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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
Commission file number: 0-20430
AZCO MINING INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1094315
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2068 Main Street, Suite C, P.O. Box 1895 Ferndale, WA 98248
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(Address of corporate office) (Zip Code)
Registrant's telephone number, including area code: (360) 380-4467
Securities registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange on which registered
Common Stock, $.002 par value The Toronto Stock Exchange
Common Stock, $.002 par value The American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { }
The number of shares of the Company's Common Stock outstanding as of September
23, 1999 is 29,832,121.
Aggregate Market Value of Stock held by Non-Affiliates as of September 23, 1999:
$27,323,776 (U.S.)
Documents incorporated by reference: None.
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PART I
Statements contained in the annual report that are not historical facts
are forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from estimated results. Such risks and uncertainties are detailed in filings
with the Securities and Exchange Commission, including, without limitation, in
Item 1. "BUSINESS", Item 2. "PROPERTIES" and Item 7. "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" below.
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
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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;
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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
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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
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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.
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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
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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. 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").
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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
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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 January 21, 1999 the Company announced that it had entered into a
joint venture with Randgold whereby Randgold acquired 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.
PONGKOR PROPERTIES
The South and West Pongkor properties adjoin the claim block containing
the 3 million ounce Pongkor Gold Mine in the Bayah Dome area of Western Java in
Indonesia. AZCO does not own any interest in the Pongkor Gold Mine.
Mineralization is known on both claim blocks, neither of which has been explored
by modern methods. In recent years accessibility has been greatly improved with
road access running to the heart of each property. Both properties are highly
prospective for low sulphidation epithermal mineralization, containing
opportunities not only for small tonnage, high-grade mineralization, but also
for bulk-tonnage, open pit targets. There are no proven or probable reserves at
the Pongkor properties at this time.
AZCO has completed a geologic evaluation of the Pongkor properties and
has compiled an extensive report that is currently being disseminated to a
number of companies, which have expressed an interest in joint-venturing the
properties.
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
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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. 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.
In Favor Against Withhold Abstain Not Voted
--------- --------- -------- ------- ---------
1a Alan P. Lindsay 19,902,031 0 29,800 269,092 0
1b Anthony R. Harvey 19,901,331 0 30,500 269,092 0
1c Ian M. Gray 19,885,431 0 46,400 269,092 0
1d Paul A. Hodges 19,900,231 0 31,600 269,092 0
1e Lawrence G. Olson 19,905,606 0 26,225 269,092 0
2 Auditors 20,016,973 98,870 0 85,080 0
3 Voting Agreement 6,103,631 642,465 0 229,180 11,088,541
4 Stock Option Plan 6,956,787 1,715,939 0 439,655 11,088,542
5 Amendment to Stock Options 4,729,479 1,801,864 0 443,932 11,088,542
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PART II
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.
Quarter Ended Toronto Stock Exchange (Canadian $) American Stock Exchange (U.S. $)
- ------------- ------------------------------------ --------------------------------
High Low High Low
---- --- ---- ---
1997
----
09/30/97 2.00 1.52 1.50 1.12
12/31/97 2.25 1.26 1.69 0.94
1998
----
03/31/98 2.20 1.50 1.62 1.06
06/30/98 1.60 1.00 1.12 0.69
09/30/98 1.13 0.70 0.75 0.44
12/31/98 0.95 0.70 0.63 0.44
1999
----
03/31/99 1.30 0.75 0.75 0.56
06/30/99 1.80 0.80 1.31 0.63
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.
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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. 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. "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included below.
For the Year Ended June 30
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT:
Revenues $917,391 $1,061,398 $1,368,753 $26,893,607 $100,800
Net income (loss) (4,528,006) (3,044,112) (8,155,700) 17,127,455 (4,698,537)
Per share $(.17) $(.12) $(.32) $.67 $(.19)
Weighted Avg. #
Of common shares
& common equiv. 26,787,226 25,646,449 25,787,247 25,554,322 25,006,637
BALANCE SHEET:
Mineral Properties $2,219,997 $nil $nil $nil $12,573,096
Total Assets 17,353,717 19,486,669 22,345,247 30,033,118 15,791,656
Notes Payable nil nil nil nil 2,540,715
Total Liabilities 387,984 299,061 337,050 58,217 3,594,210
Total Stock-holders'
equity 16,965,733 19,187,608 22,008,197 29,974,901 12,197,446
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.
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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.
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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. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
Not applicable.
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 F-1 of the Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
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PART III
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.
NAME POSITION HELD
---- -------------
Alan Peter Lindsay President, Chairman, Chief Executive
Officer and Director
Anthony Richard Harvey Vice Chairman of the Board, Director
Executive Vice President and Secretary
Paul Arthur Hodges Director of the Company
Dr. Ian McFarlane Gray Director of the Company
Lawrence G. Olson Director of the Company
Ryan Andrew Modesto Vice President Finance
Gary L. Simmerman Vice President Operations
Douglas W. Ramshaw Vice President Corporate Development
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
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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
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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. 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 $100,000 for the year ended June 30, 1999, as well as the total compensation
paid to each such individual for the Company's three previous fiscal years:
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Summary Compensation Table
(As at year ended June 30, 1999)
- --------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
------------------------------------------------- ------------
Securities
Underlying
Options/
Other Annual SARs
Name and Principal Salary Bonus Compensation Granted
Position Year ($) ($) ($) (#)
- ------------------ ---- ---------- ----- ------------ ----------
Alan P. Lindsay 1999 183,750(1) 9,000 9,000(3) 200,000
President, Chairman 1998 139,169(1) 5,500 7,250(3) 0
of the Board and CEO 1997 110,000(1) 5,500 6,000(3) 0
Anthony R. Harvey 1999 183.750(2) 9,000 9,000(3) 200,000
Vice Chairman, Exec. Vice 1998 139,169(2) 5,500 7,250(3) 0
President, Secretary 1997 110,000(2) 5,500 6,000(3) 0
Dr. Nick P. Badham(6) 1998 154,083 7,750 0 0
Chief Geologist 1997 148,000 7,500 0 0
1996 48,000 0 0 100,000
Ryan A. Modesto 1999 109,084 5,500 0 70,000
Vice President Finance 1998 97,200 4,800 30,000(4) 13,000
1997 84,479 4,100 0 50,000
Gary L. Simmerman 1999 115,973 7,500 30,000(5) 155,000
Vice President Operations 1998 96,000 4,800 0 30,000
1997 88,344 4,100 0 45,000
(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.
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(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
Potential
Realized Value
(Cdn $) at
Number Assumed Annual
of % of Total Rates
Securities Options of Stock Price
Underlying Granted to Appreciation For
Options Employees Exercise or Option Term
Granted in Fiscal Base Price ------------------
Name (#) Year (Cdn $/Sh) Expiration Date 5% 10%
- --------------- ---------- ---------- ----------- --------------- ------ ------
Ryan A. Modesto 30,000(1) 4% 0.80 July 13,2003 6,631 14,652
Gary L. Simmerman 25,000(2) 4% 0.70 October 23,2003 4,834 10,684
Ryan A. Modesto 20,000(2) 3% 0.70 October 23,2003 3,868 8.547
Alan P. Lindsay 200,000(3) 29% 0.80 February 22,2004 44,205 97,681
Anthony R. Harvey 200,000(3) 29% 0.80 February 22,2004 44,205 97,681
Gary L. Simmerman 30,000(3) 4% 0.80 February 22,2004 6,681 14,652
Ryan A. Modesto 20,000(4) 3% 1.05 March 11,2004 5,802 12,820
Gary L. Simmerman 100,000(4) 15% 1.05 March 11,2004 29,010 64,104
(1) These options are exercisable from the date of grant (July 13, 1998).
(2) These options are exercisable from the date of grant (October 23, 1998).
(3) These options are exercisable from the date of grant (February 22, 1999).
(4) These options are exercisable from the date of grant (March 11, 1999).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at FY-End FY-End ($)(*)
------------------------------ -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ----------- -------------
Alan P. Lindsay 500,000 0 146,290 0
Anthony R. Harvey 500,000 0 146,290 0
Dr. Nick Badham 100,000 0 22,470 0
Gary L. Simmerman 265,000 0 70,576 0
Ryan A. Modesto 170,000 0 48,042 0
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(*) 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. $1.05, the closing
price at that date on the Toronto Stock Exchange. This repricing was
subsequently ratified by the Company's shareholders at the annual and special
meeting of shareholders on May 26, 1999. The Board believes that the repricing
was necessary to keep compensation competitive in the industry. The following
table represents all repricings of stock option held by executive officers of
the Company during the last ten years.
TEN-YEAR OPTION REPRICINGS
Market
Price Exercise Length of
Number of of Stock at Price at New Original Term
Underlying time of Time Exercise Remaining at
Options Repricing of Repricing Price Date of
Name Date Repriced (Cdn.$) (Cdn.$) (Cdn.$) Repricing
- ------------------ ------------- ---------- ----------- ------------ -------- -------------
Alan P. Lindsay March 11,1999 300,000 $1.05 $1.80 $1.05 2 years
(CEO)
Anthony R. Harvey March 11,1999 300,000 $1.05 $1.80 $1.05 2 years
(Executive VP)
Ryan A. Modesto March 11,1999 12,000 $1.05 $3.50 $1.05 4 months
(VP Finance)
March 11,1999 25,000 $1.05 $1.80 $1.05 2 years
March 11,1999 50,000 $1.05 $1.87 $1.05 3 years,
2 months
March 11,1999 13,000 $1.05 $1.70 $1.05 3 years,
9 months
G. L. Simmerman March 11,1999 35,000 $1.05 $1.80 $1.05 2 years
(VP Operations)
March 11,1999 45,000 $1.05 $1.87 $1.05 3 years,
2 months
March 11,1999 30,000 $1.05 $1.80 $1.05 3 years,
1 month
Doug W. Ramshaw March 11,1999 100,000 $1.05 $2.32 $1.05 2 years,
(VP Corp. Dev.) 11 months
Dr. Nick Badham March 11,1999 100,000 $1.05 $1.95 $1.05 3 years,
(Chief Geologist) 4 months
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
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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
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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
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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. 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.
Name and Address Type of Number of Percent of
Of Beneficial Owner Ownership Shares Class
- ------------------------------- ---------- ------------ -------------
Alan P. Lindsay Record and 1,178,569(1) 3.89%
999 W. Hastings, Ste 1250 Beneficial
Vancouver, BC, Canada V6C 2W2
Anthony R. Harvey Record and 653,252(2) 2.15%
999 W. Hastings, Ste 1250 Beneficial
Vancouver, BC, Canada V6C 2W2
Paul A. Hodges Record and 116,524(3) *
4536 N. Via Bellas Catalinas Beneficial
Tucson, AZ 85718
Dr. Ian M. Gray
Copper Hill House, Buller Hill Record and 150,000(4) *
Redruth,Cornwall U.K., TR16 6SR Beneficial
Lawrence G. Olson 5.85%
3045 S. 35th Avenue Record and 1,750,000(5)
Phoenix, AZ 85009 Beneficial
Ryan A. Modesto Record and 170,000(6)
PO Box 1895 Beneficial *
Ferndale, WA 98248
Gary L. Simmerman Record and 265,000(7) *
1211 W. Crystal Palace Place Beneficial
Oro Valley, AZ 85737
Floyd R. Bleak Record and 1,500,000 5.03%
3616 E. Omega Circle Beneficial
Mesa, AZ 85215
Officers & Directors Record and 4,393,345 13.85%
As a Group (8 persons) Beneficial
*- indicates less than 1%
24
25
(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. 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
25
26
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. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) 1. Financial Statements - Reference is made to the Financial Statements
appearing on Pages F-1, through F-22.
2. Financial Statement Schedules - Reference is made to the Financial Statement
Schedules on Page F-22.
3. Exhibits
3.1 Registrant's Certificate of Incorporation dated August 8, 1991(1)
3.2 Articles of Amendment to the Certificate of Incorporation dated December 5, 1991(1)
3.3 Registrant's Amended By-laws(2)
3.4 Rights Agreement dated July 19, 1995 between the Registrant and Montreal Trust Company of Canada(2)
4.1 Specimen stock certificate.(3)
10.1 Agreements for Suaqui Verde property (1)
10.2 Agreements for Piedras Verdes property (1)
10.3 Purchase Agreement dated July 27, 1995 between the Registrant, Sanchez and Phelps Dodge (2)
26
27
10.4 Memorandum of Agreement between West Africa Gold & Exploration Ltd., Eagle, Lion and the Registrant (4)
10.5 Management Agreement dated February 1, 1998 between the Registrant and ARH Management Ltd. (5)
10.6 Management Agreement dated February 1, 1998 between the Registrant and Alan Lindsay and Associates, Ltd. (5)
10.7 Option to Purchase Agreement, for the Benitoite Gem Mine, dated December 1, 1997 between the Registrant and
William C. Forrest, Hilda F. Forrest and Elvis L. Gray. (5)
10.8 Debenture Agreement dated May 22, 1998, where Registrant purchases a $1,500,000 convertible debenture of
Oro Argentina Limited. (5)
10.9 Right of First Refusal Agreement dated June 18, 1998 between the Registrant and Minera Cortez Resources Ltd. (5)
10.10 Mineral Property Option Agreement dated July 21, 1998, for the La Adelita property, between the Registrant and
Minera Cortez Resources Ltd. (5)
10.11 Change in Control Management Agreements between the Registrant and each of Messrs. Lindsay, Harvey, Modesto
and Ramshaw. (5)
10.12 Change in Control Director's Agreements between the Registrant and each of Mr. Hodges and Dr. Gray. (5)
10.13 Cobre del Mayo, S.A. de C.V. Shareholders' & Operator's Agreement. (5)
10.14 Agreement and Plan of Merger of Arizona Mica Properties, Inc, into Sanchez Mining Inc. dated March 10, 1999. (6)
10.15* Shareholders Agreement between the Registrant, Sanou, WAG and Randgold dated March 31, 1999.
10.16* Mineral Property Option Agreement dated May 20, 1999, for the Silverado property, between the Registrant and
Minera Cortez Resources Ltd.
10.17* Agreement in Principle dated August 9, 1999, between the Registrant Mr. Thomas Ford and Calgem, Inc.
21.1* Subsidiaries of the Registrant.
24.1* Consent of PricewaterhouseCoopers.
27.1* Financial Data Schedule.
- ------------
(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).
27
28
(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.
28
29
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.
Signature Title Date
--------- ----- ----
/s/ Alan P. Lindsay President, Chairman of the September 27, 1999
- --------------------- Board and Chief Executive
Alan P. Lindsay Officer
/s/ Anthony R. Harvey Vice Chairman, Executive September 27, 1999
- --------------------- Vice President, Secretary
Anthony R. Harvey and Director
/s/ Paul A. Hodges Director September 27, 1999
- ---------------------
Paul A. Hodges
/s/ Dr. Ian M. Gray Director September 27, 1999
- ---------------------
Dr. Ian M. Gray
/s/ Paul A. Hodges Director September 27, 1999
- ---------------------
Paul A. Hodges
30
AZCO MINING INC. (DELAWARE)
Form 10-K
Item 8, Item 14(a) (1) and (2)
Index to Financial Statements and Supplemental Schedule
- --------------------------------------------------------------------------------
Page
----
The following financial statements required to be included in Item 8 are listed
below:
Report of Independent Accountants F-2
Consolidated Balance Sheets as at June 30, 1999 and 1998 F-3
Consolidated Statements of Loss for the fiscal years
ended June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
The following financial statement schedule of the Registrant is included in Item
14(a)(2):
Schedule II - Valuation and Qualifying Accounts for the fiscal years
ended June 30, 1999, 1998 and 1997 F-22
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.
31
[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 F-1 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
F-2
32
AZCO MINING INC. (DELAWARE)
Consolidated Balance Sheets
AS AT JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
---------- ----------
$ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents 12,106,173 18,320,882
Restricted cash -- 16,165
Prepaids and other 95,623 201,061
Income taxes receivable -- 782,000
-----------------------------
TOTAL CURRENT ASSETS 12,201,796 19,320,108
-----------------------------
PROPERTY AND EQUIPMENT
Mineral properties, plant and equipment (note 5) 5,076,969 --
Furniture and equipment 74,502 90,440
-----------------------------
5,151,471 90,440
Less: Accumulated depreciation and amortization (57,863) (66,382)
-----------------------------
5,093,608 24,058
INVESTMENT AND ADVANCES (note 4) 50,588 134,778
-----------------------------
OTHER ASSETS 7,725 7,725
-----------------------------
TOTAL ASSETS 17,353,717 19,486,669
=============================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 387,984 299,061
-----------------------------
CONTINGENCIES AND COMMITMENTS (notes 6 and 11)
STOCKHOLDERS' EQUITY
CAPITAL STOCK
Authorized
100,000,000 common shares with a par value of $0.002 per share
Issued and outstanding
29,832,121 (1998 - 25,680,497) common shares 59,664 51,361
ADDITIONAL PAID-IN CAPITAL 28,297,561 25,999,733
DEFICIT (11,391,492) (6,863,486)
-----------------------------
16,965,733 19,187,608
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 17,353,717 19,486,669
=============================
F-3
33
AZCO MINING INC. (DELAWARE)
Consolidated Statements of Loss
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
--------- --------- ----------
$ $ $
REVENUE
Interest income 905,891 1,052,516 1,332,679
Gain (loss) on sale of assets 1,500 (970) 11,074
Other income 10,000 9,852 25,000
-----------------------------------------------
917,391 1,061,398 1,368,753
-----------------------------------------------
OPERATING EXPENSES
Salaries (note 11) 1,091,914 1,007,740 1,107,910
General and administrative 1,037,957 1,138,682 1,037,253
Exploration (notes 4 and 6) 3,041,175 3,263,405 7,575,006
Accounting and legal 263,633 384,870 254,288
Depreciation and amortization 14,904 20,050 33,498
Financing and acquisition -- -- 113,031
Legal settlement costs (note 11) -- 400,000 --
-----------------------------------------------
5,449,583 6,214,747 10,120,986
-----------------------------------------------
LOSS BEFORE INCOME TAXES (4,532,192) (5,153,349) (8,752,233)
INCOME TAX BENEFIT (note 8) 4,186 2,109,237 596,533
-----------------------------------------------
LOSS FOR THE YEAR (4,528,006) (3,044,112) (8,155,700)
=================================== ===========
BASIC LOSS PER COMMON SHARE (note 9) (0.17) (0.12) (0.32)
=================================== ===========
DILUTED LOSS PER COMMON SHARE (note 9) (0.17) (0.12) (0.32)
=================================== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 26,787,226 25,646,449 25,787,247
=================================== ===========
F-4
34
AZCO MINING INC. (DELAWARE)
Consolidated Statements of Stockholders' Equity
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
COMMON STOCK
----------------------------- ADDITIONAL RETAINED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
$ $ $ $
----------- ----------- ----------- ----------- -----------
BALANCE - JUNE 30, 1996 25,512,938 51,026 25,587,549 4,336,326 29,974,901
Stock options exercised 66,896 134 38,866 -- 39,000
Stock option compensation -- -- 149,996 -- 149,996
Loss for the year -- -- -- (8,155,700) (8,155,700)
-----------------------------------------------------------------------------------
BALANCE - JUNE 30, 1997 25,579,834 51,160 25,776,411 (3,819,374) 22,008,197
Stock options exercised 59,572 119 54,174 -- 54,293
Issued for property interest 41,091 82 49,918 -- 50,000
Stock option compensation -- -- 119,230 -- 119,230
Loss for the year -- -- -- (3,044,112) (3,044,112)
-----------------------------------------------------------------------------------
BALANCE - JUNE 30, 1998 25,680,497 51,361 25,999,733 (6,863,486) 19,187,608
Stock options exercised 50,000 100 34,917 -- 35,017
Issued for exploration property
interests 405,000 810 261,690 -- 262,500
Issued for acquisition (note 5) 4,500,000 9,000 2,280,388 -- 2,289,388
Repurchase of Company's shares (803,376) (1,607) (465,767) -- (467,374)
Stock option compensation -- -- 186,600 -- 186,600
Loss for the year -- -- -- (4,528,006) (4,528,006)
-----------------------------------------------------------------------------------
BALANCE - JUNE 30, 1999 29,832,121 59,664 28,297,561 (11,391,492) 16,965,733
===================================================================================
F-5
35
AZCO MINING INC. (DELAWARE)
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the year (4,528,006) (3,044,112) (8,155,700)
Items not affecting cash
Depreciation and amortization 14,904 20,050 33,498
Stock option compensation expense (note 7) 186,600 119,230 149,996
Issuance of common stock for property interest 262,500 50,000 --
Amortization of premium on investment securities -- -- 5,686
Loss (gain) on sale of furniture and equipment (1,500) 970 (11,074)
Loss on write-down of refundable deposits -- 370,505 --
Loss on write down of investment (note 4) 1,241,359 -- --
Net change in assets and liabilities
Restricted cash 16,165 17,941 17,504
Prepaids and other 105,438 (120,168) 135,768
Refundable deposits -- 244,750 (615,255)
Income taxes receivable 782,000 (302,272) (479,728)
Accounts payable and accrued liabilities 45,923 (37,989) 278,833
Deposit -- 4,000,000 --
-----------------------------------------------
(1,874,617) 1,318,905 (8,640,472)
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of short-term investments -- -- 1,395,000
Purchase of furniture and equipment and construction in
progress (7,485) (2,900) (22,163)
Proceeds from sale of furniture and equipment 1,500 5,102 13,090
Purchase of Minera Cortez Resources Ltd. shares (16,533) (34,055) --
Purchase of investment in OAL (1,140,636) (100,723) --
Purchase of mine property, plant and equipment (2,744,581) -- --
-----------------------------------------------
(3,907,735) (132,576) 1,385,927
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 35,017 54,293 39,000
Purchase of treasury stock (467,374) -- --
-----------------------------------------------
(432,357) 54,293 39,000
-----------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,214,709) 1,240,622 (7,215,545)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 18,320,882 17,080,260 24,295,805
-----------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR 12,106,173 18,320,882 17,080,260
===============================================
F-6
36
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.
F-7
37
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.
F-8
38
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.
F-9
39
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
1999 1998
$ $
--------- ---------
Mineral properties 2,219,996 --
Land and buildings 285,533 --
Plant and mining equipment 1,789,975 --
Development costs 781,465 --
--------- ---------
5,076,969 --
========= =========
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.
F-10
40
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:
$
Net assets acquired
Mineral properties 2,219,996
Development costs 112,392
Lease obligation (43,000)
Deferred income tax liability (754,800)
Recognition of deferred income tax asset 754,800
----------
2,289,388
==========
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;
F-11
41
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.
F-12
42
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.
F-13
43
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.
F-14
44
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:
1999 1998 1997
$ $ $
Pro forma net loss (5,101,346) (3,103,293) (8,532,094)
Pro forma basic loss per share (0.19) (0.12) (0.33)
Pro forma diluted loss (0.19) (0.12) (0.33)
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.
F-15
45
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:
NUMBER OF
SHARES PRICE RANGE OF OPTIONS
Balance - outstanding at June 30, 1996 2,187,408 U.S. $0.40 to Cdn. $3.50
Granted 565,000 Cdn. $1.87 to Cdn. $2.32
Cancelled (420,940) Cdn. $1.80 to Cdn. $3.00
Exercised (66,896) U.S. $0.40 to Cdn. $1.55
----------
Balance - outstanding at June 30, 1997 2,264,572 Cdn. $1.20 to U.S. $3.00
Granted 252,000 Cdn. $1.40 to Cdn. $1.95
Cancelled (297,500) Cdn. $1.80 to U.S. $2.00
Exercised (59,572) Cdn. $1.20 to Cdn. $1.55
----------
Balance - outstanding at June 30, 1998 2,159,500 Cdn. $1.40 to U.S. $3.00
Granted 1,580,000 Cdn. $0.70 to U.S. $1.75
Cancelled (175,000) Cdn. $1.80 to Cdn. $2.89
Exercised (50,000) Cdn. $1.05
----------
Balance - outstanding at June 30, 1999 3,514,500 Cdn. $0.70 to U.S. $3.00
==========
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:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE PRICE REMAINING
PRICE RANGE OF OPTIONS SHARES CDN. $ LIFE
Cdn. $0.70 to Cdn. $1.05 2,520,000 0.96 56 months
U.S. $1.00 to Cdn. $1.80 391,500 1.74 25 months
U.S. $1.25 to U.S. $1.75 403,000 2.07 20 months
Cdn. $2.65 to U.S. $3.00 200,000 3.53 21 months
F-16
46
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:
1999 1998 1997
$ $ $
Current
Federal 4,186 2,109,237 568,524
State -- -- 28,009
-----------------------------------------
Total tax benefit 4,186 2,109,237 596,533
=========================================
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.
1999 1998 1997
$ $ $
Tax benefit at the federal statutory rate 1,524,583 1,803,678 3,027,500
State tax 403,566 257,668 431,477
Change in valuation allowance (1,133,208) 162,463 (2,874,764)
Write-down of deferred tax asset for stock options -- -- (96,692)
Deferred tax asset recognized on acquisition (note 5) (754,800) -- --
Other (35,955) (114,572) 109,012
--------------------------------------------
Tax benefit 4,186 2,109,237 596,533
============================================
The components of the deferred tax asset and deferred tax liability at June
30, 1999 and 1998 are as follows:
1999 1998
$ $
Deferred tax asset
Federal net operating loss carryforward 844,060 --
State net operating loss carryforward 819,000 379,960
Foreign mineral properties 1,772,080 1,167,188
Other 27,860 27,844
Valuation allowance (2,708,200) (1,574,992)
---------------------------
Net deferred tax asset 754,800 --
Deferred tax liability
Black Canyon Mica Project (754,800) --
---------------------------
-- --
===========================
F-17
47
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:
1999 1998 1997
$ $ $
Loss applicable to basic and diluted loss per
share (4,528,006) (3,044,112) (8,155,700)
Weighted average number of common shares
assuming no dilution 26,787,226 25,646,449 25,787,247
Weighted average common shares applicable to
income per common share 26,787,226 25,646,449 25,787,247
Weighted average number of common shares
assuming full dilution 26,787,226 25,646,449 25,787,247
Basic loss per common share (0.17) (0.12) (0.32)
Diluted loss per common share (0.17) (0.12) (0.32)
Stock options that are anti-dilutive have not been included in the
computation of diluted income per common share.
F-18
48
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:
USA OTHER TOTAL
$ $ $
June 30, 1999
Capital assets 5,076,969 16,639 5,093,608
=======================================
June 30, 1998
Capital assets -- 24,058 24,058
=======================================
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.
F-19
49
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:
F-20
50
AZCO MINING INC. (DELAWARE)
Notes to Consolidated Financial Statements
JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
$
2000 99,660
2001 99,660
2002 93,264
2003 66,375
2004 55,311
-------
414,270
=======
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.
F-21
51
AZCO MINING INC. (DELAWARE)
Schedule II - Valuation and Qualifying Accounts
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTIONS OF YEAR ADDITIONS DEDUCTIONS YEAR
$ $ $ $
Valuation allowance for
deferred tax asset(1)
June 30, 1999 1,574,992 1,133,208 -- 2,708,200
June 30, 1998 1,737,455 -- 162,463 1,574,992
June 30, 1997 1,128,408 609,047 -- 1,737,455
(1) For further information, refer to note 8, Income Taxes, in the Notes to the
Consolidated Financial Statements included in Form 10-K.
F-22