ITEM 1. BUSINESS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this report on Form 10-K, when not historical matters, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from projected results. Such factors include, among others, the speculative nature of mineral exploration, commodity prices, production and reserve estimates, environmental and governmental regulations, availability of financing, force majeure events, and other risk factors as described from time to time in the Company's filings with the Securities and Exchange Commission. Many of these factors are beyond the Company's ability to control or predict. The Company disclaims any intent or obligation to update its forward-looking statements, whether as a result of receiving new information, the occurrence of future events, or otherwise.
GENERAL
Canyon Resources Corporation, a Delaware corporation (the Company or Canyon), is a Colorado-based company which was organized in 1979 to explore, acquire, develop, and mine precious metal and other mineral properties. The Company or Canyon is used herein to refer to all of the wholly-owned and majority-owned subsidiaries of Canyon Resources Corporation. (See organizational chart on next page.) Since 1986 the Company has been a reporting company. Its securities were traded on NASDAQ until August 16, 1996. On August 19, 1996, the Company listed its shares for trading on The American Stock Exchange.
The Company is involved in all phases of the mining business from early stage exploration, exploration drilling, development drilling, feasibility studies and permitting, through construction, operation and final closure of mining projects.
Canyon has gold production operations in the western United States, and conducts exploration activities in the search for additional valuable mineral properties in the western United States and in a number of areas in Latin America and Africa. The Company's exploration and development efforts emphasize precious metals (gold and silver). Until December 31, 1998, the Company also had industrial mineral production operations (diatomite and pumice) in the western United States. (See "Financing - Asset Sales".)
Once acquired, mineral properties are evaluated by means of geologic mapping, rock sampling, and geochemical analyses. Properties having favorable geologic conditions and anomalous geochemical results usually warrant further exploration by the Company. In almost all cases, exploration or development drilling is required to further test the mineral potential of a property.
Properties which have a demonstrated inventory of mineralized rock of a potentially economic nature are further evaluated by conducting various studies including calculation of tonnage and grade, metallurgical testing, development of a mine plan, environmental baseline studies and economic feasibility studies. If economics of a project are favorable, a plan of operations is developed and submitted to the required governmental agencies for review. Depending on the magnitude of the proposed project and its expected environmental impact, a vigorous environmental review may be required prior to issuance of permits for the construction of a mining operation.
The organizational chart on the following page reflects the Company's legal ownership of subsidiaries and ownership interests in various gold properties as of 12/31/99.
[CANYON RESOURCES CORPORATION FLOWCHART]
The Company has conducted a portion of its mineral exploration and development through joint ventures with other companies. The Company has also independently financed the acquisition of mineral properties and conducted exploration and drilling programs and implemented mine development and production from mineral properties in the western United States and exploration programs in Latin America and Africa. (See "Item 2
ITEM 2. PROPERTIES
The following table provides a summary of the most significant properties in which the Company has an interest as of December 31, 1999. More detailed information regarding each of these properties is provided in the text that follows.
CANYON RESOURCES CORPORATION PROPERTIES AS OF 12/31/99
(1) Net to Canyon's interest in the property. (2) Subject to joint-venture or purchase provisions. (3) To date - an additional amount of $10 million will be paid to Phelps Dodge when all permits have been achieved or construction commences. (4) See discussion at "Development Properties - Seven-Up Pete Venture - Legal Status."
PRODUCTION PROPERTIES
BRIGGS PROJECT
General
The Briggs project, located on the west side of the Panamint Range near Death Valley, California, was acquired by the Company in 1990. It is 16 miles northeast of Trona and 35 miles northeast of Ridgecrest in Inyo County, California. Access from Trona is by 33 miles of paved and graded gravel roads. The Company owns or controls, through leasehold interests, 100% of the Briggs Mine, subject to a 2% net smelter return royalty.
Briggs' holdings include 666 unpatented mining claims, 67 mill site claims, 1 tunnel site claim, 1 patented millsite claim, and 2 patented mining claims that comprise an area of approximately 14,000 acres. The passage of the California Desert Protection Act in 1994 removed all of the Company's holdings from Wilderness Study Areas. The Company's mining claims are now located on land prescribed for multiple use management by the U.S. Bureau of Land Management. Patent applications were filed for certain claims on the Briggs deposit during 1993; however, no assurances can be made that these patent applications will be issued.
Operations
The Briggs Mine is an open-pit, heap leach operation, initially designed to produce an average of 75,000 ounces of gold per year over a seven-year life. The ore is crushed in three stages to a minus 1/4 inch size and is conveyor stacked on the leach pad. Gold is recovered from leach solutions in a carbon adsorption plant and refined into dore bars on site. The Company increased the initial design production rate to approximately 85,000 ounces per year in 1999.
Mine development and construction of facilities began on December 16, 1995. Facilities include a 12,000 ton per day crushing plant, leach pad, process ponds, recovery plant, office and lab buildings, and a maintenance shop. Crushing of ore commenced on July 29, 1996, and first gold production occurred on October 16, 1996. Limited production was realized through the remainder of 1996, yielding 3,417 ounces of gold.
In March 1997, the Briggs Mine achieved commercial production levels and, for the year, produced 66,769 ounces of gold and 19,215 ounces of silver. During 1997, 9.3 million tons were mined, of which 2.8 million tons were ore with an average grade of 0.033 ounce of gold per ton and a waste-to-ore strip ratio of 2.3 to 1.
Lower crushing throughput and higher than expected operating costs were experienced in 1997, principally relating to unsatisfactory performance of the tertiary stage vertical shaft impact crushers. In early 1998, these units were replaced with three cone crushers with the objective of reducing costs and increasing throughput. A scheduled expansion of the leach pad was completed during 1997 at a cost of $2.1 million. This expansion was financed by drawing on the final $4.0 million tranche of the Company's loan facility. (See "Item 1 - Business - Financing.")
During 1998, 10.5 million tons were mined, of which 3.4 million tons were crusher ore with an average grade of 0.030 ounce of gold per ton and a waste-to-ore strip ratio of 2.0 to 1. The Briggs Mine produced 80,316 ounces of gold and 22,138 ounces of silver in 1998.
During 1999, 9.8 million tons were mined, of which 4.3 million tons were crusher ore with an average grade of 0.028 ounce of gold per ton and 0.9 million tons were run-of-mine (non-crusher) ore with an average grade of 0.012 ounce of gold per ton. The average waste-to-ore strip ratio was 0.9 to 1. The Briggs Mine produced 86,669 ounces of gold and 24,044 ounces of silver in 1999.
Statistical production and financial data for the Briggs Mine are shown on the following table.
BRIGGS MINE OPERATIONS
(1) Proceeds from 1996 gold sales and 8,150 ounces in 1997 credited against development costs.
(2) As calculated under The Gold Institute's Production Cost Standard.
(3) Prior to interest income (expense) and other non-operating items.
(4) Excludes exploration and development drilling and permitting costs for reserve expansion.
Reserves for the Briggs Mine as calculated by the Company at various gold prices are shown on the following table.
* Excludes approximately 1.0 million tons of run-of-mine ore with an average grade of .009 ounce of gold per ton.
Development
Development drilling in 1997 at North Briggs and Goldtooth, located immediately north and south, respectively, of the Briggs Mine, identified the following mineable reserves, which are included in the above Briggs Mine reserves:
The reserves at North Briggs were defined by 151 drillholes and occur subparallel to the topography, along a low-angle detachment fault, with increased thickness of mineralization eastward approaching the high-angle regionally persistent Goldtooth fault. The gold mineralized structure at North Briggs is still open to the northeast and east. The Goldtooth reserves, defined by 132 drillholes, occur primarily in steeply dipping orientation within favorable rock units adjacent to the Goldtooth fault.
Environmental Regulation
The Briggs Mine operates under the requirements of the following permits and agencies: 1) Plan of Operations, U.S. Bureau of Land Management: 2) Mining and Reclamation Plan, Inyo County; 3) Waste Discharge Requirements, Lahontan Regional Water Quality Control Board; 4) Permits to Operate, Great Basin Unified Air Pollution Control District; and 5) Section 404 Dredge and Fill Permit, Army Corps of Engineers. In January 2000, the Briggs Mine obtained an amendment to its operating permit that allows mining of the North Briggs and Goldtooth deposits. The amendment was obtained through an Environmental Assessment conducted by the U.S. Bureau of Land Management and an equivalent document approved by the Inyo County Planning Commission. The permits issued to date are adequate for all mine operations involving currently identified mineable reserves in the Briggs deposit.
The BLM, Inyo County, the California Department of Conservation, and the Lahontan Regional Water Quality Control Board (Lahontan) have jointly required the Company to maintain a $3,030,000 reclamation bond to ensure appropriate reclamation of the Briggs Mine. Additionally, Lahontan requires that the Company maintain a $1,010,000 bond to ensure adequate funds to mitigate any "foreseeable release" of pollutants to state waters. These bonds are subject to annual review and adjustment.
KENDALL MINE
General
The Kendall Mining District is located approximately 20 miles north of Lewistown, Montana, and is accessible by paved U.S. highway and graded dirt roads. The property rights controlled by the Company
include (i) approximately 253.61 acres in patented claims and fee land; and (ii) mining leases on approximately 1,932 acres in 71 patented mining claims and fee land.
The Kendall Mine was developed as an open-pit, heap-leach gold mine in September 1988, under the management of the Kendall Venture, a joint venture between the Company and Addwest Gold, Inc. (Addwest). On January 26, 1990, the Company acquired all of the issued and outstanding common stock of Addwest and through its wholly-owned subsidiary, CR Kendall Corporation, became the operator and sole owner of the operating interest in the Kendall Mine.
Operations
Through 1995, the Kendall Mine operation leached gold and silver from crushed ore on a year-round basis. Mining and crushing of all remaining ore was completed in January 1995. Leaching of the remaining gold in the heap leach pads continued through early 1998. All economic gold has now been recovered, and the mine is currently in a reclamation and closure mode. The Kendall Mine produced approximately 302,000 ounces of gold and approximately 136,000 ounces of silver from 1988 through 1998.
During 1997, the two heap leach pads were rinsed of residual cyanide by continuous circulation of water and a treatment plant using reverse osmosis technology was installed to reduce dissolved metals so that water from the process system could be discharged.
During 1998 and 1999, the Company tested the efficiency of a biocell in removal of constituents from water of the Barnes King drainage. This passive water-treatment system performed better than expectations. As a result of the success of the test, biocells are being designed specifically for each drainage so that they will remove the constitutents and allow the clean water to flow unimpeded downstream. It is expected that biocells will be installed in any of the mine area drainages that require such passive treatment.
During 2000, subject to adequate cash resources, the Company expects to cover the heap leach pads with soil caps, commence revegetation of the heaps, and install biocells in certain mine area drainages for passive water treatment.
Environmental Regulation & Reclamation
The Kendall Mine operates under permits issued by the Montana Department of Environmental Quality (DEQ) and other regulatory agencies. A life of mine permit was granted by the DEQ on November 1, 1989. The Company is negotiating details of final mine closure with the DEQ. DEQ has approved the portions of the closure plan related to recontouring, revegetation, drainage and heap dewatering. Discussions of long-term water handling and heap closure methods continue.
In early 1996, the Company installed a system to capture and collect drainage from certain mine facilities. The DEQ, the Environmental Protection Agency, and the Company have inspected the system subsequent to its initial installation and have agreed on system improvements which have been completed. The Company will maintain, monitor, and, if necessary, improve the system until the DEQ determines that the system is no longer needed. In October 1997, the Company applied for a Montana Pollutant Discharge Elimination System (MPDES) permit to cover seepage from waste rock piles. The DEQ is reviewing the permit application.
The DEQ has issued a Notice of Violation and Administrative Order to CR Kendall for alleged water quality violations for the period from September 1, 1996 through October 31, 1997. (See " Item 3
ITEM 3. LEGAL PROCEEDINGS
CR KENDALL - VAN HAUR LAWSUIT
In May 1998, a plaintiff group including members of the Van Haur family and the Van Haur family Ranch Trust (collectively "Plaintiffs") filed suit in U.S. District Court in Montana against the Kendall Mine. The Plaintiffs operate a farming and ranching enterprise approximately 1 1/2 to 2 miles downstream of the Kendall Mine. Plaintiffs allege violation of their water rights and other torts by the Kendall Mine and request unspecified damages and punitive damages. On December 2, 1999, the lawsuit was dismissed on the basis that the federal court did not have subject matter jurisdiction. On December 8, 1999, the Plaintiffs refiled the suit in Montana State Court. The Company believes the Plaintiffs' allegations are completely without merit and that the Company will prevail in this matter.
CR KENDALL - WATER QUALITY NOTICE OF VIOLATION
On September 23, 1998, the DEQ issued a Notice of Violation and Administrative Order alleging certain violations of Montana water quality laws. DEQ proposed a penalty of $330,000 (since modified to $302,000) in connection with the alleged violations. The Company believes: (1) that many of the allegations are unfounded, and (2) the proposed fine does not comport with Montana statutes because it fails to consider certain mandatory mitigating factors. The Company is negotiating the proposed fine with the DEQ and will defend itself in court if a satisfactory resolution cannot be reached with the administrative agency.
MCDONALD GOLD PROJECT - MONTANA DEPARTMENT OF NATURAL RESOURCES METALIFEROUS MINERAL LEASES
On September 24, 1998, the Montana Department of Natural Resources (DNRC), the entity that administers state mineral leases, unilaterally decided to cancel the permitting extension of the 10-year lease term of the state leases that pertain to the McDonald Gold Project. This was provoked by Canyon's inability to continue permitting at McDonald due to the anti-cyanide initiative, I-137, and would require the Company, after a period of approximately seventeen months, to commence paying a delay rental of $150,000 per month in order to maintain the leases. In February 2000, pursuant to its September 1998 decision, the DNRC determined that the primary terms of the mineral leases had expired. The Company has appealed the action of the DNRC in an administrative hearing process under the state's Administrative Procedures Act, and believes that it will prevail. The leases continue in effect during this appeal. It is the Company's position that the permitting process has been interrupted by the threat and passage of I-137 and, thus, the permit extension is continued until the governmental impediment is resolved.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 10, 2000 the Company's shareholders, at a special meeting of shareholders, approved an alternate capital restructuring proposal for a reverse split of common stock. The approval authorized the Board of Directors of the Company, at its discretion, to implement a 1/2.5, a 1/4, or a 1/5 reverse split of shares of common stock and a reduction of the Company's authorized shares of common stock from 100 million to 50 million and elimination of the Company's authorized preferred stock at any time within the next 23 months, until January 14, 2002. Shareholders representing 25,507,425 shares of common stock or 54.8% of the shareholders of record voted in favor of the proposal, 1,361,357 shares or 2.93% voted against the proposal, and 281,591 shares or 0.6% either abstained or were broker non-votes.
On March 9, 2000, the Board of Directors approved a resolution to implement a 1/4 reverse split of common stock, reduce the Company's authorized shares of common stock to 50 million, eliminate the Company's authorized preferred stock, and modify the numbers of outstanding warrants and options and their exercise prices in accord with the 1/4 reverse split. These actions are anticipated to be effective on March 24, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The American Stock Exchange (AMEX) under the symbol CAU. Canyon's common stock was first included on the National Association of Securities Dealers Automated Quotation System (NASDAQ) on February 9, 1986, following the completion of the Company's initial public offering and on the NASDAQ National Market on May 15, 1990. Canyon subsequently moved to AMEX on August 19, 1996. The following table reflects the high and low prices for the Company's common stock during 1999 and 1998. There are currently no trading warrants.
On March 1, 2000, the high and low prices for the Company's common stock were $0.44 and $0.38, respectively.
As of March 1, 2000, there were approximately 1,330 holders of record of the Company's common stock. The number of shareholders of the Company who beneficially own shares in nominee or "street" name or through similar arrangements is estimated by the Company to be approximately 6,000. As of March 1, 2000, there was 1 holder of record of non-trading warrants to purchase common stock.
As of March 1, 2000, there were outstanding; a) 46,507,470 shares of common stock; b) 278,182 warrants to purchase common stock; and c) 2,317,000 employee and non-qualified stock options to purchase common stock.
DIVIDENDS
For the foreseeable future, it is anticipated that the Company will use any earnings to finance its growth and that dividends will not be paid to shareholders. Further, pursuant to an agreement executed by the Company on behalf of its wholly-owned subsidiary, CR Briggs Corporation, in connection with a loan for the Briggs Mine, the Company has agreed to maintain certain levels of working capital, tangible net worth, and leverage ratios after January 1, 2001 which could restrict the payment of dividends where such payment would result in a failure to maintain such levels. Similarly, CR Briggs Corporation is prohibited from
repaying the Company for advances or from paying dividends to the Company from the Briggs Mine cash flow unless certain conditions relating to the financial performance of the Briggs Mine are met.
SALE OF UNREGISTERED SECURITIES
During 1999, the Company issued 345,400 shares of its $0.01 par value common stock to six creditors as consideration for extinguishment of certain payables aggregating $76,000. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected information regarding the Company's financial condition and results of operations over the past five years.
(1) The Company changed its methods of accounting for exploration costs on unproven properties and accounting for costs of start-up activities in 1998. See Note 4 to Consolidated Financial Statements.
(2) The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS128), Earnings per Share, in 1997. All prior periods have been restated to conform with the provisions of SFAS128.
(3) Potential common shares had no effect on 1999 and would be antidilutive during the preceding four year period as the Company recorded net losses.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this report on Form 10-K, when not historical matters, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from projected results. Such factors include, among others, the speculative nature of mineral exploration, commodity prices, production and reserve estimates, environmental and government regulations, availability of financing, force majeure events, and other risk factors as described from time to time in the Company's filings with the Securities and Exchange Commission. Many of these factors are beyond the Company's ability to control or predict. The Company disclaims any intent or obligation to update its forward-looking statements, whether as a result of receiving new information, the occurrence of future events, or otherwise.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
The Company recorded net income of $203,500, or $0.00 per share, on revenues of $30,904,500 in 1999. This compares to a loss before extraordinary item and cumulative effect of changes in accounting principles of $2,849,300, or $0.06 per share, and a net loss of $12,058,900, or $0.26 per share, on revenues of $35,246,600 in 1998.
During 1999, the Company sold 83,565 ounces of gold and 23,400 ounces of silver at an average realized price of $370 per equivalent gold ounce. During 1998, the Company sold 79,303 ounces of gold and 21,500 ounces of silver at an average realized price of $375 per equivalent gold ounce.
The following table summarizes the Company's gold deliveries and revenues in 1999 and 1998:
As a result of the Company's hedging programs, additional revenues of $7,453,200 and $6,287,000 in 1999 and 1998, respectively, were recognized relative to spot prices in effect on the settlement dates. The New York Commodity Exchange (COMEX) gold prices averaged $279 per ounce in 1999 and $294 per ounce in 1998. All of the Company's revenues in 1999 and 1998 were from domestic activities.
Cost of sales was $23.9 million in 1999 compared to $26.3 million in 1998. The lower cost of sales in 1999 was principally due to the sale of the Company's industrial minerals business at the end of 1998. Cost of sales includes all direct and indirect costs of mining, crushing, processing, and overhead expenses of the Company's production operations, including provisions for estimated site restoration costs accrued on a units-of-production basis.
Per ounce cost of gold production at the Briggs Mine as computed under the Gold Institute's Production Cost Standard, was as follows:
(1) As per cost of sales description above, excluding royalties and accruals for site restoration.
(2) Cash operating cost plus royalties.
(3) Total cash costs plus depreciation, depletion, amortization and accruals for site restoration.
The lower per ounce costs in 1999 are attributable to higher production levels, despite the lower grade of ores mined and leached in 1999.
Depreciation, depletion, and amortization was higher in 1999 due to a greater number of gold ounces sold from the Briggs Mine.
Selling, general, and administration expenses were lower in 1999 due to the sale of the Company's industrial minerals business at the end of 1998 and to reduced corporate overhead.
Exploration costs in 1999 were lower due to reduced levels of activity.
During the fourth quarter of 1999, the Company recorded a charge of $0.9 million for site restoration based on an update to the anticipated scope of work remaining at the Kendall Mine.
Interest income was lower in 1999 due to lower cash balances. Interest expense was lower due to lower debt balances.
During 1999, in connection with an August 1998 restructuring of the Briggs Mine Loan Facility, certain proceeds from the sale of the Company's industrial minerals business were used to reduce the principal on a gold loan by 6,117 ounces. Additionally, in connection with a June 1999 restructuring, the gold loan principal was reduced by 20,506 ounces. As a result of the restructuring of the gold loan, the Company recognized a gain of $3,108,200. This amount is shown as an other income item on the Statement of Operations for the year ended December 31, 1999.
During 1998, as part of a May 1998 restructuring of the Briggs Mine loan facility, proceeds from a hedge liquidation were used to prepay in full certain cash loans outstanding and to reduce the principal on the gold loan by 8,869 ounces. As a result of the full prepayment on the cash loans, unamortized deferred financing costs of $281,500 were expensed. This amount is shown as an extraordinary item on the Statement of Operations for the year ended December 31, 1998. In addition, as a result of the restructuring of the gold loan, the Company recognized a gain of $919,700. This amount is shown as an other income item on the Statement of Operations for the year ended December 31, 1998.
In the second quarter of 1998, the Company changed its method of accounting for exploration costs on unproven properties from capitalizing all expenditures to expensing all costs, other than acquisition costs, prior to the establishment of proven and probable reserves. This brought the Company's accounting method in accordance with the predominant practice in the US mining industry and better reflects operating income and cash flow. The $5,625,400 cumulative effect of the change on prior years is included in the loss for 1998. The effect of the change on 1998 was to increase the loss before extraordinary item and cumulative effect of a change in accounting principle by $408,600, or $0.01 per share, and the net loss by $6,034,000 or $0.13 per share.
In the fourth quarter of 1998, the Company elected early adoption of Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 was otherwise effective for financial statements for fiscal years beginning after December 15, 1998 and requires costs of start-up activities and organization costs to be expensed as incurred. The $3,302,700 cumulative effect of the change on prior years is included in the loss for 1998. The effect of the change on 1998 was to decrease the loss before extraordinary item and cumulative effect of a change in accounting principle by $751,200, or $0.02 per share, and to increase the net loss by $2,551,500, or $0.06 per share.
On December 31, 1998, the Company completed the sale of its industrial minerals assets to an investment group. The Company recorded a loss on asset disposals of $849,100 in connection with the sale.
There was no current or deferred provision for income taxes during 1999 or 1998. Additionally, although the Company maintains significant deferred tax assets, principally in the form of operating loss carryforwards, the Company has not recorded a net deferred tax asset in either 1999 or 1998 due to an assessment of the "more likely than not" realization criteria required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 is designed to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Besides net income, other comprehensive income includes foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The Company has no items of other comprehensive income in any period presented in its financial statements.
Inflation did not have a material impact on operations in 1999 or 1998. Management of the Company does not anticipate that inflation will have a significant impact on continuing operations.
1998 COMPARED TO 1997
The Company recorded a loss before extraordinary item and cumulative effect of changes in accounting principles of $2,849,300, or $0.06 per share, and a net loss of $12,058,900, or $0.26 per share, on revenues of $35,246,600 in 1998. This compares to a net loss of $5,022,300, or $0.13 per share, on revenues of $28,890,300 in 1997.
During 1998, as part of a May 1998 restructuring of the Briggs Mine loan facility, proceeds from a hedge liquidation were used to prepay in full certain cash loans outstanding and to reduce the principal on a gold loan by 8,869 ounces. As a result of the full prepayment on the cash loans, unamortized deferred financing costs of $281,500 were expensed. This amount is shown as an extraordinary item on the Statement of Operations for the year ended December 31,1998. In addition, as a result of the restructuring of the gold loan, the Company recognized a gain of $919,700. This amount is shown as an other income item on the Statement of Operations for the year ended December 31, 1998.
In the second quarter of 1998, the Company changed its method of accounting for exploration costs on unproven properties from capitalizing all expenditures to expensing all costs, other than acquisition costs, prior to the establishment of proven and probable reserves. This brought the Company's accounting method in accordance with the predominant practice in the US mining industry and better reflects operating income and cash flow. The $5,625,400 cumulative effect of the change on prior years is included in the loss for 1998. The effect of the change on 1998 was to increase the loss before extraordinary item and cumulative effect of a change in accounting principle by $408,600, or $0.01 per share, and the net loss by $6,034,000 or $0.13 per share.
In the fourth quarter of 1998, the Company elected early adoption of Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 was otherwise effective for financial statements for fiscal years beginning after December 15, 1998 and requires costs of start-up activities and organization costs to be expensed as incurred. The $3,302,700 cumulative effect of the change on prior years is included in the loss for 1998. The effect of the change on 1998 was to decrease the loss before extraordinary item and cumulative effect of a change in accounting principle by $751,200, or $0.02 per share, and to increase the net loss by $2,551,500, or $0.06 per share.
On December 31, 1998, the Company completed the sale of its industrial minerals assets to an investment group. The Company recorded a loss on asset disposals of $849,100 in connection with the sale.
During 1998, the Company sold 79,303 ounces of gold and 21,500 ounces of silver at an average realized price of $375 per equivalent gold ounce. During 1997, the Company sold 68,436 ounces of gold and 18,500 ounces of silver at an average realized price of $402 per equivalent gold ounce. This total includes the sale of 8,150 ounces of gold during the first two months of 1997 which was credited against capitalized development costs at the Briggs Mine.
The following table summarizes the Company's gold deliveries and revenues in 1998 and 1997:
As a result of the Company's hedging programs, additional revenues of $6,287,000 and $4,823,700 in 1998 and 1997, respectively, were recognized relative to spot prices in effect on the settlement dates. The New York Commodity Exchange (COMEX) gold prices averaged $294 per ounce in 1998 and $331 per ounce in 1997. In 1998, revenue from the sale of industrial mineral products increased 17% from the prior year. All of the Company's revenues in 1998 and 1997 were from domestic activities.
Cost of sales was $26.3 million in 1998 compared to $21.4 million in 1997, reflecting the impact of the Briggs Mine operating at commercial production levels for all of 1998. Cost of sales includes all direct and indirect costs of mining, crushing, processing, and overhead expenses of the Company's production operations, including provisions for estimated site restoration costs accrued on a units-of-production basis.
Per ounce cost of gold production at the Briggs Mine as computed under the Gold Institute's Production Cost Standard, was as follows:
(1) As per cost of sales description above, excluding royalties and accruals for site restoration.
(2) Cash operating cost plus royalties.
(3) Total cash costs plus depreciation, depletion, amortization and accruals for site restoration.
The lower per ounce costs in 1998 are attributable to higher production levels, which was principally a result of a 23% improvement in crusher throughput in the current year. In late 1997 and early 1998, the original design tertiary stage vertical shaft impact crushers (VSI's) were removed from service and replaced with more efficient cone crushers. In connection with the removal, the Company adjusted its carrying value of the VSI's to fair market value during the fourth quarter of 1997, resulting in an impairment of $215,900. In 1998, the fair market value was further reduced by $19,700.
Depreciation, depletion and amortization was higher in 1998 due to a greater number of gold ounces sold from the Briggs Mine.
Exploration costs in 1998 of $0.6 million were $0.4 million higher than in 1997, principally a result of the Company's change in the method of accounting for exploration costs on unproven properties. The Company's abandonments of $0.3 million in 1997 relate to costs associated with the Cahuilla property, located in Imperial County, California.
During the fourth quarter of 1997, the Company recorded a charge of $2.6 million for site restoration based on an update to the anticipated scope of work remaining at the Kendall Mine.
Interest income was lower in 1998 due to lower cash balances. Interest expense was not materially different in 1998 as compared to 1997.
The Company executed an agreement during the second quarter of 1997 to sell the Mountain View property in Nevada for $3.0 million, payable over a twenty-four month period and, until the purchase price is paid in full, an aggregate work commitment of $1,250,000. At any time, the buyer, upon proper notice, could terminate the agreement and its then remaining obligations, and relinquish its interest in the property. Due to the contingent nature of the transaction, gain was recognized only upon receipt of cash in excess of basis. During the third quarter of 1998, the buyer relinquished its interest in the property. The Company subsequently returned the property to the underlying lessors. No gain or loss occurred as a result of the property relinquishment. In 1997, the Company recorded a gain of $229,100 in connection with payments received in the initial year of the agreement.
The Company executed an agreement during the third quarter of 1997 to sell the Aeropuerto property in Chubut Province, Argentina for $2.0 million, payable over a sixty month period. At any time, the buyer, upon proper notice, may terminate the agreement and its then remaining obligations, and relinquish its interest in the property. Due to the contingent nature of the transaction, gain is recognized only upon receipt of cash in excess of basis over the sixty month period. Accordingly, the Company recorded a gain of $70,100 during 1998 and $42,400 during 1997.
Inflation did not have a material impact on operations in 1998 or 1997.
LIQUIDITY & CAPITAL RESOURCES
SUMMARY OF 1999 CASH FLOW:
The Company's cash and cash equivalents decreased $1.3 million during 1999 to $0.7 million at year-end. The decrease was a result of net cash provided by operations of $7.4 million and $8.7 million of net cash used in financing activities.
OPERATING ACTIVITIES:
Operations provided $7.4 million of cash in 1999 as compared to $11.2 million in 1998 and $0.7 million in 1997. The liquidation of a gold hedge position in 1999 contributed $5.5 million of the total operating cash flow. During 1998, the liquidation of a gold hedge position contributed $11.1 million of the total operating cash flow. Operating cash flow in 1997 was substantially lower as the Briggs Mine operated at commercial levels for only ten months and no hedge positions were liquidated.
INVESTING ACTIVITIES:
Capital Expenditures
Capital expenditures in 1999 totaled $0.6 million. Major components included $0.5 million for the McDonald Gold Project and $0.1 million for miscellaneous projects at the Briggs Mine.
Capital expenditures in 1998 totaled $4.5 million. Major components included $4.0 million for permitting efforts on the McDonald Gold Project; $0.3 million for capital improvements at the Company's industrial minerals facilities; and $0.2 million for miscellaneous capital projects at the Briggs Mine.
Capital expenditures in 1997 totaled $19.4 million. Major components included $7.6 million at the Briggs Mine for final construction, working capital and development drilling; $8.1 million at the McDonald Gold Project which included an initial payment of $5.0 million to purchase Phelps Dodge's interest in the project and $3.0 million for ongoing permitting; $1.5 million of equipment upgrades at the Company's industrial minerals facilities and $0.5 million to purchase the pumice mine that supplied the ore for its New Mexico processing facility; and $1.7 million on exploration properties.
Asset Dispositions
During 1999, 1998, and 1997, respectively, the Company received proceeds of approximately $0.1 million, $0.1 million, and $0.4 million, respectively, in connection with the sale of certain exploration properties.
On December 31, 1998, the Company completed the sale of its industrial minerals assets to an investment group for a purchase price of $6,475,000 less certain working capital adjustments.
Seven-Up Pete Venture Funding Commitment
In September 1999, the Company entered into a contract with Franco-Nevada Mining Corporation, Inc. (Franco-Nevada) which provided $3.5 million of funding ($3.0 million cash and a commitment to maintain an existing $0.5 million reclamation bond) for the Seven-Up Pete Venture (Venture). The funding was provided to allow the Venture to maintain its property rights in the McDonald and Seven-Up Pete gold deposits and to undertake a lawsuit against the State of Montana and the Montana Department of Environmental Quality as a result of implementation of the anti-cyanide initiative, I-137. As consideration for the financing, Franco-Nevada will receive a four percent net smelter returns royalty from any mineral production from the properties of the Venture or alternatively, one-third of any proceeds received by the Venture resulting from a successful takings lawsuit.
FINANCING ACTIVITIES:
Common Stock Issues
On March 31, 1999, the Company issued 15,000 shares in connection with a warrant exercise at $3.75 per share.
On October 14, 1998, the Company issued 30,000 shares in a private placement at $0.50 per share.
On January 30, 1998, the Company completed an equity financing under a Shelf Registration which raised approximately $2.5 million ($2.3 million net of expenses) through the sale of 2,490,000 shares of common stock.
On December 30, 1997, the Company completed an equity financing under a Shelf Registration which raised $2.5 million ($2.2 million net of expenses) through the sale of 2,510,000 shares of common stock.
On June 11, 1997, the Company completed an equity financing under a Shelf Registration which raised $10.0 million ($9.1 million net of expenses) through the sale of 3,400,000 shares of common stock. Warrants to purchase 278,182 shares of common stock at a price of $4.05 per share were issued to the Company's underwriter in connection with the financing. The warrants will expire on June 5, 2000.
During 1997, 165,300 incentive and non-qualified stock options were exercised resulting in proceeds to the Company of $0.3 million.
Credit Arrangements
Purchase of the McDonald Gold Project
On September 25, 1997, the Company, together with its wholly-owned subsidiary CR Montana Corporation (CR Montana), purchased a 72.25% participating interest and underlying assets in the Seven-Up Pete Venture (Venture) from CR Montana's partner in the Venture, Phelps Dodge Corporation (Phelps Dodge). The Company and its wholly owned subsidiary now own 100% of the Venture. The Venture includes the McDonald Gold Project near Lincoln, Montana.
The Company made an initial payment of $5 million as part of a total purchase price which was to be no less than $100 million and no more than $150 million, assuming all applicable permits for the McDonald Gold Project are obtained. The largest part of the purchase price, $30 per mineable reserve ounce attributable to the Phelps Dodge ownership was to be paid after all permits for mine development were obtained. In September 1999, the Company and Phelps Dodge restructured the agreement to provide for a payment of $10.0 million upon issuance of all permits required for construction of the McDonald Gold Project, or alternatively, one-third of any proceeds received from a successful takings lawsuit.
The purchase payments are collateralized only by the 72.25% participating interest and underlying assets in the Venture transferred from Phelps Dodge to the Company and CR Montana in this transaction, and the 50% co-tenancy interest in certain real property also transferred to the Company and CR Montana.
CR Briggs Loan Facility
On December 6, 1995, the Company's wholly-owned subsidiary, CR Briggs Corporation, obtained a $34.0 million loan facility to finance the capital requirements of mine construction and working capital for its Briggs Mine in California. The Company is guaranteeing the loan obligations of CR Briggs Corporation, and the loan facility is collateralized by a first mortgage lien on the property, non-leased assets of CR Briggs Corporation, and a pledge of the Company's stock in CR Briggs Corporation. The facility was provided by a syndication of three banks, and initially included three tranches; a $25 million gold loan; a $5 million cash loan; and a $4 million cost overrun facility. Subject to certain conditions, the Company has the right to convert loans of one type into loans of another type. On December 27, 1995, drawing commenced on the facility and $25.0 million principal in the form of a gold loan (monetized at $388.05 per ounce, or 64,425 ounces) and $1.0 million principal as a dollar loan were drawn. During 1996, an additional $4.0 million principal was drawn on the facility. During 1997, the remaining $4.0 million was drawn.
In May 1998, the loan facility was restructured and included (i) the modification of certain coverage ratios (as defined), (ii) a revision to the amortization schedule for the gold loan, and (iii) the liquidation of the Company's hedge position for all forward contracts with settlement dates beyond June 30, 1998. The liquidation resulted in proceeds of $11.1 million which were used to prepay in full the cash loans then outstanding of $8.6 million.
In August 1998, the loan facility was further restructured as follows: (i) a six month, $1 million credit line at LIBOR plus 2 3/8% was established for working capital needs ($650,000 drawn at December 31, 1998); (ii) the Company pledged the stock of its subsidiary, CR Minerals, as additional collateral for the loan; (the Company subsequently sold the assets of CR Minerals and contributed $2.4 million of the proceeds which was used to pay of the credit line amount of $650,000 and further reduce the gold loan principal by 6,117 ounces) (iii) certain proceeds from any additional asset sales the Company may undertake will be used to reduce the principal balance on the loan; and (iv) the $2.5 million remaining from the May, 1998 hedge liquidation was utilized for scheduled debt service for the period ending September 30, 1998 (644 ounces of principal and 312 ounces of interest) and to further reduce the principal on the gold loan by 8,225 ounces.
In June 1999, the loan facility was again restuctured and included (i) the liquidation of 125,000 ounces of forward gold contracts which netted $5.5 million; (ii) utilizing the forward liquidation proceeds to reduce the gold loan debt by 20,506 ounces; (iii) establishing a $600,000 credit line for capital expenditures and working capital needs ($135,000 drawn at December 31, 1999; the commitment for remaining draws will expire on December 31, 2000); (iv) rescheduling remaining principal payments to 2001 and 2002 on a quarterly basis; and (v) allowing the Company access to the first $1.6 million of net cash flow from the Briggs Mine and 50% thereafter (the remaining 50% to be applied to the loan balance) through December 31, 2000.
On June 30, 1999, the Company converted its then remaining gold loan debt of 19,913 ounces to a dollar loan. As a result of the conversion, the Company reduced its carrying value of the debt from the monetized price of $388.05 per ounce ($7,727,200) to fair market value of $261.10 per ounce ($5,199,200).
The following table summarizes principal and interest payments and weighted average interest rates on the loan facility:
The Company's debt at December 31, 1999, consists of (i) a dollar loan in the amount of $5,199,200; (ii) a dollar credit line with an outstanding balance of $135,000; and (iii) an equipment loan in the amount of $33,400.
As a condition of the Briggs Mine loan facility, a portion of the mine's future production is hedged to ensure adequate cash flow for repayment of the obligation. At December 31, 1999, 43,000 ounces of the Briggs Mine production was hedged with forward contracts at an average price of $286 per ounce. Subsequent to year-end, additional forward contracts were entered into, and , as of March 1, 2000, 73,000 ounces of the the Briggs Mine production was hedged at an average price of $298 per ounce.
Surety Bonds-Collateral Commitment
Certain bonds have been issued aggregating $6.1 million for the performance of reclamation obligations and other contingent events at the Briggs Mine and Kendall Mine. The Sureties currently hold the following collateral for such bonds: (i) cash in the amount of $1,869,000; (ii) a bank Letter of Credit in the amount of $249,000 which is collateralized with cash; and (iii) a security interest in 28,000 acres of real property mineral interests in Montana. In addition, the Company has agreed to make additional cash deposits with the Sureties totalling $1.5 million over a three year period at the rate of $0.5 million per year, commencing June 30, 2001.
OUTLOOK:
Operations
The Briggs Mine is expected to produce approximately 87,000 ounces in 2000 at cash operating costs between $250-$260 per ounce. The Company's hedge position as of December 31, 1999 consisted of 43,000 ounces of forward contracts at an average price of $286 per ounce (as of March 1, 2000; 73,000 ounces at an average price of $298 per ounce). In addition, the Company will recognize approximately $8.4 million of deferred hedging gains in operations during 2000.
Reclamation activity at Kendall during 2000 will depend on governmental approval of the Company's reclamation plan and the availability of cash resources and could range from $0.4 million to $1.8 million. The Company expects that total costs to achieve mine closure will be approximately $2.8 million. The Company has accrued the expected reclamation costs at December 31, 1999, based upon its current estimate.
Expenditures at the McDonald Gold Project (funded by Franco-Nevada) are expected to be approximately $0.8 million in 2000.
OTHER MATTERS:
McDonald Gold Project, Anti-Cyanide Mining Initiative
In November 1998, the Montana electorate passed an anti-cyanide mining initiative (I-137) by a vote of 52% to 48%. I-137 bans development of new open-pit gold and silver mines and expansions to existing mines which use cyanide in the treatment and recovery process. For most of the campaign period, mining companies were prevented from campaigning due to a previously passed initiative (I-125) which prohibited campaign-expenditures by "for-profit" entities. Ten days prior to the election, a federal judge declared the prohibition "unconstitutional". The Seven-Up Pete Venture plans to file a lawsuit in April 2000 against the State of Montana seeking to have I-137 deemed unconstitutional or, alternatively, to obtain a "takings" or damage award for the lost value of the McDonald, Seven-Up Pete and Keep Cool mineral properties. The lawsuit will be based on, amongst others, (i) having been denied the opportunity to campaign due to the
effectiveness of I-125 until the last few days, and (ii) due process considerations, in that I-137 was enacted without any compelling public policy interest, since environmental safety concerns are well protected and monitored with existing laws and regulations. The Company's legal counsel believes that it is likely that the Venture will prevail in this lawsuit with respect to the claim that I-137 is unconstitutional.
Gold Prices and Hedging
The Company's revenues, earnings and cash flow are strongly influenced by world gold prices, which fluctuate widely and over which the Company has no control. The Company's strategy is to provide an acceptable floor price for a portion of its production in order to meet minimum coverage ratios as required by loan facilities while providing participation in potentially higher prices. Production not subject to loan covenants has historically been sold at spot prices. The Company's hedging program at the Briggs Mine as of December 31, 1999 consisted of forward contracts on 43,000 ounces at an average price of $286 per ounce. Subsequent to year-end, the Company increased its hedge position to 73,000 ounces at an average price of $298 per ounce. The risks of hedging include opportunity risk by limiting unilateral participation in upward prices; production risk associated with delivering physical ounces against a forward commitment; and credit risk associated with counterparties to the hedged transaction. The Company believes its production risk is minimal, and furthermore has the flexibility to selectively extend maturity dates, thereby postponing delivery against forward commitments. With regard to credit risk, the Company uses only creditworthy counterparties and does not anticipate any non-performance by such counterparties.
Environmental Regulation
In 1995 the Montana State Legislature passed legislation which streamlined the permitting process of new industrial projects by reorganizing the several state agencies that had jurisdiction over environmental permitting into one new central agency, the Department of Environmental Quality (DEQ). This agency is responsible for acting on an application for a Hard Rock Mining Operating Permit in connection with a Plan of Operations filed by the Seven-Up Pete Joint Venture for the McDonald Gold Project. This permit, as well as several other local, state and federal permits, including a joint state and federal Environmental Impact Statement (EIS), will be required before permits can be issued. There are no assurances that all permits will be issued nor that, in the event they are issued, such issuances will be timely, nor that conditions contained in the permits will not be so onerous as to preclude construction and operation of the project. Moreover, with the passage of I-137 in November, 1998, the Company cannot presently proceed with permitting and development of the McDonald Gold Project.
The Kendall Mine operates under permits granted by the DEQ and the Company currently maintains a $1,869,000 Reclamation Bond in favor of the DEQ to ensure appropriate reclamation. Although the DEQ has approved the Company's plans related to recontouring, revegetation, drainage and dewatering, discussions of long-term water handling and heap closure methods continue. Moreover, in October 1999, the Company received a determination notice from the DEQ for an increase in the bond amount to approximately $8.1 million. The Company believes the bond amount greatly exceeds the cost of remaining work and has filed an administrative appeal to the DEQ's action. The Company's estimate to achieve final mine closure may be impacted by the outcome of these pending matters.
In September 1998, the DEQ issued a Notice of Violation and Administrative Order with respect to the Kendall Mine alleging certain violations of Montana water quality laws. DEQ proposed a penalty of $330,000 (since modified to $302,000) in connection with the alleged violations. The Company believes (i) that many of the allegations are unfounded, and (ii) the proposed fine is in violation of Montana statutes because it fails to consider certain mandatory mitigating factors. The Company is negotiating the proposed
fine with the DEQ and will defend itself in court if a satisfactory resolution cannot be reached with the administrative agency.
The Briggs Mine operates under permits granted by various agencies including the U.S. Bureau of Land Management (BLM), Inyo County, the California Department of Conservation, and the Lahontan Regional Water Quality Control Board (Lahontan). These agencies have jointly required the Company to post a reclamation bond in the amount of $3,030,000 to ensure appropriate reclamation. Additionally, the Company was required by Lahontan to post a $1,010,000 bond to ensure adequate funds to mitigate any "foreseeable release" of pollutants to state waters. Both bonds are subject to annual review and adjustment.
Based upon current knowledge, the Company believes that it is in material compliance with all applicable environmental laws and regulations as currently promulgated. However, the exact nature of environmental control problems, if any, which the Company may encounter in the future cannot be predicted, primarily because of the increasing number, complexity and changing character of environmental requirements that may be enacted or of the standards being promulgated by federal and state authorities.
Federal Legislation
Legislation has been introduced in prior sessions of the United States Congress to modify the requirements applicable to mining claims on federal lands under the Mining Law of 1872. To date, no such legislation has been enacted. The timing and exact nature of any mining law changes cannot presently be predicted, however, the Company will continue its active role in industry efforts to work with Congress to achieve responsible changes to mining law. The Company is also continuing its present efforts to patent the Briggs claims into private ownership in accordance with the provisions of currently applicable law.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires that all derivatives be recognized as assets or liabilities and be measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting as either a fair value hedge or a cash flow hedge. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows of the hedging instruments and the hedged items. SFAS 133 is effective for the Company beginning on January 1, 2001 but earlier adoption is permitted. There are many complexities to this new standard and the Company is currently evaluating the impact that SFAS 133 will have on its reported operating results and financial position and has not yet determined whether it will adopt SFAS 133 earlier than January 1, 2001.
Dividends
For the foreseeable future, it is anticipated that the Company will use any earnings to finance its growth and that dividends will not be paid to shareholders. Further, pursuant to an agreement executed by the Company on behalf of its wholly owned subsidiary, CR Briggs Corporation, in connection with a loan for the Briggs Mine, the Company must maintain certain levels of working capital, tangible net worth, and leverage ratios after January 1, 2001 which could restrict the payment of dividends where such payment would result in a failure to maintain such levels. Similarly, CR Briggs Corporation is prohibited from repaying the Company for advances or from paying dividends to the Company from the Briggs Mine cash flow unless certain conditions relating to the financial performance of the Briggs Mine are met.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Prices
The Company's earnings and cash flow are significantly impacted by changes in the market price of gold. Gold prices can fluctuate widely and are affected by numerous factors, such as demand, production levels, economic policies of central banks, and producer hedging. During the last five years, the average annual market price has fluctuated between $279 per ounce and $388 per ounce. Moreover, during 1999, gold prices declined to their lowest level in over two decades.
In order to protect the selling price of a portion of its anticipated production from the Briggs Mine, the Company, as of December 31, 1999, had entered into forward gold contracts on 43,000 ounces at an average price of $286 per ounce. Subsequent to year-end, the Company increased its hedge position to 73,000 ounces (approximately 84% of its anticipated production in 2000) at an average price of $298 per ounce. A forward contract allows the Company the flexibility to (i) deliver gold and receive the contract price if the market price is below the contract price or (ii) extend the maturity date of the forward contract and sell at the market price if the contract price is below the market price. For purposes of illustrating the potential impact of a change in gold price on the Company's annual profitability and cash flow, if 85% of its estimated production was delivered against the forward contracts, a $10 change in the price of gold would have an impact of approximately $0.1 million. Similarly, a hedge position of only 50% with a $10 change in the price of gold would impact the Company's annual profitability and cash flow by approximately $0.4 million.
There are certain market risks associated with commodity instruments. If the Company's counterparties fail to honor their contractual obligation to purchase gold at agreed-upon prices, the Company may be exposed to market price risk by having to sell gold in the open market at prevailing prices. Similarly, if the Company fails to produce sufficient quantities of gold to meet its forward commitments, the Company would have to purchase the shortfall in the open market at prevailing prices. In addition, the Company could be subject to cash margin calls by its counterparties if the market price of gold significantly exceeds the forward contract price.
In May 1998, the Company liquidated a forward position that was originally established in December, 1995, resulting in proceeds of $11.1 million. During 1998, $2.5 million of deferred income was recognized in operations based on the original expected settlement dates of the forward contracts. During 1999, $4.1 million of deferred income was recognized. The balance of $4.5 million will be recognized in 2000.
In June 1999, the Company liquidated a gold hedge position consisting of forward contracts on 125,000 ounces which resulted in proceeds of $5.5 million. The proceeds on the liquidation was deferred and will be recognized in operations based on the original expected settlement dates of the forward contracts. During 1999, $1.3 million of deferred income was recognized. During 2000, $3.9 million of deferred income will be recognized with the balance of $0.3 million recognized in 2001.
On June 30, 1999, the Company converted a commodity based loan to a cash loan. In connection with the conversion, the Company reduced the monetized amount of the debt to fair value, resulting in a gain of $2.5 million which will be recognized in operations over the original scheduled gold loan repayment dates in 2001 and 2002.
At December 31, 1999, the market value of the Company's forward gold contracts was approximately $0.1 million less than contract value.
Interest Rates
At December 31, 1999, the Company's debt was approximately $5.4 million, $5.3 million of which relates to the Briggs Mine.The Company is required to periodically reset the rate on the debt associated with the Briggs Mine for periods that the Company may choose which range in duration from one to six months. During 1999, 1998, and 1997, respectively, the interest rate on the Company's cash loans for the Briggs Mine averaged 7.9%, 10.3%, and 10.2%, respectively. A 100 basis point change in the rate would have an impact on annual earnings and cash flow of less than $0.1 million, based on the outstanding loan amount of $5.3 million at December 31, 1999.
Foreign Currency
The price of gold is denominated in US dollars, and the Company's gold production operations are in the United States. The Company conducts only a minor amount of exploration activity in foreign countries and has minimal foreign currency exposure.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Canyon Resources Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Canyon Resources Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP March 9, 2000
CANYON RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998, and 1997
The accompanying notes are an integral part of these consolidated financial statements.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental disclosures of cash flow information:
1. The Company paid $543,500, $1,366,800, and $1,644,400 of interest during 1999, 1998, and 1997, respectively. No interest was capitalized during 1999 or 1998. Of the total interest paid during 1997, $543,600 was capitalized.
2. The Company paid no income taxes during 1999, 1998, and 1997.
3. During 1999, the Company received $3.0 million in connection with a third party funding commitment, the proceeds of which are designated for restricted use in the maintenance and development of certain noncurrent assets. The Company initially reduced its carrying value of mining claims and leases upon receipt of the funds. At December 31, 1999, a balance of $2.5 million remained which is included in other assets on the Company's Balance Sheet.
Supplemental schedule of noncash investing and financing activities:
1. Capital lease obligations of $12,300, $1,326,300, and $97,600 were incurred for equipment in 1999, 1998, and 1997, respectively.
2. The Company converted a commodity based loan with a carrying amount of $7,727,200 to a cash loan in 1999. The carrying amount was reduced by $2,528,000 at the time of conversion to adjust the monetized amount of the loan to the value of the commodity based loan on the conversion date.
3. The Company financed an equipment lease buy-out in the amount of $59,200 in 1999.
4. The Company acquired equipment with a fair market value of $53,000 by exchange of certain assets in 1999.
5. The Company issued 345,400 shares of common stock with a fair market value of $76,000 to certain creditors as payment for accounts payable during 1999.
6. The Company issued 50,000 shares of common stock which was valued at $106,200 in connection with the termination of a previous agreement to acquire an exploration property in 1997.
7. The Company executed a promissory note in the face amount of $475,000 ($434,300 discounted) as partial consideration to acquire an asset in 1997.
8. Certain stock options were exercised and paid for by tendering shares otherwise issuable in lieu of cash payment during 1997. Fair market value of the shares tendered was $39,900.
The accompanying notes are an integral part of these consolidated financial statements.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Canyon Resources Corporation (the Company or Canyon) is a United States based corporation involved in all phases of the mining business including exploration, permitting, developing, operating and final closure of mining projects. The Company has gold production operations in the western United States and conducts exploration activities in search of additional mineral properties (emphasizing precious metals) in the western United States and in Latin America and Africa. The principal market for the Company's precious metals products are European-based bullion trading concerns. Until December 31, 1998, the Company also had industrial mineral production operations (diatomite and pumice) in the Western United States.
2. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION: The consolidated financial statements of the Company include the accounts of Canyon and its wholly-owned subsidiaries: CR Kendall Corporation; CR Minerals Corporation; CR Briggs Corporation; CR Montana Corporation; CR International Corporation; Canyon Resources (Chile) S.A.; Canyon De Panama, S.A.; CR Brazil Corporation; and its 90% owned subsidiaries: Canyon Resources Venezuela, C.A.; Canyon Resources Africa Ltd.; and Canyon Resources Tanzania Limited. The Company applied equity accounting principles for its 40% ownership in Minera Hispaniola, S.A., a foreign corporation which was sold in 1998, and proportionately consolidates its interests in undivided interest joint ventures.
INTERCOMPANY BALANCES: All intercompany balances and transactions have been eliminated.
PRIOR PERIOD RECLASSIFICATIONS: Certain prior period items have been reclassified in the consolidated financial statements to conform with the current year presentation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include amounts which are readily convertible into cash and which are not subject to significant risk from changes in interest rates. The Company maintained at December 31, 1999 and 1998, a significant portion of its cash in two financial institutions.
RESTRICTED CASH: Cash held as collateral for letters of credit is classified based on the expected expiration of such facilities. Cash held as collateral for reclamation bonds is classified based on the expected release or use of such collateral. Cash held in trust and restricted to specific use is classified as current when expected to be used in current operations or noncurrent when expected to be used in the acquisition, maintenance, or development of noncurrent assets.
INVENTORIES: Processed ores and metal-in-process are stated at the lower of average cost or market. Materials and supplies are stated at cost.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
DEFERRED MINING COSTS: The Company, in order to more closely match expenses and revenues, capitalizes costs of overburden removal that are in excess of the estimated average pit strip ratio (ratio of waste tons mined to ore tons mined) over the pit life. When the actual strip ratio becomes less than the estimated average pit strip ratio, these costs are expensed.
MINING CLAIMS AND LEASES: All costs, other than acquisition costs, are expensed prior to the establishment of proven and probable reserves (See Note 4). Gains or losses resulting from the sale or abandonment of properties are included in operations. Proceeds from sales of properties and earn-in arrangements in which the Company has retained an economic interest are credited against property costs and no gain is recognized until all costs have been fully recovered.
PRODUCING PROPERTIES AND EQUIPMENT: Acquisition and development costs associated with properties brought into production are charged to operations using the units-of-production method based on estimated recoverable reserves. Production facilities and equipment are stated at cost and are amortized over the estimated proven and probable recoverable reserves of the related property. Vehicles and office equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to five years. Maintenance and repairs are charged to expense as incurred. Gains or losses on dispositions are included in operations.
IMPAIRMENTS: The Company evaluates the carrying value of its properties and equipment by applying the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. With respect to properties with proven reserves, an impairment loss is recognized when the estimated future cash flows (undiscounted and without interest) expected to result from the use of the asset are less than the carrying amount of the asset. Measurement of the impairment loss is based on discounted cash flows. Properties with unproven reserves are assessed for impairment when changes in market conditions or other events occur and are measured based on fair value.
SITE RESTORATION: Costs are estimated based primarily upon environmental and regulatory requirements and are accrued and charged to expense over the expected economic life of the operation using the units of production method based upon proven and probable recoverable reserves. When an operation is in the reclamation phase, the Company applies the provisions of Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.
REVENUE RECOGNITION: Revenue from the sale of gold and industrial minerals is recognized when title passes to the buyer. Deferred income represents payments received for the future delivery of mineral products to be mined. Upon delivery, revenue is included in the Company's Statement of Operations.
DERIVATIVE COMMODITY INSTRUMENTS: The Company uses derivative commodity instruments (gold loans, gold forward contracts, and put options) to manage market risks associated with fluctuating gold prices. The Company does not hold or issue derivative commodity instruments for trading purposes. Gold loans are monetized at the original proceeds amount and are recognized into revenue at the time of physical delivery of
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
the metal. At any time that it is not probable that the timing and amount of production will be sufficient to repay the gold loan, or the cost of production exceeds the market price of the gold, the gold loan is recorded at the higher of the original proceeds or the market value. Costs or premiums, if any, and gains or losses related to changes in values of other derivative commodity instruments are included in revenues when the underlying production is delivered to meet the commitment, or at the originally designated maturity dates in the event of early settlement of such instruments. Cash flow resulting from hedge contracts is included in net cash provided by operating activities on the statements of cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires that all derivatives be recognized as assets or liabilities and be measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting as either a fair value hedge or a cash flow hedge. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows of the hedging instruments and the hedged items. SFAS 133 is effective for the Company beginning on January 1, 2001 but earlier adoption is permitted. There are many complexities to this new standard and the Company is currently evaluating the impact that SFAS 133 will have on its reported operating results and financial position and has not yet determined whether it will adopt SFAS 133 earlier than January 1, 2001.
DEFERRED FINANCING COSTS: Costs incurred to obtain debt financing are capitalized and amortized over the life of the debt facilities using the effective interest method.
INTEREST CAPITALIZATION: Interest costs are capitalized as part of the historical cost of facilities and equipment.
EARNINGS PER SHARE: The Company computes earnings per share (EPS) by applying the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share. Basic EPS is computed by dividing income available to common shareholders (net income less any dividends declared on preferred stock and any dividends accumulated on cumulative preferred stock) by the weighted average number of common shares outstanding. Diluted EPS requires an adjustment to the denominator to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted to add back any convertible preferred dividends and the after-tax amount of interest recognized with any convertible debt. The inclusion of potential common shares had no effect on per share amounts in 1999. As the Company reported net losses in 1998 and 1997, inclusion of potential common shares would have an antidilutive effect on per share amounts. Accordingly, the Company's basic and diluted EPS computations are the same for all periods presented. At December 31, 1999, 1998, and 1997, respectively, there were potential common shares outstanding of 2,709,200, 4,889,000 and 5,106,500, respectively.
COMPREHENSIVE INCOME: The provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, are designed to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Besides net income, other comprehensive income includes foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
in debt and equity securities. The Company has no items of other comprehensive income in any period presented in the accompanying financial statements.
4. PRIOR YEAR CHANGES IN ACCOUNTING PRINCIPLES:
In the second quarter of 1998, the Company changed its method of accounting for exploration costs on unproven properties from capitalizing all expenditures to expensing all costs, other than acquisition costs, prior to the establishment of proven and probable reserves. This brought the Company's accounting method in accordance with the predominant practice in the US mining industry and better reflects operating income and cash flow. The $5,625,400 cumulative effect of the change on prior years is included in the loss for 1998. The effect of the change on 1998 was to increase the loss before extraordinary item and cumulative effect of changes in accounting principles by $408,600, or $0.01 per share.
In the fourth quarter of 1998, the Company elected early adoption of Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 was otherwise effective for financial statements for fiscal years beginning after December 15, 1998 and requires costs of start-up activities and organization costs to be expensed as incurred. The $3,302,700 cumulative effect of the change on prior years is included in the loss for 1998. The effect of the change on 1998 was to decrease the loss before extraordinary item and cumulative effect of changes in accounting principles by $751,200, or $0.02 per share.
5. RESTRICTED CASH:
Restricted cash consisted of the following at December 31:
(a) In connection with the issuance of certain bonds for the performance of reclamation obligations at the Kendall Mine, Briggs Mine, and McDonald Gold Project, a bank Letter of Credit was provided in favor of the Sureties as partial collateral for such bond obligations. The Letter of Credit is fully collateralized with cash. In September 1999, $1,869,000 was transferred directly to the Sureties as full and continuing collateral for the Kendall Mine reclamation bond and the bank Letter of Credit was correspondingly reduced to $249,000. The Letter of Credit will expire no earlier than December 31, 2000, and at the bank's option, may be renewed for successive one-year periods.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRICTED CASH, (CONTINUED):
(b) In September 1999, the Seven-Up Pete Venture received $3.0 million solely for the purposes of maintaining its property rights in the McDonald and Seven-Up Pete gold deposits and to undertake a lawsuit against the State of Montana as a result of the passage of the anti-cyanide initiative, I-137. In addition, a replacement reclamation bond in the amount of $0.5 million was provided for the McDonald Gold Project (See Note 7).
(c) In connection with the sale of the Company's industrial minerals assets on December 31, 1998, certain proceeds were required to be utilized for debt reduction on the Briggs Mine loan facility (See Note 8).
(d) The Briggs Mine loan facility requires all proceeds from gold sales to be held in trust and disbursed from the collected credit balance in certain orders of priority.
6. INVENTORIES:
Inventories consisted of the following at December 31:
(a) Includes all direct and indirect costs of mining, crushing, processing and mine site overhead expenses.
7. MINING CLAIMS AND LEASES:
The carrying value of the Company's mining claims and leases consists of the following components at December 31:
Feasibility studies on the McDonald and Seven-Up Pete properties located in Montana indicate sufficient mineable reserves that, with subsequent development, would allow the Company to ultimately recover its carrying values (See Note 9(e)).
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. MINING CLAIMS AND LEASES, (CONTINUED):
In September 1999, the Company entered into a contract with Franco-Nevada Mining Corporation, Inc. (Franco-Nevada) which provided $3.5 million of funding ($3.0 million cash and a commitment to maintain an existing $0.5 million reclamation bond) for the Seven-Up Pete Venture (Venture). The funding was provided to allow the Venture to maintain its property rights in the McDonald and Seven-Up Pete gold deposits and to undertake a lawsuit against the State of Montana and the Montana Department of Environmental Quality as a result of implementation of the anti-cyanide initiative, I-137 (See Note 9(e)). As consideration for the financing, Franco-Nevada will receive a four percent net smelter returns royalty from any mineral production from the properties of the Venture or, alternatively, one-third of any proceeds received by the Venture resulting from a successful takings lawsuit. Upon receipt of this funding, the Company reduced the carrying value of its mining claims and leases by $3.0 million.
8. NOTES PAYABLE:
Notes payable consisted of the following at:
(1) At December 31, 1998, the Company was not in compliance with certain covenants of the Briggs loan facility. The covenant violations constituted events of default and the lenders could, by notice to the Company, terminate the commitment and declare all amounts immediately due and payable. Accordingly, the Company classified all of the debt as current on its Balance Sheet at December 31, 1998. In June 1999, the Company reached an agreement with the lenders to restructure the facility, the terms of which included (i) waivers for all outstanding covenant violations, (ii) the liquidation of 125,000 ounces of forward gold contracts which netted $5.5 million, (iii) utilizing the forward liquidation proceeds to reduce the gold loan debt by 20,506 ounces, (iv) establishing a $600,000 credit line for capital expenditures and working capital needs ($135,000 drawn at December 31, 1999; the commitment for remaining draws will expire on December 31, 2000), (v) rescheduling remaining principal payments to 2001 and 2002 on a quarterly basis, and (vi) allowing the Company access to the first $1.6 million of net cash flow from the Briggs Mine (as defined) and 50% thereafter (the remaining 50% to be applied to the loan balance) through December 31, 2000.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE, (CONTINUED):
(a) On December 6, 1995, the Company's wholly-owned subsidiary, CR Briggs Corporation, obtained a $34.0 million loan facility to finance the capital requirements of mine construction and working capital for its Briggs Mine in California. The Company is guaranteeing the loan obligations of CR Briggs Corporation, and the loan facility is collateralized by a first mortgage lien on the property, non-leased assets of CR Briggs Corporation, and a pledge of the Company's stock in CR Briggs Corporation. The facility was provided by a syndication of three banks, and initially included three tranches; a $25 million gold loan; a $5 million cash loan; and a $4 million cost overrun facility. Subject to certain conditions,the Company has the right to convert loans of one type into loans of another type. On December 27, 1995, drawing commenced on the facility and $25.0 million principal in the form of a gold loan (monetized at $388.05 per ounce, or 64,425 ounces) and $1.0 million principal as a dollar loan were drawn. During 1996, an additional $4.0 million principal was drawn on the facility. During 1997, the remaining $4.0 million was drawn.
In May 1998, the loan facility was restructured and included (i) the modification of certain coverage ratios (as defined), (ii) a revision to the amortization schedule for the gold loan, and (iii) the liquidation of the Company's hedge position for all forward contracts with settlement dates beyond June 30, 1998. The liquidation resulted in proceeds of $11.1 million which were used to prepay in full the cash loans then outstanding of $8.6 million. As a result of the prepayment, unamortized deferred financing costs of $281,500 allocated to the cash loans were expensed in the second quarter of 1998. This amount is shown as an extraordinary item on the Statement of Operations for the year ended December 31, 1998.
In August, 1998, the loan facility was further restructured as follows: (i) a six month, $1 million credit line at LIBOR plus 2 3/8% was established for working capital needs ($650,000 drawn at December 31, 1998); (ii) the Company pledged the stock of its subsidiary, CR Minerals, as additional collateral for the loan (the Company subsequently sold the assets of CR Minerals and contributed $2.4 million of the proceeds for further debt reduction); (iii) certain proceeds from any additional asset sales the Company may undertake will be used to reduce the principal balance on the loan; and (iv) the $2.5 million remaining from the May, 1998 hedge liquidation was utilized for scheduled debt service for the period ending September 30, 1998 (644 ounces of principal and 312 ounces of interest) and to further reduce the principal on the gold loan by 8,225 ounces. As a result of the restructuring of the gold loan, the Company recognized a gain of $919,700. This amount is shown as an other income item on the Statement of Operations for the year ended December 31, 1998.
During 1999, in connection with the August 1998 restructuring as previously described, the Company contributed $2.4 million to CR Briggs Corporation which was used to pay off a credit line amount of $650,000 and reduce the gold loan principal by 6,117 ounces. Additionally, in connection with the June 1999 restructuring, the gold loan principal was reduced by 20,506 ounces. As a result of the restructuring of the gold loan, the Company recognized a gain of $3,108,200. This amount is shown as an other income item on the Statement of Operations for the year ended December 31, 1999.
On June 30, 1999, the Company converted its then remaining gold loan debt of 19,913 ounces to a dollar loan. As a result of the conversion, the Company reduced its carrying value of the debt from the monetized price of $388.05 per ounce to fair market value of $261.10 per ounce. The gain of
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE, (CONTINUED):
$2,528,000 associated with the conversion will be deferred and recognized in operations over the original gold loan repayment schedule.
The following table summarizes principal and interest payments and weighted average interest rates on the loan facility:
(b) In March 1999, the Company arranged to finance an equipment lease buy-out with Caterpillar Finance in the amount of $59,200. Terms of the financing require equal monthly payment over two years at an interest rate of 8.5%. During 1999, principal and interest payments of $25,800 and $3,700, respectively, were made.
Maturities of notes payable over the next five years are as follow:
9. COMMITMENTS AND CONTINGENCIES:
(a) Site Restoration Costs:
Reclamation spending at the Kendall Mine for 1999, 1998, and 1997 was $0.8 million, $1.1 million, and $1.8 million, respectively. During 1999 the Company recorded an additional charge of $0.9 million based on a fourth quarter update to costs associated with final reclamation, water quality
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES, (CONTINUED):
compliance, and long-term monitoring requirements. Costs to date total $6.3 million and the Company's estimate of total costs to achieve mine closure is $9.1 million.
The Kendall Mine operates under permits granted by the Montana Department of Environmental Quality (DEQ) and the Company currently maintains a $1,869,000 Reclamation Bond in favor of the DEQ to ensure appropriate reclamation. In October 1999, the Company received a determination notice from the DEQ for an increase in the bond amount to approximately $8.1 million. The Company believes the bond amount greatly exceeds the cost of remaining work and has filed an administrative appeal to the DEQ's action.
The Briggs Mine operates under permits granted by various agencies including the U.S. Bureau of Land Management (BLM), Inyo County, the California Department of Conservation, and the Lahontan Regional Water Quality Control Board (Lahontan). These agencies have jointly required the Company to post a reclamation bond in the amount of $3,030,000 to ensure appropriate reclamation. Additionally, the Company was required by Lahontan to post a $1,010,000 bond to ensure adequate funds to mitigate any "foreseeable release" of pollutants to state waters. Both bonds are subject to annual review and adjustment.
(b) Lease Commitments:
The Company has entered into various operating leases for office space and equipment, including a mining fleet at the Briggs Mine. At December 31, 1999, future minimum lease payments extending beyond one year under noncancellable leases were as follows:
The Company has also entered into various mining lease arrangements for purposes of exploring, and if warranted, developing and producing minerals from the underlying leasehold interests. The lease arrangements typically require advance royalty payments during the pre-production phase and a production royalty upon commencement of production, with previously advanced payments credited against the production royalties otherwise payable. Advance royalty commitments will vary each year as the Company adds or deletes properties. Currently, minimum advance royalty payments total approximately $196,500 annually.
The Company is also required to pay an annual rental fee to the federal government for any unpatented mining claims, mill or tunnel site claim on federally owned lands at the rate of $100 per mining claim. The Company's present inventory of claims would require approximately $79,400 in annual rental fees, however, this amount will vary as claims are added or dropped. The Company has submitted patent applications for its Briggs claims, however, no assurances can be made that
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES, (CONTINUED):
patents will be issued. The Company is also subject to rental fees to various other owners or lessors of mining claims. Currently, rental payments to these parties total approximately $18,600 annually.
Lease costs included in cost of goods sold for the years ended December 31, 1999, 1998 and 1997 were $1,983,800; $2,307,100; and $2,072,300, respectively. The aforementioned amounts do not include lease costs capitalized during the development stage of the Briggs Mine during part of 1997. Rent expense included in selling, general and administrative expense of the Company for the years ended December 31, 1999, 1998 and 1997, was $85,000; $120,300; and $120,300, respectively.
Property and equipment includes equipment with a cost and accumulated amortization of $1,915,700 and $750,300, respectively, at December 31, 1999 and $1,956,900 and $487,100, respectively, at December 31, 1998, for leases that have been capitalized. Future minimum lease obligations under capital leases are as follows:
(c) Surety Bonds - Collateral Commitment
During 1999, in response to a demand for an increase in collateral by the Sureties who issued certain bonds for the performance of reclamation obligations and other contingent matters, the Company has (i) agreed to make cash deposits with the Sureties totalling $1.5 million over a three year period at the rate of $0.5 million per year, commencing June 30, 2001 and (ii) granted a security interest in favor of the Sureties in 28,000 acres of real property mineral interests in Montana.
(d) Contingent Liability:
On September 25, 1997, the Company, together with its wholly owned subsidiary, CR Montana Corporation (CR Montana), purchased a 72.25% participating interest and underlying assets in the Seven-Up Pete Venture (Venture) from CR Montana's partner in the Venture, Phelps Dodge Corporation (Phelps Dodge). The Company and its wholly owned subsidiary now own 100% of the Venture. The Venture includes the McDonald Gold Project near Lincoln, Montana.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES, (CONTINUED):
The Company made an initial payment of $5 million as part of a total purchase price which was to be no less than $100 million and no more than $150 million, assuming all applicable permits for the McDonald Gold Project are obtained. The largest part of the purchase price, $30 per mineable reserve ounce attributable to the Phelps Dodge ownership was to be paid after all permits for mine development were obtained. In September 1999, the Company and Phelps Dodge restructured the agreement to provide for a payment of $10.0 million upon issuance of all permits required for construction of the McDonald Gold Project, or alternatively, one-third of any proceeds received from a takings lawsuit. Due to the contingent nature of the transaction, the Company recorded only the initial payment of $5 million as additions to mining claims and leases.
(e) Other Contingent Matters:
On September 24, 1998, the Montana Department of Natural Resources (DNRC), the entity that administers state mineral leases, unilaterally decided to cancel the permitting extension of the 10-year lease term of the state leases that pertain to the McDonald Gold Project which would require the Company, after a period of approximately seventeen months, to commence paying a delay rental of $150,000 per month in order to maintain the leases. In February 2000, pursuant to its September 1998 decision, the DNRC determined that the primary terms of the mineral leases had expired. The Company has appealed the action of the DNRC in an administrative hearing process under the state's Administrative Procedures Act, and believes that it will prevail. The leases continue in effect during this appeal. It is the Company's position that the permitting process has been interrupted by the threat and passage of I-137 and, thus, the permit extension is continued until the governmental impediment is resolved.
In September 1998, the DEQ issued a Notice of Violation and Administrative Order alleging certain violations of Montana water quality laws. DEQ proposed a penalty of $330,000 (since modified to $302,000) in connection with the alleged violations. The Company believes (i) that many of the allegations are unfounded, and (ii) the proposed fine does not comport with Montana statutes because it fails to consider certain mandatory mitigating factors. The Company is negotiating the proposed fine with the DEQ and will defend itself in court if a satisfactory resolution cannot be reached with the administrative agency.
In November 1998, the Montana electorate passed an anti-cyanide mining initiative (I-137) by a vote of 52% to 48%. I-137 bans development of new gold and silver mines and expansions to existing mines which use cyanide in the treatment and recovery process. For most of the campaign period, mining companies were prevented from campaigning due to a previously passed initiative (I-125) which prohibited campaign-expenditures by "for-profit" entities. Ten days prior to the election, a federal judge declared the prohibition "unconstitutional". The Seven-Up Pete Venture plans to file a lawsuit in April 2000 against the State of Montana seeking to have I-137 declared unconstitutional or, alternatively, to obtain a "takings" or damage award for the lost value of the McDonald, Seven-Up Pete and Keep Cool mineral properties. The lawsuit will be based on, amongst others, (i) having been denied the opportunity to campaign due to the effectiveness of I-125 until the last few days, and (ii) due process considerations, in that I-137 was enacted without any compelling public policy interest,
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES, (CONTINUED):
since environmental safety concerns are well protected and monitored with existing laws and regulations. The Company's legal counsel believes that it is likely that the Venture will prevail in this lawsuit with respect to the claim that I-137 is unconstitutional.
10. CERTAIN CONCENTRATIONS AND CONCENTRATIONS OF CREDIT RISK:
The Company sold its gold and silver production predominantly to two customers during 1999, 1998 and 1997. Given the nature of the commodities being sold and because many other potential purchasers of gold and silver exist, it is not believed that loss of such customers would adversely affect the Company.
The Company is subject to credit risk in connection with its price protection arrangements as outlined in Note 11) in the event of non-performance by its counterparties. The Company uses only highly-rated creditworthy counterparties, however, and does not anticipate non-performance.
The Company is subject to concentrations of credit risk in connection with maintaining its cash primarily in two financial institutions for the amounts in excess of levels insured by the Federal Deposit Insurance Corporation. The Company considers the institutions to be financially strong and does not consider the underlying risk to be significant. To date, these concentrations of credit risk have not had a significant effect on the Company's financial position or results of operations.
11. PRICE PROTECTION ARRANGEMENTS:
At December 31, 1999, 43,000 ounces of the Briggs Mine production was hedged with forward contracts totaling 43,000 ounces at an average price of $286 per ounce. Subsequent to year-end, the Company increased its hedge position to 73,000 ounces at an average price of $298 per ounce.
12. DEFERRED INCOME:
In May, 1998, the Company liquidated a gold hedge position consisting of forward contracts on 105,900 ounces which resulted in proceeds of $11.1 million. For the years ended December 31, 1999 and 1998, deferred income of $4.1 million and $2.5 million, respectively, were recognized in operations based on the original expected settlement dates of the forward contracts. During 2000, the balance of $4.5 million will be recognized.
In June 1999, the Company liquidated a gold hedge position consisting of forward contracts on 125,000 ounces which resulted in proceeds of $5.5 million. The proceeds on the liquidation was deferred and will be recognized in operations based on the original expected settlement dates of the forward contracts. For the year ended December 31, 1999, $1.3 million of the deferred income was recognized. During 2000, $3.9 million of the deferred income will be recognized with the balance of $0.3 million recognized in 2001.
On June 30, 1999, the Company converted its Briggs Mine gold loan to a cash loan. In connection with the conversion, the Company reduced the monetized amount of the debt to fair value, resulting in a gain of $2,528,000 which will be deferred and recognized in operations over the original scheduled gold loan repayment dates in 2001 and 2002.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. DEFERRED INCOME (CONTINUED):
The Company's overall deferred income balance at December 31, 1999 will be recognized in operations as follows:
13. INCOME TAXES:
The Company computes deferred income taxes under the asset and liability method prescribed by Statement of Financial Accounting Standards No. 109. This method recognizes the tax consequences of temporary differences between the financial statement amounts and the tax bases of certain assets and liabilities by applying statutory rates in effect when the temporary differences are expected to reverse. The Company has significant deferred tax assets in the form of operating loss carryforwards; however, its ability to generate future taxable income to realize the benefit of these assets will depend primarily on bringing new mines into production. As commodity prices, capital, and environmental uncertainties associated with that growth requirement are considerable, the Company applies a full valuation allowance to its deferred tax assets, except to the extent that the benefit of operating loss carryforwards can be used to offset future reversals of existing deferred tax liabilities. During 1999, the valuation allowance was reduced by $1,167,500. During 1998 and 1997, the valuation allowance increased by $4,231,400, and $1,211,500, respectively. Changes in the valuation allowance are primarily due to changes in operating loss carryforwards and other temporary differences.
Deferred tax assets and liabilities were comprised of the following at December 31, 1999, and December 31, 1998:
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES (CONTINUED):
There was no current or deferred provision for income taxes for the years ended December 31, 1999, 1998, and 1997. The current provision for income taxes differs from the amounts computed by applying the U.S. federal statutory rate as follows:
At December 31, 1999, the Company had net operating loss carryforwards for regular tax purposes of approximately $54,089,100 and approximately $39,831,100 of net loss carryforwards available for the alternative minimum tax. The net loss carryforwards will expire from 2004 through 2019.
As a result of a merger in 1987, net operating loss carryforwards at the merger date were limited by Section 382 of the Internal Revenue Tax Code to approximately $112,800 annually. Of the total net loss carryforwards available at December 31, 1999, $800,500 remains subject to Section 382 limitations.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company does not acquire, hold or issue financial instruments for trading purposes. The estimated fair values of the Company's financial instruments approximate carrying values at December 31, 1999, and December 31, 1998. The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
CASH AND CASH EQUIVALENTS: Carrying amounts approximate fair value based on the short-term maturity of those instruments.
RESTRICTED CASH: Carrying amounts approximate fair value based on the short-term maturity of those instruments.
LONG-TERM DEBT: Carrying values approximate fair values estimate based on discounted cash flows using the Company's current rate of borrowing for a similar liability.
15. STOCK OPTIONS
The Company adopted an Incentive Stock Option Plan on April 12, 1982, as amended (the Plan), whereby options to purchase shares of the Company's common stock may be granted to employees of the Company, including those who are also directors of the Company, or subsidiary corporations in which the Company owns greater than a 50% interest. Exercise price for the options is at least equal to 100% of the
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STOCK OPTIONS (CONTINUED):
market price of the Company's common stock at the date of grant for employees who own 10% or less of the total voting stock of the Company; and 110% of the market price of the Company's common stock at the date of grant for employees who own more than 10% of the Company's voting stock. Options granted can have a term no longer than 10 years and are first exercisable at dates determined at the discretion of the Company's Board of Directors.
Incentive stock option activity during 1999, 1998, and 1997 was as follows:
A summary of the outstanding incentive stock options as of December 31, 1999, follows:
At December 31, 1999 there were 2,014,200 shares reserved for future issuance under the Plan.
On March 20, 1989, the Company's Board of Directors approved the adoption of a Non-Qualified Stock Option Plan (the Non-Qualified Plan). Under the Non-Qualified Plan, the Board of Directors may
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STOCK OPTIONS (CONTINUED):
award stock options to consultants, directors and key employees of the Company, and its subsidiaries and affiliates, who are responsible for the Company's growth and profitability. The Non-Qualified Plan does not provide criteria for determining the number of options an individual shall be awarded, or the term of such options, but confers broad discretion on the Board of Directors to make these decisions. Total options granted under the Non-Qualified Plan may not have a term longer than 10 years or an exercise price less than 50 percent of the fair market value of the Company's common stock at the time the option is granted.
By vote of the Company's shareholders at the May 17, 1995, Annual Shareholders Meeting, the Company adopted a motion to award each non-employee Director options to purchase 10,000 shares of common stock each year during their tenure on the Board of Directors. Such stock option awards from the Non-Qualified Plan are made at an exercise price equal to the closing price of the Company's common stock one day prior to the Annual Shareholders Meeting. The non-employee Director grants are exercisable at any time between one and five years from the date of grant.
During 1999, options to purchase 700,000 shares of common stock were granted to certain key employees at an exercise price equal to the fair market value of the Company's common stock on the grant date. The grants are immediately exercisable and have a five-year term.
Non-qualified stock option activity during 1999, 1998, and 1997 was as follows:
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STOCK OPTIONS (CONTINUED):
A summary of the outstanding non-qualified stock options as of December 31, 1999, follows:
At December 31, 1999, there were 568,400 shares reserved for future issuance under the Non-Qualified Plan.
The Company measures compensation cost as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). No compensation cost has been recognized in the financial statements as the exercise price of all option grants is at least equal to 100% of the market price of the Company's common stock at the date of grant. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting For Stock-Based Compensation (SFAS 123), effective for fiscal years beginning after December 15, 1995. SFAS 123 defines a "fair value" based method of accounting for employee options or similar equity instruments. Had compensation cost been determined under the provisions of SFAS 123, the following pro forma net loss and per share amounts would have been recorded:
The weighted average fair value for options granted in 1999, 1998 and 1997 was $0.16 per share, $0.14 per share, and $0.72 per share, respectively. The pro forma amounts were determined using the Black-Scholes model with the following assumptions:
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STOCK OPTIONS, (CONTINUED)
(1) Incentive Stock Option grants in 1999 were immediately exercisable.
16. WARRANTS:
As a result of an equity offering in June 1997, warrants to purchase 278,182 shares of $0.01 par value common stock were issued at a price of $4.05 per share. The warrants will expire on June 5, 2000.
As a result of a private placement in March 1996, warrants to purchase 2,017,167 shares of $0.01 par value common stock were sold. For each share of the Company's common stock purchased, the purchaser received one-half warrant. Each whole warrant entitled the holder to purchase one share of common stock at an exercise price equal to $3.75 per share. A warrant to purchase 300,000 shares of common stock was issued to the Company's underwriter and financial advisor in connection with the private placement at the same terms and conditions. A warrant to purchase 15,000 shares of common stock was exercised in March 1999 and the remaining warrants to purchase 2,302,167 shares of common stock expired on March 25, 1999.
17. SUBSEQUENT EVENT:
On February 10, 2000 the Company's shareholders, at a special meeting of shareholders, approved an alternate capital restructuring proposal for a reverse split of common stock. The approval authorized the Board of Directors of the Company, at its discretion, to implement a 1/2.5, a 1/4, or a 1/5 reverse split of shares of common stock and a reduction of the Company's authorized shares of common stock from 100 million to 50 million and elimination of the Company's authorized preferred stock at any time within the next 23 months, until January 14, 2002. On March 9, 2000, the Board of Directors approved a resolution to implement a 1/4 reverse split, reduce the Company's authorized shares of common stock to 50 million, eliminate the Company's authorized preferred stock, and modify the numbers of outstanding warrants and options and their exercise price in accord with the 1/4 reverse split. These actions are anticipated to be effective on March 24, 2000.
CANYON RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There has been no change in the Company's certified public accountants during the past two years. There has been no report on Form 8-K of a disagreement between the Company and its accountants on any matter of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears in the Company's Proxy Statement for the 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year and is incorporated by reference in this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the Company's Proxy Statement for the 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year and is incorporated by reference in this Annual Report on Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the Company's Proxy Statement for the 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year and is incorporated by reference in this Annual Report on Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Company's Proxy Statement for the 2000 Annual Meeting to be filed within 120 days after the end of the fiscal year and is incorporated by reference in this Annual Report on Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements (included in Part II of this Report):
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December 31, 1999, 1998, and 1997
Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(b) There were no reports filed on Form 8-K during the last quarter of the period covered by this report.
(c) Exhibits, as required by Item 601 of Regulation S-K, are listed on pages 70 to 71. The exhibit numbers correspond to the numbers assigned in Item 601 of Regulation S-K.
* Filed herewith
(1) Exhibit 4.1 is incorporated by reference from the Company's Registration Statement on Form 8-A as declared effective by the Securities and Exchange Commission on March 18, 1986.
(2) Exhibit 3.1 is incorporated by reference from Exhibit 3.1 to the Company's Registration Statement on Form S-3 (File No. 333-00175) declared effective by the Securities and Exchange Commission on May 14, 1996.
(3) Exhibit 3.1.1 is incorporated by reference from Exhibit 4 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 26, 1990.
(4) Exhibit 10.1 is incorporated by reference from Exhibit 10.20 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
(5) Exhibits 4.2, 4.3, 10.2 and 10.3 are incorporated by reference from Exhibits 4.9, 4.10, 10.22 and 10.23 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(6) Exhibit 4.4 is incorporated by reference from Exhibit 4 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on March 27, 1997.
(7) Exhibit 10.4 is incorporated by reference from Exhibit 2 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on October 9, 1997.
(8) Exhibit 3.2 is incorporated by reference from Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(9) Exhibits 10.2.1 and 10.2.2 are incorporated by reference from Exhibits 10.2.1 and 10.2.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
CANYON RESOURCES CORPORATION
Date: March 23, 2000 /s/ Richard H. De Voto ----------------------------------------- Richard H. De Voto Principal Executive Officer
Date: March 23, 2000 /s/ Gary C. Huber ----------------------------------------- Gary C. Huber Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Date: March 23, 2000 /s/ Richard H. De Voto ----------------------------------------- Richard H. De Voto, Director
Date: March 23, 2000 /s/ Gary C. Huber ----------------------------------------- Gary C. Huber, Director
Date: March 23, 2000 /s/ Leland O. Erdahl ----------------------------------------- Leland O. Erdahl, Director
Date: March 23, 2000 /s/ Richard F. Mauro ----------------------------------------- Richard F. Mauro, Director
EXHIBIT INDEX
* Filed herewith
(1) Exhibit 4.1 is incorporated by reference from the Company's Registration Statement on Form 8-A as declared effective by the Securities and Exchange Commission on March 18, 1986.
(2) Exhibit 3.1 is incorporated by reference from Exhibit 3.1 to the Company's Registration Statement on Form S-3 (File No. 333-00175) declared effective by the Securities and Exchange Commission on May 14, 1996.
(3) Exhibit 3.1.1 is incorporated by reference from Exhibit 4 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 26, 1990.
(4) Exhibit 10.1 is incorporated by reference from Exhibit 10.20 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
(5) Exhibits 4.2, 4.3, 10.2 and 10.3 are incorporated by reference from Exhibits 4.9, 4.10, 10.22 and 10.23 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(6) Exhibit 4.4 is incorporated by reference from Exhibit 4 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on March 27, 1997.
(7) Exhibit 10.4 is incorporated by reference from Exhibit 2 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on October 9, 1997.
(8) Exhibit 3.2 is incorporated by reference from Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(9) Exhibits 10.2.1 and 10.2.2 are incorporated by reference from Exhibits 10.2.1 and 10.2.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.