GENCO RESOURCES LTD - GGCRF Report of Foreign Issuer (6-K) Notes to Consolidated Financial Statements

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The following is an excerpt from a 6-K SEC Filing, filed by GENCO RESOURCES LTD on 7/14/2004.

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GENCO RESOURCES LTD - 6-K - 20040714 - NOTES_TO_FINANCIAL_STATEMENT

Notes to Consolidated Financial Statements

Exhibit "D"

Schedule of Deferred Exploration and Mine Development Costs

Schedule "1"

______________________________

Exhibit "A"

GENCO RESOURCES LTD.

Interim Balance Sheet

(Unaudited – Prepared by Management)

April 30, 2004

April 30

July 31

Assets

2004

2003

Current:

Cash

331,227

672,195

Accounts receivable

1,012,510

6,144

Inventory

217,939

Prepaid expenses and deposits

146,646

5,000

1,708,322

683,339

Mineral properties (Note 4)

20,000

40,000

Deferred acquisition costs

175,757

354,091

Deferred exploration and mine development costs

893,718

Capital assets (Note 6)

8,881,953

63,915

11,679,750

1,141,345

Liabilities

Current:

Accounts payable and accrued liabilities

1,044,825

317,991

Accrued interest payable to related parties (Note 7)

23,811

23,812

Loans from related parties (Note 7)

49,590

49,590

Current portion of long-term debt (La Guitarra purchase payment)

659,300

1,777,526

391,393

Long-term debt (La Guitarra – NPV La Guitarra Balance)

4,615,100

6,392,626

391,393

Shareholders' Equity

Share Capital (Note 8)

10,059,294

5,744,951

Subscriptions receivable

(34,627)

Deficit, per Exhibit "B"

4,737,543

4,994,999

5,287,124

749,952

11,679,750

1,141,345

Approved by the Directors:

“Robert Gardner” :

Director

“Jim McDonald” :

Director

Exhibit "B"

GENCO RESOURCES LTD.

Interim Statement of Loss and Deficit

(Unaudited - Prepared by Management)

For the Nine Months Ended April 30, 2004

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

April 30,

April 30,

April 30,

April 30,

2004

2003

2004

2003

Revenue:

Sales

1,196,814

680

3,186,710

930

Cost of Sales:

Production costs

883,658

2,267,194

Smelting

60,175

151,308

Refining

27,889

71,665

Royalty

38,535

98,161

1,010,257

2,588,328

Gross Profit

186,557

680

598,382

930

Expenses:

Accounting

17,000

26,996

21,746

37,059

Amortization

7,781

142

9,109

142

Fees, dues and licenses

14,526

2,947

36,314

14,149

Foreign exchange (gain)

31,653

(59,521)

Insurance

16,898

Interest and bank charges

44,281

2,008

60,563

6,084

Legal

21,839

7,159

45,944

38,327

Management & Consulting fees

55,500

45,302

150,150

66,302

Office and rent

45,959

15,098

91,824

31,069

Travel and promotion

47,785

22,046

103,909

22,046

Wages

42,843

9,517

118,990

11,634

346,065

131,215

595,926

226,812

Income (Loss) before gain on sale of property

(159,508)

(130,535) 2,456

(225,882)

Gain (loss) on sale of property

255,000

Net Income (Loss)

95,492

257,456

Deficit, beginning

4,833,035

4,293,009

4,994,999

4,197,662

Deficit, ending, to Exhibit "A"

4,737,543

4,423,544

4,737,543

4,423,544

- See accompanying notes -

Exhibit "C"

GENCO RESOURCES LTD.

Interim Statement of Cash Flows

(Unaudited - Prepared by Management)

For the Nine Months Ended April 30, 2004

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

April 30,

April 30,

April 30,

April 30,

2004

2003

2004

2003

Operating Activities:

Net Income, per Exhibit "B"

95,492

(130,535)

257,456

(225,882)

Adjustment for -

Amortization

69,606

142

172,862

142

165,098

(130,393)

430,318

(225,740)

Changes in non-cash working capital -

(Increase) decrease in other current assets

(215,045)

9,333

(1,365,951)

(13,512)

Increase in accounts payable and

accrued liabilities

409,619

14,440

726,834

21,007

Increase (decrease) in current portion

of long-term debt

659,300

Cash flows from (used) in operating activities

359,672

(106,620)

450,501

(218,245)

Investing Activities:

Purchase of capital assets

(898,979)

(11,384)

(8,990,900)

(11,384)

Acquisition of Mineral Property

20,000

Deferred acquisition costs

(175,757) -

178,334

Deferred exploration and development

expenses, net of items not involving cash

(104,560)

(976)

(893,718)

(976)

Cash flows used in investing activities

(1,159,296)

(12,360)

(9,686,284)

(12,360)

Financing Activities:

Proceeds from long-term debt

4,615,100

Decrease in long-term payable

(12,328)

Decrease in loans from related parties

(245,091)

Increase (decrease) in accrued interest

payable to related parties

1,280

(1)

(26,179)

Issuance of share capital

1,050,064

100,000

4,279,716

627,750

Cash flows from financing activities

1,050,064

101,280

8,894,815

344,152

Net Increase (Decrease) in Cash

250,440

(17,700)

(340,968)

113,547

Cash, beginning

80,787

170,883

672,195

39,636

Cash, ending

331,227

153,183

331,227

153,183

Supplemental Disclosure of Cash Flow information:

Interest paid

44,281

2,008

60,563

6,084

- See accompanying notes -

Exhibit "D"

GENCO RESOURCES LTD.

Notes to Financial Statements

(Unaudited - Prepared by Management)

April 30, 2004

General Information:

The Company was incorporated under the laws of the Province of British Columbia on February 28, 1980 as Senlac Oil & Gas Ltd. The Company changed its name to Rule Resources Ltd. on June 13, 1980, to Globe Resources Inc. on March 9, 1990, and to Genco Resources Ltd. on March 30, 1998.

On August 1, 2003 the Company acquired all of the issued and outstanding shares of La Guitarra Compania Minera S.A. de C.V. from Wheaton River Minerals Ltd. The purchase price for the acquisition was US $5,000,000 with consideration being a combination of the issuance of shares and debt. Under the purchase agreement and as part of the consideration, Genco issued 1,380,315 shares valued at Cdn. $1.02 per share to the vendor to satisfy US $1,000,000 of the purchase price. Genco agreed to pay the balance of US $4,000,000 by payments of $500,000 on each of the first through eighth anniversaries of the closing date. La Guitarra is a wholly owned subsidiary incorporated under the laws of Mexico.

Accounting Policies:

These financial statements have been prepared in accordance with generally accepted accounting principles accepted in Canada applicable to a going concern and reflect the policies outlined below.

Basis of Presentation -

These consolidated financial statements include the accounts of the parent company and its wholly owned subsidiaries, Rule Nevada Inc. and La Guitarra Compania Minera, S.A. de C.V. ("La Guitarra") All significant inter-company accounts and transactions have been eliminated.

Certain exploration activities are conducted jointly with others, through joint ventures. These financial statements reflect only the Company's proportionate interest in those activities.

The Company is in the process of exploring mineral properties and has yet to determine whether the properties contain economically recoverable reserves. The recovery of amounts shown for resource properties and related assets are dependent on the existence of economically recoverable reserves, on the ability of the Company to obtain financing to complete development, and on future profitable operations.

Share Option Plan -

As of August 1, 2002, the Company adopted the standard of the CICA Handbook, Stock-Based Compensation and Other Stock-Based Payments, which has been applied prospectively. All stock-based awards made to non-employees and employees are recognized and measured using the fair value based method at the date of grant. The Company uses the Black-Scholes model to estimate fair value.

Capital Assets -

Capital assets are recorded at cost. Amortization is provided for as follows:

Furniture and fixtures

20% declining balance

Automobile

30% declining balance

Mining equipment

Units of production

Leasehold improvements

5 years

Exhibit "D" - Continued

GENCO RESOURCES LTD.

Notes to Financial Statements

(Unaudited - Prepared by Management)

April 30, 2004

Accounting Policies: (Continued)

Foreign Currency Translation -

Foreign currencies have been converted to Canadian funds at the exchange rates in effect on the dates of the transactions with the exception of current assets and liabilities that have been converted at the year end date.

Use of Estimates -

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on management's best knowledge of current events and actions the company may undertake in the future, actual results may differ from the estimates.

Financial Instruments:

The Company's financial instruments consist of cash, accounts receivable, accounts payable and accrued liabilities, loans from related parties, accrued interest payable to related parties and long term debt. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of the financial instruments approximate their carrying values, unless otherwise noted.

Mineral Properties:

Oest, Nevada

20,000

Details of Mineral Properties:

Transvaal Property - Kamloops Mining Division, B.C.

On April 19, 2004 the Company entered into an agreement with Getty Copper Inc. (“Getty”) to sell the Company’s holdings in the Kamloops Mining Division, the Transvaal Property, to Getty. At the completion of the transaction the Company will no longer have any holdings in the Kamloops Mining Division or any interest in the Transvaal Property.

Oest Property - Lyon County, Nevada, U.S.A.

The Company owns eight patented and six unpatented claims in the Devils Gate-Chinatown Mining District. During the period ended April 30, 2004 the Company expended $Nil (2003 - $976) related to these claims.

Exhibit "D" - Continued

GENCO RESOURCES LTD.

Notes to Financial Statements

(Unaudited – Prepared by Management)

April 30, 2004

Acquisition of La Guitarra:

Pursuant to a purchase agreement dated August 1, 2003, Genco acquired 100% of the outstanding common shares of La Guitarra. The results of La Guitarra's operations have been included in the consolidated financial statements since that date. La Guitarra is an operating mine located in Mexico.

The purchase price of the transaction was US $5,000,000 (Cdn. $6,996,000) with consideration being a combination of the issuance of shares and debt. Under the purchase agreement and as part of the consideration, Genco issued 1,380,315 shares valued at Cdn. $1.02 per share to the vendor to satisfy US $1,000,000 of the purchase price. Genco agreed to pay the balance of US $4,000,000 by payments of $500,000 on each of the first through eighth anniversaries of the closing date.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition in Canadian dollars.

As at August 1, 2003:

Current assets

$ 1,723,000

Property, plant and equipment

6,429,127

Total assets acquired

8,152,127

Total liabilities assumed

(1,156,127)

Net assets acquired

6,996,000

Capital Assets:

April 30,

July 31

Accumulated

2004

2003

Cost

Amortization

Net

Net

Automotive

19,953

2,834

17,119

10,815

Computer equipment

9,921

853

9,068

Drilling equipment

86,303

5,939

80,364

Furniture and fixtures

15,920

2,861

13,059

13,275

Mining equipment

8,957,642

230,699

8,726,943

Leasehold improvements

44,250

8,850

35,400

39,825

9,133,989

252,036

8,881,953

63,915

Related Party Transactions:

As at April 30, 2004 loans from related parties amount to $49,590 (July 31, 2003 - $49,590) and are payable to corporations related by way of a director in common. Loans from related parties are due on demand, bear no interest and have no fixed terms of repayment.

As at April 30, 2004 interest payable to directors or companies controlled by directors amounted to $23,812 (July 31, 2003 - $23,812).

During the nine month period ended April 30, 2004 management and consulting fees paid to directors and officers of the company amounted to $153,220 (July 31, 2003 - $66,302).

Exhibit "D" - Continued

GENCO RESOURCES LTD.

Notes to Financial Statements

(Unaudited - Prepared by Management)

April 30, 2004

Related Party Transactions: (Continued)

During the nine month period ended April 30, 2004 rent of $37,443 (2003 - $17,245) was paid to a company related by way of director in common.

Share Capital:

The Company is authorized to issue 100,000,000 common shares without par value.

Number of shares

Amount

Balance - July 31, 2002

4,891,481

3,871,044

Private placement less costs of issue

4,700,000

888,880

Exercise of warrants

4,966,682

496,667

Stock compensation expense

488,360

Balance - July 31, 2003

14,558,163

5,744,951

Private placement less cost of issue

2,213,465

2,758,338

Issuance of share capital on purchase of La Guitarra

1,380,315

1,407,921

Stock options exercised

486,326

148,084

Balance - April 30, 2004

18,638,269

10,059,294

The Company has established a share purchase option plan whereby the Company's directors may from time to time grant options to directors, employees or consultants. As of April 30, 2004, 1,607,000 options have been granted to directors, employees and consultants of the Company. 1,375,000 options have been granted at an exercise price of $0.75 which expire on February 28, 2008 and can be exercised at any time up to that date. In addition 232,000 options have been granted at an exercise price of up to $1.50 which expire on November 5, 2005 (100,000 options) and June 2, 2008. During the period ending October 3, 2003 the Company received $174,750 from the exercise of 233,000 options, during the period ending January 31, 2004 the Company received $75,000 from the exercise of 100,000 options, and during the period ending April 30, 2004 there were no options exercised. There are currently 1,274,000 options outstanding. The share purchase options have determined fair value of $646,800 and the compensation expense is charged to operations over the vesting period.

On July 11, 2003, the Company completed a private placement for 700,000 units at $0.72 per unit. Each unit comprised one common share and one share purchase warrant which is exercisable to purchase an additional common share at $0.90 per share until July 31, 2005.

On November 18, 2003 the Company completed a private placement for 575,000 units at $1.20 per unit. Each unit comprised one common share and one share purchase warrant which is exercisable to purchase an additional common share at $1.30 per share until November 18, 2005.

On January 5, 2004 the Company completed a private placement for 574,500 units for $1.40 per unit. Each unit comprised of one common share and one share purchase warrant which is exercisable to purchase an additional common share at $1.30 per share until November 18, 2005.

Exhibit "D" - Continued

GENCO RESOURCES LTD.

Notes to Financial Statements

(Unaudited - Prepared by Management)

April 30, 2004

Share Capital: (Continued)

On March 22, 2004 the Company completed a private placement for 764,000 units for $1.50 per unit. Each unit comprised of one common share and one share purchase warrant which is exercisable to purchase an additional common share at $1.55 per share until April 26, 2006

Compensation expense is determined using an option pricing model assuming no dividends are to be paid, a weighted average volatility of the Company's share price of 76%, an annual risk free interest rate of 4.2% and vesting over various periods from immediately to 5 years.

Schedule "1"

GENCO RESOURCES LTD.

Schedule of Deferred Exploration and

Mine Development Costs

(Unaudited - Prepared by Management)

April 30, 2004

Nine Months

Ended

April 30,

2004

Administrative

30,991

Core storage

3,776

Drilling

283,115

Drilling, surveying and lab fees

9,137

Engineering reports

1,907

Environmental reports

878

Insurance

14,849

Lab fees

12,958

Large equipment and supplies

91,811

Management fees

12,595

Small equipment and supplies

126,737

Subcontract, wages and benefits

277,437

Surveying

14,601

Travel and vehicle expenses

12,926

893,718

GENCO RESOURCES LTD.

Quarterly Report

For the Nine Months Ended April 30, 2004

Schedule A:

Financial Information - attached

Schedule B:

Supplementary Information

See Schedule “A”

4. (a), (b), (c)

See Schedule “A” Financial Statements

Directors:

Jim McDonald – President

Robert Gardner – Chairman

Joseph F. Church

Eduardo Luna

Brian R.D. Smith

Gordon Blankstein

Officers:

Bruno Barde – VP Exploration

Wayne Moorhouse – VP Finance

Schedule C:

Management Discussion

The following discussion and analysis should be read in conjunction with Genco Resources Limited’s consolidated financial statements and related notes.

Description of Business

Genco Resources Ltd. (the “Company”) is in the business of developing, and exploiting mineral properties. The Company’s focus has been precious metals, specifically gold and silver, and the Company’s main asset is a producing mineral property located in Mexico. Company Management believes in growth through the identification and acquisition of properties in production or properties with a high probability of future production.

The Company’s primary asset, La Guitarra Compania Minera, S.A. de C.V. (“La Guitarra”) was acquired from Wheaton River Minerals Ltd. on August 1, 2004. La Guitarra operates a producing silver/gold mine in Mexico State, Mexico. Key assets of La Guitarra include a 340 tonne per day mill, extensive mine infrastructure, mine equipment, an experienced and skilled workforce, and extensive mineral claims. Historical annual production at La Guitarra has been 13,000 – 20,000 gold equivalent ounces.

During the nine month period ending April 30, 2004 the Company invested in extensive exploration and development work at La Guitarra to expand reserves, increase production, and open new areas for mining. The Company anticipates initiatives taken in the first nine months of the year will begin to be reflected in results near the end of the year.

The Company also maintains patented and located mineral claims in Nevada (“Oest” claims). There are currently no plans to proceed with exploration or development of the Oest claims, but the company intends to maintain the claims in good standing for future exploitation.

On April 19, 2004 the Company entered into an agreement to sell Getty Copper Inc. (“Getty”) the Company’s Transvaal property located in the Kamloops Mining District of British Columbia. The agreement calls for Getty to pay $275,000 CDN for the Company’s 100% interest in the Transvaal property.

Company continues to pursue expansion through the acquisition of production or near production stage resource properties.

Operations and Financial Conditions

The Company showed a net profit for the nine months ending April 30, 2004 of $257,456 on revenues of $3,186,710, and costs of $3,184,254 compared to a loss of $225,882 on revenues of $930 and costs of $26,812 for the nine months ending April 30, 2003. The acquisition of La Guitarra on August 1, 2003 significantly effect year over year results. During the period wages (2004: $118,990; 2003: $11,634) and office expenses (2004: $91,824; 2003: $31,069) increased as a result of moving into new offices and hiring staff to assist in office operations, business development, and mine operations. Accounting costs decreased (2004: $21,746; 2003: $37,059) as a result of the Company doing more accounting internally. Travel and promotion (2004: $103,909: 2003 $22,046) costs have increased due to increased travel relating to mine operations and an increase in investor relations activities. Management and consulting fees increased (2004: $150,150; 2003: $66,302) as a result of soliciting professional advice relating to operations at La Guitarra and also increases in financing activities and general company operations. During the period there was an amortization expense of $9,109 relating to office furniture and equipment. Fees, dues, and licenses costs increased (2004: $36,314; 2003: $14,149) due to increased regulatory fees and transfer fees associated with listing and financing activities. The currency gain of $59,521 is a result of the financing arrangement made in the purchase of La Guitarra and a favorable move in the Canadian dollar in relation to the American dollar. Interest and bank charges have increased (2004: $60,563; 2003: $6,084) as a result of the financing agreement for La Guitarra and costs incurred in setting up a CDN $1,500,000 line of credit with the Toronto Dominion Bank. Legal fees (2004: $45,944; 2003: $38,327) where higher in the period ending April 30, 2003 due to increased financing activities and retaining legal council in Mexico. Insurance costs (2004: $16,898; 2003: $0) have increased due to the purchase of insurance for the Vancouver office and providing special risk protection for employees traveling to, and working in Mexico .

Financings, Principal Purposes and Milestones

At the Annual and Extraordinary General Meeting held November, 20, 2002 the shareholders approved the following resolutions:

An ordinary resolution to amend the share option plan in compliance with the

policies of the TSX in which 1,780,000 shares will be reserved for issuance

under the share option plan and in compliance with the policies of the TSX

Venture Exchange (“TSX”).

As of April 30, 2004, 1,607,000 options have been granted to directors, employees and consultants of the Company. There have been 1,375,000 options granted at an exercise price of $0.75 which expire on February 28, 2008, and can be exercised at any time up to that date. In addition there are 232,000 options outstanding at an exercise price of up to $1.50 which expire on November 5, 2005 (100,000 options) and June 2, 2008. During the period ending October 31, 2003 the company received $174,750 from the exercise of 233,000 options, during the period ending January 31, 2004 the company received an additional $75,000 from the exercise of 100,000 options, and during the period ending April 30, 2004 there were no options exercised. There are currently 1,274,000 options outstanding.

On July 11, 2003, the Company completed a private placement of $504,000. The placement consists of 700,000 units @ $0.72 per unit. Each unit consists of one common share and one share purchase warrant exercisable to purchase one common share at $0.90 per share for two years from the date of issuance.

On November 18, 2003 the Company completed a private placement of $691,200. The placement consists of 576,000 units at $1.20 per unit. Each unit consists of one common share and one share purchase warrant exercisable to purchase one common share at $1.30 per share exercisable for two years from closing.

On January 5, 2004 the Company completed a private placement of $805,000. The placement consists of 574,500 units at $1.40 per unit. Each unit consists of one common share and one share purchase warrant exercisable to purchase one common share at $1.45 per share exercisable for one year from date of issuance.

On March 22, 2004 the Company completed a private placement of $1,146,000. The placement consists of 764,000 units at $1.50 per unit. Each unit consists of one common share and one share purchase warrant exercisable to purchase one common share at $1.55 per share for a period of two years from date of issuance. Proceeds from this placement will be used for the continuation of planned infrastructure upgrades, exploration and development at La Guitarra.

On May 5, 2004 the Company received $49,833 from the exercise of 38,333 warrants at an exercise price of $1.30. These warrants were issued on the November 18, 2003 Private Placement.

Investor Relations

During the period the Company used its own staff and resources for shareholder and institutional investor relations.

Regulatory Approvals

During the period ending April 30, 2004 the Company did not require or seek regulatory approval for any of its transactions other than the private placements described above.

Subsequent Events

On June 22, 2004 Mr. John Lepinski resigned as a director of the Company. At this time there are no plans to replace Mr. Lepinski.

Liquidity and Solvency

Cash and equivalents as of April 30, 2004 was $1,728,322 up from $683,339 on July 31, 2003.

The Company is confident it has sufficient liquidity to meet its current financial obligations. In addition to cash and equivalents a $1,500,000 line of credit negotiated with the Toronto Dominion Bank on August 8, 2003 is available if to bridge any short term funding deficiency. It is expected that capital investments initiated at La Guitarra during the first half of 2004 combined with higher than anticipated prices for both gold and silver will result in higher production and margins during the second half of the year 2004.

Outlook

The Company continues to pursue the acquisition of production or near production stage projects with significant upside potential while simultaneously growing its existing assets. Management believes that investments made over the nine month period ending April 30, 2004 at La Guitarra will allow a sustainable increase in production to occur during the upcoming months leading to increased profitability and organic growth.