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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2005
Commission file number: 0-21968
BRAZAURO RESOURCES CORPORATION
(formerly Jaguar 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)
1500 - 701 West Georgia Street
Vancouver, BC, Canada V7Y 1C6
(Address of Principal Executive Offices, including Zip Code)
(604) 689-1832
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK
Indicate by check mark whether the registrant: (1) 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of April 15, 2005, the aggregate market value of voting stock held by
non-affiliates of the Registrant, based on the closing price of the Common Stock
of the Registrant quoted on the TSX Venture Exchange was $48,791,833 (Canadian).
For purposes of calculating this amount, only directors, officers and beneficial
owners of 5% or more of the capital stock of the Registrant have been deemed
affiliates.
Number of shares of Registrant's Common Stock outstanding as of April 15, 2005:
45,514,351
Documents incorporated by reference: None.
BRAZAURO RESOURCES CORPORATION
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 6
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . 16
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . 16
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . 16
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . 17
Item 12. Security Ownership of Certain Beneficial Owners and Management. 19
Item 13. Certain Relationships and Related Transactions. . . . . . . . . 20
Item 14. Principal Accounting Services and Fees. . . . . . . . . . . . . 20
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on 8-K . . 21
i
ITEM 1. BUSINESS
--------
GENERAL INFORMATION
Brazauro Resources Corporation, formerly Jaguar Resources Corporation,
("the Company") is engaged in the business of exploring for and, if warranted,
developing mineral properties and is concentrating its current acquisition and
exploration efforts on those properties which the Company believes have large
scale gold potential. The Company holds interests in properties located in the
Tapajos Gold District of Brazil's northerly Para State (collectively the
"Properties").
The Company has two wholly-owned subsidiaries; Jaguar Resources do Brasil
Ltda., a Brazilian corporation, and Star U.S. Inc., a Delaware corporation
("Star"). Star in turn owns 100% of the stock of three corporations, Diamond
Exploration, Inc. and Continental Diamonds, Inc., both of which are Arkansas
corporations ("DEI" and "CDI", respectively), and Diamond Operations, Inc., a
Delaware corporation ("DOI"). All references to the Company herein include its
subsidiaries unless otherwise noted. The Company's Consolidated Financial
Statements referred to herein also include its subsidiaries. The Company's
fiscal year ends January 31.
The Company's principal office is located at 1500-701 West Georgia Street,
Vancouver, B.C., Canada V7Y 1C6. The Company had three (3) full-time employees
at January 31, 2005; however, the Company retains consultants, independent
contractors and part-time employees on an as-needed basis in connection with its
exploration and development activities.
The Company was incorporated under the Company Act (British Columbia) on
March 12, 1986. The authorized capital of the Company consists of an unlimited
amount of shares of common stock without par value (the "Common Stock"), of
which 45,514,351 shares were issued and outstanding as of April 15, 2005. The
Common Stock of the Company ranks equally as to dividends, voting rights and
participation in assets and is traded under the symbol "BZO" on the TSX Venture
Exchange.
Unless otherwise stated herein, all monetary amounts are expressed in
Canadian dollars. At April 19, 2005, the exchange rate for conversion to United
States dollars was $1.00 (Canadian) = U.S. $ 0.8059. Historical exchange rates
for the last five years are set forth in Item 6 at page 12.
The Company is subject to substantial risks with respect to exploration
activities and will seek additional capital during fiscal 2006 to conduct
additional property exploration activities and to fund general and
administrative expenses. See "Certain Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
OPERATING HISTORY AND DEVELOPMENT
The Company became a public company in January 1988 when it undertook an
initial public offering of its Common Stock in British Columbia, Canada and
became listed on the Vancouver Stock Exchange, a predecessor to the TSX Venture
Exchange. From inception and prior to 1988 the Company had limited business
activities and through 1993 explored and abandoned several mineral properties.
During fiscal 1993, the Company elected to pursue prospects with the potential
for commercial diamond production.
The Company completed three acquisitions in fiscal 1993 consistent with its
focus on diamond exploration prospects, including acquisitions of the "Arkansas
Properties" (defined below). During fiscal 1995 through 2003, the Company
completed additional acquisitions in Arkansas and directly managed and funded
exploration efforts on certain Arkansas Properties. In fiscal 2003 the Company
decided to cease exploration efforts in Arkansas due to disappointing
exploration results, and began to pursue mineral exploration prospects,
particularly gold prospects in South America. During fiscal 2004 the Company
acquired the mineral rights to two properties in Brazil, the Tocantinzinho and
Mamoal Properties, as described below. In fiscal 2005, the Company extended its
holdings in the Tocantinzinho Properties and conducted exploration activities on
both the Tocantinzinho and Mamoal properties. Additionally, the Company
acquired the Batalha Property, a gold prospect also located in Para State,
Brazil. The Company will continue to pursue mineral exploration prospects,
focusing on the Tapajos and on a worldwide basis as opportunities arise, subject
to adequate acquisition and exploration funding.
1
Since its inception, the Company has no revenues from operations other than
rental income from the Company's Diamond Recovery Plant ("the Plant") totaling
$1,079,000, which was received during the three fiscal years ended January 31,
1999. In March 2003 the Company sold the Plant to a third party for $350,000
(U.S.).
CERTAIN RISK FACTORS
The Company's business plan to acquire additional exploration prospects,
continue exploration activities on its current projects, and, if warranted,
undertake development and mining operations is subject to numerous risks and
uncertainties, including the following:
LACK OF PROVEN PROPERTIES AND INSUFFICIENT EXPLORATION AND DEVELOPMENT
FUNDS. At this point, all of the Company's exploration prospects and property
interests (collectively the "Properties") are gold prospects in Brazil. While
the Company has sufficient funds to complete the exploration phase currently
underway, additional funds will be necessary in order for the Company to pursue
further exploration on its existing properties and to acquire and develop
additional exploration prospects. Certain of the Company's planned expenditures
are discretionary and may be increased or decreased based upon funds available
to the Company.
As of January 31, 2005, the Company had sufficient cash to fund general and
administrative expenses anticipated during fiscal 2006. As discussed above, the
Company will be required to raise additional capital for additional exploration
activity on its existing properties and acquisition of new exploration prospects
during fiscal 2006. There can be no assurance that additional funds can be
raised. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" (hereinafter referred to as "MD & A").
ENVIRONMENTAL LAWS. The exploration programs conducted by the Company are
subject to national, state and/or local regulations regarding environmental
considerations in the jurisdiction where they are located. Most operations
involving exploration or production activities are subject to existing laws and
regulations relating to exploration and mining procedures, reclamation, safety
precautions, employee health and safety, air quality standards, pollution of
stream and fresh water sources, odor, noise, dust, and other environmental
protection controls adopted by federal, state and local governmental authorities
as well as the rights of adjoining property owners. The Company may be required
to prepare and present to federal, state or local authorities data pertaining to
the effect or impact that any proposed exploration or production of minerals may
have upon the environment. All requirements imposed by any such authorities may
be costly, time consuming, and may delay commencement or continuation of
exploration or production operations. However, at this time, the Company is
exploring its Properties and does not anticipate preparing environmental impact
statements or assessments until such time as the Company believes one or more of
its Properties will prove to be commercially feasible.
LIMITED EXPLORATION PROSPECTS. The Company's existing properties are all
gold prospects in Brazil. Accordingly, the Company does not have a diversified
portfolio of exploration prospects either geographically or by mineral targets.
The Company's operations could be significantly affected by changes in the
market price of gold, as the economic viability of the Company's projects is
heavily dependent upon the market price of gold. Additionally, the Company's
projects are subject to the laws of Brazil and can be negatively impacted by the
existing laws and regulations of that country, as they apply to mineral
exploration, land ownership, royalty interests and taxation, and by any
potential changes of such laws and regulations.
TITLE TO PROPERTIES. The Company cannot guarantee title to all of its
Properties as the Properties may be subject to prior unregistered agreements or
transfers or native land claims, and title may be affected by undetected
defects. The Company does not maintain title insurance on its properties.
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business", "Item 2.
Properties", "Item 3. Legal Proceedings", and "Item 7. MD & A" and other factors
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 of 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
properties; 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 the Company's projects; and other factors
referenced in this Form 10-K. The use in this Form 10-K 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 its exploration Properties.
ITEM 2. PROPERTIES
----------
Currently, all of the Company's Properties are located in the Tapajos Gold
District of Brazil's northerly Para State. The general location of the
Company's Brazilian Properties is shown on the map provided below. The map is
followed by a description of the Company's rights and interests in each of the
Properties, including those Properties in the State of Arkansas where the
Company's rights and interests have expired.
(map)
3
BRAZILIAN PROPERTIES
Tocantinzinho Properties
In August 2003 the Company entered into an option to acquire exploration rights
to a total of 28,275 hectares in the Tapajos 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 exploration rights to such area
(referred to herein as 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.) on
exploration ($300,000 (U.S.) by July 31, 2004). 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 200,000 common shares of the Company and $40,000 (U.S.).
As of January 31, 2005, the total commitment remaining under the option
agreement is as follows (all amounts are in U.S. dollars): $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 2006, 2007 and
2008 fiscal years, respectively.
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. At January 31, 2005, the remaining payment
commitments under the Underlying Agreements are as follows (all amounts are in
U.S. dollars): $120,000, $160,000 and $1,205,000 in fiscal years 2006, 2007 and
2008, respectively. The Company made payments totaling $35,000 (U.S.) and
$80,000 (U.S.) in respect of the Underlying Agreements during fiscal 2004 and
2005, respectively. 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
which expired during fiscal 2005. 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.), respectively, discussed above. During
fiscal 2005 the Company met the requirement under the option agreement to expend
a total of $300,000 (U.S.) and met the requirement to expend $1,000,000 (U.S.)
on exploration. The Company has met its first year commitments under the option
agreement, and the option agreement is cancelable by the Company without further
obligations.
The optionors are entitled to a sliding scale gross revenues royalty ranging
from 2.5% for gold prices below $400 (U.S.) per ounce to 3.5% for gold prices in
excess of $500 (U.S.) per ounce. The Company has filed applications for
exploration licenses with the regulatory authorities in Brazil and has received
final approval on several claim areas. The Company anticipates it will receive
final approval on the remaining claim areas in fiscal 2006.
In May 2004 the Company applied for exploration permits for an additional 16,000
hectares adjacent to the above Tocantinzinho Properties. The Company has agreed
to make payments totaling $300,000 (U.S.) over a period of approximately four
years to an individual as a finder's fee related to this 16,000 hectare
property. This additional property is not subject to the option agreement and
therefore is not subject to the royalty.
The Company completed a 20 hole diamond drill program (approximately 4000
meters) at the Tocantinzinho Properties during fiscal 2005 in which 19 of 20
holes encountered mineralization and which outlined a mineralized body that is
at least 500 meters in strike length, with a true width of approximately 110
meters, and open at 290 meters vertical depth. Drill programs planned for
fiscal 2006 are designed to ascertain if the known dimensions of this
mineralization can be expanded. Additionally, the Company completed both a
ground magnetic survey and metallurgical testing of drill core samples of the
Tocantinzinho Properties during fiscal 2005 and the first quarter of fiscal 2006
and was encouraged by the results. Detailed results of the above testing,
including maps of the ground magnetics and drill hole mineralization, are
located at the company's website, www.brazauroresources.com.
4
Mamoal Property
The Company entered into an option agreement under which it may acquire the
exploration license to 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 $300,000 (U.S.) over three and one half years. The Company may terminate the
option agreement at any time without further obligation. An initial $10,000
(U.S.) payment was made by the Company in December 2003, and the exploration
research license has been transferred to Jaguar Resources do Brasil Ltda.
During fiscal 2005, the Company made payments under the option agreement
totaling $25,000 (U.S.). The remaining option payments are as follows (all
amounts are in U.S. dollars): $45,000, $65,000, and $155,000 in fiscal years
ending January 31, 2006, 2007 and 2008, respectively. The Company may acquire
the Mamoal Property at any time by accelerating the option payments. The
Company has received the exploration license from the Brazilian regulatory
authority.
During fiscal 2005, the Company conducted geological mapping, rock sampling,
mapping of old garimpeiro pit workings and approximately 2,400 auger holes to a
depth of approximately one meter. In the first quarter of fiscal 2006, the
Company announced positive sampling results from its work during fiscal 2005.
Additional soil sampling and drilling are planned for fiscal 2006. Detailed
results of the sampling program may be found at the Company's website,
www.brazauroresources.com.
Batalha Property
In September, 2004 the Company applied for an exploration license to the 9800
hectare Batalha Property, located in the Tapajos gold province in northern
Brazil. The property, host to a well known "garimpo" or artisanal mine, lies at
the western end of the Tocantinzinho trend.
The Company has agreed to pay the original holder of artisanal mining rights of
Batalha, who controls over 1,700 hectares lying within the exploration license
and directly over the Batalha zone, the equivalent of approximately $91,000
Canadian dollars in Brazilian reals over a 42 month period with a buyout after 4
years of $250,000 (U.S.) (if the project is deemed economic by the Company) and
an additional sum based on the number of ounces of gold in the proven and
probable (or measured and indicated) categories at Batalha as set out in a
pre-feasibility or feasibility study. The per ounce payment amount ranges in a
sliding scale from US$1 per ounce for the first one million ounces up to $10
(U.S.) per ounce for each ounce over four million ounces. The 9,800 hectare
exploration license lies over top of this area, covering extensions to north,
south and west. If after four years the Company, in its sole opinion, has not
found an economic ore body, the area and all collected data will be returned to
the vendor.
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.
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 retirement obligation for leasehold reclamation costs during fiscal year 2004
of approximately $150,000, 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 Company allowed the lease to expire
effective November 1, 2003.
5
ITEM 3. LEGAL PROCEEDINGS
------------------
Except as described in Note 12 of the Notes to the Company's Consolidated
Financial Statements incorporated by reference into Part II. Item 8 hereof,
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. The
Company is involved from time to time in claims arising in the normal course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
--------------------------------------------------------------
MATTERS
-------
The Company's Common Stock is listed on the TSX Venture Exchange ("the
TSX") in British Columbia, Canada under the symbol "BZO" ("JRS" through
September 3, 2004). The Company's Common Stock is not traded on an exchange or
market in the United States. The high and low sales prices (in Canadian
dollars) as quoted on the TSX for the below referenced quarterly periods were as
follows:
Price Range of Common Stock
Fiscal Year Ended January 31
2005 2004
----------------------------
Fiscal Quarter Ended High Low High Low
- -------------------- ---- ---- ---- ----
April 30 . . . . . . 1.80 0.35 0.25 0.07
July 31. . . . . . . 1.58 0.73 0.35 0.20
October 31 . . . . . 1.05 0.78 0.47 0.25
January 31 . . . . . 1.39 0.80 0.54 0.35
The closing price of the Company's Common Stock was $1.17 (Canadian) as of
April 15, 2005 on the TSX Venture Exchange.
At March 31, 2005, there were 137 holders of record of the Company's Common
Stock including 103 in the United States who collectively held 26,662,627 shares
representing 59% of the total number of issued and outstanding shares. The
Company believes it has in excess of 300 beneficial owners of its Common Stock
residing in the United States and Canada based on the number of record holders
and individual participants in security position listings.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company presently intends to retain cash for the operation and development
of its business and does not anticipate paying cash dividends in the foreseeable
future. A future determination as to the payment of dividends will depend on a
number of factors, including future earnings, capital requirements, the
financial condition and prospects of the Company and such other factors as the
Board of Directors of the Company deems relevant.
6
PASSIVE FOREIGN INVESTMENT COMPANY RULES
For U.S. federal income tax purposes, the Corporation likely was classified
as a passive foreign investment company ("PFIC") under section 1297 of the Code
for its taxable year ending January 31 2005, and likely will be a PFIC in
subsequent taxable years until it has significant operating income. A non-U.S.
corporation generally is classified as a PFIC for U.S. federal income tax
purposes in any taxable year if, either (a) at least 75% of its gross income is
"passive" income (the "income test"), or (b) on average at least 50% of the
gross value of its assets is attributable to assets that produce passive income
or are held for the production of passive income (the "asset test"). For
purposes of the income test and the asset test, if a non-U.S. corporation owns
directly or indirectly at least 25% (by value) of the stock of another
corporation, the non-U.S. corporation will be treated as if it held its
proportionate share of the assets of the latter corporation and received
directly its proportionate share of the income of that latter corporation.
Passive income generally includes dividends, interest, royalties and rents
(other than rents and royalties derived in the active conduct of a trade or
business and not derived from a related person).
For any taxable year in which the Corporation is a PFIC, U.S. Holders will
be subject to U.S. federal income tax in respect of the Securities in accordance
with the special rules applicable to investments in PFICs. Under the PFIC
rules, as discussed further below in this section "Passive Foreign Investment
Company Rules", the U.S. federal income tax consequences of the ownership of
Securities will be governed by the so-called "non-qualified fund" regime, unless
either (a) a U.S. Holder elects to treat the Corporation as a "qualifying
electing fund" ("QEF"), and the Corporation annually supplies its U.S. Holders
with the information necessary for compliance with the QEF election, or (b) the
Securities constitute "marketable stock", within the meaning of section 1296 of
the Code, and the U.S. Holder elects to mark the Securities to market as of the
end of each taxable year.
U.S. HOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR OWN TAX ADVISORS ABOUT THE
POSSIBLE CHARACTERIZATION OF THE CORPORATION AS A PFIC AS WELL AS THE
ADVISABILITY OF MAKING A QEF ELECTION OR A MARK-TO-MARKET ELECTION.
Non-Qualifying Fund
In general, if a QEF election or a mark-to-market election is not made by a
U.S. Holder, any gain on a sale or other disposition of Securities by such a
U.S. Holder would be treated as ordinary income and would be subject to special
tax rules. Under these special tax rules, (a) the amount of any such gain would
be allocated ratably over the U.S. Holder's holding period for the Securities,
(b) the amount of ordinary income allocated to years prior to the year of sale
or other disposition would be subject to tax at the highest statutory rate
applicable to such U.S. Holder for each such year (determined without regard to
other income, losses or deductions of the U.S. Holder for such years), and (c)
the tax for such prior years would be subject to an interest charge, computed at
the rate applicable to underpayments of tax. Under proposed U.S. Treasury
regulations, a "disposition" may include, under certain circumstances, transfers
at death, gifts, pledges of shares and other transactions with respect to which
gain is not ordinarily recognized. In addition, the adjustment ordinarily made
to the tax basis of stock owned by a decedent may not be available with respect
to the Securities. Rules similar to those applicable to dispositions will
generally apply to distributions in respect of Securities that exceed 125% of
the average amount of distributions in respect of such Securities during the
preceding three years, or, if shorter, during the preceding years in the U.S.
Holder's holding period ("excess distributions").
Each U.S. Holder would be required to annually file IRS Form 8621 (Return
by a Shareholder of a Passive Foreign Investment Company or Qualified Electing
Fund) with such U.S. Holder's timely filed U.S. federal income tax return (or
with the U.S. Internal Revenue Service Center, P.O. Box 21086, Philadelphia,
Pennsylvania 19114, if the U.S. Holder is not required to file a return).
7
QEF Election
If a U.S. Holder makes a valid and timely-filed QEF election in connection
with a purchase of Securities, and provided that the Corporation annually
supplies the information necessary to comply with such election, then the
electing U.S. Holder will be required each taxable year to recognize, as
ordinary income, a pro rata share of the Corporation's earnings, and to
recognize, as capital gain, a pro rata share of the Corporation's net capital
gain, in each case without regard to whether distributions are received with
respect to the Securities for such year. The QEF election, once made, applies
to all subsequent taxable years of the U.S. Holder in which it holds Securities
until the Corporation ceases to be a PFIC. If the Corporation is again a PFIC
in any taxable year following a year in which the Corporation was not treated as
a PFIC, the original QEF election continues to be effective. Accordingly, for
any taxable year in which the Corporation is a PFIC and does not have any net
income, a U.S. Holder would not have any income exclusions as a result of the
QEF election. The Corporation will provide the information necessary for
complying with the QEF election. Amounts included in a U.S. Holder's taxable
income under the QEF regime would increase such U.S. Holder's tax basis in the
Securities, and subsequent distributions by the Corporation would not be taxable
to the U.S. Holder, and instead would reduce the U.S. Holder's tax basis in the
Securities to the extent that the U.S. Holder could demonstrate that the
distributions were attributable to previously-taxed income. A U.S. Holder
generally would recognize capital gain or loss upon a disposition of Securities
that were subject to a QEF election at all times during such U.S. Holder's
holding period. Special rules would apply if a U.S. Holder makes a QEF election
later than the first taxable year in which Securities are owned (which could
result in the U.S. Holder remaining subject to the non-qualifying fund regime
described above).
Mark-to-Market Election
If a U.S. Holder makes a valid and timely-filed mark-to-market election,
and provided that the Securities constitute "marketable stock" within the
meaning of section 1296 of the Code, then in any year in which the Corporation
is a PFIC the U.S. Holder annually would be required to report any unrealized
gain with respect to its Securities as an item of ordinary income, and would be
permitted to deduct any unrealized loss, as an ordinary loss, to the extent of
previous inclusions of ordinary income. Any gain subsequently realized by such
electing U.S. Holder upon a disposition of Securities also would be treated as
ordinary income, rather than capital gain, but such U.S. Holder would not be
subject to an interest charge on the resulting tax liability as under the
non-qualifying fund regime. A U.S. Holder who makes a mark-to-market election
would still be taxed on distributions from the Corporation when received, as
described under "Dividends".
For purposes of the mark-to-market election, marketable stock generally
includes stock that is regularly traded on certain established securities
markets within the United States, or on any exchange or other market that the
IRS determines has trading, listing, financial disclosure, and other rules
adequate to carry out the purposes of the mark-to-market election. The Toronto
Stock Exchange and the Alternative Investment Market of the London Stock
Exchange may qualify as such an exchange. Each U.S. Holder should consult its
own advisor as to whether the mark-to-market election is available with respect
to the Securities. Special rules would apply to a U.S. Holder that held
Securities prior to the first taxable year for which the mark-to-market election
was effective, which could result in an interest charge for such first taxable
year, as under the non-qualifying fund regime described above.
A U.S. Holder choosing to make a mark-to-market election must make the
election on Form 8621 for the taxable year of election and must annually file
Form 8621 with such U.S. Holder's timely filed U.S. federal income tax return or
with the IRS. Once made, a mark-to-market election would be effective for all
subsequent taxable years of such U.S. Holder unless revoked with the consent of
the Secretary of the Treasury or unless the Securities cease to be marketable.
DIVIDENDS
For purposes of this section "Dividends", it is assumed that the
Corporation is a PFIC. To the extent that distributions paid on the Securities
are not treated as excess distributions received by a non-electing U.S. Holder,
and to the extent the distribution exceeds the previously-taxed income of a U.S.
Holder that makes a QEF election, such distributions (before reduction for
Canadian withholding taxes) will be taxable as dividends to the extent of the
Corporation's current or accumulated earnings and profits, as determined for
U.S. federal income tax purposes, and will be includable in a U.S. Holder's
ordinary income when received. Dividends on the Securities will not be eligible
for the dividends-received deduction generally allowed to U.S. corporations.
8
The amount of any dividend paid in Canadian dollars will equal the U.S.
dollar value of the Canadian dollars received calculated by reference to the
exchange rate in effect on the date the dividend is received by a U.S. Holder
regardless of whether the Canadian dollars are converted into U.S. dollars. If
the Canadian dollars received as a dividend are not converted into U.S. dollars
at the date of receipt, a U.S. Holder will have a basis in the Canadian dollars
equal to the U.S. dollar value on the date of receipt. Any gain or loss
realized on a subsequent conversion or other disposition of the Canadian dollars
will be treated as ordinary income or loss, and generally will be income or loss
from sources within the United States for U.S. foreign tax credit purposes.
A U.S. Holder may be entitled to deduct, or claim a U.S. foreign tax credit
for, Canadian taxes that are withheld on dividends received by a U.S. Holder,
subject to applicable limitations in the Code. Dividends will be income from
sources outside the United States and for tax years beginning before January 1,
2007, generally will be "passive income" or "financial services income", and for
tax years beginning after December 31, 2006, generally will be "passive category
income" or "general category income" for purposes of computing the U.S. foreign
tax credit allowable to a U.S. Holder. The rules governing the U.S. foreign tax
credit are complex, and investors are urged to consult their tax advisors
regarding the availability of the U.S. foreign tax credit under their particular
circumstances.
To the extent that the amount of any distribution exceeds the Corporation's
current and accumulated earnings and profits for a taxable year, the
distribution will first be treated as a tax-free return of capital to the extent
of a U.S. Holder's basis, and any excess will be treated as capital gain. Such
capital gain would not give rise to income from sources outside the United
States, and accordingly a U.S. Holder may need other non-U.S. source income in
order to claim a tax credit for Canadian withholding taxes imposed on such
distribution.
FOREIGN CONTROLS
The Company is not aware of governmental laws, decrees or regulations in
Canada restricting the import or export of capital or affecting the remittance
to the United States of interest, dividends or other payments to non-resident
holders of the Company's Common Stock. However, the payment or crediting of
interest or dividends to United States residents may be subject to applicable
withholding taxes at a rate prescribed by the Income Tax Act (Canada) as
modified by the provisions of the Canada-United States Income Tax Act (Canada)
and as further modified by the provisions of the Canada-United States Income Tax
Convention, 1980 (see "Taxation" below).
Except as provided in the Investment Canada Act (the "ICA"), there are no
limitations under the laws of Canada, the Province of British Columbia or in the
charter and organizational documents of the Company on the right of nonresident
or foreigner owners to hold and/or vote the shares of the Company.
The ICA applies when a "non-Canadian" individual or entity or controlled
group of entities as defined in the ICA proposes to make an investment to
acquire control of a Canadian business enterprise, either directly or
indirectly, and by way of purchase of voting shares of a corporation or of
substantially all of the assets used in the Canadian business enterprise. An
investment in voting shares of a corporation is deemed to be an acquisition of
control where more than 50% of the voting shares are acquired. An acquisition
of less than one-third of the voting shares of a corporation is deemed not to be
an acquisition of control and an acquisition of between one-third and one-half
of the voting shares of a corporation is presumed to be an acquisition of
control unless it can be established that the acquisition does not in fact
result in control of the corporation by the investor.
An investment to acquire control of a Canadian business enterprise, the
gross assets of which exceed certain thresholds, must be reviewed and approved
under the ICA before implementation. An investment to acquire control of a
Canadian business enterprise, the gross asset value of which falls below these
threshold amounts, is one in respect of which notification must be given under
the ICA although approval is not required prior to implementation of the
investment. NAFTA Investors, (i.e.) investors who are nationals, other than
Canadian, as defined in the North American Free Trade Agreement, are not
considered for the purposes of the ICA to be "non-Canadian".
9
TAXATION
Dividends. Generally, dividends paid by a Canadian corporation to
non-resident shareholders are, under the Income Tax Act (Canada) (the "ITA"),
subject to a withholding tax of 25%. However, paragraph 2 of Article X of the
Canada-United States Income Tax Convention (1980) (the "Treaty") provides for
the following maximum withholding tax rates:
a) 10% of the gross amount of the dividends if the beneficial owner of
such dividends is a U.S. resident company which owns at least 10% of the voting
stock of the corporation paying the dividends; and
b) 15% of the gross amount of the dividends in all other cases.
Subject to certain limitations and exceptions, U.S. resident shareholders
of a Canadian corporation may be entitled to a credit for all or a portion of
such withholding taxes in computing their U.S. federal and possibly their state
income tax liability.
Dividends paid by a Canadian corporation to shareholders resident in Canada
will not be subject to withholding tax. Any dividends received by a Canadian
resident on shares of the Company will be treated for tax purposes as dividends
from a taxable Canadian corporation. Accordingly, where a dividend is received
by an individual resident in Canada, the individual will be entitled to claim a
federal dividend tax credit, equal to 16 2/3% of the dividend. Where the
dividend is received by a corporation resident in Canada, the dividend will
normally be free of tax under Part I of the ITA but may be subject to refundable
tax under Part IV of the ITA.
Disposition of Capital Property. If shares of a Canadian public
----------------------------------
corporation held by a non-resident shareholder constitute capital property to
that shareholder, the disposition of such shares will not be subject to tax
under the ITA unless the shares constitute "taxable Canadian property" to the
vendor. Where a non-resident shareholder or persons with whom the non-resident
shareholder does not deal at arm's length have, at any time during the five year
period immediately preceding the disposition, owned not less than 25% of the
issued shares of any class of the capital stock of the public corporation, the
shares so disposed of will constitute "taxable Canadian property". Under the
ITA, a disposition of shares that constitute taxable Canadian property will give
rise to a capital gain (or a capital loss) equal to the amount by which the
proceeds of disposition of such shares, net of any cost of disposition, exceeds
(or is less than) the adjusted cost basis of such shares to that investor.
Generally, three-quarters of any capital gain realized by an investor on a
disposition or a deemed disposition of such a shares must be included in
computing his Canadian income for that year as a taxable capital gain.
Three-quarters of any capital loss realized by an investor on a disposition or
deemed disposition of such a share in a taxable year may generally be deducted
from his Canadian taxable capital gains for that year.
Any gains realized by a non-resident shareholder from the disposition of
shares which are taxable Canadian property may be exempt from tax under the ITA
by virtue of Article XIII of the Treaty if, at the time of the disposition of
the subject shares, the value thereof was derived principally from something
other than direct or indirect real property interests situated in Canada.
Under the ITA, the disposition of a share by an investor may occur or be
deemed to occur in a number of circumstances including on a sale or gift of such
share or upon the death of that investor.
The initial adjusted cost base of a share to an investor will be the cost
to him of that share. Under the ITA, certain addition or reduction adjustments
may be required to be made to the cost base of a share. The adjusted cost base
of each common share of a corporation owned by an investor at any particular
time will be the average adjusted cost base to him of all common shares of that
corporation owned at that time.
Subject to certain limitations and exceptions, U.S. resident shareholders
of a Canadian corporation may be entitled to a credit for all or a portion of
any capital gain taxation in computing their U.S. federal and possibly their
state income tax liability.
10
In general, the disposition by a shareholder resident in Canada of the
capital stock in a Canadian corporation will be subject to Canadian income
taxation in the same manner as rules described above relating to a disposition
of share which constitute taxable Canadian property. A shareholder resident in
Canada may, however, be entitled to a capital gains exemption. The ITA
provides, for residents of Canada, a cumulative lifetime exemption from income
tax of $100,000 of qualifying net capital gains.
Disposition of Non-Capital Property. If the shares of a Canadian public
---------------------------------------
corporation held by a non-resident do not constitute capital property to that
shareholder, any gains realized from the disposition thereof will be fully
taxable under the ITA if their disposition arises in the course of a business
carried on by the shareholder in Canada. Under the ITA, a shareholder will be
deemed to carry on business in Canada in respect of particular shares if he
offers them for sale in Canada through an agent, including the TSX Venture
Exchange. Under the Treaty, any business profits derived by a U.S. resident
shareholder of a Canadian public corporation from the disposition of the subject
corporation's shares will only be taxable in Canada to the extent that such
profits are attributable to a permanent establishment of the shareholder in
Canada.
The foregoing discussion is a summary of certain tax considerations which
may be relevant to stockholders of the Company, but it is not intended as a
substitute for personal tax planning and professional tax advice.
RECENT SALES OF UNREGISTERED SECURITIES
For a discussion of the recent sale of unregistered securities by the
Company, see" MD & A - Liquidity and Capital Resources".
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
----------------------------------------------
The selected consolidated financial information set forth below for each of
the five years ended January 31, 2005 has been derived from the Consolidated
Financial Statements of the Company prepared in accordance with generally
accepted accounting principles in Canada. These principles are also in
conformity, in all material respects, with generally accepted accounting
principles in the United States except as described in Note 16 of the Notes to
Consolidated Financial Statements. The selected consolidated financial
information should be read in conjunction with the MD & A discussion below and
the Consolidated Financial Statements and related notes thereto included on
pages 23 to 42 herein. References in this Annual Report on Form 10-K to "Notes"
are intended to refer to the Notes to the Consolidated Financial Statements
included herein.
Since its formation, the Company's activities have consisted primarily of
acquiring interests in mineral properties, exploration of those properties and
acquiring financing for such purposes. Consequently, the Selected Consolidated
Financial Information may not indicate the Company's future financial
performance. The weighted average number of common shares outstanding and the
net loss per common share for the fiscal year ending January 31, 2001 has been
restated to reflect the consolidation of the Company's common shares outstanding
on a seven for one basis effective November 27, 2001.
(This portion of the page is intentionally left blank.)
11
SELECTED CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
Fiscal Year Ended January 31
----------------------------
2005 2004 2003 2002 2001
--------- ---------- --------- --------- ----------
*Restated *Restated
(In Canadian dollars)
(000's except for net loss per common share data)
Writedown and abandonment of properties, plant
and equipment . . . . . . . . . . . . . . . . . - - 3,142 86 -
Net loss for the year . . . . . . . . . . . . . . (3,741) (1,199) (4,468) (1,961) (1,695)
Basic and diluted net loss per common share . . . (0.10) (0.06) (0.27) (0.21) (0.20)
Weighted average common shares outstanding. . . . 38,950 21,350 16,439 9,142 8,388
Working capital (deficit) . . . . . . . . . . . . 3,296 1,722 (63) 376 379
Total assets. . . . . . . . . . . . . . . . . . . 6,482 2,819 96 3,516 3,132
Long-term debentures payable. . . . . . . . . . . - - 1,279 1,279 -
Deficit . (37,534) (33,793) (32,594) (28,125) (26,165)
Total shareholders' equity (deficit). . . . . . . 6,133 2,450 (1,557) 1,983 2,492
*Restated to reflect the Company's change in accounting for stock-based
compensation - please see Note 2 to the consolidated financial statements.
EXCHANGE RATES
On April 19, 2005, the noon buying rate in New York City for cable
transfers in Canadian dollars, as certified for customs purposes by the Federal
Reserve Bank of New York, was $1.00 (Canadian) = U.S. $0.8059. The following
table sets forth, for each of the years indicated, additional information with
respect to the noon buying rate for $1.00 (Canadian). Such rates are set forth
as U.S. dollars per Canadian. $1.00 and are based upon the rates quoted by the
Federal Reserve Bank of New York.
Rate. . . . 2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Last Day. . 0.8310 0.7539 0.6542 0.6279 0.6669
Average (1) 0.7745 0.7289 0.6386 0.6446 0.6727
High. . . . 0.8493 0.7880 0.6619 0.6697 0.6936
Low . . . . 0.7177 0.6530 0.6200 0.6241 0.6410
(1) The average rate means the average of the exchange rates on the last day of
each month during the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------
Results of Operations.
For the Years Ended January 31, 2005, 2004 and 2003
The Company is engaged in the business of exploring for and, if warranted,
developing mineral properties and is concentrating its current acquisition and
exploration efforts on those properties which the Company believes have large
scale gold potential. The Company leases interests in properties located in the
Tapajos Gold District of Brazil's northerly Para State (collectively the
"Properties").
12
The Company has had no significant 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
4, which were acquired during fiscal 2004 and 2005. 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 4, 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's mineral properties and deferred expenditures increased to
$2,817,746 at January 31, 2005 from $714,283 at January 31, 2004 as a result of
acquisition costs totaling $555,069 and exploration costs totaling $1,548,394
related to the activities on the Company's Brazilian Properties as further
described in Note 4. Similarly, the total increase during fiscal 2004 in
mineral properties and deferred expenditures of $714,283 represented the total
of acquisition costs of $540,495 and exploration costs of $173,788 related to
the activities on the Company's Brazilian Properties as further described in
Note 4. The increases were primarily due to the acquisition and exploration
costs totaling $1,943,729 and $701,133 during fiscal 2005 and 2004,
respectively, related to the Company's project at the Tocantinzinho Properties.
The Company completed a 20 hole diamond drill program (approximately 4000
meters) at the Tocantinzinho Properties during fiscal 2005 in which 19 of 20
holes encountered mineralization and which outlined a mineralized body that is
at least 500 meters in strike length, with a true width of approximately 110
meters, and open at 290 meters vertical depth. Drill programs planned for
fiscal 2006 are designed to significantly expand the known dimensions of this
mineralization. Additionally, the Company completed both a ground magnetic
survey and metallurgical testing of drill core samples of the Tocantinzinho
Properties during fiscal 2005 and the first quarter of fiscal 2006 and was
encouraged by the results. Detailed results of the above testing, including
maps of the ground magnetics and drill hole mineralization, are located at the
company's website, www.brazauroresources.com.
The Company's revenues during fiscal 2004 were primarily comprised of the
gain from the sale of the Diamond Recovery Plant ("the Plant"). The Plant was
sold to a third party for $350,000 (U.S.) and was fully depreciated at disposal.
As discussed in Note 4, the Plant was located on the American Mine Property.
The Company recorded a retirement obligation for leasehold reclamation of
approximately $142,000, which represents the estimated costs to return the
leased property to its original condition and to complete environmental
reclamation as required by the Arkansas regulatory authorities. During the
years ended January 31, 2005 and 2003 the Company's revenues were comprised
entirely of interest income on proceeds received from prior financings and gains
on sales of equipment. The Company has not received any revenues from mining
operations since inception.
General and administrative expenses totaled approximately $3,747,000 during
fiscal 2005 as compared to approximately $1,405,000 during fiscal 2004,
representing an increase of approximately $2,343,000 or 167%. Included in
general and administrative expenses for fiscal 2005 and 2004 was approximately
$2,123,000 and $462,000, respectively, of stock compensation expense recorded
using the fair value method, which was an increase of approximately $1,661,000
from fiscal 2004 to fiscal 2005. The remaining increase in general and
administrative expenses was primarily related to the increased activities
surrounding the exploration program underway in Brazil during fiscal 2005.
After excluding the effect of the stock compensation expense recorded in fiscal
2005 and 2004, in comparison to fiscal 2004, salaries in fiscal 2005 increased
by approximately $274,000 as additional personnel were added in Brazil, and
consulting, promotional and professional fees related to the Brazilian
exploration program increased by approximately $269,000 during fiscal 2005 as
compared to fiscal 2004.
General and administrative expenses increased by approximately $226,000, or
19%, from fiscal 2003 to fiscal 2004. As discussed above and in Note 8, the
company recorded stock compensation expense using the fair value method of
approximately $462,000 during fiscal 2004 as compared to approximately $158,000
for fiscal 2003. Salaries, professional and consulting fees totaling
approximately $1,081,000 were incurred during 2004 as the Company commenced the
evaluation of several mineral prospects, principally gold prospects in Brazil.
In particular, the Company hired a new president and retained the services of an
exploration project manager and an administrator for the Brazilian Properties
during fiscal 2004. During fiscal 2003, the general and administrative expenses
13
incurred by the Company primarily represented costs associated with the
exploration activities on the Arkansas Properties, including salaries of
approximately $582,000 and repairs and maintenance of approximately $127,000.
The Company anticipates that general and administrative expenses during
fiscal 2006 will increase from the level experienced in fiscal 2005 as the
Company incurs additional consulting and exploration expenditures related to the
Brazilian Properties.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES.
As of January 31, 2005, the Company had working capital of $3,296,092 as
compared to working capital of $1,722,290 at January 31, 2004. At January 31,
2005, the Company had current assets of $3,644,657, including $3,557,214 in cash
and $87,443 in accounts receivable compared to total current liabilities of
$348,565.
In the first quarter of 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 4,261,983
units would consist 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 which will require conversion 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.
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 an exercise price of $0.30. Additionally, under the
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 in 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.
14
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.
In September, 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 had an expiration date of September 18, 2004. The Company
received a total of $563,955 during fiscal 2003 representing subscriptions for
the private placement. During fiscal year 2005, all 2,819,774 common share
warrants were exercised, and the Company received total exercise proceeds of
$704,943.
In November 2004, the Company completed a private placement of 2,112,500
common shares of the Company at a price of $0.85 per share and received proceeds
totaling $1,795,625. In consideration for assistance with the private
placement, the Company paid finders' fees of $96,950 in cash and issued 113,000
share purchase warrants entitling the finders to purchase 113,000 common shares
of the Company at $1.05 per share until November 2, 2005. In March, 2005, a
holder of the share purchase warrants elected to exercise 44,635 warrants and
the Company received proceeds of approximately $47,000.
In December 2004, the Company completed a private placement of 2,150,000
common shares of the Company at a price of $1.00 per share and received proceeds
of $2,150,000.
During fiscal 2005, 2004 and 2003 the Company received cash proceeds of
$477,577, $424,919 and $153,457 representing the exercise of 1,638,571,
1,884,376 and 570,000 stock options, respectively, by officers, directors,
employees and consultants at exercise prices from $0.10 to $0.49.
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 significant 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, Mamoal
and Batalha 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 2006, including the potential exercise
of outstanding 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
IMPACT OF INFLATION.
As the Company is not anticipating recording sales and revenues from
operations in the short term, a discussion of the effect of inflation and
changing prices on its operations is not relevant.
15
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
At the present stage of the Company's business development, there are no
significant differences between Canadian and United States generally accepted
accounting principles that impact the Consolidated Balance Sheets, the
Consolidated Statements of Operations, the Consolidated Statements of
Shareholders' Equity (Deficit) and the Consolidated Statements of Cash Flows
except for the capitalization of mineral properties and deferred expenditures
and the treatment of warrants issued as finders' fees as discussed in Note 16 to
Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------------
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
The Consolidated Financial Statements of the Company included as part of
this Annual Report on Form 10-K (pages 23 through 42) are incorporated by
reference in response to this Item 8. An index to the Consolidated Financial
Statements is included in Item 14.
The Company is not required to provide the selected quarterly financial
data specified in Item 302 of Regulation S-K because it does not satisfy the
tests outlined therein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------------------------------------------------------------------
FINANCIAL DISCLOSURE.
----------------------
None.
ITEM 9A. 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 annual 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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------
The directors and executive officers of the Company, their ages and term of
continuous service are as follows:
16
POSITION WITH SERVED AS A DIRECTOR
NAME. . . . . . . . . . . AGE REGISTRANT AND/ OR OFFICER SINCE
Patrick L. Glazier. . . . 47 Director July 8, 1998
Brian C. Irwin. . . . . . 65 Director October 3, 1995
Mark E. Jones, III. . . . 65 Director, Chairman & CEO March 12, 1986
Leendert G. Krol. . . . . 65 Director, President March 6, 2003
Daniel B. Leonard . . . . 68 Director October 20, 1999
Dr. Roger Howard Mitchell 63 Director June 14, 1993
Dr. Roger David Morton. . 69 Director June 14, 1993
PATRICK L. GLAZIER. Mr. Glazier has served as the President of East Fraser
Fiber Co. Ltd. based in Prince George, British Columbia for the past five years.
BRIAN C. IRWIN. For the past five years, Mr. Irwin's principal occupation
has been the practice of law as a partner of DuMoulin Black in Vancouver,
British Columbia.
MARK E. JONES, III. Mr. Jones has served as a Director of the Board of
Crown Resources Corporation since January 1987. Crown Resources Corporation,
based in Denver, Colorado, is publicly traded on the OTC Bulletin Board and is
engaged in the exploration and development of mineral properties, primarily
gold. Mr. Jones served as the President of the Company from 1986 to June 1990
and from July 2001 to the March 2003. Mr. Jones is also a director of Solitario
Resources Corporation. In his capacity as Chairman of the Board of Directors,
Mr. Jones is the chief executive officer of the Company.
LEENDERT G. KROL. Until his retirement in April 2001, Mr. Krol had spent
15 years with Newmont Mining Corporation including the last 10 years,
successively, as Director of Foreign Operation, Vice President Exploration and
Vice President International Exploration.
DAN LEONARD. Mr. Leonard served as Senior Vice President of INVESCO for
twenty-four years until his retirement in January 1999. Mr. Leonard also serves
as a Director of Solitario Resources Corporation.
DR. ROGER HOWARD MITCHELL. For the past six years, Dr. Mitchell has served
as a Professor of Geology at Lakehead University, Thunder Bay, Ontario. Dr.
Mitchell received his B.Sc. from the University of Manchester, 1964; M.Sc. from
Manchester, 1966; Ph.D from McMaster University, 1969; and a D.Sc in 1978 from
the University of Manchester. He was elected a Fellow of the Royal Society of
Canada in 1994.
DR. ROGER DAVID MORTON. For the past five years, Dr. Morton has been
Professor Emeritus in Geology with the Department of Earth and Atmospheric
Sciences at the University of Alberta. He also serves as Chairman of the Board
for Mindoro Resources Inc., and is President of Muskox Minerals Corp. He is a
member of the Board of Directors of Uruguay Mineral Resources and Black Swan
Resources. Dr. Morton obtained his B.Sc. (Hons. 1st class) in Geology and his
Ph.D. in Geology from the University of Nottingham, England.
All of the directors are residents of Canada except for Messrs. Jones, Krol
and Leonard, who reside in the United States. All directors are elected
annually by the shareholders and hold office until the next Annual Meeting of
Shareholders. Each officer of the Company holds office at the pleasure of the
Board of Directors. No director or officer of the Company has any family
relationship with any other officer or director of the Company. Messrs. Jones,
Irwin and Mitchell are members of the Company's audit committee. Messrs. Morton
and Mitchell are members of the Company's Environmental Committee and Messrs.
Morton and Jones serve as members of the Company's Compensation Committee.
Operating within the guidance provided by the Company's Board of Directors, the
Compensation Committee's role is to assure that the Company's executive
compensation strategy is aligned with the interests of the shareholders, and the
Company's compensation structure will allow for fair and reasonable base salary
levels and the opportunity for executives to earn compensation that reflects
both Company and individual performance.
17
CERTAIN SIGNIFICANT EMPLOYEES OR CONSULTANTS
The Company has consulting relationships with other geologists and persons
that are included in its projects and properties from time to time, none of
which are currently material to the Company.
ITEM 11. EXECUTIVE COMPENSATION
-----------------------
OFFICERS
The Company has no long-term incentive plans. However stock options are
awarded from time-to-time in the discretion of the Board of Directors and the
Compensation Committee. The following tables set forth all annual and long-term
compensation for services in all capacities to the Company and its subsidiaries
for the three most recently completed financial years, including information
regarding stock option awards made under the Company's Stock Option Plan.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------------------------- ---------------------------------
Awards Payouts
---------------------- ---------
Securities
Name . . .. . . . . Under All other
and. . . .. . . . . Other Annual Options Restricted LTIP Compensa-
Principal. . . . Fiscal Salary Bonus Compensation Granted Shares Payouts tion (2)
Position . . . . . . Year ($) ($) ($) (#) ($) ($) ($)
- --------------------- --------- ------------ --------- -------------- ---------- ---------- --------- ---------
Mark E. Jones, III 2005 US$120,000 $ 8,000 - 1,114,434 - - US$7,800
Chairman 2004 US$65,000 - - 775,000 - - US$7,800
. 2003 US$60,000 - - 130,888 - - US$7,800
Leendert G. Krol 2005 US$120,000 $ 10,000 - 857,829 - - -
President (1) 2004 US$64,000 - - 1,387,501 - - -
(1) Mr. Krol began serving as the Company's President in March 2003.
(2) Car allowance.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
(1) Market Value
Securities % of Total of Securities
Under Option Options Exercise or Underlying
Granted Granted to Base Price Options on
Employees in Date of Grant
Name (#) Fiscal Year ($/Security) ($/Security) Expiration Date
- ------------------ ------------ ------------ ------------ ------------- ------------------
Mark E. Jones, III 207,059 5.5% $0.92 $0.92 June 11, 2009
Mark E. Jones, III 771,875 20.7% $1.02 $1.02 July 29, 2009
Mark E. Jones, III 135,500 3.6% $1.10 $1.10 November 19, 2009
Leendert G. Krol . 251,328 6.7% $0.92 $0.92 June 11, 2009
Leendert G. Krol . 470,001 12.6% $1.02 $1.02 July 29, 2009
Leendert G. Krol . 136,500 3.7% $1.10 $1.10 November 19, 2009
(1) The options are subject to vesting requirements (25% on the date of grant
and 12.5% on each quarter end thereafter).
18
OPTION EXERCISES IN LAST FISCAL YEAR
Unexercised Value of Unexercised
Options In-the-Money
Securities Aggregate at Fiscal Options
Acquired Value Year-End at Fiscal Year-End
on Exercise Realized (#) ($)
Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ------------------ ----------- ---------- ----------------------- ------------------------
Mark E. Jones, III. . . 417,559 US$193,694. . 812,033 - Exercisable $460,852 - Exercisable
687,967 - Unexercisable $295,565 - Unexercisable
Leendert G. Krol. . 457,828 US$227,344 952,586 - Exercisable $798,081 - Exercisable
547,415 - Unexercisable $230,867 - Unexercisable
DIRECTORS
During fiscal 2005, in addition to the cash bonuses disclosed above for Mr.
Jones and Mr. Krol, the remaining Directors of the Company received cash bonuses
as follows: Mr. Glazier, $5,000; Mr. Leonard, $3,000; Mr. Irwin, Mr. Mitchell,
and Mr. Morton, $2,500. In fiscal 2005, in addition to the option awards to Mr.
Jones and Mr. Krol discussed above, Mr. Glazier, Mr. Irwin, Mr. Leonard, Mr.
Mitchell and Mr. Morton received 317,870, 397,381, 317,682, 244,611 and 262,256
options to purchase common stock, respectively, for their services on the Board
of Directors. The common share options granted during fiscal 2005 are subject
to vesting requirements (25% on the date of grant and 12.5% on each quarter end
thereafter). Information regarding individual awards to directors is included
in the footnotes to Item 12. Security Ownership of Certain Beneficial Owners and
Management below. The Company maintains no pension, profit sharing, retirement
or other plan providing benefits to its officers and directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------
The following table sets forth, as of April 15, 2005, the number of Common
Stock and the corresponding percentage ownership of (i) each person who held of
record, or was known by the Company to own beneficially, more than five percent
of the Company's Common Stock, (ii) each director and executive officer of the
Company, and (iii) all directors and executive officers of the Company as a
group. Unless otherwise indicated, the Company believes the following persons
have sole voting and investment power with respect to the number of shares set
forth opposite their names.
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT OF CLASS
Cede & Co.
P.O. Box 20, Bowling Green Station
New York, New York 10274 . . . . . . . . . . . . 21,234,055 (1) 46.7%
CDS & Co.
P. O. Box 1038, Station A, 25 The Esplanade
Toronto, Ontario M5W 1G5 . . . . . . . . . . . . 17,075,963 (1) 37.5 %
Patrick L. Glazier (3) . . . . . . . . . . . . . 1,948,132 (2) 4.2 %
Brian C. Irwin . . . . . . . . . . . . . . . . . 500,000 (2) 1.1 %
Mark E. Jones, III . . . . . . . . . . . . . . . 2,973,752 (2) 6.3 %
Leendert G. Krol . . . . . . . . . . . . . . . . 1,500,000 (2) 3.2 %
Daniel B. Leonard. . . . . . . . . . . . . . . . 1,479,124 (2) 3.2 %
Dr. Roger Howard Mitchell. . . . . . . . . . . . 405,494 (2) * %
Dr. Roger David Morton . . . . . . . . . . . . . 405,428 (2) * %
Officer and Directors of the Company as a group
(7 persons). . . . . . . . . . . . . . . . . . 9,211,930 (2) 18.1 %
19
* Less than 1%.
(1) It is the understanding of the Company that all of these shares are
held by the record shareholder in a nominal, fiduciary, trustee or similar
capacity. The Company is unaware of the identities of the beneficial owners of
these shares, with the exception of shares held by the Company's officers or
directors included in such share positions.
(2) A director of the Company. Address is 800 Bering, Suite 208, Houston,
TX 77057. Include options to purchase 448,421 common shares at $0.10 through
March 6, 2008 for Mr. Krol. Include options to purchase common shares at $0.30
through August 14, 2008 (242,130 for Mr. Glazier, 40,119 for Mr. Irwin, 125,000
for Mr. Jones, 142,318 for Mr. Leonard, 115,389 for Mr. Mitchell and 97,744 for
Mr. Morton). Include options to purchase common shares at $0.40 through October
21, 2008 (40,000 for Mr. Glazier, Mr. Leonard, Mr. Mitchell and Mr. Morton,
62,500 for Mr. Irwin, 260,566 for Mr. Jones, and 50,000 for Mr. Krol). Include
143,750 options to purchase common shares at $0.49 through November 26, 2008 for
Mr. Krol. Include options to purchase common shares at $0.92 through June 11,
2009 (120,995 for Mr. Glazier, 69,131 for Mr. Irwin, 207,059 for Mr. Jones,
251,328 for Mr. Krol, 78,807 for Mr. Leonard, 64,736 for Mr. Mitchell and 59,006
for Mr. Morton). Include options to purchase common shares at $1.02 through
July 29, 2009 (141,875 for Mr. Glazier, 281,250 for Mr. Irwin, 771,875 for Mr.
Jones, 470,001 for Mr. Krol, 191,875 for Mr. Leonard, 141,875 for Mr. Mitchell
and 166,250 for Mr. Morton). Include options to purchase common shares at $1.10
through November 19, 2009 (55,000 for Mr. Glazier, 47,000 for Mr. Irwin, 135,500
for Mr. Jones, 136,500 for Mr. Krol, 47,000 for Mr. Leonard, 38,000 for Mr.
Mitchell and 37,000 for Mr. Morton)
(3) The beneficial owner has sole ownership, with the exception of a total
of 124,285 shares, where ownership is shared.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
Accounts receivable at January 31, 2005 and 2004 include $55,900 and
$105,758 receivable from Mr. Jones, respectively. Amounts totaling $147,683 and
$121,957 were paid by the Company during fiscal 2005 and 2004, respectively, to
a law firm in which Mr. Irwin is a partner. In January 2004, Mr. Jones, Mr.
Glazier and Mr. Leonard exercised warrants to purchase common stock at an
exercise price of $0.25 per share and acquired 477,750, 225,000 and 238,875
common shares, respectively. In September, 2004, Mr. Jones, Mr. Glazier and Mr.
Leonard exercised warrants to purchase common shares at an exercise price of
$0.25 per share and received 286,200, 100,000, and 40,000 common shares,
respectively.
Shares of Jaguar do Brasil, Ltd. are held beneficially for the Company through
three representatives of the Company, including a director of the Company and
two directors of Jaguar do Brasil, Ltd.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------
Audit and Tax Fees. The fees billed for professional services rendered by
Morgan & Company in connection with the audit of the Company's annual financial
statements for the years ended January 31, 2004 and 2003 included in the
Company's annual report on Form 10-K totaled approximately $9,625 and $6,400,
respectively. The above fees included the professional services rendered by
Morgan & Company in connection with tax compliance for the two years ending
January 31, 2004.
20
Audit Committee. The Audit Committee makes recommendations concerning the
engagement of public accountants, reviews the scope and results of the audit
engagement, considers the range of audit and non-audit fees and reviews the
adequacy of internal controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
------------------------------------------------------------------
(a) Financial Statements and Schedules.
(1) The following is a list of and index to the Consolidated Financial
Statements filed as part of this Registration Statement:
BRAZURO RESOURCES CORPORATION
Index to Consolidated Financial Statements
Page
Auditor's Report - Morgan & Company 23
Consolidated Financial Statements:
Consolidated Balance Sheets - January 31, 2005 and 2004 24
Consolidated Statements of Operations
for each of the years ended January 31, 2005, 2004 and 2003 25
Consolidated Statements of Shareholders' Equity (Deficit)
for each of the years ended January 31, 2005, 2004 and 2003 26
Consolidated Statements of Cash Flows for each of the years
ended January 31, 2005, 2004 and 2003 27
Notes to Consolidated Financial Statements 28
(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are either not
required under the related instructions, are not applicable, or the information
required thereby is set forth in the Company's Consolidated Financial Statements
or the Notes thereto.
(3) Exhibits Filed as Part of this Registration Statement.
See Index to Exhibits.
21
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.
May 1, 2005 BRAZAURO RESOURCES CORPORATION
(Registrant)
By: /s/ Mark E. Jones, III
--------------------------
MARK E. JONES, III
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------------------------- ----------------------------------- -----------
/s/ Mark E. Jones, III
- ----------------------- Chief Executive Office and Director May 1, 2005
Mark E. Jones, III*
_____________________. . . . . . . . Director May 1, 2005
Patrick L. Glazier* .
_____________________. . . . . . . . Director May 1, 2005
Brian C. Irwin*
_____________________. . . . . . . President and Director May 1, 2005
Leendert G. Krol*
____________________. . . . . . . . Director May 1, 2005
Daniel B. Leonard*
_____________________. . . . . . . . Director May 1, 2005
Dr. Roger Howard Mitchell*
______________________. . . . . . . Director May 1, 2005
Dr. Roger David Morton*
By: /s/ Mark E. Jones, III
- ----------------------------
Mark E. Jones, III
Attorney-in-fact
For persons indicated *
22
Morgan & Company
AUDITORS' REPORT
To the Shareholders of
Brazauro Resources Corporation (Formerly Jaguar Resources Corporation)
We have audited the consolidated balance sheets of Brazauro Resources
Corporation (formerly Jaguar Resources Corporation) as at January 31, 2005 and
2004, and the consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the years ended January 31, 2005, 2004, and 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). 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.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at January 31, 2005
and 2004, and the results of its operations, shareholders' equity (deficit), and
cash flows for the years ended January 31, 2005, 2004, and 2003, in accordance
with Canadian generally accepted accounting principles.
Vancouver, B.C. "Morgan & Company"
April 28, 2005 Chartered Accountants
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern such as those described in
Note 1 of the consolidated financial statements. Our report to the
shareholders, dated April 28, 2005, is expressed in accordance with Canadian
reporting standards which do not permit a reference to such events and
conditions in the Auditors' Report when these are adequately disclosed in the
financial statements.
In the United States, reporting standards for auditors also 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 change described in Note 2 to
the financial statements. Our report to the shareholders, dated April 28, 2005,
is expressed in accordance with Canadian reporting standards which do not
require a reference to such a change in accounting principles in the auditors'
report when the change is properly accounted for and adequately disclosed in the
financial statements.
Vancouver, B.C. "Morgan & Company"
April 28, 2005 Chartered Accountants
23
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
CONSOLIDATED BALANCE SHEETS
January 31, 2005 January 31, 2004
---------------- ----------------
Restated (Note 2)
(In Canadian Dollars)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 3,557,214 $ 1,982,536
Accounts receivable . . . . . . . . . . . . . 87,443 109,468
-------------- ----------------
Total current assets . . . . . . . . . . . . . . 3,644,657 2,092,004
-------------- ----------------
Property and equipment, at cost:
Mineral properties and deferred
expenditures (Note 4) . . . . . . . . . . . 2,817,746 714,283
Equipment and other. . . . . . . . . . . . . . 80,887 68,788
Accumulated depreciation . . . . . . . . . . . (70,561) (63,472)
-------------- ----------------
Total property and equipment, at cost. . . . . . 2,828,072 719,599
-------------- ----------------
Other assets . . . . . . . . . . . . . . . . . . 8,874 7,826
-------------- ----------------
Total assets . . . . . . . . . . . . . . . . . . $ 6,481,603 $ 2,819,429
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities. . . $ 206,011 $ 369,714
Asset retirement obligations (Notes 3 and 4). 142,554 -
-------------- ----------------
Total current liabilities. . . . . . . . . . . . 348,565 369,714
-------------- ----------------
Commitments and contingencies (Note 12)
Shareholders' equity
Common share capital, no par value:
Authorized shares - unlimited
Issued and outstanding shares - 44,869,716
(35,748,871 at January 31, 2004) (Note 6) 41,536,205 35,819,799
Contributed surplus (Note 8) . . . . . . . . . 2,131,304 423,232
Deficit. . . . . . . . . . . . . . . . . . . . (37,534,471) (33,793,316)
-------------- ----------------
Total shareholders' equity . . . . . . . . . . . 6,133,038 2,449,715
-------------- ----------------
Total liabilities and shareholders' equity . . . $ 6,481,603 $ 2,819,429
============== ================
Approved by the Board of Directors.. . . . . . . Director: "Mark E. Jones, III"
Director: "Brian C. Irwin"
See accompanying notes.
24
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended January 31,
2005 2004 2003
------------ ------------ ------------
Restated Restated
(Note 2) (Note 2)
(In Canadian Dollars)
Revenues:
Interest income . . . . . . . . . . . . . . . . . . $ 12,145 $ 1,259 $ 1,618
Gains on sales of plant and equipment (Note 4). . . - 351,272 10,740
------------ ------------ ------------
12,145 352,531 12,358
------------ ------------ ------------
Expenses:
General and administrative (Note 13). . . . . . . . 3,747,476 1,404,649 1,179,086
Finance charges . . . . . . . . . . . . . . . . . . 42,329 80,579 22,396
Write-down of mineral properties (Note 4) . . . . . - - 3,141,726
Interest expense. . . . . . . . . . . . . . . . . . - 84,961 127,510
Foreign exchange translation (gains) losses . . . . (36,505) (18,252) 10,132
------------ ------------ ------------
3,753,300 1,551,937 4,480,850
------------ ------------ ------------
Net loss before provision for income taxes. . . . . . (3,741,155) (1,199,406) (4,468,492)
Provision for income taxes (Note 9) . . . . . . . . . - - -
------------ ------------ ------------
Net loss for the year . . . . . . . . . . . . . . . . $(3,741,155) $(1,199,406) $(4,468,492)
============ ============ ============
Basic and diluted net loss per common share . . . . . $ (0.10) $ (0.06) $ (0.27)
============ ============ ============
Weighted-average number of common shares outstanding. 38,949,937 21,349,766 16,439,454
See accompanying notes.
25
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In Canadian Dollars)
Total
Common Shares Contributed Shareholders'
Number Amount Surplus Deficit Equity (Deficit)
-------------- -------------- -------------- -------------- ------------------
Restated (Note 2)
Balance at February 1, 2002. . . . . . . 14,862,935 $ 30,108,507 $ - $ (28,125,418) $ 1,983,089
Issued for services. . . . . . . . . . . 218,750 52,500 - - 52,500
Stock-based compensation . . . . . . . . - - 158,357 - 158,357
Issued on exercise of stock options. . . 570,000 153,457 - - 153,457
Issued for cash. . . . . . . . . . . . . 2,819,774 563,955 - - 563,955
Net loss for the year. . . . . .. . - - - (4,468,492) (4,468,492)
-------------- -------------- -------------- -------------- ------------------
Balance at January 31, 2003. . . 18,471,459 30,878,419 158,357 (32,593,910) (1,557,134)
Issued for conversion of convertible
debentures . . . . . . . . . . . . . . 4,261,976 1,278,595 - - 1,278,595
Issued for interest on convertible debt. 1,129,522 335,075 - - 335,075
Issued for debt payment. . . . . . . . . 107,126 20,917 - - 20,917
Issued for property acquisition. . . . . 1,100,000 330,000 - - 330,000
Issued on exercise of warrants . . . . . 8,794,412 2,354,868 - - 2,354,868
Stock-based compensation . . . . . . . . - - 461,881 - 461,881
Issued on exercise of stock options. . 1,884,376 621,925 (197,006) - 424,919
Net loss for the year. . . . . . . . . . - - - (1,199,406) (1,199,406)
-------------- -------------- -------------- -------------- -----------------
Balance at January 31, 2004. . . . . . 35,748,871 35,819,799 423,232 (33,793,316) 2,449,715
Issued for cash, net of share issue cost 4,262,500 3,848,675 - - 3,848,675
Issued for property acquisition. . . . . 400,000 270,000 - - 270,000
Issued on exercise of warrants . . . . . 2,819,774 704,943 - - 704,943
Stock-based compensation . . . . . . . . - - 2,123,283 - 2,123,283
Issued on exercise of stock options. . . 1,638,571 892,788 (415,211) - 477,577
Net loss for the year. . . . . . . - - - (3,741,155) (3,741,155)
-------------- -------------- -------------- -------------- ------------------
Balance at January 31, 2005. . . . . 44,869,716 $ 41,536,205 $ 2,131,304 $ (37,534,471) $ 6,133,038
============== ============== ============== ============== ==================
See accompanying notes.
26
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended January 31,
2005 2004 2003
------------ ------------ ------------
Restated Restated
(Note 2) (Note 2)
(In Canadian Dollars)
Operating activities:
Net loss for the year . . . . . . . . . . . . . . . $(3,741,155) $(1,199,406) $(4,468,492)
Items not affecting cash:
Depreciation. . . . . . . . . . . . . . . . . . . 7,089 18,277 28,924
Gains on sales of plant and equipment (Note 4). . - (351,272) -
Stock based compensation (Note 8) . . . . . . . . 2,123,283 461,881 158,357
Write-down of mineral properties. . . . . . . . . - - 3,141,726
Interest expense. . . . . . . . . . . . . . . . . - 84,961 127,510
Other . . . . . . . . . . . . . . . . . . . . . . - - 4,275
------------ ------------ ------------
(1,610,783) (985,559) (1,007,700)
------------ ------------ ------------
Changes in noncash working capital:
Accounts receivable . . . . . . . . . . . . . . . 14,675 (77,356) (25,274)
Accounts payable and accrued liabilities. . . . . (1,255) 121,565 47,073
------------ ------------ ------------
13,420 44,509 21,799
------------ ------------ ------------
Net cash used in operating activities . . . . . . . . (1,597,363) (941,050) (985,901)
Investing activities:
Mineral properties acquisition and exploration. . . (1,833,463) (384,283) (199,640)
Equipment and other . . . . . . . . . . . . . . . . (12,099) - (1,613)
------------ ------------ ------------
Net cash used in investing activities . . . . . . . . (1,845,562) (384,283) (201,253)
------------ ------------ ------------
Financing activities:
Proceeds from issuances of common shares. . . . . . 5,031,195 2,779,784 717,412
Proceeds from sales of plant and equipment (Note 4) - 521,978 -
------------ ------------ ------------
Net cash provided by financing activities . . . . . . 5,031,195 3,301,762 717,412
Effect of exchange rate changes on cash . . . . . . . (13,592) (16,627) (829)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents. 1,574,678 1,959,802 (470,571)
Cash and cash equivalents, beginning of year. . . . . 1,982,536 22,734 493,305
------------ ------------ ------------
Cash and cash equivalents, end of year. . . . . . . . $ 3,557,214 $ 1,982,536 $ 22,734
============ ============ ============
See accompanying notes.
See Note 14 for supplemental cash flow disclosure and non-cash investing and financing activities.
27
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN CANADIAN DOLLARS)
JANUARY 31, 2005, 2004 AND 2003
1. OPERATIONS
Brazauro Resources Corporation, formerly known as Jaguar Resources Corporation,
("the Company") was incorporated in 1986 in British Columbia, Canada, and has
been engaged in the acquisition and exploration of mineral properties with the
potential for economically recoverable reserves. During fiscal 2005 and 2004
the Company pursued gold exploration opportunities that have large scale
potential, with prospects in South America as the primary focus. Prior to
fiscal 2004, the Company had concentrated its efforts primarily on the
acquisition and exploration of mineral properties with the potential for
economically recoverable diamonds. See Note 4 for further discussion of the
Company's mineral property interests.
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 economically recoverable reserves or proven reserves at the current stage
of exploration. The recoverability of the carrying value of mineral properties
and deferred expenditures is dependent upon a number of factors including the
existence of recoverable reserves, the ability of the Company to obtain
financing to renew leases and continue exploration and development and the
discovery of economically recoverable reserves.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company anticipates that
cash and cash equivalents as of January 31, 2005 will be sufficient to satisfy
the Company's cash needs for general and administrative expenses during fiscal
2006. The Company has incurred operating losses and will require additional
cash to obtain new leases and fund exploration activities during fiscal 2006.
If continued financial support or additional financing is not available, there
would be doubt about the Company's ability to continue as a going concern.
These consolidated financial statements do not include any adjustments that may
be required in the event that the Company is unable to realize its assets and
settle its liabilities in the normal course of operations.
All amounts are in Canadian dollars unless noted otherwise.
2. CHANGE IN ACCOUNTING POLICY
The Company adopted the fair value recognition provisions of the Canadian
Institute of Chartered Accountants ("CICA") Handbook Section 3870 "Stock-Based
Compensation and Other Stock-Based Payments", for stock-based compensation
awards granted to employees. This accounting policy, adopted for the 2005
fiscal year, was applied retroactively with restatement for all stock options
granted after February 1, 2002. As a result of the adoptions, Contributed
Surplus increased from amounts previously reported by $158,357 and $368,829 as
of January 31, 2003 and 2004, respectively. Additionally, General and
Administrative Expenses and Deficit increased by $158,357 and $407,478 for the
years ended January 31, 2003 and 2004, respectively, for a cumulative adjustment
of $565,835.
3. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in Canada and comply in all material respects with
United States generally accepted accounting principles except as discussed in
Note 16.
28
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN CANADIAN DOLLARS)
JANUARY 31, 2005, 2004 AND 2003
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiary Jaguar Resources do Brasil Ltda., a Brazilian
corporation, and its wholly owned United States subsidiary, Star U.S. Inc.
("Star"), and the three wholly-owned subsidiaries of Star, Diamond Operations,
Inc. ("DOI"), Diamond Exploration, Inc. ("DEI") and Continental Diamonds, Inc.
("CDI") from their respective dates of acquisition. Significant intercompany
balances and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
Transactions denominated in United States dollars or other foreign currencies
during a year are translated at exchange rates prevailing at the date of the
transaction. Exchange gains or losses resulting from such translations are
included in the determination of net loss. Translation adjustments resulting
from the process of translating monetary assets and liabilities of United States
and Brazilian wholly owned subsidiaries into Canadian dollars are included in
the determination of net loss. Property and equipment of the United States and
Brazilian wholly owned subsidiaries are translated into Canadian dollars at
exchange rates prevailing at the date of the expenditure.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes money market instruments with a maturity of
three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of January 31, 2005 and 2004, the fair value of cash and cash equivalents,
accounts receivable and accounts payable and accrued liabilities including
amounts due to and from related parties approximates carrying values because of
the short term of these instruments.
MINERAL PROPERTIES AND DEFERRED EXPENDITURES
Direct acquisitions, evaluation and exploration expenditures are capitalized,
reduced by related sundry income, to be amortized over the recoverable mineral
reserves if a property is commercially developed. When an area is disproved or
abandoned, the acquisition costs and related deferred expenditures are written
off. Interest is capitalized on properties upon the commencement of active
evaluation and preproduction activities, if significant. During the three-year
period ended January 31, 2005, no interest was capitalized.
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.
Write-downs totaling $3,141,726 were recorded in fiscal 2003.
OTHER PROPERTY, PLANT AND EQUIPMENT
Buildings, equipment and other are depreciated on a straight-line basis over
useful lives ranging from 3 to 25 years. The diamond recovery plant (the
"Plant"), sold during fiscal 2004, became fully operational in April 1994 and
was depreciated on a straight-line basis over its estimated useful life of seven
years.
29
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN CANADIAN DOLLARS)
JANUARY 31, 2005, 2004 AND 2003
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET RETIREMENT OBLIGATIONS
Effective February 1, 2004, the Company adopted the recommendations under
Section 3110, Asset Retirement Obligations, of the Canadian Institute of
Chartered Accountants Handbook ("Section 3110"). Section 3110 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal operation of the asset.
These recommendations require that the fair value of a liability for an asset
retirement obligation be recorded in the period in which it is incurred. When
the liability is initially recorded, the cost is capitalized by increasing the
carrying amount of the long-lived asset. Upon settlement of the liability, a
gain or loss is recorded. This differs from the prior practice that involved
accruing for the estimated reclamation and closure liability through charges to
the statement of operations over the life of the asset.
The adoption of this section had no material impact on these financial
statements. An amount of $142,554 previously recorded for reclamation reserves
has been reclassified from accounts payable to asset retirement obligations
(Note 4).
INCOME TAXES
The Company files a separate Canadian income tax return. The Company's United
States subsidiaries file a consolidated United States income tax return. Income
taxes are calculated using the liability method of accounting. Temporary
differences arising from the difference between the tax basis of an asset or
liability and its carrying amount on the balance sheet are used to calculate
future income tax liabilities or assets. The future income tax liabilities or
assets are measured using tax rates and laws expected to apply in the periods
that the temporary differences are expected to reverse. Valuation allowances
are provided where net future income tax assets are not more likely than not to
be realized.
LOSS PER COMMON SHARE
Basic loss per share is calculated using the weighted average number of shares
issued and outstanding during the year. The Company follows the treasury stock
method in the calculation of diluted loss per share. No shares were added to
the weighted average number of common shares outstanding during the years ended
January 31, 2005, 2004, or 2003 for the dilutive effect of employee stock
options and warrants as they were all anti-dilutive.
STOCK BASED COMPENSATION
The Company has a stock-based compensation plan, which is described in Note 8.
The Company uses the fair-value based method to account for all stock-based
payments to employees and non-employees granted after February 1, 2002 by
measuring the compensation cost of the stock-based payments using the
Black-Scholes option-pricing model. The fair value of the stock-based
compensation is recorded as a charge to net earnings based on the vesting period
with a credit to contributed surplus. Upon exercise of the stock options,
consideration paid by the option holder, together with the amount previously
recognized in contributed surplus, is recorded as an increase to share capital.
30
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN CANADIAN DOLLARS)
JANUARY 31, 2005, 2004 AND 2003
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to the consolidated financial statements. Actual
results may differ from those estimates.
COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with presentation
for the current year.
4. MINERAL PROPERTIES AND DEFERRED EXPENDITURES
The Company cannot guarantee title to all of its Properties as the Properties
may be subject to prior unregistered agreements or transfers or native land
claims, and title may be affected by undetected defects. The Company does not
maintain title insurance on its properties.
BRAZIL PROPERTIES
Tocantinzinho Properties
In August 2003 the Company entered into an option to acquire exploration rights
to 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 exploration rights to such area
(referred to herein as 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.) on
exploration ($300,000 (U.S.) by July 31, 2004). 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 200,000 common shares of the Company and $40,000 (U.S.).
As of January 31, 2005, the total commitment remaining under the option
agreement is as follows (all amounts are in U.S. dollars): $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 2006, 2007 and
2008 fiscal years, respectively.
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. At January 31, 2005, the remaining payment
commitments under the Underlying Agreements are as follows (all amounts are in
U.S. dollars): $120,000, $160,000 and $1,205,000 in fiscal years 2006, 2007 and
2008, respectively. The Company made payments totaling $35,000 (U.S.) and
$80,000 (U.S.) in respect of the Underlying Agreements during fiscal 2004 and
2005, respectively. 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
which expired during fiscal 2005. 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.), respectively, discussed above. During
31
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN CANADIAN DOLLARS)
JANUARY 31, 2005, 2004 AND 2003
4. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
fiscal 2005 the Company met the requirement under the option agreement to expend
a total of $300,000 (U.S.) and met the requirement to expend $1,000,000 (U.S.)
on exploration. The Company has met its first year commitments under the option
agreement, and the option agreement is cancelable by the Company without further
obligations.
The optionors are entitled to a sliding scale gross revenues royalty ranging
from 2.5% for gold prices below $400 (U.S.) per ounce to 3.5% for gold prices in
excess of $500 (U.S.) per ounce. The Company has filed applications for
exploration licenses with the regulatory authorities in Brazil and has received
final approval on several claim areas. The Company anticipates it will receive
final approval on the remaining claim areas in fiscal 2006.
In May 2004 the Company applied for exploration permits for an additional 16,000
hectares adjacent to the above Tocantinzinho Properties. The Company has agreed
to make payments totaling $300,000 (U.S.) over a period of approximately four
years to an individual as a finder's fee related to this 16,000 hectare
property. This additional property is not subject to the option agreement and
therefore is not subject to the royalty.
Mamoal Property
The Company entered into an option agreement under which it may acquire the
exploration license to 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 $300,000 (U.S.) over three and one half years. The Company may terminate the
option agreement at any time without further obligation. An initial $10,000
(U.S.) payment was made by the Company in December 2003, and the exploration
research license has been transferred to Jaguar Resources do Brasil Ltda.
During fiscal 2005, the Company made payments under the option agreement
totaling $25,000 (U.S.). The remaining option payments are as follows (all
amounts are in U.S. dollars): $45,000, $65,000, and $155,000 in fiscal years
ending January 31, 2006, 2007 and 2008, respectively. The Company may acquire
the Mamoal Property at any time by accelerating the option payments. The
Company has received the exploration license from the Brazilian regulatory
authority.
Batalha Property
In September, 2004 the Company applied for an exploration license to the 9800
hectare Batalha Property, located in the Tapaj s gold province in northern
Brazil. The property, host to a well known "garimpo" or artisanal mine, lies at
the western end of the Tocantinzinho trend.
The Company has agreed to pay the original holder of artisanal mining rights of
Batalha, who controls over 1,700 hectares lying within the exploration license
and directly over the Batalha zone, the equivalent of approximately $91,000
Canadian dollars in Brazilian reals over a 42 month period with a buyout after 4
years of $250,000 (U.S.) (if the project is deemed economic by the Company) and
an additional sum based on the number of ounces of gold in the proven and
probable (or measured and indicated) categories at Batalha as set out in a
pre-feasibility or feasibility study. The per ounce payment amount ranges in a
sliding scale from US$1 per ounce for the first one million ounces up to $10
(U.S.) per ounce for each ounce over four million ounces. The 9,800 hectare
exploration license lies over top of this area, covering extensions to north,
south and west. If after four years the Company, in its sole opinion, has not
found an economic ore body, the area and all collected data will be returned to
the vendor.
32
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN CANADIAN DOLLARS)
JANUARY 31, 2005, 2004 AND 2003
4. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
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.
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 allowed
the lease to expire effective November 1, 2003. The Plant was dismantled by the
third party and removed from the American Lease during fiscal 2004.
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 adjusted during the fourth quarter of fiscal 2004 to
$142,554 representing the estimated net present value of the recognized asset
retirement obligation at January 31, 2005 based on a total future liability of
$150,000. The Company expects to complete the restoration during fiscal 2006.
The Company used a credit adjusted risk free rate of 3% to calculate the net
present value of the asset retirement obligation.
Mineral properties and deferred expenditures were as follows:
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED JANUARY 31
2003 ADDITIONS WRITE-OFFS 2004
---------- ---------- ---------- ----------
Brazilian Properties
Tocantinzinho Properties
Acquisition costs . . . . . . . $ - $ 527,345 $ - $ 527,345
Exploration costs:
Drilling . . . . . . . . . . - 40,422 - 40,422
Field expenses . . . . . . . - 76,045 - 76,045
Geological . . . . . . . . . - 57,321 - 57,321
---------- ---------- ---------- ----------
Total exploration costs. . . . - 173,788 - 173,788
---------- ---------- ---------- ----------
Total Tocantinzinho Properties - 701,133 - 701,133
Mamoal Property:
Acquisition costs . . . . . . . - 13,150 - 13,150
Exploration costs . . . . . . . - - - -
---------- ---------- ---------- ----------
Total Mamoal Property . . . . . - 13,150 - 13,150
---------- ---------- ---------- ----------
Total acquisition costs . . . . . . . . - 540,495 - 540,495
Total exploration costs . . . . . . . . - 173,788 - 173,788
---------- ---------- ---------- ----------
Total costs . . . . . . . . . . . . . . $ - $ 714,283 $ - $ 714,283
========== ========== ========== ==========
33
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN CANADIAN DOLLARS)
JANUARY 31, 2005, 2004 AND 2003
4. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED JANUARY 31
2004 ADDITIONS WRITE-OFFS 2005
------------ ------------ ------------ ------------
Brazilian Properties
Tocantinzinho Properties:
Acquisition costs . . . . . . $ 527,345 $ 515,632 $ - $ 1,042,977
Exploration costs:
Drilling . . . . . . . . . . 40,422 566,912 - 607,334
Field expenses . . . . . . . 76,045 625,191 - 701,236
Geological . . . . . . . . 57,321 124,124 - 181,445
Assay. . . . . . . . . . . . - 111,870 - 111,870
------------ ------------ ------------ ------------
Total exploration costs. . . . 173,788 1,428,097 - 1,601,885
------------ ------------ ------------ ------------
Total Tocantinzinho Properties 701,133 1,943,729 - 2,644,862
Mamoal Property:
Acquisition costs . . . . . 13,150 32,138 - 45,288
Exploration costs:
Field expenses . . . . . . . - 105,258 - 105,258
Geological . . . . . . . . . - 10,901 - 10,901
Assay. . . . . . . . . . . . - 4,138 - 4,138
------------ ------------ ------------ ------------
Total exploration costs. . . . - 120,297 - 120,297
------------ ------------ ------------ ------------
Total Mamoal Property. . . . . 13,150 152,435 - 165,585
Batalha Property
Acquisition costs . . . . . . . - 7,299 - 7,299
Exploration costs . . . . . . . - - - -
------------ ------------ ------------ ------------
- 7,299 - 7,299
------------ ------------ ------------ ------------
Total acquisition costs . . . . . . . . 540,495 555,069 - 1,095,564
Total exploration costs . . . . . . . . 173,788 1,548,394 - 1,722,182
------------ ------------ ------------ ------------
Total costs . . . . . . . . . . . . . $ 714,283 $ 2,103,463 $ - $ 2,817,746
============ ============ ============ ============
5. 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.
34
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004, AND 2003
5. DEBENTURES (CONTINUED)
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.
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.
6. SHARE CAPITAL
Effective September 8, 2004 the Company increased its authorized capital from
100,000,000 common shares without par value to an unlimited number of common
shares without par value.
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.
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 had 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 fiscal year 2005, all 2,819,774 common share warrants were
exercised, and the Company received total exercise proceeds of $704,943.
In November 2004, the Company completed a private placement of 2,112,500 common
shares of the Company at a price of $0.85 per share and received proceeds
totaling $1,795,625. In consideration for assistance with the private
placement, the Company paid finders' fees of $96,950 in cash and issued 113,000
share purchase warrants entitling the finders to purchase 113,000 common shares
of the Company at $1.05 per share until November 2, 2005. In March, 2005, a
35
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004, AND 2003
6. SHARE CAPITAL (CONTINUED)
holder of the share purchase warrants elected to exercise 44,635 warrants and
the Company received proceeds of approximately $47,000.
In December 2004, the Company completed a private placement of 2,150,000 common
shares of the Company at a price of $1.00 per share and received proceeds of
$2,150,000.
7. STOCK OPTION PLAN
The Company maintains a stock option plan for its directors, officers and
employees and may issue up to 7,000,000 options. 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. Under the
terms of the plan, the exercise price of each option equals the closing market
price of the Company's stock on the date of grant. Any consideration paid by
the optionee on the exercise of options is credited to share capital. Through
July 2002 all options were immediately vested and generally have a term of five
years. The options granted subsequent to July 2002 are subject to vesting
requirements (25% on the date of grant and 12.5% on each quarter end
thereafter).
The activity in common stock option grants outstanding for the prior three
fiscal years is as follows:
2005 2004 2003
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
--------- -------- --------- -------- --------- --------
Outstanding, beginning
of year. . . . . . . . 4,449,053 $0.31 1,946,429 $0.24 1,475,000 $0.26
Granted. . . . . . . . . 3,807,376 1.01 4,387,000 0.30 1,145,000 0.22
Exercised. . . . . . . . 1,638,571 0.29 1,884,376 0.23 570,000 0.27
Expired. . . . . . . . . 14,286 0.24 - - 103,571 0.24
--------- -------- --------- -------- --------- --------
Outstanding, end of year 6,603,572 $0.72 4,449,053 $0.31 1,946,429 $0.24
========= ======== ========= ======== ========= ========
Exercisable, end of year 4,051,822 $0.61 1,796,241 $0.28 1,946,429 $0.24
========= ======== ========= ======== ========= ========
The following table summarizes information about stock options outstanding at
January 31, 2005:
NUMBER OUTSTANDING
AT JANUARY 31,2005 ISSUE DATE EXPIRATION DATE EXERCISE PRICE
2,857 May 4, 2000. . . . May 4, 2005 0.24
14,286 September 27, 2000 September 27, 2005 0.24
14,286 May 11, 2001 . . . May 11, 2006 0.24
47,143 January 31, 2002 . January 31, 2007 0.28
78,375 September 26, 2002 September 26, 2007 0.18
448,421 March 6, 2003. . . March 6, 2008 0.10
897,012 August 14, 2003. . August 14, 2008 0.30
700,066 October 21, 2003 . October 21, 2008 0.40
143,750 November 26, 2003. November 26, 2008 0.49
450,000 December 17, 2003. December 17, 2008 0.42
950,000 June 11, 2004. . . June 11, 2009 0.92
2,327,376 July 29, 2004. . . July 29, 2009 1.02
530,000 November 19, 2004. November 19, 2009 1.10
36
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004 AND 2003
8. STOCK BASED COMPENSATION
Stock-based compensation related to options granted to employees and
non-employees increased the following expenses in the consolidated financial
statements (as restated) of the Company in 2005, 2004 and 2003:
2005 2004 2003
---------- -------- --------
Consulting $ 131,367 $ 54,403 $ -
Salary . . 1,991,916 407,478 158,357
---------- -------- --------
$2,123,283 $461,881 $158,357
========== ======== ========
These amounts have also been recorded as contributed surplus on the balance
sheet.
The fair value of each option granted has been estimated as of the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
2005 2004 2003
Expected dividend yield . . 0% 0% 0%
Expected volatility . . . . 160% 161% 141%
Risk-free interest rate . . 4.00% 3.00% 5.25%
Expected life . . . . . . . 3.5 years 3.5 years 3.5 years
Weighted average fair value
of options granted. . . . $ 0.75 $ 0.26 $ 0.19
9. INCOME TAXES
A reconciliation of the combined Canadian federal and provincial income taxes at
statutory rates and the Company's effective income tax expense (recovery) is as
follows:
YEARS ENDED JANUARY
2005 2004 2003
------------ ------------ ------------
Statutory rates . . . . . . . . . . . 35.62% 37.62% 39.62%
Net loss for the year . . . . . . . . $(3,741,155) $(1,199,406) $(4,468,492)
Income tax at statutory rates . . . . (1,333,000) (451,000) (1,770,000)
Increase (decrease) in taxes from:
Non-deductible items . . . . . . 770,000 174,000 63,000
Differences in foreign tax rates 225,000 525,000 142,000
Effect of change in tax rate . . 56,000 53,000 133,000
Benefit of losses not recognized 282,000 (301,000) 1,432,000
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
Future income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The significant components of the
Company's future tax assets as of January 31 are as follows:
37
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004 AND 2003
9. INCOME TAXES (CONTINUED)
JANUARY 31
2005 2004
------------- ------------
FUTURE INCOME TAX ASSETS
Operating loss carryforwards. . . . . . . $ 10,119,000 $ 9,650,000
Property and equipment. . . . . . . . . . 174,000 193,000
Share issue cost. . . . . . . . . . . . . 28,000 -
Valuation allowance for future tax assets (10,321,000) (9,843,000)
------------- ------------
$ - $ -
============= ============
The Company has available losses for income tax purposes of approximately $30
million, which may be carried forward and applied against future taxable income
when earned. Brazilian losses are offset by up to 30% of fiscal profits.
United States net operating losses may be limited if more than a 50% ownership
change has occurred with respect to any Company included in the consolidated
group. If an ownership change has occurred, such losses are limited on an
annual basis to the value of the respective Company on the date of change
multiplied by the U.S. federal long-term, tax-exempt rate in effect for the
period. In addition, some U.S. net operating losses may be subject to other
limitations based on taxable income from wholly owned subsidiaries on a
stand-alone basis.
The losses expire as follows:
CANADA UNITED STATES BRAZIL TOTAL
----------- ------------- ----------- -----------
(in Canadian dollars)
2006 . . . . . . . $ 121,000 $ 236,000 $ - $ 357,000
2007 . . . . . . . 383,000 290,000 - 673,000
2008 . . . . . . . 231,000 301,000 - 532,000
2009 . . . . . . . 134,000 25,000 - 159,000
2010 . . . . . . . 439,000 492,000 - 931,000
2011 . . . . . . . 273,000 164,000 - 437,000
2012 . . . . . . . 448,000 1,557,000 - 2,005,000
2013 . . . . . . . 358,000 4,865,000 - 5,223,000
From 2014 to 2022. - 17,170,000 - 17,170,000
Indefinitely . . . - - 3,222,000 3,222,000
----------- ----------- ----------- -----------
2,387,000 $25,100,000 $3,222,000 $30,709,000
=========== =========== =========== ===========
At January 31, 2005, the Company has incurred approximately $488,000 of
exploration and development costs which may be deducted against future Canadian
taxable income subject to certain limitations.
10. RELATED PARTY TRANSACTIONS
The chairman has significant share ownership of the Company. Accounts
receivable at January 31, 2005 and 2004 includes $55,900 and $105,758,
respectively, receivable from the chairman of the Company. The chairman made
net payments to the Company totaling approximately $49,000 during the first
quarter of fiscal 2006. Amounts totaling $147,683, $121,957 and $24,681were
paid by the Company during fiscal 2005, 2004 and 2003, respectively, to a law
firm in which a director is a partner. As of January 31, 2005 an amount of
$4,781 (2004 - $5,800, 2003 - $22,082) is due to that law firm. In January
2004, three directors exercised warrants to purchase common stock at an exercise
price of $0.25 per share and acquired 477,750, 225,000 and 238,875 common
shares, respectively. In September, 2004, three directors exercised warrants to
38
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004 AND 2003
10. RELATED PARTY TRANSACTIONS (CONTINUED)
purchase common shares at an exercise price of $0.25 per share and received
286,200, 100,000, and 40,000 common shares, respectively.
Shares of Jaguar do Brasil, Ltd. are held beneficially for the Company through
three representatives of the Company, including a director of the Company and
two directors of Jaguar do Brasil, Ltd.
11. SUBSEQUENT EVENTS
In the first quarter of fiscal 2006, the Company granted incentive options as
follows:
DATE OF EXERCISE EXPIRATION
NUMBER GRANT PRICE DATE
100,000 February 15, 2005 $1.15 February 15, 2010
600,000 March 22, 2005. . 1.30 March 22, 2010
500,000 April 1, 2005 . . 1.30 April 1, 2010
In the first quarter of fiscal 2006, directors and employees of the Company
exercised a total of 600,000 options at prices ranging from $0.10 to $0.40, and
the Company received proceeds of $152,623.
12. 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. Texas
Star Resources Corporation was the name of the Company in 1998 and 1999. 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 for damages 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.
39
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004 AND 2003
13. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of the following:
2005 2004 2003
---------- ---------- ----------
Consulting fees . . . . $ 386,456 $ 234,253 $ 134,605
Depreciation expense. . 7,089 18,277 28,924
Entertainment . . . . . 79,831 29,716 31,884
Insurance . . . . . . . 1,870 484 7,385
Office expenses . . . . 181,789 70,587 61,639
Professional fees . . . 194,247 110,674 68,767
Rent. . . . . . . . . . 28,757 33,999 32,724
Repairs and maintenance 2,243 21,400 126,856
Salary. . . . . . . . . 2,594,363 736,134 582,159
Shareholder relations . 161,749 51,192 30,126
Travel. . . . . . . . . 109,082 92,783 41,393
Utilities . . . . . . . - 5,150 32,624
---------- ---------- ----------
Total . . . . . . . . . $3,747,476 $1,404,649 $1,179,086
========== ========== ==========
14. SUPPLEMENTAL CASH FLOW AND NON-CASH INVESTING AND FINANCING DISCLOSURE
2005 2004 2003
---------- ---------- ----------
Supplemental cash flow disclosure:
Interest paid in cash. . . . . . . . . . . . . . . . . $ - $ - $ -
Income taxes paid. . . . . . . . . . . . . . . . . . . - - -
Non-cash investing activities:
Shares issued for mineral properties . . . . . . . . $ 270,000 $ 330,000 -
Non-cash financing activities:
Shares issued for debt . . . . . . . . . . . . . . . . - $ 20,917 -
Shares issued for conversion of convertible debentures - $1,278,595 -
Shares issued for interest on convertible debentures . - $ 335,075 -
Shares issued for services . . . . . . . . . . . . . . - - $ 52,500
15. SEGMENT INFORMATION
The Company acquires and explores mineral properties, and these activities are
focused principally in North and South America. Geographic segmentation of
capital assets is provided in Note 4.
16. 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.
40
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004 AND 2003
16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (continued)
Mineral Properties and Deferred Expenditures
Under Canadian GAAP, companies have the option to defer mineral exploration
expenditures on prospective properties until such time as it is determined that
further work is not warranted, at which point property costs would be written
off. Under United States GAAP, all exploration expenditures are expensed until
an independent feasibility study has determined that the property is capable of
commercial production. At this stage, the Company has not yet identified
economically recoverable reserves on any of its properties. Accordingly, under
United States GAAP, all exploration costs incurred are expensed.
The significant differences in the consolidated statements of loss relative to
US GAAP were:
2005 2004 2003
------------ ------------ ------------
Net loss in accordance with Canadian GAAP . . . . . . $(3,741,155) $(1,199,406) $(4,468,492)
Deduct:
Deferred exploration expenditures capitalized
during the period. . . . . . . . . . . . . . . . . . (1,548,394) (173,788) -
Add:
Deferred exploration expenditures written off in the
period that would have been expensed in a prior
period.. . . . . . . . . . . . . . . . . . . . . . . - - 1,697,164
------------ ------------ ------------
Net loss in accordance with United States GAAP. . . . $(5,289,549) $(1,373,194) $(2,771,328)
============ ============ ============
Basic and diluted net loss per share (United States
GAAP) . . . . . . . . . . . . . . . . . . . . . . . . $ (0.14) $ (0.06) $ (0.17)
============ ============ ============
Weighted average shares outstanding (United States
GAAP). . . . . . . . . . . . . . . . . . . . . . . . 38,949,937 21,349,766 16,439,454
============ ============ ============
The significant differences in the consolidated balance sheet relative to US
GAAP were:
2005 2004
------------ -----------
Shareholders' equity - Canadian GAAP . . . . . . . . . . $ 6,133,038 $2,449,715
Mineral properties and deferred exploration expenditures (1,722,182) (173,788)
------------ -----------
Shareholders' equity - United States GAAP. . . . . . . . $ 4,410,856 $2,275,927
============ ===========
41
BRAZAURO RESOURCES CORPORATION
(FORMERLY JAGUAR RESOURCES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Canadian Dollars)
JANUARY 31, 2005, 2004 AND 2003
16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (continued)
2005 2004
------------ -----------
Mineral properties and deferred exploration expenditures
- - Canadian GAAP. . . . . . . . . . . . . . . . . . . . . $ 2,817,746 $ 714,283
Mineral properties and deferred exploration expenditures
expensed per United States GAAP . . . . . . . . . . . . (1,722,182) (173,788)
------------ -----------
Acquisition costs of mineral properties - United States
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,095,564 $ 540,495
============ ===========
The significant differences in the consolidated statement of cash flows relative
to US GAAP were:
Years ended January 31,
2005 2004 2003
------------ ------------ ------------
NET CASH USED IN OPERATIONS
Canadian GAAP. . . . . . . . . . . . . . . . . . . . . . $(1,597,363) $ (941,050) $ (985,901)
Mineral properties and deferred exploration expenditures (1,548,394) (173,788) (197,374)
------------ ------------ ------------
US GAAP. . . . . . . . . . . . . . . . . . . . . . . . . (3,145,757) (1,114,838) (1,183,275)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES
Canadian GAAP. . . . . . . . . . . . . . . . . . . . . . (1,845,562) (384,283) (201,253)
Mineral properties and deferred exploration expenditures 1,548,394 173,788 197,374
------------ ------------ ------------
US GAAP. . . . . . . . . . . . . . . . . . . . . . . . . (297,168) (210,495) (3,879)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES
Canadian GAAP and U.S. GAAP. . . . . . . . . . . . . . . 5,031,195 3,301,762 717,412
------------ ------------ ------------
Warrants Issued
Under United States GAAP, the fair value of the 113,000 warrants issued to
brokers related to the private placement in November 2004 would be recorded as
Warrants of $33,000 in Shareholders' Equity as of January 31, 2005, and Common
Shares would be reduced by $33,000 to $41,664,174 as of January 31, 2005. The
fair value of the warrants was calculated using the Black-Scholes model and the
following assumptions: expected dividend yield, 0%, expected volatility, 115%;
risk-free interest rate, 2.9%. expected life of warrant, 1 year.
42
INDEX TO EXHIBITS
3.1 Certificate of Incorporation, Memorandum and Articles of Texas Star
Resources Corporation (the "Company") dated March 12, 1986. (a)
3.1.1 Amendment to Certificate of Incorporation and Memorandum. (b)
3.1.2 Certificate of Change of Name dated October 30, 1996.
3.1.3 Amendment to the Company's Memorandum, effective November 27, 2001.
(h)
10.6 Agreement dated July 28, 1992, between the Company and certain royalty
holders (as set forth therein). (a)
10.7 Stock Purchase Agreement dated July 29, 1992, by and among the
Company, DEI, James M. Cairns, Jr., Gandy Baugh and Stewart Jackson
(such individuals being collectively referred to as the "DEI
Shareholders"), and the Amendment thereto dated January 13, 1993. (a)
10.11 Prospecting Permit and Option to Lease dated November 4, 1992,
between DEI and various interest holders. (a)
10.12 Agreement dated December 22, 1992, between the Company and certain
royalty interest holders. (a)
10.16 Royalty Interest Agreement dated January 13, 1993, by and between the
Company and the DEI Shareholders relating to the properties of the
Company and DEI in Arkansas. (a)
10.40 Mining Lease between the Company and certain royalty interest holders
dated November 4, 1996. (c)
10.42 Amendment No. 1 to Mining Lease between the Company and certain
royalty interest holders dated November 1997. (d)
10.43 Mining Lease between the Company and ABJ Hammett Estate/ Trust dated
September 11, 1997. (d)
10.47 Mining Lease Agreement and Lease Modification and Escrow Agreement
dated December 16, 1999. (e)
10.48 Letter Agreement dated October 26, 2000 between the Company and
McGeorge Contracting Co. (f)
10.49 Stripping Agreement dated October 31, 2000 between the Company and
McGeorge Contracting Co. (f)
10.50 Lease Confirmation Agreement dated effective March 16, 2000. (g)
10.51 Mining Lease between the Company and ABJ Hammett Estate/ Trust dated
November 15, 2000. (g)
10.52 Trust Deed for Debentures dated February 16, 2001 between the Company
and Montreal Trust Company of Canada. (g)
10.53 Pledge Agreement for Shares of Star U.S., Inc. between the Company
and Montreal Trust Company of Canada dated February 16, 2001. (g)
10.54 Pledge Agreement for Shares of Diamond Operations, Inc. between the
Company and Montreal Trust Company of Canada dated February 16, 2001.
(g)
10.55 Second Supplemental Indenture between the Company and Computershare
Trust Company of Canada dated February 11, 2003. (i)
10.56 Option Agreement, Tocantinzinho Project - Brazil dated July 31, 2003.
(j)
22 Subsidiaries of the Registrant. (k)
23 Consent of Independent Auditors, Morgan & Company, dated April 30,
2004. (k)
24 Powers of Attorney dated April 23, 2004. (k)
31.1 Certification of Chairman pursuant to Exchange Act Rules 13a-14. (k)
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. (k)
_________________
(a) Filed as an exhibit to Registration Statement on Form 10 as filed on
June 23, 1993.
(b) Filed as an exhibit to Form 8 Amendment No. 1 to Form 10 as filed
on October 4, 1993.
(c) Filed as an exhibit to Form 10-K for the fiscal year ended January
31, 1997 as filed on May 13, 1997.
(d) Filed as an exhibit to Form 10-K for the fiscal year ended January 31,
1998 as filed on April 29, 1998.
(e) Filed as an exhibit to Form 10-K for the fiscal year ended January 31,
2000 as filed on April 28, 2000.
(f) Filed as an exhibit to Form 10-Q for the fiscal quarter ended
October 31, 2000 as filed on December 13, 2000.
(g) Filed as an exhibit to Form 10-K for the fiscal year ended January
31, 2001 as filed on April 27, 2001.
(h) Filed as an exhibit to Form 10-Q for the fiscal quarter ended
October 31, 2001 as filed on December 13, 2001.
(i) Filed as an exhibit to Form 10-Q for the fiscal quarter ended April
30, 2003 as filed on June 16, 2003.
(j) Filed as an exhibit to Form 10-Q for the fiscal quarter ended July
31, 2003 as filed on September 15, 2003.
(k) Filed herewith.
All Exhibits referred to in (a) through (j) above were filed with previous
Securities and Exchange Commission filings of the Company (File No. 0-21968) and
are incorporated herein by reference.
43