SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13
or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended
December 31, 2001
or
[ ] Transition report pursuant to Section
13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period
from to
Commission file number 0-17480
CROWN RESOURCES CORPORATION
(Exact name of registrant as specified in charter)
Washington 84-1097086
(State or other jurisdiction of (IRS Employer
Identification No.)
incorporation or organization)
4251 Kipling St. Suite 390, Wheat Ridge,
Colorado 80033
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including
area code: (303)534-1030
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained to the best of registrant's
knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by
nonaffiliates of the registrant was approximately $ 1,927,000,
based upon the closing price on March 4 2002.
There were 14,804,104 shares of common stock, $0.01 par value,
outstanding on March 4, 2002.
This Form 10-K consists of 60 pages
Exhibit Index Begins on Page 51
TABLE OF CONTENTS
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . .
3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . .
11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . .
17
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . .
19
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . .
20
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . .
20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . .
21
Item 8. Financial Statements and Supplementary Data . . . . . . .
32
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . .
33
PART III
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . .
33
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . .
37
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . .
43
Item 13. Certain Relationships and Related Transactions . . . . . .
44
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . .
44
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
PART I
The information set forth in this Form 10-K including
that in Business, Properties and Management's Discussion and
Analysis of Financial Condition and Results of Operations
includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, and is subject to the
safe harbor created by those sections. Factors that
realistically could cause results to differ materially from
those projected in the forward looking statements are set
forth in Business, Management's Discussion and Analysis of
Financial Condition and Results of Operations and
Considerations Related to Crown's Business below.
Item 1. Business
(a) Overview
Crown Resources Corporation ("Crown") is a precious
metals exploration company operating in the western United
States. Crown owns 41.2% of Solitario Resources Corporation
("Solitario"), which was consolidated prior to Solitario's
acquisition of Altoro Gold Corporation ("Altoro"). Crown's
investment in Solitario since October 2000 is accounted for
under the equity method of accounting. Solitario operates as
a precious and base metals exploration company in Brazil,
Bolivia and Peru.
Crown's principal expertise is in identifying properties
with promising mineral potential, acquiring these properties
and exploring them to an advanced stage. Crown's goal is to
advance its properties, either on its own or through joint
ventures, to the feasibility study stage. Furthermore, Crown
intends to pursue development of the properties, typically
through a joint venture with a partner that has expertise in
mining operations. Crown has in the past recognized, and
expects in the future to recognize, revenues from the option
and sale of property interests to joint venture partners and
from the sale of its share of metals produced on its
properties.
Crown was incorporated under the laws of the State of
Washington in August 1988. Unless otherwise indicated by the
context, all references to Crown in this report shall be read
to refer to Crown Resources Corporation and its subsidiaries
taken together. However, "CRC" shall refer to Crown Resources
Corporation only.
(b) Recent Developments
Corporate Reorganization
On March 8, 2002, CRC filed a voluntary petition for
protection under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy") in the United States Bankruptcy Court
for the District of Colorado (the "Court"). As part of the
Bankruptcy CRC filed a Plan of Reorganization (the "Plan") and
a Disclosure Statement with the Court on March 27, 2002. The
Plan contemplates a restructuring of CRC's 5.75% convertible
subordinated debentures, which were due August 27, 2001 (the
"Debentures") through an exchange of outstanding Debentures,
including any accrued interest thereon for the following
consideration to be proportionally distributed to each
Debenture holder:
(i) $1,000,000 in cash;
(ii) $2,000,000 in 10% Convertible Secured Notes (the
"Secured Notes") convertible into Crown common
shares at $0.35 per share. The Secured Notes will
be pari-passu to and have essentially the same
terms as certain Senior Notes, issued in October
2001 and discussed below, including a 10%
interest rate payable in cash or stock at CRC's
option, and a maturity date of October 2006.
(iii) Warrants, which entitle the holders the right to
purchase, in the aggregate, 5,714,285 shares of
CRC common stock at an exercise price of $0.75
per share. The warrants expire in October 2006;
(iv) $4,000,000 of convertible unsecured subordinated
notes (the "Unsecured Notes") convertible into
common stock of CRC at $0.75 per share. The
Unsecured Notes would pay interest at 10% in
stock or cash at CRC's option, and mature on the
same date as the Secured Notes.
All other liabilities of CRC and Crown would be paid in
the normal course under the Plan.
The Plan contemplates a 5 for 1 reverse split of the
currently outstanding common stock, while maintaining the
conversion and exercise prices of the Senior Notes, the
Secured Notes, the Unsecured Notes and the related warrants.
The Plan contemplates that, immediately after the approval of
the Plan, assuming full dilution, the Senior Note holders
would own approximately 52% of the common stock, the Debenture
holders would own approximately 41% of the common stock and
current shareholders would own approximately 7% of the common
stock. The Plan also contemplates the cancellation of CRC's
preferred stock, currently held by a wholly owned subsidiary
and which is eliminated in consolidation.
After being filed with the Court, the Plan must be voted
on by CRC's creditors and shareholders. If the Plan is
approved by the Court, the Plan becomes a legally binding
agreement between CRC and its creditors and shareholders.
Subject to any objections and related delays, Crown
anticipates the Court could set a hearing to determine the
adequacy of the Disclosure Statement and Confirmation of the
Plan, prior to June 30, 2002.
There can be no assurance given that the Plan will be
approved by the creditors or shareholders, nor that the Court
will confirm the Plan as filed, if at all. If the Plan is not
confirmed by the Court, there can be no assurance that Crown
will have sufficient funds to continue as a going concern, to
restructure the Debentures on acceptable terms or continue
operations. If the Plan is not confirmed by the Court, Crown
may be forced to liquidate its assets under Chapter 7 of the
U.S. Bankruptcy Code and to cease operations.
Senior Note financing
In October 2001, Crown issued $3,600,000 of 10%
convertible secured promissory notes due in October 2006 (the
"Senior Notes"). Pending confirmation of the Plan, discussed
above, Crown intends to use a portion of the proceeds from
this financing to restructure the Company's existing
Debentures and initiate permitting on its Crown Jewel Project
in the state of Washington. The Senior Notes are secured by
all the assets of Crown, consisting primarily of its interest
in the Crown Jewel Project and its wholly-owned subsidiary,
Crown Resource Corp. of Colorado whose assets consist
primarily of a 41.2% equity interest in Solitario.
The Senior Notes have a five-year term and carry a 10%
interest rate payable quarterly in cash or Crown common stock,
at the election of the Crown. Proceeds of $3,250,000 from the
Senior Notes were placed in escrow pending restructuring of
the Debentures (the specific Senior Notes related to the
proceeds placed in escrow are also referred to as "Escrowed
Notes"). Solitario invested $650,000 in these Escrowed Notes.
The Escrowed Notes are convertible into Crown common shares
at a conversion price of $0.35 per share, subject to
adjustment. In addition, the Escrowed Note holders have been
issued a five-year warrant for every share into which the
Escrowed Notes are convertible, which warrant will be
exercisable into a Crown common share at $0.75 per share,
subject to adjustment. Solitario also invested in a separate
Senior Note, (referred to as the "Solitario Note") for the
remaining $350,000 of the Senior Notes. These funds were made
immediately available to Crown for general corporate purposes.
The Solitario Note is convertible into Crown common shares at
a conversion price of $0.2916 per share, subject to
adjustment. In addition, Solitario has been issued a five-
year warrant to acquire 1,200,000 shares of Crown common stock
at $0.60 per share, subject to adjustment. The terms of the
Solitario Note and the related warrants are otherwise
identical to the terms of the Escrowed Notes and warrants. On
March 5, 2002, the Crown and the Senior Lenders amended the
terms of the Senior Notes, which released to Crown $200,000 of
the proceeds being held in escrow. Per the terms of the
Senior Notes, as amended, the release of the remaining
escrowed funds is conditional upon the confirmation of a Plan,
on terms acceptable by the holders of the Senior Notes, by
June 30, 2002. The Senior Notes are classified as a current
liability at December 31, 2001 as they are due by June 30,
2002 if the Plan is not confirmed. If the Plan is confirmed
as filed, there will be a substantial dilution to existing
shareholders as further described above under Corporate
Reorganization and the Senior Notes will be classified as a
long-term liability.
Crown Jewel Project Joint Venture
On July 23, 2001, Crown announced the completion of an
agreement with Battle Mountain Gold Company, a wholly owned
subsidiary of Newmont Mining Corporation (both companies
referred to as "Newmont") to terminate its joint venture on
the Crown Jewel Project where Newmont was earning a 46%
interest by building a 3,000-ton per day mining facility. As
part of the agreement Crown became the sole owner and manager
of the Crown Jewel Project and granted Newmont a sliding scale
royalty on the first 1 million ounces of gold. The royalty
varies with the price of gold and Crown may purchase the
royalty from Newmont for a payment of $2 million any time over
the next five years. Crown has also announced it will be
seeking regulatory approval and permits to operate a primarily
underground mining operation at the Crown Jewel Project, which
Crown believes significantly reduces the environmental impacts
compared to the open-pit mining plan proposed by Newmont.
Newmont's plan proposed moving over 105 million tons of
material, producing 8.5 million tons of ore over an eight-year
period. Crown's underground proposal, still in the planning
stages, would move less than 10% of the material of the
Newmont plan and estimates the total ore produced at
approximately 3.3 million tons. Crown recorded $353,000 in
mineral property additions in connection with the termination
of the joint venture related to the assumption of liabilities
of $116,000 in property taxes payable in 2001 and $237,000 for
a $250,000 note payable (the "Keystone Note"), originally due
in February 2002.
On December 18, 2001 Crown amended the terms of the
Keystone Note, by paying the holders of the note $30,000 and
extending the term of the note for a period of four years,
with a payment, including interest, of $20,000 due in June
2002 and four annual payments, including interest, of $50,000
beginning in December 2002. At December 31, 2001, the current
portion of the Keystone Note was $68,000.
(c) Considerations Related to Crown's Business
Exploration and Development
As of December 31, 2001, Crown's only significant
mineral property is the Crown Jewel Project, located in
Washington State. Crown also holds interests in mineral
properties in Utah and Nevada. The Crown Jewel Project
consists of a variety of interests including unpatented
and patented claims and fee land held 100% by Crown or
under lease or option or purchase agreements. Crown's
interest in Latin American properties are held by
Solitario which has interests in properties located in
Peru and Brazil. Crown has acted as operator on all of
its properties that are not held in joint ventures. The
success of projects held under joint ventures that are
not operated by Crown is substantially dependent on the
joint venture partner. Currently, there are no properties
held in joint ventures.
Historically, after selecting a possible exploration
area through its own efforts or with others, Crown
compiles reports, reviews past production records, and
geologic surveys concerning the area. Crown then
undertakes a field exploration program to determine
whether the area merits work. Initial field exploration
on a property normally consists of geologic mapping and
geochemical and/or geophysical surveys, together with
selected sampling to identify host environments that may
contain specific mineral occurrences. If an area shows
promise, Crown will generally either conduct geologic
drilling programs in an effort to locate the existence of
economic mineralization or seek a joint venture partner
to undertake such work. If mineralization is delineated,
further work will be undertaken to estimate ore reserves,
evaluate the feasibility for the development of a mining
project, obtain permits for commercial development and,
if the project appears to be economically viable, proceed
to place the ore deposit into commercial production.
Foreign Operations
During 1999, Crown had property interests in Mexico and
during 1999, 2000 and 2001, through Solitario, interests in
properties located in Peru, Bolivia and Brazil. As of
December 31, 2001, Crown does not hold any direct property
interests outside of the United States. Crown holds a
significant investment in Solitario, which is subject to the
laws of Peru, Bolivia and Brazil, where it operates. These
countries have, from time to time, experienced periods of
political and economic instability. Foreign properties,
operations and investments may be adversely affected by local
political and economic developments, including
nationalization, exchange controls, currency fluctuations,
taxation and laws or policies as well as, bylaws and policies
of the United States affecting foreign trade, investment and
taxation. Certain other regions in which Crown may conduct
operations have also been subject to political and economic
instability, creating uncertainty and the potential for a loss
of resources located in these regions.
Management Services
Management and technical services are provided to
Solitario by Crown pursuant to a management agreement for
which Crown receives management fees. Certain directors and
officers of Crown are also directors and officers of
Solitario. As such, certain of these officers devote a
portion of their time to Solitario matters from which Crown
may not receive the full benefit. Additionally, the fact
that these officers receive cash compensation from Crown and
not from Solitario may give rise to certain conflicts of
interest between these officers' duties to Crown and to
Solitario.
Sources of Financing
The capital required for exploration and development of
properties is substantial. Crown has financed operations
through the issuance of the Senior Notes, the Debentures,
utilization of joint venture arrangements with third parties
(generally providing that the third party will obtain a
specified percentage of Crown's interest in a certain
property in exchange for the expenditure of a specified
amount), the sale by Crown of interests in properties or
other assets, and the issuance of common stock.
On March 8, 2002, CRC filed the Bankruptcy under
Chapter 11 with the Court. If the Court confirms the Plan of
Reorganization as filed, Crown will exchange its Debentures,
including any accrued interest, for a payment of $1,000,000
in cash, the issuance of $2,000,000 of Secured Notes,
warrants for 5,714,285 shares and $4,000,000 of Unsecured
Notes. Until the Plan is confirmed, there is substantial
doubt about Crown's ability to continue as a going concern.
Crown's consolidated financial statements do not include any
adjustments that might result from the outcome of that
uncertainty. If the Plan is confirmed as filed, there is no
assurance that Crown will be able to permit the Crown Jewel
Project or obtain long-term financing to allow Crown to
develop and operate the Crown Jewel Project or to repay its
long-term debt and continue operations. See Properties -
Crown Jewel Project-Financing, and Management's Discussion
and Analysis of Financial Condition and Results of Operations
- - Liquidity and Capital Resources.
Competition and Markets.
A large number of companies are engaged in the
exploration and development of mineral properties, many of
which have substantially greater technical and financial
resources than Crown. Therefore, Crown may be at a
disadvantage with respect to many of its competitors in the
acquisition, exploration and development of mining properties.
The marketing of minerals is affected by numerous
factors, many of which are beyond the control of Crown. Among
factors beyond the control of Crown are the price of the raw
or refined minerals in the marketplace, imports of minerals
from other countries, the availability of adequate milling and
smelting facilities, the price of fuel, the availability and
the cost of labor, and the market price of competitive
minerals.
Title. U.S. Properties.
Crown's domestic property consists, to a large extent, of
unpatented mining claims on unappropriated federal land
pursuant to procedures established by the Mining Law of 1872
and other federal and state laws. These acts generally provide
that a citizen of the United States (including corporations)
may acquire a possessory right to develop and mine valuable
mineral deposits discovered upon unappropriated federal lands,
provided that such lands have not been withdrawn from mineral
location, e.g., national parks, military reservations and
lands designated as part of the National Wilderness
Preservation System. These laws also provide for the location
of unpatented millsite claims for the purpose of mining and
milling minerals from valid mining claims. The validity of
all unpatented mining claims is dependent upon inherent
uncertainties and conditions. These uncertainties relate to
such non-record facts as the sufficiency of the discovery of
minerals, proper posting and marking of boundaries and
possible conflicts with other claims not determinable from
descriptions of record. Furthermore, the acquisition of
unpatented millsite claims may be limited by several factors,
which include the number of valid unpatented mining claims.
The Crown Jewel Project has located necessary millsite
claims in excess of the number of unpatented mining claims to
be developed. In November 1997 the Solicitor of the Department
of the Interior issued an opinion which stated among other
things, that the Bureau of Land Management should not approve
plans of operation that rely on a greater number of millsite
claims than the number of mining claims being developed.
Federal Public Law 106-31 mandated reinstatement of the Record
of Decision for the Crown Jewel Project and approval of the
plan of operations submitted by Newmont (the "Plan of
Operations"), which had respectively been revoked and denied,
based upon the Solicitor's opinion. Opponents of the Crown
Jewel Project have filed claims in various courts and
jurisdictions opposing the Crown Jewel Project, including an
appeal of the approval of the Plan of Operations, which was
subsequently denied. See Legal Proceedings.
Prior to discovery of a locatable mineral thereon, a
mining claim may be open to location by others unless the
owner is in possession of the claim. In the event that the
discovery of a valuable mineral deposit is made on unpatented
mining claims in the exploratory stage, Crown may not be able
to assure clear title.
The Budget Reconciliation Act of 1993 (the "1993 Act"),
requires the holder of each unpatented mining claim to pay a
"claim maintenance fee" of $100 per claim on or before August
31 of each year. To locate new unpatented claims, Crown must
pay the $100 per claim maintenance fee for the initial
assessment year and a $25 per claim location fee. If Crown
fails to pay a claim maintenance fee or a location fee as
required by the 1993 Act, it conclusively forfeits the related
unpatented claim.
In connection with the acquisition of Crown's properties,
Crown conducts limited reviews of title and related matters,
and obtains certain representations regarding ownership.
Although Crown believes it has conducted reasonable
investigations (in accordance with standard mining practice)
of the validity of ownership, there can be no assurance that
it holds good and marketable title to all of its properties.
Regulation.
The development, production and sale of minerals is
subject to federal, state, provincial and local regulation in
a variety of ways, including environmental regulation and
taxation. Federal, state, and local environmental regulations
generally have a significant effect on all companies,
including Crown, engaged in mining or other extractive
activities, particularly with respect to the permitting
requirements imposed on such companies, the possibilities of
project delays, and the increased expense required to comply
with such regulations. Crown believes it is in substantial
compliance with all such regulations in all the jurisdictions
in which it operates.
Crown is subject to income taxes, state and local
franchise taxes, personal property taxes, and state severance
taxes levied by various governmental units in the countries in
which Crown operates. State severance taxes vary between the
states and, within a single state, the amount of tax, based on
a percentage of the value of the mineral being extracted, vary
from mineral to mineral. Crown's operations are also subject
to taxation by each locality in which it owns mineral
properties or does business.
The domestic exploration programs conducted by Crown are
subject to federal, state and local environmental regulations.
A substantial portion of Crown's mining claims is on U.S.
public lands. The United States Forest Service ("USFS") and
Bureau of Land Management ("BLM") extensively regulate mining
operations conducted on public lands. Most operations
involving the exploration for minerals are subject to existing
laws and regulations relating to exploration procedures,
safety precautions, employee health and safety, air quality
standards, pollution of stream and fresh water sources, odor,
noise, dust, and other environmental protection controls
adopted by federal, state, and local governmental authorities
as well as the rights of adjoining property owners. Crown may
be required to prepare and present to federal, state, or local
authorities data pertaining to the effect or impact that any
proposed exploration or mining activity may have upon the
environment. All requirements imposed by any such authorities
may be costly and time-consuming and may delay commencement or
continuation of exploration or production operations.
Future legislation and regulations are expected to
continue to emphasize the protection of the environment and,
as a consequence, the activities of Crown may be more closely
regulated to further the cause of environmental protection.
Such legislation and regulations, as well as future
interpretation of existing laws may require substantial
increases in capital and operating costs to Crown and delays,
interruptions, or a termination of operations, the extent of
which cannot be predicted.
Bills proposing major changes to the mining laws of the
United States have been considered by Congress. If these
bills, which may include royalty fees or net profits
interests, are enacted in the future, they could have a
significant effect on the ownership and operation of patented
and unpatented mining claims in the United States including
claims owned or held by Crown. Although it is not possible to
predict whether or in what form Congress might enact changes
to the mining laws, amendments to current laws and regulations
governing operations and activities of mining companies or
more stringent implementation thereof could have a material
adverse impact on Crown.
Applicable laws and regulations require Crown to make
certain capital and operating expenditures to maintain current
operations and initiate new operations. Crown's estimates of
expenditures required to comply with applicable regulations
are included in all of its budgets for its projects. Although
these costs are difficult to determine, Crown is not currently
aware of any expenditure that is required in excess of
budgeted amounts. Crown incurs expenditures for land
reclamation undertaken in the normal course of operations in
compliance with federal and state land restoration laws and
regulations. Under certain circumstances, it may be required
to close an operation until a particular problem is remedied
or to undertake other remedial actions. However, Crown is not
aware of the existence of any such circumstances at this time.
Gold Price.
The future profitability of Crown's operations is
significantly dependent on the price of gold. The gold price
has fluctuated widely over time due to factors beyond Crown's
control and, in the third quarter of 1999, reached a twenty-
year low of $251 per ounce. The gold price continued to
remain at depressed levels during most of 2000 and 2001. Many
factors influence the price of gold including interest rates,
rate of inflation, the strength of the U.S. dollar in relation
to other currencies, supply and demand, economic conditions,
and political turmoil. Crown cannot predict whether gold
prices will remain at a level at which its reserves can be
mined profitably.
Insurance.
The gold mining industry is subject to risks of human
injury, environmental liability and loss of assets. Crown
maintains insurance coverage consistent with industry
practice, but can give no assurance that this level of
insurance can cover all risks of harm to Crown associated with
being involved in the mining business.
Employees.
As of March 5, 2002, Crown employed seven persons. Crown
considers its relations with employees to be excellent. All
employees are eligible to participate in Crown's stock option
plans. None of Crown's employees are covered by a collective
bargaining agreement.
Item 2. Properties
Reserves and Mineral Deposits
The following table shows gold reserves Crown at December 31,
2001:
Mineable Proven and Probable Reserves
Ore Gold Grade Contained Gold
(Millions of tons) (oz/ton) (000 ozs)
Crown Jewel
Project 2.14 0.392 839
Crown's proven and probable reserves are reported as
mineable (extractable) ore reserves. Reserves do not reflect
recovery losses in the milling process, but do include
allowance for dilution of ore in the mining process.
Metallurgical recovery of 85% was estimated. Due to the
continued low price of gold, a gold price of $280 per ounce
has been applied to the reserves as of December 31, 2001, the
same as at December 31, 2000, and compared to a gold price of
$325 utilized as of February 2000. The reserves are based upon
an independent analysis performed by Mine Reserves Associates
("MRA") in March 2000. As of July 2001, Crown gained 100%
ownership in the Crown Jewel Project. See Crown Jewel
Project.
In addition to the proven and probable reserves shown
above, the Crown Jewel Project contains mineral resource
deposits reported by MRA of 1,184,000 tons at a grade of 0.403
ounces of gold per ton for a total of 477,000 contained ounces
of gold. These tons are included to be mined and processed in
the mine plan developed by MRA.
In addition to the above, Crown has identified mineral
deposits on the Cord Ranch property in Nevada and the Kings
Canyon property in Utah. Crown has no proven and probable
reserves or capitalized costs associated with these properties
as of December 31, 2001 or 2000.
The following discussion summarizes the primary mining
properties in which Crown has interests. Company management
believes the properties described below are favorable for
mineral development, although there is no assurance that any
of the properties, in which Crown has or may acquire an
interest, will be economically viable.
Crown Jewel Project
General. The Crown Jewel Project is located on an
approximate 2,000-acre property 24 miles east of Oroville,
Washington. Crown discovered the Crown Jewel Project in 1988,
and has a carrying value of approximately $14.4 million in
land, acquisition and exploration costs as of December 31,
2001. The Crown Jewel Project is currently 100% owned by
Crown and was held in a joint venture with Newmont prior to
July 2001.
The Crown Jewel Project is held by a combination of fee
ownership, private mining leases with options to purchase,
state mining leases, with the balance being unpatented mining
claims. Royalties payable to third parties vary from 4%-5%
net smelter return royalties ("NSR") on certain private
parcels. The ore body as currently defined is subject to a
sliding-scale royalty payable to Newmont of 0.5% to 4%,
depending on the price of gold.
Geology and Land. The Crown Jewel Project deposit occurs
within a large skarn system formed at the southern contact of
the Buckhorn Mountain Cretaceous-aged diorite-granodiorite
pluton with Triassic-aged limestones and andesites. Both the
skarn system and the ore body are relatively tabular and flat
lying in geometry. The skarn system is compositionally zoned
in relation to the intrusive pluton with gold mineralization
both concordant and crosscutting to the various skarn
assemblages.
Newmont Joint Venture. In March 1990, Crown entered into
a joint venture agreement with Newmont (the "Agreement"),
where Newmont was earning a 46% interest in the Crown Jewel
Project by building a 3,000-ton per day mining facility. The
Agreement was subsequently modified in May 1994. Under the
Agreement as modified, Newmont paid to Crown $18,500,000, and
since March 14, 1990, funded all exploration and permitting on
the Crown Jewel Project. On July 23, 2001, Crown announced
the completion of an agreement (the Termination Agreement")
with Newmont to terminate the Agreement. As part of the
Termination Agreement Crown became the sole owner and manager
of the Crown Jewel Project and granted Newmont a sliding scale
royalty of O.5% to 4% on the first 1 million ounces of gold.
The royalty varies with the price of gold and Crown may
purchase the royalty from Newmont for a payment of $2 million
any time over the next five years. Crown will be seeking
regulatory approval and permits to operate a primarily
underground mining operation at the Crown Jewel Project, which
Crown believes significantly reduces the environmental impacts
compared to the open-pit mining plan proposed by Newmont.
Newmont's plan proposed moving over 105 million tons of
material, producing 8.5 million tons of ore over an eight-year
period. Crown's underground proposal would move less than 10%
of the material of the Newmont plan and estimates the total
ore produced at approximately 3.3 million tons. Crown recorded
$353,000 in mineral property additions in connection with the
termination of the joint venture related to the assumption of
liabilities of $116,000 in property taxes payable in 2001 and
$237,000 for the Keystone Note.
Reserves. In February 2000 Crown engaged MRA to conduct
an independent analysis of an alternative mine plan that
reduces environmental impacts. Crown also engaged Gochnour
and Associates ("Gochnour"), an independent mining consultant,
to evaluate the ability to obtain permits for the alternate
mine plan. Based upon the reports of MRA and Gochnour, Crown
has determined that the Crown Jewel Project contains
sufficient reserves to recover Crown's investment. At
December 31, 2000, Crown revised the reserves based upon an
analysis by MRA, which increased the cut-off grade from 0.155
ounces per ton to 0.20 ounces per ton. The gold price was
reduced, for Crown's economic analysis of the Crown Jewel
Project, from $325 to $280 per ounce.
The following table summarizes the Crown Jewel Project
reserves as of December 31, 2001, as provided by MRA:
Proven and Probable Reserves (100% basis)
Grade Contained
Tons (oz/ton) Ounces
Crown Jewel Project 2,139,000 0.392 839,000
Reserve Study. The MRA study indicates the deposit could
be mined in a combination of underground operations with a
small open-cut, with ore processed on site in a mill
processing 1,850 tons per day.
The reserve analysis was based on results from 765 drill holes
totaling 307,038 feet. MRA's mine design utilizes a 0.20
ounces of gold per ton ("opt") cutoff grade with an 85%
metallurgical recovery factor for gold. The assumed economic
parameters applied to the design included a $280 gold price,
mining costs of $26.20 per ton for underground and $25.74 per
ton of ore, including stripping costs, for the open cut. The
open cut is assumed to produce 308,000 tons of ore at an
average grade of 0.289 opt with a strip ratio of 10.7:1. The
MRA design utilizes the waste rock from the open cut for
tailings dam construction and to backfill the underground
mining areas to reduce subsidence and increase the recoverable
underground ounces. The underground mine is assumed to
produce 1,831,000 tons of ore at an average grade of 0.410
opt. The design calls for a processing facility rated at 1,850
tons per day utilizing the parameters developed in the 1992
feasibility study, updated for subsequent engineering studies,
for a carbon in leach mill with an 85% recovery factor. The
estimated milling costs are $13.60 per ton with project
administration estimated at $2.00 per ton.
Based upon the same cutoff grade, MRA has estimated other
mineral deposits of 1,184,000 tons grading 0.403 opt for a
total of 477,000 contained ounces within the currently
designed underground workings at the Crown Jewel Project.
The cash operating costs to mine proven and probable
reserves and deposits within the underground workings have
been estimated by MRA to be approximately $124 per ounce, with
capital costs of approximately $91 million (including $21
million of contingency) to bring the Crown Jewel Project into
production.
Exploration. Crown began an exploration program at the
Crown Jewel Project in mid-1988 and by the end of 1989 had
drilled approximately 200 holes on the property. Between
March 1990 and December 1992, Newmont drilled over 550 holes
designed to both confirm and expand the known reserve. To
date, only 500 acres of the approximate 2,000 acres of
prospective skarn geology have been drill-tested.
Feasibility Study. Prior to the MRA study Crown relied
upon the results of an independent feasibility study
commissioned by Newmont in March of 1992. Based on this
study, Newmont began development of the Crown Jewel Project
based on a mine design utilizing an open pit and a 3,000-ton
per day mining facility. Further engineering and reserve
studies by Newmont estimated direct cash production costs at
approximately $165 per ounce of gold produced. Newmont's mine
design estimated capital costs at approximately $80 million to
achieve commercial production.
Permitting and Development. Newmont submitted
its original Plan of Operations to the Washington
Department of Ecology ("WDOE") and the United Stated
Forest Service ("USFS") in January 1992. In February
1997, the Final Environmental Impact Statement
("FEIS") was filed by the USFS and the WDOE. The FEIS
describes the environmental effects of the plan to
construct and operate the Crown Jewel Project mine,
and alternatives to that plan. Also, in February
1997, the USFS and the Bureau of Land Management
issued a favorable Record of Decision ("ROD")
selecting Newmont's open pit mining alternative.
Several appeals by certain persons and special
interest groups contesting the FEIS were filed with
the USFS in 1997. In May of 1997, the USFS Deputy
Regional Forester upheld the ROD to approve the Crown
Jewel Project, denying four appeals, which had been
filed in March 1997. In May 1997, an action was
filed in U.S. District Court against the USFS
appealing certain issues. In January 1999, the Court
ruled in favor of the USFS and denied all claims of
the plaintiffs.
In January 2000, the State of Washington Pollution
Control Hearings Board ("PCHB") issued a ruling vacating
the previously granted 401 Water Quality Permit for the
Crown Jewel Project issued by the Washington Department of
Ecology ("WDOE"). The ruling also reversed certain water
rights issued by the WDOE for the Crown Jewel Project. At
the time, the PCHB ruling created further delay and
uncertainty regarding a timetable for the construction of
the Crown Jewel Project. In March 2000, Newmont filed an
appeal in Superior Court for the State of Washington for
Okanogan County, challenging the PCHB ruling. In light of
the termination of the Crown Jewel Project Joint Venture
and Crown's intention to permit a primarily underground
mine, Crown will not pursue this action and Newmont has
dropped its appeal. It is not known if other permits
previously granted to the Crown Jewel Project may be
subject to review as a result of the PCHB ruling.
As part of the analysis of the Crown Jewel Project
reserves subsequent to the January 2000 PCHB ruling, Crown
retained Gochnour, to review the required permits for the
mine design as proposed in the MRA report. Gochnour
indicated the MRA design would require conducting
additional baseline studies and collecting data for
modeling to amend previously approved permits as well as
to obtain permits for activities that were not previously
contemplated, for example the underground mining effects
on ground water. Gochnour indicated the underground
alternative would also require mitigation of environmental
impacts. The Gochnour report concluded the MRA mine
design is legally permittable. Although Crown and
Gochnour are not aware of any laws or regulations which
would be violated by the mine design proposed by MRA,
there will continue to be uncertainty regarding the
ability of Crown obtaining the necessary permits from the
regulatory authorities in a timely manner, if ever.
Construction of the Crown Jewel Project will not
begin prior to the successful completion of the remaining
permit applications and resolution of the legal and
administrative challenges. Potential delays due to the
appeals process, permit process or litigation are
difficult to quantify. See Legal Proceedings.
Financing. Since July 2001, when Crown obtained a
100% interest in the Crown Jewel Project, Crown has
evaluated whether to either proceed with the Crown Jewel
Project alone or seek a joint venture with another major
mining company. There is no assurance that Crown could
successfully pursue either strategy.
Crown would require additional capital in the form of
either equity or debt financing, or enter into a joint
venture to permit, develop and operate the Crown Jewel
Project. No assurance can be given that such financing
would be available on acceptable terms in order for the
Crown Jewel Project to enter into commercial production.
See also Corporate Reorganization and Management's
Discussion and Analysis of Financial Condition and Results
of Operations.
Other Property Interests
Cord Ranch Project. The Cord Ranch Project currently
consists of two property acquisitions, the Pinon and Dixie
Creek properties (collectively the "Pinon Project") which
were made in 1990. The Pinon Project, consisting of
approximately 1,880 acres of unpatented claims, was
acquired under agreements entered into in October 1990.
The Pinon Project properties are subject to a joint
venture with Royal Standard Minerals Inc. ("Royal
Standard") whereby Royal Standard has earned a 70%
interest in these properties. In 2000, Crown wrote off
its remaining land and leasehold investment in the Pinon
Project properties. However, Crown will continue to hold
the properties while Royal Standard seeks a joint venture
partner to further evaluate and develop the deposits.
Kings Canyon. The Kings Canyon property in Utah
consists of 1,525 acres of state leases and unpatented
claims. Crown holds a 100% interest in the property,
subject to a 1-4% NSR royalty to third parties. Crown
estimates the Kings Canyon property hosts a mineral
deposit that contains 6.8 million tons of material grading
0.030 opt of gold at a cutoff grade of 0.013 opt gold.
The gold occurs as sediment-hosted disseminated
mineralization in Paleozoic carbonate rocks. During 2000,
Crown wrote off its remaining land and leasehold
investment in the Kings Canyon property. Crown will
however continue to maintain the property and seek a joint
venture partner to further evaluate and develop Kings
Canyon.
Kendall Mine and Lamefoot Royalty. Crown held certain
mining leases on the Kendall mine property located near
Lewiston, Montana and Crown held various royalties on the
Lamefoot deposit located in Washington State. These
property interests were both held through its wholly owned
subsidiary, Judith Gold. In January 2001, Crown sold its
holding in Judith Gold Corporation to Canyon Resources
Corporation for 200,000 shares of Canyon common stock. A
gain on sale of $200,000 was recorded during 2001 on the
sale of Judith Gold.
Peru and Brazil
Primarily as a result of the issuance, in October
2000, of Solitario shares in connection with its
acquisition of Altoro Gold Corporation of Vancouver, BC,
Canada, Crown's ownership percentage of Solitario was
reduced from 57.2%, prior to the acquisition, to 41.2% at
December 31, 2001. Accordingly Crown has accounted for
its investment in Solitario under the equity method since
the acquisition. Crown's interest in the net assets of
Solitario is shown in the Consolidated Balance Sheet as of
December 31, 2001 as equity in unconsolidated subsidiary.
As of December 31, 2001, Crown has no direct interest in
properties outside of the United States.
Exploration Expenditure Overview
During 2001, Crown incurred $5,000 in expenditures
conducting exploration activities on its Crown Jewel
Project. Crown's properties are subject to leases and/or
options to purchase. Crown is required to make
approximately $24,000 in payments for its share of 2002
annual lease and rental obligations and option payments
for properties it currently holds. Certain other mining
claims and properties not subject to leases were acquired
by Crown either by deed or were located by Crown. With
respect to the claims and other properties acquired by
deed or located by Crown, the obligation required to hold
the claims is to pay ad valorem property taxes in the case
of the patented mining claims and fee land, and annual
rental fees in the case of the unpatented mining claims.
See Considerations Related to Crown's Business.
2002 Mineral Lease and Rental Commitments
Payments
On leases,
Unpatented Crown's Share
Claims and of Costs
Property Concessions in 2002(1)(2)
Crown Jewel Project $ 22,000 $ 22,000
Cord Ranch 5,000 -
Kings Canyon 2,000 2,000
TOTAL: $ 29,000 $ 24,000
(1) Represents Crown's estimated share of rentals and
option payments in 2001 based upon existing joint
venture or leasing arrangements. (This estimate does
not include costs to be borne by other joint
venturers.)
(2) Crown has no work commitments remaining to be
fulfilled in 2002.
Item 3. Legal Proceedings
In March 1997, administrative appeals of the ROD for
the Final Environmental Impact Statement ("FEIS") for the
Crown Jewel Project were filed against the United States
Forest Service, ("USFS") by members of the following
parties: (i) a joint appeal by the Okanogan Highlands
Alliance, Washington Environmental Council, Colville Indian
Environmental Protection Alliance, Washington Wilderness
Coalition, Rivers Council of Washington, and Sierra Club,
Cascade Chapter; (ii) Confederated Tribes of the Colville
Reservation; (iii) Columbia River Bioregional Education
Project; and (iv) Kettle Range Conservation Group; (all
groups collectively the "Plaintiffs"). The appeals were
denied in May 1997.
Pollution Control Hearings Board
Since the fourth quarter of 1997, members of the
Plaintiffs, and others filed a total of seven actions (PCHB
Nos. 97-146, 97-182, 97-183, 97-185, 97-186, 98-019 and 99-
019) against the Washington Department of Ecology ("WDOE")
before the Pollution Control Hearings Board ("PCHB"), a
state administrative tribunal, challenging the FEIS and
certain permit decisions. Although the PCHB dismissed or
ruled in favor of the WDOE on three of the actions (PCHB
97-146, 97-185 and 98-019), after a consolidated hearing on
the remaining actions, in January of 2000, the PCHB issued
a ruling vacating the previously granted 401 Water Quality
Permit for the Crown Jewel Project issued by WDOE. The
ruling also reversed certain water rights issued by the
WDOE for the Crown Jewel Project. On March 14, 2000,
Newmont filed an appeal in Superior Court of the State of
Washington for Okanogan County challenging the PCHB ruling.
In light of the termination of the joint venture between
Crown and Newmont and Crown's announced intention to permit
a primarily underground mining plan, Crown will not pursue
this action and Newmont has dropped this appeal.
United States District Court
In late May 1997, members of the Plaintiffs
filed an action in United States District Court
for the District of Oregon against the USFS
appealing the Forest Service's issuance of the
FEIS, its decision to uphold the ROD and the
denial of administrative appeals. On December
31, 1998 the Court affirmed the decisions of the
USFS on the adequacy of the FEIS by granting all
motions for summary judgement on behalf of the
USFS and BMG, while denying all motions of the
Plaintiffs. Members of the Plaintiffs appealed
the decision to the Ninth Circuit Court of
Appeals in April of 1999. The appeal was denied
in December of 2000.
Thurston County Superior Court
In December of 1997, the members of the
Plaintiffs filed three separate actions against
the WDOE in Superior Court of the State of
Washington for Thurston County. The actions
challenge the WDOE's approval of permits issued
to BMG for water resource mitigation and solid
waste permit rulings. In April 1998, members of
the Plaintiffs dismissed one of the three actions
related to the tailings and solid waste permits
without prejudice. In November 1998, the
remaining two actions were consolidated. The
case is currently pending and no trial date has
been set. In light of the termination of the
joint venture between Crown and Newmont and
Crown's intention to permit a primarily
underground mine, Crown will not pursue the
action.
United States District Court for the District of
Oregon
This action, commenced in November 1999 by
members of the Plaintiffs against the Department
of the Interior, et al., challenges the
reinstatement of the Crown Jewel Project Record
of Decision and the grant of the Plan of
Operations for the Crown Jewell Project. In July
2000, Newmont filed non-merits dispositive
motions. Responses and reply briefs on the
motions have been received and oral arguments on
the dispositive motions were held November 6,
2000. In April of 2001, the Court denied the
appeal.
Department of the Interior
In May 2000, members of the Plaintiffs filed
a protest of the patent application for the
grandfathered Crown Jewel Project lode claims.
The protest was filed in the Washington/Oregon
State Bureau of Land Management office. The
Department of the Interior has invited Newmont
and/or Crown to submit a response to the protest,
but has not set a date for such response or a
time frame for the resolution of the protest.
Crown is considering filing a response to this
protest.
The impact and timing of resolutions of
these and any other appeals related to the
permitting process cannot be determined with any
accuracy at this time. See Properties - Crown
Jewel Project - Permitting and Development.
Item 4. Submission of Matters to a Vote of
Security Holders
There were no matters submitted to a vote of
security holders during the fourth quarter of
2001
EXECUTIVE OFFICERS
The executive officers of Crown are as follows:
Name and municipality Position with Crown and
business
of residence Age experience within the
last five years
MARK E. JONES, III 62 Chairman of Crown since
1987,
Houston, Texas Chief Executive Officer
from 1987 to
1993 and President from
September 1989
to November 1990;
Chairman of Solitario
since August 1993.
CHRISTOPHER E. HERALD 48 Chief Executive Officer
of Crown
Golden, Colorado since June of 1999, the
President of Crown
since November 1990.
Chief Executive
Officer of Solitario
since June of 1999,
President of Solitario
since August 1993.
JAMES R. MARONICK 46 Chief Financial Officer
of Crown Lakewood, Colorado since June
1999, Vice President -
Finance and Secretary/Treasurer of the
Company and Solitario since September
1997; Vice President -
Finance and
Secretary/Treasurer of Consolidated
Nevada Goldfields
Corporation from
November 1994 to September 1997.
DEBBIE W. MINO 49 Vice President -
Investor Relations
Sugar Land, Texas of Crown since 1989.
WALTER H. HUNT 50 Vice President - South
American Lima, Peru
Operations of Crown since July
1994; President - South American
Operations, Solitario since
June
1999; Vice President -
Peru Operations of
Solitario since July 1994.
The Board of Directors appoints officers of Crown.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The common stock of Crown had been listed and traded on
the NASDAQ National Market under the symbol CRRS since 1989.
On October 20, 2000 the NASDAQ Stock Market notified Crown
that its common stock was no longer listed on the NASDAQ
National Market because the stock had failed to maintain a
minimum bid price of $1.00 for 30 consecutive trading days as
required for continued listing on the NASDAQ National Market.
The common shares of Crown are now traded on the Over the
Counter Bulletin Board (OTCBB) under the symbol OTCBB: CRRS.
Crown's stock was listed and traded in Canada on the
Toronto Stock Exchange ("TSE") since December 10, 1991,
under the symbol CRO. In October 2001, Crown was notified
by the TSE that it was no longer listed on the TSE because
Crown failed to meet the minimum listing requirements of
the TSE.
The following table sets forth the high and low sales
prices on the OTCBB and NASDAQ National Market for Crown's
common stock for the quarterly periods from January 1,
2000 to December 31, 2001.
Prices (US$)
High Low
2000:
First Quarter 2.00 0.94
Second Quarter 1.19 0.63
Third Quarter 0.96 0.38
Fourth Quarter 0.56 0.23
2001:
First Quarter 0.45 0.24
Second Quarter 0.30 0.13
Third Quarter 0.27 0.12
Fourth Quarter 0.19 0.07
Holders of common stock are entitled to receive such
dividends as may be declared by the Board of Directors.
Crown has not paid any dividends on its common stock and
does not anticipate paying any dividends in the
foreseeable future. At February 25, 2002, there were
2,348 record holders of Crown's common stock.
In October 2001, Crown issued $3,600,000 of Senior Notes
and related warrants, see Item I, Recent Developments.
These securities were issued pursuant to an exemption
under Section 4(2) of the 1933 Securities Act.
Item 6. Selected Financial Data
The selected consolidated financial data set forth
below for each of the five years in the period ended
December 31, 2001 and as of the years then ended has been
derived from the audited consolidated financial statements
of Crown (not all of which financial statements are
presented herein). The selected consolidated financial
data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and
Results of Operations and the audited consolidated
financial statements and related notes thereto included
elsewhere in this report.
Balance sheet data: As of December 31,
(in thousands) 2001 2000 1999 1998 1997
Total assets $21,265 $20,095 $22,709 $36,500 $34,338
Current portion
long term debt 18,322 15,000 - - -
Long term debt - - 15,000 15,000 15,000
Working capital(deficit)(15,713) (14,211) 4,881 7,839 5,521
Stockholders' equity 1,850 4,695 5,980 17,182 13,979
Income statement Year ended December 31,
data: (in thousands, 2001 2000 (1) 1999 (2) 1998 1997
except per share amounts)
Revenues $ 248 $ 6,401 $ 538 $ 610 $ 685
Net loss before
change in accounting
principle (3,148) (1,659) (2,666) (1,928)
(4,979)
Change in accounting
principle - - (8,451) - -
Net loss $(3,148)$(1,659) $(11,117)$(1,928)
$(4,979)
Basic loss per share
before change in
accounting principle $(0.22) $(0.11) $(0.18) $(0.13) $(0.38)
Change in accounting
principle - - (0.58) - -
Basic loss per share $(0.22) $(0.11) $(0.76) (0.13) $(0.38)
(1) Includes the operations of Solitario on a consolidated
basis through October 18, 2000. Subsequent to October 18,
2000, the results of Solitario are reflected under the
equity method of accounting.
(2) Crown changed its method of accounting for exploration costs and
recorded a $8.5 million charge related to the cumulative effect of
the change in accounting principle to operations in 1999.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction
with Crown's consolidated financial statements for the years
ended December 31, 2001, 2000 and 1999, included elsewhere
in this report. Crown's financial condition and results of
operations are not necessarily indicative of what may be
expected in future years.
Corporate Reorganization
On March 8, 2002, CRC filed a voluntary
petition for protection under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy") in
the United States Bankruptcy Court for the District
of Colorado (the "Court"). As part of the
Bankruptcy CRC filed a Plan of Reorganization (the
"Plan") and a Disclosure Statement with the Court on
March 27, 2002. The Plan contemplates a
restructuring of CRC's 5.75% convertible
subordinated debentures, which were due August 27,
2001 (the "Debentures") through an exchange of
outstanding Debentures, including any accrued
interest thereon for the following consideration to
be proportionally distributed to each Debenture
holder:
(i) $1,000,000 in cash;
(ii) $2,000,000 in 10% Convertible Secured
Notes (the "Secured Notes") convertible
into Crown common shares at $0.35 per
share. The Secured Notes will be pari-
passu to and have essentially the same
terms as certain Senior Notes, issued
in October 2001 and discussed below,
including a 10% interest rate payable
in cash or stock at CRC's option, and a
maturity date of October 2006.
(iii) Warrants, which entitle the holders the
right to purchase, in the aggregate,
5,714,285 shares of CRC common stock at
an exercise price of $0.75 per share.
The warrants expire in October 2006;
(iv) $4,000,000 of convertible unsecured
subordinated notes (the "Unsecured
Notes") convertible into common stock
of CRC at $0.75 per share. The
Unsecured Notes would pay interest at
10% in stock or cash at CRC's option,
and mature on the same date as the
Secured Notes.
All other liabilities of CRC and Crown would be
paid in the normal course under the Plan.
The Plan contemplates a 5 for 1 reverse split
of the currently outstanding common stock, while
maintaining the conversion and exercise prices of
the Senior Notes, the Secured Notes, the Unsecured
Notes and the related warrants. The Plan
contemplates that, immediately after the approval of
the Plan, assuming full dilution, the Senior Note
holders would own approximately 52% of the common
stock, the Debenture holders would own approximately
41% of the common stock and current shareholders
would own approximately 7% of the common stock. The
Plan also contemplates the cancellation of CRC's
preferred stock, currently held by a wholly owned
subsidiary and which is eliminated in consolidation.
After being filed with the Court, the Plan must
be voted on by CRC's creditors and shareholders. If
the Plan is approved by the Court, the Plan becomes
a legally binding agreement between CRC and its
creditors and shareholders. Subject to any
objections and related delays, Crown anticipates the
Court could set a hearing to determine the adequacy
of the Disclosure Statement and Confirmation of the
Plan, prior to June 30, 2002.
There can be no assurance given that the Plan will be
approved by the creditors or shareholders, nor that the Court
will confirm the Plan as filed, if at all. If the Plan is not
confirmed by the Court, there can be no assurance that Crown
will have sufficient funds to continue as a going concern, to
restructure the Debentures on acceptable terms or continue
operations. If the Plan is not confirmed by the Court, Crown
may be forced to liquidate its assets under Chapter 7 of the
U.S. Bankruptcy Code and to cease operations.
Senior Note financing
In October 2001, Crown issued $3,600,000 of 10%
convertible secured promissory notes due in October 2006 (the
"Senior Notes"). Pending confirmation of the Plan, discussed
above, Crown intends to use a portion of the proceeds from
this financing to restructure the Company's existing
Debentures and initiate permitting on its Crown Jewel Project
in the state of Washington. The Senior Notes are secured by
all the assets of Crown, consisting primarily of its interest
in the Crown Jewel Project and its wholly-owned subsidiary,
Crown Resource Corp. of Colorado whose assets consist
primarily of a 41.2% equity interest in Solitario.
The Senior Notes have a five-year term and carry a 10%
interest rate payable quarterly in cash or Crown common stock,
at the election of the Crown. Proceeds of $3,250,000 from the
Senior Notes were placed in escrow pending restructuring of
the Debentures (the specific Senior Notes related to the
proceeds placed in escrow are also referred to as "Escrowed
Notes"). Solitario invested $650,000 in these Escrowed Notes.
The Escrowed Notes are convertible into Crown common shares
at a conversion price of $0.35 per share, subject to
adjustment. In addition, the Escrowed Note holders have been
issued a five-year warrant for every share into which the
Escrowed Notes are convertible, which warrant will be
exercisable into a Crown common share at $0.75 per share,
subject to adjustment. Solitario also invested in a separate
Senior Note, (referred to as the "Solitario Note") for the
remaining $350,000 of the Senior Notes. These funds were made
immediately available to Crown for general corporate purposes.
The Solitario Note is convertible into Crown common shares at
a conversion price of $0.2916 per share, subject to
adjustment. In addition, Solitario has been issued a five-
year warrant to acquire 1,200,000 shares of Crown common stock
at $0.60 per share, subject to adjustment. The terms of the
Solitario Note and the related warrants are otherwise
identical to the terms of the Escrowed Notes and warrants. On
March 5, 2002, the Crown and the Senior Lenders amended the
terms of the Senior Notes, which released to Crown $200,000 of
the proceeds being held in escrow. Per the terms of the
Senior Notes, as amended, the release of the remaining
escrowed funds is conditional upon the confirmation of a Plan,
on terms acceptable by the holders of the Senior Notes, by
June 30, 2002. The Senior Notes are classified as a current
liability at December 31, 2001 as they are due by June 30,
2002 if the Plan is not confirmed. If the Plan is confirmed
as filed, there will be a substantial dilution to existing
shareholders as further described above under Corporate
Reorganization and the Senior Notes will be classified as a
long-term liability.
Results of Operations
Crown has historically derived its revenues from the
option and sale of property interests, from royalty interests,
interest income and from the sale of its share of gold
produced on its properties. Revenues from the option and sale
of property interests have consisted of a small number of
relatively large transactions. Such transactions have
occurred, and in the future are likely to occur, if at all, at
irregular intervals and have a significant impact on operating
results in the periods in which they occur. In the past,
Crown's exploration expenditures, including those of
Solitario, have constituted the bulk of its activities.
Accordingly, the deconsolidation of Solitario and the
reduction in Crown's assets related to the change in
accounting principle, have affected the comparability of its
assets, income and cash flows for the three years ended
December 31, 2001.
Crown had a net loss of $3,148,000 or $0.22 per share in
2001 compared with a net loss of $1,659,000 or $0.11 per share
in 2000 and a net loss before cumulative effect of an
accounting change of $2,666,000 in 1999 or $0.18 per share.
Total revenues were $248,000 in 2001 compared to
$6,401,000 in 2000 and $538,000 in 1999. During 2000,
Solitario, which was consolidated with Crown through October
2000, completed a transaction with an affiliate of Newmont
Mining Corporation ("Newmont") and sold its interest in its
Yanacocha property for $6 million and a sliding scale net
smelter return royalty that varies with the price of gold.
Crown recorded a gain on sale, on a consolidated basis, of
$5,809,000 on that sale, which accounted for the increase in
revenues during 2000.
Crown's recurring revenues have been primarily derived
from its royalty interests and from interest income. Royalty
income was $112,000 in 2000 and $104,000 in 1999. Royalty
income was from Crown's interest in the Lamefoot deposit at
the Kettle River mine in Washington. The Lamefoot deposit was
mined out during the fourth quarter of 2000 and, in January
2001, Crown sold its interest in Judith Gold, which held the
Lamefoot royalty to Canyon Resources Corporation, for 200,000
shares of Canyon Resources Corporation common stock. As a
result, no future royalty income is expected. Crown recorded
a gain on sale of $200,000, which equaled the proceeds from
the sale during 2001.
Interest income was $34,000 in 2001, compared with
$344,000 in 2000 and $337,000 in 1999. The fluctuations are
due to changes in Crown's average invested cash balances. The
primary factors resulting in the decrease in cash balances
from 2000 to 2001 are the deconsolidation of Solitario and the
payment of interest and other expenses entirely from cash
balances during 2001.
During the fourth quarter of 1999, Crown changed its
method of accounting for exploration costs on properties
without proven and probable reserves from capitalizing all
expenditures to expensing all costs, other than acquisition
costs, prior to the establishment of proven and probable
reserves. This brings Crown's accounting method in accordance
with the predominant practice in the U.S. mining industry.
The $8,451,000 cumulative effect of the change on prior years
is included in the loss for 1999. The effect of the change on
1999 was to increase the loss before cumulative effect of
change in accounting principle by $83,000 or $0.01 per share.
Exploration expense was $5,000 in 2001 compared to
$903,000 in 2000 and $1,025,000 in 1999 primarily as a result
of the deconsolidation of Solitario as of October 2000 and a
reduction of exploration activities by Crown in both the
United States and Mexico.
General and administrative expenses in 2001 were $828,000
compared to $1,171,000 in 2000 and $1,367,000 in 1999. The
lower costs in 2001 and 2000 are the result of reduced
administrative costs, reductions in staff and travel related
to decreased exploration activity especially with regard to
the United States and the deconsolidation of Solitario.
Interest expense was $1,046,000 in 2001 and $971,000 in
each of 2000 and 1999. Interest expense increased during 2001
as a result of the issuance of $3,600,000 of Senior Notes in
October 2001 and additional interest on the Debentures, which
accrued as a result of the default on the Debentures in August
2001. Included in interest expense is amortization of deferred
offering costs of $68,000 in 2001 and $102,000 in each of 2000
and 1999.
Crown regularly performs evaluations of its assets to
assess the recoverability of its investments in these assets.
All long-lived assets are reviewed for impairment whenever
events or circumstances change which indicate the carrying
amount of an asset may not be recoverable utilizing
established guidelines based upon estimated future net cash
flows from the asset. Write-downs relating to exploration
properties amounted to $2,542,000 in 2000 compared to $166,000
in 1999. There were no mineral property write-downs in 2001.
Included in the write-down for 2000 was the abandonment
of the Cord Ranch lease property with a charge to asset write-
downs of $1.2 million. Additionally Crown recorded an asset
write-down of $1.3 million for the impairment of Crown's
interest in the Pinon Range and Dixie Creek prospects at Cord
Ranch as well as the impairment of the King's Canyon property
in Utah. The impairment of Crown's investment in these
properties is attributable to continued low gold prices and an
inability of Crown to complete acceptable joint ventures to
explore and develop these properties.
Minority interest in (income) loss of subsidiary was
$(2,141,000) in 2000 compared to $389,000 in 1999. The income
from Solitario in 2000 was primarily due to Solitario's gain
on sale of the Yanacocha property of $5,809,000.
Liquidity and Capital Resources
Due to the nature of the mining business, the
acquisition, exploration and development of mineral properties
require significant expenditures prior to the commencement of
production. Crown has in the past financed its activities
through the sale of debt and equity securities, joint venture
arrangements (including project financing) and the sale of
interests in its properties. To the extent necessary, Crown
expects to continue to use similar financing techniques.
Crown's exploration and development activities and
funding opportunities, as well as those of its joint venture
partners, may be materially affected by gold price and mineral
commodity levels and changes in those levels. The market
price of gold and mineral commodities is determined in world
markets and is affected by numerous factors, many of which are
beyond Crown's control.
Net cash used in operating activities was $1,163,000 in
2001 compared to $2,416,000 in 2000 and $2,714,000 in 1999.
The reduction in cash used during 2001 related to the
deconsolidation of Solitario, a reduction in exploration
activity and the increase in current payables, primarily as a
result of non-payment of Debenture interest since February
2001. During 2000 the inclusion of Crown's share of
Solitario's gain on sale of the Yanacocha property, mitigated
by the minority interest in the transaction, accounted for a
significant portion of the change. The change between 2000
and 1999 primarily relate to reductions in exploration and
general and administrative expenses.
Net cash used in investing activities in 2001 was $18,000
compared to $1,787,000 in 2000 and $259,000 in 1999. The
fluctuation during 2000 resulted from the inclusion of
Solitario's $5,600,000 proceeds from the Yanacocha sale, which
was offset by the elimination of Solitario's cash of
$6,908,000 when Crown no longer consolidated Solitario and
accounted for its investment under the equity method. During
2001, Crown's additions to mineral properties, consisting of
additions to the Crown Jewel Project, were offset by proceeds
from assets sales.
Net cash provided by financing activities was $320,000 in
2001. There was no cash provided from financing activities
during 2000 compared to $11,000 provided by financing
activities from issuance of common stock in 1999. Proceeds of
$350,000 from the Secured Note financing were delivered to
Crown in October 2001. The balance of the $3,600,000 Senior
Notes financing of $3,250,000 was placed in escrow, pending
confirmation of the Plan.
Crown has budgeted $460,000 for exploration and
development expenditures in 2002 pending confirmation of the
Plan. These expenditures will be directed toward the
permitting of the Crown Jewel Project. These costs include
certain baseline hydrologic studies, work on a Supplemental
Draft Environmental Impact Statement and a socio-impact
studies of various ore processing alternatives. Additionally,
Crown will pay certain maintenance and legal expenses to
maintain Crown's interest in the Crown Jewel Project. The
development of the Crown Jewel Project through initial
production is estimated to be approximately $91 million
(including $21 million in contingencies). Crown will require
significant new capital resources in order to develop the
Crown Jewel Project, which may be in the form of a joint
venture, project or debt finance, or issuance of equity.
There is no assurance Crown will be able to obtain the
necessary capital resources on acceptable terms, if at all.
Cash and cash equivalents amounted to $110,000 at
December 31, 2001. These funds are generally invested in
short-term interest-bearing deposits and securities, pending
investment in current and future projects. Working capital at
December 31, 2001 was a negative $15,713,000.
The accompanying financial statements have been prepared
assuming that Crown will continue as a going concern. As of
December 31, 2001, Crown has a working capital deficiency of
$15,713,000 and Crown has defaulted on its $15,000,000
Debentures, discussed in Note 4 to the accompanying financial
statements. Crown has insufficient liquidity to pay the
Debentures and interest currently due. See Corporate
Reorganization discussed above. There is no assurance that the
Court will approve the Plan or, that if the Plan is not
approved, that Crown will be able to raise sufficient funds or
to restructure the Debentures on acceptable terms. The
accompanying financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Related party transactions
On June 26, 2001, Solitario agreed to acquire 200,000 shares
of Canyon Resources Corporation common stock from Crown at its
fair market value of $200,000 at that date. Solitario sold
the shares for $245,000 in February 2002, the fair market
value at that date. The transaction provided additional
working capital to Crown, and was approved by independent
Board members of both Crown and Solitario.
In October 2001, Solitario invested in two Secured Notes
totaling $1,000,000 of the Secured Notes issued by Crown. The
proceeds from the first note, the Solitario Note, of $350,000
were delivered to Crown. The proceeds from the second Note,
of $650,000 were placed in escrow pending the outcome of the
Bankruptcy. See Note 1 and 5. In March an additional
$200,000 was advanced to Crown out of escrow of which
Solitario's share of the advance was $56,000. The independent
Board members of both Crown and Solitario approved the
transaction. The terms of the transaction were the same as
given to other Senior Lenders and, with regard to the terms of
the $650,000 note, the terms were negotiated with and approved
by the other Senior Lenders.
Exploration Activities
A significant part of Crown's business involves the review
of potential property acquisitions and continuing review and
analysis of properties in which it has an interest, to
determine the exploration and development potential of the
properties. In analyzing expected levels of expenditures for
work commitments and lease obligations, Crown considers the
fact that its obligations to make such payments fluctuate
greatly depending on whether, among other things, Crown makes a
decision to sell a property interest, convey a property
interest to a joint venture, or to allow its interest in a
property to lapse by not making the work commitment or payment
required.
Crown estimates that during 2002 there will be no work
commitments remaining to be fulfilled by Crown on its existing
properties. Crown's estimates it will pay approximately
$24,000 for its share of rental obligations and other property
payments for 2002.
New Accounting Pronouncements
Critical Accounting Policies
Land and leasehold acquisition costs are capitalized
in cost centers and are depleted on the basis of the
cost centers' economic reserves (estimated recoverable,
proven and probable reserves) using the units-
of-production method. If there are insufficient economic
reserves to use as a basis for depleting such costs, they
are expensed as a mineral property write-off in the period
in which the determination is made.
During 1999, Crown changed its method of accounting for
exploration costs on properties without proven and
probable reserves from capitalizing all expenditures to
expensing all costs incurred, other than acquisition
costs, prior to the establishment of proven and probable
reserves (See Note 2).
Crown records the proceeds from the sale of property
interests as a reduction of the related property's
capitalized cost. Proceeds that exceed the capital
cost of the property are recorded as revenue. When
such proceeds are associated with properties subject to
a joint venture, they are recorded as revenue in accordance
with the terms of the joint venture and the transfer of the
property interest to the joint venture partner during the
term of the joint venture.
Crown regularly performs evaluations of its assets to
assess the recoverability of its investments in these
assets. All long-lived assets are reviewed for impairment
whenever events or circumstances change which indicate the
carrying amount of an asset may not be recoverable utilizing
established guidelines based upon future net cash flows
from the asset. Write-downs relating to mineral properties
were to $2,542,000 in 2000 and $166,000 in 1999. There
were no mineral property write-downs in 2001. The write-
down for 2000 included Crown's decision to write off
its Cord Ranch and Kings Canyon properties due to low
gold prices resulting in a $2,482,000 charge to operations.
In August 2001, the Financial Accounting Standards Board
issued Statement No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("SFAS No. 144"). SFAS No. 144
Supersedes SFAS No. 121, and provides for the use of
probability weighted cash flow estimation in determining cash
flows for the impairment of assets as well as establishing
methods for accounting for assets to be disposed of other than
by sale. Crown is required to implement SFAS No. 144 on January
1, 2002 and has not determined the impact that this statement
will have on its consolidated financial position or results of
operations.
In July 2001, the Financial Accounting Standards Board
(?FASB?) issued Statement of Financial Accounting Standards No.
141 (?SFAS No. 141"), ?Business Combinations.? SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. On an
annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be
tested for impairment, and write-downs may be necessary. Crown
implemented SFAS No. 141 during 2001 and it has not had a
material impact on its consolidated financial position or
results of operations.
In July 2001, the Financial Accounting Standards Board
issued Statement No. 142, ?Goodwill and Other Intangible
Assets? (?SFAS No.142"). SFAS No. 142 changes the accounting
for goodwill from an amortization method to an impairment-only
approach. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon
adoption of this statement. Crown intends to implement SFAS
No. 142 on January 1, 2002 and it is not expected to have a
material impact on its consolidated financial position or
results of operations.
The Company will adopt SFAS 143
, "Accounting for Asset Retirement Obligations", no
later than January 1, 2003. Under SFAS 143, the fair
value of a liability for an asset retirement obligation
covered under the scope of SFAS 143 would be recognized
in the period in which the liability is incurred, with
an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability would
be accreted to its present value, and the capitalized
cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity
would either settle the obligation for its recorded amount
or incur a gain or loss upon settlement. The Company is
still studying this newly-issued standard to determine,
among other things, whether it has any asset retirement
obligations which are covered under the scope of SFAS 143.
The effect to the Company of adopting this standard, if any,
has not yet been determined.
Environmental, Permitting and Legal
The Final Environmental Impact Statement ("FEIS") on the
Crown Jewel Project was issued to the public in February 1997.
In May of 1997, the United States Forest Service ("USFS")
upheld the Record of Decision ("ROD") to approve the Crown
Jewel Project. In May 1997, an action was filed in U.S.
District Court against the USFS appealing its decision to
uphold the ROD. This action was dismissed on December 31,
1998. In January of 2000, the Pollution Control Hearings Board
("PCHB"), a state administrative tribunal, vacated the
previously granted 401 Water Quality Permit for the Crown
Jewel Project issued by Washington Department of Ecology
("WDOE"). The ruling also reversed certain water rights
issued by the WDOE for the Crown Jewel Project. On March 14,
2000, Newmont filed an appeal in Superior Court of the State
of Washington for Okanogan County challenging the PCHB ruling.
In light of the termination of the Crown Jewel Project Joint
Venture and Crown's intention to permit a primarily
underground mine, Crown will not pursue this action and
Newmont has dropped its appeal. It is not known if other
permits previously granted to the Crown Jewel Project may be
subject to review as a result of the PCHB ruling.
Crown engaged Mine Reserves Associates ("MRA") to conduct
an independent analysis of its Crown Jewel Project reserves in
March 2000. Per the MRA report, Crown is reporting proven and
probable reserves of 2,139,000 tons at a grade of 0.392 for a
total of 839,000 contained ounces. The MRA design would use
the bulk of the waste rock material from mine design for
tailings dam construction and to backfill the underground
mining areas, in order to increase the recoverable underground
ounces.
As part of the analysis of the Crown Jewel Project
reserves subsequent to the January 2000 PCHB ruling, Crown
retained Gochnour and associates ("Gochnour"), an independent
mining environmental consultant, to review the required
permits for the mine design as proposed in the MRA report.
Gochnour indicated the MRA design would require conducting
additional baseline studies and collecting data for modeling
to amend previously approved permits as well as to obtain
permits for activities that were not previously contemplated,
for example the underground mining effects on ground water.
Gochnour indicated the underground alternative would also
require mitigation of environmental impacts. The Gochnour
report concluded the MRA mine design is legally permittable.
Although Crown and Gochnour are not aware of any laws or
regulations which would be violated by the mine design
proposed by MRA, there will continue to be uncertainty
regarding the ability of Crown obtaining the necessary permits
from the regulatory authorities in a timely manner, if ever.
Construction of the Crown Jewel Project will not begin
prior to the successful completion of the remaining permit
applications and resolution of the legal and administrative
challenges. Potential delays due to the appeals process, the
permit process or litigation are difficult to quantify. There
are no assurances that required permits will be issued in a
timely fashion, that Crown will prevail in current or future
legal actions or that conditions contained in permits issued
by the agencies will not be so onerous as to preclude
construction or operation of the Crown Jewel Project.
Additionally, uncertainties exist with respect to the
timing of commercial production at the Crown Jewel Project, as
well as the potential fluctuation in gold prices, which could
have a material effect upon Crown's ability to fund its
operating activities in the long term. There is no assurance
that such funding will or can be secured on terms favorable to
Crown, if at all.
Item 7a. Quantitative and Qualitative Disclosure About Market
Risk
Crown is exposed to market risks associated with changes in
interest rates as it relates to its cash and short term
investments, and commodity price risks for changes in the
price of precious and base metals insofar as such changes may
affect the economic viability of its exploration and
development projects. Both the Senior Notes and the
Debentures are not subject to market risk because they have a
fixed interest rate and a repayment amount payable either in
cash or common stock of Crown. Crown does not use financial
or other derivative instruments to manage market risk. A
hypothetical change of one percent in the interest rate earned
on short term investments during 2001 would have resulted in
an increase or decrease of less than $0.1 million in net
income. A change of 10% in the price of gold, silver or zinc
would not have had a material change in the assets,
liabilities or net income of Crown.
Item 8. Financial Statements and Supplementary Data
CROWN RESOURCES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31,
2001 and 2000 . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999 . . . F-3
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2001, 2000 and 1999F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 . . . . F-5
Notes to Consolidated Financial Statements . . . . F-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Crown Resources Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of
Crown Resources Corporation and subsidiaries (Crown) as of December
31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. These financial
statements are the responsibility of Crown's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Crown as
of December 31, 2001 and 2000, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1, Crown has filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code on March 8, 2002. The
accompanying financial statements do not purport to reflect or
provide for the consequences of the bankruptcy proceedings. In
particular, such financial statements do not purport to show (a) as
to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to prepetition
liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to
stockholder accounts, the effect of any changes that may be made in
the capitalization of Crown; or (d) as to operations, the effect of
any changes that may be made in its business.
The accompanying financial statements have been prepared assuming
that Crown will continue as a going concern. As discussed in Note
1, Crown's inability to pay certain debentures that were due August
2001, recurring losses from operations, and negative working capital
raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also
discussed in Note 1. The financial statements do not include
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the financial statements, Crown changed
its method of accounting for exploration costs on properties without
proven and probable reserves in 1999.
Deloitte & Touche LLP
Denver, Colorado
April 1, 2002
F-1
CROWN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
2001 2000
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 110 $ 971
Short-term investments 79 79
Escrowed cash 3,263 -
Prepaid expenses and other 102 139
Total current assets 3,554 1,189
Mineral properties, net 14,363 13,902
Other assets:
Equity in unconsolidated subsidiary 3,291 4,873
Debt issuance costs, net - 68
Other 57 63
Total other assets 3,348 5,004
$21,265 $20,095
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 153 $ 111
Convertible debentures 15,000 15,000
Current portion of long-term debt 68 -
Convertible secured notes payable 2,234 -
Convertible secured notes payable related party 1,000 -
Other 812 289
Total current liabilities 19,267 15,400
Long term liabilities:
Long-term note payable 148 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value;
authorized 20,000,000 shares;
none outstanding - -
Common stock, $0.01 par value;
authorized 50,000,000 shares;
issued and outstanding 14,553,302 146 146
Additional paid-in capital 35,429 35,045
Accumulated deficit (33,644) (30,496)
Accumulated other comprehensive loss (81) -
Total stockholders' equity 1,850 4,695
$21,265 $20,095
See notes to consolidated financial statements.
F-2
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per Year Ended December 31,
share amounts) 2001 2000 1999
Revenues:
Mineral property option proceeds $ - $ 100 $ 100
Royalty income - 112 104
Interest income 34 344 337
Gain (loss) on sale of assets
and mineral properties 214 5,845 (3)
Total revenues 248 6,401 538
Costs and expenses:
Exploration 5 903 1,025
Depreciation, depletion and
amortization 11 39 65
General and administrative 828 1,171 1,367
Interest 1,046 971 971
Asset write-downs - 2,542 166
Other, net - (2) (1)
Total costs and expenses 1,890 5,624 3,593
Operating income (loss) (1,642) 777 (3,055)
Equity in loss of unconsolidated
subsidiary (1,506) (295) -
Income (loss) before minority interest (3,148) 482 (3,055)
Minority interest in (income)
loss of subsidiary - (2,141) 389
Net loss before cumulative effect of
change in accounting principle (3,148) (1,659) (2,666)
Cumulative effect of change in
accounting principle - - (8,451)
Net loss $ (3,148) $ (1,659) $(11,117)
Per common share:
Basic and diluted loss
before cumulative effect of
change in accounting principle $ (0.22) $ (0.11) $ (0.18)
Change in accounting principle ( - ) ( - ) (0.58)
Basic and diluted loss $ (0.22) $ (0.11) $ (0.76)
Basic and diluted weighted average
number of common and common
equivalent shares outstanding 14,553 14,553 14,534
See notes to consolidated financial statements.
F-3
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other
(in thousands, except share Common Stock Paid-in Accumulated Comprehensive
amounts) Shares Amount Capital Deficit Loss Total
Balance, January 1, 1999 14,520,725 $ 145 $ 34,768 $ (17,720) $ (11) $ 17,182
Issuance of shares:
Exercise of stock options 6,275 - 11 - - 11
For services 12,697 - 24 - - 24
Comprehensive income (loss):
Net loss - - - (11,117) - (11,117)
Net unrealized gain on
marketable equity securities - - - - (120) (120)
Comprehensive loss - - - - - (11,237)
Balance, December 31, 1999 14,539,697 145 34,803 (28,837) (131) 5,980
Issuance of shares:
For services 13,605 1 24 - - 25
Disproportionate share of sale of
subsidiary stock 218 218
Comprehensive income (loss):
Net loss - - - (1,659) - (1,659)
Net unrealized loss on
marketable equity securities - - - - 131 131
Comprehensive loss - - - - - (1,528)
Balance, December 31, 2000 14,553,302 146 35,045 (30,496) - 4,695
Issuance of warrants 379 379
Disproportionate share of sale of
subsidiary stock 5 5
Comprehensive loss:
Net loss - - - (3,148) (3,148)
Net unrealized loss on subsidiary
marketable equity securities - - - - (81) (81)
Comprehensive loss - - - - (81) (3,229)
Balance, December 31, 2001 14,553,302 $ 146 $ 35,429 $(33,644) $ (81) $ 1,850
See notes to consolidated financial statements.
F-4
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in thousands) 2001 2000 1999
Operating Activities:
Net loss $ (3,148) $ (1,659) $(11,117)
Adjustments:
Depreciation, depletion and amortization 79 141 167
Asset write-downs - 2,542 166
Common stock issued for services - 25 24
Minority interest - 2,141 (389)
Equity in loss of unconsolidated subsidiary 1,506 295 -
Cumulative effect of change in
accounting principle - - 8,451
Loss (gain) on sale of assets (211) (5,845) 3
Changes in operating assets and liabilities,
excluding effects of
Solitario deconsolidation:
Prepaid expenses and other 24 (59) (1)
Accounts payable and
other current liabilities 587 3 (18)
Net cash used in operating activities (1,163) (2,416) (2,714)
Investing Activities:
Additions to mineral properties (224) (258) (217)
Proceeds from asset sales 211 5,725 22
Cash effect of Solitario deconsolidation - (6,908) -
Increase in other assets (5) (346) (64)
Net cash used in investing activities (18) (1,787) (259)
Financing Activities:
Secured note financing 350 - -
Payment on long term note (30) - -
Issuance of common stock and warrants - - 11
Net cash provided by financing activities 320 - 11
Net decrease in cash and cash equivalents (861) (4,203) (2,962)
Cash and cash equivalents, beginning of year 971 5,174 8,136
Cash and cash equivalents, end of year $ 110 $ 971 $ 5,174
Supplemental disclosure of cash flow
information:
Non-cash transactions:
Securities received for mineral
property transactions $ - $ - $ 21
Disposition of interest in subsidiary - 218 -
Cash paid for interest 431 868 868
Cash placed in escrow from secured note financing 3,250 - -
Long term debt assumed for mineral
property transactions 237 - -
Issuance of warrants 379 - -
See notes to consolidated financial statements.
F-5
1. Business and Summary of Significant Accounting Policies:
Business
Crown Resources Corporation ("CRC") and its subsidiaries
(collectively referred to as "Crown") engage principally in
the acquisition, exploration and development of mineral
properties, which presently exist in the western United
States. Prior to October 18, 2000 Crown held properties in
Peru through Solitario Resources Corporation ("Solitario"),
which is currently a 41.2%-owned unconsolidated subsidiary.
Crown's operations constitute a single business segment.
Crown has historically derived its revenues principally
from royalty interests and interest income and to a lesser
extent from the option and sale of property interests and from
the sale of its share of gold produced from its properties.
Basis of presentation
The accompanying financial statements have been prepared
assuming that Crown will continue as a going concern. As of
December 31, 2001, Crown has a working capital deficiency of
$15,713,000 and has defaulted on its $15,000,000 5.75%
convertible subordinated debentures, which were due in August
2001 (the "Debentures"), discussed in Note 4. Crown currently
has insufficient liquidity to pay the Debentures and accrued
interest currently due. On March 8, 2002, CRC filed a
voluntary petition for protection under Chapter 11 of the
United States Bankruptcy Code, discussed below. There is no
assurance that Crown will be able to raise sufficient funds or
to restructure the Debentures on acceptable terms. The
accompanying financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Corporate Reorganization
On March 8, 2002, CRC filed a voluntary petition for
protection under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy") in the United States Bankruptcy Court
for the District of Colorado (the "Court"). As part of the
Bankruptcy CRC filed a Plan of Reorganization (the "Plan") and
a Disclosure Statement with the Court on March 27, 2002. The
Plan contemplates a restructuring of CRC's 5.75% convertible
subordinated debentures, which were due August 27, 2001 (the
"Debentures") through an exchange of outstanding Debentures,
including any accrued interest thereon for the following
consideration to be proportionally distributed to each
Debenture holder:
(i) $1,000,000 in cash;
F-6
1. Business and Summary of Significant Accounting Policies
(Continued):
(ii) $2,000,000 in 10% Convertible Secured Notes (the
"Secured Notes") convertible into Crown common
shares at $0.35 per share. The Secured Notes will
be pari-passu to and have essentially the same
terms as certain Senior Notes, issued in October
2001 and discussed below, including a 10%
interest rate payable in cash or stock at CRC's
option, and a maturity date of October 2006.
(iii) Warrants, which entitle the holders the right to
purchase, in the aggregate, 5,714,285 shares of
CRC common stock at an exercise price of $0.75
per share. The warrants expire in October 2006;
(iv) $4,000,000 of convertible unsecured subordinated
notes (the "Unsecured Notes") convertible into
common stock of CRC at $0.75 per share. The
Unsecured Notes would pay interest at 10% in
stock or cash at CRC's option, and mature on the
same date as the Secured Notes.
All other liabilities of CRC and Crown would be paid in
the normal course under the Plan.
The Plan contemplates a 5 for 1 reverse split of the
currently outstanding common stock, while maintaining the
conversion and exercise prices of the Senior Notes, the
Secured Notes, the Unsecured Notes and the related warrants.
The Plan contemplates that, immediately after the approval of
the Plan, assuming full dilution, the Senior Note holders
would own approximately 52% of the common stock, the Debenture
holders would own approximately 41% of the common stock and
current shareholders would own approximately 7% of the common
stock. The Plan also contemplates the cancellation of CRC's
preferred stock, currently held by a wholly owned subsidiary
and which is eliminated in consolidation.
After being filed with the Court, the Plan must be voted
on by CRC's creditors and shareholders. If the Plan is
approved by the Court, the Plan becomes a legally binding
agreement between CRC and its creditors and shareholders.
Subject to any objections and related delays, Crown
anticipates the Court could set a hearing to determine the
adequacy of the Disclosure Statement and Confirmation of the
Plan, prior to June 30, 2002.
F-7
1. Business and Summary of Significant Accounting Policies
(Continued):
There can be no assurance given that the Plan will be
approved by the creditors or shareholders, nor that the Court
will confirm the Plan as filed, if at all. If the Plan is not
confirmed by the Court, there can be no assurance that Crown
will have sufficient funds to continue as a going concern, to
restructure the Debentures on acceptable terms or continue
operations. If the Plan is not confirmed by the Court, Crown
may be forced to liquidate its assets under Chapter 7 of the
U.S. Bankruptcy Code and to cease operations.
Financial reporting
The consolidated financial statements include the
accounts of Crown and its wholly- and majority-owned
subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation. Undivided
interests in mineral properties are accounted for by the
proportionate consolidation method in accordance with standard
practice in the mining industry.
On October 18, 2000, Solitario completed a Plan of
Arrangement with Altoro Gold Corp. of Vancouver, Canada
("Altoro"), whereby Altoro became a wholly owned subsidiary of
Solitario. In connection with the Plan of Arrangement,
Solitario issued 6,228,894 shares to Altoro shareholders and
option holders. Solitario also reserved 825,241 Solitario
shares for issuance upon the exercise of 825,241 warrants
issued in exchange for Altoro warrants. On October 24, 2000,
Solitario issued 261,232 shares upon the exercise of the above
warrants, the remaining warrants have since expired
unexercised. After the issuance of the shares in connection
with the Plan of Arrangement, shares issued upon the exercise
of the warrants discussed above, and the issuance of 62,487
shares during 2001, Solitario has 23,407,134 shares
outstanding of which Crown owns 9,633,585 shares or 41.2%.
Accordingly, Crown has accounted for its investment in
Solitario under the equity method since October 2000.
Solitario's income, expense and minority interest are included
in the Consolidated Statement of Operations of Crown through
October 2000. Crown's interest in the net assets of Solitario
is shown in the Consolidated Balance Sheet as of December 31,
2001 and 2000 as equity in unconsolidated subsidiary. Crown's
share of Solitario's net loss for the year ended December 31,
2001 and from October 2000 through December 31, 2000 is shown
as equity in loss of unconsolidated subsidiary in the
Consolidated Statement of Operations.
F-8
1. Business and Summary of Significant Accounting Policies
(Continued):
Use of estimates
The preparation of financial statements, in conformity
with accounting principles generally accepted in the United
States of America, 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.
Cash equivalents
Cash equivalents include investments in highly liquid
debt securities with maturities of three months or less when
purchased. Investments with longer maturities at the date of
purchase are classified as short-term investments.
Mineral properties
Land and leasehold acquisition costs are capitalized in
cost centers and are depleted on the basis of the cost
centers' economic reserves (estimated recoverable, proven and
probable reserves) using the units-of-production method. If
there are insufficient economic reserves to use as a basis for
depleting such costs, they are expensed as a mineral property
write-off in the period in which the determination is made.
During 1999, Crown changed its method of accounting for
exploration costs on properties without proven and probable
reserves from capitalizing all expenditures to expensing all
costs incurred, other than acquisition costs, prior to the
establishment of proven and probable reserves (See Note 2).
Crown records the proceeds from the sale of property
interests as a reduction of the related property's capitalized
cost. Proceeds that exceed the capital cost of the property
are recorded as revenue. When such proceeds are associated
with properties subject to a joint venture, they are recorded
as revenue in accordance with the terms of the joint venture
and the transfer of the property interest to the joint venture
partner during the term of the joint venture.
F-9
1. Business and Summary of Significant Accounting Policies
(Continued):
Asset write-downs
Crown regularly performs evaluations of its assets to
assess the recoverability of its investments in these assets.
All long-lived assets are reviewed for impairment whenever
events or circumstances change which indicate the carrying
amount of an asset may not be recoverable utilizing
established guidelines based upon future net cash flows from
the asset. Write-downs relating to mineral properties were to
$2,542,000 in 2000 and $166,000 in 1999. There were no
mineral property write-downs in 2001. The write-down for
2000 included Crown's decision to write off its Cord Ranch and
Kings Canyon properties due to low gold prices resulting in a
$2,482,000 charge to operations.
Marketable equity securities
Crown's equity securities are classified as available-
for-sale and are carried at fair value. The cost of marketable
equity securities sold is determined by the specific
identification method.
Revenue recognition
Royalty revenue is recognized when product is delivered
in-kind or cash payments are received.
Income taxes
Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist
of taxes currently due plus deferred taxes related to certain
income and expenses recognized in different periods for
financial and income tax reporting purposes. Deferred tax
assets and liabilities represent the future tax return
consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for
operating losses and tax credits that are available to offset
future taxable income and income taxes, respectively. A
valuation allowance is provided if it is more likely than not
that some or all of the deferred tax assets will not be
realized.
F-10
1. Business and Summary of Significant Accounting Policies
(Continued):
Loss per share
The calculation of basic and diluted loss per share is
based on the weighted average number of common shares
outstanding during the years ended December 31, 2001, 2000,
and 1999. Securities that could potentially dilute earnings
per share, which include stock options, warrants and
convertible debt securities, were approximately 24,100,000
shares in 2001, 3,618,000 shares in 2000 and 3,193,000 shares
in 1999. The effects of these securities are not included in
the computation of diluted per share amounts where their
inclusion would be anti-dilutive.
Employee stock compensation plans
Crown follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the terms
of Crowns's stock option plans, the exercise price of options
issued to employees and directors equals the market price of
the stock on the date of grant and, therefore, Crown records
no compensation expense on stock options granted to employees
and directors.
Minority interest
Minority interest represents the minority stockholders'
proportionate interest in the equity and losses of Solitario
prior to 0ctober 18, 2000. Crown owned 41.2% and 41.3%
of Solitario at December 31, 2001 and December 31, 2000,
respectively and 57.2% of Solitario at December 31, 1999.
New accounting pronouncements
In August 2001, the Financial Accounting Standards Board
issued Statement No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("SFAS No. 144"). SFAS No. 144
Supersedes SFAS No. 121, and provides for the use of
probability weighted cash flow estimation in determining cash
flows for the impairment of assets as well as establishing
methods for accounting for assets to be disposed of other than
by sale. Crown is required to implement SFAS No. 144 on
January 1, 2002 and has not determined the impact that this
statement will have on its consolidated financial position or
results of operations.
F-11
1. Business and Summary of Significant Accounting Policies
(Continued):
In July 2001, the Financial Accounting Standards Board
(?FASB?) issued Statement of Financial Accounting Standards No.
141 (?SFAS No. 141"), ?Business Combinations.? SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. On an
annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be
tested for impairment, and write-downs may be necessary. Crown
implemented SFAS No. 141 during 2001 and it has not had a
material impact on its consolidated financial position or
results of operations.
In July 2001, the Financial Accounting Standards Board
issued Statement No. 142, ?Goodwill and Other Intangible
Assets? (?SFAS No.142"). SFAS No. 142 changes the accounting
for goodwill from an amortization method to an impairment-only
approach. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon
adoption of this statement. Crown intends to implement SFAS
No. 142 on January 1, 2002 and it is not expected to have a
material impact on its consolidated financial position or
results of operations.
The Company will adopt SFAS 143, "Accounting
for Asset Retirement Obligations", no later
than January 1, 2003. Under SFAS 143, the fair value of a
liability for an asset retirement obligation covered under
the scope of SFAS 143 would be recognized in the period in
which the liability is incurred, with an offsetting increase
in the carrying amount of the related long-lived asset. Over
time, the liability would be accreted to its present value,
and the capitalized cost would be depreciated over the useful
life of the related asset