UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . to . . . . . . . . .
Commission file number 0-20430
AZCO MINING INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 84-1094315
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7239 N. El Mirage Road
Glendale, Arizona 85307
----------------------------
(Address of principal executive offices)
(Zip Code)
(623) 935-0774
--------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The Company had 37,992,122 shares of Common Stock outstanding as of June 6,
2003.
AZCO MINING INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statement of Stockholders' Equity 6
Notes to Interim Consolidated Financial Statements 7-18
-2-
AZCO MINING INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
ASSETS 2003 2002
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 9,544 $ 884,647
Prepaids and other 201,296 179,225
Inventories (Note 2) 1,082,147 1,095,780
------------- -------------
Total current assets 1,292,987 2,159,652
------------- -------------
Capital assets (Note 3):
Mineral properties, plant & equipment, net 6,884,402 10,352,872
Capital assets, net 219,292 288,148
------------- -------------
7,103,694 10,641,020
------------- -------------
Restricted cash 178,659 190,400
------------- -------------
Total assets $ 8,575,340 $ 12,991,072
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 849,452 $ 540,768
Notes payable (Note 4) 1,161,680 443,672
Accrued settlement obligation (Note 5) 540,000 586,000
------------- -------------
2,551,132 1,570,440
Long term liabilities:
Accrued settlement obligation (Note 5) $ - 444,900
Financing lease liability (Note 4) 2,107,116 1,975,650
Notes payable to related party (Note 4) - 615,068
Other liabilities 82,218 275,127
------------- -------------
2,189,334 3,310,745
------------- -------------
Total liabilities 4,740,466 4,881,185
------------- -------------
Contingencies and commitments (Note 6)
STOCKHOLDERS' EQUITY
Common stock: $.002 par value, 100,000,000 shares
authorized; 37,922,122 shares outstanding as of March 31, 74,773 62,304
2003 and 31,151,121 shares outstanding as of June 30, 2002
Additional paid-in capital 32,979,705 30,951,523
Accumulated deficit (29,219,604) (22,903,940)
------------- -------------
3,834,874 8,109,887
------------- -------------
Total liabilities and stockholders' equity $ 8,575,340 $ 12,991,072
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
AZCO MINING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
SALES $ 23,974 $ 31,280 $ 54,799 $ 56,080
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Production costs 108,021 452,726 872,662 919,091
General and administrative 267,684 350,787 689,496 796,868
Exploration 4,500 89,839 33,559 173,425
Amortization & depreciation 60,354 33,470 174,709 103,228
Financing consulting fees - - 432,349 -
Impairment of long-lived assets 3,291,773 - 3,291,773 -
Gain on sale of assets (65,000) - (65,000) -
Accretion of asset retirement
obligation (Note 6) 1,250 - 3,750 -
------------ ------------ ------------ ------------
Total operating costs and expenses 3,668,582 926,822 5,433,298 1,992,612
------------ ------------ ------------ ------------
OPERATING LOSS $(3,644,608) $ (895,542) $(5,378,499) $(1,936,532)
OTHER INCOME/EXPENSE:
Interest expense (253,652) (284,721) (733,798) (496,047)
Interest income - 4,190 3,210 6,103
Miscellaneous expense, net (73,563) - (157,672) -
------------ ------------ ------------ ------------
(327,215) (280,531) (888,260) (489,944)
------------ ------------ ------------ ------------
INCOME TAX BENEFIT - (998,053) - (998,053)
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF (3,971,823) (178,020) (6,266,759) (1,428,423)
ACCOUNTING CHANGE
Cumulative effect of accounting change, - - 13,902 -
net of taxes of $0 (Note 8)
------------ ------------ ------------ ------------
NET LOSS $(3,971,823) $ (178,020) $(6,280,661) $(1,428,423)
============ ============ ============ ============
Basic loss per share before cumulative (0.11) (0.01) (0.18) (0.05)
effect of accounting change
Cumulative effect of accounting change - - - -
------------ ------------ ------------ ------------
Basic loss per share $ (0.11) $ (0.01) $ (0.18) $ (0.05)
============ ============ ============ ============
Diluted loss per share before cumulative (0.11) (0.01) (0.18) (0.05)
effect of accounting change
Cumulative effect of accounting change - - - -
------------ ------------ ------------ ------------
Diluted loss per common share $ (0.11) $ (0.01) $ (0.18) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES 37,604,319 30,052,843 34,230,029 30,051,351
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
AZCO MINING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,280,661) $(1,428,423)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 174,709 103,228
Write-down of inventory - 891,891
Impairment of long-lived assets 3,291,773
Accretion of asset retirement obligation 3,750 -
Stock compensation and other
non-cash expenses 363,000 -
Amortization of debt discount 286,298 303,689
Beneficial conversion from convertible debt 163,543 -
Mark to market adjustments on conversion option (5,871)
Gain on sale of mineral properties, plant and
equipment (65,000) -
Cumulative effect of accounting change 13,902 -
Changes in assets and liabilities, net:
Prepaid and other (109,819) (130,036)
Income tax receivable - (998,053)
Inventories 13,633 (927,945)
Restricted cash 11,741 -
Accounts payable and accrued liabilities 635,884 (519,611)
Accrued settlement obligation (184,900) -
------------ ------------
Net cash used in operating activities (1,688,018) (2,705,260)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment - (100,000)
Mineral properties, plant and equipment 65,000 (123,194)
------------ ------------
Net cash used for investing activities 65,000 (223,194)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 879,483 843,500
Payments on notes payable (100,000) (243,500)
Issuance of financing lease - 3,000,000
Proceeds from stock sale - 164,250
Payments on capital lease obligations (51,968) (38,704)
Proceeds from exercise of options 20,400 8,800
------------ ------------
Net cash provided by financing activities: 747,915 3,734,346
------------ ------------
Net increase (decrease) in cash and cash equivalents (875,103) 805,892
Cash and cash equivalents at beginning of period 884,647 39,920
------------ ------------
Cash and cash equivalents at end of period $ 9,544 $ 845,812
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
AZCO MINING INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
COMMON
STOCK ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
Balance June 30, 2002 31,152,121 $62,304 $30,951,523 $(22,903,940) $ 8,109,887
Dividend to shareholders
(Note 4) 35,003 (35,003) -
Benificial conversion on
convertible debt 163,543 163,543
Common shares issued
(Note 7) 6,740,001 12,409 1,809,296 1,821,705
Exercise of options 30,000 60 20,340 20,400
Net loss (6,280,661) (6,280,661)
---------- ------- ----------- ------------- ------------
Balance March 31, 2003 37,922,122 $74,773 $32,979,705 $(29,219,604) $ 3,834,874
========== ======= =========== ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND GOING CONCERN
-----------------------------------------------
The unaudited consolidated financial information presented herein has been
prepared in accordance with the instructions to Form 10-Q and does not include
all of the information and note disclosures required by generally accepted
accounting principles. Therefore, this information should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Azco Mining Inc. ("Azco" or "the Company") Annual Report on Form 10-K for the
fiscal year ended June 30, 2002. This interim financial information reflects all
adjustments that are, in the opinion of management, necessary to a fair
statement of the results for the interim period.
The consolidated balance sheet as of June 30, 2002 included herein has been
derived from the audited consolidated balance sheet included in the Company's
annual report on Form 10-K for the year ended June 30, 2002, but does not
include all the disclosures required by generally accepted accounting
principals.
Azco Mining Inc. is a mining company incorporated in Delaware. Its general
business strategy is to acquire, explore and develop mineral properties. The
Company's principal assets are the 100% owned Black Canyon Mica Project in
Arizona. The Company is currently focused on producing high quality muscovite
mica and feldspathic sand that is produced as a by-product of mica.
Additionally, marketing efforts are concentrated on the sale of mica filled
plastic pellets, developed by Azco, to be used in the production of reinforced
plastics.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue to operate as a going concern. The Company has
suffered recurring losses from operations and the Company will require
additional funds to continue operations. In November 2002, the Company
temporarily ceased production at its Black Canyon Mine crushing and
concentrating facilities due to cash constraints. Production will start again
once acceptable financing can be arranged. Management is actively seeking
additional financing; however, there is no assurance that these efforts will be
successful or on terms acceptable to the Company. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
These consolidated financial statements do not include the adjustments that
would be necessary, should the Company be unable to continue as a going concern.
The Company is currently in default under the terms of the settlement agreement
with two of its former officers as well as it financing lease agreement. It is
in negotiations for the resolution of both of these issues. In addition, the
Company is attempting to structure a convertible debenture transaction as well
as a loan secured by the proceeds of current plastic production. The proceeds
of these bridge-financing transactions are expected to enable the Company
finance its immediate cash needs and enable it to continue operating through the
closing of a long term financing arrangement.
-7-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Long-term financing arrangements are currently being investigated with several
groups. Two of the Company's major secured creditors have been approached and
talks are ongoing as to what financing arrangements can be found. The Company
is negotiating with a potential purchaser who has expressed an interest in the
purchase of the entire mica project. In addition, we continue to communicate
with potential joint venture partners who show an interest in the mica project.
The Company anticipates that a minimum of $3 million will be required during
fiscal 2004 to support production and marketing of products. These requirements
include costs for general operating purposes including planned production,
payments due on existing debt obligations (including interest costs) and costs
associated with the generation of plastic pellets. In order to achieve a level
of planned production necessary to achieve continued operations, the Company
will likely require additional funding over and above the $3 million during
fiscal 2004.
The Company also anticipates the expenditure of $3.5 million on additional
capital improvements in fiscal 2004. These expenses will cover enhancements to
the sand plant facilities including additional rare earth magnets and bagging
equipment enabling it to sell a much larger portion of its sand production into
the stucco and high-end sand markets.
In addition to the capital and operating expenditures anticipated in fiscal 2004
once long term financing has been procured, the Company anticipates expenditures
of $2.0 million in accrued obligations and debt retirement or restructuring
costs.
The Company has several mica products inventoried and continues its development
of mica filled plastic pellets in conjunction with three manufacturers of
reinforced plastics. During the current quarter, the Company filled orders of
7,500 lbs. of its mica filled polyethylene masterbatch and has an additional
70,000 lbs. order for the fourth quarter of the current fiscal year. The
Company anticipates that its current inventory of mica is sufficient to support
its continued plastics product development until mica and sand production is
resumed.
There is no assurance that the Company can secure financing by way of a joint
venture or otherwise, and if at all, on terms acceptable to the Company.
-8-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 2. INVENTORIES
---------------------
MARCH 31, JUNE 30,
2003 2002
---------- ----------
Broken ore $ 634,351 $ 725,202
Mica work-in-process 353,196 277,378
Mica finished goods 90,000 93,200
Sand finished goods 4,600 0
---------- ----------
Total $1,082,147 $1,095,780
---------- ----------
NOTE 3. CAPITAL ASSETS
-------------------------
Detail of mica project mineral properties, plant and equipment is as follows:
MARCH 31, JUNE 30,
2003 2002
----------- ------------
Acquisition of mineral properties $1,528,724 $ 2,219,996
Mining and processing plant and equipment 4,818,438 7,122,679
Development costs 647,444 1,104,966
Accumulated amortization (110,204) (94,769)
----------- ------------
Total $6,884,402 $10,352,872
----------- ------------
Detail of other capital assets is as follows:
---------------------------------------------
MARCH 31, JUNE 30,
2003 2002
----------- ----------
Office building $ 152,997 $ 152,997
Furniture and equipment 381,383 381,383
Vehicles 81,146 81,146
Accumulated depreciation (396,234) (327,378)
----------- ----------
Total $ 219,292 $ 288,148
----------- ----------
During the quarter the Company reassessed the carrying value of the long-lived
mineral properties, plant and equipment previously valued at the historical
cost. See Note 11 for further discussion.
-9-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 4. NOTES PAYABLE, WARRANTS AND OTHER FINANCING
---------------------------------------------------
In December 2002, the Company issued a $250,000 note to Cornell Capital Partners
LP ("Cornell") in conjunction with the Equity Line of Credit. A 5% discount was
deducted resulting in net proceeds to the Company of $237,500. The note was
paid off before the due date of February 2003 by issuing 1,400,000 shares in the
second quarter and an additional 222,586 shares during the third quarter.
In January 2003, the Company received an additional $226,983 from the sale of a
$250,000 note to Cornell in conjunction with the Equity Line of Credit. Legal
fees of $10,517 and a 5% discount of $12,500 were deducted from the proceeds.
The note accrues interest at 24% per year and was due March 17, 2003. The
Company repaid $176,855 of the note in the third quarter through the issue of
1,348,140 shares of its common stock and a balance of $73,145 is currently
outstanding. The Company is currently negotiating financing arrangements with
Cornell to address this outstanding balance.
In October 2002, Azco issued a $500,000 convertible debenture to Cornell. The
entire amount of the note has been converted into Azco Common stock (1,920,373
shares in the second quarter and an additional 861,377 shares in the third
quarter) based upon the contractual conversion price of the average of the three
lowest closing prices of Azco's common stock for the five trading days
immediately preceding conversion. The Company's results of operations for the
nine months ended March 31, 2003 reflect expenses of $163,543 for the excess of
market price over conversion price (beneficial conversion) and $5,871 for the
recognition and subsequent mark to market adjustments for the conversion option
as a derivative in accordance with Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and hedging Activities".
In January 2002, Azco completed a financing lease transaction that yielded the
Company net proceeds of $2,842,500. Under the terms of the transaction, the
Company sold a 40 percent ownership in its mica processing facility located in
Glendale, Arizona. Subsequently, Azco leased the property back for an initial
period of 10 years, with an option to repurchase the 40 percent ownership for
120 percent of the purchase price after the second year. The repurchase price of
the property increases by 10 percent of the purchase price each year the option
remains unexercised up to a maximum of 150 percent of the purchase price.
Payments for the first 6 months under the lease agreement were $30,000, $37,500
for the second six months and $45,000 thereafter. The Company is currently in
default under the terms of the financing lease transaction and is in discussions
to resolve the issue. The Company continues to classify this liability as long
term as should negotiations fail to mature the lessor's remedies pertain to a
security interest in most of the Company's property, plant and equipment.
-10-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
In connection with this transaction, the Company issued a warrant to purchase
2,550,000 shares of the Company's common stock at $.50 per share. This warrant
vested in January 2002 and is exercisable through January 2007.
The notes payable, financing lease and related warrants have been reflected in
the accompanying balance sheet at their relative fair values. The discount
associated with the notes payable and financing lease is being amortized over
the term of the respective instrument using an effective interest method.
In December 2001, the Company received a one-year $100,000 loan, bearing
interest at 12% per annum, from Luis Barrenachea, a shareholder. In connection
with this loan, the Company issued a warrant to purchase 125,000 shares of the
Company's common stock at $.40 per share. In December 2002, the terms of the
loan and the warrants were extended an additional year through December 2003.
The Company's policy is to account for the increase in the value of the warrant
(resulting from an extension of the exercise date) as a dividend to a
shareholder. Accordingly, an additional $7,188 has been reflected as an
increase to accumulated deficit and additional paid-in-capital in the March 31,
2003 Consolidated Statement of Stockholders' Equity.
In October 2001, the Company received a one-year $100,000 loan, bearing interest
at 12% per annum, from Mr. Barrenachea. In connection with this loan, the
Company issued a warrant to purchase 125,000 shares of the Company's common
stock at $.40 per share. In October 2002, the loan and the warrants were
extended an additional year through October 2003. The Company's policy is to
account for the increase in the value of the warrant (resulting from an
extension of the exercise date) as a dividend to a shareholder. Accordingly, an
additional $11,617 has been reflected as an increase to accumulated deficit and
additional paid-in-capital in the March 31, 2003 Consolidated Statement of
Stockholders' Equity.
In September 2001, the Company received a one-year $200,000 loan, bearing
interest at 12% per annum, from Mr. Barrenachea. In connection with this loan,
the Company issued a warrant to purchase 125,000 shares of the Company's common
stock at $.40 per share. In September 2002 the terms of the loan and the
warrants were extended an additional year through September 2003. The Company's
policy is to account for the increase in the value of the warrant (resulting
from an extension of the exercise date) as a dividend to a shareholder.
Accordingly, an additional $16,198 has been reflected as an increase to
accumulated deficit and additional paid-in-capital in the March 31, 2003
Consolidated Statement of Stockholders' Equity.
In October 2001, the Company restructured its $800,000 loan agreement with
Lawrence Olson the Company's Chairman, CEO and President. Mr. Olson agreed to
extend the note payable an additional year to March 15, 2003 in consideration
for 700,000 warrants
-11-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
to purchase the Company's stock at an exercise price of $0.40. The warrants
vested in December 2001 and shall expire in October 2003. In addition the annual
interest rate was adjusted from prime plus 1% to 12%. In June 2002, the loan was
extended an additional year and Azco entered into a security agreement with Mr.
Olson, whereby Azco's assets secured the loan. The Company's assets also secure
the lease payments due on the financing lease as well as the payments due under
the settlement agreement. The loan is currently due in March 2004.
The fair value of the warrants issued has been determined by the Company using
the Black Scholes valuation model and has been reflected as additional-paid in
capital.
Notes payable and other financing at March 31, 2003 consisted of the following:
------------------------------------------------------------------------------
Principal Unamortized Discount
------------------------------------------------------------------------------
24% note, due March 2003 $ 73,145 $ -
12% note, due September 2003 200,000 -
12% note, due October 2003 100,000 -
12% note, due December 2003 100,000 -
12% note, due March 2004 800,000 $ 111,465
---------------------------------
Total $1,273,145 $ 111,465
---------------------------------
Financing lease liability, due January 2011 $2,107,116 $ 2,392,884
------------------------------------------------------------------------------
NOTE 5. SETTLEMENT OBLIGATION
--------------------------------
In July 2002, Azco entered into a settlement agreement regarding fees payable
under severance agreements with two of its former officers and directors, Alan
P. Lindsay and Anthony R. Harvey. Azco agreed to pay each former director the
sum of $350,000. The amount is to be paid in an initial payment of $20,000 each,
due upon the signing of the agreement, and in monthly payments of $10,000
thereafter, with the entire balance due within 24 months of the date this
agreement is signed. In addition, Azco paid $24,898 representing one half of the
legal fees incurred by the former directors. Under the terms of the agreement,
Azco also provided Harvey and Lindsay each with 150,000 shares of common stock,
which shares shall be unrestricted as allowed pursuant to Rule S-8 of the Rules
of the Securities and Exchange Commission. As of March 31, 2003, $540,000
remained outstanding under the agreement. No monthly payments have been made
since December 2002. Accordingly, the Company is currently in default
-12-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
under the terms of the settlement agreement and is in negotiations for the
resolution of this matter.
NOTE 6. COMMITMENTS AND CONTINGENCIES
-----------------------------------------
On January 22, 1999, the trustee (Petitioner) in bankruptcy proceedings against
Eagle River served a petition, in the Quebec Superior Court, District of Hull,
upon the Company in order to recover assets from the Company. The Petitioner
alleges that, through the Company's involvement with Eagle River in the Mali
Project, the Company is guilty of contractual breaches in excess of $4,300,000.
No accrual has been made for this claim because management does not believe it
is probable that the case will be determined against the Company.
On June 25, 2002 Azco received a demand for arbitration filed by iCapital
Corporation seeking $144,000 in relief due to failure to pay under a June 26,
2001 Financial Consulting Agreement. It is the position of Azco and its counsel
that the contract is void and it is unlikely that iCapital will prevail on their
claim.
NOTE 7. CAPITAL STOCK AND OUTSTANDING OPTIONS
---------------------------------------------------
In November 2002, the Company's Registration Statement on Form S-1, filed with
the Securities and Exchange Commission in regard to the Equity Line of Credit,
became effective. Under the agreement, the Company became eligible to, at its
discretion, periodically issue and sell shares of common stock to Cornell for up
to a total purchase price of $5 million through November 12, 2004. For each
share of common stock purchased under the Equity Line of Credit, Cornell will
pay 92.5% of the lowest closing bid price of our common stock on the American
Stock Exchange for the five trading days immediately following the notice date.
The amount of each advance is subject to a maximum of $500,000 per advance, with
a minimum of five trading days between advances. In addition, Cornell will
retain 5% of each advance under the Equity Line of Credit. Cornell and Westrock
Advisors, Inc. received 237,624 and 9,901 shares of common stock, respectively,
as a one-time commitment fee, which was equal to $250,000 based on a closing bid
of $1.01 on June 19, 2002. The Company has issued the maximum 6,000,000 shares
allowed under the terms of the registration statement filed with the SEC in
conjunction with the Cornell financing.
On December 18, 2002, the Company issued 10,000 shares for legal services
rendered in conjunction with an August 2002 filing on Form S-8 in connection
with the settlement agreement discussed in Note 5. The value of the shares
issued was $10,200 recorded as general and administrative expense in fiscal
2002.
-13-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
In July 2002, the Company issued 430,000 shares of the Company's common stock in
conjunction with the consulting agreement with Pacifica Financial Group.
Options to purchase 1,234,500 and 2,305,500 shares of the Company's common stock
were outstanding under the Company's Stock Option Plan at March 31, 2003 and
2002, respectively. The impact of these options has been excluded from the
diluted earnings per share calculation, as their effect would be anti-dilutive.
These options are exercisable between $0.44 and $1.20 per common share at
varying dates through 2007.
The Company accounts for its stock option plans by measuring compensation cost
using the intrinsic-value-based method presented by Accounting Principles (APB)
Opinion No. 25, "Accounting Stock Issued to Employees," and related
interpretations. No compensation cost is reflected in consolidated net loss, as
all options granted under the plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant. The following
table presents the effect on net loss and loss per common share as if the
Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock Based Compensation," to compensation cost.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
-------------------- ------------------- ------------ ------------
Net loss, as reported $ (3,971,823) (178,020) $(6,266,759) (1,428,423)
Add:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards
net of tax - (1,101,483) - (1,342,743)
Pro forma net loss $ (3,971,823) (1,279,503) $(6,266,759) (2,771,166)
Loss per common share
Basic - as reported $ (0.11) $ (0.01) $ (0.18) $ (0.05)
Basic - pro forma $ (0.11) $ (0.04) $ (0.18) $ (0.09)
Loss per common share
Diluted - as reported $ (0.11) $ (0.01) $ (0.18) $ (0.05)
Diluted - pro forma $ (0.11) $ (0.04) $ (0.18) $ (0.09)
-14-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 8. GUARANTEES
--------------------
In November 2002, the Financial Accounting Statements Board (FASB) issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires that upon issuance of certain guarantees, a guarantor must
recognize a liability for the fair value of an obligation assumed under the
guarantee. FIN 45 also requires significant new disclosures, in both interim
and annual financial statements, by a guarantor, about obligations associated
with guarantees issued. FIN 45 disclosure requirements are effective for Azco's
fiscal quarter ended December 31, 2002 and the initial recognition and
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002.
As of March 31, 2003, the Company does not have any identified guarantees which
meet the requirements of FIN 45
NOTE 9. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
---------------------------------------------------------
On July 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
(SFAS No. 143). SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs estimated to aggregate approximately $250,000.
Specifically, the Statement requires that retirement obligations be recognized
when they are incurred and displayed as liabilities with the initial measurement
being at the present value of estimated third party costs. In addition, the
asset retirement cost is capitalized as part of the asset's carrying value and
subsequently allocated to expense over the assets useful life.
The asset retirement costs associated with the Mica project consist of
reclamation of disturbed property as well as the disposal and dismantling of
related property and equipment. The Company previously accounted for these
costs through periodic charges to earnings using the units-of-production method.
The change in accounting resulted in a decrease to long-lived assets of
$161,746, a decrease to long-term liabilities of $147,844 and a cumulative
effect charge to earnings during the period of $13,902.
As of December 31, 2002, the Company maintained the following restricted assets
associated with reclamation costs for the Black Canyon Mica property pursuant to
regulatory requirements:
-15-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
- $50,000 held on deposit for the Arizona State Treasurer in a one-year
automatically renewable short-term investment; and
- $128,659 held on deposit as collateral against an irrevocable letter
of credit of the same amount to the U.S. Bureau of Land Management,
which renewed October 9, 2002 for an additional year.
A roll forward of the Company's asset retirement obligation through March 31,
2003 is as follows:
Initial liability recognition, July 1, 2002 $45,309
Accretion 3,750
_______
Balance, March 31, 2003 $49,059
_______
Had SFAS No. 143 been adopted on July 1, 2002 cost of products sold would have
increased (due to accretion) by $1,250 and $3,750 for the three and nine months
ended March 31, 2003, respectively.
NOTE 10. NEW PRONOUNCEMENTS
------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 replaces certain
previously issued accounting guidance, develops a single accounting model for
long-lived assets other than goodwill and indefinite-lived intangibles, and
broadens the framework previously established for assets to be disposed of by
sale (whether previously held or newly acquired). This Statement was effective
as of the beginning of fiscal 2003 and did not have a material impact on the
Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections"
(SFAS No.145). This Statement rescinds SFAS No. 4, SFAS No. 64 and further
clarifies debt extinguishments, which classify as extraordinary. Additionally,
SFAS No. 145 amends SFAS No. 13 in order to clarify the accounting for the
treatment of lease modifications. Provisions of this Statement are effective for
fiscal year 2003 and the pronouncement did not have a material impact on its
financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 replaces
Emerging Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits
-16-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
and Other Costs to Exit and Activity (including Certain Costs Incurred in a
Restructuring)". The primary difference from existing guidance is that SFAS No.
146 requires the recognition of exit costs at fair value when a liability is
incurred, versus at the date of the exit plan approval. This Statement is
effective for exit and disposal activities of the Company that are initiated
after December 31, 2002. The Company has not historically had significant exit
or disposal activities.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123". SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, the Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both interim and annual financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The statement was effective for
fiscal years ending after December 15, 2002. The Company adopted this Statement
in regards to disclosure provisions for the quarter ended March 31, 2003, and
has provided the interim information in Note 7, Capital Stock and Outstanding
Options.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 provides guidance in determining (1) whether consolidation is required
under the "controlling financial interest" model of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, or other existing
authoritative guidance, or, alternatively, (2) whether the variable-interest
model under FIN 46 should be used to account for existing and new entities. Azco
has considered the guidance in FIN 46 and has determined that it did not have a
material effect on its financial position, results of operations cash flows or
note disclosures thereto.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. This statement is generally effective for contracts entered into
or modified after June 30, 2003. We are currently analyzing the impact of
adoption of SFAS No. 149 on our financial reporting and disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equities" (SFAS No.
150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain
-17-
AZCO MINING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
financial instruments with characteristics of both liabilities and equity. The
Company is currently evaluating the impact of SFAS No. 150 on its balance sheet.
NOTE 11. WRITE-DOWN OF LONG-LIVED ASSETS
---------------------------------------------
In conjunction with the in-depth discussions surrounding a potential sale of all
or some portion of the Company's mining assets, the Company determined that an
impairment charge was necessary to more accurately reflect the carrying value of
their long-lived assets. The amount of the impairment charge was based upon a
formal indication of willingness to acquire the Company's mining assets received
during the third quarter and, accordingly, represents management's best estimate
of the fair value of these assets. An impairment charge of $3,291,773 has
reduced the carrying cost of mineral properties, plant and equipment.
NOTE 12. SECURITY PURCHASE AGREEMENT
----------------------------------------
Under the terms of a Stock Purchase Agreement ("the Agreement") dated April 10,
2003, the Company sold all of the issued and outstanding shares of stock of
Cobre del Mayo S.A. de D.V., a Mexican corporation ("Cobre del Mayo") to
Frontera Cobre del Mayo, Inc. a Delaware corporation ("Frontera"). Azco
received $200,000 upon closing and is to receive $50,000 three months after
closing.
In addition, Azco will receive an initial deferred payment of $250,000, upon the
date of construction commencement of the Piedras Verdes copper project ("the
Project"), if the COMEX price of copper is less than $1.00 per pound or $500,000
if the COMEX price is above $1.00 per pound. Upon the date of commercial
production, Azco will receive an additional payment of $500,000, if the COMEX
price is less than $1.00 per pound or $1,000,000 if the COMEX price is above
$1.00 per pound.
Frontera also agreed to pay Azco a royalty of $0.02 per pound of copper
produced and sold from the Project during which calendar quarter the average
COMEX price is at or above $1.20 per pound up until such time as the initial
deferred payment, the subsequent deferred payment and the royalty equals in
aggregate $4,750,000.
Under the terms currently being negotiated with two of the Company's former
directors it is possible that the Company could assign all or part of the
payments and royalties it is due under the Agreement to the former directors.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements concerning trends and other forward-looking
information, within the meaning of the federal securities laws. Such
forward-looking statements are subject to uncertainties and factors relating to
our operations and business environment, all of which are difficult to predict
and many of which are beyond our control. We believe that the following factors,
among others, could affect our future performance and cause actual results to
differ materially from those expressed or implied by forward-looking statements
made by us or on our behalf: (1) our lack of necessary financial resources to
complete development of the mica product and by-products, successfully market
our mica product and fund our other capital commitments; (2) the lack of
commercial acceptance of our mica product or by-products; (3) changes in
environmental laws; (4) problems regarding availability of materials and
equipment; (5) failure of the mica project equipment to process or operate in
accordance with specifications, including expected throughput, which could
prevent the project from producing commercially viable output; and (6)
unfavorable weather conditions, in particular, high water levels in the Agua
Fria river which could temporarily limit access to the Black Canyon mica mine
site.
References to "we", "us", "our", and Azco Mining, refer to Azco Mining Inc. and
its subsidiaries, on a consolidated basis, unless the context otherwise
requires.
GENERAL
-------
We were formed in 1988. In December 1995, we sold our Sanchez copper project
and a 70% interest in our Mexican copper project, the Piedras Verdes Project, to
Phelps Dodge Corporation for $40 million. Principal income since the sale has
been a result of interest earned on the proceeds of the sale of these assets.
We are currently focused on the start up of our facilities to a consistent
production capacity designed to produce high quality muscovite mica and
feldspathic sand from our 100% owned Black Canyon mica project located near
Phoenix, Arizona. The Company is seeking financing that will be necessary to
continue operations.
The Company is aware that it currently is not in compliance with certain listing
requirements established by the American Stock Exchange ("AMEX"). Under the
current circumstances we believe that it is possible the Company could be better
served by trading its common stock over the counter on the bulletin board
established by the National Association of Securities Dealers ("NASD"). We have
initiated discussions with the NASD and the AMEX as to the possibility of
de-listing from the AMEX and listing our securities on the OTC:BB.
-19-
RESULTS OF OPERATIONS
-----------------------
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
The Company's sales for the three months ended March 31, 2003 were $23,974
compared to $31,280 for the three months ended March 31, 2002. Sales in the
current period consisted of approximately $17,000 of plastic pellets and $6,000
of cosmetic grade mica while all sales for the three month period ended March
31, 2002 were of cosmetic grade mica.
The net loss for the three months ended March 31, 2003 was $3,971,823 ($0.11)
per share) compared to a net loss of $ 178,020 ($0.01 per share) for the three
months ended March 31, 2002. The increased net loss reflects a $3,291,773
write-down of long-lived assets (See Note 11 to Interim Consolidated Financial
Statements) and lower production costs due to curtailed activity in the current
period off set by a $998,053 income tax benefit realized in the third fiscal
quarter of 2002 as a result of the Job Creation and Worker Assistance Act of
2002.
Production expense was $108,021 for the three months ended March 31, 2003
compared to $452,726 for the three months ended March 31, 2002. The decrease in
production expense reflects the curtailment of production activity in the second
quarter.
General and administrative expense was $257,684 for the three months ended March
31, 2003 compared to $350,787 for the three months ended March 31, 2002. The
decrease in general and administrative expense reflects cost cutting efforts due
to financial conditions.
Exploration expenses were $4,500 for the three months ended March 31, 2003
compared to $89,839 for the three months ended March 31, 2002. The decrease in
exploration expense is due to the fact that the Company did not fund its share
of the costs associated with the Piedras Verdes project. Our interest in this
project has subsequently been sold. See Financial Condition for further
information.
The gain on sale of assets was $65,000 for the three months ended March 31, 2003
is the result of the sale of a piece of heavy machinery for operating cash
purposes.
Miscellaneous expense was $73,563 for the three months ended March 31, 2003
compared to $0 for the three months ended March 31, 2002. The increase in
miscellaneous expense reflects the mark to market adjustments for the conversion
option associated with the $500,000 convertible debenture sold to Cornell.
-20-
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED
MARCH 31, 2002
The Company's sales for the nine months ended March 31, 2003 were $54,799
compared to $56,080 for the nine months ended March 31, 2002. Sales in the
current period consisted of approximately $17,000 of plastic pellets, $31,000 of
feldspathic sand and $6,000 of cosmetic grade mica while all sales for the nine
month period ended March 31, 2002 were of cosmetic grade mica.
The net loss for the nine months ended March 31, 2003 was $6,280,661 ($0.18 per
share) compared to a net loss of $ 1,428,423 ($0.05 per share) for the nine
months ended March 31, 2002. The increased net loss reflects a $3,291,773
write-down of long-lived assets (See Note 11 to Interim Consolidated Financial
Statements) and lower production costs due to curtailed activity in the current
period off set by a $998,053 income tax benefit realized in the third fiscal
quarter of 2002 as a result of the Job Creation and Worker Assistance Act of
2002.
General and administrative expense was $689,496 for the nine months ended March
31, 2003 compared to $796,868 for the nine months ended March 31, 2002. The
decrease in general and administrative expense reflects cost cutting efforts due
to financial conditions.
Exploration expense was $33,559 for the nine months ended March 31, 2003
compared to $173,425 for the nine months ended March 31, 2002. The decrease in
exploration expense is due to the fact that the Company did not fund its share
of the costs associated with the Piedras Verdes project. Our interest in this
project has subsequently been sold. See Financial Condition for further
information.
The gain on sale of assets was $65,000 for the nine months ended March 31, 2003
is the result of the sale of a piece of heavy machinery for operating cash
purposes.
Financial consulting fees were $432,349 for the nine months ended March 31, 2003
compared to $0 for the nine months ended March 31, 2002, these costs reflect
$363,000 for the value of shares provided to a financial consultant of the
Company as well as efforts to find suitable financing arrangements for the
Company.
Interest expense was $733,798 for the nine months ended March 31, 2003 compared
to $496,047 for the nine months ended March 31, 2002. The increase is due to
the amortization of the discount associated with the notes payable and financing
lease agreement.
Miscellaneous expense was $157,672 for the nine months ended March 31, 2003
compared to $0 for the nine months ended March 31, 2002. The increase in
miscellaneous expense reflects the mark to market adjustments for the conversion
option associated with the $500,000 convertible debenture sold to Cornell.
-21-
FINANCIAL CONDITION
--------------------
As of March 31, 2003, we had unrestricted cash of $9,544.
Net cash used in operating activities was $1,688,018 for the first nine months
of fiscal 2003 as compared to $2,705,260 in the same period of the prior year.
The decrease was primarily due to a $998,053 income tax benefit realized in the
third fiscal quarter of 2002.
Net cash flows provided by financing activities were $747,915 for the first nine
months of fiscal 2003 as compared to $3,734,346 in the same period of the prior
year. The variance from the same period of the prior year is the result of the
$3,000,000 financing lease agreement entered into during the previous period.
The Company has suffered recurring losses from operations and assuming it will
continue to operate as a going concern it will require additional funds to
continue operations. On November 4, 2002 the Company temporarily ceased
production at its Black Canyon Mine crushing and concentrating facilities due to
cash constraints. Production will start again once adequate financing has been
raised. Management is actively seeking major financing; however, there is no
assurance that these efforts will be successful or on terms acceptable to the
Company. These matters raise substantial doubt about the Company's ability to
continue as a going concern. These consolidated financial statements do not
include the adjustments that would be necessary, should the Company be unable to
continue as a going concern.
In conjunction with the in-depth discussions surrounding a potential sale of all
or some portion of the Company's mining assets, the Company determined that an
impairment charge was necessary to more accurately reflect the carrying value of
their long-lived assets. The amount of the impairment charge was based upon a
formal indication of willingness to acquire the Company's mining assets during
the third quarter and, accordingly, represents management's best estimate of the
fair value of these assets. An impairment charge of $3,291,773 has reduced the
carrying cost of mineral properties, plant and equipment.
The Company is currently in default under the terms of the settlement agreement
with two of its former officers as well as it financing lease agreement. It is
in negotiations for the resolution of both of these issues. In addition, the
Company is currently attempting to structure a convertible debenture transaction
as well as a loan secured by the proceeds of current plastic production. The
proceeds of these bridge-financing transactions are expected to enable the
Company to fund its immediate cash needs and enable it to continue operating
through the closing of a long term financing arrangement.
Long-term financing arrangements are currently being negotiated with two groups
for the sale of some portion or the entire mica project. Azco expects to reach a
definitive agreement in the next month.
-22-
Once acceptable funding has been obtained, the Company anticipates a minimum of
$3 million in expenditures of during fiscal 2004 to support production and
marketing of our products. These requirements include costs for general
operating purposes including planned production, payments due on existing debt
obligations (including interest costs) and costs associated with the generation
of plastic pellets. In order to achieve a level of planned production necessary
to achieve continued operations, the Company will likely require additional
funding over and above the $3 million during fiscal 2004.
The Company also anticipates the expenditure of $3.5 million on additional
capital improvements in fiscal 2004. These expenses will cover enhancements to
the sand plant facilities including additional rare earth magnets and bagging
equipment enabling it to sell a much larger portion of its sand production into
the stucco and high-end sand markets.
In addition to the capital and operating expenditures anticipated in fiscal 2004
once long term financing has been procured, the Company anticipates expenditures
of $2.0 in accrued obligations and debt retirement or restructuring costs.
The Company has several mica products inventoried and continues its development
of mica filled plastic pellets in conjunction with three manufacturers of
reinforced plastics. During the current quarter, the Company filled orders of
7,500 lbs. of its mica filled polyethylene masterbatch and has an additional
70,000 lbs. order for the fourth quarter of the current fiscal year. The
Company anticipates that its current inventory of mica is sufficient to support
its continued plastics product development until mica and sand production is
resumed.
There is no assurance that the Company can secure financing by way of a joint
venture or otherwise, and if at all, on terms acceptable to the Company. Should
such financing not be arranged within the next few months, then it is likely
that the Company will need to, once again, reassess the carrying value of its
long-lived assets, as the likelihood of recovering their value would be
diminished and a write-down of these assets may be appropriate. In an effort to
more accurately reflect the carrying value of its long-lived assets the Company
reduced the carrying value of its long-lived assets by $3,291,773 in the quarter
ended March 31, 2003.
LEASE ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
--------------------------------------------------
Azco leases some heavy equipment. Certain equipment leases are classified as
capital leases and, accordingly, the equipment and related obligation are
recorded on our balance sheet. The Company was formerly committed to lease its
former executive office in Vancouver BC through April 2004. In March 2003, the
lease was terminated and the Company agreed to pay a total of $35,200 to
landlord and sub-let tenant by September 1, 2003.
-23-
Currently, Azco has a total of $1,273,145 of short-term notes due and payable
before March 15, 2004. In addition, the Company has entered into a
sale-leaseback financing arrangement where it may re-purchase the equipment it
sold under this transaction in January 2004 or thereafter, but is not
contractually obligated to do so until 2011. The Company is currently in
default under the terms of the financing lease transaction and is in discussions
to resolve the issue. (See Note 5 for additional information)
In conjunction with the departure of two former executives in October 2000, Azco
entered into a settlement agreement in June 2002 whereby Azco is required to
make monthly payments of $10,000, to each director, through June 2004, with the
remaining balance of $90,000 due in July 2004. The Company has paid $184,906
through March 31, 2003. Under the terms of the agreement, Azco was required to
provide Messrs. Harvey and Lindsay each with 150,000 shares of unrestricted
common stock in Azco Mining Inc. The shares were issued in July 2002. The
Company is currently in default under the terms of the settlement agreement and
is in negotiations for the resolution of this matter.
The following table is provided to detail our contractual obligations and lease
commitments:
PAYMENTS DUE IN PAYMENTS DUE IN PAYMENTS DUE IN PAYMENTS DUE
PAYMENTS DUE THROUGH 1 YEAR 2-3 YEARS 4-5 YEARS AFTER
JUNE 30, 2003 2003 2004-2005 2006-2007 2007
--------------------- --------------- -------------- ------------ ----------------
Equipment leases $ 30,478 57,483 27,244 - -
Office lease - 36,000 - - -
Settlement payments 540,000 - - - -
Notes payable 73,145 1,200,000 - - -
Financing lease 270,000 540,000 1,080,000 1,080,000 6,390,000
--------------------- --------------- -------------- ------------ ----------------
Total contractual obligations $ 913,623 1,833,483 1,107,244 1,080,000 6,390,000
===================== =============== ============== ============ ================
NEW ACCOUNTING PRONOUNCEMENTS
-------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 replaces certain
previously issued accounting guidance, develops a single accounting model for
long-lived assets other than goodwill and indefinite-lived intangibles, and
broadens the framework previously established for assets to be disposed of by
sale (whether previously held or newly acquired). This Statement was effective
as of the beginning of fiscal 2003 and did not have a material impact on the
Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). This Statement rescinds SFAS No. 4, SFAS No. 64 and further
clarifies debt extinguishments, which classify as extraordinary. Additionally,
SFAS No. 145 amends SFAS No. 13 in order to clarify the accounting for the
treatment of lease
-24-
modifications. Provisions of this Statement are effective for fiscal year 2003
and the pronouncement did not have a material impact on its financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Task Force
Issue No. 94- 3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring)" (SFAS No. 146).
The primary difference from existing guidance is that SFAS No. 146 requires the
recognition of exit costs at fair value when a liability is incurred, versus at
the date of the exit plan approval. This Statement is effective for exit and
disposal activities of the Company that are initiated after December 31, 2002.
The Company has not historically had significant exit or disposal activities.
On July 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
(SFAS No. 143). SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs estimated to aggregate approximately $250,000.
Specifically, the Statement requires that retirement obligations be recognized
when they are incurred and displayed as liabilities with the initial measurement
being at the present value of estimated third party costs. In addition, the
asset retirement cost is capitalized as part of the asset's carrying value and
subsequently allocated to expense over the assets useful life.
The asset retirement costs associated with the Mica project consist of
reclamation of disturbed property as well as the disposal and dismantling of
related property and equipment. The Company previously accounted for these
costs through periodic charges to earnings using the units-of-production method.
The change in accounting resulted in a cumulative effect charge to earnings
during the period of $13,902. See Note 9 for additional information.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of certain guarantees, a guarantor must recognize a liability for the
fair value of an obligation assumed under the guarantee. FIN 45 also requires
significant new disclosures, in both interim and annual financial statements, by
a guarantor, about obligations associated with guarantees issued. FIN 45
disclosure requirements are effective for Azco's fiscal quarter ended December
31, 2002 and the initial recognition and measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123". SFAS No.
-25-
148 provides alternative methods of transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, the Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both interim and annual financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Azco continues to apply the
intrinsic value method of accounting for stock options and will provide the
enhanced disclosure requirements in its third quarter Form 10-Q.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 provides guidance in determining (1) whether consolidation is required
under the "controlling financial interest" model of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, or other existing
authoritative guidance, or, alternatively, (2) whether the variable-interest
model under FIN 46 should be used to account for existing and new entities. Azco
has considered the guidance in FIN 46 and has determined that it did not have a
material effect on its financial position, results of operations cash flows or
note disclosures thereto.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. This statement is generally effective for contracts entered into
or modified after June 30, 2003. We are currently analyzing the impact of
adoption of SFAS No. 149 on our financial reporting and disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equities" (SFAS No.
150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Company is currently evaluating the impact of SFAS No. 150 on
its balance sheet.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
See June 30, 2002 Form 10-K.
ITEM 4: CONTROLS AND PROCEDURES
-------------------------
The Company maintains a system of disclosure controls and procedures that is
designed to ensure information required to be disclosed by the Company is
accumulated and communicated to management in a timely manner. Management has
reviewed this system of disclosure controls and procedures within 90 days of the
date hereof, and has concluded that the current system of controls and
procedures is effective.
The Company maintains a system of internal controls and procedures for financial
reporting. Since the date of management's most recent evaluation, there were no
significant changes in internal controls or in other factors that could
significantly affect internal controls.
-26-
PART II. OTHER INFORMATION
-----------------------------
ITEM 1: LEGAL PROCEEDINGS
------------------
On January 22, 1999, the trustee (Petitioner) in bankruptcy proceedings against
Eagle River served a petition, in the Quebec Superior Court, District of Hull,
upon the Company in order to recover assets from the Company. The Petitioner
alleges that, through the Company's involvement with Eagle River in the Mali
Project, the Company is guilty of contractual breaches in excess of $4,300,000.
In management's opinion, this claim is unfounded although the eventual outcome
of the case is not yet determinable. No accrual has been made for this claim
because the Company does not believe it is probable that the case will be
determined against the Company.
On June 25, 2002 Azco received a demand for arbitration filed by iCapital
Corporation seeking $144,000 in relief due to failure to pay under a June 26,
2001 Financial Consulting Agreement. It is the position of Azco and its counsel
that the contract is void and it is unlikely that iCapital will prevail on their
claim.
In conjunction with the departure of two former executives in October 2000, Azco
entered into a settlement agreement in June 2002 whereby Azco is required to
make monthly payments of $10,000, to each director, through June 2004, with the
remaining balance of $90,000 due in July 2004. The Company has paid $184,906
through March 31, 2003. Under the terms of the agreement, Azco was required to
provide Messrs. Harvey and Lindsay each with 150,000 shares of unrestricted
common stock in Azco Mining Inc. The shares were issued in July 2002. The
Company is currently in default under the terms of the settlement agreement and
is in negotiations for the resolution of this matter.
SIGNATURES
Pursuant to the requirements 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.
----------------------------------
(Registrant)
Date: June 9, 2003 BY: /s/ Lawrence G. Olson
-------------- ------------------------
Lawrence G. Olson
CEO, President and Chairman
Date: June 9, 2003 BY: /s/ Ryan A. Modesto
-------------- ----------------------
Ryan A. Modesto
Vice President Finance,
Corporate Secretary
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Azco Mining Inc. (the "Company") on
Form 10-K for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of the undersigned,
in the capacities and on the dates indicated below, hereby certifies pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his knowledge:
1. The Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2003 as filed with the Securities and Exchange Commission on the date
hereof, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; as amended; and
2. The information contained in the Quarterly Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Lawrence G. Olson
------------------------------------------
Lawrence G. Olson, Chief Executive Officer
/s/ Ryan Modesto
------------------------------------------
Ryan Modesto, Vice President Finance
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Certifications
--------------
I, Lawrence G. Olson, Chief Executive Officer, certify that:
l. I have reviewed this quarterly report on Form 10-Q of AZCO Mining
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
June 9, 2003
/s/ Lawrence G. Olson
------------------------
_________________________
Chief Executive Officer
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I, Ryan Modesto, Vice President Finance, certify that:
l. I have reviewed this quarterly report on Form 10-Q of AZCO Mining
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
June 9, 2003
/s/ Ryan Modesto
------------------
________________________
Vice President Finance
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