ITEM 1. BUSINESS
Azco Mining Inc. ("AZCO" or the "Company") is a U.S. mining company with a general business strategy to acquire and develop mineral properties amenable to low cost production. The Company is currently focused on producing high quality Muscovite Mica from its 100% owned Black Canyon Mica project located in Arizona. The Company, with its 30% interest, has established a strategic partnership with Phelps Dodge Corporation on the Piedras Verdes copper project located in Sonora, Mexico. The business strategy on large exploration projects has been focused on establishing partnerships with major companies. This strategy generally reduces financial risk and offers the opportunity to participate in major mineral projects.
Prior to the sale of the majority of its copper assets the Company was dedicated to the development and production of low-cost copper utilizing solvent extraction-electrowinning or the SX-EW process. AZCO's principal mineral property was the Sanchez porphyry copper project ("Sanchez" or "Sanchez Project") located about 10 miles northeast of the City of Safford in southeastern Arizona. The Company also had interests in two other porphyry copper properties, the Piedras Verdes and Suaqui Verde properties located in Sonora State, Mexico. On July 27, 1995 the Board of Directors of AZCO (the "Board") signed definitive agreements with Phelps Dodge Corporation ("Phelps Dodge" or "PDC") to sell a substantial portion of the Company's copper assets. AZCO's shareholders approved the sale of 100% of the Sanchez and 70% of the Piedras Verdes project for gross consideration of $40 million.
A predecessor of AZCO was incorporated on July 13, 1988 under the laws of Colorado to acquire the mining rights to the Sanchez, as well as certain other mineral properties. On August 27, 1991, the predecessor was merged into AZCO, a newly incorporated Delaware corporation. In October 1991, AZCO acquired all of the shares of Filton Enterprises Limited, a Gibraltar corporation ("Filton"), in return for the issuance of 3,650,000 common shares. At that time Filton owned rights in two mining properties located in Mexico, the Suaqui Verde project in southeastern Sonora and the Piedras Verdes project in southern Sonora. Filton was dissolved effective February 14, 1994 with its Mexican interests being distributed to the Company.
On July 31, 1992 AZCO merged with AZCO Mining Inc., a Wyoming corporation ("AZCO (Wyoming)"), with AZCO being the survivor of the merger (the "Merger"). At the time of the completion of the Merger AZCO (Wyoming) had 3,946,550 shares issued and outstanding and the Company had 12,633,822 common shares issued and outstanding. One common share of the Company was issued in exchange for each
share of AZCO (Wyoming) in connection with the Merger. AZCO (Wyoming) was formerly a British Columbia corporation, which was incorporated under the laws of the Province of British Columbia on August 20, 1981 under the name 241145 B.C. Ltd. 241145 B.C. Ltd. changed its name to Canarex Resources Inc. on June 22, 1983, to International Baron Resources Ltd. on January 25, 1988 and finally to AZCO Mining Inc. on February 20, 1992. AZCO (Wyoming) was continued under the laws of Wyoming effective May 13, 1992 prior to merging with AZCO.
SIGNIFICANT DEVELOPMENTS IN FISCAL 1999 AND SUBSEQUENT EVENTS
On March 9, 1999 the Company completed the acquisition of Arizona Mica Properties, Inc., an Arizona corporation ("Arizona Mica"), which owned the rights to develop 43 unpatented lode-mining claims located in Yavapai County, Arizona. This acquisition was accomplished through the merger of Arizona Mica with and into the Company's wholly owned subsidiary, Sanchez Mining Inc., a Delaware corporation ("Sanchez"), with Sanchez being the surviving corporation in the merger. Sanchez has subsequently changed its name to AZCO Mica, Inc. In connection with the merger, the Company issued an aggregate of 4,500,000 shares (the "Shares") of its common stock to the three shareholders of Arizona Mica, Messrs. Lawrence G. Olson, John O. Rud and Floyd R. Bleak, with each such shareholder receiving 1,500,000 shares of the Company's common stock. The Shares were issued as "restricted securities", as that term is defined in Rule 144 promulgated under the United States Securities Act of 1933, as amended (the "Act"), and the certificates representing the Shares bear a restrictive legend permitting transfer only pursuant to registration or applicable exemption under the Act.
The Company undertook a 3-month due diligence period, which included confirmation drilling, a marketing study and environmental and legal audits. The price of the transaction was determined at arms length with the principals of Arizona Mica.
In addition to the 43 mining claims the Company also acquired a pilot mica processing facility that Arizona Mica was developing in Glendale, Arizona. The Company is currently developing further this processing facility.
***
On June 18, 1998 the Company entered into an agreement with Minera Cortez Resources Ltd. ("Cortez") whereby the Company was granted a right of first refusal for a period of five years to acquire all or any property interests that Cortez desired to either joint venture, option or dispose of. In consideration, therefore, the Company has subscribed for 200,000 common shares of Cortez at Cdn. $.25 per share. The Company was also granted a right of first refusal for the same period to provide up to 100% of any private or public equity or debt financing that Cortez proposes to obtain, on similar terms, as any third party is willing to provide.
On July 21, 1998 the Company entered into an option agreement with Cortez whereby the Company was granted an option to earn up to a 70% interest in the La Adelita property located in Sonora, Mexico, under the following terms:
1. by subscribing to 100,000 common shares of Cortez at Cdn. $0.25 per share;
2. by making option payments and paying finders' fees on behalf of Cortez totaling $165,000 over the next five years; and
3. by incurring exploration expenditures on the property totaling $500,000 over the next three years.
On June 10, 1999 the Company acquired a 100% interest in the Silverado property, which surrounds the Adelita property, from Cortez for $20,000 and 30,000 of the Company's shares.
***
On May 9, 1996 the Company signed an agreement with West Africa Gold & Exploration Ltd., Eagle River International Limited ("Eagle") and Lion Mining Finance Limited ("Lion") that provided for the establishment of a joint venture holding company, Sanou Mining Corporation ("Sanou"). Sanou is the sole beneficial owner of a Malian subsidiary headquartered in Bamako and called Western African Gold and Exploration Company S.A. ("WAG"), which has a 100% working interest in the Medinandi and Dandoko concessions located in the Kenieba Gold Mining District of western Mali. Eagle, the original principal concession owner through a Malian subsidiary, has caused that subsidiary to convey the concessions to Wag.
Effective August 9, 1996 Wag entered into a debenture agreement with AZCO thereby acknowledging itself indebted to and promising to pay AZCO, in consideration of financial advances and services then made, or thereafter made, the aggregate principal sum of $4,000,000. All advances AZCO has made to date under this agreement are also evidenced by promissory notes from Eagle.
On September 3, 1997 AZCO served notice to Eagle stating that, due to the fact that the work commitment for the license on the Mali project was unacceptable, AZCO was declaring default of its May 9, 1996 agreement with the same. In regard to the May 9, 1996 agreement among West African Gold & Exploration Ltd., Eagle, Lion and AZCO, AZCO gave notice of default to its joint-venture partners. This dispute is still outstanding and the Company is currently trying to resolve it. Eagle is currently bankrupt as indicated in Item 3. "LEGAL PROCEEDINGS"
On April 6, 1998 the Company entered into an agreement with Lines Overseas Management Ltd. ("Lines"). Under the terms of the Mali agreement, Lines had originally advanced $500,000 and 125,000 shares of the Company's common stock owned by it to Eagle for payments to Guefest and other parties. The Company issued 375,000 shares to Lines in consideration for assigning and quitclaiming to the company all advances and any other benefit or claim of Lines related to the Mali agreement.
On January 21, 1999 the Company announced that it had entered into a joint venture arrangement with Randgold Resources Ltd. ("Randgold") whereby Randgold was to acquire the right to earn up to 75% of the Company's interest in WAG. To earn this consideration Randgold has agreed, over the next 36 months, to conduct exploration on the WAG concessions at a minimum cost of $2 million, with the aim of establishing whether there is a viable economic gold resource, as defined in
the agreement, of at least one million ounces. Thereafter Randgold is required to prepare a Bankable Feasibility Study on any such resource for WAG within a further 12 months in order to earn its interest therein.
***
On December 5, 1997 the Company announced that it had acquired the option to explore, evaluate and purchase the Benitoite Gem Mine located in San Benito County, California. AZCO paid $20,000 for the original option and an additional $20,000 in March of 1999 for an option extension through January 1, 2000. On or before this date the Company has the option to purchase the mine outright for $1.5 million, unencumbered by royalty.
***
On May 22, 1998 the Company entered into an agreement to purchase a $1,500,000 convertible debenture in and to Oro Argentina Limited ("OAL") for the purpose of financing the first phase of the Chigue White Bentonite project and the option payments of OAL as required thereby. OAL has an option to acquire a 50% interest in this Bentonite project that is located in San Juan, Argentina, pursuant to an agreement dated February 2, 1998 between OAL and Pierre Martre. The debenture bears interest at 12% per annum and is due on September 1, 2000. Accrued interest on the debenture for the first year was due on September 1, 1999.
As at June 30, 1999 $1,159,390 has been drawn against the debenture by OAL. During the first three quarters $81,969 of accrued interest had been capitalized.
On September 1, 1999 OAL defaulted on the interest payment of $136,722 due under the terms of the debenture agreement. The Company expensed all costs related to this project in fiscal 1999 and is currently considering its alternatives under the debenture agreement with OAL.
***
Effective on August 9, 1999 the Company entered into an "Agreement in Principal" (the "AIP") with each of Thomas Ford and Calgem, Inc., Mr. Ford's wholly owned subsidiary, of Redondo Beach, California (collectively, "Calgem"), pursuant to which, and subject to such legal, accounting and tax advice as may be provided to the Company by its various professional advisors and counsel prior to closing, Calgem therein granted the Company an option to purchase all of the issued and outstanding shares of Calgem and/or business assets of Calgem in consideration of, among other matters, the issuance of an aggregate of 250,000 common shares of the Company to Calgem together with the payment to Calgem of an aggregate of $150,000 over a period of one year from regulatory approval to the transaction.
In accordance with the terms and conditions of the AIP the Company has now advanced, by way of interim loan (the "Loan"), an aggregate of $250,000 to the order and direction of Calgem. The Loan, together with interest accruing thereon at the rate of ten percent per annum, is to be secured by way of a senior fixed and floating charge on all of the assets of Calgem and, furthermore, and in accordance with the terms of the AIP, the Loan is to be utilized for the sole
purpose of purchasing gemstones on behalf of, in the name of and as agent only for the Company and in conjunction with the present business of Calgem which is contemplated for acquisition by the Company under the AIP.
The Company and Calgem, in accordance with the terms and conditions of the AIP, are presently negotiating the terms and conditions of a proposed formal agreement which is expected to expand upon, and replace in its entirety, the AIP, together with the formal terms, conditions and security for the Loan which is contemplated under the AIP.
REPURCHASE PROGRAM
On August 6, 1998 the Company approved the repurchase of up to 1,284,024 shares of its issued and outstanding common stock on The American Stock Exchange commencing on August 13, 1998 and continuing up to and including August 13, 1999. The Company purchased 803,376 shares through the life of the repurchase program for a total of $490,776.
EXPLORATION AND DEVELOPMENT
During fiscal 1999 the Company received no material revenues, other than interest income, as the Company has no mineral properties in production.
Exploration expense of $229,479 was incurred as the Company funded its 30% share of the Piedras Verdes project.
Exploration expense in Indonesia totaled $37,628 during fiscal 1999. The Company continues to investigate the whereabouts of refundable deposits made to the Indonesian government and written off in fiscal 1998.
During fiscal 1999 AZCO incurred $409,428 of exploration expense on the Mali project. Randgold Resources Ltd. successfully completed its first year commitment under the joint venture agreement on the Mali project and has indicated to the Company that it intends to continue with the second year of commitments under the agreement.
The Company incurred exploration expense of $411,413 for its gemstone initiative. Expenses of $88,910 and $322,503 were accumulated on the Chivor Emerald and California Benitoite projects, respectively.
A total of $1,241,359 was expensed to the Chigue Bentonite project located in Argentina. This represents the $1,159,390 advanced to OAL under the debenture agreement and any accrued interest booked to date. The decision to expense all costs related to this project was made after OAL was expected to default on its interest payment due on September 1, 1999.
Costs associated with the due diligence performed on the Black Canyon Mica project, a total of $293,386, were expensed as exploration expense.
Exploration expense of $228,258 was allocated to the La Adelita property in fiscal 1999.
EMPLOYEES
As of August 15, 1999 there were 9 full-time employees of AZCO. None of these employees are represented by a labor union contract or a collective bargaining agreement.
LAWS AND REGULATIONS
AZCO's interests in its projects will be subject to various laws and regulations concerning development, production, taxes, labor standards, environmental protection, mine safety and other matters. In addition, new laws or regulations governing operations and activities could have a material adverse impact on AZCO.
FOREIGN COUNTRIES AND REGULATORY REQUIREMENTS
AZCO has mineral interests located in foreign countries including Mexico, Indonesia and Mali. Mineral exploration, development and mining activities on its property interests may be affected in varying degrees by political stability and the policies of other nations in respect of these countries. Any changes in regulations or shifts in political conditions are beyond the control of the Company and may adversely affect its business. Operations may be affected in varying degrees by government regulations, including those with respect to export controls, expropriation of property, employment, land use, water use, environmental legislation and mine safety. Operations may be also affected in varying degrees by political and economic instability, economic or other sanctions imposed by other nations, terrorism, military repression, crime, extreme fluctuations in currency exchange rates and high inflation.
SEASONABILITY
The mine and concentrator located at the Black Canyon Mica project are accessed by crossing a ford in the Agua Fria River. This ford is unusable at times due to high runoff from streams and snowmelt. From past records the maximum duration that the ford is unusable is approximately 30 days. To overcome possible interruptions to production due to weather, a one to two month stockpile of mica concentrate is expected to be inventoried at the Glendale process plant.
It is not anticipated that AZCO's Mexican property interests in the State of Sonora will be of a seasonable nature. The Company is aware of the fact that circumstances in other parts of the world, such as Mali and Indonesia, do make exploration, mining and mineral processing a seasonal endeavor.
COMPETITIVE CONDITIONS
Many companies are engaged in the exploration and development of mineral properties. Since many of these companies have substantially greater technical and financial resources than the Company, the Company may be at a disadvantage with respect to some of its competitors.
The marketing of minerals is affected by numerous factors, many of which are beyond the control of the Company. Such factors include the price of the
mineral in the marketplace, imports of minerals from other nations, the availability of adequate refining and processing facilities, the price of fuel, electricity, labor, supplies and reagents and the market price of competitive minerals. In addition, sale prices for many commodities are determined by world market forces or are subject to rapid and significant fluctuations that may not necessarily be related to supply or demand or competitive conditions that in the past have affected such prices.
ENVIRONMENTAL
In connection with its future mining and processing operations, the Company will be required to comply with various federal, state and local laws and regulations pertaining to the discharge of materials into the environment. The Company will also be required to maintain various permits and licenses necessary for its operations from appropriate regulatory agencies. Apart from capital expenditures associated with the construction and maintenance of facilities required for usual mining and processing activities, the Company does not anticipate that compliance with environmental laws will have a material adverse effect upon the capital expenditures, earnings and competitive position of the Company for the remainder of the current fiscal year, the next fiscal year or in subsequent periods deemed material by the Company. AZCO is not currently subject to any material proceedings arising under environmental laws and regulations.
In light of the nature of its business the Company could face significant exposure from potential claims involving environmental matters. These matters could involve alleged soil, air and water contamination, and personal injuries or property damage allegedly caused by toxic materials handled or used by the Company in connection with its mining activities. The Company's policy is to accrue environmental and cleanup costs when it is probable that a liability has been incurred and the amount of such liability is determinable. However, future environment-related expenditures cannot be reasonably quantified in many circumstances due to the speculative nature of remediation and cleanup costs, estimates and methods, the imprecise and conflicting data regarding the characteristics of various types of materials and waste, the unknown number of other potentially responsible parties involved, the extent to which such costs may be recoverable from insurance and changing environmental laws and interpretations. As a result the Company believes its future environment-related expenditures could potentially become material at some point, but the amount of such expenditures are uncertain at this time.
ITEM 2.
ITEM 2. PROPERTIES
BLACK CANYON MICA PROJECT
On March 9, 1999 the Company completed the acquisition of Arizona Mica, which owned the rights to develop 43 unpatented lode-mining claims located in Yavapai County, Arizona. This acquisition was accomplished through the merger of Arizona Mica with and into the Company's wholly owned subsidiary, Sanchez, with Sanchez being the surviving corporation in the merger. Sanchez has subsequently changed its name to AZCO Mica, Inc. ("AZCO Mica").
AZCO Mica has staked 226 additional claims adjacent to the original property and has defined, through its initial drill program, a deposit of 390,000 tons of muscovite mica resource. Construction is underway on a 10,000 tpy wet ground mica processing facility in Glendale, Arizona, approximately 40 miles from the Black Canyon Mica Mine.
Through August 31, 1999 the Company has expended a total of $3,361,338 on the construction of the Glendale processing facility and mine development. Total capital costs for the Black Canyon Mica project are currently budgeted at $5,387,000. AZCO Mica is expecting to be in production of high quality muscovite mica by the end of 1999.
PIEDRAS VERDES PROJECT
The Piedras Verdes property is leased by Cobre del Mayo, S.A. de C.V. ("Cobra del Mayo"), a Mexican corporation that is owned 30% by AZCO and 70% by Minera Phelps Dodge Mexico S. de R.L. de C.V. ("MPDM"), a subsidiary of Phelps Dodge. The property consists of approximately 640 hectares and is located in southern Sonora State, Mexico.
Prior to the sale of a 70% interest in Cobre del Mayo to MPDM, 242 reverse circulation holes totalling 26,815 meters had been drilled. Since the sale of the 70% interest in Cobre del Mayo to MPDM 217 holes totaling 47,869 meters have been cored. In addition, the geologic mapping has been expanded, metallurgical testing has been advanced and a geological and ore deposit model has been prepared. A pre-feasibility report has been prepared and a $3,600,000 work budget advancing the project towards a bankable feasibility has been approved and initiated.
The Company estimates that the Piedras Verdes property contains a 316 million ton deposit grading .37% copper or 2.34 billion pounds of contained copper (at a .2% cut-off).
SUAQUI VERDE PROJECT
Cobre de Suaqui Verde, S.A. de C.V., a Mexican corporation that is owned 99.97% by AZCO, leased the Suaqui Verde copper property. Effective July 31, 1999 Cobre de Suaqui Verde, S.A. de C.V., under the direction of the Company, terminated the June 17, 1991 Suaqui Verdi Agreement with Mrs. Maria Dausinger and is currently having the mineral concessions transferred to Mrs. Dausinger.
MALI GOLD CONCESSIONS
On May 9, 1996 the Company signed an agreement with West Africa Gold & Exploration Ltd., Eagle and Lion that provided for the establishment of a joint venture holding company, Sanou. Sanou is the sole beneficial owner of a Malian subsidiary headquartered in Bamako and called Wag, which has a 100% working interest in the Medinandi and Dandoko concessions located in the Kenieba Gold Mining District of western Mali. Eagle, the original principal concession owner through a Malian subsidiary, has caused that subsidiary to convey the concessions to Wag.
Effective August 9, 1996 Wag entered into a debenture agreement with AZCO
thereby acknowledging itself indebted to and promising to pay AZCO, in consideration of financial advances and services then made, or thereafter made, the aggregate principal sum of $4,000,000. All advances AZCO has made to date under this agreement are also evidenced by promissory notes from Eagle.
On September 3, 1997 AZCO served notice to Eagle stating that, due to the fact that the work commitment for the license on the Mali project was unacceptable, AZCO was declaring default of its May 9, 1996 agreement with the same. In regard to the May 9, 1996 agreement among West African Gold & Exploration Ltd., Eagle, Lion and AZCO, AZCO gave notice of default to its joint-venture partners. This dispute is still outstanding and the Company is currently trying to resolve it. Eagle is currently bankrupt as indicated in Item 3.
ITEM 3. LEGAL PROCEEDINGS
On January 22, 1999 the trustee ("Petitioner") in bankruptcy proceedings against Eagle served a petition, in the Quebec Superior Court, District of Hull, upon the Company in order to recuperate assets from the Company. The Petitioner alleges that the Company owes an accounting to the Petitioner for certain stock in its subsidiary and other alleged assets which, the Petitioner has alleged, represent hypothetical values that may aggregate, if one accepts the Petitioner's claims of private stock values, up to $3,400,000. The Company considers the Petitioner's claims to be without merit and has engaged counsel that is disputing
the matter vigorously on behalf of the Company. To the knowledge of the Company it is also the largest creditor of Eagle (a claim has been made in excess of $4,000,000) and, therefore, it is ultimately the Company's and Canadian counsel's view that the Petitioner will be primarily accountable to the Company for any assets recovered, whether such should be through the Company or any other party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 26, 1999 the Company held an annual and special meeting of shareholders. A brief discussion of the matters voted upon follows:
1. Alan P. Lindsay, Anthony R. Harvey, Ian M. Gray, Lawrence G. Olson and Paul A. Hodges were elected directors of the Company to hold office until the next annual general meeting of the Company or until their successors are elected or appointed subject to the provisions of the Company's by-laws;
2. It was resolved that PricewaterhouseCoopers would serve as the Company's auditors for the fiscal year ending June 30, 1999;
3. It was resolved that the Voting Agreement among the Company, Arizona Mica, Lawrence G. Olson, John O. Rud, Floyd R Bleak, Alan P. Lindsay and Anthony R. Harvey be authorized and approved;
4. It was resolved that the maximum number of shares for which options may be granted under the Company's existing Stock Option Plan be fixed at 5,950,424; and
5. It was resolved that the proposal to amend certain issued and outstanding options to acquire shares of common stock of the Company in the manner as set forth in the Company's Proxy Statement be authorized and approved.
The following table states the number of shares cast as to each matter.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common shares are listed for trading on The Toronto Stock Exchange in Canada and The American Exchange in the U.S. under the stock symbol "AZC". The approximate number of registered shareholders of record for the Company, as of September 23, 1999, was 1,036.
Shown below are high and low sale prices of the common stock of the Company on The Toronto Stock Exchange and The American Stock Exchange for the fiscal periods indicated.
ISSUANCE OF UNREGISTERED SHARES
On September 17, 1998 AZCO issued 375,000 common shares to a single sophisticated investor in connection with the settlement of certain arrangements with Lines in relation to the Mali Project, on March 11, 1999 AZCO issued 4,500,000 common shares to three sophisticated investors in connection with the acquisition of Arizona Mica and on June 10, 1999 AZCO issued 30,000 common shares to Cortez in connection with the acquisition of the Silverado property. The above mentioned transactions are described above in Item 1. "BUSINESS". The shares are represented by certificates containing restrictive legends and were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act of 1933.
DIVIDEND POLICY
AZCO has not paid any dividends on its common shares to date. AZCO does not anticipate paying any dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information regarding the financial position and operating results for the Company. For each of the years ended June 30 the selected financial information has been derived from the Company's consolidated financial statements. This information should be read in conjunction with Item 7.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All material revenues received during fiscal 1999 and 1998 were a result of interest earned on the proceeds of the sale of assets to Phelps Dodge. All funds raised prior to fiscal 1996 were used in the exploration and development of the Company's various mineral properties.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1999 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1998.
AZCO had a net loss of $4,528,006 in fiscal 1999 compared to net loss of $3,044,112 in 1998. The increase in net loss for the year ended June 30, 1999 was the result of a provision for income tax benefit booked in fiscal 1998.
The Company's provision for income tax benefit in fiscal 1998 was $2,109,237 compared to $4,186 for 1999 due to federal income tax refunds received as a result of taxes paid on the sale of assets in 1996.
Exploration expense in 1999 was $3,041,175 as compared to $3,261,405 in 1998. Exploration expense for the current period includes $1,241,359 representing advances and accrued interest under the OAL debenture agreement. The decision to expense all costs related to this project was made after OAL defaulted on its interest payment due on September 1, 1999.
Miscellaneous expense in fiscal 1998 resulted from the $400,000 payment to AIOC Corporation ("AIOC") as full and final payment of all matters and claims between AIOC, AZCO and Sanchez.
TWELVE MONTHS ENDED JUNE 30, 1998 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1997.
AZCO had a net loss of $3,044,112 for fiscal 1998 compared to net loss of $8,155,700 in 1997. The reduction in net loss for the year ended June 30, 1998 was the result of a decrease in exploration expenditures of $4,313,601.
Exploration expense in 1998 was $3,261,405 as compared to $7,575,006 in 1997. The Company, in fiscal 1998, funded $1,101,188 for its 30% share of the costs related to the Piedras Verdes project compared to $1,846,330 in fiscal 1997. During the fiscal year ended June 30, 1998 AZCO expended $783,672 on the Mali project as compared to $4,052,316 in the previous fiscal year. In fiscal 1998 a total of $290,678 was expensed against the Indonesian properties in contrast to $1,211,549 during fiscal 1997. In addition, the Company incurred expenses of $973,830 relating to its gemstone initiative in fiscal 1998.
Accounting and legal expenses increased from $254,288 in 1997 to $386,870 in 1998. Increased legal expense in 1998 is the result of the AIOC settlement.
Miscellaneous expense in fiscal 1998 resulted from the $400,000 payment to AIOC as full and final payment of all matters and claims between AIOC, AZCO and Sanchez.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended June 30, 1998 the Company met its capital requirements through the proceeds of the sale of assets to Phelps Dodge in 1996.
At June 30, 1999 and June 30, 1998 the Company had cash and cash equivalents of $12,106,173 and $18,320,882, respectively, and working capital of $11,813,811 and $19,021,047, respectively. Total liabilities at June 30, 1998 were $299,061 as compared to $387,984 on June 30, 1999.
The Company feels that its current cash position is strong enough to fund all capital requirements in fiscal 2000. In the event that a production decision is made in regards to the Piedras Verdes project it is the Company's intention to raise additional capital to fund its share of the construction costs. The continued development of the Black Canyon Mica project is expected to be funded from the Company's treasury. Funding of the ongoing exploration projects in California, Mali, Indonesia and Mexico (including approximately $4.1 million in potential pre-production royalties on the Piedras Verdes project over the next 10 years) is expected to come from either the Company's treasury or from potential joint venture partners. In the event that is not possible additional funding will be sought to fund the advance royalties on the Piedras Verdes project if the Company chooses to retain its interest in that project.
ADDRESSING YEAR 2000
The Year 2000 issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems that use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 issue may be experienced before, on or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure that could affect an entity's ability to conduct normal business operations. However, the Company has installed updated accounting software that addresses the potential year 2000 problem. It is anticipated that there will be no material impact on the Company. It is not possible to be certain that all aspects of the Year 2000 issue affecting the Company, including those related to the efforts of customers, suppliers or other third parties, will be fully resolved.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section at the end of this report beginning on page of the Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the names and positions of the executive officers and directors of the Company as of September 23, 1999. All executive officers and directors have been elected and appointed to serve until their successors are elected and qualified. Additional information regarding the age, business experience, and length of time served in each capacity and other matters relevant to each individual is set forth below in the table.
All of the directors and officers of the Company have held their principal occupations as set out above, except as follows, during at least the last five years:
Mr. Lindsay, aged 49, one of the Company's founders, has been responsible for arranging the financing, the corporate development and the building of the organization important to the success of the Company. Mr. Lindsay has an extensive background in business management and marketing. Mr. Lindsay has been involved in the mining business for the past ten years and since 1989 has been devoted to AZCO's business. From 1982 to 1989 Mr. Lindsay was the Manager of the Financial Services Division of the North American Life Assurance Company in Vancouver.
Mr. Harvey, aged 65, one the Company's founders, has been associated with the Company since July 13, 1988. He has been a full-time employee since May 18, 1989, prior to which he spent 30 years with Wright Engineers Limited, where he gained extensive experience in the mining industry in various management positions, including mine construction and ore extraction, bulk handling and
processing, project management and corporate marketing and development, in many countries including the U.S. As a senior project manager he was responsible for the overall management and direction of many mining projects worldwide, including the Copper Flat Project 15,000 ton per day copper/moly open pit mining and processing plant located in New Mexico, for Quintana Minerals Corporation, and a 3,000 tpd underground copper mine rehabilitation expansion located in Ireland, for Avoca Mines Limited.
Mr. Hodges, aged 72, a director, has a degree of Engineer of Mines from the Colorado School of Mines and is a Registered Professional Engineer in Arizona. Mr. Hodges has over 40 years experience in the mining industry covering exploration, operations, project startup, management and financing and has worked for Anaconda, Asarco, RTZ and St. Joe. Mr. Hodges was the Chief Engineer worldwide for open pit mining for RTZ and was the President of Anamax Mining Company at Twin Buttes. Most recently Mr. Hodges was the President of Compania Minera El Indio. He was a director of Lac Minerals Limited, a publicly traded company acquired by American Barrick in late 1994. Mr. Hodges joined the Board in August 1993.
Dr. Gray, aged 63, a P.Eng. of Ontario, Canada, and a Fellow of the Society of Economics Geologists, became a director of the Company on September 4, 1996. Dr. Gray, a Mining Geologist from the Royal School of Mines in London, UK, has spent over 40 years in the international mining industry. His experience ranges from mineral exploration through project development to mine production for a wide variety of minerals throughout North, Central and South America, Australia, East and Southeast Asia and Central and Southern Africa. During his career Dr. Gray has held senior positions with major mining companies such as Inco Ltd. and BP Minerals International Ltd., followed by considerable experience in the formation and general management of Canadian based junior mining public companies. Notable achievements include important roles in the development of the huge Olympic Dam copper, uranium and gold production complex in South Australia and the 370,000 ounce per year Fort Knox gold mine located near Fairbanks Alaska.
Mr. Olson, aged 62, became a director of the Company on March 15, 1999 in connection with the acquisition of Arizona Mica (see Item 13 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in respect to the arrangements under which Mr. Olson became a director). Mr. Olson has owned and operated his own business, Olson Precast of Arizona Inc., since 1973. In 1998 Olson Precast of New Mexico, Inc., a company controlled by Mr. Olson, was liquidated under the United States Bankruptcy law in proceedings in the United States Bankruptcy Court for the district of New Mexico. Mr. Olson received a B.S. in Civil Engineering from the University of Southern California in 1959.
Mr. Simmerman, aged 49, joined the Company in September 1992 as Chief Engineer of the Sanchez Project, and in October of 1998 was appointed Vice-President of Operations. Mr. Simmerman, a Mining Engineer from the University of Arizona, has been working in the mining industry since 1974, and has been involved in exploration, development and production operations in gold, silver, copper, cobalt, coal and uranium. For the five years prior to joining the Company Mr. Simmerman was Chief Engineer for Santa Fe Pacific Gold's Rabbit Creek Mine and was involved in the original determinations of the ore reserves and the
feasibility stage through startup, production and expansion to a 200,000 ton per day operation.
Mr. Modesto, aged 44, Vice President Finance since October 26, 1998 joined the Company in June of 1994 as Controller of the Sanchez project. Mr. Modesto served as the Company's Corporate Controller and Principal Accounting Officer from January of 1996 to October of 1998. Mr. Modesto earned a B.S. in Accounting from the University of Utah in 1977 and has 22 years of accounting and administrative experience in the mining industry. For the six years prior to joining the Company Mr. Modesto was the Controller for Corona Gold Inc.'s Santa Fe Mine located in Nevada.
Mr. Ramshaw, aged 28, Vice-President of Corporate Development effective April 29, 1997, joined AZCO on February 1, 1997 as Manager-Corporate Development. Mr. Ramshaw, a Mining Geologist, earned a B.S. from the Royal School of Mines, London, in 1993 and has a variety of experience in gold exploration and mining. Prior to joining AZCO Mr. Ramshaw was a Mining Analyst at C.M. Oliver and Co. Ltd. from January 1996 through February 1997, Assistant Editor for the Mining Journal from February 1994 through 1995 and a Consulting Geologist from June 1993 through January 1994.
Dr. Badham, aged 52, Chief Geologist joined AZCO on August 1, 1997. Dr. Badham resigned from his position with the Company effective July 31, 1999. Prior to being associated with AZCO Dr. Badham was Chief Geologist for RTZ Mining and Exploration from 1989 through 1996 and Area Selection Geologist for B.P. Minerals from 1983 through 1989.
COMPLIANCE WITH SECTION 16(a)BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that, during the fiscal year ended June 30, 1999, all filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with, except for one late filing of a Form 3 reporting eleven sales in July 1999 by Dr. Badham.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief Executive Officer and the other most highly compensated executive officers (collectively, the "Named Executive Officers") of the Company earning in excess of $100,000 for the year ended June 30, 1999, as well as the total compensation paid to each such individual for the Company's three previous fiscal years:
(1) These amounts were actually paid to Alan Lindsay and Associates Ltd., a management company under the control of Mr. Lindsay, pursuant to management agreements, dated May 1989 and February 1998, with the Company.
(2) These amounts were actually paid to ARH Management Ltd., a management company under the control of Mr. Harvey, pursuant to management agreements, dated May 1989 and February 1998, with the Company.
(3) These amounts were paid as reimbursement of medical insurance premiums.
(4) Mr. Modesto was granted a $30,000 relocation allowance in conjunction with the move of the Company's corporate office from Solomon, Arizona, to Ferndale, Washington.
(5) Mr. Simmerman was granted a $30,000 relocation allowance in conjunction with the Company's establishment of its Glendale office to oversee the Black Canyon Mica project.
(6) Dr. Badham resigned his position with the Company on July 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
(1) These options are exercisable from the date of grant (July 13, 1998).
(2) These options are exercisable from the date of grant (October 23, 1998).
(3) These options are exercisable from the date of grant (February 22, 1999).
(4) These options are exercisable from the date of grant (March 11, 1999).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS VALUES
(*) Based on the closing price of $0.94 of the Company's common stock as quoted on The American Stock Exchange on June 30, 1999.
COMPENSATION OF DIRECTORS
The Company pays a fee to its outside, non-officer directors of $1,500 per month. The Company also reimburses its directors for reasonable expenses incurred by them in attending meetings of the Board of Directors. During fiscal 1999 non-officer directors received a total of $320 in consulting fees.
REPORT ON REPRICING OF OPTIONS
The Company's Board of Directors on March 10, 1999 repriced all outstanding stock options of employees and directors to Cdn. $1.05, the closing price at that date on the Toronto Stock Exchange. This repricing was subsequently ratified by the Company's shareholders at the annual and special meeting of shareholders on May 26, 1999. The Board believes that the repricing was necessary to keep compensation competitive in the industry. The following table represents all repricings of stock option held by executive officers of the Company during the last ten years.
TEN-YEAR OPTION REPRICINGS
The foregoing report is submitted by the entire board of directors Mr. Alan P. Lindsay, Mr. Anthony R. Harvey, Mr. Paul A. Hodges, Dr. Ian M. Gray and Mr. Lawrence G. Olson.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
Effective February 1, 1998 the Company entered into a management agreement with Alan Lindsay and Associates Ltd. ("Associates"), a British Columbia corporation owned and controlled by Mr. Lindsay, the Company's Chief Executive Officer. This new agreement replaces an original May 1, 1989 agreement in its entirety. This agreement requires all salary amounts otherwise payable by the Company to Mr. Lindsay to be paid to Associates. Associates is therein provided with a base fee of $180,000 annually and an allowance for equivalent benefits enjoyed by Company personnel. The base fee may be renegotiated annually at the request of either party. In the event that the parties cannot agree then the base fee is to be increased by the greatest of 5% or the amount of the cost of living index as published by the Canadian Federal government. The term of this agreement is for a period of 36 months and renews automatically for subsequent one-year periods unless either party gives the other party notice of non-renewal at least 90 days prior to the end of any term. In the event that the agreement is terminated, or fails to renew due to failure of agreement after the issuance of a non-renewal notice, Associates will receive a termination fee equal to either the sum of the buy-out of any outstanding stock options for a price equal to the average market price of the Company's shares on The Toronto Stock Exchange multiplied by the number of shares under option and less the exercise price thereof or, at the election of Associates and subject to regulatory approval, extension of the option for a year after termination; plus the greater of:(i) the aggregate remaining base fee for the unexpired remainder of the term and (ii) the then annual base fee plus one month of base fee for each year, or portion thereof, served after the effective date. In the event that Associates is unable to provide the services due to protracted disability or sickness or the death of its principal (Mr. Lindsay) it may, at any time, declare such to the Company and may terminate the agreement as a without fault termination and the termination fee shall be payable. The Company may elect to effect such termination, and shall pay the termination fee, in the case of death of Associates' principal or in the event that sickness or disability has continued for a period in excess of 120 days. It is the Company's estimation that if the management agreement with Associates was terminated September 23, 1999 Associates would be due $454,420 as a termination fee. This fee represents $186,670 (Cdn.$275,000) for the buyout of outstanding stock options on September 23, 1999 and $267,750 as the aggregate remaining base fee for the remainder of the term of the agreement.
Effective February 1, 1998 the Company entered into a management agreement with ARH Management Ltd. ("Management"), a British Columbia corporation owned and controlled by Mr. Harvey, the Company's Vice Chairman. This new agreement replaces an original May 1, 1989 agreement in its entirety. This agreement requires all salary amounts otherwise payable by the Company to Mr. Harvey to be paid to Management. Management is therein provided with a base fee of $180,000 annually and an allowance for equivalent benefits enjoyed by Company personnel. The base fee may be renegotiated annually at the request of either party. In the event that the parties cannot agree then the base fee is to be increased by the greatest of 5% or the amount of the cost of living index as published by the Canadian Federal government. The term of this agreement is for a period of 36 months and renews automatically for subsequent one-year periods unless either party gives the other party notice of non-renewal at least 90 days prior to the end of any term. In the event that the agreement is terminated, or fails to renew due to failure of agreement after the issuance of a non-renewal notice, Management will receive a termination fee equal to the sum of the buy-out of any outstanding stock options for a price equal to the average market price of either
the Company's shares on The Toronto Stock Exchange multiplied by the number of shares under option and less the exercise price thereof or, at the election of Management and subject to regulatory approval, extension of the option for a year after termination; plus the greater of: (i) the aggregate remaining base fee for the unexpired remainder of the term and (ii) the then annual base fee plus one month of base fee for each year of portion thereof, served after the effective date. In the event that Management is unable to provide the services due to protracted disability or sickness or the death of its principal (Mr. Harvey) it may, at any time, declare such to the Company and may terminate the agreement as a without fault termination and the termination fee shall be payable. The Company may elect to effect such termination, and shall pay the termination fee, in the case of death of Management's principal or in the event that sickness or disability has continued for a period in excess of 120 days. It is the Company's estimation that if the management agreement with Management was terminated September 23, 1999 Management would be due $454,420 as a termination fee. This fee represents $186,670 (Cdn.$275,000) for the buyout of outstanding stock options on September 23, 1999 and $267,750 as the aggregate remaining base fee for the remainder of the term of the agreement.
Effective August 15, 1994 management agreements were provided to both Messrs. Harvey and Lindsay that are effective in the event of a change in control of the Company. Similar management agreements (collectively, the "Management Agreements") were provided to each of Mr. Modesto, on November 19, 1996, and Mr. Simmerman, on October 23, 1998. The Management Agreements provide for a lump sum distribution in an amount (taking into account all other applicable change in control payments by the Company) not to exceed 299% of the base amount as defined in IRC Section 280G(b) upon a change in control of the Company. Such "base amount" is generally equivalent to the applicable person's average annual compensation from the Company includable in his gross income over the preceding five years. Change of control is therein defined to include only the following circumstances:
(i) the acquisition (whether direct or indirect)of shares in excess of 20 percent of the outstanding shares of common stock of the Company by a person or group of persons, other than through a public equity offering by the Company;
(ii) the occurrence of any transaction relating to the Company required to be described pursuant to the requirements of item 6(e) of Schedule 14A of Regulation 14A of the SEC under the Securities and Exchange Act of 1934; or
(iii) any change in the composition of the Board of Directors of the Company resulting in a majority of the present directors not constituting a majority, provided, that in making such determination directors who were elected by, or on the recommendation of, such present majority, shall be excluded.
Effective August 15, 1994 for Mr. Hodges, and effective November 19, 1996 for Dr. Gray, director's agreements (collectively, the "Director's Agreements") were provided to each of the above that are also effective in the event of a change in control of the Company. These Director's Agreements provide for a lump
sum distribution not to exceed $100,000 upon a change in control of the Company. Change in control has the same definition as set forth above in connection with the Management Agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ending 1999 the entire board of directors acted as the Company's compensation committee.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of September 23, 1999, with respect to beneficial ownership of the Company's common stock by each person known by the Company to be the beneficial owner of more than 5% of its outstanding common stock, by each director of the Company, by each Named Executive Officer and by all officers and directors of the Company as a group. Unless otherwise noted each shareholder has sole investment and voting power over the shares owned.
*- indicates less than 1%
(1) Includes 605,308 shares owned by a corporation controlled by Mr. Lindsay. Includes options to acquire 300,000 shares at an exercise price of CDN $1.05 per share and 200,000 shares at an exercise price of CDN $0.80 per share.
(2) Includes 122,224 shares owned by Mr. Harvey's wife. Includes options to acquire 300,000 shares at an exercise price of CDN $1.80 per share and 200,000 shares at an exercise price of CDN $0.80 per share.
(3) Includes options to acquire 50,000 shares at an exercise price of CDN $1.05 per share and 50,000 shares at an exercise price of CDN $0.70 per share.
(4) Represents options to acquire 100,000 shares at an exercise price of CDN $1.05 per share and 50,000 shares at an exercise price of CDN $0.70 per share.
(5) Includes an options to acquire 100,000 shares at an exercise price of CDN $1.05 per share.
(6) Represents options to acquire 120,000 shares at an exercise price of CDN $1.05 per share, 20,000 shares at an exercise price of CDN $0.70 per share and 30,000 shares at an exercise price of CDN $0.80 per share.
(7) Represents options to acquire 210,000 shares at an exercise price of CDN $1.05 per share, 25,000 shares at an exercise price of CDN $0.70 per share and 30,000 shares at an exercise price of CDN $0.80 per share.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 9, 1999 the Company completed the acquisition of Arizona Mica, which owned the rights to develop 43 unpatented lode-mining claims located in Yavapai County, Arizona. This acquisition was accomplished through the merger of Arizona Mica with and into the Company's wholly owned subsidiary, Sanchez, with Sanchez being the surviving corporation in the merger. Sanchez has subsequently changed its name to AZCO Mica, Inc. In connection with the merger, the Company issued an aggregate of 4,500,000 shares (the "Shares") of its common stock to the three shareholders of Arizona Mica, Messrs. Lawrence G. Olson, John O. Rud and Floyd R. Bleak, with each such shareholder receiving 1,500,000 shares of the Company's common stock. The Shares were issued as "restricted securities", as that term is defined in Rule 144 promulgated under the United States Securities Act of 1933, as amended (the "Act"), and the certificates representing the shares bear a restrictive legend permitting transfer only pursuant to registration or applicable exemption under the Act.
As part of the merger transaction Messrs. Olson, Bleak and Rud also entered into a Voting Agreement (the "Voting Agreement") with the Company, Arizona Mica and Messrs. Alan P. Lindsay and Anthony R. Harvey, who are officers, directors and shareholders of the Company. The Voting Agreement has a term of five years commencing March 9,1999 and the principal provisions of the Voting Agreement are as follows:
1. Messrs. Olson, Rud and Bleak each grant to the management of the Company, as such may exist from time to time, the right to vote their Shares in favor of
the nominees to the Company's Board of Directors proposed by management at any meeting of Shareholders of the Company. This provision is implemented through the grant of an irrevocable proxy by Messrs. Olson, Rud and Bleak to such member of the Board of Directors of the Company as the Board of Directors may specify from time to time;
2. The Company agrees to appoint one nominee (the "Nominee") of Messrs. Olson, Rud and Bleak to the Company's Board of Directors and agrees to include the Nominee in the management's slate of directors at any meeting, of the Shareholders of the Company;
3. Messrs. Olson, Rud and Bleak are permitted to sell, assign or otherwise transfer the Shares covered by the Voting Agreement provided that such transfers comply with applicable securities laws. Any Shares so transferred will no longer subject to the terms of the Voting Agreement; and
Lawrence G. Olson, a non-officer director of the Company since March 15, 1999, is the owner of Olson Precast of Arizona Inc. ("Precast"). Precast, through a closed bidding arrangement, was awarded the concrete contract on the Company's Glendale, Arizona, mica processing facility. Precast was compensated a total of $141,385 for the contract.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) 1. Financial Statements - Reference is made to the Financial Statements appearing on Pages, through.
2. Financial Statement Schedules - Reference is made to the Financial Statement Schedules on Page.
3. Exhibits
- ------------ (1) Exhibit nos. 3.1, 3.2, 10.4 and 10.5 are incorporated by reference from exhibit nos. 3.1, 3.2, 10.10 and 10.11, respectively, from the Registrant's Registration Statement on Form S-4 (File No. 33-45162).
(2) Exhibit nos. 3.3, 3.4 and 10.3 are incorporated by reference from exhibit nos. 3.3, 3.4 and 10.20, respectively, from the Registrant's Annual Report on Form 10-K(a) for the fiscal year ended June 30, 1995.
(3) Exhibit No. 4.1 is incorporated by reference from exhibit no. 1 from the Registrant's Registration Statement on Form 8-A that was filed with the SEC on July 21, 1992.
(4) Exhibit No. 10.4 is incorporated by reference from exhibit no. 10.10 from the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
(5) Exhibit nos. 10.5, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 are incorporated by reference from exhibit nos. 10.7, 10.8, 10.9, 10.10, 10.12, 10.13, 10.15, 10.16 and 10.17, respectively, from the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
(6) Exhibit No. 10.14 is incorporated by reference from exhibit no. 1 from the Registrant's Form 8K filed with the SEC and dated March 9, 1999.
* Filed herewith.
(b) Reports on Form 8K:
March 9, 1999. Acquisition of Arizona Mica Properties Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AZCO MINING INC.
Date: September 27, 1999 By: /s/ Alan P. Lindsay -------------------------------------- Alan P. Lindsay President, Chairman of the Board and Chief Executive Officer
Date: September 27, 1999 By: /s/ Ryan A. Modesto -------------------------------------- Ryan A. Modesto Vice President Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.
AZCO MINING INC. (DELAWARE) Form 10-K Item 8, Item 14(a) (1) and (2) Index to Financial Statements and Supplemental Schedule - --------------------------------------------------------------------------------
Schedules other than the one listed above have been omitted since they are either not required or not applicable, or since the required information is shown in the financial statements or related notes.
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
September 4, 1999
AUDITORS' REPORT
TO THE SHAREHOLDERS OF AZCO MINING INC. (DELAWARE)
We have audited the consolidated financial statements and the financial statement schedule of AZCO MINING INC. (DELAWARE) and its subsidiaries listed in the index on page of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with United States 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. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Azco Mining Inc. (Delaware) and its subsidiaries as at June 30, 1999 and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with United States generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statement taken as a whole, presents fairly, in all material respects, the information required to be included therein.
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
AZCO MINING INC. (DELAWARE) Consolidated Balance Sheets AS AT JUNE 30, 1999 AND 1998 - --------------------------------------------------------------------------------
AZCO MINING INC. (DELAWARE) Consolidated Statements of Loss FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
AZCO MINING INC. (DELAWARE) Consolidated Statements of Stockholders' Equity FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
AZCO MINING INC. (DELAWARE) Consolidated Statements of Cash Flows FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1 NATURE OF OPERATIONS
Azco Mining Inc. (Delaware) (the Company) is a U.S. mining company with a general business strategy to acquire mineral properties. The Company plans to supplement its core assets, the 100% owned Black Canyon Mica Project in Arizona and a 30% interest in the Piedras Verdes Project, through its acquisition of other mineral properties. As at June 30, 1999, no property had proven reserves of commercial ore.
Although the Company has taken steps to verify title to mineral properties in which it has an interest, according to the usual industry standards for the stage of exploration of such properties, these procedures do not guarantee the Company's title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.
2 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost which approximates market value.
MINERAL PROPERTIES, PLANT AND EQUIPMENT
Mineral properties, plant and equipment are recorded at cost.
Depletion of mineral properties and development costs is to be provided on the unit-of-production method, based on proven and probable ore reserves. Buildings, plant and equipment is to be depreciated on a straight-line basis over their estimated useful lives.
EXPLORATION PROPERTIES
The Company expenses prospecting and exploration costs and capitalizes costs directly attributable to the acquisition of mineral properties, pending determination as to their commercial feasibility (to contain a viable mineral deposit). Gains or losses resulting from the sale or abandonment of mineral properties are included in operations. Proceeds from sales of properties in which the Company has retained an economic interest are credited against property costs, and no gain is recognized until all costs have been fully recovered.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
PROPERTY EVALUATION
Recoverability of investments in operating and non-operating properties is evaluated periodically. Estimated future net cash flows from each property are calculated using estimates of proven and probable ore reserves, estimated future prices (considering historical and current prices, price trends, and related factors), operating capital, and reclamation costs on an undiscounted basis. Where property costs are not recoverable reductions in the carrying value of each property are recorded to the extent the remaining investment exceeds the estimate of fair value. Changes in the geological and engineering interpretations of the Company's ore bodies, mica prices and operating costs may change the Company's estimate of proven and probable reserves. It is reasonably possible that the Company's estimate of proven and probable reserves will change in the near term resulting in additional charges for depreciation and reclamation in future reporting periods.
Where properties are held for sale, recoverability is assessed based on management's estimate of fair value. Reductions in the carrying value of each property are recorded to the extent the remaining investment exceeds fair value, less costs of disposal.
ENVIRONMENTAL AND RECLAMATION COSTS
Estimated costs of decommission and reclamation associated with mineral properties, plant and equipment, as well as revised regulatory requirements are accrued over the life of the mine through periodic charges to earnings on the unit-of-production method.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Replacements, maintenance and repairs that do not improve or extend the life of the respective assets are expensed. Major renewals and improvements are capitalized. Upon retirement, sale or other disposition of furniture and equipment, the cost and accumulated depreciation are eliminated from the accounts and the gain or loss is included in operations.
The Company depreciates these assets over their estimated useful lives (3 - 5 years) using the straight-line method.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Income taxes and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123), which defines a fair value based method of accounting for employee (including directors) stock options. However, it also allows an entity to continue to account for these plans according to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB No. 25), provided pro forma disclosures of net income and earnings per share are made as if the fair value based method of accounting defined by SFAS No. 123 has been applied. The Company has elected to continue to measure compensation expense related to employee stock options using APB No. 25. The fair value of options granted to non-employees is expensed as compensation when options are granted, and the corresponding amount is credited to stockholders' equity.
3 CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company invests its cash and cash equivalents in high quality issuers. The Company, in the normal course of business, maintains cash balances in excess of the Federal Deposit Insurance Corporation's insurance limit. At June 30, 1999 and 1998, cash equivalents of $11,800,000 and $18,300,000, respectively, were invested with one bank's trust and institutional portfolio department.
4 INVESTMENT AND ADVANCES
INVESTMENT
On June 18, 1998, the Company entered into an agreement with Minera Cortez Resources Ltd. (Cortez), a private company, whereby the Company was granted a right of first refusal for a period of five years to acquire all or any of the property interest that Cortez decides to either joint venture, option, or dispose of. In consideration, the Company has subscribed for 200,000 common shares of Cortez at Cdn. $0.25 per share. The Company was also granted a right of first refusal for the same period to provide up to 100% of any private or public equity or debt financing that Cortez proposes to obtain, on similar terms as any third party is willing to provide.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
ADVANCES
On May 22, 1998, the Company entered into an agreement to purchase a $1,500,000 convertible debenture of Oro Argentina Limited (OAL) for the purpose of financing the first phase of the Chiqua White Bentonite Project and the option payments of OAL. OAL has an option to acquire a 50% interest in the Bentonite Project in San Juan, Argentina pursuant to an agreement dated February 2, 1998 between OAL and Pierre Martre. The debenture bears interest at 12% per annum and is due on September 1, 2000. During the term of the debenture, the Company has the option to convert the unpaid balance of the principal and interest into common units of OAL at $0.50 per unit, where each unit consists of one common share and one warrant, and each warrant entitles the Company to purchase an additional common share at $0.60 per share for a period of two years after conversion. The debenture is collateralized by a first floating and fixed charge on the assets of OAL.
The Company was also granted a two-year option to purchase all of the shares of OAL, subject to OAL shareholders' approval. Pursuant to the terms of the agreement, if the financing of the second phase of the project is not in place after 18 months from the date of issue of the debenture, the Company can extend the option for an additional year. The exercise of the option will be paid with common shares of the Company at a ratio of one common share for two shares of OAL. The shares of the Company issued for 10,136,935 issued and outstanding shares of OAL and any other shares issued pursuant to the purchase option will be placed into a pool for a period of two years, 25% of which will be released immediately, 25% one year thereafter, and the remaining 50% two years thereafter.
During the year ended June 30, 1999, the Company made the decision to write off all the investment in OAL. This resulted in a charge to exploration expense of $1,241,359 during the year.
5 MINERAL PROPERTIES, PLANT AND EQUIPMENT
BLACK CANYON MICA PROJECT
On March 10, 1999 the Company announced that it had acquired Arizona Mica Properties, Inc. ("AMPI") through a merger with the Company's subsidiary, Sanchez Mining Inc. AMPI is the owner of the Black Canyon Mica Project, a significant source of high-quality mica and a pilot processing plant situated near Phoenix, Arizona.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
The acquisition has been accounted for by the purchase method, and the results of AMPI have been reflected in the Company's results of operations from March 10, 1999. The Company issued to the principals of AMPI 4,500,000 shares of the Company's common stock (subject to certain trading and voting trust restrictions) with a value of $2,289,388, in exchange for all the outstanding shares of AMPI. Details of the net assets acquired are as follows:
The issuance of the Company's shares to acquire shares of AMPI is a non-cash investing and financing activity, and accordingly, the transaction is not reflected in the Consolidated Statement of Cash Flows.
6 EXPLORATION PROPERTIES
a) Piedras Verdes Project
The Piedras Verdes Project is located in southern Sonora, Mexico. During the year ended June 30, 1996, the Company sold 70% of its interest in the Piedras Verdes Project to Phelps Dodge Corporation (Phelps Dodge).
Under the terms of the sales agreement with Phelps Dodge, all assets and commitments related to this project were transferred to a separate company incorporated as Cobre del Mayo, S.A. de C.V. (Cobre). The Company maintains a 30% interest and Phelps Dodge a 70% interest in Cobre. Under the terms of the Shareholders' and Operator's Agreement among Phelps Dodge, Cobre del Mayo, Inc., the Company, and Cobre, the Company committed to provide up to $3,000,000 for costs required to bring the Piedras Verdes Project to the feasibility stage. As at June 30, 1999, the Company has advanced $3,865,511 towards the project. The Company also committed to funding its 30% of expenditures incurred in the feasibility stage. The Company is expensing all costs related to the project.
On March 4, 1997, Cobre entered into a mining exploration and exploitation agreement with Compania Minera Serrana, S.A. de C.V. This agreement superseded the pre-existing lease. Under the terms of this agreement, Cobre has the following commitments to be funded 70% by Phelps Dodge and 30% by the Company:
i) $10,000 per month from the execution of the agreement until production begins;
ii) three payments of $299,035 due on the date of execution and on the first and second anniversaries of the date of execution;
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
iii) royalties equal to three percent of the net value of mineral production; and
iv) advance royalties of $1,000,000 on the third through fifth anniversaries of the date of execution, and $1,500,000 on the sixth through eleventh anniversaries if commercial production is not met by those anniversary dates.
Following the results of a pre-feasibility study carried out by Phelps Dodge and announced in November 1998, Phelps Dodge has approved and initiated a $3,600,000 work budget advancing the project towards a bankable feasibility. Under the terms of the agreement, the Company is responsible for funding 30% of this work.
b) Suaqui Verde Project
On June 20, 1996, the Company entered into a Mineral Exploration and Option to Form Company Agreement with Minera Phelps Dodge Mexico (MPDM) for the mineral exploration and evaluation of the Suaqui Verde mineral concessions in Sonora, Mexico. Under the terms of the agreement, MPDM could earn a 70% interest in the concessions by incurring exploration expenditures of $2,000,000 on the project over three years, funding the completion of a comprehensive feasibility study, and paying the Company $25,000 annually.
During the year ended June 30, 1998, MPDM terminated the option agreement with the Company.
On July 17, 1999, the Company decided to terminate the agreement with the property owners and made the final payment due under the agreement. The Company intends to leave the property in good standing and have paid the mineral duties on the concessions until December 31, 1999.
c) La Adelita Property
On July 21, 1998, the Company entered into an option agreement with Cortez whereby the Company was granted an option to earn up to 70% interest in the La Adelita property in Sonora, Mexico under the following terms:
i) by subscribing to 100,000 common shares of Cortez at Cdn. $0.25 per share;
ii) by making option payments and paying finder's fees on behalf of Cortez totalling $165,000 over the next five years; and
iii) by incurring exploration expenditures on the property totalling $500,000 over the next three years.
During the year ended June 30, 1999, the company has expended $228,256 on the La Adelita property and thus completing its first year's commitment to the property.
On June 10, 1999, the Company acquired 100% interest in the Silverado property, which surrounds the La Adelita property, from Cortez for $20,000 and 30,000 of the Company's shares.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
d) Mali Project
On May 9, 1996, the Company entered into a Memorandum of Agreement with West African Gold and Exploration, Ltd. (WAG), a British Virgin Islands company, Eagle River International Limited (Eagle River), a Vanuatu corporation, and Lion Mining Finance Limited (Lion Mining), a United Kingdom corporation. Eagle River has purchased properties in Mali, Africa from Guefest, a Russian mining consortium. Under the terms of this agreement, the properties were transferred to West African Gold (Mali) Inc. (WAG (Mali)) on July 7, 1997. Shares in this corporation have been transferred to Chaplin Holding Ltd., a Bahamian company, which has changed its name to Sanou Mining Corporation (Sanou). The Company currently holds a 100% interest in Sanou.
On May 17, 1996, under the terms of the above agreement, the Company issued an irrevocable standby letter of credit in the amount of $1,000,000 to guarantee the development of certain mineral concessions in Mali. The Company, on behalf of Eagle River, Lion Mining, and WAG, had guaranteed $1,000,000 of development by May 15, 1997 to keep the properties in good standing. During the year ended June 30, 1997, the Company funded $4,052,316 for operating costs on the Mali Project, which exceeds the required expenditures. The operating costs are included in exploration costs in the accompanying statement of loss.
On September 3, 1997, the Company served notice to Eagle River that it was declaring default of the Mali agreement as the work commitment for the licence on the Mali Project was unacceptable. Under the terms of the agreement, Eagle River and Lion Mining have to repay all advances made by the Company towards the Mali Project. These advances were secured by promissory notes from Eagle River and debentures from Societe Olifer de Falome (SOF) and WAG Mali in the amount of $4,000,000. The Company is in the process of foreclosure on these securities and, as a consequence, takes the position that it is the 100% owner of the mining concessions through its subsidiaries WAG and Sanou and will pursue Eagle River and SOF for any value shortfall.
On November 18, 1997, the Company entered into an agreement with Lion Mining forming a joint venture called the Kingfisher Venture created to pursue profitable exploitation of mineral opportunities located by Lion Mining. Pursuant to the terms of the agreement, Lion Mining will seek and make available to the venture mineral opportunities coming to them in which they are capable of participating, and the Company has the right of first refusal on these opportunities. The term of the venture is the longer of three years or the payout of the Negative Balance plus six months, expiring on December 31, 2010. The Negative Balance is equal to the total expenditures related to the Mali agreement less all recoveries. Lion Mining has also assigned to the Company all its rights and interests in the Mali agreement and has agreed to cooperate fully with the Company in pursuit of any remedies against Eagle River. The Company has released and discharged Lion Mining of all suits, debts, and claims related to the Mali agreement. The Company plans to foreclose on the promissory notes of Eagle River.
On December 18, 1997, WAG (Mali) was granted a renewable exploration agreement on the Mali Project by the Mali Ministry of Mines and Energy. The agreement ran through December 1998 and has a work commitment of $3,360,000 assigned to it. As of June 30, 1998, this work commitment has been fulfilled.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
On April 6, 1998, the Company entered into an agreement with Lines Overseas Management Ltd. (Lines). Under the terms of the Mali agreement, Lines had originally advanced $500,000 and 125,000 shares of the Company owned by it to Eagle River for payments to Guefest and other parties. The Company has agreed to issue 375,000 of its shares to Lines in consideration for assigning and quitclaiming to the Company all advances and shares and any other benefit or claim of Lines related to the Mali agreement. These shares were issued on September 17, 1998.
On January 22, 1999, the trustee ("Petitioner") in bankruptcy proceedings against Eagle River International Ltd. ("Eagle") served a petition, in the Quebec Superior Court, District of Hull, upon the Company in order to recuperate assets from the Company (see note 11).
On March 31, 1999 the Company announced that it had entered into a joint venture with Randgold Resources Ltd. ("Randgold") whereby Randgold acquired the right to earn up to 75% of the Company's interest. To earn this consideration Randgold has agreed, over the next 36 months, to conduct exploration on the WAG concessions at a minimum cost of $2 million, with the aim of establishing whether there is a viable economic gold resource, as defined in the agreement, of at least one million ounces. Thereafter Randgold shall prepare a Bankable Feasibility Study on any such resource for WAG within a further 12 months in order to earn its interest therein.
e) Indonesia Projects
During the year ended June 30, 1997, the Company entered into certain agreements to obtain the rights to explore properties in Indonesia. As a part of the agreements, the Company was obligated to pay all costs required under Indonesian law. These costs include funds required to be put on deposit with the Indonesian Ministry of Mines to obtain Contracts of Work (CoWs).
At June 30, 1997, the Company had a total of $615,255 on deposit with the Indonesian Ministry of Mines as security for CoWs on mineral concessions covering 121,623 hectares. During the year ended June 30, 1998, the Company decided not to pursue exploration on 83,940 hectares.
As a result, the Company received a refund of $244,750 in deposits on one of the properties. The remaining $370,505 in deposits was written off to exploration expenses in the year ended June 30, 1998.
f) Benitoite Project
On December 1, 1997, the Company entered into an agreement whereby it was granted an option to purchase the Benitoite mineral property in San Benito County, California for a purchase price of $1,500,000. The Company can exercise the option on or before February 1, 1999. Pursuant to the terms of the agreement, the Company has made a non-refundable payment of $20,000 to the property owners.
On March 18, 1999 the Company made an additional payment of $20,000 to extend the option to January 1, 2000.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
7 STOCK OPTIONS
The Company has elected to follow APB No. 25 and related interpretations in accounting for its stock-based employee compensation arrangements. Under APB No. 25, as the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company has a Stock Option Plan (the Plan) dated July 24, 1989, as amended, for the granting of options to purchase common stock. The board of directors may grant options to key personnel and others as it deems appropriate. There are no vesting requirements under the Plan. The options are exercisable over a maximum term of five years.
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 of SFAS No. 123. The fair value of these options was estimated at the date of grant using a Black-Scholes options valuation model with the following weighted-average assumptions for fiscal 1999: risk-free interest rate from 4.07% to 5.50%, no dividend, volatility factor of the expected market price of the Company's common stock of 0.71, and an expected life of five 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. The Company's employee stock options have characteristics significantly different from those of traded options. Changes in the subjective assumptions can materially affect the fair value estimate.
For the purposes of pro forma disclosure, the estimated fair value of the options of $303,580 (1998 - $59,141; 1997 - $376,394) is expensed when the options are granted as the options are fully vested when granted. Additional fair value of the options of $269,760 (1998 - $nil; 1997 - $nil) is expensed when certain options were repriced during the year. The Company's pro forma information for fiscal 1999, 1998 and 1997 follows:
The estimated fair value of options granted to non-employees of $186,600 (1998 - $119,230; 1997 - $149,995) has been credited to paid-in capital and shown as a charge to salaries in the statement of operations.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
Plan activity for the years ended June 30, 1999, 1998 and 1997 was as follows:
At June 30, 1999 and 1998, 928,424 and 1,485,545 shares of common stock were reserved for future grants of options, respectively.
Of the 3,514,500 stock options outstanding at June 30, 1999, 2,070,000 stock options were issued to directors, employees or key advisors of the Company.
Stock options exercisable at June 30, 1999 include the following:
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
8 INCOME TAXES
The income tax benefit is as follows:
The income tax benefit differs from the amount computed by applying the U.S. federal income tax rate to net income before income taxes, as shown.
The components of the deferred tax asset and deferred tax liability at June 30, 1999 and 1998 are as follows:
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
At June 30, 1999, the Company had net operating loss carryforwards for Arizona income tax purposes of approximately $9.1 million (1998 - $7.6 million). These losses expire in the amount of $5.3 million on June 30, 2002, $2.3 million on June 30, 2003 and $1.5 million on June 30, 2004.
At June 30, 1999, the Company had net operating loss carryforward for federal income tax purposes of approximately $2.5 million (1998 - $nil). These losses expire on June 30, 2019.
9 EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS No. 128) was issued. In accordance with SFAS No. 128, the Company has adopted the new standard in the quarter ended December 31, 1997 and for the year ended June 30, 1998. SFAS No. 128 requires dual presentation of basic and diluted earnings per share (EPS) on the face of the consolidated statement of loss, and a reconciliation of the components of the basic and diluted EPS calculations in the notes to the financial statements. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding. Diluted EPS reflects potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following is the reconciliation of EPS for fiscal 1999, 1998 and 1997:
Stock options that are anti-dilutive have not been included in the computation of diluted income per common share.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
10 SEGMENTAL INFORMATION
The Company has one operating sector, mineral exploration and development, and geographical segments as follows:
11 CONTINGENCIES AND COMMITMENTS
EAGLE RIVER INTERNATIONAL LTD.
LITIGATION
On January 22, 1999, the trustee ("Petitioner") in bankruptcy proceedings against Eagle River International Ltd. ("Eagle") served a petition, in the Quebec Superior Court, District of Hull, upon the Company in order to recuperate assets from the Company (see note 6(d)). It is the understanding of the Company and its Canadian legal counsel that the Petitioner alleges that, through the Company's involvement with Eagle in the Mali Project, the Company is guilty of contractual breaches in excess of $3,400,000. In management's opinion this claim is unfounded, although the eventual outcome of the case is not yet determinable.
Copper Purchase Agreement
The Company had formerly entered into a Copper Purchase Agreement relating to the copper output of the Sanchez Project. After sale of the Sanchez Project, the Company was informed that it was in alleged violation of this agreement. A lawsuit was filed against the Company by AIOC Corporation (AIOC). The Company agreed to binding arbitration with AIOC and received a dismissal of the lawsuit on February 8, 1996, under terms of the Stipulation and Order of Compromise and Dismissal.
Under the terms of the Company's Stipulation and Order of Compromise and Dismissal with AIOC, the Company placed $4,000,000 into escrow to satisfy any award in the arbitration. During the year ended June 30, 1998, the Company settled the dispute and paid $400,000 to AIOC. This amount has been recorded as a legal settlement cost. The remaining deposit with interest held in escrow has been refunded to the Company.
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENTS
The Company has entered into agreements with four officers and two directors. The agreements provide that if there is a change in control of the Company and the officer leaves the employment of the Company, for whatever reason (other than discharge for cause, death, or disability) within six months after such acquisition of control, the officer shall receive a lump sum cash payment pursuant to certain limitations of the Internal Revenue Code. In addition, the officers will continue to be covered by all of the Company's medical, health, life, and dental plans for 24 months after such change of control. The directors shall receive a lump sum cash payment in the amount not to exceed $100,000.
In addition, the Company has entered into separate management agreements with its President and its Executive Vice-President. These agreements were effective February 1, 1998 for a term of 36 months, and provide that in the event of termination or failure to renew, the officer will receive a termination fee equal to the sum of:
a) buy-out of any outstanding stock options at the average market price of the Company's shares and less the exercise price, or at the officer's election and subject to regulatory approval, extension of the option for a year after termination
b) greater of the aggregate remaining base fee for the unexpired remainder of the term, or an annual base fee plus one month of base fee for each year of service after the effective date of the agreement.
During the year ended June 30, 1999, the Company paid $403,500 in management fees to companies controlled by directors. This amount has been recorded as salaries expense.
PUBLIC RELATIONS AGREEMENT
On April 1, 1998, the Company entered into an agreement with the Wall Street Group to provide financial public relations services to the Company. Pursuant to the terms of the agreement, the Company will pay a monthly cash fee of $5,000 and has granted a five-year stock option on 84,000 common shares of the Company at $1.20 per share. If the agreement is not cancelled or modified after 12 months, the same terms will apply for the next 12 months, except that an additional five-year stock option on as many common shares as can be purchased for $100,000 will be granted, with an exercise price equal to the closing bid price on April 1, 1999. Each year thereafter, this additional stock option grant and formula will be maintained until the agreement is cancelled or modified.
On April 1, 1999, the Company cancelled the agreement. The stock option was still outstanding at June 30, 1999.
LEASE COMMITMENTS
The Company is obligated under a long-term operating lease for its office space in Vancouver, British Columbia, through April 1999. The lease contains a renewal option of five years. The aggregate annual rental commitment under the leases is as follows:
AZCO MINING INC. (DELAWARE) Notes to Consolidated Financial Statements JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
Rental expense, net of sublease income, for the years ended June 30, 1999, 1998 and 1997 was $60,732, $60,514 and $68,121, respectively.
12 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and restricted cash approximated fair value as of June 30, 1999 and 1998 because of the relatively short maturity of these instruments. It was not practicable to estimate the fair value of advances to OAL as at June 30, 1998 because the ultimate recovery of the advances was dependent on the ability of OAL to realize its exploration and development assets, which are subject to the measurement uncertainty inherent in such assets. This investment was written off during the year ended June 30, 1999.
13 FOURTH QUARTER CHARGES
During the fourth quarter of fiscal 1999, the Company recorded a compensation expense credit of $123,400 relating to an over-provision in the accounting of stock options granted to non-employees under SFAS No. 123 in the third quarter of fiscal 1999. The company recognized a deferred tax asset of $754,800 to offset the deferred tax liability arising on the acquisition, during the third quarter of fiscal 1999, of the Black Canyon Mica Project. In addition, the Company wrote off $1,241,359 investment in Oro Argentina Limited due to uncertainty of recoverability.
14 NEW PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company is currently assessing the impact of this statement for fiscal years beginning after June 15, 2000.
AZCO MINING INC. (DELAWARE) Schedule II - Valuation and Qualifying Accounts FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
(1) For further information, refer to note 8, Income Taxes, in the Notes to the Consolidated Financial Statements included in Form 10-K.