UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period from 7-1-02 to 9-30-02
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT.
For the transition period from __________ to __________
Commission file number 000-31025
METALINE CONTACT MINES
| Washington | 91-0779945 | |
| (State or jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
6599 Prichard Creek Road, Murray, ID 83874
208-682-2217
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: 14,064,300
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
| PAGE | ||||
PART I — FINANCIAL INFORMATION | ||||
Item 1. Financial Statements | 1 | |||
Item 2. Management’s Analysis and Discussion | 15 | |||
PART II — OTHER INFORMATION | ||||
Item 1. Legal Proceedings | 16 | |||
Item 2. Changes in Securities | 16 | |||
Item 3. Defaults Upon Senior Securities | 16 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 16 | |||
Item 5. Other Information | 17 | |||
Item 6. Exhibits and Reports on Form 8-K | 17 | |||
SIGNATURES | 17 | |||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
The Board of Directors
Metaline Contact Mines
Murray, Idaho
ACCOUNTANT’S REVIEW REPORT
We have reviewed the accompanying balance sheet of Metaline Contact Mines as of September 30, 2002, and the related statements of operations, stockholders’ equity, and cash flows for the nine months then ended. All information included in these financial statements is the representation of the management of Metaline Contact Mines.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
The financial statements for the year ended December 31, 2001 were audited by us and we expressed an unqualified opinion on them in our report dated February 14, 2002. We have not performed any auditing procedures since that date.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
October 14, 2002
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METALINE CONTACT MINES
BALANCE SHEETS
| September 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
| (Unaudited) | |||||||||||
ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | 122,346 | $ | 183,354 | |||||||
| Receivable from related party | 18,000 | — | |||||||||
| Total Current Assets | 140,346 | 183,354 | |||||||||
| OTHER ASSETS | 109,413 | 109,413 | |||||||||
| Receivables from related parties | 109,413 | 109,413 | |||||||||
| Accrued interest receivable | 13,405 | 7,660 | |||||||||
| Investment in LLC | 35,750 | 36,188 | |||||||||
| Total Other Assets | 158,568 | 153,261 | |||||||||
TOTAL ASSETS | $ | 298,913 | $ | 336,615 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Deferred royalty income | $ | 3,880 | $ | 3,000 | |||||||
| Total Current Liabilities | 3,880 | 3,000 | |||||||||
| COMMITMENTS AND CONTINGENCIES | — | — | |||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
| Common stock, $0.05 par value; 20,000,000 shares authorized, 14,064,300 shares issued and outstanding | 703,222 | 703,222 | |||||||||
| Additional paid-in capital | 302,165 | 302,165 | |||||||||
| Stock options | 17,907 | 17,907 | |||||||||
| Accumulated deficit | (728,261 | ) | (689,679 | ) | |||||||
| Total Stockholders’ Equity | 295,033 | 333,615 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 298,913 | $ | 336,615 | |||||||
See accountant’s review report and accompanying notes.
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METALINE CONTACT MINES
STATEMENTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||
| REVENUES | ||||||||||||||||||
| Royalty income | $ | 2,910 | $ | 3,000 | $ | 8,910 | $ | 9,000 | ||||||||||
| GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||||||||||||
| Consulting and management fees | 9,000 | 30,000 | 30,614 | 90,000 | ||||||||||||||
| Professional fees | 3,000 | 7,303 | 14,695 | 21,668 | ||||||||||||||
| Transfer agent fees | 261 | 168 | 901 | 823 | ||||||||||||||
| Taxes, licenses, and fees | — | — | 428 | 10 | ||||||||||||||
| Office supplies and expenses | 2,295 | 2,673 | 7,408 | 11,016 | ||||||||||||||
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 14,556 | 40,144 | 54,046 | 123,517 | ||||||||||||||
| OPERATING LOSS | (11,646 | ) | (37,144 | ) | (45,136 | ) | (114,517 | ) | ||||||||||
| OTHER INCOME | ||||||||||||||||||
| Dividend income | 359 | 2,120 | 1,247 | 8,264 | ||||||||||||||
| Interest income | 1,466 | — | 5,745 | — | ||||||||||||||
| Miscellaneous income | — | — | — | 300 | ||||||||||||||
| Loss from investment in LLC | (226 | ) | (1,332 | ) | (439 | ) | (1,570 | ) | ||||||||||
| TOTAL OTHER INCOME | 1,599 | 788 | 6,554 | 6,994 | ||||||||||||||
| LOSS BEFORE TAXES | (10,047 | ) | (36,356 | ) | (38,582 | ) | (107,523 | ) | ||||||||||
| INCOME TAX EXPENSE | — | — | — | — | ||||||||||||||
| NET LOSS | $ | (10,047 | ) | $ | (36,356 | ) | $ | (38,582 | ) | $ | (107,523 | ) | ||||||
| NET LOSS PER COMMON SHARE, BASIC AND DILUTED | $nil | $nil | $nil | $ | (0.01 | ) | ||||||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 14,064,300 | 14,064,300 | 14,064,300 | 14,064,300 | ||||||||||||||
See accountant’s review report and accompanying notes.
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METALINE CONTACT MINES
STATEMENT OF STOCKHOLDERS’ EQUITY
| Common Stock | Additional | Total | ||||||||||||||||||||||
| Paid-in | Accumulated | Stock | Stockholders' | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Options | Equity | |||||||||||||||||||
| Balance, January 1, 2000 | 13,564,300 | $ | 678,222 | $ | 302,165 | $ | (432,146 | ) | $ | 13,632 | $ | 561,873 | ||||||||||||
| Issuances of stock for consulting fees at $0.05 per share | 500,000 | 25,000 | — | — | — | 25,000 | ||||||||||||||||||
| Net loss for year ended, December 31, 2000 | — | — | — | (122,207 | ) | — | (122,207 | ) | ||||||||||||||||
| Balance, December 31, 2000 | 14,064,300 | 703,222 | 302,165 | (554,353 | ) | 13,632 | 464,666 | |||||||||||||||||
| Stock options granted November 12, 2001 | — | — | — | — | 4,275 | 4,275 | ||||||||||||||||||
| Net loss for year ended, December 31, 2001 | — | — | — | (135,326 | ) | — | (135,326 | ) | ||||||||||||||||
| Balance, December 31, 2001 | 14,064,300 | 703,222 | 302,165 | (689,679 | ) | 17,907 | 333,615 | |||||||||||||||||
| Net loss for nine months ended, September 30, 2002 | — | — | — | (38,582 | ) | — | (38,582 | ) | ||||||||||||||||
| Balance, September 30, 2002 (unaudited) | 14,064,300 | $ | 703,222 | $ | 302,165 | $ | (728,261 | ) | $ | 17,907 | $ | 295,033 | ||||||||||||
See accountant’s review report and accompanying notes.
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METALINE CONTACT MINES
STATEMENTS OF CASH FLOWS
| Nine Months Ended | |||||||||||
| September 30, | September 30, | ||||||||||
| 2002 | 2001 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | (38,582 | ) | $ | (107,523 | ) | |||||
| Adjustments to reconcile net loss to net cash provided (used) by operating activities: | |||||||||||
| Accrued interest on amount due from MCMLLC | (5,745 | ) | — | ||||||||
| Changes in assets and liabilities: | |||||||||||
| Decrease in investment in LLC | 439 | 1,570 | |||||||||
| Increase (decrease) in accounts payable | — | (1,355 | ) | ||||||||
| Increase (decrease) in deferred royalty income | 880 | — | |||||||||
| Net cash provided (used) by operating activities | (43,008 | ) | (107,308 | ) | |||||||
| CASH FLOWS PROVIDED BY INVESTING ACTIVITIES | |||||||||||
| Cash advance to related party | (18,000 | ) | — | ||||||||
| Net cash provided (used) by financing activities | (18,000 | ) | — | ||||||||
| CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | — | — | |||||||||
| Net increase (decrease) in cash and cash equivalents | (61,008 | ) | (107,308 | ) | |||||||
| Cash and cash equivalents, beginning of period | 183,354 | 321,761 | |||||||||
| Cash and cash equivalents, end of period | $ | 122,346 | $ | 214,453 | |||||||
| SUPPLEMENTAL CASH FLOW DISCLOSURES: | |||||||||||
| Income taxes paid | $ | — | $ | — | |||||||
| Interest paid | $ | — | $ | — | |||||||
See accountant’s review report and accompanying notes.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Metaline Contact Mines (hereinafter “Metaline”) was incorporated in November of 1928 under the laws of the State of Washington for the purpose of engaging in mining and the buying and selling of ores, metals, and minerals.
The Company was reorganized and recapitalized in 1960 and its articles of incorporation were amended to expand its business purposes to include various additional business activities. Metaline has continued its operations since its formation and has historically acquired land, mineral rights, patented lode mining claims, and timber in the Pacific Northwest.
In the last quarter of 1996, Metaline transferred substantially all of its assets to a limited liability company. See Note 4.
The Company’s year end is December 31.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Accounting Method
The Company’s financial statements are prepared using the accrual method of accounting.
Accounting Pronouncements
In September 2000, the FASB issued SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities and also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000, and is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after June 30, 2001. The Company believes that the adoption of this standard will not have a material effect on the Company’s results of operations or financial position.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Pronouncements (Continued)
In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 provides for the elimination of the pooling-of-interests method of accounting for business combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142 prohibits the amortization of goodwill and other intangible assets with indefinite lives and requires periodic reassessment of the underlying value of such assets for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. An early adoption provision exists for companies with fiscal years beginning after March 15, 2001. On September 1, 2001, the Company adopted SFAS No. 142. Application of the nonamortization provision of SFAS No. 142 is expected to result in no changes to the Company’s results of operations or financial position.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). SFAS 144 replaces SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.” This new standard establishes a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations. SFAS No. 144 requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. This statement is effective beginning for fiscal years after December 15, 2001, with earlier application encouraged. The Company adopted SFAS 144 and does not believe that the adoption will have a material impact on the financial statements of the Company at September 30, 2002.
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, which updates, clarifies and simplifies existing accounting pronouncements. FASB No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded, as a result, FASB 64, which amended FASB 4, was rescinded as it was no longer necessary. SFAS No. 145 amended FASB 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Management has not yet determined the effects of adopting this Statement on the financial position or results of operations at September 30, 2002.
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146,” Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Pronouncements (continued)
SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 was issued in June 2002 and is not yet effective. The impact on the Company’s financial position or results of operations from adopting SFAS No. 146 has not been determined.
Interim Financial Statements
The interim financial statements as of and for the period ended September 30, 2002 included herein have been prepared for the Company without audit. They reflect all adjustments, which are, in the opinion of management, necessary to present fairly the results of operations for these periods. All such adjustments are normal recurring adjustments. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year.
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts for cash, receivables, investments, and payables approximate their fair value.
Concentration of Risk
The Company held funds in primarily one money market account, the funds of which are not insured by the Federal Deposit Insurance Company. The balance in that account was $121,164 and $180,035 at September 30, 2002 and December 31, 2001, respectively. Further, the Company’s sole source of income currently is royalty income it receives under a mineral property lease with Teck Cominco American, Inc. See Note 6.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities —
Deferral of the Effective Date of FASB No. 133”, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, which is effective for the Company upon incorporation. These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes.
At September 30, 2002, the Company had not engaged in any transactions that would be considered derivative instruments or hedging activities.
Investments
The Company accounts for its investment in Metaline Contact Mines LLC using the equity method. See Note 3.
Compensated Absences
Currently, the Company has no employees; therefore it is impracticable to estimate the amount of compensation for future absences and no liability has been recorded in the accompanying financial statements. The Company’s policy will be to recognize the costs of compensated absences when actually paid to employees.
Basic and Diluted Loss Per Share
Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Outstanding options have been excluded from the calculation of diluted loss per share as they would be antidilutive, therefore basic and diluted loss per share are the same.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 3 — INVESTMENT IN LLC
On October 30, 1996, the Company organized a Delaware limited liability company, Metaline Contact Mines, LLC (hereinafter “The LLC”). Upon organization of The LLC, the Company transferred substantially all of its assets (primarily real property surface rights and timber) to The LLC. At the time of The LLC’s formation, the Company was the sole managing member in The LLC, representing 100% ownership.
In 1998, the majority of the Company’s interest in The LLC was expensed in connection with the sale of the majority of The LLC’s assets.
At the beginning of 1998, the Company’s former shareholders acquired 93% of The LLC by transferring their stock in the Company to The LLC in exchange for non-managing membership interests. (See Note 7.) At the conclusion of this share exchange, the Company’s percentage of ownership in The LLC was reduced to seven percent (7%). The Company wrote down its initial investment by 93% to reflect its diluted investment in The LLC. After the write down of its investment, and net change in member capital during the year 1998, the value of the Company’s investment in The LLC was $45,440 at December 31, 1998.
After the dilution of its investment in The LLC, the Company continued as the managing member of The LLC. (See Note 5.)
At September 30, 2002, the Company recorded a nine-month loss in The LLC of $439, reducing the Company’s recorded interest in the LLC to $35,750.
NOTE 4 — MINERAL PROPERTIES
In 1996, Metaline transferred timber and real property surface rights to The LLC (see Note 3) but retained underground mineral rights to the transferred real property and its mining claims, located in Pend Oreille County in Washington State. The timber and real property surface rights were deemed by management to have a value equal to their recorded cost and this cost was transferred to The LLC. The related mineral rights are carried at no cost on Metaline’s books.
In 1997, Metaline and The LLC jointly leased certain Pend Oreille County real estate and all of its mineral rights to a major mining company. See Note 6.
NOTE 5 — RELATED PARTIES
In March 2002, the Company advanced $18,000 on a short-term, unsecured basis to Murrayville Land Company, an affiliated company, to facilitate a real estate purchase. Collection on the receivable is expected within one year.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 5 — RELATED PARTIES (continued)
During 1998, The LLC sold property for a net gain of $5,958,762. Metaline’s share of this gain, before adjustment of the Company’s investment from The LLC’s operating results and write down from its substantial decrease in ownership of The LLC, was $507,858. (See Note 3.) The Company recorded a non-current, related party receivable of $109,413 for the balance of the distribution. Due to uncertainty as to the date this receivable will be collected, interest at the rate of 7 percent per annum was accrued as a non-current asset at September 30, 2002 and December 31, 2001.
In June 1998, Metaline executed an agreement with Nor-Pac Limited Company, an affiliated company, wherein, for providing management and consulting services to Metaline, Nor-Pac was entitled to receive 500,000 shares of Metaline common stock in the second half of 1998, 250,000 shares of Metaline common stock quarterly in 1999 and $10,000 per month thereafter commencing on January 1, 2000. This agreement was subsequently modified with an effective date of January 1, 2002, providing that Nor-Pac will receive $3,000 per month, rather than $10,000 per month.
For additional information on related parties, see Notes 3, 6, 7 and 10.
NOTE 6 — MINING LEASE WITH PURCHASE OPTION
On September 1, 1997, Metaline and The LLC acting jointly as lessors, executed an agreement with Cominco American Incorporated (hereinafter “Cominco”) wherein Cominco received the right to explore, develop, and mine Metaline’s underground mineral rights in Pend Oreille County, Washington for a period of twenty years with an option renewal period of the same length. Under this lease agreement, Cominco obligated itself to pay the lessors $3,000 per quarter for the first five years of the lease with ascending quarterly increments at each successive five year interval.
The aforementioned quarterly disbursements are characterized by the lease as “advance royalty payments” which may be fully offset against a three-percent production royalty retained by the lessors. The lease agreement, while providing that Cominco must expend $125,000 in exploration work within the first five years of the lease, also gave Cominco the option to purchase 200 surface acres of the leased property for fair market value during the lease term.
From the inception of the lease through September 30, 2002, Metaline has received $59,016 in payments from Cominco.
During 2001, Teck Cominco Limited was formed, following the acquisition of Cominco Corporation by another mining company, Teck Corporation. The former subsidiary of Cominco Corporation, Cominco American Incorporated was renamed, Teck Cominco American, Inc., and continues as lessee under the original Cominco lease agreement.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 6 — MINING LEASE WITH PURCHASE OPTION (continued)
Effective March 15, 2002, the aforementioned lease agreement was amended, thereby reducing the amount of acreage leased from the Company, and providing for an approximately three percent (3%) decrease in royalty payments.
NOTE 7 — CHANGE IN LLC OWNERSHIP
On June 1, 1998, Nor-Pac Limited Company (hereinafter “Nor-Pac”) purchased control of The LLC from its three principal owners at the time (Bunker Limited Partnership, Hecla Mining Company, and Metaline Mining & Leasing Company) by acquiring these entities’ non-managing membership interests in Metaline Contact Mines LLC. See Notes 1 and 5.
NOTE 8 — INCOME TAXES
Income taxes are provided based upon the liability method of accounting pursuant to SFAS No. 109 “Accounting for Income Taxes.” Under this approach, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by SFAS No. 109 to allow recognition of such an asset.
At December 31, 2001, the Company had a net deferred tax asset of approximately $138,000, principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at December 31, 2001.
At December 31, 2001, the Company has a net operating loss carryforward of approximately $690,000 which will expire in the year 2021. At September 30, 2002, the Company’s estimated net operating loss was $730,000 for federal income tax purposes.
NOTE 9 — STOCK OPTIONS
On November 16, 1999, the board of directors approved the Metaline Contact Mines 1999 Stock Option Plan. This plan allows the Company to distribute up to 2,000,000 shares of common stock shares to officers, directors, employees and consultants through the authorization of the Company’s board of directors at an initial exercise price of $0.125, or $0.15, depending on the terms of the option certificate. The options may be exercised until November 16, 2009, at which time they expire.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 9 — STOCK OPTIONS (continued)
The fair value of the options granted on November 12, 2001 was estimated using the Black-Scholes Option Price Calculation. The following assumptions were made to estimate fair value: the risk-free interest rate is 6.0%, volatility is 0.24, and the expected life of the options is eight years. Accordingly, $4,275 of option expense was recorded in the Company’s financial statements as consulting and management fees. In accordance with Financial Accounting Standard No. 123 paragraph 115, this expense was deemed to be an estimate, subject to adjustment by decreasing the expense in the period of forfeiture.
Following is a summary of the status of fixed options outstanding at December 31, 2001 and September 30, 2002:
| Weighted | |||||||||
| Average | |||||||||
| Number of | Exercise | ||||||||
| Shares | Price | ||||||||
| Outstanding, January 1, 2001 | 1,000,000 | $ | 0.125 | ||||||
| Granted, November 12, 2001 | 250,000 | 0.150 | |||||||
| Exercised | — | — | |||||||
| Forfeited | — | — | |||||||
| Expired | — | — | |||||||
| Outstanding, December 31, 2001 | 1,250,000 | $ | 0.130 | ||||||
| Exercisable, December 31, 2001 | 1,250,000 | $ | 0.130 | ||||||
| Outstanding January 1, 2002 | 1,250,000 | $ | 0.130 | ||||||
| Granted | — | — | |||||||
| Exercised | — | — | |||||||
| Forfeited | — | — | |||||||
| Expired | — | — | |||||||
| Outstanding, September 30, 2002 | 1,250,000 | $ | 0.130 | ||||||
| Exercisable, September 30, 2002 | 1,250,000 | $ | 0.130 | ||||||
NOTE 10 — COMMITMENTS AND CONTINGENCIES
All earnings from The LLC in 1997 and 1996 were attributed by The LLC’s principal owners to Metaline. Accordingly, Metaline reported these earnings as its own taxable income (on both Metaline’s and The LLC’s federal income tax returns) with Metaline retaining only a 6.9861% interest in The LLC. For calendar years 1998 through 2001, Metaline reported only its pro rata share (6.9861%) of taxable income from The LLC, with other LLC members reporting their respective share of LLC taxable income.
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METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
NOTE 10 — COMMITMENTS AND CONTINGENCIES (continued)
The LLC has agreed, in writing, to indemnify Metaline for any prior year income distributions requested by other LLC members. As of September 30, 2002, no cash or property distributions were made by the LLC to its members for indemnification purposes. In view of the ownership changes in The LLC, future distributions are expected to be made by The LLC to its members as determined from time to time by Metaline, its managing member. See Note 7 regarding a change in LLC ownership and see Note 5 regarding related party commitment.
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Item 2. Management’s Discussion and Analysis or Plan of Operations
Results of Operations
The Company had revenues from operations of $2,910 in the third quarter of 2002 versus operating revenues of $3,000 in the third quarter of 2001. The loss of $90 was a result of the Company’s lessee, Teck Cominco American Incorporated, reducing the amount of acreage leased from the Company by approximately 3%. The Company experienced a decrease in its operating loss to $11,646 in the third quarter of 2002 from $37,144 in the second third of 2001. The decrease in operating loss of $25,498 in the third quarter of 2002 was predominantly due to decrease in management and professional fees.
Consulting and management fees decreased from $30,000 in the third quarter of 2001 to $9,000 during the third quarter of 2002. Professional fees, consisting of legal and accounting, decreased $4,303 in the third quarter of 2002 to $3,000 versus $7,303 in the third quarter of 2001, due to a decrease in accounting fees and financial printing fees. Transfer agent fees increased $93 in the third quarter of 2002 to $261 from $168 in the third quarter of 2001 due to a slight increase in trading volume in the Company’s common stock. Office supplies and expenses decreased to $2,295 in the third quarter of 2002 from $2,673 in the third quarter of 2001, or $378, due to the Company’s continuing efforts to reduce its office related expenses.
The Company’s other income increased by $811 in the third quarter of 2002 to $1,599 from $788 in the third quarter of 2001. The increase was due predominately to interest income from the Company’s notes receivable with Metaline Contact Mines LLC. Dividends earned on the Company’s money market account of $359 was a decrease from $2,120 in the third quarter of 2001 due mainly to reduced interest rates and a decrease in the Company’s balances in the account. The Company also experienced a decrease in its loss from its investment in Metaline Contact Mines LLC, from $1,332 during the third quarter of 2001 to $226 during the third quarter of 2002.
Financial Condition
The Company’s financial condition is such that it can continue at its current level of operations for an additional 2 years without the necessity of additional capital. Current level of operations includes maintaining compliance with the New Cominco Lease, and the reporting requirements of the SEC. Thereafter, the Company may require additional capital for future operating costs and working capital. Such additional capital could be obtained from either increased revenues from operations (in the event the Company’s mineral rights and properties are placed into commercial production by Teck Cominco), or from the sale of shares of the Company’s authorized, but unissued, common stock.
Under the New Cominco Lease, any production decision on the Company’s mineral rights and properties is under the sole discretion and control of Cominco. Further, there are no assurances that the Company would be able to sell shares of its authorized, but unissued, common stock on terms acceptable to the Company. Any such sales of shares could be dilutive to the Company’s then-existing shareholders, and any debt financings could involve restrictive covenants with respect to future capital raising activities, and other financial and operational matters.
Presently there are no trends, events or uncertainties that have, or are reasonably likely to have, a material impact on the Company’s short-term or long-term liquidity; there are no material commitments for capital expenditures, except for the management of its own business affairs; and there are no known trends, events or uncertainties that have or that are reasonably expected to have a material impact on the revenues from operations.
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As a mineral resource exploration oriented enterprise, the Company will investigate future business opportunities that are consistent with its corporate charter and field of expertise, and in the opinion of management worthy of investigation. It should be noted, however, that the Company competes with other mining companies in connection with the acquisition of mineral properties, some of which have substantially greater financial resources than the Company. Management has not recognized any such opportunities as of the date of this filing, nor does it expect to do so during the next 12-month period. In the event such an opportunity would materialize, the Company’s initial due diligence process in investigating such opportunity would not involve any significant investment by the Company.
Liquidity and Capital Resources
To date, the Company has funded its capital requirements from revenues from operations, and dividends and interest earned on its cash accounts. The Company’s cash position as of September 30, 2002 was $122,346 as compared to $214,453 as of September 30, 2001.
The Company has no debt. The Company does not expect to incur any debt in the immediate future to expand its current level of operation, nor does it expect to expand its business operation in the immediate future. The Company’s most significant cash requirement is its management fee of $3,000 per month payable under the terms of its Management Agreement, as amended, with Nor-Pac. However, as a related party, Nor-Pac has contractually agreed in the Management Agreement to (i) review and adjust on a quarterly basis the amount of the management fees based on time spent on the Company’s affairs, and (ii) convert management fees that are payable in cash into common stock in the Company in the event of a shortfall of cash (the exchange rate would be determined at the time of the shortfall). The Company also has a related party receivable from MCMLLC in the amount of $109,413, with accrued interest of $13,405, as of September 30, 2002. As the Managing Member of MCMLLC, the Company has the ability to collect on this receivable in the event of a shortfall of cash.
Based on the foregoing, it is management’s opinion that at its current level of operations the Company can satisfy its working capital requirements internally in the immediate future without the need to seek outside sources of equity or debt funding.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any legal proceedings, and management is not aware of any threatened litigation, claims or assessments.
Item 2. Changes in Securities
There has been no change in securities during the third quarter of 2002.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its shareholders during the third quarter of 2002.
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Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 — Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 — Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
There were no reports filed on Form 8-K during the three month period ended June 30, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DATED this the 12th day of November, 2002 | METALINE CONTACT MINES | |||
| By: | /s/John W. Beasley | |||
| John W. Beasley Secretary & Director | ||||
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