EX-99.1 4 financials.htm FINANCIAL STATEMENTS Consolidated Financial Statements of

Consolidated Financial Statements of


CANARC  RESOURCE  CORP.



(expressed in thousands of United States dollars)



Three Months Ended March 31, 2006 and 2005



(Unaudited – Prepared by Management)







SHAREHOLDER UPDATE


First Quarter Review of Fiscal 2006



Bradford Cooke, Chairman and CEO of Canarc Resource Corp., provides the following review of the First Quarter 2006 and the outlook for the Second Quarter 2006.



First Quarter Review



In Q1 2006, Canarc set out to strengthen its management team and finance its key projects.  I am pleased to say that progress was made on all fronts and the foundations for future growth are now firmly in place.


In January 2006, Canarc announced the appointment of Mr. Jack McClintock, B.Sc., MBA, as its new President and Chief Operating Officer.  Bradford Cooke, the previous President and Company founder, assumed the role of Chairman and will continue as the Chief Executive Officer.  Mr. McClintock most recently held the position of global Exploration Manager for BHP Billiton, the world’s largest mining company, based in Melbourne, Australia.  He brings to Canarc a wealth of experience in the exploration and mining business, both for hands-on project management as well as senior management.


The Company released plans for a CA$2.7 million, 60 hole, Phase 3 in-fill drilling program in 2006 at the New Polaris gold property located 60 km south of Atlin in northwest British Columbia.  New Polaris is one of the largest undeveloped pure gold deposits in western Canada.  Drilling will commence in the 2nd quarter of 2006 and should be completed by the end of the 3rd quarter so that a new resource estimate, conceptual mine plan, initial economic evaluation and mine permit application can be completed by year-end.


To finance the New Polaris project, Canarc raised CA$3.5 million in two private placements of flow-through common shares.  Dundee Securities Corporation acted as Canarc’s Agent in a brokered private placement of 3,850,000 flow-through common shares at CA$0.82 per share for total proceeds of CA$3,157,000.  Canarc also completed a non-brokered private placement to an additional 450,000 flow-through common shares at CA$0.82 per share for additional proceeds of CA$369,000.


Canarc also made progress on its Benzdorp property in Suriname, identifying several new gold prospect areas.  Benzdorp is one of the largest historic gold districts in Suriname, with past alluvial mine production estimated at over 1 million ounces gold.  In 2005, Canarc completed 33 km of line-cutting and collected 1189 soil samples in the Van Heemstra Kreek area, on the north part of the property.  A total of 96 anomalous samples exceeded 0.25 gpt gold, including 10 samples that assayed more than 1.0 gpt gold.  Two large new gold prospect areas were outlined, referred to as VHA and VHB.  The VHA target is 650 m long by up to 600 m wide, and is possibly related to two separate quartz-sericite schist and quartz vein exposures, one of which assayed over 3 gpt gold in a grab sample.  The VHB target is 400 m long by 200 m wide, with peak values up to 1.7 gpt gold.


Glencairn Gold Corporation, the owner/operator of the new Bellavista gold mine in Costa Rica, declared it had reached commercial production.  The mine produced 4,257 oz gold in December 2005, or 85% of the 5,000 oz per month rated capacity. Bellavista is expected to produce 60,000 oz gold per year, at an estimated cash cost of US$ 257 per oz.  Canarc holds a royalty interest amounting to 5.6% of net profits during the 1st payback period, rising to 10.4% during the 2nd payback period and 20.2% of net profit thereafter.


Last but not least, Canarc’s affiliated company, Aztec Metals Corp., completed a name change, share consolidation, rights offering, shares-for-debt settlement and CA$1.1 million private placement financing for working capital.  Canarc previously held approximately 63% of Aztec Metals and currently owns 2.7 million shares (19.5%) and 0.5 million warrants (17% fully diluted) of Aztec Metals.  Aztec Metals is actively evaluating base metal projects with precious metal credits for acquisition, principally in Mexico and Peru.















Second Quarter Outlook



Canarc’s three pronged growth strategy focusing on New Polaris, Benzdorp and a material new gold acquisition in 2006 should continue to enhance shareholder value in the Second Quarter.


In Q2 2006, Canarc will commence an expanded 65 hole, 20,000 m, Phase 3 in-fill drilling program at New Polaris.


The airborne geophysical survey over Benzdorp was recently completed and data evaluation will be carried out in Q2 to interpret the geology and structures as they relate to gold mineralization.


New property evaluations are already underway in Mexico and Peru with a view to making at least one material acquisition in Q3 2006.


In addition, management is working on some new developments regarding Canarc’s non-core assets including the Sara Kreek project, the Bellavista mine royalty and Aztec Metals.


As of March 31, 2006, Canarc held cash and marketable securities totalling CA $7.2 million, of which CA $3.5 million is reserved for New Polaris.  The Company is well financed to fund further work at Benzdorp and the evaluation of acquisition opportunities out of working capital.







On Behalf of the Board of Directors


CANARC RESOURCE CORP.


/s/     Bradford J. Cooke


Bradford J. Cooke

May 8, 2006

Chairman and C.E.O.









CAUTIONARY DISCLAIMER – FORWARD LOOKING STATEMENTS


Certain statements contained herein regarding the Company and its operations constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995.  All statements that are not historical facts, including without limitation statements regarding future estimates, plans, objectives, assumptions or expectations of future performance, are “forward-looking statements”.  We caution you that such “forward looking statements” involve known and unknown risks and uncertainties that could cause actual results and future events to differ materially from those anticipated in such statements.  Such risks and uncertainties include fluctuations in precious metal prices, unpredictable results of exploration activities, uncertainties inherent in the estimation of mineral reserves and resources, fluctuations in the costs of goods and services, problems associated with exploration and mining operations, changes in legal, social or political conditions in the jurisdictions where the Company operates, lack of appropriate funding and other risk factors, as discussed in the Company’s filings with Canadian and American Securities regulatory agencies.  The Company expressly disclaims any obligation to update any forward-looking statements.






















Notice to Readers of the Interim Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2006



The interim unaudited consolidated financial statements of Canarc Resource Corp. (the “Company”) for the three months ended March 31, 2006 (“Financial Statements”) have been prepared by management and have not been reviewed by the Company’s auditors.  The Financial Statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2005 which are available at the SEDAR website at www.sedar.com.  The Financial Statements are stated in terms of United States dollars, unless otherwise indicated, and are prepared in accordance with Canadian generally accepted accounting principles.
















CANARC  RESOURCE  CORP.

Consolidated Balance Sheets

(Unaudited – Prepared by Management)

(expressed in thousands of United States dollars)



      
   

March 31, 2006

 

 December 31, 2005

   

 (Unaudited)

 

 (Audited)

      

ASSETS

     
      

CURRENT ASSETS

     

Cash and cash equivalents

  

 $          4,187

 

 $              489

Marketable securities (Note 3)

  

                524

 

                 899

Receivables and prepaids

  

                   36

 

                   48

   

             4,747

 

              1,436

      

NONCURRENT ASSETS

     

Mineral properties (Note 4)

  

             9,935

 

              9,658

Equipment (Note 5)

  

                     9

 

                   10

Investment in affiliated company (Note 6)

  

                   71

 

                   78

   

           10,015

 

              9,746

   

 $       14,762

 

 $         11,182

      

LIABILITIES AND SHAREHOLDERS' EQUITY

     
      

CURRENT LIABILITIES

     

Accounts payable and accrued liabilities

  

 $             111

 

 $              235

      

SHAREHOLDERS' EQUITY

     

Share capital (Note 7(a))

  

           52,220

 

            49,150

Contributed surplus (Note 7(b))

  

             1,440

 

              1,502

Deficit

  

         (39,009)

 

           (39,705)

   

           14,651

 

            10,947

   

 $       14,762

 

 $         11,182

      

Nature of operations (Note 1)

     

Commitments and contingencies (Note 4)

     
      
      

Refer to the accompanying notes to the consolidated financial statements.

  



Approved by the Directors:


/s/

Bradford Cooke

/s/

Chris Theodoropoulos


Director

Director






CANARC  RESOURCE  CORP.

Consolidated Statements of Operations and Deficit

(Unaudited – Prepared by Management)

(expressed in thousands of United States dollars, except per share amounts)



        
     

  Three Months Ended March 31,

     

2006

 

2005

        

Expenses:

       

Amortization

    

 $                1

 

 $                 1

Corporate development

    

                 45

 

                    3

Employee and director remuneration (Note 8)

    

               101

 

                  38

Foreign exchange

    

                 50

 

                    8

General and administrative

    

                 65

 

                  44

Shareholder relations

    

                 98

 

                  38

Stock-based compensation (Note 7(c))

    

                    6

 

                    1

     

 

 

 

Loss before the undernoted

    

             (366)

 

              (133)

     

 

 

 

Equity loss from investment in affiliated company

    

                  (7)

 

                     -

Gain on disposition of marketable securities

    

            1,066

 

                  69

Future income tax recovery

    

                     -

 

                142

Investment and other income

    

                    3

 

                    1

Non-controlling interest

    

                     -

 

                    3

Recovery of mineral properties

    

                     -

 

                  32

Write-down of mineral properties

    

                     -

 

                  (9)

     

 

 

 

Income for the period

    

               696

 

                105

     

 

 

 

Deficit, beginning of the period

    

        (39,705)

 

         (40,020)

     

 

 

 

Deficit, end of the period

    

 $    (39,009)

 

 $      (39,915)

     

 

 

 

     

 

 

 

Basic and diluted earnings per share

    

 $           0.01

 

 $                -   

     

 

 

 

Weighted average number of shares outstanding

    

         59,361,576

 

           58,360,220

        
        

Refer to the accompanying notes to the consolidated financial statements.

    
        
        









CANARC  RESOURCE  CORP.

Consolidated Statements of Cash Flows

(Unaudited – Prepared by Management)

(expressed in thousands of United States dollars)





        
     

  Three Months Ended March 31,

     

2006

 

2005

        

Cash provided from (used for):

       
        

Operations:

       

Income for the period

    

 $             696

 

 $              105

Items not involving cash:

       

Amortization

    

                     1

 

                     1

Equity loss from investment in affiliated company

    

                     7

 

                      -

Gain on disposition of marketable securities

    

           (1,066)

 

                  (69)

Future income tax recovery

    

                      -

 

                (142)

Non-controlling interest

    

                      -

 

                    (3)

Stock-based compensation

    

                     6

 

                     1

Recovery of mineral property expenditures

    

                      -

 

                  (32)

Write-down of mineral properties

    

                      -

 

                     9

     

               (356)

 

                (130)

Changes in non-cash working capital items:

       

Receivables and prepaids

    

                   12

 

                   50

Due to/from related parties

    

                      -

 

                (118)

Accounts payable and accrued liabilities

    

               (124)

 

                (237)

     

               (468)

 

                (435)

        

Financing:

       

Issuance of common shares, net of issue costs

    

             3,002

 

                   33

        

Investing:

       

Proceeds from disposal of marketable securities

    

             1,558

 

                   97

Acquisition of marketable securities

    

               (117)

 

                  (94)

Mineral properties, net of recoveries

    

               (277)

 

                   37

     

             1,164

 

                   40

        

Increase (decrease) in cash and cash equivalents

    

             3,698

 

                (362)

Cash and cash equivalents, beginning of period

    

                489

 

                 715

        

Cash and cash equivalents, end of period

    

 $          4,187

 

 $              353

        
        

Supplemental disclosure with respect to cash flows (Note 10).

     
        

Refer to the accompanying notes to the consolidated financial statements.

    








CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)




1.

Nature of Operations


Canarc Resource Corp. (the “Company”), a company incorporated under the laws of British Columbia, is in the mineral exploration business and has not yet determined whether its mineral properties contain reserves that are economically recoverable.  The recoverability of amounts capitalized for mineral properties is dependent upon the existence of economically recoverable reserves in its mineral properties, the ability of the Company to arrange appropriate financing to complete the development of its properties, confirmation of the Company’s interest in the underlying properties (Notes 4(d) and 4(e)), the receipt of necessary permitting and upon future profitable production or proceeds from the disposition thereof.


The Company has incurred significant operating losses and has an accumulated deficit of approximately $39 million at March 31, 2006.  Furthermore, the Company has working capital of approximately $4.6 million as at March 31, 2006, which is not sufficient to achieve the Company’s planned business objectives.  These financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business.  The Company’s ability to continue as a going concern is dependent on the continued financial support from its shareholders and other related parties, the ability of the Company to raise equity financing, and the attainment of profitable operations, external financings and further share issuances to meet the Company’s liabilities as they become payable.  These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary, should the Company be unable to continue as a going concern.



2.

Significant Accounting Policies


(a)

Basis of presentation:


These consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned except for:


-

Sara Kreek Resource Corporation N.V., in which the Company holds an 80% interest;

-

Aztec Metals Corp. (“Aztec”), in which the Company held a 63% interest as at December 31, 2004 and diluted its interest to 27% as at December 31, 2005 when its investment was accounted using the equity method (Note 6) and further diluted its interest to 19% as at March 31, 2006 when its investment was accounted using the cost method;

-

Carib Industries Ltd., in which the Company holds a 78.5% interest;  and

-

its 40% owned investee, Benzdorp Gold N.V., which is proportionately consolidated.


All significant intercompany transactions and balances have been eliminated.


(b)

Cash and cash equivalents:


Cash and cash equivalents include cash and short-term liquid investments having terms to maturity when acquired of three months or less.  Short-term investments having terms to maturity when acquired of greater than three months and less than one year are included in marketable securities.






Canarc Resource Corp.

  Page 7

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)




2.

Significant Accounting Policies     (continued)


(c)

Marketable securities:


Marketable securities include investments in shares of companies and other investments capable of reasonably prompt liquidation.  Share investments are carried at the lower of cost and quoted market value at the reporting date.  Short-term deposits and other short-term investments are carried at the lower of cost plus accrued interest and quoted market value.


(d)

Mineral properties:


All costs related to investments in mineral properties are capitalized on a property-by-property basis.  Such costs include mineral property acquisition costs and exploration and development expenditures, net of any recoveries.  The costs related to a property from which there is production, together with the costs of mining equipment, will be amortized using the unit-of-production method.  When there is little prospect of further work on a property being carried out by the Company or its partners or when a property is abandoned or when the capitalized costs are not considered to be economically recoverable, the related property costs are written down to the amount recoverable.


The amounts shown for mineral properties represent costs incurred to date, less recoveries and write-downs, and are not intended to reflect present or future values.


(e)

Equipment:


Equipment is recorded at cost and, for that equipment subject to amortization, the Company uses the declining balance method at rates varying from 20% to 30% annually.  Amortization on equipment used directly on exploration projects is included in mineral properties.


(f)

Investment in affiliated company:


Investment in shares of an affiliated company in which the Company’s ownership is greater than 20% but no more than 50% is, where significant influence is present, accounted for by the equity method.  Investment in shares of an affiliated company in which the Company’s ownership is less than 20% is accounted for by the cost method.


(g)

Stock-based compensation plan:


The Company has a share option plan which is described in Note 7(c).  The Company records all stock-based payments using the fair value method.  Under the fair value method, stock-based payments are measured at the fair value of the consideration received or the fair value of the equity instruments issued or liabilities incurred, whichever is more reliably measurable, and are charged to operations over the vesting period.  The offset is credited to contributed surplus.  Consideration received on the exercise of stock options is recorded as share capital and the related contributed surplus is transferred to share capital.







Canarc Resource Corp.

  Page 8

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)




2.

Significant Accounting Policies     (continued)


(h)

Asset retirement obligations:


The Company has adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3110 “Asset Retirement Obligations” (“HB 3110”).  This standard recognizes statutory, contractual or other legal obligations related to the retirement of tangible long-lived assets when such obligations are incurred, if a reasonable estimate of fair value can be made.  These obligations are measured initially at fair value and the resulting costs capitalized to the carrying value of the related asset.  In subsequent periods, the liability is adjusted for any changes in the amount or timing and for the discounting of the underlying future cash flows.  The capitalized asset retirement cost is amortized to operations over the life of the asset.


Prior to the adoption of HB 3110, the Company had accounted for reclamation and closure costs by accruing an amount associated with the retirement of tangible long-lived assets as a charge to operations over the life of the asset.  The Company adopted HB 3110 retroactively, resulting in no changes to amounts previously presented.


(i)

Earnings (loss) per share:


Basic earnings (loss) per share is computed by dividing the earnings (loss) available to common shareholders by the weighted average number of shares outstanding during the period.  For all periods presented, earnings (loss) available to common shareholders equals the reported earnings (loss).  The Company uses the treasury stock method for calculating diluted earnings per share.  Under the treasury stock method, the weighted average number of common shares outstanding used for the calculation of diluted earnings per share assumes that the proceeds to be received on the exercise of dilutive share options and warrants are used to repurchase common shares at the average market price during the period.  In the Company’s case, diluted earnings (loss) per share presented is the same as basic earnings (loss) per share as the effect of outstanding options and warrants in the earnings (loss) per share calculation would be anti-dilutive.


(j)

Foreign currency translation:


The Company uses the United States dollar as its reporting currency, and accounts denominated in currencies other than the United States dollar have been translated as follows:


Ÿ

Revenue and expense items at the rate of exchange in effect on the transaction date;

Ÿ

Non-monetary assets and liabilities at historical exchange rates, unless such items are carried at market, in which case they are translated at the exchange rate in effect on the balance sheet date;  and

Ÿ

Monetary assets and liabilities at the exchange rate at the balance sheet date.


Exchange gains and losses are recorded in the statement of operations in the period in which they occur.




Canarc Resource Corp.

  Page 9

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)




2.

Significant Accounting Policies     (continued)


(k)

Flow-through shares (EIC 146):


The Company adopted the guidelines which related to the accounting for flow-through shares as issued by the Emerging Issues Committee of the Canadian Institute of Chartered Accountants (“CICA”) under EIC 146 Flow-Through Shares.  EIC 146 requires the recognition of a provision at the date of the actual renunciation, by a reduction in the amount included in share capital relating to the flow-through shares, for the future income taxes related to the deductions foregone by the Company.  EIC 146 is applicable on a prospective basis for flow-through share transactions after March 2004.  The Company adopted EIC 146 on a prospective basis.


(l)

Use of estimates:


The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant areas requiring the use of management estimates relate to impairment of mineral properties, determination of reclamation obligations, valuation allowances for future income tax assets, and assumptions used in determining the fair value of non-cash stock-based compensation.  Actual results could differ from those estimates.


(m)

Fair value of financial instruments:


The fair values of the Company’s cash and cash equivalents, receivables, and accounts payable and accrued liabilities approximate their carrying values due to the short terms to maturity.  The fair value of marketable securities is disclosed in Note 3.


(n)

Variable interest entities:


Effective January 1, 2005, the Company adopted the Canadian Institute of Chartered Accountants Accounting Guideline 15, "Consolidation of Variable Interest Entities" ("AcG15") on a prospective basis.  AcG15 prescribes the application of consolidation principles for entities that meet the definition of a variable interest entity (“VIE”).  An enterprise holding other than a voting interest in a VIE could, subject to certain conditions, be required to consolidate the VIE if it is considered its primary beneficiary whereby it would absorb the majority of the VIE’s expected losses, receive the majority of its expected residual returns, or both.  The adoption of this new standard had no effect on the consolidated financial statements as the Company does not have any VIE’s.


(o)

Comparative figures:


Certain of the prior periods’ comparative figures have been reclassified to conform to the presentation adopted in the current period.






Canarc Resource Corp.

  Page 10

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)




3.

Marketable Securities

     
    

 March 31, 2006

     
 

Investment in shares of companies, at cost

  

 $           533

 

Cumulative write-downs

  

                 (9)

    

 $           524

     


The quoted market value of shares of companies is approximately $2.2 million at March 31, 2006.


Investment in shares of companies includes shares of Endeavour Silver Corp. (“Endeavour”), a company which has two directors in common with the Company.  At March 31, 2006, these shares had a cost and a carrying value of $656,598 and a quoted market value of approximately $2.09 million.



4.

Mineral Properties

         
       

 March 31, 2006

      

 Acquisition

 Exploration/

 
      

 Costs

 Development

 Total

         
 

British Columbia:

       
 

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

    

 $   3,605

 $   1,290

 $   4,895

         
 

Suriname:

       
 

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

    

         100

             -

         100

 

Benzdorp (Note 4(c)(ii))

    

         301

      4,639

      4,940

         
      

 $   4,006

 $   5,929

 $   9,935


(a)

British Columbia:


(i)

New Polaris:


The New Polaris property, which is located in the Atlin Mining Division, British Columbia, is 100% owned by the Company subject to a 15% net profit interest which may be reduced to a 10% net profit interest within one year of commercial production by issuing 150,000 common shares to Rembrandt Gold Mines Ltd.  Acquisition costs at March 31, 2006 include a reclamation bond for CAD$249,000.





Canarc Resource Corp.

  Page 11

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)


4.

Mineral Properties     (continued)


(a)

British Columbia:     (continued)


(ii)

Eskay Creek:


The Company owns a one-third carried interest in the Eskay Creek property, Skeena Mining Division, British Columbia, pursuant to a joint venture with Barrick Gold Corporation (“Barrick”).  The property is subject to a 2% net smelter return in favour of a related company.  The Company elected to write-off the associated property costs in 2005.


(b)

Bellavista, Costa Rica:


The Company holds a net profit interest in the Bellavista property, which is located near San Jose, Costa Rica.  A property agreement giving Glencairn Gold Corporation (“Glencairn”) the right to earn a 100% working interest in the property calls for pre-production payments to be made to the Company in the amount of $117,750 annually up to and including the year commercial production commences.  The pre-production payments for the years ended December 31, 2003 and 2002 were made by the previous property holder, Wheaton River Minerals Inc. (“Wheaton”), for cash of $58,875 and the issuance of 529,000 common shares of Wheaton.  Glencairn paid the Company $120,546 in fiscal 2005.  In December 2005, Glencairn achieved commercial production in its Bellavista mine.


The Company has a net profit interest in Bellavista in which the Company is entitled to 5.67% of the net profits during the first payback period, as defined, then increasing to 10.40% during the second payback period and then to 20.24% of net profits thereafter, once commercial production commences.  Thirty-five percent of this net profit interest will reduce the net profit interest to be received from Glencairn until $317,741 in advance royalty payments are repaid.


(c)

Suriname:


(i)

Sara Kreek:


The Company holds 80% of the shares of Sara Kreek Resource Corporation N.V., the company that holds the Sara Kreek concession.  The Company may be required to issue an additional 200,000 shares to the vendor upon completing a feasibility study and commencing commercial production of the underground deposits.  During fiscal 2002, the Company wrote down the property by $1,717,000 to reflect management’s estimate of the property’s recoverable value, and in fiscal 2004, the property was further written down by $3,184,000 to a nominal $100,000 in accordance with Canadian generally accepted accounting principles.  However, a loan to the vendor that was included in acquisition costs, with a principal balance of $400,000 plus accrued interest remains outstanding and continues to be owed to the Company.  The write-down of the property for accounting purposes does not affect the Company’s legal claim and right to recover the outstanding loan plus accrued interest owed to it, and the Company continues with its collection and settlement efforts.




Canarc Resource Corp.

  Page 12

 

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)


4.

Mineral Properties     (continued)


(c)

Suriname:     (continued)


(ii)

Benzdorp:


In April 1996, the Company entered into an option agreement with Grasshopper Aluminum Company N.V. (“Grassalco”) to earn up to an 80% interest in the Benzdorp property by making cumulative cash payments of $750,000 and property expenditures totalling $5 million over a four-year period.  In August 2002, the Company and Grassalco amended the option agreement.  Cash payments prior to commercial production were reduced to $300,000 with the balance of $450,000 to be paid on or before 30 days after the commencement of commercial production, and exploration expenditures of $5 million were to be incurred by April 2005.  In April 2005 a further amendment to the option agreement was made which extended the date, by which the property expenditures had to be completed, to December 6, 2005, subject to a payment of $40,000 which was made by the Company in April 2005.  By December 6, 2005, the Company incurred property expenditures in excess of $5 million, which included a management fee of 10%, subject to verification by Grassalco.


Pursuant to the amended option agreement, the Company will owe Grassalco an additional $250,000 payable on or before 30 days after the commencement of commercial production if a feasibility study has not been completed by October 6, 2005.  For the years 2006 to 2008, the Company will owe an additional $250,000 payable on or before 30 days after the commencement of commercial production.  However, if a feasibility study has not been completed by October 6, 2008, then the annual additional cash payments of $250,000 will increase at that time to $500,000 payable on or before 30 days after the commencement of commercial production.  These additional cash payments will be treated as advance payments against Grassalco’s shareholder ownership interest and will be deductible from Grassalco’s net profit share or net smelter profit from exploiting the deposits.  As at March 31, 2006, the Company did not complete a feasibility study.


The Company has earned a 40% interest in the Benzdorp property, and expects to exercise its right to increase its interest by making additional option payments (Note 4(d)).  During fiscal 2004, Grassalco transferred the Benzdorp concessions to an incorporated company in which the Company owns 40% and Grassalco owns 60%.




Canarc Resource Corp.

  Page 13

 


CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)


4.

Mineral Properties     (continued)


(d)

Expenditure options:


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

     
  

 Option/Advance

 Expenditure

 
  

 Royalty Payments

 Commitments

 Shares

     
 

Benzdorp (Note 4(c)(ii)):

   
 

On commercial production (i)

 $                450

 $               -

                            -

     
 

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

   
 

On commercial production

                        -

                  -

                200,000

     
 

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

   
 

Net profit interest reduction or buydown

                        -

                  -

                150,000

     
  

 $                450

 $               -

                350,000

     



(i)

Paid on or before 30 days after the commencement of commercial production.


These amounts may be reduced in the future as the Company determines which properties to continue to explore and which to abandon.


(e)

Mineral properties contingencies:


The Company has diligently investigated rights of ownership of all of its mineral properties/concessions and, to the best of its knowledge, all agreements relating to such ownership rights are in good standing.  However, all properties/concessions may be subject to prior claims, agreements or transfers, and rights of ownership may be affected by undetected defects.



5.

Equipment

         
       

 March 31, 2006

       

 Accumulated

 Net Book

      

 Cost

 Amortization

 Value

         
 

Office equipment

    

 $      140

 $    (131)

 $          9

         



Canarc Resource Corp.

  Page 14

 


CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)



6.

Investment in Affiliated Company


In 2005, the Company’s interest in Aztec was diluted from 63% to 27% due to a private placement which Aztec closed in November 2005, and in which the Company did not participate, and at which time the Company recognized a dilution gain of $621,390.  Prior to the dilution in November 2005, the Company consolidated its financial statements with Aztec whereas subsequent to the dilution the Company’s investment in Aztec was accounted for using the equity method as at December 31, 2005.


In March 2006, Aztec closed another private placement which further diluted the Company’s interest in Aztec from 27% to 19%.  Subsequent to this dilution, the Company’s investment in Aztec is accounted using the cost method.


7.

Share Capital


(a)

Authorized and issued:


The Company’s authorized share capital consists of unlimited common shares without par value.


The Company’s issued share capital is as follows:

     
  

 Number of Shares

 

 Amount

     
 

Balance at December 31, 2005

           58,545,115

 

 $    49,150

 

Issued:

   
 

Private placements (Note 7(a)(i))

             4,380,361

 

         2,880

 

Exercise of options (Note 7(c))

                382,500

 

            190

 

Balance at March 31, 2006

           63,307,976

 

 $    52,220

     



Common shares issued for consideration other than cash are recorded at the quoted market value of the shares as of the agreement date, except in the case of common shares issued on exercise of stock options and share appreciation rights under the Company’s stock option plan, which include the fair value of related options or rights previously allocated to contributed surplus.


 (i)

In March 2006, the Company closed brokered and non-brokered private placements.  The brokered private placement with Dundee Securities Corporation (the “Agent”) was for 3,850,000 flow-through common shares at CAD$0.82 per share for gross proceeds of CAD$3,157,000.  Agent’s fees of CAD$189,420 were comprised of CAD$123,123 in cash and CAD$66,297 in non-flow-through common shares, totalling 80,850 shares, at a deemed price of CAD$0.82 per share.  The Agent also received a compensation warrant exercisable for 231,000 non-flow-through common shares at an exercise price of CAD$0.82 and with an expiry date of March 17, 2007.


The non-brokered private placement was for 449,511 flow-through common shares at CAD$0.82 per share for gross proceeds of CAD$368,599.  Finders’ fees totalling CAD$20,316 were paid.





Canarc Resource Corp.

  Page 15

 

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)




7.

Share Capital     (continued)


(b)

Contributed surplus:

       
 

Balance at December 31, 2005

    

 $          1,502

 

Changes during the period:

     
 

Exercise of options

    

                (68)

 

Fair value of stock options recognized

    

                    6

 

Balance at March 31, 2006

    

 $          1,440

       


(c)

Stock option plan:


The Company has a stock option plan that allows it to grant options to its employees, directors and consultants to acquire up to 18,374,095 common shares, of which options for 6,651,500 common shares are outstanding as at March 31, 2006.  The exercise price of each option equals the high/low average price for the common shares on the Toronto Stock Exchange based on the last five trading days before the date of the grant.  Options have a maximum term of ten years and terminate 30 days following the termination of the optionee’s employment, except in the case of death, in which case they terminate one year after the event.  Vesting of options is made at the discretion of the Board at the time the options are granted.  At the discretion of the Board, certain option grants provide the holder the right to receive the number of common shares, valued at the quoted market price at the time of exercise of the stock options, that represent the share appreciation since granting the options.


The continuity of stock options for the three months ended March 31, 2006 is as follows:

           
         

 March 31, 2006

          

 Weighted

          

 average

          

 exercise

         

 Number

 price

         

 of Shares

 (CAD$)

           
 

Outstanding, beginning of period

       

      6,984,000

$0.50

 

Granted

       

           50,000

$0.67

 

Exercised

       

       (382,500)

$0.35

 

Converted to stock appreciation rights on exercise

     

                     -

            -   

 

Expired

       

                     -

            -   

 

Outstanding, end of period

       

      6,651,500

$0.51

           
 

Exercise price range (CAD$)

       

 $0.17 - $1.00

 
           




Canarc Resource Corp.

  Page 16

 

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)




7.

Share Capital     (continued)


(c)

Stock option plan:     (continued)


The following table summarizes information about stock options outstanding at March 31, 2006:

          
     

Options Outstanding and Exercisable

  
     

Weighted

 

Weighted

  
   

Number

 

Average

 

Average

  
 

Price

 

Outstanding and

 

Remaining

 

Exercise

  
 

Intervals

 

Exercisable at

 

Contractual Life

 

Prices

  
 

(CAD$)

 

March 31, 2006

 

(Number of Years)

 

(CAD$)

  
          
 

$0.01 - $0.24

 

80,000

 

0.8

 

$0.17

  
 

$0.25 - $0.49

 

3,186,500

 

4.1

 

$0.33

  
 

$0.50 - $0.74

 

2,659,500

 

2.2

 

$0.60

  
 

$0.75 - $0.99

 

185,500

 

1.5

 

$0.87

  
 

$1.00 - $1.24

 

540,000

 

2.9

 

$1.00

  
   

6,651,500

 

3.1

 

$0.51

  



At March 31, 2006, 6,651,500 options are exercisable and expire at various dates from January 16, 2007 to December 5, 2010, with a weighted average remaining life of 3.1 years.  During the three month period ended March 31, 2006, the Company recognized stock-based compensation of $6,490 based on the fair value of options granted that were earned by the provision of services during the period.


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


The fair value of stock options granted and the assumptions used to calculate compensation expense are estimated using the Black-Scholes Option Pricing Model as follows:

       
      

 March 31, 2006

       
 

Fair value of options granted during the period

    

$0.13

       
 

Risk-free interest rate

    

2.63%

 

Expected dividend yield

    

0%

 

Expected stock price volatility

    

55%

 

Expected option life in years

    

1.5





Canarc Resource Corp.

  Page 17

 


 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)


7.

Share Capital     (continued)


(d)

Warrants:


At March 31, 2006, the Company had outstanding warrants as follows:

        
 

Exercise

      
 

Prices

 

 Oustanding at

   

 Oustanding at

 

(CAD$)

Expiry Dates

 December 31, 2005

 Issued

 Exercised

 Expired

 March 31, 2006

        
 

$0.82

March 17, 2007

                        -

    231,000

              -

                    -

                     231,000

        
   

                                -

    231,000

              -

                    -

                     231,000



(e)

Shares reserved for issuance:

   
  

 Number of Shares

   
 

Outstanding, March 31, 2006

         63,307,976

 

Property agreements (Note 4(d))

              350,000

 

Stock options (Note 7(c))

           6,651,500

 

Warrants (Note 7(d))

              231,000

   
 

Fully diluted, March 31, 2006

         70,540,476

   



(f)

Shareholder rights plan:


On May 31, 2005, the shareholders of the Company approved a shareholder rights plan (the “Plan”), that became effective on April 30, 2005.  The Plan is intended to ensure that any entity seeking to acquire control of the Company makes an offer that represents fair value to all shareholders and provides the board of directors with sufficient time to assess and evaluate the offer, to permit competing bids to emerge, and, as appropriate, to explore and develop alternatives to maximize value for shareholders.  Under the Plan, each shareholder at the time of the Plan’s adoption was issued one Right for each common share of the Company held.  Each Right entitles the registered holder thereof, except for certain “Acquiring Persons” (as defined in the Plan), to purchase from treasury one common share at a 50% discount to the prevailing market price, subject to certain adjustments intended to prevent dilution.  The Rights are exercisable after the occurrence of specified events set out in the Plan generally related to when a person, together with affiliated or associated persons, acquires, or makes a take-over bid to acquire, beneficial ownership of 20% or more of the outstanding common shares of the Company.  The Rights expire on April 30, 2015.





Canarc Resource Corp.

  Page 18

 

 

CANARC  RESOURCE  CORP.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2006

(Unaudited – Prepared by Management)

(tabular dollar amounts expressed in thousands of United States dollars, except per share amounts)



8.

Related Party Transactions


Salaries of CAD$22,551 were paid to a director and a total of CAD$10,000 were paid to all directors in their capacity as Directors of the Company.



9.

Segment Disclosures


The Company has one operating segment, being mineral exploration, and substantially all assets of the Company are located in Canada except for certain mineral properties as disclosed in Note 4.



10.

Supplemental Disclosure with respect to Cash Flows

     
    

 March 31, 2006

     
 

Non-cash financing and investing activities:

   
     
 

Fair value of stock options allocated to shares issued on exercise of:

   
 

Stock options

  

 $        68

     
     
 

Supplemental cash flow information:

   
     
 

Income taxes paid

  

 $           -

 

Interest paid

  

              -

     






Canarc Resource Corp.

  Page 19

 


CORPORATE  INFORMATION





HEAD OFFICE

#800 – 850 West Hastings Street

Vancouver, BC, Canada, V6C 1E1


Telephone:

(604) 685-9700

Facsimile:

(604) 685-9744


Website:

www.canarc.net




DIRECTORS

Bradford Cooke

Chris Theodoropoulos

Derek Bullock

Leonard Harris

William Price




OFFICERS

Bradford Cooke ~ Chairman

John McClintock ~ President

Philip Yee ~ Chief Financial Officer

Stewart Lockwood ~ Secretary




REGISTRAR AND

Computershare Investor Services Inc.

TRANSFER AGENT

3rd Floor, 510 Burrard Street

Vancouver, BC, Canada, V6C 3B9




AUDITORS

KPMG LLP

777 Dunsmuir Street

Vancouver, BC, Canada, V7Y 1K3




SOLICITORS

Vector Corporate Finance Lawyers

#1040 – 999 West Hastings Street

Vancouver, BC, Canada, V6C 2W2




SHARES LISTED

Trading Symbols

TSX:            CCM

OTC-BB:     CRCUF





Canarc Resource Corp.

  Page 20