INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNT ING FIRM

F - 2

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-3

 

FINANCIAL STATEMENTS

 

 

Consolidated Balance Sheets

F-4

 

Consolidated Statements of Operations

F-5

 

Consolidated Statements of Stockholders’ Equity

F-6

 

Consolidated Statements of Cash Flows

       

F-7

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-8 – F23

 

 

 

F-1

 

 

 

Report of Independent   Registered Public Account ing Firm

 

 

To the Board of Directors and Stockholders of

AZCO Mining Inc. and Subsidiary

 

We have audited the consolidated balance sheet of AZCO Mining Inc. and Subsidiary as of June 30, 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit 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 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 audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AZCO Mining Inc. and Subsidiary as of June 30, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note B to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations which raise substantial doubt about its ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

Semple & Cooper, LLP

 

 

Phoenix, Arizona

March 6, 2004

 

 

 

F-2

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and

Stockholders of Azco Mining Inc.

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Azco Mining Inc. and its subsidiary at June 30, 2002, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with 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 the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note B to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations which raises substantial doubt about its ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

PricewaterhouseCoopers LLP

Phoenix, Arizona

September 3, 2002

 

 

Additional Comments for Canadian Readers

 

Canadian reporting standards do not consider it appropriate to refer to going concern issues where the matter is adequately disclosed in the notes to financial statements, such as described in Note B to these consolidated financial statements.  This report has been prepared in accordance with reporting standards in the United States of America which requires a reference in the Report of Independent Registered Public Accounting Firm, when there is substantial doubt as to an entity’s ability to continue as a going concern.

 

 

 

PricewaterhouseCoopers LLP

Phoenix, Arizona

September 3, 2002

 

 

F-3

 

 

 

 

AZCO MINING, INC.

CONSOLIDATED BALANCE SHEETS

Years Ended June 30,

 

ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

See accompanying notes to the financial statements

 

F-4

 

 

 

AZCO MINING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended June 30,

 

 

 

 

See accompanying notes to the financial statements

 

 

F-5

 

 

 

AZCO MINING, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Years Ended June 30, 2003, 2002 and 2001

 

 

 

 

 

See accompanying notes to the financial statements

 

 

F-6

 

 

 

AZCO MINING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended June 30,

 

 

 

 

See accompanying notes to the financial statements

 

F-7

 

 

 

 

AZCO MINING INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES

 

Azco Mining Inc. (the Company) is a mining company incorporated in Delaware.  Its general business strategy is to acquire, explore and develop mineral properties.  The Company’s principal asset is the 100% owned Black Canyon Mica Project (the Mica Project) in Arizona.  

 

In April 2003, the Company sold its remaining 30% share of Cobre del Mayo S.A. de D.V. (Cobre del Mayo), the Mexican corporation which holds the Piedra Verdes Project, to Frontera Cobre Del Mayo S.A. de D.V. (Frontera), for consideration of $250,000 and possible future deferred payments and royalties of up to $4.75 million.  Rights to these contingent payments were subsequently given to former directors as a part of a settlement agreement. Frontera, after the purchase of Azco’s shares in Cobre del Mayo, owns 100% of the shares in Cobre Del Mayo, having purchased Phelps Dodge Corporation’s 70% interest in March 2002.

 

In November 2002, the Company ceased crushing and concentration activities at its Mica Project due to economic constraints.  Limited production, marketing and sales activities have continued at its Glendale mica processing facility using inventoried mica, while the Company seeks financing for the project.  

 

Principles of Consolidation

     

These consolidated financial statements include the accounts of the company and its wholly owned subsidiary, Azco Mica, Inc., a Delaware corporation.  All significant inter-company balances and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents.    

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value.  Cost is determined on a weighted average basis and includes all costs in bringing the inventory to its present location and condition.  Net realizable value is the estimated price at which inventory can be sold in the normal course of business after allowing for the cost of completion and sale.

 

At June 30, 2003 and 2002, the Company’s inventory was reduced to estimated net realizable values.  Results of operations for the years ended June 30, 2003 and 2002 included a corresponding charge of $996,223 and $1,340,207, respectively, which represents the excess of cost over net realizable value at June 30, 2003 and 2002.

 

Capital Assets

 

Land, buildings, plant, equipment and vehicles are carried at cost.  Replacements, maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred.  Major renewals and improvements are capitalized.  Upon retirement, sale or other disposition, the cost and accumulated depreciation are eliminated and the gain or loss is included in other income or expense on the statement of operations.

 

The Company expenses prospecting and exploration costs as incurred, but capitalizes costs directly attributable to the acquisition of mineral properties, pending determination as to their commercial feasibility.  Mine development costs that are expected to benefit future production are capitalized and amortized on the units-of-production method over proven reserves.  

 

 

 

F-8

 

 

 

 

AZCO MINING INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES (continued)

 

Capital Assets (continued)

 

Mineral properties (including capitalized development costs), plant and equipment are amortized on the units-of-production basis using proven and probable reserves.  Office buildings, furniture, equipment, and vehicles are depreciated over their estimated useful lives (3 –15 years) using the straight-line method.

 

The Company evaluates its long-term assets for impairment when events or changes in economic circumstances indicate the carrying amount of such assets may not be recoverable.  The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life to measure whether the assets are recoverable and measure any impairment by reference to fair value.  Fair value is generally estimated using the Company’s expectation of discounted net cash flows.

 

During the year ended June 30, 2003, management determined that an impairment charge was necessary to reduce the carrying value of the Company’s long lived assets to the amount that could be recovered from future operations .  The amount of the impairment charge was based upon a formal indication of willingness to acquire the Company’s mining assets received from a third-party investor during the third quarter and represented management’s best estimate of the fair value of these assets.  During the year ended June 30, 2003, an impairment charge of $3,291,773 has reduced the carrying amount of mineral properties, plant and equipment.

 

Recoverability of the investment in the Mica Project is assessed using estimates of proven and probable ore reserves, estimated prices (considering historical and current prices, price trends, and related factors), operating capital, and reclamation costs.  Where capitalized costs are not recoverable, reductions in the carrying value would be recorded to the extent the remaining investment exceeds the estimate of fair value.  Changes in the geological and engineering interpretations of ore bodies, product prices and operating costs may change the Company’s estimate of proven and probable reserves.  

 

It is reasonably possible that the Company’s estimates of proven and probable reserves may change in the future, resulting in additional charges for depreciation, amortization, reclamation and impairments in future reporting periods.

 

Reclamation Costs

 

On July 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143).  SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  Specifically, the Statement requires that retirement obligations be recognized when they are incurred and displayed as liabilities with the initial measurement being at the present value of estimated third party costs.  In addition, the asset retirement cost is capitalized as part of the assets’ carrying value and subsequently allocated to expense over the assets useful life.

 

The asset retirement obligations associated with the Mica Project consist of reclamation of disturbed property as well as the disposal and dismantling of related property and equipment.  The Company previously accounted for these costs through periodic charges to earnings using the units-of-production method.  The change in accounting resulted in a decrease to long-lived assets of $161,746, a decrease to long-term liabilities of $147,844 and a cumulative effect charge to earnings of $13,902 during the fiscal year ended June 30, 2003.  T he change in accounting had no impact on the Company’s loss per share in fiscal 2003 .

 

 

 

 

F-9

 

 

 

 

AZCO MINING INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES (continued)

 

Reclamation Costs (continued)

 

The Company’s asset retirement obligation through June 30, 2003 is as follows.

 

 

 

Revenue Recognition

             

The Company recognizes the sale of product when an agreement of sale exists, product delivery has occurred, title has transferred to the customer and collection is reasonably assured.  The price received is based upon terms of the contract.

 

Income Taxes

            

The Company accounts for income taxes in accordance with Financial Accounting Standard No. 109, “Accounting for Income Taxes” (SFAS 109).  SFAS 109 requires the Company to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.  Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

 

Stock-Based Compensation

 

The Company has elected to account for stock-based compensation using the intrinsic value method.  Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.  The Company has adopted the disclosure-only provision s of Financial Accounting Standard No. 123, “Accounting for Stock Based Compensation”.

 

The following table shows the pro forma effect of stock-based compensation on the Company’s financial statements at June 30, 2003, 2002 and 2001:

 

 

 

F-10

 

 

 

AZCO MINING INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES (continued)

 

Pro forma information regarding net income and earnings per share is required by SFAS No.123, and has been determined as if the Company had accounted for its stock option plan under the fair value based method prescribed by SFAS No. 123.  The fair value of options was estimated at the date of grant using a Black-Scholes options valuation model with the following weighted-average assumptions for fiscal years 2003, 2002 and 2001:  risk-free interest rates of 1.53% to 3.58%, respectively, no dividend, volatility factor of the expected market price of the Company’s common stock of 100% and 90%, respectively, and approximate expected lives of 1 to 3 years.

 

The Black Scholes options valuation model was developed for use in estimating the fair value of traded options that have no vesting or trading restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Changes in the subjective assumptions can materially affect the fair value estimate.

 

For the purposes of pro forma disclosure, the weighted-average fair value of the options of $77,133 for fiscal year 2002 (2001 - $116,012) is expensed when the options are granted as the Company’s stock options are fully vested when granted.  No options were granted in fiscal year 2003.  

 

Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in 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 r