UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2006
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to ____________________
Commission File Number: 0-21968
BRAZAURO RESOURCES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
British Columbia (State or Other Jurisdiction of Incorporation or Organization) | 76-0195574 (I.R.S. Employer Identification No.) |
800 Bering, Suite 208
Houston, TX 77057
(Address of Principal Executive Offices, including Zip Code)
(713) 785-1278
(Registrant’s Telephone Number, Including Area Code)
Shares of Registrant’s Common Stock outstanding as of June 9, 2006: 52,937,145
BRAZAURO RESOURCES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. | Financial Information | Page |
Item 1. | Financial Statements |
Consolidated Balance Sheets - January 31, 2006 and April 30, 2006 (Unaudited) | 1 |
Interim Consolidated Statements of Operations - Three Months Ended April 30, 2006 and 2005 (Unaudited) | 2 |
Interim Consolidated Statements of Shareholders’ Equity - January 31, 2005, January 31, 2006 and April 30, 2006 (Unaudited) | 3 |
Interim Consolidated Statements of Cash Flows - Three Months Ended April 30, 2006 and 2005 (Unaudited) | 4 |
Notes to Interim Consolidated Financial Statements (Unaudited) - April 30, 2006 and 2005 | 5 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 15 |
Item 4. | Controls and Procedures | 15 |
PART II. | Other Information |
Item 1. | Legal Proceedings | 16 |
Item 1A. | Risk Factors | 16 |
Item 2. | Changes in Securities and Use of Proceeds | 16 |
Item 3 | Defaults Upon Senior Securities | 16 |
Item 4. | Submission of Matters to a Vote of Security Holders | 16 |
Item 5. | Other Information | 16 |
Item 6. | Exhibits and Reports on Form 8-K | 16 |
Signatures | 17 |
i
Brazauro Resources Corporation
Consolidated Balance Sheets (Unaudited)
April 30, 2006 | January 31, 2006 | ||||
---|---|---|---|---|---|
(In Canadian Dollars) | |||||
Assets | |||||
Current assets: | |||||
Cash and cash equivalents | $ 7,853,502 | $ 8,955,186 | |||
Accounts receivable | 8,790 | 9,563 | |||
Total current assets | 7,862,292 | 8,964,749 | |||
Property and equipment, at cost: | |||||
Mineral properties and deferred | |||||
expenditures (Note 2) | 5,014,074 | 4,492,503 | |||
Equipment and other | 87,323 | 74,030 | |||
Accumulated depreciation | (46,290 | ) | (39,534 | ) | |
Total property and equipment, at cost | 5,055,107 | 4,526,999 | |||
Other assets | 6,610 | 6,747 | |||
Total assets | $ 12,924,009 | $ 13,498,495 | |||
Liabilities and shareholders’ equity | |||||
Current liabilities: | |||||
Accounts payable and accrued liabilities | $ 301,189 | $ 234,732 | |||
Asset retirement obligations | 116,809 | 119,239 | |||
Total current liabilities | 417,998 | 353,971 | |||
Contingencies (Note 4) | |||||
Shareholders’ equity: | |||||
Common share capital, no par value: | |||||
Authorized shares - unlimited | |||||
Issued and outstanding shares - 52,937,145 | |||||
(52,931,645 at January 31, 2006) (Note 3) | 53,436,826 | 53,432,703 | |||
Contributed surplus | 6,270,502 | 5,505,767 | |||
Deficit | (47,201,317 | ) | (45,793,946 | ) | |
Total shareholders’ equity | 12,506,011 | 13,144,524 | |||
Total liabilities and shareholders’ equity | $ 12,924,009 | $ 13,498,495 | |||
See accompanying notes.
1
Brazauro Resources Corporation
Consolidated Statements of Operations (Unaudited)
Three Months Ended April 30, | ||||||||
---|---|---|---|---|---|---|---|---|
2006 | 2005 | |||||||
(In Canadian Dollars) | ||||||||
Revenues: | ||||||||
Interest income | $ | 76,849 | $ | 13,885 | ||||
Gain on sale of equipment | — | 1,202 | ||||||
76,849 | 15,087 | |||||||
Expenses: | ||||||||
General and administrative (Note 5) | 1,301,515 | 1,314,926 | ||||||
Finance charges | 18,215 | 6,204 | ||||||
Write-down of mineral properties (Note 2) | 17,342 | — | ||||||
Foreign exchange translation (gains) losses | 147,148 | (29,672 | ) | |||||
1,484,220 | 1,291,458 | |||||||
Net loss before provision for income taxes | (1,407,371 | ) | (1,276,371 | ) | ||||
Provision for income taxes | — | — | ||||||
Net loss for the period | $ | (1,407,371 | ) | $ | (1,276,371 | ) | ||
Basic and diluted net loss per common share | $ | (0.03 | ) | $ | (0.03 | ) | ||
Weighted-average common shares outstanding | 52,935,847 | 45,195,594 |
See accompanying notes.
2
Brazauro Resources Corporation
Consolidated Statements of Shareholders’ Equity (Unaudited)
(In Canadian Dollars)
Common Shares | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Number | Amount | Contributed Surplus | Deficit | Total Shareholders’ Equity | |||||||||||||
Balance at January 31, 2005 | 44,869,716 | $ | 41,536,205 | $ | 2,131,304 | $ | (37,534,471 | ) | $ | 6,133,038 | |||||||
Issued for cash, net of share issue | |||||||||||||||||
cost | 5,000,000 | 8,983,538 | — | — | 8,983,538 | ||||||||||||
Issued for property acquisition | 200,000 | 400,000 | — | — | 400,000 | ||||||||||||
Issued on exercise of warrants | 113,000 | 118,650 | — | — | 118,650 | ||||||||||||
Stock-based compensation | — | — | 4,481,631 | — | 4,481,631 | ||||||||||||
Issued on exercise of stock | |||||||||||||||||
options | 2,748,929 | 2,394,310 | (1,107,168 | ) | — | 1,287,142 | |||||||||||
Net loss for the year | — | — | — | (8,259,475 | ) | (8,259,475 | ) | ||||||||||
Balance at January 31, 2006 | 52,931,645 | 53,432,703 | 5,505,767 | (45,793,946 | ) | 13,144,524 | |||||||||||
Stock-based compensation | — | — | 766,658 | — | 766,658 | ||||||||||||
Issued on exercise of stock | |||||||||||||||||
options | 5,500 | 4,123 | (1,923 | ) | — | 2,200 | |||||||||||
Net loss for the period | — | — | — | (1,407,371 | ) | (1,407,371 | ) | ||||||||||
Balance at April 30, 2006 | 52,937,145 | $ | 53,436,826 | $ | 6,270,502 | $ | (47,201,317 | ) | $ | 12,506,011 | |||||||
See accompanying notes.
3
Brazauro Resources Corporation
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended April 30, | ||||||||
---|---|---|---|---|---|---|---|---|
2006 | 2005 | |||||||
(In Canadian Dollars) | ||||||||
Operating activities | ||||||||
Net loss for the period | $ | (1,407,371 | ) | $ | (1,276,371 | ) | ||
Adjustments to reconcile net loss to net cash used in | ||||||||
operating activities: | ||||||||
Depreciation | 6,756 | 1,880 | ||||||
Gain on sale of equipment | — | (1,202 | ) | |||||
Stock based compensation | 766,658 | 865,748 | ||||||
Changes in non-cash operating working capital: | ||||||||
Accounts receivable | 615 | (50,027 | ) | |||||
Accounts receivable from a related party | — | 52,064 | ||||||
Accounts payable and accrued liabilities | 49,302 | 8,489 | ||||||
Net cash used in operating activities | (584,040 | ) | (399,419 | ) | ||||
Investing activities | ||||||||
Mineral property acquisition and exploration | (499,671 | ) | (394,881 | ) | ||||
Equipment and other | (13,292 | ) | (28,466 | ) | ||||
Net cash used in investing activities | (512,963 | ) | (423,347 | ) | ||||
Financing activities | ||||||||
Proceeds from issuances of common shares and warrants | 2,200 | 200,176 | ||||||
Proceeds from sale of equipment | — | 1,202 | ||||||
Net cash provided by financing activities | 2,200 | 201,378 | ||||||
Effect of exchange rate changes on cash | (6,881 | ) | 1,311 | |||||
Decrease in cash and cash equivalents | (1,101,684 | ) | (620,077 | ) | ||||
Cash and cash equivalents, beginning of period | 8,955,186 | 3,557,214 | ||||||
Cash and cash equivalents, end of period | $ | 7,853,502 | $ | 2,937,137 | ||||
See accompanying notes.
See Note 8 for supplemental cash flow disclosure and non-cash investing and financing activities.
4
Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
1. Basis of Operations
Brazauro Resources Corporation (“the Company”) is engaged in the acquisition and exploration of mineral properties with the potential for economically recoverable reserves. The accompanying interim unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and comply in all material respects with United States generally accepted accounting principles except as discussed in Note 7. The consolidated financial statements are presented in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by Canadian and United States generally accepted accounting principles for complete financial statements. This report on Form 10-Q should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended January 31, 2006. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context.
In the opinion of management all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended April 30, 2006 are not necessarily indicative of the results that may be expected for the entire year ending January 31, 2007.
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.
The nature of the Company’s operations results in significant expenditures for the acquisition and exploration of properties. None of the Company’s properties have been proven to have economically recoverable reserves or proven reserves at the current stage of exploration. 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 recoverable reserves.
Certain amounts in the financial statements for the quarter ended April 30, 2005 have been reclassified to conform to the presentation as of April 30, 2006.
All amounts are in Canadian dollars unless noted otherwise. For further information, refer to the consolidated financial statements and footnotes thereto.
2. Mineral Properties and Deferred Expenditures
The Company cannot guarantee title to all of its Properties as the Properties may be subject to prior mineral rights applications with priority, prior unregistered agreements or transfers or native land claims, and title may be affected by undetected defects. Certain of the mineral rights held by the Company are held under applications for mineral rights and, until final approval of such applications is received, the Company’s rights to such mineral rights may not
5
Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
2. Mineral Properties and Deferred Expenditures (continued)
materialize and the exact boundaries of the Company’s properties may be subject to adjustment. The Company does not maintain title insurance on its properties.
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 Tapajós gold district in Para State, Brazil under an option agreement with two individuals (herein referred to as “optionors”). 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 and July 2005, the Company made the third and fourth option payments, each consisting of 200,000 common shares of the Company and $40,000 (U.S.).
As of April 30, 2006, the total commitment remaining under the option agreement is as follows (all amounts are in U.S. dollars): $130,000 and 200,000 common shares of the Company, and $150,000 and 700,000 common shares of the Company for the 2007 and 2008 fiscal years, respectively.
Additionally, the option agreement requires the Company to assume all existing obligations of the optionors to certain Brazilian residents in respect of the mineral rights to the Tocantinzinho Properties (the “Underlying Agreements”) totaling $1,600,000 (U.S.) over a four-year period. At April 30, 2006, the remaining payment commitments under the Underlying Agreements are as follows (all amounts are in U.S. dollars): $120,000 and $1,205,000 in fiscal years 2007 and 2008, respectively. The Company made payments totaling $35,000 (U.S.), $80,000 (U.S.), $120,000 (U.S.) and $40,000 (U.S.) in respect of the Underlying Agreements during fiscal 2004, 2005, 2006 and 2007, respectively. The payments under the option agreement and the Underlying Agreements 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 completed 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 commitments under the option agreement at April 30, 2006, 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 received exploration licenses in respect of the central 4,000 hectare area of the Tocantinzinho Properties on which it has been focusing its exploration efforts as well as for a 9,315 hectare area forming the north eastern and eastern boundary of the Tocantinzinho Properties. Under the option agreement the Company also holds rights to acquire two other applications for exploration licenses filed with the regulatory authorities in Brazil: one covering 4,275 hectares that lies to the south of the central 4,000 hectare area and one (the “Extension Area”) covering 10,000 hectares that lies immediately to the east but continues well south of the central 4,000 hectare area. The mineralized zone discovered by the Company on the Tocantinzinho Properties starts on the central 4,000 hectare area and extends eastward beyond the boundary of the central 4,000 hectare area into the Extension Area. At the end of fiscal 2006, as a result of further title reviews by the Company, it came to the Company’s attention that a long dormant application for a mining license that covered the Extension Area had never been processed by the Departamento Nacional de Produção Mineral (“DNPM”) and was still valid. According to advice from Brazilian
6
Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
2. Mineral Properties and Deferred Expenditures (continued)
counsel, the dormant application carried paramount title to the Extension Area. The Company, through its subsidiary, Jaguar Resources do Brasil Ltda., reached an agreement with the holder of such application to acquire its rights to obtain a mining license over the Extension Area, subject to receipt of confirmation from the DNPM of the granting of the mining license. In the event the DNPM does not grant the mining license, the Company’s rights to the Extension Area will be in doubt. To date, the Company has made a payment of $150,000 (U.S.) to the holder of the application.
The Company is aware that another entity has asserted that it holds prior mineral rights to areas of the Tocantinzinho Properties, including areas of the mineralized zone discovered by the Company. The Company is presently undertaking an extensive review of its title position and has found inconsistencies in its title documentation relating to license boundaries. The Company is working with its Brazilian counsel and the DNPM to resolve these inconsistencies. These inconsistencies may adversely affect the Company’s rights to a portion of the mineralized zone. The Company has been advised of the laws governing these matters and considers that these inconsistencies should be resolved such that the Company will retain rights to all of the mineralized zone. However, the resolution of these inconsistencies will require the DNPM to concur with the Company’s interpretation of these laws. An adverse interpretation of Brazilian mining laws may result in another party receiving rights to some portion of the mineralized zone.
Under a separate agreement, the Company holds exploration permits for an additional 16,052 hectares adjacent to the western border of 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. As of April 30, 2006, the remaining commitment under this agreement is $215,000 (U.S.). This additional property is not subject to the option agreement and therefore is not subject to the royalty. The Company received an exploration license from the Brazilian regulatory authority with respect to the additional 16,052 hectares in fiscal year 2005.
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 and 2006, the Company made payments under the option agreement totaling $25,000 (U.S.) and $45,000 (U.S.), respectively. The remaining option payments are as follows (all amounts are in U.S. dollars): $65,000 and $155,000 in fiscal years ending January 31, 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 and 2006, the Company performed exploration activities at the Mamoal Property, including a regional soil auger sampling program, in conjunction with channel-sampling of old pits and rock-chip sampling. At the Mamoal Property, core drilling commenced in November 2005 and was completed in January 2006. Additionally, an extensive grid soil geochemical survey was conducted at Mamoal during fiscal 2006. The results of the above testing were not encouraging, and the Company may cease exploration of this project. Accordingly the net capitalized costs related to the Mamoal Property totaling $906,535 were written off during the fourth quarter of fiscal 2006. Additional costs incurred during the quarter ended April 30, 2006 totaling $17,342 were written off as of April 30, 2006.
7
Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
2. Mineral Properties and Deferred Expenditures (continued)
Batalha Property
In September, 2004 the Company applied for an exploration license to the 9800 hectare Batalha Property, located in the Tapajós gold province in northern Brazil. The property, host to a well known and extensive “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 $1 (U.S.) 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.
Mineral properties and deferred expenditures were as follows:
Balance at January 31 2006 | Additions | Impaired Write-Offs | Balance at April 30 2006 | ||||||
---|---|---|---|---|---|---|---|---|---|
Brazilian Properties | |||||||||
Tocantinzinho Properties: | |||||||||
Acquisition costs | $1,720,296 | $227,449 | $ — | $1,947,745 | |||||
Exploration costs: | |||||||||
Drilling | 1,038,257 | 125,337 | — | 1,163,594 | |||||
Field expenses | 1,175,031 | 107,973 | — | 1,283,004 | |||||
Geological | 341,939 | 7,122 | — | 349,061 | |||||
Assay | 196,451 | 147 | — | 196,598 | |||||
Total exploration costs | 2,751,678 | 240,579 | — | 2,992,257 | |||||
Total Tocantinzinho Properties | 4,471,974 | 468,028 | — | 4,940,002 | |||||
Mamoal Property: | |||||||||
Acquisition costs | — | — | — | — | |||||
Exploration costs: | |||||||||
Field expenses | — | 13,042 | (13,042 | ) | — | ||||
Geological | — | 62 | (62 | ) | — | ||||
Assay | — | 4,238 | (4,238 | ) | — | ||||
Total exploration costs | — | 17,342 | (17,342 | ) | — | ||||
Total Mamoal Property | — | 17,342 | (17,342 | ) | — | ||||
Batalha Property | |||||||||
Acquisition costs | 20,529 | 10,751 | — | 31,280 | |||||
Exploration costs (Field costs) | — | 42,792 | — | 42,792 | |||||
20,529 | 53,543 | — | 74,072 | ||||||
Total acquisition costs | 1,740,825 | 238,200 | — | 1,979,025 | |||||
Total exploration costs | 2,751,678 | 300,713 | (17,342 | ) | 3,035,049 | ||||
Total costs | $4,492,503 | $538,913 | $(17,342 | ) | $5,014,074 | ||||
8
Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
3. Share Capital
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.
During August 2005 the Company closed a private placement of 5,000,000 units at $1.90 per unit for gross proceeds of $9,500,000. The Company paid a brokerage commission on the placement of $475,000. Each unit consists of one common share and one half of one share purchase warrant. Each whole warrant will entitle the holder to purchase one additional share of the Company at $3.80 for a period of one year. If the shares of the Company trade at $4.80 or higher on each trading day during a thirty day period, the exercise period of the warrants will accelerate and holders will have a period of 30 days thereafter to exercise their warrants, failing which they will expire. As of April 30, 2006, all of the 2,500,000 share purchase warrants are outstanding.
In the first quarter of fiscal 2006, employees, directors and consultants of the Company exercised a total of 602,857 common share options at prices ranging from $0.10 to $0.40, and the Company received exercise proceeds of $153,309.
In the first quarter of fiscal 2007, the Company granted incentive stock options to an officer of the Company for the purchase of 250,000 common shares at an exercise price of $1.36 per share through April 1, 2011.
As of April 30, 2006, the Company had a total of 8,199,143 common stock options outstanding at prices ranging from $0.18 to $1.36.
4. 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 styledJames Cairns and Stewart Jackson vs. Texas Star Resources Corporation d/b/a Diamond Star, Inc.was filed in the 215th Judicial District Court of Harris County, Texas, Cause No. 9822760 wherein the Plaintiffs allege, among other things, that the Company breached contractual agreements and committed fraud by not timely releasing or causing to be released from an escrow account required by Canadian law certain shares of the Company to which Plaintiffs allege that they were entitled to receive in calendar 1995 and, as a result of the Company’s alleged actions with respect to the release of such shares, the Plaintiffs sought monetary damages for losses in share value, attorney’s fees, court costs, expenses, interest and exemplary damages. In 1999, the litigation against the Company in Houston, Harris County, Texas, was dismissed by the court with prejudice, leaving only the claims of James M. Cairns, Jr. pending in British Columbia, which is generally described below. The legal action in Texas is similar to one filed against the Company in the Supreme Court of British Columbia, Canada, in August 1996 styled Cause No. C96493;James M. Cairns, Jr. vs. Texas Star Resources Corporation. In January 1993, the Plaintiffs were issued common stock of the Company in escrow which shares were to be released based on exploration expenditures by the Company on certain of its properties in Arkansas. The escrow requirements were imposed by the Vancouver Stock Exchange. Plaintiffs requested that all of the shares be released in 1995. At that time the Company believed that the release of said shares when requested by the Plaintiffs was inappropriate due to legal requirements and regulatory concerns. The shares were subsequently released to the Plaintiffs.
9
Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
4. Contingencies (continued)
The Company intends to vigorously defend the allegations of the Plaintiffs in the pending litigation in British Columbia and in Texas (if the case is appealed or refiled) and believes it has meritorious defenses to such claims. No proceedings in the action in British Columbia have been taken by the Plaintiff since March 30, 2000. However, the Company cannot provide any assurances that it will be successful, in whole or in part, with respect to its defense of the claims of the Plaintiffs. If the Company is not successful, any judgment obtained by Plaintiffs could have a material and adverse effect on its financial condition.
5. General and Administrative Expenses
General and administrative expenses consisted of the following:
Three Months Ended April 30, | |||||
---|---|---|---|---|---|
2006 | 2005 | ||||
Consulting fees | $ 116,492 | $ 128,526 | |||
Depreciation expense | 6,756 | 1,880 | |||
Entertainment | 10,807 | 17,770 | |||
Office expenses | 37,874 | 68,423 | |||
Professional fees | 157,039 | 59,360 | |||
Rent | 11,466 | 8,622 | |||
Repairs and maintenance | 4,162 | 3,747 | |||
Salary | 905,917 | 966,334 | |||
Shareholder relations | 12,517 | 22,723 | |||
Travel | 38,485 | 37,541 | |||
Total | $1,301,515 | $1,314,926 | |||
6. Stock Based Compensation
Stock-based compensation related to options granted to employees and non-employees increased the following expenses in the consolidated financial statements of the Company in the three months ended April 30, 2006 and 2005:
Three months ended April 30, | |||||
---|---|---|---|---|---|
2006 | 2005 | ||||
Consulting | $ 63,639 | $ 56,299 | |||
Salary | 703,019 | 809,449 | |||
Total | $766,658 | $865,748 | |||
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:
10
Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
6. Stock Based Compensation (continued)
2007 | 2006 | ||||
---|---|---|---|---|---|
Expected dividend yield | 0% | 0% | |||
Expected volatility | 136% | 150% | |||
Risk-free interest rate | 4.09% | 3.64% | |||
Expected life | 2 years | 3 years | |||
Weighted average fair value | |||||
of options granted | $ 0.92 | $ 1.05 |
7. Differences Between Canadian and United States Generally Accepted Accounting Principles (“GAAP”)
The consolidated financial statements have been prepared in accordance with Canadian GAAP, which differs in some respects from United States GAAP. The material differences in respect to these financial statements between Canadian and United States GAAP, and their effect on the Company’s financial statements, are summarized below.
Mineral Properties and Deferred Expenditures
Under 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:
Three Months Ended April 30, | ||||||||
---|---|---|---|---|---|---|---|---|
2006 | 2005 | |||||||
Net loss in accordance with Canadian GAAP | $ | (1,407,371 | ) | $ | (1,276,371 | ) | ||
Deduct: | ||||||||
Deferred exploration expenditures capitalized during the period | (283,371 | ) | (207,329 | ) | ||||
Net loss in accordance with United States GAAP | $ | (1,690,742 | ) | $ | (1,483,700 | ) | ||
Basic and diluted net loss per share (United States GAAP) | $ | (0.03 | ) | $ | (0.03 | ) | ||
Weighted average shares outstanding (United States GAAP) | 52,935,847 | 45,195,594 | ||||||
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Brazauro Resources Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
(In Canadian dollars)
April 30, 2006 and 2005
7. Differences Between Canadian and United States Generally Accepted Accounting Principles (“GAAP”) (continued)
The significant differences in the consolidated balance sheet relative to US GAAP were:
April 30, 2006 | January 31, 2006 | |||||||
---|---|---|---|---|---|---|---|---|
Shareholders’ equity - Canadian GAAP | $ | 12,506,011 | $ | 13,144,524 | ||||
Mineral properties and deferred exploration expenditures | (3,035,049 | ) | (2,751,678 | ) | ||||
Shareholders’ equity - United States GAAP | $ | 9,470,962 | $ | 10,392,846 | ||||
Mineral properties and deferred exploration expenditures | ||||||||
- Canadian GAAP | $ | 5,014,074 | $ | 4,492,503 | ||||
Mineral properties and deferred exploration expenditures | ||||||||
expensed per United States GAAP | (3,035,049 | ) | (2,751,678 | ) | ||||
Acquisition costs of mineral properties - United States | ||||||||
GAAP | $ | 1,979,025 | $ | 1,740,825 | ||||
The significant differences in the consolidated statement of cash flows relative to US GAAP were:
Three months ended April 30, | |||||
---|---|---|---|---|---|
2006 | 2005 | ||||
Net cash used in operations | |||||
Canadian GAAP | $(584,040 | ) | $(399,419 | ) | |
Mineral properties and deferred exploration expenditures | (300,713 | ) | (207,329 | ) | |
US GAAP | (884,753 | ) | (606,748 | ) | |
Net cash used in investing activities | |||||
Canadian GAAP | (512,963 | ) | (423,347 | ) | |
Mineral properties and deferred exploration expenditures | 300,713 | 207,329 | |||
US GAAP | (212,250 | ) | (216,018 | ) | |
Net cash provided by financing activities | |||||
Canadian GAAP and U.S. GAAP | 2,200 | 201,378 | |||
8. Supplemental Cash Flow and Non-Cash Investing and Financing Disclosure
Three months ended April 30, | ||||||||
---|---|---|---|---|---|---|---|---|
2006 | 2005 | |||||||
Supplemental cash flow disclosure: | ||||||||
Interest paid in cash | $ | — | $ | — | ||||
Income taxes paid | — | — |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under “Part I — Item 1. Financial Information,” “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II — Item 1. Legal Proceedings” and elsewhere constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; competition; success of operating initiatives; the success (or lack thereof) with respect to the Company’s exploration and development operations on its properties; the Company’s ability to raise capital and the terms thereof; the acquisition of additional mineral properties; changes in business strategy or development plans; exploration and other property writedowns; the continuity, experience and quality of the Company’s management; changes in or failure to comply with government regulations or the lack of government authorization to continue certain projects; the outcome of litigation matters, and other factors referenced from time to time in the Company’s filings with the Securities and Exchange Commission. The use in this Form 10-Q of such words as “believes”, “plans”, “anticipates”, “expects”, “intends” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. The success of the Company is dependent on the efforts of the Company, its employees and many other factors including, primarily, its ability to raise additional capital and establishing the economic viability of any of its exploration properties.
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations – For the Three Month Periods Ended April 30, 2006 and 2005
All dollar amounts referred to herein are in Canadian Dollars unless otherwise stated. As of June 9, 2006 the exchange rate is $1.00 (Canadian) = $0.9033 (U.S.)
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 Tapajós Gold District of Brazil’s northerly Pará State (collectively the “Properties”).
The Company has had no significant revenues from mining operations. None of its Properties have proven to be commercially developable to date and as a result the Company has not generated any revenue from these activities. The Company’s existing Properties are gold prospects in Brazil, as discussed in Note 2, which were acquired during fiscal 2004 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.
The Company’s mineral properties and deferred expenditures increased to $5,014,074 at April 30, 2006 from $4,492,503 at January 31, 2006 as a result of acquisition costs totaling $238,200 and exploration costs totaling $283,371 related to the activities on the Company’s Brazilian Properties as further described in Note 2. The increases were primarily due to the acquisition and exploration efforts of the Company related to its Tocantinzinho Properties.
The Company completed a diamond drill program consisting of twenty holes (approximately 4000 meters) at the Tocantinzinho Properties during fiscal 2005 in which 19 of 20 holes encountered mineralization. The Company completed a follow-up fourteen-hole Phase III drilling program at the Tocantinzinho Properties in the third quarter of fiscal 2006. A total of thirty four (34) core holes have now been completed on the property. Drill
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results to date indicate an extended strike length of mineralization of greater than 650 meters in length and confirm the earlier reported intercepts of continuous lower grade mineralization with several zones of high grade from 26.82 to 374.40 grams of gold per ton over widths of 2.5 to 0.85 meters. Additionally, the Company completed both a ground magnetic survey and metallurgical testing of drill core samples of the Tocantinzinho Properties during fiscal 2005 and 2006 and was encouraged by the results.
In fiscal 2005 the Company carried out a regional soil auger sampling program on its Mamoal Property, in conjunction with channel-sampling of old pits and rock-chip sampling. At the Mamoal Property, core drilling commenced in November 2005 and was completed in January 2006.
An extensive grid soil geochemical survey was conducted at Mamoal during fiscal 2006. Hand-augered soil samples were collected over two specific areas identified in previous soil sampling programs as being gold anomalous. One area is called Itapecoim, where 544 augered soil samples were collected and chemically analyzed for gold in fiscal 2006. The second area is called Agua Limpa, where 426 augered soil samples were collected in fiscal 2006. Following the geochemical results, seven core holes were drilled for a total of 1,342.7 meters, with 394 core samples assayed. The best intersection returned 0.30 meter at 6.49 grams Au per tonne. The results of the above testing were not encouraging, and the Company may cease exploration of this project. Accordingly, the net capitalized costs related to the Mamoal Property totaling $906,535 were written off during the fourth quarter of fiscal 2006. Additional costs incurred during the quarter ended April 30, 2006 totaling $17,342 were written off as of April 30, 2006.
At the Company’s Batalha property a detailed geological survey was followed by an auger geochemical survey. These programs were conducted between February and April 2006 and results are being reviewed and analyzed at the present time.
The Company has signed a 3,000-meter drilling contract for continued drilling at the Tocantinzinho Properties, and work has commenced as of April 17, 2006. Detailed results of the above testing at the Tocantinzinho Properties, including maps of the ground magnetic results and mineralization found by the core drilling program, are located at the Company’s website, www.brazauroresources.com.
The Company’s revenues during the first quarters of fiscal 2007 and 2006 were primarily comprised of interest income and gains on sales of equipment. The Company has not received any revenues from mining operations since inception.
General and administrative expenses totaled approximately $1,302,000 during the first quarter of fiscal 2007 as compared to approximately $1,315,000 during the first quarter of fiscal 2006, representing a decrease of approximately 1%. Included in general and administrative expenses during the first quarters of fiscal 2007 and 2006 were approximately $767,000 and $866,000, respectively, of stock compensation expense recorded using the fair value method. The Company experienced an increase in professional expenses of approximately $98,000 from the quarter ended April 30, 2005 to the quarter ended April 30, 2006. This increase in professional fees relates to the Company’s efforts to resolve the inconsistencies in its title position on the Tocantinzinho Properties.
The Company anticipates that general and administrative expenses during the remaining three quarters of fiscal 2007 will increase from the level experienced in the first quarter of fiscal 2007 as the Company incurs additional consulting, professional and exploration expenditures related to the Brazilian Properties.
Financial Condition; Liquidity and Capital Resources.
As of April 30, 2006, the Company had working capital of $7,444,294 as compared to working capital of $8,610,778 at January 31, 2006. At April 30, 2006, the Company had current assets of $7,862,292, including $7,853,502 in cash and $8,790 in accounts receivable compared to total current liabilities of $417,998.
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
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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.
During the quarter ended April 30, 2005, the Company received cash proceeds of $153,309 representing the exercise of 602,857 stock options, respectively, by officers, directors, employees and consultants at exercise prices from $0.10 to $0.40.
During August 2005 the Company closed a private placement of 5,000,000 units at $1.90 per unit for gross proceeds of $9,500,000. The Company paid a brokerage commission on the placement of $475,000. Each unit consists of one common share and one half of one share purchase warrant. Each whole warrant will entitle the holder to purchase one additional share of the Company at $3.80 for a period of one year. If the shares of the Company trade at $4.80 or higher on each trading day during a thirty day period, the exercise period of the warrants will accelerate and holders will have a period of 30 days thereafter to exercise their warrants, failing which they will expire. As of April 30, 2006, all of the 2,500,000 share purchase warrants are outstanding.
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 Company has no properties that have proven to be commercially developable and has no significant revenues from mining operations. 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 2007, including the potential exercise of outstanding options and warrants. The inability of the Company to raise further equity financing will adversely affect the Company’s business plan, including its ability to acquire additional properties and perform exploration activities on existing properties. If additional equity is not available, the Company may seek additional debt financing or seek exploration partners to assist in funding acquisition or exploration efforts. Historically, the Company has been able to successfully raise capital as required for its business needs; however, no assurances are made by the Company that it can continue to raise debt or equity capital for a number of reasons including its history of losses and property writedowns, the decline in the price of its common stock, the number of shares outstanding and the Company’s limited and speculative asset base of exploration properties and prospects.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
Item 4. | CONTROLS AND PROCEDURES. |
(a) | Evaluation of disclosure controls and procedures. |
The term “disclosure controls and procedures” (defined in SEC rule 13a-15(e)) 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 Chief Executive Officer, who also serves as the Company’s principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report, and he concluded that, as of such date, the Company’s disclosure controls and procedures were effective. |
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(b) | Changes in internal controls. |
There were no changes in internal control over financial reporting that occurred during our fiscal quarter ended April 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
PART II. OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS. |
Except as described in “Part I — Item 1 — Financial Information — Note 4 of Notes to Interim Consolidated Financial Statements (Unaudited)” which description is incorporated in its entirety by this reference into this part, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject.
Item 1A. | RISK FACTORS. |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors“ in our Annual Report on Form 10-K for the year ended January 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS. |
Any issuances or sales of equity securities resulting in cash proceeds to the Company described in “Part 1. Item 2. Liquidity and Capital Resources”, were made in reliance on exemptions from registration provided by Regulation D, Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Item 3. | DEFAULTS UPON SENIOR SECURITIES. |
Not applicable.
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
Item 5. | OTHER INFORMATION. |
Not applicable.
Item 6. | EXHIBITS AND REPORTS ON FORM 8-K. |
(a) | Exhibits. |
See Index of Exhibits. |
(b) | Reports on Form 8-K. |
None. |
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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.
Dated: June 14, 2006 | BRAZAURO RESOURCES CORPORATION (Registrant) By: /s/ Mark E. Jones, III MARK E. JONES, III Chairman (and principal financial officer) |
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Index to Exhibits
Exhibit Number | Description | ||
---|---|---|---|
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) | ||
31.1 | Certification of Chairman pursuant to Exchange Act Rules 13a-14.(l) | ||
32.1 | Certification of Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(l) |
__________________________________
(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 as an exhibit to Form 10-K for the fiscal year ended January 31, 2006 as filed on May 16, 2006. |
(l) | Filed herewith. |
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