are written off. Management's
assessment of the net realizable value of mineral properties and deferred
expenditures requires considerable judgment and estimates which could change
significantly in the near term.
All amounts are in Canadian dollars unless noted otherwise. For further
information, refer to the consolidated financial statements and footnotes
thereto.
2. MINERAL PROPERTIES AND DEFERRED EXPENDITURES
BRAZILIAN PROPERTIES
Tocantinzinho Properties
In August 2003 the Company acquired a total of 28,275 hectares in the Tapaj s
gold district in Para State, Brazil under an option agreement with two
individuals. The option agreement entitles the Company to acquire a 100%
interest in the Tocantinzinho Properties over a four-year period in
consideration for the staged payment of US$465,000, the staged issuance of
2,600,000 shares of the Company and the expenditure of $1,000,000 (U.S.). The
Company received approval for the acquisition from the TSX Venture Exchange in
August 2003 and made the initial payment required by the option agreement to the
optionors, consisting of 1,100,000 common shares of the Company and $75,000
(U.S.). The Company made the second option payment, consisting of 200,000
common shares of the Company and $30,000 (U.S.), in February 2004. In August
2004, the Company made the third option payment of US$40,000 and 200,000 common
shares.
4
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2004
2. Mineral Properties and Deferred Expenditures (continued)
The total commitment under the option agreement is as follows (all amounts are
in U.S. dollars): $70,000 and 400,000 common shares of the Company, $40,000 and
200,000 common shares of the Company, $130,000 and 200,000 common shares of the
Company, and $150,000 and 700,000 common shares of the Company for the 2005,
2006, 2007 and 2008 fiscal years, respectively. During fiscal 2005 the Company
met the requirement under the option agreement to expend a total of $300,000
(U.S.) by July 31, 2004.
Additionally, the option agreement requires the Company to assume all existing
obligations of the optionors to the owners of the mineral rights of the
Tocantinzinho Properties (the "Underlying Agreements") totaling $1,600,000
(U.S.) over a four-year period. The lease commitments under the Underlying
Agreements are as follows (all amounts are in U.S. dollars): $35,000, $80,000,
$120,000, $160,000 and $1,205,000 in fiscal years 2004, 2005, 2006, 2007 and
2008, respectively. The Company paid the lease payments totaling $35,000 (U.S.)
during fiscal 2004. One of the optionors entered into a consulting agreement
with the Company for an 18-month period at a rate of $7,000(U.S.) per month.
The payments under the option agreement, the Underlying Agreements and the
consulting agreement are considered expenditures for purposes of meeting the
required total and initial annual expenditures of $1,000,000 (U.S.) and $300,000
(U.S.) discussed above. The option agreement is cancelable by the Company
without obligation other than the initial payment of $75,000 (U.S.) and
1,100,000 shares of the Company and the expenditure of $300,000 (U.S.) by July
31, 2004.
The optionors are entitled to a sliding scale net smelter return royalty ranging
from 2.5% for gold prices below $400 (U.S.) per ounce and 3.5% for gold prices
in excess of $500 (U.S.) per ounce. Royalties will be reduced by the amount of
any royalties payable to underlying owners and the Government of Brazil.
Mamoal Property
The Company acquired the 10,000 hectare Mamoal Property, located 30 kilometers
southeast of the Company's Tocantinzinho Properties, in December 2003. The
Company has an option to earn 100% of the Mamoal Property by payment of a total
of US$300,000 over three and one half years. The Company may terminate the
option agreement at any time without further obligation. The initial US$10,000
payment was made by the Company in December 2003, and the exploration research
license has been transferred to Jaguar Resources do Brasil Ltda. The remaining
lease commitments are as follows: US$25,000, US$45,000, US$65,000, and
US$155,000 in fiscal years ending January 31, 2005, 2006, 2007 and 2008,
respectively. The Company may acquire the Mamoal Property at any time by
accelerating the lease payments.
ARKANSAS PROPERTIES
The Company maintained interests in several Arkansas Properties during the
period from fiscal 1993 through fiscal 2003. In December 2002, based upon the
cumulative exploration results obtained on the Arkansas Properties, the Company
made the decision to cease operations in Arkansas.
American Mine Property
Pursuant to an agreement dated November 4, 1992, DEI was granted a permit to
explore a mineral property located in Pike County, Arkansas. The Company's
Plant was located on this leased property. The Company leased the property and
conducted exploration activities during certain periods from 1992 to 2002. The
lease payment of $47,500(U.S.) on the American Property, due November 1, 2002,
was not made by the Company.
5
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2004
2. Mineral Properties and Deferred Expenditures (continued)
In March 2003 the Company sold the Plant to a third party for $350,000 (U.S.).
In conjunction with the sale, the third party paid the lessor of the American
Mine Property $47,500 (U.S.) on behalf of the Company in order to extend the
Company's lease on the property through October 31, 2003. The Company recorded
a reserve for leasehold reclamation costs during the quarter ended April 30,
2003 of approximately $70,000, representing the estimated costs of the Company's
obligation to restore the Arkansas properties to their original condition prior
to lease expiration and to perform reclamation activities as required by
Arkansas regulatory authorities. The reserve for leasehold reclamation was
increased during the fourth quarter of fiscal 2004 to approximately $150,000
based upon a revision in the estimate discussed above. The Company allowed the
lease to expire effective November 1, 2003.
Mineral properties and deferred expenditures were as follows:
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED JULY 31,
2004 ADDITIONS WRITE-OFFS 2004
-------- ---------- ---------- ----------
Brazilian Properties
Tocantinzinho Properties:
Acquisition costs. . $527,345 $ 185,116 $ - $ 712,461
Exploration costs. . 173,788 899,236 - 1,073,024
-------- ---------- ---------- ----------
701,133 1,084,352 - 1,785,485
-------- ---------- ---------- ----------
Mamoal Property:
Acquisition costs. . 13,150 13,678 - 26,828
Exploration costs. . - 11,750 - 11,750
-------- ---------- ---------- ----------
13,150 25,428 - 38,578
-------- ---------- ---------- ----------
Total acquisition costs. . . 540,495 198,794 - 739,289
Total exploration costs. . . 173,788 910,986 - 1,084,774
-------- ---------- ---------- ----------
Total costs. . . . . . . . . $714,283 $1,109,780 $ - $1,824,063
======== ========== ========== ==========
3. DEBENTURES
In fiscal 2002, the Company completed the issuance of $1,278,595 principal
amount of 10% secured convertible debentures ("the Debentures"). The Debentures
were convertible into units at the rate of one unit for each $2.87 principal
amount of the Debentures until February 16, 2003. Each unit was to consist of
one common share of the Company and one share purchase warrant with an exercise
price of $3.15, exercisable through August 16, 2003. The conversion and share
purchase warrant prices above were adjusted to reflect the Company's seven for
one share consolidation on November 27, 2001.
On February 11, 2003, the holders of the Debentures approved the amendment of
the conversion price of the units to $0.30 and the extension of the maturity
date of the Debentures to February 16, 2004. As amended, each of the 4,261,976
units consisted of one common share of the Company and one share purchase
warrant with an exercise price of $0.30, exercisable through February 16, 2004.
Additionally, the terms of the Debenture were amended to include a mandatory
conversion provision of all Debentures and exercise of all related warrants
within 30 days after the closing price of the Company's common shares has
exceeded $0.375 for ten consecutive trading days.
Interest at the rate of 10% was payable on conversion or maturity in cash, or at
the election of the Company, in common shares valued at the weighted average
trading price of the common shares of the Company for the ten trading days
preceding the interest payment date. The Debentures were secured by a general
security interest in the Company's current and future assets and by the stock of
Star U.S., Inc. ("Star"), a wholly owned subsidiary of the Company, and a
wholly-owned subsidiary of Star.
During fiscal 2004, several holders of the Debentures elected to convert a total
of $197,000 principal amount and received 656,666 common shares and 656,666
common share purchase warrants with exercise prices of $0.30. Additionally,
during the third quarter of fiscal 2004, a director of the Company elected to
convert $97,000 principal amount and received 323,333 common shares.
6
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2004
3. DEBENTURES (CONTINUED)
Effective October 31, 2003 a total of $984,595 principal amount of Debentures
were automatically converted into 3,281,977 units of the Company in accordance
with the February 11, 2003 amendments discussed in the third preceding
paragraph. Each unit consisted of one common share and one common share
purchase warrant with exercise prices of $0.30. Additionally, under terms of
the mandatory conversion provision, the expiration date of all warrants issued
upon conversion of the Debentures was established as December 1, 2003. During
the fourth quarter of fiscal 2004, the Company received a total of $937,593,
representing the exercise price of 3,125,311 warrants, and issued 3,125,311
common shares. A total of 813,332 common share warrants expired unused on
December 1, 2003. During fiscal 2004, a total of $335,075 of interest accrued
on the principal amounts converted during fiscal 2004 was paid via the issuance
of a total of 1,129,522 shares, representing the conversion of the interest
amounts at weighted average prices from $0.17 to $0.33 per share.
4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")
The consolidated financial statements have been prepared in accordance with
Canadian GAAP, which differs in some respects from United States GAAP. The
material differences in respect to these financial statements between Canadian
and United States GAAP, and their effect on the Company's financial statements,
are summarized below.
Mineral Properties and Deferred Expenditures
Under United States GAAP, the preferred method for accounting for evaluation and
exploration costs on properties without proven and probable reserves is to
expense all costs incurred, other than acquisition costs, prior to the
establishment of proven and probable reserves. The effect of the application of
this method to the financial statements would be to increase net loss by
approximately $567,000 and $911,000, respectively, for the three and six months
ended July 31, 2004 and to decrease mineral properties and deferred expenditures
by $911,000 and $174,000 as of July 31, 2004 and January 31, 2004, respectively.
The application of this method to the income statements dated July 31, 2003
would be to increase net loss by approximately $49,000 for the three and six
months ended July 31, 2003.
Foreign Currency Translation
Under United States GAAP, shareholders' equity would reflect a foreign currency
translation gain of approximately $15,300 at January 31, 2004 and a foreign
currency translation loss of approximately $16,900 at July 31, 2004.
5. SHARE CAPITAL
On January 29, 2002 the Company completed a private placement of 5,691,376 units
at a price of $0.20 per unit, each unit to consist of one common share and one
share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants had an expiration date of January 29, 2003, which was extended
during fiscal 2003 to January 29, 2004. A total of 5,669,101 warrants were
exercised in January 2004, and the Company received total exercise proceeds of
$1,417,275. A total of 22,275 warrants expired unused on January 29, 2004.
7
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2004
5. SHARE CAPITAL (CONTINUED)
On September 18, 2002, the Company completed a private placement of 2,819,774
units at a price of $0.20 per unit, each unit consisting of one common share and
one share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants have an expiration date of September 18, 2004. The Company
received a total of $563,955 during fiscal 2003 representing subscriptions for
the private placement. Included in that amount was a total of $85,240
representing subscriptions for 426,200 units by three of the Company's
directors. During the quarter ended April 30, 2004, 250,000 common share
warrants were exercised, and the Company received total exercise proceeds of
$62,500. During the quarter ended July 31, 2004, 103,350 common share warrants
were exercised, and the Company received total exercise proceeds of $25,838. As
of July 31, 2004, 2,466,424 warrants were outstanding.
In July, 2004 the Company's shareholders approved an amendment to its stock
option plan to increase the number of shares reserved for issuance from
4,000,000 to 7,000,000. During the second quarter of fiscal 2005, directors,
employees and consultants exercised a total of 1,108,571 common stock options
and the Company received exercise proceeds totaling approximately $360,000. In
June and July 2004, the Company issued to directors, employees and consultants a
total of 950,000 and 2,327,376 options to purchase common shares at prices of
$0.92 and $1.02, respectively. As of July 31, 2004, the Company had a total of
6,617,858 options outstanding at prices ranging from $0.10 to $1.02.
6. COMMITMENTS AND CONTINGENCIES
Except as described below, there are no material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of their
property is subject.
On May 15, 1998, a legal action styled James Cairns and Stewart Jackson vs.
------------------------------------
Texas Star Resources Corporation d/b/a Diamond Star, Inc. was filed in the 215th
-----------------------------------------------------
Judicial District Court of Harris County, Texas, Cause No. 9822760 wherein the
Plaintiffs allege, among other things, that the Company breached contractual
agreements and committed fraud by not timely releasing or causing to be released
from an escrow account required by Canadian law certain shares of the Company to
which Plaintiffs allege that they were entitled to receive in calendar 1995 and,
as a result of the Company's alleged actions with respect to the release of such
shares, the Plaintiffs sought monetary damages for losses in share value,
attorney's fees, court costs, expenses, interest and exemplary damages. In
1999, the litigation against the Company in Houston, Harris County, Texas, was
dismissed by the court with prejudice, leaving only the claims of James M.
Cairns, Jr. pending in British Columbia, which is generally described below.
The legal action in Texas is similar to one filed against the Company in the
Supreme Court of British Columbia, Canada, in August 1996 styled Cause No.
C96493; James M. Cairns, Jr. vs. Texas Star Resources Corporation. In January
----------------------------------------------------------
1993, the Plaintiffs were issued common stock of the Company in escrow which
shares were to be released based on exploration expenditures by the Company on
certain of its properties in Arkansas. The escrow requirements were imposed by
the Vancouver Stock Exchange. Plaintiffs requested that all of the shares be
released in 1995. At that time the Company believed that the release of said
shares when requested by the Plaintiffs was inappropriate due to legal
requirements and regulatory concerns. The shares were subsequently released to
the Plaintiffs. The Company intends to vigorously defend the allegations of the
Plaintiffs in the pending litigation in British Columbia and in Texas (if the
case is appealed or refiled) and believes it has meritorious defenses to such
claims. No proceedings in the action in British Columbia have been taken by the
Plaintiff since March 30, 2000. However, the Company cannot provide any
assurances that it will be successful, in whole or in part, with respect to its
defense of the claims of the Plaintiffs. If the Company is not successful, any
judgment obtained by Plaintiffs could have a material and adverse effect on its
financial condition.
(This portion of the page is intentionally left blank.)
8
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2004
7. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consisted of the following:
Three Months Ended July 31, Six Months Ended July 31,
2004 2003 2004 2003
---------- -------- ---------- --------
Consulting fees . . . . . . $ 104,330 $ - $ 181,679 $ 2,344
Depreciation expense. . . . 1,151 5,767 5,679 9,878
Entertainment . . . . . . . 6,416 8,494 10,980 12,197
Insurance . . . . . . . . . 1,945 1,059 1,945 1,059
Office expenses . . . . . . 51,225 12,264 74,077 21,471
Professional fees . . . . . 9,804 40,519 33,461 60,772
Rent. . . . . . . . . . . . 5,194 9,401 12,216 17,034
Repairs and maintenance . . - 9,286 - 13,787
Salary. . . . . . . . . . . 981,204 74,861 1,245,203 163,181
Shareholder relations . . . 47,433 16,813 100,933 17,644
Travel. . . . . . . . . . . 29,992 24,754 51,828 34,214
Utilities . . . . . . . . . - - - 5,323
---------- -------- ---------- --------
Total . . . . . . . . . . $1,238,694 $203,218 $1,718,001 $358,904
========== ======== ========== ========
8. STOCK BASED COMPENSATION
Commencing February 1, 2004, in accordance with Handbook Section 3870 of the
Canadian Institute of Chartered Accountants, the Company has recorded stock
based compensation to employees, directors and consultants on a fair value
basis, as follows:
Three Months Ended July 31, Six Months Ended July 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Consulting $ 40,666 $ - $ 65,683 $ -
Salaries . 815,214 - 945,467 -
---------- ---------- ---------- ----------
$855,880 $ - $1,011,150 $ -
========== ========== ========== ==========
These amounts have been recorded using the Black Scholes valuation model with
the following variables: risk-free interest rate from 3.0% to 4.08%; expected
life, 3.5 years; volatility, 160%; expected dividend yield, $nil. The weighted
average grant date fair value for options granted during the quarter ended July
31, 2004 is $0.87 per option.
9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under "Part I - Item 1. Financial
Information," "Part I - Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Part II - Item 1. Legal
Proceedings" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; competition; success of operating
initiatives; the success (or lack thereof) with respect to the Company's
exploration and development operations on its properties; the Company's ability
to raise capital and the terms thereof; the acquisition of additional mineral
properties; changes in business strategy or development plans; exploration and
other property writedowns; the continuity, experience and quality of the
Company's management; changes in or failure to comply with government
regulations or the lack of government authorization to continue certain
projects; the outcome of litigation matters, and other factors referenced from
time to time in the Company's filings with the Securities and Exchange
Commission. The use in this Form 10-Q of such words as "believes", "plans",
"anticipates", "expects", "intends" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. The success of the Company is dependent on the
efforts of the Company, its employees and many other factors including,
primarily, its ability to raise additional capital and establishing the economic
viability of any of its exploration properties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
Results of Operations - For the Three and Six Month Periods Ended July 31,
2004 and 2003
All dollar amounts referred to herein are in Canadian Dollars unless
otherwise stated. As of September 8, 2004, the exchange rate is $1.00 (Canadian)
= $0.7749 (U.S.)
The Company is in the exploration stage and has no revenues from operations
other than rental income related to the Diamond Recovery Plant, totaling
approximately $1,079,000 from inception through March 2003, when the Plant was
sold. None of its Properties have proven to be commercially developable to date
and as a result the Company has not generated any revenue from these activities.
The Company's existing Properties are gold prospects in Brazil, as discussed in
Note 2, which were acquired during fiscal 2004. The Company capitalizes
expenditures associated with the direct acquisition, evaluation and exploration
of mineral properties. When an area is disproved or abandoned, the acquisition
costs and related deferred expenditures are written-off. The net capitalized
cost of each mineral property is periodically compared to management's
estimation of the net realizable value and a write-down is recorded if the net
realizable value is less than the cumulative net capitalized costs. As
discussed in Note 2, during fiscal 2003 the Company decided to cease exploration
activities in Arkansas due to disappointing exploration results, and the total
of $3,141,726 of accumulated capitalized costs related to the Arkansas leases
were written off. The Company has recorded cumulative write-offs of mineral
properties of $15,306,613 during its exploration stage, a period of
approximately fifteen years, and cumulative writedowns of property, plant and
equipment of $3,614,952.
During the six months ended July 31, 2004, the Company's mineral properties
and deferred expenditures increased to $1,824,063 from $714,283 primarily as a
result of acquisition costs totaling $185,116 and exploration costs totaling
$899,236 related to the activities on the Company's Tocantinzinho Properties.
The increase in mineral properties and deferred expenditures during the quarter
ended July 31, 2004 of $627,926 consisted primarily of acquisition costs
totaling $47,831 and exploration costs totaling $554,938 related to the
activities on the Company's Tocantinzinho Properties. The Company completed its
Phase I drilling program on the Tocantinzinho Properties in May 2004. The Phase
I drilling program consisted of 8 inclined diamond drill holes totaling
approximately 1700 meters. Based upon the positive results of the Phase I
drilling program, which may be viewed in detail at the Company's website
(www.jaguarresources.com), Company management commenced the second phase
drilling program totaling 3000 meters in the second fiscal quarter of 2005.
This Phase II drilling program is expected to be completed in September,
2004.
10
The Company had no significant revenues during the three and six months
ended July 31, 2004 and during the three months ended July 31, 2003. The
Company's revenues totaling $447,498 during the six months ended July 31, 2003
are primarily comprised of the gain from the sale of the diamond sorting and
recovery plant ("the Plant"). The Plant was sold to a third party for US$350,000
and was fully depreciated at disposal. As discussed in Note 2 to the Company's
Interim Financial Statements, the Plant was located on the American Mine
Property, and a reserve for leasehold improvements totaling approximately
$150,000 is included in accounts payable and accrued liabilities as of July 31,
2004. The Company has not received any revenues from mining operations from
inception.
General and administrative expenses for the six months ended July 31, 2004
increased by approximately $1,359,000 or 379% compared to the six months ended
July 31, 2003. Approximately $1,011,000 of this increase consisted of stock
compensation expense recorded using the fair value method adopted by the Company
effective February 1, 2004, as discussed in Note 8. The remaining increase
totaling approximately $348,000 was primarily due to the increased activity
surrounding the Phase I and II drilling programs, which were in process
throughout the first two quarters of fiscal 2005. In contrast, during the first
two quarters of fiscal 2004, the Company was engaged in the acquisition of the
Brazilian Properties and had not begun exploration activities.
General and administrative expenses for the three months ended July 31,
2004 increased by approximately $1,035,000 or 510% compared to the three months
ended July 31, 2003. Approximately $856,000 of this increase consisted of stock
compensation expense recorded using the fair value method adopted by the Company
effective February 1, 2004, as discussed in Note 8, and the remaining increase
of $179,000 relates to the commencement of the drilling programs discussed
above. The Company anticipates that general and administrative expenses during
the remaining six months of fiscal 2005 will remain consistent with the level
experienced in the first six months of fiscal 2005.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES.
As of July 31, 2004 and January 31, 2004, the Company had working capital
of $437,283 and $1,722,290, respectively. At July 31, 2004, the Company had
current assets of $990,596, including $801,759 in cash, compared to total
current liabilities of $553,313.
The Company received $563,955 during fiscal 2003, representing
subscriptions for a private placement of the Company's common shares. A total
of 2,819,774 units were issued in the private placement at a price of $0.20 per
unit, each unit to consist of one common share and one share purchase warrant
with an exercise price of $0.25. The share purchase warrants have an expiration
date of September 17, 2004. During the six months ended July 31, 2004, 353,350
common share warrants were exercised, and the Company received total exercise
proceeds of $88,338. As of July 31, 2004, 2,466,424 warrants were outstanding.
The Company received approximately $1,138,000 during fiscal 2002
representing subscriptions for a private placement of the Company's common
shares. A total of 5,691,376 units were issued at a price of $0.20 per unit,
each unit to consist of one common share and one share purchase warrant with an
exercise price of $0.25. The share purchase warrants originally had an
expiration date of January 29, 2003, and that date was extended during fiscal
2003 to January 29, 2004. A total of 5,669,101 warrants were exercised in
January 2004, and the Company received total exercise proceeds of $1,417,275. A
total of 22,275 warrants expired unused on January 29, 2004.
During the second quarter of fiscal 2005, directors, employees and
consultants exercised a total of 1,108,571 common stock options and the Company
received exercise proceeds totaling approximately $360,000.
11
All financings described herein were private placements and were made
pursuant to the private placement laws of Canada and pursuant to the exemptions
provided by Section 4(2) and Regulation S under the United States Securities Act
of 1933. The Debentures were offered to a limited number of accredited
investors in the United States and Canada pursuant to Rule 506 of Regulation D
and Regulation S.
The Company has no properties that have proven to be commercially
developable and has no revenues from mining operations other than the rentals
received from the Plant and the proceeds from the sales of the Plant and related
equipment. The rights and interests in the Tocantinzinho and Mamoal Properties
in Brazil constitute the Company's current mineral holdings. The Company cannot
estimate with any degree of certainty either the time or the amount of funds
that will be required to acquire and conduct additional exploration activities
on new prospects. The Company intends to seek additional equity financing
during fiscal 2005, including the potential exercise of outstanding warrants and
options. The inability of the Company to raise further equity financing will
adversely affect the Company's business plan, including its ability to acquire
additional properties and perform exploration activities on existing properties.
If additional equity is not available, the Company may seek additional debt
financing or seek exploration partners to assist in funding acquisition or
exploration efforts. Historically, the Company has been able to successfully
raise capital as required for its business needs; however, no assurances are
made by the Company that it can continue to raise debt or equity capital for a
number of reasons including its history of losses and property writedowns, the
decline in the price of its common stock, the number of shares outstanding and
the Company's limited and speculative asset base of exploration properties and
prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------------
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
---------------------------
(a) Evaluation of disclosure controls and procedures.
The term "disclosure controls and procedures" (defined in SEC rule
13a-14(c)) refers to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed
by a company in the reports that it files under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within required time periods. The Company's
Chairman, who also serves as the Company's principal financial
officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days before the filing
of this quarterly report, and he concluded that, as of such date, the
Company's controls and procedures were effective.
(b) Changes in internal controls.
The Company maintains a system of internal accounting controls that
are designed to provide reasonable assurance that its books and
records accurately reflect its transactions and that established
policies and procedures are followed. There were no significant
changes to the Company's internal controls or in other factors that
could significantly affect its internal controls subsequent to such
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-------------------
Except as described in "Part I - Item 1 - Financial Information - Note 6 of
Notes to Interim Consolidated Financial Statements (Unaudited)" which
description is incorporated in its entirety by this reference into this part,
there are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their property is subject.
12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------------
Any issuances or sales of equity securities resulting in cash proceeds to
the Company described in "Part 1. Item 2. Liquidity and Capital Resources",
were made in reliance on exemptions from registration provided by Regulation D,
Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-----------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------------------------------------------------------------
The Company's Annual General Meeting of Shareholders was held July 29,
2004. The nominees elected as directors at such meeting and the number of
shares voted for, against or withholding authority for each director are listed
below:
Shares
Director/ Nominee. In Favor Against Withheld Abstain
---------- ---------- ---------- ----------
Patrick L. Glazier 18,431,001 - 31,234 -
Brian C. Irwin . . 18,389,931 - 72,304 -
Mark E. Jones, III 18,431,472 - 30,763 -
Daniel B. Leonard. 18,450,073 - 12,162 -
Leendert G. Krol . 18,390,644 - 71,591 -
Roger H. Mitchell 18,431,472 - 30,763 -
Roger D. Morton. . 18,450,786 - 11,449 -
(This portion of the page is intentionally left blank.)
13
The following is a brief description of each other matter submitted to vote at
such meeting and the number of shares voted for, against or withholding
authority:
Shares
Description of matter. . . . . . . . . . . . . . .. . . . In Favor Against Withheld Abstain
- -------------------------------------------------------- ---------- ---------- ---------- ----------
1. To fix the number of directors at seven. . . . . . . 18,440,463 21,772 - -
2. To appoint Morgan & Co. as auditor.. . . . . . . . . 18,400,350 - 60,955 -
3. To authorize the directors to fix the
renumeration to be paid to the auditors. . . . . . . . . 18,450,704 5,786 - -
4. To authorize the Directors to amend
stock options. . . . . . . . . . . . . . . . . . . . . 7,087,427 132,954 - 9,994,154
5. To approve amendments to the
Company's Stock Option Plan.. . . . . . . . . . . . . 7,089,570 136,811 - 9,994,154
6. To pass a special resolution to alter the
Notice of Articles of the Company to remove
the application of the Pre-Existing Company. . . . .
Provisions.. . . . . . . . . . . . . . . . . . . . . . . 18,321,495 122,305 - -
7. To pass a special resolution to alter the
Notice of Articles of the Company to
increase the authorized common share
capital to an unlimited number of common
shares.. . . . . . . . . . . . . . . . . . . . . . . . 18,342,945 56,998 - -
8. To pass a special resolution adopting new
Articles.. . . . . . . . . . . . . . . . . . . . . . . . 18,336,237 55,998 - -
9. To transact such other business as may properly
come before the meeting. 18,353,870 98,365 - -
ITEM 5. OTHER INFORMATION.
-------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------------
(a) Exhibits.
See Index of Exhibits.
(b) Reports on Form 8-K.
Form 8-K filed September 13, 2004.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BRAZAURO RESOURCES CORPORATION
(Registrant)
Dated: September 13, 2004 By: /s/ Mark E. Jones, III
--------------------------
MARK E. JONES, III
Chairman
(and principal financial officer)
15
INDEX OF EXHIBITS
Exhibit No. Description of Exhibits
- ----------- ------------------------------------------------------------------------------------
31 Certification of Chairman pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
. . . . . Exchange Act of 1934.
32 Certification of Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
. . . . . Section 906 of the Sarbanes-Oxley Act of 2002.