EX-1.2 3 ex1-2.htm EXHIBIT 1.2 ex1-2.htm
 


Crystallex International Corporation






Consolidated Financial Statements

December 31, 2007 and 2006


(Expressed in United States Dollars)
 
 

 

 
Crystallex International Corporation

RESPONSIBILITY FOR FINANCIAL REPORTING

The Board of Directors which, among other things, is responsible for the consolidated financial statements of the Company, delegates to management the responsibility for the preparation of the financial statements and internal controls. The Board of Directors delegates to the Audit Committee the responsibility for ensuring that management fulfils its responsibilities in respect of financial reporting and internal control. Each year the shareholders appoint independent auditors to audit and report directly to them on the financial statements.

The consolidated financial statements have been prepared using appropriate generally accepted accounting principles and estimates considered necessary by management to present fairly and consistently the consolidated financial position and the results of operations.

The Company’s Audit Committee is appointed by the Board of Directors annually and is currently comprised of three independent directors. The Committee meets regularly with management and with the independent auditors to satisfy itself that each group is properly discharging its responsibilities and to review the financial statements and the independent auditors’ report. PricewaterhouseCoopers LLP, the independent auditors appointed by the shareholders to audit the consolidated financial statements, have full and unrestricted access to the Audit Committee. The Audit Committee reports its findings to the Board of Directors for consideration in approving the financial statements for issuance to the shareholders.

As enunciated below, the Company has determined that internal control over financial reporting was not effective in preventing possible material misstatements without further substantive work. Accordingly, additional substantive procedures were applied subsequently to provide assurance that such misstatements do not exist, and accordingly believes that the consolidated financial statements are now free from material misstatements. In addition, the Company has commenced a number of remediation steps to rectify such weaknesses in order to diminish the possibility of a material misstatement in 2008. These are outlined below.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate control over financial reporting for the Company.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.  

Management has evaluated the effectiveness of the Company’s internal control over financial reporting as at December 31, 2007 based on the criteria set forth in “Internal Control–Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual financial statements will not be prevented or detected.

As at December 31, 2007, the Company identified material weaknesses as follows:

(a)           There are insufficient controls to monitor and prevent the override of established controls at the Company’s subsidiaries with respect to existing policies and procedures, communication of the delegation of authority and the timeliness of financial analysis and reporting, primarily in remote locations.

(b)           The Company did not consistently maintain implementation of effective controls over the purchasing function relating to the documentation of the arrangement with certain suppliers at the parent entity level and the authorization and approval of both suppliers and services at remote locations.

(c)           The Company did not design and maintain effective controls over the identification and recognition of timing differences in accounting for future income taxes. This resulted in an audit adjustment to the Company’s December 31, 2007 consolidated financial statements and the restatement of the Company’s December 31, 2006 and 2005 consolidated financial statements with respect to mineral properties, future income taxes and operations.
 
 


Crystallex International Corporation
 
Each of these material weaknesses could result in a material misstatement to the Company’s annual consolidated financial statements that would not be prevented or detected.  Material weaknesses (a) and (b) noted above could also result in unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

As a result of the material weaknesses described above, Management has concluded that, as at December 31, 2007, the Company’s internal control over financial reporting was not effective.

The effectiveness of the Company’s internal control over financial reporting as at December 31, 2007 has been audited by PricewaterhouseCoopers LLP, our independent auditors, as stated in their report which appears herein.

MANAGEMENT’S PLANS TO REMEDIATE MATERIAL WEAKNESSES

Management, under the Board’s direction, has undertaken significant additional work to ensure the consolidated financial statements are free from material misstatement that may not have been prevented or detected as a result of the material weaknesses noted.  Furthermore, Management has identified and commenced the implementation of additional internal control procedures, particularly in remote locations, to ensure the acquisition, use or disposal of the Company’s assets are appropriately authorized.

Management has taken the following steps to address the weaknesses identified:

(a) Monitoring and override of established controls:   Management continues to work with the subsidiary managers, particularly at remote locations, to ensure corporate policies and internal control procedures are respected by all and information is provided on a timely basis.  Training and coordination of activities amongst the senior managers of the subsidiaries is ongoing.

(b) Controls over the purchasing function:   Management has begun a process of renewing and updating the physical documentary support for existing service providers and suppliers and establishing a regimen of pre-qualifying potential new service providers and suppliers.  Management has implemented additional controls at the subsidiary level to ensure appropriate approval and timely authorization of suppliers.  We are continuing to reinforce compliance with these controls.

 
(c) Controls over accounting for income tax timing differences:   Management continues to work with independent expert advisors, in both Canada and Venezuela, to ensure the timely identification of those items giving rise to timing differences for income tax purposes.  Management has implemented controls to ensure the valuation basis, for both accounting and tax reporting purposes, of the Company’s assets, is identified, recorded and retained for financial reporting purposes.
 


Johan van’t Hof
Gordon Thompson
Hemdat Sawh
Chairman of the Audit Committee
President & Chief Executive Officer
Chief Financial Officer

 
 

 
Crystallex International Corporation
 
INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Crystallex International Corporation

We have completed an integrated audit of the consolidated financial statements and internal control over financial reporting of Crystallex International Corporation (the “Company”) as at December 31, 2007.  Our opinions, based on our audit, are presented below.

Consolidated financial statements

We have audited the accompanying consolidated balance sheet of Crystallex International Corporation as at December 31, 2007, and the related consolidated statement of operations and comprehensive operations, cash flows and shareholders’ equity for the year ended December 31, 2007.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit of the Company’s financial statements as at December 31, 2007 and for the year then ended in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.  An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.


 
Crystallex International Corporation
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and the results of its operations and its cash flows for the year ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.

Internal control over financial reporting

We have also audited the Company’s internal control over financial reporting as at December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual financial statements will not be prevented or detected on a timely basis. As at December 31, 2007, the following material weaknesses have been identified and described in Management's Report On Internal Control Over Financial Reporting: insufficient controls to monitor and prevent the override of established controls at the Company's subsidiaries, lack of effective controls over the purchasing function relating to the authorization and approval of both suppliers and services, and lack of the design and operation of controls over the identification and recognition of timing differences in accounting for income taxes.

We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2007 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as at December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the COSO.
 
 
/s/ PricewaterhouseCoopers LLP

Chartered Accountants, Licensed Public Accountants
Toronto, Canada
March 31, 2008
 


Crystallex International Corporation
 
 
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders of Crystallex International Corporation
 
We have audited the consolidated balance sheet of Crystallex International Corporation as at December 31, 2006 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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.
 
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Crystallex International Corporation as at December 31, 2006 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2006 in accordance with Canadian generally accepted accounting principles.
 
As described in Note 11 to the consolidated financial statements, the consolidated financial statements as at December 31, 2006 and for each of the years in the two-year period ended December 31, 2006 have been restated.  We therefore withdraw our previous audit report dated March 27, 2007, except as to then Note 17, which is as at March 29, 2007, and October 22, 2007 as to the effects of the previous restatement described in then Note 19.
 
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion.
 
 
 
/s/ Deloitte & Touche LLP
 
Independent Registered Chartered Accountants
 
Licensed Public Accountants
 

 
Toronto, Ontario
 
March 27, 2007, except as to Note 18 which is as of October 22, 2007, and March 28, 2008 as to the effects of the restatement described in Note 11.
 
 

 
Crystallex International Corporation
Consolidated Balance Sheets
As at December 31, 2007 and 2006
(Expressed in United States dollars)

   
2007
   
2006
 
         
Restated
(Note 11)
 
ASSETS
           
             
CURRENT
           
Cash and cash equivalents
  $ 16,065,203     $ 28,573,142  
Accounts receivable
    1,169,312       490,090  
Inventories (Note 4)
    2,142,374       4,867,577  
Prepaid expenses and other
    1,978,953       4,250,970  
      21,355,842       38,181,779  
                 
PROPERTY, PLANT AND EQUIPMENT (Note 5)
    317,179,327       283,407,219  
DEFERRED FINANCING FEES (Note 6)
    -       2,595,627  
OTHER
    705,327       510,029  
                 
TOTAL ASSETS
  $ 339,240,496     $ 324,694,654  
                 
                 
LIABILITIES
               
                 
CURRENT
               
Accounts payable and accrued liabilities
  $ 10,868,261     $ 12,791,456  
Current portion of debt (Note 6)
    -       3,172,559  
Current portion of asset retirement obligations (Note 7)
    566,786       239,408  
      11,435,047       16,203,423  
                 
DEBT (Note 6)
    83,291,377       84,524,929  
ASSET RETIREMENT OBLIGATIONS (Note 7)
    1,864,240       971,167  
FUTURE INCOME TAXES (Note 10)
    14,242,886       23,514,101  
                 
TOTAL LIABILITIES
    110,833,550       125,213,620  
                 
SHAREHOLDERS’ EQUITY
               
                 
SHARE CAPITAL (Note 8)
    503,489,584       448,100,697  
CONTRIBUTED SURPLUS
    27,123,608       23,135,187  
ACCUMULATED OTHER COMPREHENSIVE INCOME
    11,958,981       11,958,981  
DEFICIT
    (314,165,227 )     (283,713,831 )
                 
TOTAL SHAREHOLDERS’ EQUITY
    228,406,946       199,481,034  
                 
    $ 339,240,496     $ 324,694,654  

COMMITMENTS AND CONTINGENCIES (Note 14)
     
     
Gordon M. Thompson, Director
 
Johan van’t Hof, Director
 
Page 1 of 35

 
Crystallex International Corporation
Consolidated Statements of Operations and Comprehensive Operations
Years ended December 31, 2007, 2006 and 2005
(Expressed in United States dollars)

   
2007
   
2006
   
2005
 
         
Restated
   
Restated
 
         
(Note 11)
   
(Note 11)
 
                   
MINING REVENUE
  $ 13,565,167     $ 28,087,764     $ 24,989,681  
                         
OPERATING EXPENSES
                       
   Operations
    19,628,681       26,244,665       22,117,746  
   Amortization
    -       949,996       2,366,312  
   Accretion of asset retirement obligations
    211,256       288,376       345,460  
   Depletion
    -       833,427       330,472  
      19,839,937       28,316,464       25,159,990  
                         
OPERATING LOSS
    (6,274,770 )     (228,700 )     (170,309 )
                         
OTHER EXPENSES
                       
   General and administrative
    21,688,357       22,860,917       23,126,395  
   Interest on Debt     13,009,439       12,945,985       11,809,087  
   Amortization of property, plant and equipment
    63,464       104,165       705,414  
   Amortization of deferred financing fees
    -       597,710       342,882  
      34,761,260       36,508,777       35,983,778  
                         
COMMODITY CONTRACT LOSS
    -       -       (3,770,835 )
                         
LOSS BEFORE OTHER ITEMS
    (41,036,030 )     (36,737,477 )     (39,924,922 )
                         
OTHER ITEMS
                       
   Interest and other income
    1,094,198       1,159,586       1,926,425  
   Foreign exchange gain
    9,732,746       459,734       249,888  
   Gain on settlement of debt (Note 6)
    -       -       875,610  
   Investment in subsidiaries (Note 9)
    -       -       (6,600,000 )
      10,826,944       1,619,320       (3,548,077 )
                         
NET LOSS BEFORE INCOME TAX EXPENSE
    (30,209,086 )     (35,118,157 )     (43,472,999 )
                         
INCOME TAX EXPENSE (Note 10)
    (242,310 )     (566,072 )     (291,436 )
                         
NET LOSS AND COMPREHENSIVE
     LOSS FOR THE YEAR
    (30,451,396 )     (35,684,229 )     (43,764,435 )
                         
DEFICIT, BEGINNING OF YEAR
    (283,713,831 )     (248,029,602 )     (204,265,167 )
                         
DEFICIT, END OF YEAR
  $ (314,165,227 )   $ (283,713,831 )   $ (248,029,602 )
                         
NET LOSS PER SHARE
                       
      – Basic and diluted
  $ (0.12 )   $ (0.15 )   $ (0.22 )
                         
WEIGHTED AVERAGE NUMBER OF
     SHARES OUTSTANDING
                       
      – Basic and diluted
    256,668,551       230,229,162       194,729,931  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
Page 2 of 35

 
Crystallex International Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005
(Expressed in United States dollars)
   
2007
   
2006
   
2005
 
               
Restated
 
               
(Note 11)
 
CASH FLOWS FROM (USED) IN OPERATING ACTIVITIES
                 
Net loss for the year
  $ (30,451,396 )   $ (35,684,229 )   $ (43,764,435 )
Items not affecting cash:
                       
Amortization and depletion
    63,464       2,485,298       3,745,080  
Interest accretion on debt
    3,567,170       2,960,413       2,672,895  
Stock-based compensation
    3,111,561       2,463,691       3,665,894  
Accretion of asset retirement obligations
    211,256       288,376       345,460  
Increases (reductions) in asset retirement
                       
obligations
    1,009,195       (598,539 )     (1,095,903 )
Directors’ fees paid in shares
    148,000       60,000       190,000  
Investment in subsidiaries
    -       -       6,600,000  
Gain on settlement of debt
    -       -       (875,610 )
Unrealized gain on translation of future income
                       
taxes (Note 10)
    (14,322,229 )     -       (1,442,481 )
Unrealized foreign exchange loss
    2,274,657       -       -  
Unrealized commodity contract gain
    -       -       (8,265,111 )
Warrants issued for professional fees
    -       1,365,839       -  
Changes in other operating assets and liabilities:
                       
Decrease (increase) in accounts receivable
    (579,772 )     391,444       (351,627 )
Decrease (increase) in inventories
    2,725,203       (2,300,756 )     (782,033 )
Decrease (increase) in prepaid
                       
expenses and other
    609,840       (1,166,947 )     (2,231 )
Increase (decrease) in accounts payable
                       
and accrued liabilities
    (2,676,135 )     (940,265 )     5,107,126  
      (34,309,186 )     (30,675,675 )     (34,252,976 )
CASH FLOWS FROM (USED) IN INVESTING ACTIVITIES
                       
Investment in property, plant and
                       
equipment
    (26,892,775 )     (49,787,854 )     (92,831,304 )
Decrease in restricted cash and
                       
cash equivalents
    -       21,323,163       76,682,473  
Decrease in short-term investments
    -       -       30,277,280  
      (26,892,775 )     (28,464,691 )     14,128,449  
CASH FLOWS FROM (USED) IN FINANCING ACTIVITIES
                       
Issuance of common shares
    52,792,543       82,951,454       15,892,242  
Issuance of warrants
    -       5,972,069       272,926  
Debt borrowings
    -       -       7,673,793  
Debt repayments
    (3,577,355 )     (5,202,552 )     (4,512,500 )
Deferred financing fees
    -       (77,482 )     (898,657 )
      49,215,188       83,643,489       18,427,804  
INCREASE (DECREASE) IN CASH
                       
AND CASH EQUIVALENTS
    (11,986,773 )     24,503,123       (1,696,723 )
EFFECTS OF EXCHANGE RATE FLUCTUATIONS
                       
ON CASH
    (521,166 )     -       -  
CASH AND CASH EQUIVALENTS,
                       
BEGINNING OF YEAR
    28,573,142       4,070,019       5,766,742  
CASH AND CASH EQUIVALENTS,
                       
END OF YEAR
  $ 16,065,203     $ 28,573,142     $ 4,070,019  

Supplemental disclosures with respect to cash flows (Note 12)
 
Page 3 of 35

 
Crystallex International Corporation
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2007, 2006 and 2005
(Expressed in United States dollars)
 
                     
         
Equity Component
Cumulative
Accumulated Other
     
 
Number of
 
Number of
Contributed
of Exchangeable
Translation
Comprehensive
     
 
Common Shares
Amount
Warrants
Surplus
Bank Loan
Adjustment
Income
Deficit
 
Total
               
(Restated)
 
(Restated)
               
(Note 11)
 
(Note 11
                     
Balance at December 31, 2004
189,836,735
$  306,031,783
13,008,235
$  31,824,328
$                    -
$        11,958,981
$                        -
$      (204,265,167)
 
$       145,549,925
Retroactive adjustment (Note 3)
-
-
-
-
-
(11,958,981)
11,958,981
-
 
-
Shares issued
                   
Unit offering
200,000
466,549
450,000
272,926
-
-
-
-
 
739,475
Exercise of options
775,000
1,196,957
-
(143,934)
-
-
-
-
 
1,053,023
Issuance of shares under
equity draw down facility
12,273,236
17,394,493
-
-
-
-
-
-
 
17,394,493
Acquisition of non-controlling
interest
1,467,136
3,000,000
-
-
-
-
-
-
 
3,000,000
Exercise of warrants
3,418,500
8,210,355
(3,418,500)
(3,129,998)
-
-
-
-
 
5,080,357
Directors’ fees
65,186
190,000
-
-
-
-
-
-
 
190,000
Share exchange – El Callao
523
1,487
-
-
-
-
-
-
 
1,487
Exchangeable debt
-
-
-
-
2,564,366
-
-
-
 
2,564,366
Stock-based compensation
-
-
-
3,665,894
-
-
-
-
 
3,665,894
Warrants expired
-
-
(1,042,008)
-
-
-
-
-
 
-
Loss for the year (Restated)
-
-
-
-
-
-
-
(43,764,435)
 
(43,764,435)
                     
Balance at December 31, 2005 (Restated)
208,036,316
$  336,491,624
  8,997,727
$  32,489,216
$  2,564,366
$                            -
$  11,958,981
$    (248,029,602)
 
$  135,474,585
Shares issued:
                   
Unit offerings
20,924,000
51,208,985
17,312,500
5,972,069
-
-
-
-
 
57,181,054
Exercise of options
1,641,800
5,490,735
-
(1,838,981)
-
-
-
-
 
3,651,754
   Issuance of shares under equity draw down  facility
1,661,130
4,317,661
-
-
-
-
-
-
 
4,317,661
Settlement of promissory note
611,300
1,800,000
-
-
-
-
-
-
 
1,800,000
Settlement of bank loan
3,765,841
7,641,266
-
-
(2,564,366)
-
-
-
 
5,076,900
Exercise of warrants
8,764,682
41,089,701
(8,764,682)
(17,316,647)
-
-
-
-
 
23,773,054
Directors’ fees
19,170
60,000
-
-
-
-
-
-
 
60,000
Share exchange – El Callao
255
725
-
-
-
-
-
-
 
725
Stock-based  compensation
-
-
-
2,463,691
-
-
-
-
 
2,463,691
Warrants issued for professional fees
-
-
500,000
1,365,839
-
-
-
-
 
1,365,839
Warrants issued in exchange for early
                   
exercise of warrants
-
-
875,000
-
-
-
-
-
 
-
Warrants expired
-
-
(233,045)
-
-
-
-
-
 
-
Loss for the year
-
-
-
-
-
-
-
(35,684,229)
 
(35,684,229)
                     
Balance at December 31, 2006 (Restated)
245,424,494
$  448,100,697
  18,687,500
$  23,135,187
$                   -
$                           -
$  11,958,981
$    (283,713,831)
 
$  199,481,034
Shares issued:
                   
Public offering
14,375,000
50,701,111
-
-
-
-
-
-
 
50,701,111
Exercise of options
858,591
1,622,286
-
(411,734)
-
-
-
-
 
1,210,552
Settlement of promissory note
460,900
1,800,000
-
-
-
-
-
-
 
1,800,000
Exercise of warrants
501,500
1,117,190
(501,500)
(236,310)
-
-
-
-
 
880,880
Directors’ fees
38,508
148,000
-
-
-
-
-
-
 
148,000
Share exchange – El Callao
79
300
-
-
-
-
-
-
 
300
Stock-based compensation
-
-
-
4,636,465
-
-
-
-
 
4,636,465
Loss for the year
-
-
-
-
-
-
-
(30,451,396)
 
(30,451,396)
Balance at December 31, 2007
261,659,072
$  503,489,584
  18,186,000
$  27,123,608
$                    -
$                            -
$  11,958,981
$  (314,165,227)
(1)
$  228,406,946
(1) Includes total comprehensive deficit for the twelve months ended December 31, 2007 of $302,206,246 (2006 - $271,754,850).
 
 
Page 4 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

1.      NATURE OF OPERATIONS AND CONTINUATION OF BUSINESS

Crystallex International Corporation (“Crystallex” or the “Company”) is engaged in the production of gold and related activities including exploration, development, mining and processing in Venezuela.  As reflected in these financial statements, the Company has not generated sustainable operating capital from its business activities and has relied on debt, equity and other forms of financing to meet its obligations.  On February 11, 2008, the Company completed a public offering for gross proceeds of CDN$69,069,000 (Note 17). Management is of the opinion that additional financing is available to continue its planned activities in the normal course upon completion of the permitting process (refer below); however, while the Company has been successful in the past, there can be no assurance it will be able to raise sufficient funds in the future.

The Company’s principal asset is the Las Cristinas project, currently under development in Venezuela.  Continued development and the ultimate commencement of commercial production are dependent upon receipt of the Authorization to Affect Natural Resources (the “Permit”) which will allow management to proceed to put in place financing to fund construction.  These financial statements have been prepared on a going concern basis which assumes that the Company will be successful in obtaining the Permit and will be able to obtain the necessary financing to complete the Las Cristinas project through project debt, other forms of public market debt, or equity financing; thereby fulfilling its commitment under its Mine Operating Agreement.  The Company continues to believe that it will be successful in obtaining the Permit and any other government approvals that are necessary to complete the mine development and commence commercial production. The Company received official notice in March 2006 from the Venezuelan Ministry of Basic Industries and Mining (“MIBAM”) advising that MIBAM has formally approved the technical, economic and financial Feasibility Study for the Las Cristinas project. The Company further received notice in June 2007 from the Corporación Venezolana de Guayana (“CVG”), that the requirements of the Ministry of the Environment and Natural Resources of Venezuela (“MinAmb” formerly referred to as “MARN”) for the issuance of the environmental permit to commence construction of the Las Cristinas Project have been fulfilled upon the posting of a Compliance Guarantee Bond and payment of certain taxes.

The carrying value of the Las Cristinas assets could be subject to material write-down in the event that the Permit or any other permits are not received or that financing efforts are not successful, and, in addition, other adjustments to amounts and classification of assets and liabilities may be necessary to these consolidated financial statements should such circumstances impair the Company’s ability, in the future, to continue as a going concern as contemplated under accounting principles generally accepted in Canada.

2.      SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies followed by the Company, which have been consistently applied in the preparation of these consolidated financial statements, except for certain new pronouncements which have been adopted effective January 1, 2007 as described in Note 3, are summarized as follows.

These policies are consistent with accounting principles generally accepted in the United States in all material respects except as outlined in Note 18.

Basis of presentation of consolidated financial statements

The consolidated financial statements of Crystallex are prepared by management in accordance with accounting principles generally accepted in Canada.
 
Page 5 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 


 
 
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)

Principles of consolidation

These consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, all of which are controlled through the ownership of a majority voting interest.  All inter-company balances and transactions have been eliminated.

Translation of foreign currency subsidiaries and foreign currency balances

The accounts of subsidiaries, all of which are considered to be integrated foreign operations, are translated from the local currency into U.S. dollars using the temporal method.  Under this method, monetary assets and liabilities are translated into U.S. dollars at the year end exchange rates, and non-monetary assets and liabilities are translated into U.S. dollars using historical rates of exchange.  Revenues and expenses, except for expenses related to non-monetary assets which are not historical, are translated into U.S. dollars at average rates for the year.  Exchange gains and losses on translation are included in the Consolidated Statement of Operations and Comprehensive Operations.

The Company translates monetary assets and liabilities that are denominated in foreign currencies at the rate of exchange in effect at the balance sheet date and non-monetary assets and liabilities at historical exchange rates.  Revenues and expenses are translated at average rates in the month except for depreciation and amortization, which are translated using the same rates as the related assets.  Foreign exchange gains and losses on monetary items are recorded on the statement of operations as they occur.

Cash and cash equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less.

Short-term investments

Short-term investments include highly liquid investments with original maturities greater than three months and less than one year.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated amortization.  Amortization of plant and equipment used directly in the mining and production of gold is included in operating costs.  Amortization is being provided for using the straight-line method over the following periods, not to exceed the mine’s estimated life:
 
 
Buildings
5  
years
 
Field vehicles
5  
years
 
Furniture and equipment
5  
years
 
Mill and plant
20  
years
 
Mining equipment
10  
years

Page 6 of 35

 
 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 


 
2.         SIGNIFICANT ACCOUNTING POLICIES (continued)

Mineral properties and deferred exploration and development expenditures

Mineral exploration costs such as topographical, geochemical and geophysical studies are capitalized and carried at cost until the properties to which they relate are placed into production, sold or where management has determined there to be a permanent impairment in value.  Development costs incurred to access ore bodies identified in the current mining plan are expensed as incurred after production has commenced.  Development costs necessary to extend a mine beyond those areas identified in the current mining plan and which are incurred to access additional reserves are deferred until the incremental reserves are mined.  Mineral properties and development costs, including the mineral acquisition and direct mineral exploration costs relating to the current mining plan, are depleted and amortized using the unit-of-production method over the estimated life of the ore body based on proven and probable reserves.

Asset retirement obligations

The Company records a liability for its long-term asset retirement obligations, equal to the fair value of the obligation for asset retirement, and records a corresponding increase to the carrying amount of the related asset which is amortized and charged to amortization expense over the life of the associated asset.  The liability is increased over the period of expected cash flows with a corresponding charge to operating expenses.  The fair value of the obligation for asset retirement is re-assessed annually.

Impairment of long lived assets

The Company reviews and evaluates the recoverability of the carrying amounts of all its producing properties and related plant and equipment annually or when events or changes in circumstances indicate that the carrying amount may not be recoverable.  Estimated future net cash flows, on an undiscounted basis, are calculated using estimated recoverable ounces of gold (considering current proven and probable mineral reserves and the value beyond proven and probable which includes those mineral resources expected to be converted into mineral reserves), estimated future commodity price realization (considering historical and current prices, price trends and related factors) and operating costs, future capital expenditures, project financing costs and reclamation costs.

The amount of the impairment loss is determined as the excess of the carrying value of the asset over its fair value, which is measured using discounted cash flows.

Non-producing mineral properties are evaluated for impairment based on management’s intentions and are written down when the long-term expectation is that the net carrying amount will not be recovered.

Production inventories

Gold in doré, gold in process and stockpiled ore are stated at the lower of average production cost which includes all direct and indirect costs, including amortization of equipment and facilities, and net realizable value.

Consumables and spare parts inventory are valued at the lower of average and replacement cost.

Page 7 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 


2.        SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

The Company uses the asset and liability method of accounting for income taxes whereby future income taxes are recognized for the tax consequences of timing differences by applying substantively enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of certain assets and liabilities.  The Company provides a valuation allowance against the recorded future income tax asset when it is more likely than not that some or all of the future income tax assets will not be realized.

Revenue recognition

Revenue from mining operations are recognized upon shipment of gold, when title has passed to the customer, when persuasive evidence of an arrangement exists, and collection of the sale is reasonably assured.

Deferred financing fees and debt

Until December 31, 2006, transaction costs related to the Company’s debt financings were deferred and amortized over the term of the related financing.  As a result of new accounting standards effective January 1, 2007, the Company has elected to record debt net of transaction costs. Debt is subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the debt using the effective interest method.

Loss per share

Loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the year plus outstanding warrants that are unconditionally convertible into common shares.  Diluted per share amounts are calculated using the treasury stock method.  In 2007, 2006 and 2005, the potential effect of the outstanding convertible notes, stock options and warrants were anti-dilutive.

Stock-based compensation plan

The Company has a stock-based compensation plan which is described in Note 8.  The Company accounts for stock options using the fair value method, whereby compensation expense for stock options is measured at the fair value at the grant date using the Black-Scholes valuation model and is recognized over the vesting period of the options granted.

Fair value of financial instruments

The balance sheet carrying amounts for cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate fair value due to their short-term nature.  The fair value of debt is disclosed in Note 6.

Page 8 of 35

 
 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 


2.         SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in Canada requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements.  Significant estimates used include those relating to the timing and receipt of the Permit, gold prices, recoverable proven and probable reserves, available resources, available operating capital, fair value of stock options and warrants, income taxes and required asset retirement obligations.  These estimates each affect management’s evaluation of asset impairment and the recorded balances of inventories, site closure and asset retirement obligations.

While management believes these estimates and assumptions are reasonable, actual results could vary significantly.

Comparative figures

The comparative figures have been reclassified, where necessary, to conform to the presentation adopted for 2007.

3.      CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING PRONOUNCEMENTS

In 2005, the CICA issued three new accounting standards: Handbook Section 1530, Comprehensive Income (Section 1530), Handbook Section 3855, Financial Instruments – Recognition and Measurement (Section 3855), and Handbook Section 3865, Hedges (Section 3865).  These new standards became effective for the Company on January 1, 2007.

Section 1530 – Comprehensive Income

Comprehensive income is composed of net income and other comprehensive income (“OCI”).  OCI is the change in shareholders’ equity, which results from transactions and events from sources other than the Company’s activities.  These transactions and events include changes in the currency translation adjustment relating to self-sustaining foreign operations and unrealized gains and losses resulting from changes in fair value of certain financial instruments.  The Company has included a Consolidated Statement of Operations and Comprehensive Operations for changes in these items for the year ended December 31, 2007, while the cumulative changes in OCI are included in accumulated other comprehensive income (“AOCI”), which is presented as a new category of shareholders’ equity in the Consolidated Balance Sheet.  The cumulative translation adjustment has been retroactively reclassified to AOCI.

Section 3855 – Financial Instruments – Recognition and Measurement

Under the new standards, financial assets, financial liabilities and derivatives are initially recognized at fair value and their subsequent measurement depends on their classification as described below.  All financial assets or liabilities, with the exception of those securities designated as “held-to-maturity” (“HTM”), financial assets designated as “available-for-sale” (“AFS”), financial assets that are loans and receivables and other financial liabilities, are measured at fair value on each balance sheet date, with changes in fair value recorded in the Consolidated Statement of Operations and Comprehensive Operations.  Financial instruments classified as HTM, loans and receivables or other financial liabilities are recorded at amortized cost.  Financial instruments classified as AFS are measured at fair value,
 
Page 9 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 

3.      CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING PRONOUNCEMENTS
         (continued)

with changes in fair value recorded in OCI, with the exception of AFS equity securities that do not have quoted market prices in an active market which are measured at cost.

Derivative instruments are carried at fair value, including those derivative instruments that are embedded in financial or non-financial contracts which are not closely related to the host contracts.  Changes in the fair values of derivative instruments are recognized in income of the current period, with the exception of derivative instruments designated in effective cash flow hedges or hedges of foreign currency exposure in a self-sustaining foreign operation.

Section 3865 – Hedges

Section 3865 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies: fair value hedges and cash flow hedges.  These criteria have not changed substantially.  Any hedge ineffectiveness is measured and recorded in income of the current period.  Hedge accounting is discontinued prospectively when the derivative no longer qualifies as an effective hedge, or the derivative is terminated or sold, or upon the sale or early termination of the hedged item.

The Company did not have any outstanding hedging contracts as at December 31, 2007 and December 31, 2006.

There was no material impact to the Company’s financial statements on adoption Sections 1530, 3855 and 3865.

Sections 1535, 3862 and 3863

In 2007, the CICA issued Handbook Section 3862, Financial Instruments – Disclosures, and Handbook Section 3863, Financial Instruments – Presentation, and Handbook Section 1535, Capital Disclosures.  Handbook Sections 3862 and 3863 together supersede Handbook Section 3861, Financial Instruments – Disclosure and Presentation and provide disclosure and presentation requirements for financial instruments.  Handbook Section 1535, Capital Disclosures specifies the disclosure of (i) an entity’s objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non compliance. These new standards apply to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007 with early adoption permitted. The Company has elected to apply these standards for the year-ended December 31, 2007.

Future accounting pronouncements

The CICA issued new accounting standards which are effective for interim and annual consolidated financial statements for the Company’s reporting period beginning on January 1, 2008 and 2009.

Handbook Section 1400, “General Standards of Financial Statement Presentation”.  This section was amended so as to include the criteria for determining and presenting the Company’s ability to continue as a going concern.
 
Page 10 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 
3.      CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING PRONOUNCEMENTS
         (continued)

Future accounting pronouncements (continued)

Handbook Section 3031, “Inventories”.  This section establishes standards for the measurement of inventories, allocations of overhead accounting for write-down and disclosures.

Handbook Section 3251, “Equity”.  This section establishes standards for the presentation of equity and changes in equity during the reporting period.  The requirements in this section are in addition to Section 1535.
The Company is currently assessing the impact of this new accounting standard on its consolidated financial statements.

The CICA has issued a new standard which may affect the financial disclosures and results of operations of the Company for interim and annual periods beginning January 1, 2009. Section 3064, Goodwill and intangible assets, establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. Concurrent with the introduction of this standard, the CICA withdrew EIC 27, Revenues and Expenses during the pre-operating period. As a result of the withdrawal of EIC 27, the Company will no longer be able to defer costs and revenues incurred prior to commercial production at new mine operations.

The Company has not yet assessed the impact of Sections 1400, 3031, 3064 and 3251 on its consolidated financial statements.

4.    INVENTORIES
 
   
2007
   
2006
 
Gold in doré
  $ 397,543     $ 524,360  
Gold in process
    296,538       563,746  
Stockpiled ore
    33,229       958,271  
Consumables and spare parts
    1,415,064       2,821,200  
    $ 2,142,374     $ 4,867,577  

 
5.    PROPERTY, PLANT AND EQUIPMENT

The components of property, plant and equipment are as follows:

           
2007
       
     
Cost
   
Accumulated Amortization and Depletion
   
Net Book
Value
 
 
Plant and equipment
  $ 121,890,469     $ 9,066,587     $ 112,823,882  
 
Mineral properties
    212,262,022       7,906,577       204,355,445  
        334,152,491     $ 16,973,164     $ 317,179,327  
 
 
Page 11 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 
 

5.  
PROPERTY, PLANT AND EQUIPMENT (continued)


     
2006 Restated (Note 11)
 
     
Cost
   
Accumulated
Amortization
and Depletion
   
Net Book
Value
 
 
Plant and equipment
  $ 113,865,685     $ 9,003,122     $ 104,862,563  
 
Mineral properties
    186,451,233       7,906,577       178,544,656  
      $ 300,316,918     $ 16,909,699     $ 283,407,219  


The net book values of property, plant and equipment by location are as follows:

           
2007
       
     
Plant and
Equipment
   
Mineral
Properties
   
Total
 
 
Las Cristinas
  $ 112,723,890     $ 204,355,445     $ 317,079,335  
 
Corporate
    99,992       -       99,992  
      $ 112,823,882     $ 204,355,445     $ 317,179,327  

     
2006 Restated (Note 11)
 
     
Plant and
Equipment
   
Mineral
Properties
   
Total
 
 
Las Cristinas
  $ 104,691,650     $ 178,544,656     $ 283,236,306  
 
Corporate
    170,913       -       170,913  
      $ 104,862,563     $ 178,544,656     $ 283,407,219  

Plant and equipment for Las Cristinas are not subject to amortization as they have not been placed in use.

Property, plant and equipment is summarized as follows:

Las Cristinas

On September 17, 2002, the Company entered into a non-assignable mining agreement (the “Agreement”) with the Corporación Venezolana de Guayana (“CVG”), acting under the authority of the Ministry of Energy and Mines of Venezuela (“MEM”), pursuant to Venezuelan mining law, under which the Company was granted the exclusive right to explore, develop and exploit the Las Cristinas 4, 5, 6 and 7 properties including the processing of gold for its subsequent commercialization and sale. As a result of entering into the Agreement, the Company has discontinued previous legal proceedings to confirm its title rights to the Las Cristinas 4 and 6 concessions.

The aggregate cost incurred by the Company to December 31, 2007 to obtain the right to exploit the area is $317,079,335, represented by $266,627,080 of payments in cash, $32,003,206 related to future income taxes, $16,924,146 made through the issuance of common shares of the Company, and $1,524,903 made through stock options issues by the Company. Costs are comprised of property payment and finders’ fees of $36,170,393 ($24,978,317 in cash and $11,192,076 through shares); professional fees and related expenses of $136,151,846 ($130,419,776 in cash and $5,732,070 through shares); and equipment purchases of $112,753,890 (in cash).  Share issuances are valued at the prior 5 day weighted average trading price for the common shares on the American Stock Exchange.  The preceding amounts include payments relating to travel and administrative costs of  $3,515,806, during the year ended December 31, 2007 (2006 - $793,557; 2005 - $370,579).
 
Page 12 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 
 
6.       DEBT

     
2007
   
2006
 
 
Notes payable
  $ 83,291,377     $ 82,734,477  
 
Bank loan
    -       3,163,011  
 
Exchangeable promissory note
    -       1,800,000  
        83,291,377       87,697,488  
 
Less: Current portion of debt
    -       3,172,559  
      $ 83,291,377     $ 84,524,929  


Deferred Financing Fees

Effective January 1, 2007 deferred financing fees of $2,595,627 were reclassified to debt as a result of new accounting standards.  Accordingly, the Notes payable balance as at December 31, 2007 is reflected net of financing fees.

Notes Payable

In conjunction with a Unit offering on December 23, 2004 the Company issued $100,000,000 principal amount senior unsecured notes (the “Notes”) with a coupon rate of 9.375%, due on December 23, 2011 for net proceeds of $75,015,250, after expenses and equity allocation.  Interest is payable semi-annually on January 15 and July 15 of each year, beginning July 15, 2005.  The Company may redeem the Notes, in whole or in part, at any time after December 31, 2008 at a redemption price of between 100% and 102% of the principal amounts of the Notes, depending on the redemption date, plus accrued and unpaid interest and additional interest, if any, to the date of the redemption.  In addition, the Company may be required to redeem the Notes for cash under certain circumstances, such as a change in control in the Company or where the Company ceases to beneficially own, directly or indirectly, at least a majority interest in the Las Cristinas Project; or the Company may redeem the Notes, in whole but not in part, for cash at its option under certain circumstances, such as a change in the applicable Canadian withholding tax legislation.

The carrying value of the Notes was derived from a financial offering that contained both a liability and equity component.  As a result, the equity component was allocated based on the fair value of the shares issued with the Unit offering, calculated at $21,450,000 with $78,550,000 being the discounted fair value of the Notes.  The discounted fair value of the Notes is accreted to the face value of the Notes using the effective interest rate method over its seven year term, with the resulting charge recorded to interest expense.

Bank Loan

In May 2007, the loan balance was repaid.

On December 23, 2005 the Company and its subsidiaries restructured their outstanding obligations to Standard Bank Plc (“SB”) to close out all outstanding gold forward sales and call option transactions and to amend its existing credit agreement.

Pursuant to the restructuring, (1) the gold forward sales and call options transactions were closed out and the resulting liability of approximately $14,315,000 was converted into a fully drawn term loan facility, and amortized over two years until maturity on December 31, 2008 and (2) the payment obligation under the existing credit agreement due in January 2006 was restructured and coordinated with the payment terms of the new term loan facility.
 
Page 13 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 
6.         DEBT (continued)

The principal amounts outstanding under the new term loan facility and the restructured credit agreement bore interest at a rate per annum equal to LIBOR plus 2.5%. The Company was required to make a single aggregate payment of $150,000 per month on account of interest and principal under the term loan facility and the restructured credit agreement. The Company was also required to make additional principal repayments under the new term loan facility and the restructured credit agreement in certain circumstances, including the issuance of equity or convertible or exchangeable debt securities other than issuances pursuant to existing credit arrangements.  Accordingly, upon completion of the private placement unit offerings in February 2006 and August 2006 (Note 8), the Company repaid $2,123,800 and $1,889,324, respectively, of principal due to SB.

Of the principal amount outstanding under the new term loan facility, $7,500,000 was exchangeable at the option of SB for Crystallex common shares at a price per common share equal to the lesser of the average market price of Crystallex common shares on the Toronto Stock Exchange (“TSX”) for the five trading days preceding December 23, 2005 and the average market price of Crystallex common shares on the TSX for the five trading days preceding the exchange date.

Of the $7,500,000 exchangeable portion of the debt, $4,935,634 and $2,564,366 respectively, was allocated between the liability and equity components of the debt.  The liability component represented the present value of the exchangeable portion discounted using the interest rate that would have been applicable to the non-exchangeable debt.  The equity component represented the present value of the interest payments which the Company could settle through the issuance of shares or by cash, discounted at the same rate as the liability component (the interest component) and the right of SB to convert the principal of the debt into common shares, determined as the residual amount at the date of the new term loan facility.

As a result of restructuring the $2,054,000 principal payment due in January 2006 under the previous credit agreement with SB, the Company recorded a gain of $875,610 in December 2005.

In May 2006, SB elected to convert into common shares $7,500,000 principal amount of the loan in accordance with the terms of the credit agreement.  As a result of the conversion, Crystallex issued 3,765,841 common shares to SB as settlement of the $7,500,000 face value amount of the loan as well as including the accrued interest, accretion and deferred financing fees all of which resulted in a value of $7,641,266 being assigned to the shares issued.

Exchangeable Promissory Note

In July 2007, the promissory note was settled in full.

On December 31, 2005, the Company, through ECM (Venco) Ltd, (“ECM”), an indirect wholly-owned subsidiary, issued to Corporación Vengroup, S.A. (“Vengroup”) a $3,600,000 exchangeable promissory note of ECM.

Under the terms of the exchangeable promissory note, either party may elect to have the instalment payment satisfied by the delivery of Crystallex common shares.  The number of shares to be delivered to Vengroup is based on the weighted average trading price of the Crystallex common shares on the TSX during the five trading days immediately preceding delivery of an exchange notice.

Page 14 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 


 
6.      DEBT (continued)

In March 2006 Vengroup exercised its right to exchange the June 29, 2006 principal instalment payment of $900,000 for common shares of Crystallex.  The Company issued 307,213 common shares as settlement of this principal instalment payment.

In July 2006 Vengroup exercised its right to exchange the December 29, 2006 principal instalment payment of $900,000 for common shares of Crystallex.  The Company issued 304,087 common shares as settlement of this principal instalment payment

In January 2007 Vengroup exercised its right to exchange the June 29, 2007 principal instalment payment of $900,000 for common shares of Crystallex.  The Company issued 245,710 common shares as settlement of this principal instalment payment.

In July 2007, Vengroup exercised its right to exchange the December 29, 2007 final principal instalment payment of $900,000 for common shares of Crystallex.  The Company issued 215,190 common shares as settlement of this final principal instalment payment.  This obligation was settled in full after the July 2007 exercise.

Interest accretion

Interest accretion on the Notes and bank loan of $3,567,170 was expensed during the year ended December 31, 2007 (December 31, 2006 – $ 2,960,413) as a component of interest expense.

Fair value of debt

The estimated fair value of debt, which is not recognized in these consolidated financial statements, is $82,000,000 (2006: $84,878,219) and is determined by discounting the contractual cash flows using market interest rates for debt with similar terms and risks.

7.       ASSET RETIREMENT OBLIGATIONS

The key assumptions on which the fair value of the asset retirement obligations are based include the estimated future cash flows, the timing of those cash flows, and the credit-adjusted risk-free rate or rates at which the estimated cash flows have been discounted.  The Company used a discount rate of 15%.  As at December 31, 2007, undiscounted cash outflows approximating $3,400,000 are expected to occur over a five year period.

In view of the uncertainties concerning future asset retirement and progressive reclamation costs, the ultimate costs to the Company could differ materially from the amounts estimated.  The estimate for the future liability is subject to change based on possible amendments to applicable laws and legislation, the nature of ongoing operations and technological innovations.  Future changes, if any, due to their nature and unpredictability, could have a significant impact and would be reflected prospectively, as a change in an accounting estimate.

Page 15 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 

7.       ASSET RETIREMENT OBLIGATIONS (continued)

The following table explains the change in the asset retirement obligations:

     
2007
   
2006
 
 
Asset retirement obligations, beginning of year
  $ 1,210,575     $ 1,520,738  
 
Accretion expense
    211,256       288,376  
 
Revisions in estimated cash flows
    1,009,195       (598,539 )
        2,431,026       1,210,575  
 
Less: current portion
    566,786       239,408  
 
Asset retirement obligations, end of year
  $ 1,864,240     $ 971,167  


8.       SHARE CAPITAL

     
2007
   
2006
 
 
Authorized
           
 
Unlimited common shares, without par value
               
 
Unlimited Class “A” preference shares, no par value
               
 
Unlimited Class “B” preference shares, no par value
               
                   
 
Issued
               
 
261,659,072 Common Shares
               
 
(2006 – 245,424,494)
  $ 503,489,584     $ 448,100,697  
                   


Warrants

As at December 31, 2007 common share purchase warrants were outstanding enabling the holders to acquire common shares as follows:

 
Exercise Price
Number of
Warrants
 
Weighted Average
Remaining Contractual
Life (Years)
 
$4.30 ($4.25 CDN)
5,061,000
 1 
0.12
 
$4.00
875,000
 
0.54
 
$4.25
12,250,000
 2 
-
   
18,186,000
   


 
¹ These warrants expired at maturity on February 11, 2008.

 
² These warrants become exercisable for an eighteen month period commencing on the date which is 45 days following the receipt of the Permit for the Company’s Las Cristinas project.
 

Page 16 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 

8.      SHARE CAPITAL (continued)

Warrants (continued)

A summary of common share purchase warrants outstanding as at December 31 and changes during each of the years then ended is as follows:

     
2007
   
2006
 
     
Weighted
Number of
Warrants
   
Average
Exercise Price
   
Weighted
Number of
Warrants
   
Average
Exercise Price
 
 
Balance – beginning of year
    18,687,500       4.01       8,997,727       2.71  
 
Granted
    -       -       18,687,500       4.01  
 
Exercised
    (501,500 )     1.76       (8,764,682 )     2.71  
 
Expired or forfeited
    -       -       (233,045 )     2.75  
                                   
 
Balance – end of year
    18,186,000       4.25       18,687,500       4.01  


Stock options

The Company has an Incentive Share Option Plan (the “Plan”) that provides for the granting of options to executive officers, directors, employees and service providers of the Company to a maximum of 10% of the issued and outstanding common shares of the Company on a non-dilutive basis.  Under the Plan, the exercise price of each option cannot be less than the closing price of the Company’s common shares on the Toronto Stock Exchange, on the trading day immediately preceding the date of the grant.  Stock options granted to service providers and employees, executive officers, and directors have a life of two, five and ten years, respectively.  Stock options may vest immediately, or over periods ranging from one year to three years.  In June 2007 the shareholders of the Company approved amendments to the Plan whereby the Board of Directors may permit an optionee to elect to receive without payment by the optionee of any additional consideration, common shares equal to the value of options surrendered.

The Company determines the fair value of the employee stock options using the Black-Scholes option pricing model.  The estimated fair value of the options is expensed over their respective vesting periods.  The fair value of stock options was determined using the following weighted average assumptions:
 
 
                     
     
2007
   
2006
   
2005
 
                     
 
Risk free interest rate
    4.10 %     4.13 %     3.61 %
 
Expected life (years)
    3.0       3.70       3.97  
 
Expected volatility over expected life
    111 %     119 %     105 %
 
Expected dividends
    -       -       -  
 
 
The fair value compensation recorded for the year ended December 31, 2007 was $4,636,465 (2006 - $2,463,691; 2005 - $3,665,894) of which $3,111,561 (2006 - $2,463,691; 2005 - $3,665,894) was expensed and $1,524,904 (2006 – nil; 2005 – nil) was capitalized to mineral properties.

Page 17 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 


8.       SHARE CAPITAL (continued)

Stock options (continued)
     
2007
   
2006
   
2005
 
 
Weighted average fair
value of options granted
during the year-CDN$
  $ 2.49     $ 2.63     $ 2.75  



As at December 31, 2007 stock options were outstanding enabling the holders to acquire common shares as follows:

     
Outstanding Options
Exercisable Options
             
 
Range of
Exercise Price-Cdn
Number
of Options
Weighted Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price-CDN$
Number
Exercisable
Weighted
Average
Exercise
Price-CDN$
 
$1.00 to $1.50
797,500
0.64
$      1.46
797,500
$    1.46
 
$1.75 to $2.60
4,139,935
3.48
2.22
4,010,435
2.23
 
$2.65 to $3.60
4,260,754
4.83
3.12
3,800,754
3.09
 
$4.00 to $4.65
3,329,233
5.12
4.33
2,632,733
4.26
   
12,527,422
4.20
$      3.04
11,241,422
$    2.94

A summary of the status of the Plan as at December 31 and changes during each year then ended is as follows:


     
2007
   
2006
   
2005
 
     
Number
Of Options
   
Weighted
Average
Exercise
Price-CDN$
   
Number
of Options
   
Weighted
Average
Exercise
Price-CDN$
   
Number
of Options
   
Weighted
Average
Exercise
Price- CDN$
 
 
Balance -
beginning of year
    11,394,085    
$
2.80       11,327,394     $ 2.63       10,950,250     $ 2.46  
 
Granted
    2,067,004       3.66       1,773,400       3.73       1,407,644       3.28  
 
Exercised
    (864,000 )*     1.62       (1,641,800 )     (2.31 )     (775,000 )     (1.66 )
 
Expired or forfeited
    (69,667 )     3.81       (64,909 )     (2.51 )     (255,500 )     (2.02 )
 
Balance - end of year
    12,527,422     $ 3.04       11,394,085     $ 2.80       11,327,394     $ 2.63  
 
*Includes 6,500 options which were exercised for 1,091 common shares of the Company on a cashless basis

Financing Transactions

Fiscal 2007 Activities

On April 24, 2007, the Company issued 14,375,000 common shares at CDN$4.25 per common share, in a bought deal with a syndicate of underwriters, for proceeds of CDN$57,103,000 ($50,701,111) after underwriting fees and expenses.

In January and July, 2007, under the terms of the exchangeable promissory note between Vengroup and ECM (Note 6), the Company issued a total of 460,900 common shares to Vengroup as settlement of $1,800,000 due to Vengroup.

Page 18 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 

8.         SHARE CAPITAL (continued)

Fiscal 2006 Activities

In January 2006, the Company issued 1,661,130 common shares for net proceeds of $4,317,661 under the terms of its equity draw down facility.

In February 2006, the Company completed a private placement of 10,799,000 units.  Each unit was comprised of one common share and 1.1344 common share purchase warrants.  Each whole warrant entitles the holder to purchase one common share at a price of US$4.25.  The warrants are non-transferable and are exercisable for an 18 month period commencing 45 days following receipt of the Permit for the Company’s Las Cristinas project in Venezuela.  Certain events, including change in control of the Company or in the Company’s interest in the Las Cristinas project, make the warrants immediately exercisable.  The net proceeds received by the Company, after considering issuance costs of $991,972, was $30,325,132.  The issuance costs were allocated proportionately to the amounts recorded as share capital of $28,233,744 and contributed surplus of $2,091,388.

In March and July 2006, under the terms of the exchangeable promissory notes between Vengroup and ECM (Note 6), the Company issued a total of 611,300 common shares to Vengroup as settlement of $1,800,000.

In May 2006, upon SB’s exercise of its exchange rights, the Company issued 3,765,841 common shares to SB as settlement of the $7.5 million exchangeable portion of the bank loan (Note 6).

In July 2006, the Company agreed to amend the terms of 2,197,727 unlisted common share purchase warrants (the “Warrants”). Each Warrant entitled the holder to acquire one common share of the Company at an exercise price of US$2.75 per share until September 15, 2006. Pursuant to the terms of the amendment to the Warrants and their subsequent exercise, the Company issued approximately 0.398 new common share purchase warrants (the “New Warrants”) in exchange for each Warrant exercised, for an aggregate of 875,000 New Warrants. Each New Warrant issued entitles the holder to acquire one common share in the capital of the Company at an exercise price of US$4.00 per share until July 14, 2008.

The Company agreed to amend the terms of warrants granted to its project finance advisor (“Advisor”). The Company previously issued 500,000 common share purchase warrants to its Advisor in April 2003 that would only become exercisable to the Advisor should the Advisor secure financing for the Las Cristinas project (“the Financing Condition”). In July 2006 the Company agreed to remove the Financing Condition from these warrants and, accordingly, recorded professional fees of $1,365,839.

In August 2006, the Company completed a public offering of 10,125,000 units.  Each unit was comprised of one common share and one half of one common share purchase warrant.  Each whole warrant entitles the holder to purchase one common share at a price of CDN$4.25.  The warrants are exercisable on or before February 10, 2008. The net proceeds received by the Company, after considering issuance costs of CDN$2,309,331 ($2,061,078), was CDN$30,090,669 ($26,855,922). The issuance costs were allocated proportionately to the amounts recorded as share capital of CDN$25,742,567 ($22,975,241) and contributed surplus of CDN$4,348,102 ($3,880,681).

Page 19 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 

8.         SHARE CAPITAL (continued)

Fiscal 2005 Activities

On July 29, 2005, the Company filed a preliminary short form base shelf prospectus with the Ontario Securities Commission and a corresponding registration statement with the United States Securities and Exchange Commission pursuant to the multijurisdictional disclosure system. On August 23, 2005 the preliminary short form base shelf prospectus and registration statement became effective. This prospectus enables the Company to offer at its option, over a 25-month period, up to an aggregate of CDN$75 million of senior unsecured notes, common shares, warrants and units in one or more offerings.

On September 14, 2005 the Company established, as covered under the short form base shelf prospectus, a CDN$60 million equity draw down facility with a counterparty and also issued and sold to them for gross proceeds of CDN$10 million (received on closing), units comprising CDN$10,000,000 principal amount of 5% Series 2 Notes due March 13, 2006, 200,000 common shares, and warrants to acquire 450,000 common shares exercisable on or before September 13, 2006 at a price of CDN$3.19 per share. The securities comprising the units separated immediately upon issue (Note 6).  During the period October 5, 2005 through to December 16, 2005 the Company issued 12,273,236 common shares for net proceeds of $17.8 million under its equity draw down facility.  In accordance with the terms of the draw down facility a portion of the proceeds were used to repay the outstanding Series 2 Notes.

On December 30, 2005, the Company acquired the non-controlling shareholder interests in the holding companies which own or control the interests in certain of Lo Incréible mining properties located in Bolivar State, Venezuela (including the La Victoria deposit).  Under the terms of the transaction ECM purchased the 49% outstanding interest in Osmin Holdings Limited (“Osmin”) and the 30% outstanding interest in Tamanaco Holdings Limited (“Tamanaco”) owned by Vengroup and a related company, for consideration consisting of $6,600,000 payable as follows:

-  
$3,000,000 by the issuance and delivery to Vengroup of 1,467,136 Crystallex common shares;
-  
$3,600,000 by the issuance and delivery to Vengroup of a $3,600,000 exchangeable promissory note of ECM (Note 6).

In addition, the arbitration proceedings between Crystallex and Vengroup were terminated and the parties delivered mutual releases with respect to the subject matter of the arbitration proceedings.  As a result of the transaction, the joint venture arrangements between ECM and Vengroup have been terminated and the Company, through its subsidiaries, now owns 100% of Osmin and Tamanaco. ECM’s obligations under the exchangeable promissory note are guaranteed by a subsidiary of ECM and secured by a pledge of the shares of ECM’s Venezuelan subsidiary that directly holds the interest in the Lo Increible properties.

As part of the transaction, Crystallex also entered into a consulting agreement with the principals of Vengroup pursuant to which Crystallex has agreed to pay aggregate consulting fees of $600,000.  These amounts were expensed during 2005 and included in general and administrative expenses in the consolidated statement of operations.

Page 20 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 

8.         SHARE CAPITAL (continued)

Shareholder Rights Plan

On October 30, 2006 the shareholders of the Company voted to ratify, confirm and approve a new shareholder Rights Plan (the “Rights plan”) which was originally approved by the Board of Directors of the Company on June 22, 2006.  The rights issued under the Rights plan are subject to reconfirmation at every third annual meeting of shareholders and will expire at the close of the Company’s annual meeting in 2016 (the “Expiration Time”).

Pursuant to the Rights plan, the Board of Directors declared a distribution of one right (a “Right”) for each outstanding Common Share of the Company to shareholders of record at the close of business on the Record Date and authorized the issuance of one Right for each Common Share issued after the Record Date and prior to the Separation Time (described below) and the Expiration Time.  The Rights will separate from the Common Shares at the time (the “Separation Time”) which is the close of business on the eighth trading day (or such later day as determined by the Board of Directors) after the public announcement of the acquisition of, or intention to acquire, beneficial ownership of 20% of the Common Shares of the Company by any person other than in accordance with the terms of the Rights plan.

In order to constitute a “Permitted Bid”, an offer must be made in compliance with the Rights plan and must be made to all shareholders (other than the offeror), must be open for at least 60 days and be accepted by shareholders holding more than 50% of the outstanding voting shares and, if so accepted, must be extended for a further 10 business day period.

9.         INVESTMENT IN SUBSIDIARIES

In November 2004, Vengroup delivered a notice of arbitration to the Company and ECM.  On December 29, 2005 the Company and ECM reached a settlement with Vengroup.  As part of this settlement ECM acquired the non-controlling shareholder interests in the holding companies which own or control the mining rights to certain of its Lo Increible mining properties for consideration of $6.6 million.  As part of the transaction to acquire the non-controlling shareholder interests, the Company also entered into a two-year consulting agreement for total fees of $600,000.  This investment in ECM and its subsidiaries was subsequently written down to $ Nil in 2005, as the Company had previously written off its controlling interest in the related underlying mining assets.

Effective August 19, 2004, the Company acquired, under a plan of arrangement, all of the outstanding shares of El Callao Mining Corporation (“El Callao”) not previously owned.  As a result of this transaction 0702259 B.C. Ltd., a successor company to El Callao under the plan of arrangement and a subsequent amalgamation, is now a wholly-owned subsidiary of Crystallex.  As consideration, shareholders of El Callao (other than Crystallex) received 0.01818 of a Crystallex common share for each of their El Callao shares representing a total obligation to issue 172,975 Crystallex common shares.  The value associated with acquiring these shares was $493,702.  This investment was subsequently written down to $ Nil in 2004.  As at December 31, 2007, the Company had issued 164,815 common shares and is obligated to issue the remaining 8,160 common shares.

Page 21 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 
10.     INCOME TAXES

The Company did not record a benefit for income taxes for the years ended December 31, 2007, 2006 and 2005, due to the recurrence of operating losses and the Company’s determination that it is not more likely than not that future income tax assets will be realized. The Company recorded a provision for income taxes related to one of its subsidiaries in Venezuela.

The provision for income taxes reported differs from the amounts computed by applying the cumulative Canadian federal and provincial income tax rates to the loss before tax provision due to the following: 

     
2007
   
2006
   
2005
Restated
(Note 11)
 
 
Statutory tax rate
    35.08 %     35.88 %     36.12 %
 
Loss before income tax provision
  $ (30,209,086 )   $ (35,118,157 )   $ (43,472,999 )
                           
 
Expected income taxes recoverable
  $ (10,597,347 )   $ (12,600,395 )   $ (15,702,447 )
 
Change in valuation allowance
    (6,957,710 )     9,645,913       8,406,291  
 
Change in substantively enacted tax rates
    4,869,757       2,772,385       -  
 
Change in foreign exchange rates
    (10,060,082 )     (1,513,694 )     (951,840 )
 
Non-deductible items
    6,850,578       1,946,169       1,768,547  
 
Reduction in loss carry forwards
    16,026,915       284,071       6,484,430  
 
Difference in foreign tax rates
    110,199       31,623       286,455  
 
Actual income tax provision
  $ 242,310     $ 566,072     $ 291,436  

The tax effects of temporary differences that would give rise to significant portions of the future tax assets and future tax liabilities at December 31 are as follows:


     
2007
   
2006
Restated
(Note 11)
 
 
Future income tax assets:
           
 
Loss carry forwards and deferred financing fees
  $ 60,739,199     $ 68,083,102  
 
Asset retirement obligations
    826,549       411,596  
 
Less:  valuation allowance
    (57,938,069 )     (64,895,779 )
 
Net future income tax asset
    3,627,679       3,598,919  
                   
 
Future income tax liabilities
               
 
Property, plant and equipment
    (17,870,565 )     (27,113,020 )
 
Net future income taxes
  $ (14,242,886 )   $ (23,514,101 )

Future income tax assets are recognized to the extent that realization is considered more likely than not.  Since the Company has determined that it is more likely than not that the future income tax assets are not recoverable, the net future income tax assets have been fully offset by a valuation allowance.  The prior years’ presentation has been amended to conform to the current year’s presentation.

Page 22 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 

 
10.     INCOME TAXES (continued)

 
The components of the Company’s future income tax balance include a future income tax estimate of 34% of the carrying value of the Las Cristinas asset recorded in the parent entity for accounting purposes which may not have deductibility for income tax purposes in the Venezuela Branch in the foreseeable future. The Company recognized unrealized non-cash foreign currency translation gains of $14,322,229 during the year ended December 31, 2007 (2006: $nil; 2005: $1,442,481). These translation gains result from the translation into U.S. dollars at the end of the year of the Venezuelan-denominated future income tax liabilities that are recognized in connection with these expenditures on the Las Cristinas asset. Such currency translation gains and losses have been recorded in the determination of net loss.
 
At December 31, 2007 the Company has the following unused tax losses available for tax purposes:

     
Country
 
 
Year of Expiry
 
Canada
   
Venezuela
 
 
2008
  $ 1,874,000     $ 2,191,464  
 
2009
  $ 45,965,000     $ 265,029  
 
2010
  $ 38,962,000     $ 899  
 
2014
  $ 17,670,000     $ -  
 
2015
  $ 37,152,000     $ -  
 
2026
  $ 28,335,000     $ -  
 
2027
  $ 22,468,000     $ -  


11.    RESTATEMENT OF PRIOR YEARS DUE TO FUTURE INCOME TAXES

In 2007, the Company reviewed its accounting practices in respect of certain expenditures made in connection with its Venezuela Branch but funded by its Canadian parent entity with respect to Las Cristinas. The Company determined that such expenditures, previously treated as deductible for tax purposes, that have been capitalized in the Canadian parent entity are not likely to be deductible neither in Venezuela nor in Canada thereby creating a difference between their accounting and tax values. The resulting future tax liability is subject to foreign exchange translation gains and losses at each reporting period when it is re-valued into US dollars.

The following table summarizes information relating to the restatement of prior years as a result of this review:
     
Canadian GAAP
   
U.S. GAAP
 
 
Cumulative non-deductible expenditures
           
 
2006
  $ 52,318,966     $ 28,622,554  
 
2005
  $ 39,356,965     $ 15,660,553  
 
2004
  $ 30,048,783     $ 6,352,371  
 
Related Future income tax liabilities
               
 
2006
  $ 23,514,101     $ 14,394,877  
 
2005
  $ 16,836,707     $ 7,717,481  
 
2004
  $ 13,484,065     $ 3,272,433  
 
Capitalized to Mineral Properties during the year
               
 
2006
  $ 6,677,395     $ 6,677,395  
 
2005
  $ 4,795,124     $ 4,795,124  
 
2004
  $ 3,506,014     $ 3,272,433  
 
Unrealized foreign currency translation gains
               
 
2006
  $ -     $ -  
 
2005
    1,442,481       350,072  
 
2004
    1,995,610       -  
 
Cumulative effect on net loss
  $ 3,438,091     $ 350,072  


Page 23 of 35

 
Crystallex International Corporation
Notes to the Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Expressed in United States dollars) 


 
11.          RESTATEMENT OF PRIOR YEARS DUE TO FUTURE INCOME TAXES (continued)


           
As at December 31, 2006
 
     
As Previously
Reported
   
Adjustment
   
As Restated
 
 
Canadian GAAP
                 
 
Property, plant and equipment
  $ 256,455,027     $ 26,952,192     $ 283,407,219  
 
Future income taxes
  $ -     $ 23,514,101     $ 23,514,101  
 
Opening Deficit
  $ (251,467,693 )   $ 3,438,091     $ (248,029,602 )
 
Net Loss for the Year
    (35,684,229 )     -       (35,684,229 )
 
Deficit, End of Year
  $ (287,151,922 )   $ 3,438,091     $ (283,713,831 )
                           
 
U.S. GAAP
                       
 
Property, plant and equipment
  $ 195,346,705     $ 14,744,949     $ 210,091,654  
 
Future income taxes
  $ -     $ 14,394,877     $ 14,394,877  
 
Shareholders’ Equity
  $ 134,934,621     $ 350,072     $ 135,284,693  


     
As at December 31, 2005
 
     
As Previousl
Reported
   
Adjustment
   
As Restated
 
 
Canadian GAAP
                 
 
Property, plant and equipment
  $ 215,260,043     $ 20,274,801     $ 235,534,844  
 
Future income taxes
  $ -     $ 16,836,707     $ 16,836,707  
 
Opening Deficit
  $ (206,260,777 )   $ 1,995,610     $ (204,265,167 )
 
Net Loss for the Year
    (45,206,916 )     1,442,481       (43,764,435 )
 
Deficit, End of Year
  $ (251,467,693 )   $ 3,438,091     $ (248,029,602 )
                           
 
Net Loss per Share
  $ (0.23 )   $ 0.01     $ (0.22 )
                           
 
U.S. GAAP
                       
 
Property, plant and equipment
  $ 144,559,985     $ 8,067,557     $ 152,627,542  
 
Future income taxes
  $ -     $ 7,717,481     $ 7,717,481  
 
Shareholders’ Equity
  $ 58,772,070     $ 350,072     $ 59,122,142  
 
Net Loss for the Year
  $ (41,911,000 )   $ 350,072     $ (41,560,928 )
 
Net Loss per Share
  $ (0.22 )   $ $0.01     $ $(0.21 )


The estimated future income taxes represent a net accounting entry derived from the current lack of deductibility in the Venezuela Branch of certain expenditures related to Las Cristinas which were funded by the parent Company in Canada. These costs will be amortized for accounting purposes but may not be for income tax purposes. Accordingly, the future income taxes represent an undiscounted estimate of the tax effect of this difference, and therefore are not payable at the present.

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