<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the period ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from __________ to _________
----------------------
Commission file number 1-11887
CANYON RESOURCES CORPORATION
(a Delaware Corporation)
I.R.S. Employer Identification Number 84-0800747
14142 Denver West Parkway, Suite 250
Golden, CO 80401
(303) 278-8464
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 46,107,074 shares of the
Company's Common Stock were outstanding as of August 1, 1998.
================================================================================
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements have been prepared by
Canyon Resources Corporation ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations.
These consolidated financial statements should be read in conjunction
with the financial statements and accompanying notes included in the Company's
Form 10-K for the year ended December 31, 1997.
Consolidated Balance Sheets.................................Page 3
Consolidated Statements of Operations ......................Page 4
Consolidated Statements of Cash Flows.......................Page 5-6
Notes to Interim Consolidated Financial Statements..........Page 7-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................Page 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ......................................Page 20
2
<PAGE> 3
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 936,900 $ 3,111,000
Restricted cash 5,724,000 2,316,300
Accounts receivable 1,195,500 746,700
Inventories 5,600,000 6,051,800
Prepaid and other assets 862,900 1,288,500
-------------- --------------
Total current assets 14,319,300 13,514,300
-------------- --------------
Property and equipment, at cost
Mining claims and leases 24,056,300 26,463,800
Producing properties 61,938,200 60,616,800
Other 1,076,400 1,144,500
-------------- --------------
87,070,900 88,225,100
Accumulated depreciation and depletion (10,929,900) (7,269,100)
-------------- --------------
Net property and equipment 76,141,000 80,956,000
-------------- --------------
Other Assets 3,025,200 2,811,800
-------------- --------------
Total Assets $ 93,485,500 $ 97,282,100
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,635,100 $ 3,829,600
Notes payable - current 1,579,200 4,554,300
Deferred income 4,731,700 --
Accrued taxes, other than payroll and income 56,900 151,400
Accrued reclamation costs 830,000 1,441,200
Other accrued liabilities 554,000 956,600
-------------- --------------
Total current liabilities 11,386,900 10,933,100
Notes payable - long term 21,125,000 28,055,000
Deferred income 6,470,700 --
Accrued reclamation costs 3,228,600 2,857,500
Other noncurrent liabilities 1,406,000 398,000
-------------- --------------
Total Liabilities 43,617,200 42,243,600
-------------- --------------
Common stock ($.01 par value) 100,000,000 shares authorized;
issued and outstanding: 46,107,100 at June 30, 1998, and
43,617,100 at December 31, 1997 461,100 436,200
Capital in excess of par value 95,278,800 92,999,400
Deficit (45,871,600) (38,397,100)
-------------- --------------
Total Stockholders' Equity 49,868,300 55,038,500
-------------- --------------
Total Liabilities and Stockholders' Equity $ 93,485,500 $ 97,282,100
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Sales $10,146,600 $ 9,668,800 $17,538,200 $13,108,400
----------- ----------- ----------- -----------
EXPENSES
Cost of sales 7,910,900 6,155,100 12,796,500 8,395,600
Depreciation, depletion, and amortization 2,256,700 1,820,300 3,660,200 2,391,800
Selling, general and administrative 931,800 889,100 1,685,200 1,670,600
Exploration costs 90,100 47,900 306,200 118,500
----------- ----------- ----------- -----------
11,189,500 8,912,400 18,448,100 12,576,500
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 58,700 104,400 112,500 168,400
Interest expense (402,900) (393,400) (936,600) (540,000)
Gain (loss) on asset disposals (42,100) 149,400 17,700 149,400
Other (4,500) (11,200) (22,100) (14,800)
----------- ----------- ----------- -----------
(390,800) (150,800) (828,500) (237,000)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle $(1,433,700) $ 605,600 $(1,738,400) $ 294,900
Extraordinary loss on debt prepayments $ (281,500) - $ (281,500) -
Cumulative effect of change in accounting
principle - - (5,454,600) -
----------- ----------- ----------- -----------
Net income (loss) $(1,715,200) $ 605,600 $(7,474,500) $ 294,900
=========== =========== =========== ===========
Basic and diluted income (loss) per
share:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle $(0.03) $0.02 $(0.04) $0.01
Extraordinary loss on debt prepayments $(0.01) - - -
Cumulative effect of change in
accounting principle - - $(0.12) -
----------- ----------- ----------- -----------
Net income (loss) $(0.04) $0.02 $(0.16) $0.01
=========== =========== =========== ===========
Weighted average shares outstanding 46,107,100 38,756,500 46,107,100 38,147,500
=========== =========== =========== ===========
Pro forma amounts assuming the change in
accounting principle is applied
retroactively
Net income (loss) $(1,715,200) $ 274,400 $(2,019,900) $ (367,200)
Basic and diluted per share amounts $(0.04) $0.01 $(0.04) $(0.01)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE> 5
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,474,500) $ 294,900
--------------- ----------------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Extraordinary loss on debt prepayments 281,500 -
Cumulative effect of change in accounting principle 5,454,600 -
Depreciation, depletion, and amortization 3,660,200 2,391,800
Amortization of financing costs 404,000 75,200
(Gain) loss on asset disposals (17,700) (149,400)
Other 25,100 3,600
Changes in assets and liabilities,
Increase in receivables (491,700) (546,500)
(Increase) decrease in inventories 451,800 (1,337,200)
Increase in prepaid and other assets (783,000) (314,000)
(Decrease) increase in accounts payable and accrued liabilities (1,042,400) 2,085,400
Increase in deferred income 11,202,400 -
(Decrease) increase in other liabilities 371,100 (386,200)
Increase in restricted cash (3,407,700) (1,821,700)
--------------- ----------------
Total adjustments 16,108,200 1,000
--------------- ----------------
Net cash provided by operating activities 8,633,700 295,900
--------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (3,117,400) (10,178,000)
Proceeds on asset dispositions 113,800 150,500
Proceeds from gold sales and restricted cash - 3,894,300
--------------- ----------------
Net cash used in investing activities (3,003,600) (6,133,200)
--------------- ----------------
Cash flows from financing activities:
Issuance of stock, net 2,192,500 9,410,200
Proceeds from loans and restricted cash, net 500,000 3,081,200
Payments on debt (10,425,000) (841,200)
Payments on capital lease obligations (71,700) (66,700)
--------------- ----------------
Net cash provided by (used in) financing activities (7,084,200) 11,583,500
--------------- ----------------
Net increase (decrease) in cash and cash equivalents (2,174,100) 5,746,200
Cash and cash equivalents, beginning of year 3,111,000 4,181,100
--------------- ----------------
Cash and cash equivalents, end of period $ 936,900 $ 9,927,300
=============== ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 6
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
Supplemental disclosures of cash flow information:
1. The Company paid $908,800 of interest during the first half of 1998, and
$803,300 during the corresponding period of 1997. Of the total payments,
capitalized interest during the first half of 1998 and 1997 was $0 and
$338,600, respectively.
2. The Company paid no income taxes during the first half of 1998 and no
income taxes during the corresponding period of 1997.
Supplemental schedule of noncash investing and financing activities:
1. The Company acquired $1,139,000 in equipment through capital leases during
the first half of 1998, and $31,200 in equipment through capital leases
during the first half of 1997.
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE> 7
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
1. BASIS OF PRESENTATION:
During interim periods, Canyon Resources follows the accounting
policies set forth in its Annual Report to Stockholders and its Report
on Form 10-K filed with the Securities and Exchange Commission. Users
of financial information produced for interim periods are encouraged to
refer to the footnotes contained in the Annual Report to Stockholders
when reviewing interim financial results.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. 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 the accompanying
interim financial statements.
The provisions of Statement of Financial Accounting Standards No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related
Information, will be effective for the Company's 1998 fiscal year. SFAS
131 establishes standards for the way that public business enterprises
determine operating segments and report information about those
segments in annual financial statements. SFAS 131 also requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 further
establishes standards for related disclosures about products and
services, geographic areas, and major customers. As the provisions need
not be applied to interim financial statements in the initial year of
application, the accompanying interim financial statements do not
include the disclosures required by SFAS 131. Upon adoption, the
Company anticipates a material impact on its reported disclosures.
In April 1998, the Financial Accounting Standards Board approved the
issuance of Statement of Position No. 98-5, Reporting on the Costs of
Start-Up Activities (SOP 98-5). SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998 and
provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. Initial adoption will be
reported as a cumulative effect of a change in accounting principle. At
this time, the Company cannot determine the effects of adopting SOP
98-5 on its financial condition, liquidity or results of operations.
7
<PAGE> 8
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
1. BASIS OF PRESENTATION: (Continued)
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 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999
and establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that the Company
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. At this time, the Company cannot determine the effects, if any,
that adopting SFAS 133 will have on its financial condition, liquidity
or results of operations.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial
position, the results of operations, and the cash flows of Canyon
Resources and its consolidated subsidiaries for interim periods.
2. CHANGE IN ACCOUNTING PRINCIPLE:
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 will bring the Company's accounting method in accordance
with the predominant practice in the US mining industry and will better
reflect operating income and cash flow. The $5,454,600 cumulative
effect of the change on prior years is included in the loss for the six
months ended June 30, 1998. The effect of the change on the three
months ended June 30, 1998 was to increase the net loss by $66,200,
which had no effect on per share amounts. The effect of the change on
the six months ended June 30, 1998 was to increase the loss before
extraordinary item and cumulative effect of a change in accounting
principle by $256,100, or $0.01 per share and the net loss by
$5,710,700 or $0.12 per share. The effect of the change on the first
quarter of 1998 is as follows:
<TABLE>
<CAPTION>
$ AMOUNTS PER SHARE AMOUNTS
---------- ------------------
<S> <C> <C>
Net loss as originally reported $ 114,800 $0.00
Effect of accounting change 189,900 0.01
---------- -----
Loss before cumulative effect of a change in
accounting principle 304,700 0.01
Cumulative effect on prior years 5,454,600 0.12
---------- -----
Net loss as restated $5,759,300 $0.13
========== =====
</TABLE>
8
<PAGE> 9
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
3. INTERIM RESULTS:
The foregoing interim results are not necessarily indicative of the
results of operations for the full year ending December 31, 1998.
4. 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.
5. RESTRICTED CASH:
Restricted cash consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Escrow Account - Briggs Loan (a) $2,590,800 -
Collateral for Letter of Credit (b) 1,953,000 $1,953,000
Unexpended proceeds from gold sales (c) 1,124,900 309,100
Unexpended proceeds from loan drawing (d) 55,100 54,000
Contingency account (e) 200 200
---------- ----------
$5,724,000 $2,316,300
========== ==========
</TABLE>
(a) Held in escrow account after closeout of hedge position for the
use by Lenders at their discretion. (See Note 7(a))
(b) In connection with the issuance of certain bonds for the
performance of reclamation obligations at the Kendall and Briggs
Mines, a bank Letter of Credit has been provided in favor of the
Surety as partial collateral for such bond obligations. The
Letter of Credit is fully collateralized with cash and will
expire no earlier than December 31, 1998. At the bank's option,
the Letter of Credit may be renewed for successive one-year
periods.
(c) 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.
9
<PAGE> 10
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
5. RESTRICTED CASH (Continued)
(d) Loan proceeds are restricted solely for the development of the
Briggs Mine.
(e) As a condition precedent to securing the Briggs loan facility,
the Company transferred $2.0 million to an escrow account to be
held in reserve against construction cost overruns at the Briggs
Mine. These funds were utilized in 1996 due to higher than
anticipated construction costs and working capital needs.
6. INVENTORIES:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Gold-in-process (a) $4,586,900 $4,997,900
Industrial minerals - in process (a) 301,900 413,200
Materials and supplies 711,200 640,700
---------- ----------
$5,600,000 $6,051,800
========== ==========
</TABLE>
(a) Includes all direct and indirect costs of mining, crushing,
processing, and site overhead expenses.
7. NOTES PAYABLE:
Notes payable consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Briggs Loan (a) $21,750,000 $31,825,000
Norwest Revolver (b) 500,000 350,000
Western Mobile Note (c) 454,200 434,300
----------- -----------
$22,704,200 $32,609,300
Current portion 1,579,200 4,554,300
----------- -----------
Notes Payable - Long Term $21,125,000 $28,055,000
=========== ===========
</TABLE>
10
<PAGE> 11
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
7. 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. Drawings on the
facility included $25.0 million principal in the form of a gold
loan and $9.0 million principal as dollar loans. The gold loan
portion was monetized at $388.05 per ounce, or 64,425 ounces.
Weighted average interest rates on the amounts outstanding during
the three months ended June 30, 1998 were (i) 3.6% on the gold
loan and (ii) 10.2% on the cash loans. For the comparable period
in 1997, weighted average interest rates on the gold loan and
dollar loans were 3.2% and 10.0%, respectively. For the six
months ended June 30, 1998, weighted average interest rates on
the gold loan and dollar loans were (i) 3.7% and 10.5%,
respectively. For the comparable period in 1997, weighted average
interest rates were 3.4% and 10.0%, respectively. Interest
payments of $390,100 and $422,900 were made during the three
months ended June 30, 1998 and 1997, respectively. For the six
month period, interest payments of $811,500 and $767,400 were
made during 1998 and 1997, respectively.
In May, 1998, the loan facility was restructured. As part of the
restructuring, the Company liquidated its 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 outstanding of $8.6 million. The
balance of the proceeds ($2.5 million) is currently held in an
escrow account for the use by the lenders at their discretion. 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 three and six months
ended June 30, 1998.
In addition, the restructuring included the modification of
certain coverage ratios (as defined) and a revision to the
amortization schedule for the gold loan. The revised amortization
schedule follows:
<TABLE>
<CAPTION>
PAYMENT PERIOD OUNCES $ MONETIZED AMOUNT
- -------------- ------ ------------------
<S> <C> <C>
Balance of 1998 1,288 $ 500,000
1999 3,060 1,187,400
2000 2,738 1,062,500
2001 14,174 5,500,200
2002 34,789 13,499,900
------ -----------
56,049 $21,750,000
</TABLE>
11
<PAGE> 12
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
7. NOTES PAYABLE: (Continued)
The Company was not in compliance with certain conditions of the
loan agreement as of June 30, 1998, relating to (i) achieving
project completion (as defined) and (ii) a certain coverage ratio
(as defined). In August, 1998, as a condition precedent to
obtaining closure on the matters of non-compliance, the loan
facility was further amended as follows: (i) the Company has
pledged the stock of its subsidiary, CR Minerals, as additional
collateral for the loan; (ii) should the Company undertake any
asset sales, certain proceeds will be used to reduce the
principal balance on the gold loan; (iii) the $2.5 million held
in the escrow account will be utilized for debt service for the
period ending September 30, 1998 with the balance used to reduce
the principal on the gold loan; and (iv) a six month, $1 million
credit line at LIBOR plus 2 3/8% will be established for working
capital needs. With respect to the matters of non-compliance, the
lenders have agreed to (i) deem the project complete, (ii)
maintain certain negative covenants relating to asset
dispositions, (iii) waive the debt cover requirement as of June
30, 1998, and (iv) lower the debt cover requirement for the next
two quarters. The Company anticipates to be in compliance with
this covenant in future periods.
(b) In October, 1997, the Company's wholly owned subsidiary, CR
Minerals Corporation (CR Minerals), obtained a one-year revolving
credit line (Revolver) with Norwest Bank Colorado, N.A. in an
amount not to exceed the lesser of a borrowing base or $600,000.
The borrowing base is calculated on 70% of CR Minerals' domestic
accounts receivables not more than 90 days in age from date of
invoice. The average interest rate for the current period was
9.0% and interest payments for the three and six months ended
June 30, 1998, were $4,400 and $8,500, respectively. At June 30,
1998, the amount available under the Revolver was $100,000.
(c) On December 31, 1997, CR Minerals purchased the pumice mine which
supplies the raw ore for its New Mexico processing facility from
Western Mobile Santa Fe, Inc. Total purchase price was $950,000,
of which $475,000 was paid at closing with the balance of
$475,000 due one year later. As the promissory note issued for
the remaining consideration did not contain a stated interest
rate, an imputed rate of 9% was used to establish the note's
present value, resulting in a discount of $40,700. The amounts
amortized to interest expense during the three and six months
ended June 30, 1998, were $10,100 and $19,900, respectively.
12
<PAGE> 13
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
8. SITE RESTORATION COSTS:
Reclamation spending at the Kendall Mine for the three months ended
June 30, 1998 was $327,100. For the comparable period of 1997, spending
totaled $513,500. For the six months ended June 30, 1998, spending
totaled $529,200 as compared to $924,800 for the prior period.
9. 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, which is currently in the
permitting stage.
The initial agreement required the Company to make a payment of $5
million as part of a total purchase price which would 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, $20 to $30 per mineable reserve ounce attributable
to the Phelps Dodge ownership as determined by a final feasibility
study, would be paid after all permits for mine development are
obtained.
In June, 1998, the Company and Phelps Dodge amended the purchase terms,
subject to the Company entering into a joint venture or other business
arrangement, including a merger, by December 31, 1998, that would
provide adequate financing to carry the McDonald Gold Project through
completion of permitting and engineering (Restructuring Event). Upon
completion of a Restructuring Event, the original purchase terms would
be modified to include an immediate $5.0 million payment and a further
payment of $20.0 million upon completion of the permitting process. In
addition, production payments would be modified to commence when the
gold price is above $325 per ounce and would no longer be capped. If a
Restructuring Event does not occur on or prior to December 31, 1998,
the amendment will terminate and the original purchase terms will then
remain in force. Due to the contingent nature of the transaction, the
Company has recorded only the initial payment of $5.0 million as
additions to mining claims and leases.
10. YEAR 2000 ISSUE:
Many computer programs utilize a two digit format to identify the
applicable year. Without modification, any date sensitive software
beyond December 31, 1999 could fail,
13
<PAGE> 14
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
10. YEAR 2000 ISSUE: (Continued)
as the date would be reset to year 1900. This could result in, amongst
other things, disruptions to operations and the inability to process
financial transactions. The Company has not yet made an assessment of
the year 2000 issue and cannot presently estimate the costs associated
with any remediation. The Company expects to commence work on
identifying the scope of the year 2000 issue in the second half of
1998. This will involve the inventorying of systems, both hardware and
software. In addition, the Company will identify all third party
products and services utilized. The Company will next assess the risk
associated with each of the identified items and design a course of
action for dealing with each problem item, i.e., modification or
replacement. Finally, the Company will implement and test systems to
ensure year 2000 compliance. Although the Company believes it has
adequate resources and personnel to complete all phases prior to
December 31, 1999, the Company remains at risk with respect to its
ability to complete its own program and/or to a failure by one or more
of its third party suppliers to achieve year 2000 compliance within the
required time frame.
11. DEFERRED INCOME
In May, 1998, the Company liquidated its gold hedge position for all
forward contracts with settlement dates beyond June 30, 1998, resulting
in a gain of $11.1 million. This gain will be deferred and recognized
in operations over the original terms of the forward contracts as
follows:
<TABLE>
<CAPTION>
$MM
-----
<S> <C>
Balance of 1998 $2.5
1999 4.1
2000 4.5
-----
TOTAL $11.1
=====
</TABLE>
12. INCOME TAXES:
The Company has not recorded a tax benefit for the current period as
the benefit is not expected to be realized during the year. The benefit
is also not expected to be realizable as a deferred tax asset at year
end as the Company anticipates recording a full valuation allowance for
all deferred tax assets, except to the extent of offsetting reversals
of expected deferred tax liabilities.
14
<PAGE> 15
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
13. EARNINGS PER SHARE (EPS):
The Company computes EPS by applying the provisions of Financial
Accounting Standards No. 128, Earnings per Share. The following table
provides a reconciliation of the amounts used in the calculation of the
Company's basic and diluted EPS before extraordinary item and
cumulative effect of a change in accounting principle.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EPS
Income (loss) before extraordinary
item and accounting change $(1,433,700) $ 605,600 $(1,738,400) $ 294,900
=========== =========== =========== ===========
Weighted average shares
outstanding 46,107,100 38,756,500 46,107,100 38,147,500
=========== =========== =========== ===========
Per share amount $(0.03) $0.02 $(0.04) $0.01
=========== =========== =========== ===========
DILUTED EPS
Income (loss) before extraordinary
item and accounting change $(1,433,700) $ 605,600 $(1,738,400) $ 294,900
=========== =========== =========== ===========
Weighted average shares
outstanding 46,107,100 38,756,500 46,107,100 38,147,500
Add: effect of dilutive options (A) 331,200 (A) 165,600
----------- ----------- ----------- -----------
Weighted average shares
outstanding, as adjusted 46,107,100 39,087,700 46,107,100 38,313,100
=========== =========== =========== ===========
Per share amount $(0.03) $0.02 $(0.04) $0.01
=========== =========== =========== ===========
</TABLE>
(A) Effect would be antidilutive due to a loss before extraordinary item
and accounting change.
Options and warrants to purchase 4,917,000 shares of common stock were
outstanding at June 30, 1998 that were not included in the current
period calculations of diluted EPS as the effect would be antidilutive.
At June 30, 1997, options and warrants to purchase 3,545,800 shares of
common stock were outstanding that were not included in the prior
period calculations of EPS because their exercise price was greater
than the average market price of the Company's common shares.
15
<PAGE> 16
ITEM 2. 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-Q, 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
The Company recorded a loss before extraordinary item of $1,433,700, or
$0.03 per share and a net loss of $1,715,200, or $0.04 per share, on revenues of
$10,146,600 for the second quarter of 1998. For the six months ended June 30,
1998, the Company reported a loss before extraordinary item and cumulative
effect of a change in accounting principle of $1,738,400 or $0.04 per share and
a net loss of $7,474,500, or $0.16 per share on revenues of $17,538,200. This
compares to net income of $605,600, or $0.02 per share, on revenues of
$9,668,800 during the second quarter of 1997, and net income of $294,900, or
$0.01 per share on revenues of $13,108,400 during the first six months of 1997.
In May, 1998, the Company prepaid in full the cash loans outstanding of
$8.6 million on the Briggs Mine loan facility. As a result of the prepayment,
unamortized deferred financing costs of $285,100 allocated to the cash loans
were expensed and recorded as an extraordinary loss for the three and six months
ended June 30, 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 will bring the Company's
accounting policy in accordance with the predominant practice in the US mining
industry and will better reflect operating income and cash flow. The $5,454,600
cumulative effect of the change on prior years is included in the loss for the
six months ended June 30, 1998.
For the three months ended June 30, 1998, the Company sold 23,879
ounces of gold and 7,000 ounces of silver at an average price of $361 per
equivalent gold ounce. For the comparable period of 1997, the Company sold
20,262 ounces of gold and 6,500 ounces of silver at an average realized price of
$409 per equivalent gold ounce. For the first half of 1998, 38,058 ounces of
gold and 10,500 ounces of silver were sold at an average realized price of $384
per equivalent gold ounce. For the comparable period in 1997, 34,012 ounces of
gold and 6,500 ounces of silver were
16
<PAGE> 17
sold at an average realized price of $408 per equivalent gold ounce. This total
includes the sale of 8,150 ounces of gold during the first two months of the
year which was credited against capitalized development costs. The New York
Commodity Exchange (COMEX) gold price averaged $300 and $297 per ounce,
respectively, for the three and six months ended June 30, 1998. For the
comparable periods of 1997, the COMEX gold price averaged $343 and $348 per
ounce. Revenue from the sales of industrial minerals products increased 11% and
14%, respectively, for the three and six months ended June 30, 1998 as compared
to the prior year. Sales of industrial minerals products accounted for 15% and
17% of the Company's revenues for the three and six months ended June 30, 1998,
respectively. Sales of industrial mineral products accounted for 14% and 20% of
the Company's revenues respectively, for the three and six months ended June 30,
1997.
Cost of sales was $7.9 million for the three months ended June 30,
1998, as compared to $6.2 million in the prior period. For the six months ended
June 30, 1998, cost of sales was $12.8 million as compared to $8.4 million in
the prior period. The prior period includes only four months of commercial
production from the Briggs Mine.
Per ounce cost of gold sold at the Briggs Mine, as computed under the
Gold Institute's Production Cost Standard, was as follows:
CR BRIGGS MINE
COST PER OUNCE OF GOLD SOLD
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997(1)
---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Cash operating (2) $281 $253 $278 $249
Total cash costs (3) $287 $260 $284 $256
Total production costs (4) $382 $351 $379 $348
</TABLE>
(1) March, 1997 - June, 1997, only.
(2) All direct and indirect costs of the operation, excluding
royalties and accruals for site restoration. Includes inventory
changes and adjustments for deferred stripping.
(3) Cash operating costs plus royalties
(4) Total cash costs plus depreciation, depletion, amortization and
accruals for site restoration.
Although the ounces of gold produced and sold were higher and the
operating costs were somewhat lower in 1998 than the comparable periods in 1997,
per ounce costs were higher in the current periods due to lower grades of ore
mined. For the three and six months ended June 30, 1998, the average ore grade
was 0.026 ounce per ton and 0.028 ounce per ton, respectively. For the
comparable periods of 1997, the average ore grade was 0.033 ounce per ton and
0.034 ounce per ton, respectively.
Depreciation, depletion and amortization was higher in the current
periods due to higher gold sales. In addition, the prior six month period
included only four months of commercial gold production from the Briggs Mine.
17
<PAGE> 18
Interest expense was not materially different for the three month
period ended June 30, 1998 as compared to 1997. For the six months ended June
30, 1998, interest expense was higher than the prior period as interest on the
Briggs loan facility was capitalized for the first two months of 1997.
LIQUIDITY & CAPITAL RESOURCES
CASH FLOW
Net cash provided by operating activities during the six months ended
June 30, 1998, was $8.6 million as compared to $0.3 million for the same period
in 1997. The substantial improvement was a result of the Company liquidating
most of its gold hedge position in May, 1998, resulting in proceeds of $11.1
million. (See separate caption "Briggs Mine Loan Facility".)
Cash and cash equivalents at June 30, 1998 was $0.9 million.
The Company spent $3.1 million on capital programs for the six months
ended June 30, 1998, principally on advancing the permitting effort at the
McDonald Gold Project and improvements to the industrial minerals business.
During the first six months of 1998, the Company raised $2.5 million
($2.3 million net of expenses) through the sale of 2,490,000 shares of common
stock, repaid $10.1 million of principal on the Briggs loan facility (See
separate caption "Briggs Mine Loan Facility") and borrowed an additional $0.150
million on the CR Minerals Revolver.
BRIGGS MINE LOAN FACILITY
In May, 1998, as part of a restructuring of the Briggs Mine loan
facility, the Company liquidated its 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 outstanding of
$8.6 million. The balance of the proceeds ($2.5 million) are currently held in
an escrow account for the use by the lenders at their discretion. The gain of
$11.1 million resulting from the liquidation will be deferred and recognized in
operations over the original terms of the forward contracts.
In addition, the restructuring included the modification of certain
coverage ratios (as defined) and a revision to the amortization schedule for the
gold loan. The revised amortization schedule follows:
<TABLE>
<CAPTION>
PAYMENT PERIOD OUNCES $ MONETIZED AMOUNT
- -------------- ------ ------------------
<S> <C> <C>
Balance of 1998 1,288 $ 500,000
1999 3,060 1,187,400
2000 2,738 1,062,500
2001 14,174 5,500,200
2002 34,789 13,499,900
------ ------------
56,049 $21,750,000
</TABLE>
18
<PAGE> 19
The Company was not in compliance with certain conditions of the loan
agreement as of June 30, 1998, relating to (i) achieving project completion (as
defined) and (ii) a certain coverage ratio (as defined). In August, 1998, as a
condition precedent to obtaining closure on the matters of non-compliance, the
loan facility was further amended as follows: (i) the Company has pledged the
stock of its subsidiary, CR Minerals, as additional collateral for the loan;
(ii) should the Company undertake any asset sales, certain proceeds will be used
to reduce the principal balance on the gold loan; (iii) the $2.5 million held in
the escrow account will be utilized for debt service for the period ending
September 30, 1998 with the balance used to reduce the principal on the gold
loan; and (iv) a six month, $1 million credit line at LIBOR plus 2 3/8% will be
established for working capital needs. With respect to the matters of
non-compliance, the lenders have agreed to (i) deem the project complete, (ii)
maintain certain negative covenants relating to asset dispositions, (iii) waive
the debt cover requirement as of June 30, 1998, and (iv) lower the debt cover
requirement for the next two quarters. The Company anticipates to be in
compliance with this covenant in future periods.
MCDONALD GOLD PROJECT
In June, 1998, the Company and Phelps Dodge amended the deferred
payment terms resulting from the Company's purchase in September 1997 of Phelps
Dodge's interest in the Seven-Up Pete Joint Venture and the McDonald Gold
Project. Subject to the Company completing a joint venture or other business
arrangement, including a merger, by December 31, 1998 that would provide
adequate financing to carry the McDonald Gold Project through completion of
permitting and engineering (Restructuring Event), the original purchase terms
would be modified to include an immediate $5.0 million payment and a further
payment of $20.0 million upon completion of the permitting process. In addition,
production payments would be modified to commence when the gold price is above
$325 per ounce and would no longer be capped. If a Restructuring Event does not
occur on or prior to December 31, 1998, the amendment will terminate and the
original purchase terms will then remain in force. Due to the contingent nature
of the transaction, the Company has recorded only the initial payment of $5.0
million as additions to mining claims and leases.
Effective July 20, 1998, an anti-cyanide gold and silver mining
initiative (I-137) has been qualified to be placed on the ballot in Montana for
the November 1998 election. I-137 would bar development of new gold and silver
mines and expansions to existing mines which use cyanide in the treatment and
recovery process. With the initiative on the ballot and the inability to attract
a joint venture partner to date, the Company has greatly reduced its rate of
expenditures on the project. Work on the Environmental Impact Statement by the
State's independent contractor and its subcontractors has been temporarily
suspended and the project staff has been reduced by approximately 80%.
OVERALL LIQUIDITY
At June 30, 1998, the ratio of the Company's liquid assets (cash and
cash equivalents, restricted cash available to fund Briggs operations and
accounts receivable) to its current liabilities (excluding deferred income) was
0.49 to 1. At current gold prices, the Briggs Mine is not
19
<PAGE> 20
expected to generate positive cash flow after capital expenditures and debt
repayments until the third quarter of 1999. Additionally, although the
industrial minerals segment will contribute a modest cash flow over the next
twelve months, it will not be sufficient to cover on-going general and
administrative expenses and other project related costs. Thus, the Company is
actively pursuing a strategy of i) divestiture or joint venture of one or more
of its assets, ii) curtailing further or completely suspending the permitting
effort at the McDonald Gold Project, and iii) reducing corporate general and
administrative expenses. The Company anticipates, but can make no assurances,
that implementation of the above strategy will adequately address its liquidity
needs.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Financial Accounting Standards Board approved the
issuance of Statement of Position No. 98-5, Reporting on the Costs of Start-Up
Activities (SOP 98-5). SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998 and provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
adoption will be reported as a cumulative effect of a change in accounting
principle. At this time, the Company cannot determine the effects of adopting
SOP 98-5 on its financial condition, liquidity or results of operations.
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 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999 and establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that the Company recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. At this time, the Company cannot determine the effects, if any,
that adopting SFAS 133 will have on its financial condition, liquidity or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not meet the minimum market capitalization requirement
for these disclosures for interim periods in 1998.
20
<PAGE> 21
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: ................................... None
ITEM 2. CHANGES IN SECURITIES:................................ None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:...................... None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS:
On June 11, 1998, the Company held its Annual Meeting of Shareholders.
The following three items of business were voted upon by shareholders
at the meeting:
Proposal I was the election of two Directors of the Company: Richard
H. De Voto and Robert L. Zerga. The proposal electing the two
Directors passed with votes of 33,070,978 and 34,060,422 shares "For"
respectively, and 2,096,021 and 1,106,577 "Withheld", respectively.
Proposal II was to amend the Company's Incentive Stock Option Plan to
increase the amount of shares available under the plan from 3,500,000
to 4,500,000. The proposal passed with votes of 32,104,242 "For";
2,879,327 "Against"; and 183,430 "Abstaining".
Proposal III was to ratify the appointment of PricewaterhouseCoopers
LLP (formerly Coopers & Lybrand L.L.P.) as the Company's independent
public accountants for 1998. The proposal passed with votes of
34,924,745 "For"; 151,834 "Against"; and 90,420 "Abstaining".
ITEM 5. OTHER INFORMATION:
SHAREHOLDER PROPOSALS
Proposals by shareholders of the Company to be presented at the 1999
Annual Meeting of Shareholders must be received by the Company no
later than January 6, 1999, to be included in the Company's Proxy
Statement and proxy for that meeting. If a shareholder intends to
submit a proposal at the meeting that is not included in the Company's
proxy statement, and the shareholder fails to notify the Company prior
to March 22, 1999 of such proposal, then the proxies appointed by the
Company's Management would be allowed to use their discretionary
voting authority when the proposal is raised at the Annual Meeting,
without any discussion of the matter in the proxy statement. The
proponent must be a record or beneficial owner entitled to vote on his
or her proposal at the next Annual Meeting and must continue to own
such security entitling him or her to vote through that date on which
such meeting is held. The proponent must own 1% or
21
<PAGE> 22
more of the outstanding shares or $1,000.00 in value of the Company's
Common Stock and must have owned such shares for one year in order to
present a shareholder proposal to the Company.
ITEM 6(A) EXHIBITS:
No. 18 - Letter regarding change in accounting principles
No. 27 - Financial Data Schedule
ITEM 6(B) REPORTS ON FORM 8-K:.........................................None
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANYON RESOURCES CORPORATION
Date: August 19, 1998 /s/ Richard H. De Voto
----------------------
Richard H. De Voto
President
Date: August 19, 1998 /s/ Gary C. Huber
-----------------
Gary C. Huber
Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE
- ----------- ------------------- ----
<S> <C> <C>
18 Letter regarding change in accounting principles
27 Financial Data Schedule
</TABLE>
24
<PAGE> 1
Exhibit 18
PRICEWATERHOUSE COOPERS LLP
- ------------------------------------------------------------------------------
August 14, 1998
Canyon Resources Corporation
14142 Denver West Parkway
Suite 250
Golden, Colorado 80401
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting from
capitalizing all exploration costs on unproven properties to expensing these
costs, prior to the establishment of proven and probable reserves as contained
in the Company's Form 10-Q for the quarter ended June 30, 1998. Based on our
reading of the data and discussions with Company officials of the business
judgment and business planning factors relating to the change, we believe
management's justification to be reasonable. Accordingly, in reliance on
management's determination as regards elements of business judgment and business
planning, we concur that the newly adopted accounting principle described above
is preferable in the Company's circumstances to the method previously applied.
We have not audited any financial statements of Canyon Resources Corporation as
of any date or for any period subsequent to December 31, 1997, nor have we
audited the application of the change in accounting principle disclosed in Form
10-Q of Canyon Resources Corporation for the six months ended June 30, 1998;
accordingly, our comments are subject to revision on completion of an audit of
the financial statements that include the accounting change.
Very truly yours,
/s/PriceWaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,660,900
<SECURITIES> 0
<RECEIVABLES> 1,195,500
<ALLOWANCES> 0
<INVENTORY> 5,600,000
<CURRENT-ASSETS> 14,319,300
<PP&E> 87,070,900
<DEPRECIATION> 10,929,900
<TOTAL-ASSETS> 93,485,500
<CURRENT-LIABILITIES> 11,386,900
<BONDS> 21,125,000
0
0
<COMMON> 461,100
<OTHER-SE> 95,278,800
<TOTAL-LIABILITY-AND-EQUITY> 93,485,500
<SALES> 17,538,200
<TOTAL-REVENUES> 17,538,200
<CGS> 12,796,500
<TOTAL-COSTS> 12,796,500
<OTHER-EXPENSES> 3,966,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 936,600
<INCOME-PRETAX> (1,738,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,738,400)
<DISCONTINUED> 0
<EXTRAORDINARY> (281,500)
<CHANGES> (5,454,600)
<NET-INCOME> (7,474,500)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
