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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, 1997
Commission file number: 0-20430
AZCO MINING INC.
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(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.)
1250 - 999 West Hastings Street, Vancouver, BC V6C 2W2
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 682-7286
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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
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Common Stock, $.002 par value The American Stock Exchange
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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
25, 1997 is 25,620,925.
Aggregate Market Value of Stock held by Non-Affiliates as of September 25,
1997: $ 29,362,171(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.
ITEM 1. BUSINESS
AZCO Mining Inc. ("AZCO" or the "Company") is a U.S. mining company
with a general business strategy to acquire mineral properties with a prime
focus on gold. The Company plans to supplement its core asset, a 30% interest
in the Piedras Verdes project, through the acquisition of other mining
projects. The Company believes that numerous opportunities exist to acquire
such properties or companies, and that the Company will be an effective
competitor due to its strong cash position and experienced management team.
The Company plans to implement this strategy by entering into joint ventures or
corporate mergers, or making property or corporate acquisitions.
Prior to the sale of the majority of its copper assets the Company was
dedicated to 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, U.S.A. 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 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 in Mexico, the
Suaqui Verde project in southeastern Sonora and the Piedras Verdes project in
southern Sonora. Filton was dissolved effective February 14, 1994 with its
Mexican interests being distributed to the Company.
On July 31, 1992, AZCO merged with AZCO Mining Inc., a Wyoming
corporation ("AZCO (Wyoming)"), with AZCO being the survivor of the merger (the
"Merger"). At the time of the completion of the Merger AZCO (Wyoming) had
3,946,550 shares issued and outstanding and the Company had 12,633,822 common
shares issued and outstanding. One common share of the Company was issued in
exchange for each share of AZCO (Wyoming) in connection with the Merger. AZCO
(Wyoming) was formerly a British Columbia corporation which was incorporated
under the laws of
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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 1997
On September 9, 1996 the Company announced that it had received
confirmation from the Ministry of Mines of Indonesia that it had been accepted
to apply for a contract of work (the "Contract of Work") in the name of AZCO
over ground in Irian Jaya.
The Contract of Work was acquired for AZCO under agreement with
Indotan Inc. ("Indotan"), whereby AZCO paid $416,750 as security for the
Contract of Work and Indotan retained a 15% participating interest, but which
interest was carried in the form of a non-interest-bearing, non-recourse loan
until the completion of a favorable, bankable feasibility study.
AZCO has since made the decision to relinquish its Contract of Work
over the ground in Irian Jaya and has received a full refund of $416,750
covering the security deposit on that contract.
On December 5, 1996 the Company announced that it had contracted to
acquire a 90% interest in two additional gold properties, the Bengkulu and the
Purwokerto, totaling 83,940 hectares in Indonesia. AZCO deposited a total of
$426,840 as security for Contracts of Work on the two properties.
AZCO has since decided to relinquish its contracts of work over both
these properties. The Company has received a refund of $244,750 on the
Bengkulu property and is anticipating a refund of $182,090 on the Purwokerto
property.
On December 10, 1996 AZCO received confirmation from the Indonesian
government that its applications for mineral rights on two parcels of land in
the Pongkor region, covering 37,683 hectares, had been granted. The Company
has secured this position with the deposit of $188,415 in seriousness bonds
with the Indonesian government.
On September 17, 1996 the Company announced that it had contracted to
acquire 51% of a new company ("Sanou Mining Corporation") which has a 100%
working interest in the Medinandi and Dandoko concessions located in the
Kenieba Gold Mining District of western Mali. The Government of Mali has
retained an option to acquire up to a 15% working interest after completion of
a favorable feasibility study in connection with these concessions.
An agreement between AZCO, West Africa Gold & Exploration Ltd., Eagle
River International Limited ("Eagle") and Lion Mining Finance Limited provides
for the establishment of a joint venture holding company, Chaplin Holdings
Ltd., which has changed its name to Sanou Mining Corporation. 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 owns these
concessions. Eagle,
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the original principal concession owner through a Malian subsidiary, has caused
that subsidiary to convey the concessions to Wag in consideration of 3,500,000
shares and 4,000,000 warrants (exercisable at $1.00 per warrant) of Sanou
Mining Corporation. As part of its contractual commitment, AZCO has made
available an exploration guarantee of $1,000,000 to the government of Mali, has
the right to purchase 4,800,000 shares of Sanou Mining Corporation at $0.25
per share and has the right to receive and additional 1,000,000 shares of Sanou
Mining Corporation by paying to Eagle 125,000 common shares of AZCO.
Additionally, AZCO has contracted to arrange for and itself provide (and has
the right and obligation to purchase 50%) financing in an amount of $1,000,000
at $0.50 per Sanou Mining Corporation unit. At completion of the initial
capitalization of Sanou Mining Corporation it is expected that AZCO will own
approximately 51.33% of Sanou Mining Corporation and, in the event that it
purchases 50% of the referenced $1,000,000 financing of Sanou Mining
Corporation, it will own 55.28% of Sanou Mining Corporation. AZCO has an
obligation to purchase 50% of future financings and a first right to purchase
any unbought portion of such future financings.
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 U.S.$4,000,000. All advances AZCO has made to
date under this agreement are also evidenced by promissory notes from Eagle
River.
On June 7, 1996 AZCO entered into a agreement to form a strategic
alliance with Eagle River, with the intent of forming a joint venture company
to mutually develop mineral properties identified by Eagle River. Eagle
River's responsibility is to seek out and acquire mutually acceptable
properties while AZCO is responsible for the funding of the joint venture
entity. AZCO 's interest in the entity will be 75% while Eagle River shall
have a 25% interest.
In fiscal 1997 AZCO advanced $352,659 to Eagle River for the
procurement of several mineral properties located in Africa, but no properties
were acquired and the strategic alliance has not led to the formation of a
joint venture company.
EXPLORATION AND DEVELOPMENT
As the Company has no properties in production, during fiscal 1997 it has
received no material revenues other than interest income. During fiscal 1997
the Company expensed $14,345 in exploration costs related to the Suaqui Verde
project. Exploration expenses of $1,846,331 were also incurred as the Company
funded its 30% share of the Piedras Verdes project.
Exploration expense in Indonesia totaled $1,211,549 for the four
properties AZCO was involved with during the fiscal year.
During fiscal 1997 AZCO incurred $4,431,625 of exploration expense in
Africa, and of that amount $4,052,316 was expended on the Mali project while
$352,659 was advanced to Eagle River to fund the strategic alliance.
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The Company, during fiscal 1997, advanced Eagle River a total of
$3,832,058 for the advancement of the Mali project and the procurement of
properties to be the basis of a joint venture under the strategic alliance
between AZCO and Eagle River. To date Eagle River has documented only
$3,392,382 of expenditures on the project funds which have been advanced, and
it is AZCO's contention that Eagle River currently owes the Company $439,676.
EMPLOYEES
As of August 15, 1996 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.
SEASONABILITY
It is not anticipated that AZCO's Mexican interests in the state of
Sonora would be of a seasonable nature. The Company is aware of the fact that
circumstances in other parts of the world, such as Mali and Indonesia, do make
exploration, mining and mineral processing a seasonal endeavor.
COMPETITIVE CONDITIONS
Many companies are engaged in the exploration and development of
mineral properties. Since many of these companies have substantially greater
technical and financial resources than the Company, the Company may be at a
disadvantage with respect to some of its competitors.
The marketing of minerals is affected by numerous factors, many of
which are beyond the control of the Company. Such factors include the price of
the mineral in the marketplace, imports of minerals from other nations, the
availability of adequate refining and processing facilities, the price of fuel,
electricity, labor, supplies, 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
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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 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 potentially could become
material at some point, but the amount of such expenditures are uncertain at
this time.
ITEM 2. PROPERTIES
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. Activities at the Piedras Verdes property have
consisted mainly of definition drilling, surface trenching, sampling and
metallurgical testing. The main objective of the most recent program was to
further define and expand in-place copper resources.
Prior to the sale of a 70% interest in Cobre del Mayo to MPDM, the
Company had drilled 242 reverse circulation holes totalling 26,815 meters.
About 110 meters of core drilling was done to obtain geologic information and
samples for metallurgical testing.
Since the sale of the 70% interest in Cobre del Mayo to MPDM, 217
holes totaling 47,869 meters have been cored thru July 1997. In addition, the
geologic mapping has been expanded, metallurgical testing has begun and a
geological and ore deposit model is being prepared.
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The Piedras Verdes property contains no proven or probable reserves at
this time. Based on 242 holes drilled by AZCO as described above, the Company
estimated in March 1995 that the mineral resource at Piedras Verdes contains
approximately 154 million tons of copper mineralization with an average grade
of 0.41% copper.
SUAQUI VERDE PROJECT
The Suaqui Verde copper property is leased by Cobre de Suaqui Verde,
S.A. de C.V., a Mexican corporation that is owned 99.97% by AZCO. The project
is located in southeastern Sonora State, Mexico, near the town of Suaqui
Grande, which is about 350 km south of the U.S.- Mexico border and 160 km
southeast of Hermosillo (population 600,000), the state capital.
On June 20, 1996 Cobre de Suaqui Verde, S.A. de C.V. entered into an
agreement (the "Agreement") with Minera Phelps Dodge Mexico, S. de R.L. de
C.V.("MPDM"), a subsidiary of Phelps Dodge, for the exploration of its Suaqui
Verde property.
Under the terms of the Agreement a new company may eventually be
formed to hold the Suaqui Verde mining rights. MPDM can earn 70% in the new
company by expending $2.0 million on the project over the next three years,
funding completion of a comprehensive feasibility study and paying AZCO $25,000
annually.
Approximately 27,000 feet of drilling completed by AZCO and others has
demonstrated the widespread nature of copper mineralization on the property.
Approximately 115 million pounds of oxide copper have been drill-inferred in 20
million tons of mineralization within a preliminary open pit mine plan. There
are no proven or probable reserves at the Suaqui Verde project at this time.
Through June 30, 1997 MPDM has drilled 6 core holes totaling 1600
meters and has conducted surface mapping, geochemical surveys and geophysical
surveys.
MALI GOLD CONCESSIONS
AZCO presently is the nominal 100% owner of Sanou Mining Corporation
("Sanou"), which is the owner of a Malian subsidiary called Western African
Gold and Exploration Company, S.A. ("WAG") which is the registered owner of the
Medinandi and Dandoko gold concessions in Mali. Pursuant to its contract with
Eagle River International Limited and Lion Mining Finance, AZCO has an
accountability under the agreement to issue 3,500,000 shares and 4,000,000
warrants of Sanou, subject to AZCO's satisfaction on curing of certain
defaults. The Medinandi and Dandoko concessions (188.5 and 155.5 square kms.
respectively) are located in the Kenieba Gold Mining district of western Mali.
The exploration program on the Mali gold concessions in fiscal 1997 was
designed to qualify former exploration results on the Medinandi property. This
program has given the Company a good understanding of the geology and has
identified two new zones that will be targeted in the next phase of exploration.
Activities at the Mali gold concessions include core drilling, auger
drilling, geochemical surveys, mapping, remote sensing and geological
evaluations. Through June, 1997 a total of 21 core holes were completed
totaling 2246 meters. There are no proven or probable reserves at the Mali
gold concessions at this time.
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The Company expensed $4,052,316 on the Mali gold concessions during
fiscal 1997. Of this amount $3,832,058 was advanced to Eagle River for the
following: $1,000,000 towards the purchase payments of the concessions;
$2,166,421 to purchase exploration equipment, establish exploration camps and
fund exploration activities through June 30, 1997; $225,960 to cover
pre-exploration, incorporation and other administrative expenses. An amount of
$439,677 advanced to Eagle River has yet to be accounted for by the Company's
joint venture partner.
In addition, the Company expended $220,258 directly on the project for
administrative, project management and pre-exploration expense.
Initial shipments of exploration equipment to Mali, including 2 drill
rigs an exploration camp and related equipment, were commissioned in January
1997. Delineation drilling, geochemical surveying and geological evaluation
continued through June. With the onset of the monsoon season exploration
activity has been put on hold and preparations are being made for the next
drill season anticipated to begin in October. This will test a number of newly
identified target areas on both the Medinandi and Dandoko concessions.
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 is currently reviewing the available data on the property and
will shortly commence presentations to a number of companies which have
expressed an interest in joint-venturing the properties.
ITEM 3. LEGAL PROCEEDINGS
On December 21, 1995 Sanchez Mining Inc. (the Company's wholly-owned
subsidiary) received notice commencing arbitration (the "Arbitration") in
respect of a claim by AIOC Corporation ("AIOC") claiming entitlement of a
buyout of $2.4 million plus additional damages in an unspecified amount and
such other relief as the tribunal may deem appropriate arising from an alleged
breach by Sanchez Mining Inc. of the copper purchase agreement between Sanchez
Mining Inc. and AIOC dated December 30, 1994 (the "Copper Purchase
Agreement"). AIOC has claimed that the recent sale by Sanchez Mining Inc. and
the Company of certain assets to Phelps Dodge has resulted in the alleged
breach of the Copper Purchase Agreement. The Arbitration will be conducted in
London, England, in accordance with the arbitration rules of the London Metal
Exchange("LME").
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On December 28, 1995 AIOC instituted a legal proceeding against the
Company and Sanchez Mining Inc. in the court of Chancery of the State of
Delaware in and for New Castle County (Civil Action No.14765). In its
complaint AIOC claimed a breach of the Copper Purchase Agreement and the letter
of agreement, also dated December 30, 1994, among AIOC, Axel Johnson Ore &
Metals, Inc. and the Company, as a result of the Phelps Dodge transaction and
alleged the existence of a buyout agreement whereby the Company agreed, among
other things, to make a $2.4 million payment to AIOC. AIOC sought damages "in
excess of $5,000,000" and an injunction to prevent the Company and Sanchez
Mining Inc. from transferring the proceeds of the Phelps Dodge sale so as to
preserve AIOC's right to meaningful relief in the Arbitration before the LME.
On February 8, 1996 AIOC, the Company and Sanchez Mining Inc. entered
into a "Stipulation and Order of Compromise and Dismissal" whereby (i)the
Company placed $4,000,000 into escrow to satisfy any award in Arbitration, (ii)
the parties agreed to submit all their disputes to the exclusive forum of the
LME Arbitration, (iii) AIOC agreed to release Phelps Dodge from any liability
relating to AIOC's dispute with the Company and Sanchez Mining Inc. and (iv)
the Delaware Chancery Court action would be dismissed. The Company and Sanchez
Mining Inc. anticipate that they will continue to contest vigorously the claims
of AIOC in the Arbitration. As a result of the release of Phelps Dodge by
AIOC, the Company received payment of a $1.5 million holdback amount from
Phelps Dodge (plus interest) that had been retained by Phelps Dodge pending the
release of Phelps Dodge in connection with the AIOC dispute. AIOC has filed a
bankruptcy petition under the United States Bankruptcy Code. It is uncertain
what effect this will have on the Arbitration.
LME arbitrators have provided the Company with a timetable for dealing
with the initial hearing. This hearing will deal with the claims made by AIOC
for payment of $2.4 million plus interest and costs together with certain
related matters. The potential remains for the balance of the claims made in
arbitration to be pursued at a later date depending on the outcome of the
initial hearing. Discovery of documents relating to the initial hearing is to
be completed by September 30, 1997. Witness statements of all factual
witnesses are to be exchanged on or before November 14, 1997. The hearing has
been set for January 19, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 25, 1997, was 1,075.
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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 EXCHANGE AMERICAN EXCHANGE
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(Canadian Dollars) (U.S. Dollars)
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High Low High Low
---- --- ---- ---
1995
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09/30/95 $2.18 $1.60 $1.56 $1.06
12/31/95 $1.74 $1.00 $1.31 $0.75
1996
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03/31/96 $2.00 $1.23 $1.50 $0.81
06/30/96 $2.84 $1.69 $2.06 $1.19
09/30/96 $2.35 $1.75 $1.75 $1.25
12/31/96 $2.45 $1.90 $1.88 $1.31
1997
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03/31/97 $2.95 $1.90 $2.25 $1.38
06/30/97 $2.35 $1.66 $1.75 $1.19
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 the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
For the Year Ended June 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
INCOME STATEMENT:
Revenues $ 1,368,753 $ 26,893,607 $ 100,800 $ 96,268 $ 71,973
Net income (8,155,700) 17,127,455 (4,698,537) (3,508,702) (1,965,626)
Per share $ (.32) $ .67 $ (.19) $ (.17) $ (.11)
Weighted Avg. #
of common shares 25,787,247 25,554,322 25,006,637 20,495,454 17,598,790
& common equiv
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BALANCE SHEET:
Mineral Properties
12,573,096 10,971,142 7,527,995
Total Assets 22,345,247 30,033,118 15,791,656 15,792,370 8,845,921
Notes Payable 2,540,715 540,715 540,715
Total Liabilities 337,050 58,217 3,594,210 2,032,941 1,136,574
Total Stock- 22,008,197 29,974,901 12,197,446 13,759,429 7,709,347
holders' equity
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
All material revenues received during fiscal 1997 and 1996 were a
result of 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 properties.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1997 COMPARED TO TWELVE MONTHS ENDED JUNE 30,
1996.
AZCO had a net loss of $8,155,700 for 1997 compared to net income of
$17,127,455 in 1996. This was the result of the gain on the sale of assets to
Phelps Dodge of $26,076,026, recognized in the year ended June 30, 1996.
Salaries expense was $1,107,910 during 1997 compared to $774,461 in
1996. The increase was due primarily to a severance payment of $193,846 and
$149,996 of compensation expense to account for the fair value of stock options
granted to non-employees during the year ended June 30, 1997.
General and administrative expense was $1,037,253 during 1997 compared
to $772,997 during 1996. This increase in 1997 was due to increases in general
office and investor relations expenditures of $127,963 and $104,713,
respectively.
Exploration expense in 1997 was $7,575,005 as compared to $738,597 in
1996. The Company funded $1,846,330 for its 30% share of the costs related to
the Piedras Verdes project. In addition, expenditures of $14,344 were incurred
to sustain the Suaqui Verde project. AZCO expended $4,052,316 on the Mali
project and an additional $352,659 on other various African projects in
connection with the strategic alliance with Eagle River. A total of $1,211,549
was expended on the four Indonesian properties AZCO was involved with in 1997.
In addition, the company had general exploration expense of $97,807 in 1997.
The large increase in exploration activity in 1997 represents the Company's
change in direction from
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a development stage mining company with the Sanchez project in 1996 to a pure
exploration company in 1997.
Accounting and legal expenses decreased from $578,928 in 1996 to
$254,288 in 1997. The decrease in legal expense in 1997 is the result of the
consent solicitation initiated by Muzinich & Co. in fiscal 1996.
The Company did not incur interest expense in 1997 as all debt was
retired with the proceeds of the Phelps Dodge sale in 1996.
TWELVE MONTHS ENDED JUNE 30, 1996 COMPARED TO TWELVE MONTHS ENDED JUNE 30,
1995.
AZCO had net income $17,127,455 for 1996 compared to a net loss of
$4,698,537 in 1995. This was the result of the gain on the sale of assets to
Phelps Dodge of $26,076,026, recognized in the year ended June 30, 1996.
Salaries expense was $774,461 during 1996 compared to $640,306 in
1995. The increase was due primarily to severance payments of $114,884.
General and administrative expense was $772,997 during 1996 compared
to $920,246 during 1995. This decrease in 1996 was in large part due to a
reduction in investor relations expenditures of $127,888.
Exploration expense in 1996 was $738,597 as compared to no exploration
expense in 1995. The Company funded $667,380 for its 30% share of the costs
related to the Piedras Verdes project. In addition, expenditures of $71,217
were incurred to sustain the Suaqui Verde project.
The 1996 writedown of $848,487 in mineral properties represents the
Company's Investment in Cobre del Mayo. AZCO holds a 30% interest in Cobre del
Mayo and, due to the uncertainties involved in the production decision on the
Piedras Verdes project, the Company has written-off this investment. This
writedown compares to the $503,797 of capitalized development costs that were
expensed in 1995 when it was determined that the Suaqui Verde project was
unlikely to be developed by the Company.
Accounting and legal expenses decreased from $785,740 in 1995 to
$578,928 in 1996. This decrease in 1996 is the result of the 1995 expense of
$400,000 related to the settlement with Muzinich & Co. which is partially
offset in 1996 by proxy solicitation costs of $225,408 incurred over the same
issue.
Interest expense increased to $171,173 during 1996 as compared to
$106,376 during 1995 as a result of the carrying of increased debt in the first
half of fiscal 1996. All debt was retired with the proceeds of the Phelps
Dodge sale.
Financing and acquisition expense decreased to $109,362 during 1996
compared to $1,686,168 during 1995. This decrease is due to the 1995 writeoff
of debt and equity costs associated with the attempted financing of the Sanchez
Project.
12
13
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended June 30, 1997 the Company met its capital
requirements through the proceeds of the sale of assets to Phelps Dodge in
1996.
At June 30, 1997 and June 30, 1996 the Company had cash and cash
equivalents of $17,080,260 and $24,295,805, respectively, and working capital
of $17,303,831 and $25,682,136, respectively. Total liabilities increased from
$58,217 on June 30, 1996 to $337,050 on June 30, 1997. The increase in current
liabilities in 1997 is due to exploration expenses accrued at year end.
The Company feels that its current cash position is strong enough to
fund all capital requirements in fiscal 1998. 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. Funding of the ongoing exploration projects in Mali, Indonesia and
Mexico (including approximately $4.4 million in potential exploration and
pre-production royalties on the Piedras Verdes project over the next 11 years)
is expected to come from the Company's treasury. 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 their interest in
the property.
ADDRESSING THE YEAR 2000
The Company has confirmed with its accounting software vendor that the
subsequent version of its current product used by the Company will address the
potential year 2000 problem. It is the intention of the Company to upgrade to
the upcoming software version once it is available. It is anticipated that
there will be no material impact on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section at the
end of this report on page F-1 of the Form 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
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 13, 1997. 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
13
14
experience, length of time served in each capacity and other matters relevant
to each individual is set forth below the table.
NAME POSITION HELD
- ---------------------------------------------------------------------------
Alan Peter Lindsay..................President, Chairman, Chief Executive
Officer and Director
Anthony Richard Harvey..............Vice-Chairman of the Board,
Executive Vice-President,
Secretary and Director
Andrew Frederic de Paula Malim......Director of the Company
Paul Arthur Hodges..................Director of the Company
Dr. Ian McFarlane Gray..............Director of the Company
Ryan Andrew Modesto.................Corporate Controller and
Principal Accounting Officer
Doug W. Ramshaw.....................Vice-President of Corporate Development
Dr. Nick Badham.....................Chief Geologist
All 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 47, 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 nine 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 63, one the Company's founders, has been associated
with the Company since July 13, 1988. He has been a full-time employee since
May 18, 1989, prior to which he spent 30 years with Wright Engineers Limited,
where he gained extensive experience in the mining industry in various
management positions, including mine construction and ore extraction, bulk
handling and processing, project management and corporate marketing and
development, in many countries including the U.S. As a senior project manager
he was responsible for the overall management and direction of many mining
projects worldwide, including the Copper Flat Project 15,000 ton per day
copper/moly open pit mining and processing plant located in New Mexico, for
Quintana Minerals Corporation, and
14
15
a 3,000 tpd underground copper mine rehabilitation expansion located in
Ireland, for Avoca Mines Limited.
Mr. Malim, aged 54, became a director of the Company on July 16, 1991.
Mr Malim has been associated with Lion Mining Group since 1981 and currently is
the managing director of that company. Mr. Malim also has majority ownership
of the Lion Mining Group. The Lion Mining Group has been associated with the
Company since March 1989 and was responsible for rasing a significant portion
of the Company's financing prior to the Company going public. Mr. Malim was
one of the original members of the James Capel & Company mining team, and for
ten years was a member of the International Stock Exchange, London.
Mr. Hodges, aged 70, 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 President of Anamax
Mining Company at Twin Buttes. Most recently Mr. Hodges was 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 as a voting member in August 1993.
Dr. Gray, aged 61, director, became a director September 4, 1996.
Most recently Dr. Gray has been involved in the assessment, acquisition and
development of gold and copper properties in Indonesia, Peru and Brazil. For
much of his career Dr. Gray held senior operations and management positions
with INCO Ltd. and BP Minerals International Ltd. and has been involved in
mineral exploration, project development, mine production, formation and
general management of public companies in North America, Australia, Central
Southern Africa, S.E. Asia and South America.
Mr. Modesto, aged 42, Corporate Controller and Principal Accounting
Officer since January 1, 1996, joined the Company in June 1994 as Controller of
the Sanchez Project. Mr. Modesto earned a B.S. in Accounting from the
University of Utah in 1977 and has 20 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's Santa Fe project in
Nevada.
Mr. Ramshaw, aged 26, 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 50, Chief Geologist joined AZCO on August 1, 1997.
Prior to being associated with AZCO, Dr. Badham was Chief Geologist for RTZ
Mining and
15
16
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, 1997, all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with, except that Mr. Modesto had one late filing,
reporting one transaction and Mr. Ramshaw failed to timely file his initial
filing on Form 3.
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 $100,000 for the year ended June 30, 1997, as well as the total compensation
paid to each such individual for the Company's three previous fiscal years:
Summary Compensation Table
(As at year ended June 30, 1996)
Annual Compensation Long Term
------------------- ---------
Compensation
------------
Securities
Underlying
Options/
Other Annual SARs
Name and Principal Salary Bonus Compensation ($) Granted
Position Year ($) ($) (#)
Alan P. Lindsay(1) 1997 110,000 5,500 6,000(3) 0
- ---------------------------------------------------------------------------------------------------------
President(6),Chairman 1996 99,482 0 6,000(3) 300,000
- ---------------------------------------------------------------------------------------------------------
of the Board and CEO 1995 92,400 0 2,500(3) 0
16
17
Anthony R. Harvey(2) 1997 110,000 5,500 6,000(3) 0
- ---------------------------------------------------------------------------------------------------------
Vice-Chairman, Vice 1996 99,482 0 6,000(3) 300,000
- ---------------------------------------------------------------------------------------------------------
President, Secretary 1995 92,400 0 2,500(3) 0
- ---------------------------------------------------------------------------------------------------------
David C. Beling 1997 145,833 0 193,846(4) 0
- ---------------------------------------------------------------------------------------------------------
President and Chief 1996 142,178 65,000 0 155,000
- ---------------------------------------------------------------------------------------------------------
Operating Officer 1995 135,000 7,000 6490(5) 0
(1) These amounts were actually paid to Alan Lindsay and Associates Ltd.,
a management company under the control of Mr. Lindsay pursuant to a
management agreement dated May 1, 1989 with the Company.
(2) These amounts were actually paid to ARH Management Ltd., a management
company under the control of Mr. Harvey pursuant to a management
agreement dated May 1, 1989 with the Company.
(3) These amounts were paid as reimbursement of medical insurance
premiums.
(4) Mr. Beling resigned as a director and officer of the Company effective
as of April 30, 1997. Mr. Beling's resignation triggered the
provision of his employment agreement where in the event of merger,
consolidation, divestiture, takeover, sale or other similar
circumstances which result in conditions or terms unacceptable to Mr.
Beling within the first year after such event, Mr Beling would be paid
12 months base salary plus any prorated bonuses and vacation accrued
to the time of termination. This amount includes $175,000
representing 12 months of base pay and $18,846 of accrued vacation.
(5) This amount was paid as a premium on a life insurance policy.
(6) Mr. Lindsay was appointed President of the Company upon the
resignation of Mr. Beling effective April 30, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS VALUES
==============================================================================================================================
Name Shares Value Value of Unexercised
Acquired Realized Number of Securities Underlying In-The-Money Options at FY-End
on Unexercised Options at FY-End ($)(1)
Exercise
-------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------
Alan P. Lindsay 300,000 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------
David C. Beling(2) 50,000 $73,750 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------
Anthony R. Harvey 300,000 0 0 0
==============================================================================================================================
17
18
(1) Based on the closing price of $1.31 of the Company's common stock as quoted
on the American stock Exchange on June 30, 1997.
(2) Mr. Beling exercised 50,000 options prior to his resignation on April 30,
1997. The balance of Mr. Beling's unexercised options were canceled May 31,
1997.
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
1997 Dr. Gray a non-officer director, was granted an option to acquire 100,000
shares of the Company's stock.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS.
Effective May 1, 1989 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 agreement requires all salary amounts otherwise payable by the
Company to Mr. Lindsay to be paid to Associates. This agreement is
automatically renewed for two year terms unless either party gives the other
party notice of non-renewal at least 30 days prior to the end of any term. The
agreement may be terminated by the Company without notice if Mr. Lindsay is no
longer a principal of Associates, or upon the occurrence of certain other
events such as Mr. Lindsay's bankruptcy or disability. The agreement may be
terminated by either party, without notice, upon breach of the material terms
of the Agreement, commission of fraud, or misconduct or declaration of
bankruptcy by either party.
Effective May 1, 1989 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 agreement
requires all salary amounts otherwise payable by the Company to Mr. Harvey to
be paid to Management. This agreement is automatically renewed for two year
terms unless either party gives the other party notice of non-renewal at least
30 days prior to the end of any term. The agreement may be terminated by the
Company without notice if Mr. Harvey is no longer a principal of Management, or
upon the occurrence of certain other events such as Mr. Harvey's bankruptcy or
disability. The agreement may be terminated by either party, without notice,
upon breach of material term of the Agreement, commission of fraud, misconduct
or declaration of bankruptcy by either party.
Effective August 15, 1994 management agreements (collectively, the
"Management Agreements") were provided to both Messrs. Harvey and Lindsay that
are effective in the event of a change in control of the Company. 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). Such
"base amount" is generally equivalent to the applicable person's average annual
compensation
18
19
from the Company includable in his gross income over the preceding five years.
Change of control is therein defined to include only the following:
(i) the acquisition of (whether direct or indirect) 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; or
(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 Messers. Malim and 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 effective
in the event of a change in control of the Company. These Director's
Agreements provide for a lump sum distribution in the amount of $100,000.
Change in control has the same definition as set forth above in connection with
the Management Agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year ending 1997 the Company had no compensation
committee. Each of the Company's officers and directors participated in
deliberations of the Company's Board of Directors concerning officer
compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of June 30, 1997, 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 Ownership Number of Shares Percent of Class
of Beneficial Owner
- -----------------------------------------------------------------------------------------------------------------
Alan P. Lindsay Record and 978,569(1) 3.83%
999 W. Hastings, Ste 1250 Beneficial
Vancouver, BC, Canada V6C 2W2
- -----------------------------------------------------------------------------------------------------------------
19
20
- -----------------------------------------------------------------------------------------------------------------
Anthony R. Harvey Record and 453,252(2) 1.77%
999 W. Hastings, Ste 1250 Beneficial
Vancouver, BC, Canada V6C 2W2
- -----------------------------------------------------------------------------------------------------------------
Andrew F de P Malim Record and 171,541(3) *
7-8 Kendrick Mews Beneficial
London, England SW7 3HG
- -----------------------------------------------------------------------------------------------------------------
Paul A. Hodges Record and 116,524(4) *
4536 N. Via Bellas Catalinas Beneficial
Tucson, AZ 85718
- -----------------------------------------------------------------------------------------------------------------
Dr. Ian M. Gray Record and 100,000(5) *
Copper Hill House, Buller Hill Beneficial
Redruth,Cornwall U.K., TR16 6SR
- -----------------------------------------------------------------------------------------------------------------
Officers & Directors Record and 2,106,886 8.24%
as a Group (8 persons) Beneficial
*- indicates less than 1%
(1) Includes 605,308 shares owned by a corporation controlled by Mr. Lindsay.
Includes options to acquire 300,000 shares at an exercise price of CDN
$1.80 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.
(3) Includes an option to acquire 125,000 shares at an exercise price of CDN
$1.80 per share.
(4) Includes options to acquire (i) 50,000 shares at an exercise price of
$2.00 per share and (ii) 50,000 shares at an exercise price of CDN $1.80
per share.
(5) Includes an option to acquire 100,000 shares at an exercise price of CDN
$1.90 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Andrew F de P Malim, a non-officer director of the Company, is the
chairman, managing director and majority shareholder of Lion Mining Finance, a
United Kingdom registered company. AZCO has entered into a memorandum of
agreement with Eagle River, WAG, and Lion Mining Finance concerning the
development of mining concessions in Mali. Pursuant to that agreement, Lion
Mining Finance was paid $15,692 for management services and it is anticipated
that Lion Mining Finance will receive an equity interest of up to approximately
21 percent in the project on a fully diluted basis upon completion of the
transaction.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10K
20
21
(a) 1. Financial Statements - Reference is made to the Financial Statements
appearing on Pages F-1, F-2, F-3, F-4, F-5, F-6, F-8-F-18 hereof.
2. Financial Statement Schedules - Reference is made to the Financial
Statement Schedules on Page F-20.
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 Bylaws(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 Management Agreement dated May 1, 1989 between the Registrant and
ARH Management Ltd.(1)
10.2 Management Agreement dated May 1, 1989 between the Registrant and
Alan Lindsay and Associates, Ltd.(1)
10.3 Distribution Agreement dated August 15, 1991 between the
Registrant and Axel Johnson Ore & Metals, Inc.(1)
10.4 Agreements for Suaqui Verde Property(1)
10.5 Agreements for Piedras Verdes Property(1)
10.6 Employment Agreement with David Beling dated September 10,
1991(1)
10.7 Copper Purchase Agreement dated December 30, 1994 between AIOC
Corporation and Sanchez Mining Inc.(2)
10.8 Purchase Agreement dated July 27, 1995 between the Registrant,
Sanchez Mining, Inc. and Phelps Dodge Corporation.(2)
10.9 Settlement Agreement dated August 3, 1995 between the Registrant
and Muzinich & Co., Inc.(2)
10.10 Memorandum of Agreement between West Africa Gold & Exploration
Ltd., Eagle River International Limited, Lion Mining Finance
Limited and AZCO Mining Inc.(4)
10.11 Suaqui Verde Mineral exploration agreement and option to form
company among AZCO Mining, Inc., Cobre de Suaqui Verde, S.A. de
C.V. and Minera Phelps Dodge Mexico, S. de R.L. de C.V.(4)
21
22
10.12* Letter agreement relating to the Pongkor property offer.
10.13* Letter agreement relating to the Strategic Alliance with Eagle
River.
11.1* Statement regarding computation of per share earnings.
21.1* Subsidiaries of the Registrant.
24.1* Consent of Coopers and Lybrand.
27.1* Financial Data Schedule.
- ----------------------
(1) Exhibit Nos. 3.1, 3.2, 10.1, 10.2, 10.3, 10.4, 10.5, and 10.6 are
incorporated by reference from Exhibit Nos. 3.1, 3.2, 10.1, 10.2, 10.3,
10.10, 10.11 and 10.15 respectively, from the Registrant's Registration
Statement on Form S-4 (File No. 33-45162).
(2) Exhibit Nos. 3.3, 3.4, 10.7, 10.8 and 10.9 are incorporated by reference
from exhibits Nos. 3.3, 3.4, 10.19, 10.20 and 10.21 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 filed with the SEC on
July 21, 1992.
(4) Exhibit Nos. 10.10 and 10.11 are incorporated by reference from exhibits
Nos. 10.10 and 10.11 from the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
* Filed herewith.
(b) Reports on Form 8K: None
22
23
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 29, 1997 By: /s/ Alan P. Lindsay
-----------------------------------------
Alan P. Lindsay
President, Chairman of the Board and
Chief Executive Officer
Date: September 29, 1997 By: /s/ Ryan A. Modesto
-----------------------------------------
Ryan A. Modesto
Corporate Controller and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Alan P. Lindsay President, Chairman of the September 29, 1997
- --------------------- Board and Chief Executive
Alan P. Lindsay Officer
/s/ Anthony R. Harvey Vice Chairman, Executive September 29, 1997
- --------------------- Vice President, Secretary
Anthony R. Harvey and Director
/s/ Andrew Malim Director September 29, 1997
- ---------------------
Andrew F de P Malim
/s/ Paul A. Hodges Director September 29, 1997
- ---------------------
Paul A. Hodges
/s/ Dr. Ian M. Gray Director September 29, 1997
- ---------------------
Dr. Ian M. Gray
23
24
AZCO MINING, INC. (DELAWARE)
FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2)
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
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 of June 30, 1997 and 1996 F-3
Consolidated Statements of Operations for the fiscal years
ended June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equityfor the fiscal
years ended June 30, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
THE FOLLOWING FINANCIAL STATEMENT SCHEDULE OF THE REGISTRANT
ISINCLUDED IN ITEM 14(A)(2):
Schedule II - Valuation and Qualifying Accounts for the fiscal
years ended June 30, 1997, 1996 and 1995 F-20
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.
F-1
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Azco Mining, Inc. (Delaware):
We have audited the consolidated financial statements and the financial
statement schedule of Azco Mining, Inc. (Delaware) and Subsidiary listed in the
index on page F-1 of this Form 10-K. These financial statements and 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Azco Mining, Inc.
(Delaware) and Subsidiary as of June 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with 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 statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
August 8, 1997
F-2
26
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,080,260 $ 24,295,805
Short-term investments 1,400,687
Prepaids and other 80,893 43,861
Income tax receivable 479,728
------------ ------------
Total current assets 17,640,881 25,740,353
------------ ------------
Property and equipment:
Furniture and equipment 158,539 188,080
Less accumulated depreciation (111,259) (127,450)
------------ ------------
47,280 60,630
------------ ------------
Refundable deposits 615,255
Restricted cash 34,106 51,610
Deposit 4,000,000 4,000,000
Other assets 7,725 180,525
------------ ------------
$ 22,345,247 $ 30,033,118
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 337,050 $ 58,217
------------ ------------
Total current liabilities 337,050 58,217
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock: $.002 par value, 100,000,000 shares authorized; 25,579,834
and25,512,938 shares issued and outstanding as of June 30, 1997 and 1996,
respectively
51,160 51,026
Additional paid-in capital 25,776,411 25,587,549
Retained earnings (accumulated deficit) (3,819,374) 4,336,326
------------ ------------
Total stockholders' equity 22,008,197 29,974,901
------------ ------------
$ 22,345,247 $ 30,033,118
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
27
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the fiscal years ended June 30, 1997, 1996 and 1995
1997 1996 1995
Income:
Interest income $ 1,332,679 $ 817,581 $ 100,800
Gain on sale of assets 11,074 26,076,026
Other income 25,000
------------ ------------ ------------
1,368,753 26,893,607 100,800
------------ ------------ ------------
Operating expenses:
Salaries 1,107,910 774,461 640,306
General and administrative 1,037,253 772,997 920,246
Write-down of mineral properties 848,487 503,797
Exploration 7,575,006 738,597
Accounting and legal 254,288 578,928 785,740
Amortization and depreciation 33,498 57,147 156,704
Interest expense, net of amount capitalized 171,173 106,376
Financing and acquisition 113,031 109,362 1,686,168
------------ ------------ ------------
10,120,986 4,051,152 4,799,337
------------ ------------ ------------
Income (loss) before income taxes (8,752,233) 22,842,455 (4,698,537)
Income tax benefit (provision) 596,533 (5,715,000)
------------ ------------ ------------
Net income (loss) $ (8,155,700) $ 17,127,455 $ (4,698,537)
============ ============ ============
Net income (loss) per common and common equivalent share $ (0.32) $ 0.67 $ (0.19)
============ ============ ============
Weighted average number of common and common equivalent shares
outstanding
25,787,247 25,554,322 25,006,637
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
28
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the fiscal years ended June 30, 1997, 1996 and 1995
COMMON STOCK ADDITIONAL RETAINED
----------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
Balance, June 30, 1994 23,862,938 $ 47,726 $ 21,804,295 $ (8,092,592) $ 13,759,429
Private placement, net of issuance costs of $346,366 1,650,000 3,300 3,133,254 3,136,554
Net loss (4,698,537) (4,698,537)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1995 25,512,938 51,026 24,937,549 (12,791,129) 12,197,446
------------ ------------ ------------ ------------ ------------
Tax benefit of stock options 650,000 650,000
Net income 17,127,455 17,127,455
------------ ------------ ------------ ------------ ------------
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
Net loss (8,155,700) (8,155,700)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1997 25,579,834 $ 51,160 $ 25,776,411 $ (3,819,374) $ 22,008,197
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
F-5
29
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the fiscal years ended June 30, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities:
Net income (loss) $ (8,155,700) $ 17,127,455 $ (4,698,537)
Adjustments to reconcile net income (loss) to net cash provided
by(used in) operations:
Depreciation and amortization 33,498 57,147 156,704
Stock compensation expense 149,995
Tax benefit of stock options 650,000
Write-off of financing costs 434,989
Amortization of (discount) premium on investment securities 5,687 1,284 (23,317)
Write-down of mineral properties 848,487 503,797
(Gain) loss on sale of furniture and equipment (11,074) 4,461
Gain on sale of assets (26,076,026)
Changes in assets and liabilities, net:
Restricted cash 17,504 298,510 4,750
Other assets 135,768 (151,542) 58,298
Refundable deposits (615,255)
Income tax receivable (479,728)
Accounts payable and accrued liabilities 278,833 (545,278) (22,479)
Deferred liability (450,000)
Deposit (4,000,000)
Proceeds from sale of mineral properties 39,173,295
------------ ------------ ------------
Net cash provided by (used in) operating activities (8,640,472) 26,937,793 (3,585,795)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of short-term investments (1,401,971)
Proceeds from maturity of short-term investments 1,395,000
Proceeds from maturity of investment securities 1,300,000
Proceeds from certificate of deposit 100,000
Purchases of furniture and equipment and construction in progress (22,163) (6,245) (615,014)
Proceeds from sale of furniture and equipment 13,090 28,882
Development of mineral properties (516,577) (2,105,751)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,385,927 (1,895,911) (1,320,765)
------------ ------------ ------------
Cash flows from financing and offering activities:
Payments for offering costs (346,366)
Proceeds from sale of common stock 3,482,920
Proceeds from exercise of stock options 39,000
Proceeds from issuance of debt 500,000 2,000,000
Payments of debt (3,040,715)
Borrowings on line of credit 508,348
Payments on line of credit (924,600)
------------ ------------ ------------
Net cash provided by (used in) financing and offering activities 39,000 (2,540,715) 4,720,302
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (7,215,545) 22,501,167 (186,258)
Cash and cash equivalents, beginning of period 24,295,805 1,794,638 1,980,896
------------ ------------ ------------
Cash and cash equivalents, end of period $ 17,080,260 $ 24,295,805 $ 1,794,638
============ ============ ============
Cash paid during the period for:
Interest paid net of amount capitalized $ $ 230,453 $ 89,374
============ ============ ============
Taxes $ $ 5,715,000 $
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
30
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Azco Mining, Inc. (the "Company") is a U.S. mining company with
a general business strategy to acquire mineral properties with
a prime focus on gold. The Company plans to supplement its core
asset, a 30% interest in the Piedras Verdes Project through its
acquisition of other mineral properties.
As of June 30, 1997, the Company had signed agreements with
various companies to acquire the rights to explore precious
metal properties in Mali (Northwest Africa) and Indonesia. At
June 30, 1997, none of the properties had proven reserves of
commercial ore.
2. BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiary. All intercompany
balances have been eliminated.
3. SIGNIFICANT ACCOUNTING POLICIES:
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.
SHORT-TERM INVESTMENTS
Short-term investments consisted of United States Treasury
Notes with maturities between three and twelve months and were
classified as "held to maturity" investments at June 30, 1996.
Accordingly, these investments were carried at amortized cost.
Due to the short-term maturity of these investments, amortized
cost approximated fair value. Net realized gains and losses, if
any, on investments sold are recorded in operations based on
specific identification of the investments on the trade date.
Interest income is recorded as earned. No gains or losses were
realized upon maturity of the investments.
MINERAL PROPERTIES
The Company expenses prospecting and exploration costs and
capitalizes costs directly attributable to the acquisition of
mining properties, pending determination as to their commercial
feasibility (to contain a viable mineral deposit). Development
costs are capitalized and, upon commencement of production,
will be amortized using the units-of-production method. 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 cost and no gain is
recognized until all costs have been fully recovered.
F-7
31
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY EVALUATION
Recoverability of investments in 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) and operating capital and reclamation costs on an
undiscounted basis. Reductions in the carrying value of each property are
recorded to the extent the remaining investment exceeds the estimate of
future net cash flows.
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.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Replacements, maintenance
and repairs which do not improve or extend the life of the respective
assets are expensed currently. 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 the non-mining 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 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.
NET INCOME (LOSS) PER SHARE
Net income or loss per common and common equivalent share is
based on the weighted average number of common and common
equivalent shares outstanding during each year. The common
equivalent shares of options and warrants are excluded from the
weighted average number of shares if they are anti-dilutive.
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.
F-8
32
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STOCK-BASED COMPENSATION
In October 1995 the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation
("FAS No. 123"), which defines a fair value based method of accounting
for employee stock options or similar equity instruments. However, it
also allows an entity to continue to account for these plans according to
Accounting Principles Board Opinion No. 25 ("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 FAS No. 123 has been
applied. The Company has elected to continue to measure compensation
expense related to employee stock purchase options using APB No. 25.
4. 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 places its cash and cash equivalents with high
quality financial institutions. 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, 1997 and 1996, cash
equivalents of $16.8 million and $24.2 million, respectively, were
invested with one bank's trust and institutional portfolio department.
5. MINERAL PROPERTIES:
SANCHEZ PROJECT
During the second quarter of the year ended June 30, 1996, the Company
sold 100% of its investment in the Sanchez property located in Graham
County, Arizona. Proceeds of $37,000,000 from the sale were received and
a gain of $26,076,026 was recorded.
COBRE DEL MAYO (PIEDRAS VERDES PROJECT)
The Piedras Verdes project is located in southern Sonora, Mexico. During
the second quarter of the year ended June 30, 1996, the Company sold 70%
of its investment in the Piedras Verdes project. In accordance with the
Company's policy regarding sales of mineral properties, proceeds of
$3,000,000 from the sale were credited against the remaining development
costs and no gain was recognized. The Company is expensing all costs
related to the project.
SUAQUI VERDE PROJECT
During 1995, the Company wrote off all costs related to the Suaqui Verde
Project due to the cessation of activities.
On June 20, 1996, Azco entered into a Mineral Exploration and Option to
Form Company Agreement with Minera Phelps Dodge Mexico for the mineral
exploration and evaluation of the Suaqui Verde mineral concessions in
Sonora, Mexico. The Company is expensing all costs related to the
project.
F-9
33
5. MINERAL PROPERTIES: (CONTINUED)
MALI PROJECT (NORTHWESTERN AFRICA)
On May 9, 1996, Azco 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 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"). Upon fulfillment
of conditions precedent to Azco's participation, Azco has committed to
purchase 4,800,000 shares of Sanou at a price of ($0.25) (U.S.) per share
and receive 1,000,000 shares of Sanou in consideration for 125,000 common
shares of Azco to be issued to Eagle River. Azco currently holds in trust
the one and only share of Sanou.
On May 17, 1996, under 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, has 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 provided the
Mali project $4,052,316 for operating costs which exceeds the required
expenditures. The operating costs are included in exploration costs in
the accompanying statement of operations.
INDONESIAN PROJECTS
During the year, the Company entered into certain agreements to obtain
the rights to explore property 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. Subsequent to year end, the Company decided
not to pursue exploration on 83,940 hectares. As a result, the Company
has applied for a refund of $426,840 in deposits.
F-10
34
6. NOTES PAYABLE:
In May 1991, the Company commenced an offering to issue $1,000,000, 10%
unsecured Convertible Redeemable Debentures, (the "Debentures"). Under
this offering, the Company sold $540,715 of the Debentures, $500,000 of
which were sold to a stockholder of the Company. Interest was 10% per
annum until May 31, 1995 and 14% per annum until maturity. The Debentures
could have been converted to common stock at the option of the investor
after one year for $4 per share. The Debentures were subject to
prepayment, in whole or in part, without penalty or premium, at any time
at the option of the Company. The Debentures were subordinate to any
Senior Debt, as defined in the debenture agreement, that the Company may
have obtained. The Debentures matured and were paid in full on December
31, 1995.
On May 12, 1995, the Company issued $2,000,000, 14% Convertible
Debentures. Interest at 14% per annum is payable semi-annually from the
issue date. The Convertible Debentures could have been converted to
common stock at the option of the investor at any time during the
two-year term of the Convertible Debentures for $2.00 per share. The
Convertible Debentures were subordinated to any and all security or
obligations which may have been issued or incurred by the Company in
connection with the Company's debt financing requirement for its mineral
properties. The Convertible Debentures were paid in full on December 19,
1995. No penalty was assessed for early extinguishment of the debt.
Interest expense for the years ended June 30, 1996 and 1995 was $171,173
and $106,376, respectively, after capitalization of interest of $0 and
$13,940, respectively.
F-11
35
7. WARRANTS AND STOCK OPTIONS:
WARRANTS
In connection with a private offering in October 1994, the Company issued
1,650,000 common shares with warrants at a price of $2.85 (Cdn.) per
unit. Each warrant entitles the holder to purchase one additional common
share of the Company for a period of two years from the closing at a
purchase price of $2.95 (Cdn.) per common share. In October 1996, the
exercise period was extended one year.
Changes to outstanding warrants were as follows:
OTHER SPECIAL TOTAL
Exercise Price $2.00 to $2.95 Cdn.
$4.00 U.S.
Expiration Date 07/31/93 to 10/19/97
07/31/95
Balance outstanding at June 30, 1994 100,000 100,000
Issued 1,650,000 1,650,000
---------- ---------- ----------
Balance outstanding at June 30, 1995 100,000 1,650,000 1,750,000
Canceled (100,000) (100,000)
---------- ---------- ----------
Balance outstanding at June 30, 1996 0 1,650,000 1,650,000
---------- ---------- ----------
Balance outstanding at June 30, 1997 0 1,650,000 1,650,000
========== ========== ==========
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its stock-based employee compensation
arrangements. Under APB 25, because 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.
F-12
36
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. WARRANTS AND STOCK OPTIONS: (CONTINUED)
STOCK OPTIONS (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its stock option plan under the fair value based method of
SFAS 123. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal 1997: risk-free interest rate
from 5.49% to 6.73%, no dividend, volatility factor of the expected
market price of the Company's common stock of .66, and an expected life
of the option of 5 years.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which 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. Because the Company's
employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate.
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed when the options are granted as the options are fully
vested when granted. The Company's pro forma information for fiscal 1997
and 1996 follows (in thousands except for earnings per share
information):
1997 1996
Pro forma net income (loss) $ (8,532,094) $ 16,409,607
Pro forma earnings per share:
Net income (loss) per common and common and
common equivalent share
$ (0.33) $ 0.64
Net income (loss) per common share assuming full dilution $ (0.33) $ 0.64
F-13
37
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. WARRANTS AND STOCK OPTIONS: (CONTINUED)
STOCK OPTIONS (CONTINUED)
Plan activity for the years ended June 30, 1997, 1996 and 1995, was as
follows:
NUMBER OF PRICE RANGE
SHARES OF OPTIONS
Balance outstanding at June 30, 1994 1,247,408 $0.40 U.S. to $3.50 Cdn.
Canceled (50,000) $2.00 U.S.
--------------
Balance outstanding at June 30, 1995 1,197,408 $0.40 U.S. to $3.50 Cdn.
--------------
Granted 1,147,500 $1.20 Cdn. to $3.00 U.S.
Canceled (157,500) $2.40 Cdn. to $3.40 Cdn.
--------------
Balance outstanding at June 30, 1996 2,187,408 $0.40 U.S. to $3.50 Cdn.
--------------
Granted 565,000 $1.87 Cdn. to $2.32 Cdn.
Canceled (420,940) $1.80 Cdn. to $3.00 Cdn.
Exercised (66,896) $0.40 U.S. to $1.55 Cdn.
--------------
Exercisable at June 30, 1997 2,264,572 $1.20 Cdn. to $3.00 U.S.
==============
At June 30, 1997 and 1996, there were 181,543 and 363,886 shares of
common stock reserved for future grants of options.
Of the 2,264,468 stock options outstanding at June 30, 1997, all stock
options were issued to directors, employees or key advisors of the
Company.
Shares exercisable at June 30, 1997 include the following:
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE REMAINING LIFE
1,217,072 $1.78 Cdn. 42 months
878,500 $2.06 Cdn. 47 months
169,000 $3.00 Cdn. 29 months
F-14
38
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES:
The income tax (benefit) expense is as follows:
1997 1996
Current:
Federal $ (568,524) $4,080,000
State (28,009) 1,635,000
---------- ----------
Total current (596,533) 5,715,000
---------- ----------
Total tax (benefit) expense $ (596,533) $5,715,000
========== ==========
Income tax expense (benefit) differs from the amount computed by applying
the U.S. federal income tax rate to net income before income taxes, as
shown.
1997 1996 1995
Tax expense (benefit) at the federal statutory rate $(3,027,500) $ 7,995,803 $(1,644,488)
State tax, net of federal benefit (431,477) 1,142,257 (274,864)
Change in valuation allowance 2,874,764 (4,207,230) 2,140,751
Write down of deferred tax asset for stock options 96,692
Stock options 650,000
Other (109,012) 134,170 (221,399)
----------- ----------- -----------
Tax expense (benefit) $ (596,533) $ 5,715,000 $ 0
=========== =========== ===========
The components of the net deferred tax asset as of June 30, 1997 and 1996
are as follows:
1997 1996
Deferred tax assets:
State net operating loss carryforward, expires June 30, 2002 $ 68,532 $
----------- -----------
Stock options 126,192
Foreign mineral properties 3,911,789 971,457
Other 22,851 30,759
Valuation allowance (4,003,172) (1,128,408)
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========
F-15
39
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
The net change in the valuation allowance for the deferred tax asset of
the Company is as follows:
1997 1996 1995
----------- ----------- -----------
Valuation allowance as of July 1 $ 1,128,408 $ 5,335,638 $ 3,194,887
Increase (decrease) in valuation allowance 2,874,764 (4,207,230) 2,140,751
----------- ----------- -----------
Valuation allowance as of June 30 $ 4,003,172 $ 1,128,408 $ 5,335,638
=========== =========== ===========
At June 30, 1997, the Company had income tax reporting net operating loss
carryforwards for Arizona income tax purposes of approximately $1.3
million.
9. CONTINGENCIES AND COMMITMENTS:
MINERAL PROPERTIES
As described in Note 5, the Company sold 70% of its interest in the
Piedres Verdes Project. Under terms of the sales agreement with Phelps
Dodge Corporation ("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. The Company maintains a 30% interest and Phelps
Dodge a 70% interest in Cobre del Mayo, S.A. de C.V. Under terms of the
Shareholders and Operator's Agreement among P.D. Cobre del Mayo, Inc.,
the Company and Cobre del Mayo S.A. de C.V., the Company is committed to
provide up to $3,000,000 for costs required to bring the Piedres Verdes
Project to the feasibility stage. During the years ended June 30, 1997
and 1996, the Company advanced $1,846,331 and $667,380, respectively,
under terms of this agreement.
On March 4, 1997, Cobre del Mayo, S.A. de C.V. entered into a mining
exploration and exploitation agreement with Compania Minera Serrana, S.A.
de C.V. This agreement superseded the Piedras Verdes lease. Under terms
of this agreement, Cobre del Mayo, S.A. de C.V. has the following
commitments:
- $10,000 per month from the execution of the agreement until
production begins;
- Three payments of $299,035 due on the date of execution and on the
first and second anniversaries of the date of execution;
- Royalties equal to three percent of the net value of mineral
production;
- Advance royalties of $1,000,000 on the third through fifth
anniversaries of the date of execution, $1,500,000 on the sixth
through eleventh anniversaries if commercial production in not met
by those anniversary dates.
F-16
40
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONTINGENCIES AND COMMITMENTS: (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has entered into agreements with three of its officers, three
of its directors and one employee. 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 had entered into a separate employment agreement
with its President. The agreement provides that in the event of merger,
consolidation, divestiture, takeover, sale or other similar circumstances
which result in conditions or terms unacceptable to the President within
the first year after such event, the President had the option to be paid
12 months' base salary plus any prorated bonuses and vacation accrued
from the time of termination. In fiscal 1997 the President was paid
$193,846 under this agreement upon termination of his employment with the
Company.
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 5 years. The Company was required to provide
a letter of credit in the amount of $32,975. The letter of credit is
collateralized by a term deposit of $32,975, which is recorded in
financial statements as other assets. The annual rental commitment under
the lease is as follows:
JUNE 30,
1998 $ 61,389
1999 51,158
--------
$112,547
========
Rental expense, net of sublease income, for the years ended June 30,
1997, 1996 and 1995 was $68,121, $69,140 and $62,737, respectively.
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 violation of
this agreement. A lawsuit was filed against the Company by AIOC
Corporation. The Company agreed to binding arbitration with AIOC
Corporation and received a dismissal of the lawsuit on February 8, 1996,
under terms of the Stipulation and Order of Compromise and Dismissal.
DEPOSIT
Under the terms of the Company's Stipulation and Order of Compromise and
Dismissal with AIOC Corporation, the Company placed $4,000,000 into
escrow to satisfy any award in the arbitration. The amount of the
settlement, if any, will be applied as an adjustment on the gain on sale
of assets. Management does not believe that there will be any settlement
amounts paid as a result of this arbitration and therefore, has not
accrued any liability.
F-17
41
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments and restricted cash approximated fair
value as of June 30, 1997 and 1996 because of the relatively short
maturity of these instruments.
11. RELATED PARTY TRANSACTION:
A non-officer director of the Company, is the chairman, managing director
and majority shareholder of Lion Mining Finance, a United Kingdom
registered company. The Company has entered into a memorandum of
agreement with Eagle River, WAG and Lion Mining Finance concerning the
development of mining concessions in Mali (See Note 5). Pursuant to that
agreement, Lion Mining Finance was paid $15,692 for management services.
12. FOURTH QUARTER CHARGES:
During the fourth quarter of fiscal 1997, the Company recorded additional
compensation expense of $149,996 related to the accounting for stock
options granted to non-employees accounted for under Financial Accounting
Standard No. 123. In addition, the Company recorded an additional tax
benefit of $261,953 for additional tax deductions estimated.
During the fourth quarter of fiscal 1996, the Company wrote-off its
investment in Cobre del Mayo, S.A. de C.V. in the amount of $848,487 due
to the uncertainty regarding the feasibility of the Piedras Verdes
property located in Mexico.
During the fourth quarter of fiscal 1995, the Company wrote-down its
capitalized development costs for the Suaqui Verde property located in
Mexico because it was unlikely that the property would be developed
unless warranted by favorable future exploration results. This write-down
was $503,797 plus the write-off of deferred financing costs of $595,530.
The deferred financing costs related primarily to the Prudential Power
Funding Associates debt commitment. Since the Company had agreed to sell
its interest in the Sanchez Project, the Board of Directors concluded
that the debt commitment would, in all likelihood, not be utilized.
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42
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. NEW PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128") which specifies the computation, presentation, and disclosure
requirements for earnings per share. FAS 128 replaces the presentation of
primary and fully diluted EPS pursuant to Accounting Principles Board
Opinion No. 15, Earnings Per Share ("APB 15") with the presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income available to common stockholders by the
weighted-average number of shares outstanding for the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. The Company is required to adopt FAS 128 with its December 31,
1997 quarterly financial statements and restate all prior period EPS
information. The Company will continue to account for EPS under APB 15
until that time. The application of SFAS 128 had no material effect on
the amounts reported in the financial statements for the years ended June
30, 1997, 1996, and 1995.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
and Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information. The Company is
currently assessing the impact of these statements, both of which are
effective for fiscal years beginning after December 15, 1997.
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43
AZCO MINING, INC. (DELAWARE)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS
ENDED JUNE 30, 1997, 1996 AND 1995
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------- ---------- ----------- ---------- ----------
BALANCE AT BALANCE AT
BEGINNING END
DESCRIPTIONS OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
Valuation allowance for deferred tax assets(1):
June 30, 1997 $1,128,408 $2,874,764 $ $ 4,003,172
June 30, 1996 5,335,638 4,207,230 1,128,408
June 30, 1995 3,194,887 2,140,751 5,335,638
(1) For further information, refer to Note 8, Income Taxes, in the notes to
the Consolidated Financial Statements included in the Form 10-K
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