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, 2002
Commission file number: 0-20430
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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.)
7239 N El Mirage Road, Glendale, AZ 85307
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (623) 935-0774
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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
Common Stock, $.002 par value The American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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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 (ss.229.405 of this Chapter) 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. {x}
Aggregate Market Value of Stock held by Non-Affiliates as of September17, 2002:
$22,779,709
The number of shares of the Company's Common Stock outstanding as of September
17, 2002 is 31,912,121.
Documents incorporated by reference: See Item 14.
PART I
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this annual report may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This annual report contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, (e) our anticipated needs for working
capital, (f) 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, (g) the lack of commercial acceptance of our mica product or
by-products, (h) changes in environmental laws, (i) problems regarding
availability of materials and equipment, (j) 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 (k) 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. These statements may be found
under "Management's Discussion and Analysis or Plan of Operations" and
"Business," as well as in this annual report generally. Actual events or results
may differ materially from those discussed in forward-looking statements as a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in this annual report generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this annual report will in fact occur.
In addition to the information expressly required to be included in this annual
report, we will provide such further material information, if any, as may be
necessary to make the required statements, in light of the circumstances under
which they are made, not misleading.
ITEM 1. BUSINESS
Azco Mining Inc. is a U.S. mining company, incorporated in August 1991 in
the state of Delaware, with a general business strategy to acquire and develop
mineral properties amenable to low cost production. Azco is currently focused on
producing high quality muscovite mica from its Black Canyon Mica project located
in Arizona. Construction has been completed on the mica project and sales of
cosmetic grade mica have begun. Marketing efforts are concentrated on the sale
of mica filled plastic pellets, developed by Azco, to be used in the production
of reinforced plastics. Feldspathic sand, produced as a by-product of mica
production, is being sold into the local stucco and golf course sand markets.
Azco also owns a 30% interest in the Piedras Verdes copper mining project
in Sonora, Mexico. This project was originally a strategic partnership with
Phelps Dodge Corporation ("Phelps Dodge"), which subsequently sold their share
to Frontera Copper Corporation. If Azco does not fund its share of expenditures,
the 30% interest is subject to dilution under a shareholders agreement.
Prior to the sale of the majority of its copper assets, Azco was dedicated
to the development and production of low-cost copper utilizing solvent
extraction-electrowinning or the SX-EW process. Azco's principal mineral
property was the Sanchez porphyry copper project located about 10 miles
northeast of the City of Safford in southeastern Arizona. Azco 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 signed definitive agreements with Phelps Dodge to sell a
substantial portion of Azco's copper assets. Azco's shareholders approved the
sale of all of the Sanchez Project and 70% of the Piedras Verdes project for
gross consideration of $40 million.
A predecessor of Azco was incorporated in July 1988 under the laws of
Colorado to acquire the mining rights to the Sanchez Project, 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, in
return for the issuance of 3,650,000 common shares. At that time, Filton owned
rights in two mining properties located in Mexico: the Suaqui Verde project
located in southeastern Sonora and the Piedras Verdes project located in
southern Sonora. Filton was dissolved in 1994 and its assets were distributed to
Azco.
In July 1992, Azco merged with Azco Mining Inc., a Wyoming corporation
("Azco Wyoming"), with Azco being the survivor of the merger. At the time of the
completion of the merger, Azco Wyoming had 3,946,550 shares issued and
outstanding and Azco had 12,633,822 common shares issued and outstanding. One
common share of Azco was issued in exchange for each share of Azco Wyoming in
connection with the merger. Azco Wyoming was formerly a British Columbia
corporation, which was incorporated under the laws of the Province of British
Columbia in August 1981 under the name 241145 B.C. Ltd. 241145 B.C. Ltd. changed
its name to Canarex Resources Inc. in June 1983, to International Baron
Resources Ltd. in January 1988, and finally to Azco Mining Inc. in February
1992. Azco Wyoming was continued under the laws of Wyoming in May 1992 prior to
merging with Azco.
In March 1999, Azco completed the acquisition of Arizona Mica Properties,
Inc. ("Arizona Mica"), an Arizona corporation, which owned the rights to develop
43 unpatented lode-mining claims located in Yavapai County, Arizona. It is from
these mining claims that Azco obtains all of its mica. This acquisition was
accomplished through the merger of Arizona Mica with and into Azco's
wholly-owned subsidiary, Sanchez Mining Inc., a Delaware corporation, with
Sanchez being the surviving corporation. Sanchez subsequently changed its name
to Azco Mica, Inc. In connection with the merger, Azco issued an aggregate of
4,500,000 shares of its common stock in equal amounts to each of the three
shareholders of Arizona Mica: Lawrence G. Olson, John O. Rud and Floyd R. Bleak.
Recent Developments
-------------------
In January 2002, Azco completed a financing lease transaction that yielded
Azco net proceeds of $2,842,500. Under the terms of the transaction, Azco sold a
40% ownership in Azco's 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 stake for 120% of the original sales price
after the second year. The repurchase price of the property increases by 10% of
the original sales price each year the option remains unexercised up to a
maximum of 150% of the original sales price. The lessor maintains a mirror image
option to put the property back to the Company. Payments for the first 6 months
under the lease agreement are $30,000, for the second 6 months they increase to
$37,500 after which time they are $45,000 per month. In connection with this
transaction, the Company issued a warrant to purchase 2,550,000 shares of the
Company's common stock at $0.50 per share. The warrant vested January 2002 and
is exercisable through January 16, 2007.
In June 2002, we entered into an Equity Line of Credit Agreement with
Cornell Capital Partners ("Cornell"). Pursuant to the Equity Line of Credit
Agreement, we may, at our discretion, periodically sell to Cornell, shares of
our common stock for a total purchase price of $5.0 million. The effectiveness
of the sale of shares under the Equity Line of Credit is conditioned upon us
registering the shares to be sold with the Securities and Exchange Commission.
Cornell Capital Partners will purchase the shares of common stock for a 7.5%
discount to the lowest closing bid price of our common stock for the 5 days
immediately following the notice date. In addition, Cornell is entitled to
retain 5% of each advance under the Equity Line of Credit, together with a
one-time commitment fee of $240,000, payable in shares of Azco common stock.
Azco is currently selling products into the cosmetic grade mica market, as
well as the golf course and construction sand markets.
Exploration And Development
---------------------------
Azco incurred exploration expenses of $116,895 during fiscal 2002 in
connection with its funding requirements under the terms of its 30% share of the
Piedras Verdes project.
Effective September 1, 2001, Randgold Resources terminated the West Africa
Gold Joint Venture - Mali exploration agreement with Azco. Randgold previously
had the right to earn 75% of Azco's mineral interests in WAG through an
agreement where Randgold would spend a minimum $2 million establishing a minimum
one million ounce gold deposit. Azco has no plans to renew the mineral
concessions or the work commitment with the Malian government. During fiscal
2002, Azco incurred no exploration expense on the Mali project.
Azco continues to control the Silverado and the Alamos claims in Sonora,
Mexico. In an effort to limit financial exposure, Azco intends to try to attract
a joint venture partner to help further explore these claim blocks. Exploration
expenses of $41,292 were incurred with respect to the Silverado and Alamos
claims in fiscal 2002.
Products
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Azco currently is selling cosmetic grade mica and feldspathic sand.
Feldspathic sand is a by-product of the mica concentrator, which is sold as golf
course bunker sand, and stucco sand. Mica filled plastic pellets have been
produced and are currently being marketed to the manufacturers of reinforced
plastics. Azco produces mica that is being sold into or marketed to the
cosmetic, paint, plastic, coatings and pigments industries.
Marketing
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Azco employs a full-time marketing director on a monthly contract basis. An
eastern United States plastic distributor is on retainer for the development of
the mica reinforced plastics market. A local engineer is under retainer for the
development of the local and western United States mica market. In addition,
Azco has a commissioned salesman arranging the sales of its sand products.
Customers
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Azco sells its cosmetic grade mica to Presperse, Inc. and KOBO, who
distribute the product to various cosmetic manufacturers. Pioneer Sand purchases
our golf course bunker sand and Western Stucco currently purchases our stucco
sand.
Competition
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Many companies are engaged in the exploration and development of mineral
properties. Azco may be at a disadvantage with respect to some of its
competitors because many of these companies have substantially greater technical
and financial resources than Azco.
Engelhard Corp. and Georgia Industrial Minerals are considered to Azco's
main competitors in the production of wet ground mica. Oglebay Norton Co. is
considered to be Azco's chief competitor for the production of crushed silica
sand in the Phoenix, Arizona area.
Research And Development
------------------------
Azco currently retains Transmit Technology Group, LLC, of Arlington, Texas,
on a monthly basis, to provide research and development support for its mica
filled plastic products. Azco's mica is being evaluated and tested by several
potential customers in the cosmetics and plastics industries as to the
suitability of our mica for their products. An equipment vendor is providing
additional testing in the grinding of mica.
Employees And Consultants
-------------------------
As of June 30, 2002, we had fifteen full-time employees one part-time
employee and two full-time consultants. None of our employees are covered by a
labor union contract or any collective bargaining agreement.
ITEM 2. PROPERTIES
Black Canyon Mica Project
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Azco has staked 162 additional claims adjacent to its original property and
has defined, through two drill programs, a deposit of 3,926,700 tons of
muscovite mica ore. In the fourth quarter of fiscal 2000, limited production was
initiated at Azco's 10,000-ton per year wet ground mica processing facility in
Glendale, Arizona. Construction of the crushing and concentrating circuits, at
the mine-site near Black Canyon City, Arizona, was completed in June 2001.
Through June 30, 2002, Azco has incurred the following capital costs in
relation to the mica project:
Acquisition of mineral properties $ 2,219,996
Mining and processing plant and equipment 7,122,679
Development costs 1,104,966
Accumulated amortization (94,769)
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Total $ 10,352,872
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During the year ended June 30, 2002, the following expenses were incurred
in relation to the mica project:
Write-down of inventory costs $1,340,207
Other production costs 31,600
Reclamation 330
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Total $1,372,137
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Piedras Verdes Project
----------------------
Cobre del Mayo S.A. de C.V. ("Cobre del Mayo") is a Mexican corporation set
up to develop the Piedras Verdes copper project in Sonora, Mexico ("Piedras
Verdes Project"). Azco owns 30% of Cobre del Mayo and, in March 2002, Phelps
Dodge sold its 70% operating interest in Cobre del Mayo to a privately held
Canadian company, Frontera Copper Corporation ("Frontera"). Frontera plans to
secure necessary financing for the Piedras Verdes Project and to advance it to a
bankable feasibility stage as soon as possible. Under the Cobre del Mayo
shareholders agreement, we are obligated to fund 30% of the development expenses
incurred in connection with the Piedras Verde project. The type, amount and
timing of development are determined at the sole discretion of Frontera. Azco
has informed Frontera that until it has secured a more stable financial position
it will be unable to fund its 30% portion of development expenses. Under the
terms of the Cobre del Mayo shareholders agreement, Azco's ownership in Cobre
del Mayo will be diluted proportionate to the contributions Azco has made to
date. Azco will have the opportunity to resume contributions at any time at a
rate equal to its ownership level at that time. During the fiscal year ended
June 30, 2002, Azco funded $116,895 of the development costs.
Prior to the sale of a 70% interest in Cobre del Mayo to Phelps Dodge in
late 1995, Azco drilled 242 reverse circulation holes totaling 26,815 meters.
During the period of Phelps Dodge involvement, December 1995 through March 2002,
an additional 217 holes were cored totaling 47,869 meters. In addition, the
geologic mapping was expanded, metallurgical testing advanced and a geological
and ore deposit model prepared in addition to a positive pre-feasibility report.
The Cobre del Mayo partners believe that there are sufficient exploration
results available on the project to advance it to the bankable feasibility stage
without additional drilling or testing.
Azco estimates that the inferred mineralized material at the Piedras Verdes
property contains 316 million tons grading .37% copper. However, there are no
proven or probable reserves confirmed at the Piedras Verdes property at this
time.
New Planet Property
-------------------
In September 2000, Azco entered into a lease purchase option with the New
Planet Copper Mining Company on 31 patented mining claims located in La Paz
County, Arizona. Azco is currently paying $1,500 a month in rental fees and is
assessing the viability of developing the property for its micaceous iron oxide
(specular hematite) potential.
Mali Gold Concession
--------------------
Effective September 1, 2001, Randgold Resources terminated the WAG Joint
Venture - Mali exploration agreement with Azco. Azco has no plans to renew the
mineral concessions or the work commitment with the Malian government.
Silverado And Alamos Claims
---------------------------
Azco continues to control the Silverado and the Alamos claims in Sonora,
Mexico. In an effort to limit financial exposure, Azco intends to try to attract
a joint venture partner to help further explore these claim blocks. Exploration
expenses of $41,292 were incurred with respect to the Silverado and Alamos
claims in fiscal 2002.
ITEM 3. LEGAL PROCEEDINGS
In July 2002, Azco entered into a settlement agreement regarding fees
payable under terminated management agreements with two of its former officers
and directors, Mr. Alan P. Lindsay and Mr. 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 agreed to pay $24,898
representing one half of the legal fees incurred by the former directors. Under
the terms of the agreement, Azco is required to provide Messrs. Harvey and
Lindsay each with 150,000 shares of common stock in Azco Mining, Inc., which
shares shall be unrestricted as allowed pursuant to Rule S-8 of the Rules of the
Securities and Exchange Commission.
On January 22, 1999, the trustee in bankruptcy proceedings against Eagle
River International Limited, a former WAG - Mali joint venture partner of Azco,
served a petition, in the Quebec Superior Court, District of Hull, upon Azco in
order to recuperate assets from Azco. The trustee alleges that Azco is
accountable to the trustee for certain stock in its subsidiary and other alleged
assets which, represent hypothetical values that may aggregate, if one accepts
the trustee's claims of private stock values, up to $3,400,000. Azco considers
the trustee's claims to be without merit and has engaged counsel that is
disputing the matter vigorously on behalf of Azco. To the knowledge of Azco, it
is also the largest creditor of Eagle (Azco has made a claim in excess of
$4,000,000) and, therefore, it is Azco's opinion that ultimately the trustee
will be primarily accountable to Azco for any assets recovered, whether from
Azco or any other party.
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.
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
Our common stock is traded on the Toronto Stock Exchange in Canada and the
American Stock Exchange in the United States under the symbol "AZC." As of
September 3, 2002, there were 31,912,121 common shares outstanding.
The following table summarizes the high and low closing sales prices per
share of the common stock for the periods indicated as reported on the Toronto
Stock Exchange and the American Stock Exchange:
Quarter ended American Stock Exchange Toronto Stock Exchange
(U.S. $) (Canadian $)
2000 HIGH LOW HIGH LOW
------------------------------------------------ ----------------- ---------------- -------------------- --------------------
09/30/00 1.19 0.81 1.70 1.20
12/31/00 1.06 0.31 1.70 0.45
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2001 HIGH LOW HIGH LOW
------------------------------------------------ ----------------- ---------------- -------------------- --------------------
03/31/01 $0.94 $0.38 $1.30 $0.55
06/30/01 0.74 0.46 1.19 0.71
09/30/01 0.76 0.43 1.15 0.55
12/31/01 0.69 0.49 1.08 0.73
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2002 HIGH LOW HIGH LOW
------------------------------------------------ ----------------- ---------------- -------------------- --------------------
03/31/02 $1.20 $0.53 $1.96 $0.94
06/30/02 1.13 0.82 1.84 1.08
Holders Of Common Equity
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As of September 17, 2002, Azco had 918 recordholders of common stock.
Dividends
---------
Azco's Board of Directors has not declared any dividend on its common stock
since Azco's inception and does not intend to pay out any cash dividends on its
common stock in the foreseeable future.
Recent Sales Of Unregistered Securities
---------------------------------------
In July 2002, Azco entered into a settlement agreement regarding fees
payable under terminated management agreements with two of its former officers
and directors Mr. Alan P. Lindsay and Mr. 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 agreed to pay $24,898
representing one half of the legal fees incurred by the former directors. Under
the terms of the agreement, Azco is required to provide Messrs. Harvey and
Lindsay each with 150,000 shares of unrestricted common stock.
In July 2002, Pacifica Financial Group was issued 430,000 shares of Azco's
common stock as compensation for consulting services provided to azco. These
shares were valued at $0.95 per share, or a total of $408,500 on the date of
issuance.
In June 2002, we entered into the Equity Line of Credit Agreement where we
may, at our discretion, periodically issue and sell to Cornell Capital Partners
shares of our common stock for a total purchase price of $5 million. The amount
of each advance is subject to a maximum advance amount of $500,000 with a
minimum of a seven trading days period between advances. Cornell Capital
Partners will purchase the shares of common stock for a 7.5% discount to the
lowest closing bid price of our common stock for the 5 days immediately
following the notice date. In addition, Cornell Capital Partners is entitled to
retain 5% of each advance under the Equity Line of Credit, together with a
one-time commitment fee of $240,000, payable in shares of common stock. We
issued 237,624 shares of our common stock to Cornell Capital Partners, LP with a
market value of $240,000 as the commitment fee. Cornell Capital Partners intends
to sell any shares purchased under the Equity Line of Credit at the then
prevailing market price. Additionally, Westrock Advisors, Inc. was paid a fee of
9,901 shares of Azco's common stock, which was equal to $10,000 at a closing bid
of $1.01 on June 19, 2002 for acting as the placement agent.
In April 2002, Floyd Bleak was issued 390,000 shares of Azco's common stock
as compensation for the 300,000 shares of common stock Mr. Bleak paid to
iCapital Corp. for its consulting services to Azco. These shares were valued at
$0.65 per share, or a total of $253,500, on the date the agreement was approved
by the Azco board.
In April 2002, Gary R. Blume was issued 25,000 shares of Azco's common
stock as payment for legal services. These shares were valued at $0.57 per
share, or a total of $14,250, on the date the contract was entered into.
In April 2002, Mr. Bleak purchased 375,000 shares of Azco at $0.40 per
share in a private offering under Regulation D.
In January 2002, Patty J. Ryan exercised warrants that were issued on
August 27, 2001. The warrants were issued to Ms. Ryan in connection with a
$200,000 notes payable. This loan agreement was between Azco and Ms. Ryan for a
term of up to one year at 12% interest. The warrant provided for 250,000 shares
of common stock at a price of $0.40 per share.
In January 2002, Azco completed a financing lease transaction that yielded
net proceeds of $2,842,500. Under the terms of the transaction, Azco sold a 40%
ownership in the 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 stake for 120% of the original sales price
after the second year. The repurchase price of the property increases by 10% of
the original sales price each year the option remains unexercised up to a
maximum of 150% of the original sales price. The lessor maintains a mirror image
option to put the property back to the Company. Payments for the first six
months under the lease agreement are $30,000, for the second six months they
increase to $37,500 after which time they are $45,000 per month. In connection
with this transaction, Azco issued a warrant to purchase 2,550,000 shares of
Azco's common stock at $.50 per share. This warrant vested in January 2002 and
is exercisable through January 16, 2007.
In December 2001, Azco received a one-year $100,000 loan, bearing interest
at 12% per annum, from a sophisticated investor and shareholder, Luis
Barrenchea. In connection with this loan, Azco issued a warrant to purchase
125,000 shares of Azco's common stock at $.40 per share. This warrant vested in
February 2002 and is excercisable through December 3, 2002.
In October 2001, Azco received a one-year $100,000 loan, bearing interest
at 12% per annum, from Mr. Berrenachea. In connection with this loan, Azco
issued a warrant to purchase 125,000 shares of Azco's common stock at $.40 per
share. This warrant vested in December 2001 and is excercisable through October
19, 2002.
In September 2001, Azco received a one-year $200,000 loan, currently
bearing interest at 12% per annum, from Mr. Barrenchea. In connection with this
loan, Azco issued a warrant to purchase 125,000 shares of Azco's common stock at
$.40 per share. This warrant vested in November 2001 and is excercisable through
September 4, 2002. Azco is currently in negotiations with Mr. Barrenchea
regarding an extension of this loan. Azco has offered to extend the exercise
date of the warrant an additional year, in exchange for a one-year extension of
the loan.
In March 2001, Lawrence G. Olson the President, CEO and Chairman of the
Board, jointly with his wife, made an unsecured loan to Azco in the amount of
$800,000 at an interest rate equal to the prime rate of interest as reported by
Imperial Bank plus one percentage point. Mr. Olson received, in conjunction with
the loan, a warrant to purchase 300,000 shares of common stock for $0.69. In
October 2001, Azco restructured its $800,000 loan agreement with Mr. Olson. Mr.
Olson agreed to extend the note payable an additional year to March 15, 2003 in
consideration for 700,000 warrants to purchase common stock at an exercise price
of $0.40. The warrants vested in December 2001 and expire on October 12, 2003.
In addition, effective October 1, 2001, the interest rate payable on the
$800,000 Olson loan was adjusted from prime plus 1% to 12% annually. 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 loan is
currently due on March 14, 2004.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding Azco so as to make an informed investment decision. More specifically,
Azco had a reasonable basis to believe that each purchaser was an "accredited
investor" as defined in Regulation D of the 1933 Act and otherwise had the
requisite sophistication to make an investment in Azco's securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for each of the five years during
the period ended June 30 are derived from our audited consolidated financial
statements. The data presented below should be read in conjunction with our
consolidated financial statements and related notes, and with Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Years Ended June 30,
2002 2001 2000 1999 1998
Statement of Operations Data:
Sales $ 64,880 $ 17,600 $ -- $ -- $ --
Net loss from operations (4,476,861) (3,436,202) (4,491,676) (5,449,583) (4,091,951)
Net loss (4,247,586) (3,365,376) (3,899,486) (4,528,006) (3,044,112)
Loss per share
(0.14) (0.11) (0.13) (0.17) (0.12)
Weighted avg. number of
common shares 30,295,261 29,964,636 29,846,839 26,787,226 25,646,449
Balance Sheet Data: June 30, 2001 June 30, 2001 June 30, 2000 June 30, 1999 June 30, 1998
Capital assets $ 10,641,020 $ 10,538,089 $ 8,181,582 $ 2,219,997 $ --
Total assets 12,991,072 11,904,545 13,872,311 17,353,717 19,486,669
Total debt (including
materials) 2,659,523 866,023 -- -- --
Total liabilities 4,881,185 1,747,142 566,028 387,984 299,061
Total stockholders' equity 8,109,887 10,157,403 13,306,283 16,965,733 19,187,608
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results Of Operations
---------------------
Year Ended June 30, 2002 Compared To Year Ended June 30, 2001
Sales
-----
Sales increased in fiscal 2002 to $64,880 from $17,600 in fiscal 2001 due
to the continuing acceptance of our cosmetic grade mica. Specifically, our sales
volume in 2001 was 8,800 lbs. as compared to 31,600 lbs. in fiscal 2002. The
sales consist of cosmetic grade mica produced from its Black Canyon Mica project
located in Arizona. Since June 30, 2002, Azco is also selling feldspathic sand a
by-product of mica production, which is sold into the local golf course sand and
stucco markets. Azco's customers consist of Presperse, Inc and KOBO, with
respect to mica and Pioneer Sand and Western Stucco with respect to feldspathic
sand.
Expenses
--------
Production costs decreased by $104,705 due to lower than expected demand of
the Company's mica product.
Exploration costs decreased by $250,921 as the result of the Company's
decision to not fund its current portion of expenses associated with the Piedras
Verdes Copper Project.
Salaries expense decreased in fiscal 2002 to $341,608 from $430,111 in
fiscal 2001. This decrease was due to the non-renewal of management agreements
with two former executives in October 2002.
General and administrative expense increased in fiscal 2002 to $1,329,508
from $588,632 in fiscal 2001. This increase was due to $180,000 in financing
lease payments in the fiscal 2002 that did not exist in fiscal 2001, as well as,
investor relations expense relating to contract services of $495,903 in the
current fiscal period compared to $71,644 in fiscal 2001, accounting fees of
$118,180 in the current fiscal period compared to $38,583 for fiscal 2001 and
stock exchange fees of $108,023 in the current fiscal period compared to $51,673
for fiscal 2001. Investor relations expense includes $336,043 of non-cash
expense related to the issuance of 820,000 shares of stock and 50,000 warrants
to purchase stock in exchange for services rendered. The increase in accounting
fees is due to services rendered in connection with the various financings
throughout the year.
Expenses of $1,030,900 related to the settlement reached with two of the
Company's former executives were recorded in the fiscal year ended June 30,
2002.
Financing expenses in the fiscal year ended June30, 2002 were $315,591
compared to $72,139 in the previous year. The increase was due to recording of
the transaction fees due under the Cornell Capital equity line of credit
agreement, whereby the Company agreed to issue $250,000 of its common stock as
fees.
Other Income and Expenses
-------------------------
Other income and expenses in fiscal 2002 was $(588,778) as compared to net
other income of $70,826 in 2001. The principal factor was increased interest due
to interest payments of $139,639 due on new notes payable and $457,745 of
non-cash amortization expenses on debt discounts on the financing arrangements.
The Company's income tax benefit for fiscal 2002 consisted of a $998,053
benefit associated with the carryback of net operating losses resulting from the
March 2002 enactment of the Job Creation and Workers Assistance act of 2002.
Net Loss
--------
Azco had a net loss of $4,247,586 in fiscal 2002 compared to a net loss of
$3,365,376 in 2001. The increase in net loss for the year ended June 30, 2002 is
the result of increased general and administrative expenses of $740,876, the
recording of a $1,030,900 settlement with former executives and increased
interest expense of $546,943. These increases are offset by a decrease in fiscal
2002 production costs of $104,705, decreased exploration expense of $250,921, a
capital asset write-down of $349,744 in fiscal 2001 and a $998,053 income tax
benefit recorded in fiscal 2002.
Year Ended June 30, 2001 Compared To Year Ended June 30, 2000
Sales
-----
All material income received during fiscal 2001 and 2000 was a result of
interest earned on available cash resources with the exception of $17,600
received in fiscal 2001 for the sale of mica products.
Expenses
--------
Salaries expense decreased in fiscal 2001 to $430,111 from $1,009,682 in
fiscal 2000. This decrease was due to a reduction in executives resulting from
the non-renewal of management agreements with former executives and the
expensing of $201,900 due to the granting of stock options to non-employees in
fiscal 2000.
General and administrative expense decreased in fiscal 2001 to $588,632
from $1,027,582 in fiscal 2000. This decrease was due to the closure of the
executive office in Vancouver, Canada and reduced investor relations activity
Other Income and Expenses
-------------------------
Other income in fiscal 2001 was $70,826 as compared to $592,190 in 2000.
Income in the current period was reduced in large part due to a decrease in
interest income of $209,959 (net of expenses) and the non-recurrence of a
$277,500 sale of assets in fiscal 2000.
Net Loss
--------
Azco had a net loss of $3,365,376 in fiscal 2001 compared to a net loss of
$3,899,486 in 2000. The decrease in net loss for fiscal 2001 is the result of
decrease in salaries and general and administrative expense of $1,018,524. The
decrease was offset by a decrease in the 2001 fiscal year in other income of
$521,364.
Liquidity And Capital Resources
-------------------------------
As of June 30, 2002, we had cash-on-hand of $884,647. We anticipate that
our current cash-on-hand will fund our current operations for approximately
three months.
Azco believes that it will need additional financing to fund its operating
and capital requirements over the next twelve months assuming that the Company
continues to advance it marketing and sales efforts. In particular, Azco
anticipates the need for at least $2.9 million of additional financing during
the next 12 months, in order to fund the following expected uses:
Mica project operating losses $ 500,000
Mica project capital expenditures 350,000
Corporate overhead and related expenses 1,400,000
Exploration and development 650,000
-------
Total funds needed $2,900,000
If Azco's mica and sand project does not achieve commercial production
levels or if Azco is unable to successfully market the mica and sand products
during the next 12 months, Azco will need increased additional funding to meet
its operating expenses.
Our primary need for cash is to fund our ongoing operations until such time
that the sale of minerals generates enough revenue to fund operations. In
addition, our need for cash includes satisfying current liabilities of
$1,573,229 as of June 30, 2002, consisting of accounts payable and accrued
liabilities of $1,129,557 and notes payable of $443,672.
In January 2002, Patty J. Ryan exercised her warrant to purchase 250,000
shares of common stock at a price of $0.40 per share. The warrant was issued in
connection with the August 27, 2002, one-year, $200,000 note payable yielding
12% interest. In lieu of payment for the exercise price, the outstanding note
payable was reduced by $100,000. The $100,000 balance of the note was retired in
August 2002.
In September 2001, Azco received a one-year $200,000 loan, currently
bearing interest at 12% per annum, from Mr. Barrenchea. In connection with this
loan, Azco issued a warrant to purchase 125,000 shares of Azco's common stock at
$.40 per share. This warrant vested in November 2001 and is excercisable through
September 4, 2002. Azco is currently in negotiations with Mr. Barrenchea
regarding the extension of this loan. Azco has offered to extend the exercise
date of the warrant an additional year, in exchange a one-year extension of the
loan.
In October 2001, Azco received a one-year $100,000 loan, bearing interest
at 12% per annum, from Mr. Barrenchea. In connection with this loan, Azco issued
a warrant to purchase 125,000 shares of Azco's common stock at $.40 per share.
This warrant vested in December 2001 and is excercisable through October 19,
2002.
In December 2001, Azco received a one-year $100,000 loan, bearing interest
at 12% per annum, from a sophisticated investor and shareholder, Luis
Barrenchea. In connection with this loan, Azco issued a warrant to purchase
125,000 shares of Azco's common stock at $.40 per share. This warrant vested in
February 2002 and is excercisable through December 3, 2002.
A summary of the maturity dates of the notes payable due within the next
twelve months and the amounts (excluding debt discounts) are set forth below:
Due Dates Amount
--------- ------
August 27, 2002 $100,000
September 4, 2002 200,000
October 19, 2002 100,000
December 3, 2002 100,000
--------
Total $500,000
In addition, Azco is obligated under the financing lease completed in
January 2002 for which monthly payments for the first six-month period July 2002
to December 2002 are $37,500 and thereafter are $45,000 per month.
Azco leases some heavy equipment. Certain equipment leases are classified
as capital leases and, accordingly, the equipment and related obligation are
recorded on its balance sheet. Azco is committed to lease its former executive
office in Vancouver, British Columbia, through April 2004 for a monthly payment
of $5,250. This location currently has a tenant under a sub-lease contract
whereby Azco is receiving $3,140 per month.
In conjunction with the departure of two former executives in October 2000,
Azco entered into a severance agreement whereby Azco is required to make
up-front payments of $20,000 and 24 monthly payments of $10,000, to each
director, through June 2004, with the remaining balance of $90,000 due in July
2004. Under the terms of the agreement, Azco additionally, is required to
provide Messrs. Harvey and Lindsay each with 150,000 shares of unrestricted
common stock in Azco Mining, Inc.
The following table is provided to detail our contractual obligations and
lease commitments:
Payments due in Payments due in Payments due
Payments due through 1-3 years 4-5 years after
June 30, 2003 2003-2005 2006-2007 2007
------------- --------- --------- ----
Equipment leases $ 98,358 84,727 - -
Office lease 61,680 51,400 - -
Settlement payments 280,000 420,000 - -
Notes payable 610,000 872,000 - -
Financing lease 495,000 1,080,000 1,080,000 6,930,000
Total contractual obligations $1,545,038 2,508,127 1,080,000 6,930,000
Cobre del Mayo S.A. de C.V. is a Mexican corporation set up to develop the
Piedras Verdes copper project in Sonora, Mexico. Azco owns 30% of Cobre del
Mayo. The 70% owner is a Canadian privately held company, Frontera Copper
Corporation. Frontera plans to secure necessary financing for the Piedras Verdes
Project and to advance it to a bankable feasibility stage as soon as possible.
Under the Cobre del Mayo shareholders agreement, we are obligated to fund 30% of
the development expenses incurred in connection with the Piedras Verde project.
The type, amount and timing of development are determined at the sole discretion
of Frontera. Azco has informed Frontera that until it has secured a more stable
financial position it will be unable to fund its 30% portion of development
expenses. Under the terms of the Cobre del Mayo shareholders agreement, Azco's
ownership in Cobre del Mayo S.A. will be diluted proportionate to the
contributions Azco has made to that date. Azco will have the opportunity to
resume contributions at any time at a rate equal to its ownership level at that
time.
In June 2002, we entered into an Equity Line of Credit Agreement with
Cornell Capital Partners. Pursuant to the Equity Line of Credit Agreement, we
may, at our discretion, periodically sell to Cornell Capital shares of our
common stock for a total purchase price of $5.0 million. The effectiveness of
the sale of shares under the Equity Line of Credit is conditioned upon us
registering the shares to be sold with the Securities and Exchange Commission.
Other than the Equity Line of Credit, we do not have any commitments for
funding. No assurances can be given that the Equity Line of Credit will provide
sufficient funding to finance our ongoing operations or our long-term business
plan. Among other reasons, this is due to the limit, imposed by the American
Stock Exchange, whereby a maximum of 6,000,000 shares may be issued under the
Equity Line of Credit. Further, no assurance can be given that we will be able
to obtain other commitments for financing on favorable terms or at all. Current
economic and market conditions have made it difficult to raise required
finances.
If we are unable to access the Equity Line of Credit or obtain alternative
financing arrangements, Azco (i) may be unable to fund our required development
expense of the Piedras Verdes project, resulting in substantial dilution of
Azco's interest, (ii) may be forced to delay or terminate the development and
marketing of Azco's mica and sand by-products, thereby hindering or eliminating
Azco's expected primary source of future revenue, (iii) may be required to
eliminate substantially all business activities to conserve cash, or (iv) may
need to seek protection under the U.S. bankruptcy laws.
Critical accounting policies and estimates
------------------------------------------
Azco believes the following significant assumptions and estimates influence
its more critical practices and accounting policies used in the preparation of
its consolidated financial statements.
Azco has initially estimated its ore reserves at the Black Canyon Mica Mine
based on its exploration program completed in 1999. Uncertainties are inherent
in certain of the Company's critical accounting policies and estimated
quantities of reserves, including many factors beyond the control of the
Company. Ore reserve estimates are currently based upon engineering evaluations
of assay values from 41 drill holes and samples of outcropping surface
structures. Azco uses its ore reserve estimate in calculating the depreciation
of production assets and their long-term recovery. The Company's estimate of ore
reserves together with its assumed sales volumes and realized prices for mica
products are significant factors used in performing annual impairment
assessments of its long-lived assets. Changes in ore reserve estimates and other
assumptions regarding pricing and volume could materially influence these
assessments. Should the quantity of sales of mica and other products not
materialize, significant impairments of the Company's long-lived assets may
result.
Environmental liabilities are based on bonding requirements placed on the
Black Canyon Mica Mine by the State of Arizona and the Bureau of Land
Management. Currently a total bond of $190,400 is in place with these agencies.
Azco records the liability when incurred and books the reclamation expense as
the ore reserve is processed.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." The Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Statement is effective as of the beginning of fiscal 2003.
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 will be capitalized as part of the asset's carrying value
and subsequently allocated to expense over the assets useful life. At June 30,
2002, the Company had recorded a net asset of approximately $187,000 and a
corresponding liability of $190,400 associated with its estimate of ultimate
reclamation costs associated with the Black Canyon site. The Company is
currently in the process of determining the impact of the pronouncement on its
financial position discounting and its estimate of third party costs of
reclamation.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". 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 is effective as
of the beginning of fiscal 2003. The pronouncement is not expected to have a
material impact on the Company's financial position, results of operations and
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". 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 relating to the
rescission SFAS No. 4 are effective for fiscal year 2003 and provisions of this
Statement relating to the SFAS No. 13 are effective for transactions occurring
after May 15, 2002. The pronouncement is not expected to have a material impact
on its financial position, results of operations of 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)". The primary difference from existing
guidance is that SFAS No. 146 requires the recognition of exit cost 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.
Going Concern
-------------
The accompanying consolidated financial statements have been prepared
assuming that Azco will, as noted above, continue to operate as a going concern.
Azco has suffered recurring losses from operations and Azco will require
substantial additional funds to continue and develop operations.
These matters raise substantial doubt about Azco's ability to continue as a
going concern. The accompanying consolidated financial statements in this Form
10-K do not include the adjustments that would be necessary, and could be
significant, including a provision of impairment for plant and equipment should
Azco be unable to continue as a going concern.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
Azco's financial instruments include cash and cash equivalents and
long-term debt. Azco considers all financial instruments which are highly liquid
and have original maturities of three months or less to be cash and cash
equivalents which are readily convertible into cash. Azco's cash and cash
equivalents are not subject to significant interest rate risk due to the short
maturities of these instruments. The total outstanding long-term debt (including
capital leases) of Azco as of June 30, 2002 was $2,659,523. Azco's long-term
debt is not subject to interest rate risk because all of Azco's long-term debt
has fixed rates of interest. Azco does not enter into contracts for speculative
or investment purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2002 and 2001 F - 3
Consolidated Statements of Operations for the fiscal years
ended June 30, 2002, 2001 and 2000 F - 4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 2002, 2001 and 2000 F - 5
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 2002, 2001 and 2000 F - 6
Notes to Consolidated Financial Statements F - 7
The following financial statement schedule of the Registrant is included in Item
14(a) (2):
Schedule II - Valuation and Qualifying Accounts for the fiscal years
ended June 30, 2002, 2001 and 2000 F - 25
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 consolidated financial statements or related notes thereto.
F-1
Report of Independent Accountants
To the Board of Directors and
Stockholders of Azco Mining Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Azco
Mining Inc. and its subsidiary at June 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2002 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses and
negative cash flows from operations which raises substantial doubt about its
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
September 3, 2002
Additional Comments for Canadian Readers
Canadian reporting standards do not consider it appropriate to refer to going
concern issues where the matter is adequately disclosed in the notes to
financial statements, such as described in Note 1 to these consolidated
financial statements. This report has been prepared in accordance with reporting
standards in the United States of America which requires a reference in the
Report of Independent Accountant, when there is substantial doubt as to an
entity's ability to continue as a going concern.
September 3, 2002
F-2
Azco Mining Inc.
Consolidated Balance Sheets
June 30,
2002 2001
---- ----
Assets
Curent assets:
Cash and cash equivalents $ 884,647 $ 39,920
Prepaids and other 179,225 74,689
Inventories (Note 5) 1,095,780 1,061,447
--------- ---------
2,159,652 1,176,056
Capital assets:
Mineral properties, plant and equipment, net (Note 7) 10,352,872 10,130,668
Other capital assets, net (Note 8) 288,148 407,421
------- -------
10,641,020 10,538,089
Restricted cash (Note 4) 190,400 190,400
------- -------
Total assets $12,991,072 $11,904,545
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 540,768 $ 690,719
Notes payable (Note 9) 443,672 -
Accrued settlement obligation(Note 14) 586,000 -
------- -------
1,570,440 690,719
Accrued settlement obligation (Note 14) 444,900 -
Financing lease liability (Note 9) 1,975,650 -
Note payable to related party (Note 9) 615,068 715,280
Other liabilities (Note 10) 275,127 341,143
------- -------
3,310,745 1,056,423
--------- ---------
Total liabilities 4,881,185 1,747,142
--------- ---------
Contingencies and commitments (Note 14) - -
Stockholders' equity:
Common stock, $.002 par value, 100,000,000 shares
authorized; 31,152,121 and 30,050,621 shares issued and
outstanding at June 30, 2002 and 2001, respectively 62,304 60,101
Additional paid-in capital 30,951,523 28,753,656
Accumulated deficit (22,903,940) (18,656,354)
------------ ------------
8,109,887 10,157,403
--------- ----------
Total liabilities and stockholders' equity $12,991,072 $11,904,545
----------- -----------
F-3
Azco Mining Inc.
Consolidated Statements of Operations
For the years ended June 30,
2002 2001 2000
---- ---- ----
Sales $ 64,880 $ 17,600 $ -
Operating costs and expenses
Production costs 1,371,807 1,476,512 424,287
General and administrative 1,149,508 588,632 1,027,582
Salaries 341,608 430,111 1,009,682
Exploration 187,618 438,539 697,388
Depreciation and amortization 144,379 93,860 133,174
Capital asset write-downs - 349,744 -
Severence agreement(Note 14) 1,030,900 - -
Financing expenses 315,591 72,139 -
Start-up costs - - 947,511
Loss on investments - 3,894 250,000
Reclamation 330 371 2,052
--- --- -----
4,541,741 3,453,802 4,491,676
--------- --------- ---------
Operating loss (4,476,861) (3,436,202) (4,491,676)
Other income and expenses
Interest income 12,945 124,626 314,690
Interest expense (781,723) (54,780) -
Other income - 980 277,500
- --- -------
(768,788) 70,826 592,190
--------- ------ -------
Loss before income taxes (5,245,639) (3,365,376) (3,899,486)
Income tax benefit 998,053 - -
------- - -
Net loss $ (4,247,586) $(3,365,376) $(3,899,486)
-------- ------------- ------------ ------------
Basic loss per common share $ (0.14) $ (0.11) $ (0.13)
- ------ - ------ - ------
Diluted loss per common share $ (0.14) $ (0.11) $ (0.13)
- ------ - ------ - ------
Weighted average number of common shares outstanding 30,297,261 29,964,636 29,846,839
---------- ---------- ----------
F-4
Azco Mining Inc.
Consolidated Statements of Stockholders' Equity
Coommon Shares Additional
Number of Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance June 30, 1999 29,832,121 59,664 28,297,561 (11,391,492) 16,965,733
Stock options exercised 55,000 110 38,026 - 38,136
Stock option compensation - - 201,900 - 201,900
Net loss - - - (3,899,486) (3,899,486)
Balance, June 30, 2000 29,887,121 59,774 28,537,487 (15,290,978) 13,306,283
Stock options exercised 163,500 327 96,564 - 96,891
Warrants (Notes 9 and 11) - - 119,605 - 119,605
Net loss - - - (3,365,376) (3,365,376)
Balance, June 30, 2001 30,050,621 60,101 28,753,656 (18,656,354) 10,157,403
Stock options exercised 61,500 123 27,269 - 27,392
Warrants (Notes 9 and 11) - - 1,654,928 - 1,654,928
Common shares issued (Note 11) 790,000 1,580 416,170 - 417,750
Warrant exercised 250,000 500 99,500 - 100,000
Net loss - - - (4,247,586) (4,247,586)
Balance, June 30, 2002 31,152,121 $ 62,304 $30,951,523 $(22,903,940) $ 8,109,887
F-5
Azco Mining Inc.
Consolidated Statements of Cash Flows
For the years ended June 30,
2002 2001 2000
---- ---- ----
Cash flows fromp operating activities:
Net loss $ (4,247,586) $ (3,365,376) $ (3,899,486)
Items not affecting cash:
Depreciation and amortization 144,379 93,860 133,174
Stock option compensation and
other non-cash expenses 611,243 - 201,900
Gain on sale of mineral properties,
plant and equipment - (980) -
Loss on write-down/sale of invetsments - 3,894 250,000
Loss on write-down of mineral properties,
plant and equipment - 349,744 -
Amortization of debt discount 457,745 34,885 -
Severance agreement 1,030,900 - -
Net change in operating assets and liabilities:
Prepaids and other (112,036) 49,388 (20,729)
Inventories (34,333) (60,669) (1,000,778)
Accounts payable and accrued liabilities (477,151) 232,981 178,044
--------- ------- -------
Cash flows used in operations (2,626,839) (2,662,273) (4,157,875)
----------- ----------- -----------
Cash flows from investing activitis:
Sale of Minera Cortez Resources Ltd. shares - 46,694 -
Investment in Calgem, Inc. - - (250,000)
Purchase of capital assets - - (298,974)
Proceeds from sale of mineral properties,
plant and equipment - 980 -
Purchase of mineral properties, plant and equipment (239,810) (2,558,537) (2,922,174)
Restricted cash - - (190,400)
- - ---------
Cash flows used in investing activities (239,810) (2,510,863) (3,661,548)
--------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of financing lease 3,000,000 - -
Proceeds from issuance of notes payable 811,000 800,000 -
Payments on notes payable (211,000) - -
Exercise of stock options 27,392 96,891 38,136
Payments on capital lease obligations (66,016) (8,721) -
Issuance of common stock 150,000 - -
------- - -
Cash flows from financing activities 3,711,376 888,170 38,136
--------- ------- ------
Increase(decrease) in cash and cash equivalents 844,727 (4,284,966) (7,781,287)
Cash and cash equivalents, beginning of year 39,920 4,324,886 12,106,173
------ --------- ----------
Cash and cash equivalents, end of year $ 884,647 $ 39,920 $ 4,324,886
- ------- - ------ - ---------
F-6
Azco Mining Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Going Concern
Azco Mining Inc. (the Company) 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 (the Mica Project) in Arizona and an interest in the
Piedras Verdes Copper Project in Sonora, Mexico. The Company's interest in
the Piedras Verdes Copper Project has been diluted from its original
ownership of 30% as a result of its decision not to make certain funding
requirements in the current year (Note 7).
Initial construction has been completed on the mica project and sales of
cosmetic grade mica have begun. Feldspathic sand, produced as a by-product
of mica production, is being sold into the local golf course sand and
stucco markets.
Although the Company has taken steps, consistent with usual industry
standards, to verify title to mineral properties in which it has an
interest, these procedures do not guarantee the Company's title. Such
properties may be subject to prior agreements or transfers and title may be
affected by undetected defects.
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 and negative cash flows from
operations. The Company requires additional funds to continue operations,
including production and marketing of mica and sand products, exploration
commitments on mineral properties, general and administrative expenses and
to meet other obligations as they are due. Management of the Company is
currently in negotiations for a $15 million financing in the form of equity
and/or debt which would be used to expand and carry out certain upgrades to
its processing facilities and to retire existing high interest debt. The
Company has also retained an investor relations firm to assist in seeking
additional financing and possible joint venture agreements. However there
is no assurance that these efforts will be successful 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 to assets and liabilities that
would be necessary, and which could be significant, should the Company be
unable to continue as a going concern.
2. Significant Accounting Policies
Principles of Consolidation
---------------------------
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Azco Mica, Inc., a Delaware corporation.
All significant intercompany balances and transactions have been eliminated
in consolidation.
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.
F-7
Azco Mining Inc.
Notes to Consolidated Financial Statements
2. Significant Accounting Policies (Continued)
Inventories
-----------
Inventories are recorded at the lower of cost and net realizable value.
Cost is determined on a weighted average basis and includes all costs in
bringing the inventory to its present location and condition. Net
realizable value is the estimated price at which inventories can be sold in
the normal course of business after allowing for the cost of completion and
sale.
As of June 30, 2002 and 2001, the Company's cost of its inventories was in
excess of the net realizable value. Write-downs of $1,340,207, $1,817,456
and $424,287 during fiscal years, 2002, 2001 and 2000, respectively,
reflected the necessary adjustments to the carrying value.
Capital Assets
--------------
Land, buildings, plant, equipment, and vehicles are carried at cost.
Replacements, maintenance and repairs that do not improve or extend the
life of the respective assets are expensed as incurred. Major renewals and
improvements are capitalized. Upon retirement, sale or other disposition,
the cost and accumulated amortization are eliminated and the gain or loss
is included in operations.
The Company expenses prospecting and exploration costs as incurred, but
capitalizes costs directly attributable to the acquisition of mineral
properties, pending determination as to their commercial feasibility.
Exploration costs include those related to the Piedras Verdes Copper
Project (Note 7). Mine development costs that are expected to benefit
future production are capitalized and amortized on the units-of-production
method over proven and probable reserves.
Mineral properties (including capitalized development costs), plant and
equipment are amortized on the units-of-production basis using proven and
probable reserves. Office buildings, furniture, equipment, and vehicles are
depreciated over their estimated useful lives (3 - 15 years) using the
straight-line method.
The Company evaluates its long-term assets for impairment when events or
changes in economic circumstances indicate the carrying amount of such
assets may not be recoverable. The Company uses an estimate of the future
undiscounted net cash flows of the related asset or asset grouping over the
remaining life to measure whether the assets are recoverable and measure
any impairment by reference to fair value. Fair value is generally
estimated using the Company's expectation of discounted net cash flows.
Recoverability of the investment in the Mica project is assessed using
estimates of proven and probable ore reserves, estimated prices
(considering historical and current prices, price trends, and related
factors), operating capital, and reclamation costs on an undiscounted
basis. Where capitalized costs are not recoverable, reductions in the
carrying value would be recorded to the extent the remaining investment
exceeds the estimate of fair value. Changes in the geological and
engineering interpretations of ore bodies, product prices and operating
costs may change the Company's estimate of proven and probable reserves. It
is reasonably possible that the Company's estimate of proven and probable
reserves may change in the future resulting in additional charges for
depreciation, amortization and reclamation in future reporting periods.
Reclamation Costs
-----------------
Estimated costs of decommissioning and reclamation associated with mineral
properties, plant and equipment, pursuant to regulatory and other
requirements, are expensed over the life of the mine through periodic
charges to earnings using the units-of-production method.
F-8
Azco Mining Inc.
Notes to Consolidated Financial Statements
2. Significant Accounting Policies (Continued)
Revenue Recognition
-------------------
The Company recognizes the sale of product when an agreement of sale
exists, product delivery has occurred, title has transferred to the
customer and collectibility is reasonably assured. The price received is
based upon terms of the contract.
Income Taxes
------------
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and
their financial reporting amounts ("temporary differences") at each year
end based on enacted tax laws and statutory rates applicable to the period
in which the temporary differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. Income tax expense
includes both taxes payable for the period and the change during the period
in deferred tax assets and liabilities.
Stock-Based Compensation
------------------------
The Company has elected to account for stock-based compensation using the
intrinsic value method. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the
stock. Note 11 contains the pro forma effects on reported results of
operations if the Company had chosen to recognize compensation cost based
on the fair value of options granted pursuant to Statement of Financial
Accounting Standards (SFAS) No. 123.
Estimates
---------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. The most
significant area requiring the use of management estimates and assumptions
relate to mineral reserves that are the basis for future cash flow
estimates and units-of-production amortization depreciation. Actual results
could differ from those estimates under different assumptions or
conditions.
Presentation
------------
Certain reclassifications have been made to prior years' amounts to conform
with current year presentation.
3. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents. As of June 30, 2002, the Company had cash and cash equivalents
on deposit with a major financial institution that were in excess of FDIC
insured limits. Historically, the Company has not experienced any loss of
its cash and cash equivalents due to such concentration of credit risk.
F-9
Azco Mining Inc.
Notes to Consolidated Financial Statements
4. Restricted Cash
As part of the reclamation deposit required for the Black Canyon Mica
property, the Company has restricted cash of $190,400, comprising:
- $50,000 held on deposit for the Arizona State Treasurer in a one-year
automatically renewable short-term investment; and
- $140,400 held as collateral against an irrevocable letter of credit of
the same amount to the U.S. Bureau of Land Management which expires on
October 25, 2002.
Both of the amounts will be held until all terms and conditions of the
reclamation agreement have been fulfilled or a satisfactory replacement
bond has been accepted.
5. Inventories
Inventories at June 30 consists of the following stated at their net
realizable value:
2002 2001
---- ----
Broken ore $ 725,202 $ 814,107
Work-in-process 277,378 187,540
Finished goods 93,200 59,800
$1,095,780 $ 1,061,447
6. Investments
On June 18, 1998, the Company entered into an agreement with Minera Cortez
Resources Ltd. (Cortez), a public company which trades on the Canadian
Venture Stock Exchange, whereby the Company was granted a right of first
refusal for a period of five years to acquire all or any of the property
interest that Cortez decides to either joint venture, option, or dispose
of. In consideration, the Company subscribed for 200,000 common shares of
Cortez at Cdn. $0.25 per share. The Company was also granted a right of
first refusal for the same period to provide up to 100% of any private or
public equity or debt financing that Cortez proposes to obtain, on similar
terms as any third party is willing to provide. In the year ended June 30,
1999, the Company purchased an additional 100,000 shares at Cdn. $0.25 per
share, bringing the carrying value of the shares to $50,588.
During June 2001, the Company sold its 300,000 share interest in Cortez for
Cdn. $0.25 per share. The sale resulted in a $3,894 loss primarily from
movement in the foreign currency exchange.
F-10
Azco Mining Inc.
Notes to Consolidated Financial Statements
6. Investments (Continued)
Effective on August 9, 1999, the Company entered into an "Agreement in
Principle" (AIP) with each of Thomas Ford and Calgem, Inc., a company
wholly-owned by Mr. Ford (collectively, Calgem), pursuant to which Calgem
therein granted the Company an option to purchase all of the issued and
outstanding shares and/or business assets of Calgem, a company that
auctions coloured gemstones on television. In accordance with the terms and
conditions of the AIP, the Company had advanced, by way of a loan to
Calgem, an aggregate of $250,000. A senior fixed and floating claim on all
of the assets of Calgem was to be pledged as collateral for the loan
together with interest accruing thereon at a rate of 10% per annum. The AIP
has expired and the Company wrote off the loan during the year ended June
30, 2000, as it had not been successful in contacting Calgem to discuss
either repayment terms or the establishment of the security for the loan.
7. Mineral Properties, Plant and Equipment
Mineral properties, plant and equipment consist of the following at June
30:
2002 2001
---- ----
Mineral Properties $ 2,219,996 $ 2,219,996
Mining and processing plant and equipment 7,122,679 6,882,869
Development costs 1,104,966 1,104,966
Accumulated amortization (94,769) (77,163)
$ 10,352,872 $ 10,130,668
Black Canyon Mica Project
-------------------------
On March 9, 1999, the Company acquired Arizona Mica Properties, Inc.
(AMPI), owner of the Black Canyon Mica Project, a mineral property of mica
ore and a pilot processing plant located near Phoenix, Arizona. AMPI was
merged with a wholly-owned subsidiary and renamed Azco Mica, Inc.
The acquisition has been accounted for by the purchase method with the
excess of purchase price over fair value being allocated to mineral
properties. The Company issued to the principals of AMPI 4,500,000 shares
of common stock (subject to certain trading and voting trust restrictions)
with a value of $2,289,388, in exchange for all the outstanding shares of
AMPI.
Piedras Verdes Copper Project
-----------------------------
The Piedras Verdes Project is located in southern Sonora, Mexico. During
the year ended June 30, 1996, the Company sold 70% of its interest in the
Piedras Verdes Project to Phelps Dodge Corporation (Phelps Dodge).
F-11
Azco Mining Inc.
Notes to Consolidated Financial Statements
7. Mineral Properties, Plant and Equipment (Continued)
Under the terms of the sales agreement with Phelps Dodge, all assets and
commitments related to this project were transferred to a separate company
incorporated as Cobre del Mayo, S.A. de C.V. (Cobre). In March 2002 Phelps
Dodge sold its 70% operating interest in Cobre to a Canadian privately held
company, Frontera Copper Corporation (Frontera). Under the Cobre
shareholders agreement, The Company is obligated to fund 30% of the
development expenses incurred in connection with the Piedras Verdes
project. The type, amount and timing of development are determined at the
sole discretion of Frontera. Azco has informed Frontera that until it has
secured a more stable financial position it will be unable to fund its 30%
portion of development expenses. The Company's failure to fund its current
year requirement does not result in any additional obligations. Under the
terms of the Cobre shareholders agreement, Azco's ownership in Cobre will
be diluted proportionate to the contributions Azco has made to date. Azco
will have the opportunity to resume contributions at any time at a rate
equal to its ownership level at that time. During the fiscal year ended
June 30, 2002, Azco funded $116,895 (2001 - $192,300; 2000 - $428,373) of
such development costs. The funding was less than the required 30% which
will result in a dilution to the Company's ownership percentage. As of June
30, 2002, the Company has advanced an aggregate of $4,603,079 towards the
project. The Company expenses all costs related to the project and
classifies them as Exploration within the Consolidated Statement of
Operations.
On March 4, 1997, Cobre entered into a mining exploration and exploitation
agreement with Compania Minera Serrana, S.A. de C.V., the mineral property
lessor. Under the terms of this new agreement, Cobre has the following
commitments to be funded 70% by Frontera and 30% by the Company:
a. $10,000 per month from the execution of the agreement until production
begins;
b. three payments of $299,035 due on the date of execution and on the
first and second anniversaries of the date of execution (paid);
c. royalties equal to 3% of the net value of mineral production; and
d. advance royalties of $1,000,000 on the third through fifth
anniversaries of the date of execution, and $1,500,000 on the sixth
through eleventh anniversaries if commercial production is not met by
those anniversary dates, provided the average copper price is above
$0.90 per pound for eight of the previous 12 months, otherwise the
advanced royalty is reduced by 75%.
In the year ended June 30, 2002, Cobre made advanced royalty payments of
$250,000. These amounts are not recoverable if Cobre does not proceed with
the project.
Frontera plans to secure necessary financing for the Piedras Verdes Project
and to advance it to a bankable feasibility stage in the near future.
F-12
Azco Mining Inc.
Notes to Consolidated Financial Statements
7. Mineral Properties, Plant and Equipment (Continued)
Mali Concessions
----------------
On March 31, 1999, the Company announced that it had entered into a joint
venture with Randgold Resources Ltd. (Randgold) whereby Randgold acquired
the right to earn up to 75% of the Company's interest in certain mineral
concessions in Mali, West Africa. To earn this interest, Randgold agreed,
over the next 36 months, to conduct exploration of the concessions at a
minimum cost of $2,000,000, with the aim of establishing whether there is a
viable economic gold resource, as defined in the agreement, of at least one
million ounces. Thereafter Randgold was to prepare a Bankable Feasibility
Study on any such resource within a further 12 months. In September 2001,
Randgold terminated the agreement. The Company has no plans to renew the
concessions or work commitment with the Mali government and is not
obligated for any further costs or expenses related to this project.
8. Other Capital Assets
Other capital assets consists of the following at June 30:
2002
Accumulated
Cost Depreciation Net
---- ------------ ---
Land and office buildings $ 152,997 $ 28,003 $ 124,994
Furniture and equipment 381,383 220,821 160,562
Vehicles 81,146 78,554 2,592
------ ------ -----
$ 615,526 $ 327,378 $ 288,148
- ------- - ------- - -------
2001
Accumulated
Cost Depreciation Net
---- ------------ ---
Land and office buildings $ 152,997 $ 17,815 $ 135,182
Furniture and equipment 381,383 130,775 250,608
Vehicles 81,146 59,515 21,631
------ ------ ------
$ 615,526 $ 208,105 $ 407,421
- ------- - ------- - -------
9. Notes Payable and Other Financing
In January 2002, Azco completed a financing lease transaction resulted in
net proceeds of $2,842,500. Under the terms of the transaction, the Company
sold a 40 percent ownership in the Company's 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 stake
for 120 percent of the original sales price after the second year. The
repurchase price of the property increases by 10 percent of the original
sales price each year the option remains unexercised up to a maximum of 150
percent of the original sales price. Payments for the first 6 months under
the financing agreement are $30,000, for the second 6 months they increase
to $37,500 after which time they are $45,000 per month.
F-13
Azco Mining Inc.
Notes to Consolidated Financial Statements
9. Notes Payable and Other Financing (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 16,
2007. The fair value of the warrant of $1,093,808 was determined by the
Company using the Black-Scholes valuation model and has been reflected as
additional paid-in capital and a discount to the related note.
From December 2001 through January 17, 2002, the Company's Chief Executive
Officer provided unsecured short-term financing in the amount of $243,500.
These funds were provided at a rate of 6.5%, until alternate financing
could be secured. These notes and all associated interest and fees were
paid in full, subsequent to the closing of the financing lease agreement in
January 2002 whereby Azco secured alternate financing.
In December 2001, the Company received a one-year $100,000 loan, bearing
interest at 12% per annum, from 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. This warrant vested in February
2002 and is exercisable through December 2002. The relative fair value of
the warrant at the time of issuance was $29,895 and was reflected as
additional paid-in capital and a discount to the related note.
In October 2001, the Company received a one-year $100,000 loan, bearing
interest at 12% per annum, from the same 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. This warrant vested in December
2001 and is exercisable through October 19, 2002. The relative fair value
of the warrant at the time of issuance was $33,841 and was reflected as
additional paid-in capital and a discount to the related note.
In September 2001, the Company received a one-year $200,000 loan, bearing
interest at 12% per annum, from the same shareholder. In connection with
this loan, the Company issued a warrant to purchase 250,000 shares of the
Company's common stock at $.40 per share. This warrant vested in December
2001 and is contractually exercisable through September 2002. The relative
fair value of the warrant at the time of issuance was $75,415 and was
reflected as additional paid-in capital and a discount to the related note.
The Company and the shareholders are currently in negotiations to extend
the maturity date of the note and attached warrant.
In August 2001, the Company received a one-year $200,000 loan, bearing
interest at 12% per annum, from a shareholder. In connection with this
loan, the Company issued a warrant to purchase 250,000 shares of the
Company's common stock at $.40 per share. The relative fair value of the
warrant at the time of issuance was $75,402 and was reflected as additional
paid-in capital and a discount to the related note. This warrant was
exercised in January 2002. In lieu of payment for the exercise price, the
outstanding note payable was reduced by $100,000.
F-14
Azco Mining Inc.
Notes to Consolidated Financial Statements
9. Notes Payable and Other Financing (Continued)
In March 2001, the Company received an unsecured loan of $800,000 from its
Chief Executive Officer. The note bore an interest rate equal to the prime
rate plus one percentage point, and was due on March 14, 2002. In
connection with this loan, the Company issued a warrant to purchase 300,000
shares of its common stock at $0.70 per share. The relative fair value of
the warrant at the time of issuance was $119,605. In October 2001, the
Company restructured this note payable. The note was extended an additional
year to March 15, 2003 in consideration for 700,000 warrants to purchase
the Company's stock at an exercise price of $0.40. The warrants vested in
December 2001 and expire on October 12, 2003. The relative fair value of
the warrant at the time of issuance was $330,273 and was reflected as
additional paid-in capital and a discount to the related note. In addition,
effective October 1, 2001, the interest rate payable on the note was
adjusted from prime plus 1% to 12% annually. In June 2002, the note was
again extended through March 2004 in return for a security interest in all
of Azco's accounts receivable, inventory, equipment and real property.
The notes payable, financing lease liability and related warrants have been
reflected in the accompanying balance sheet at their relative fair values.
The discount associated with the notes payable and the financing lease is
being amortized over the term of the respective instrument using the
effective interest method.
Notes payable and other financing at June 30, 2002 consisted of the
following:
Unamortized
Principal Discount
--------- --------
12% note, due August 2002 $ 100,000 $ 14,244
12% note, due September 2002 200,000 16,366
12% note, due October 2002 100,000 11,711
12% note, due December 2002 100,000 14,007
Current portion 500,000 56,328
12% note, due March 2004 800,000 184,832
Total $ 1,300,000 $ 241,260
Financing lease, due January 2012 $ 4,500,000 $ 2,524,350
10. Other Liabilities
Other liabilities consist of the following at June 30:
2002 2001
---- ----
Reclamation provision $ 190,400 $ 190,400
Capital leases 84,727 150,743
$ 275,127 $ 341,143
F-15
Azco Mining Inc.
Notes to Consolidated Financial Statements
10. Other Liabilities (Continued)
The Company has provided for decommissioning and reclamation of the Black
Canyon mine site at the cost estimate established with the Federal Bureau
of Land Management. The corresponding deferred expense included in mineral
property, plant and equipment is being amortized to operating results on a
unit-of-production basis.
Capital leases represents the long-term portion of capital leases (see Note
14).
11. Stockholders' Equity
In June 2002, the Company entered into an agreement with an external party
whereby the Company will receive certain investor relations services. The
Company agreed to issue 430,000 shares of its common stock as consideration
for a retainer. The Company recognized expenses of $67,000 for the portion
of services obtained during fiscal 2002. As of June 30, 2002, these shares
had not yet been issued.
In June 2002, the Company entered into an agreement with an external party
whereby the Company will receive certain investor relation services. The
Company issued a warrant for the purchase of 50,000 shares of its common
stock at an exercise price of $2.50 as consideration for a retainer. The
warrant was valued at $16,204 using the Black-Scholes valuation model.
In April 2002, the Company issued 375,000 shares of its common stock to an
existing shareholder at a price of $0.40 per share.
In April 2002, the Company entered into an agreement with an external party
whereby the Company would receive certain investor relation services valued
at $253,500. As consideration for the services rendered, the Company issued
390,000 shares of its common stock.
In November 2001, the Company entered into an agreement with an external
party whereby the Company would receive certain legal services valued at
$14,250. The Company issued 25,000 shares of its common stock as
consideration for services obtained.
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 provided the number of options does not exceed 6,798,263. There
are no vesting requirements under the Plan. The options are exercisable
over a maximum term of five years.
F-16
Azco Mining Inc.
Notes to Consolidated Financial Statements
11. Stockholders' Equity (Continued)
Stock option and warrant activity for the years ended June 30, 2002, 2001
and 2000 was as follows:
Stock Options Stock Warrants
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Balance-oustanding June 30, 1999 3,514,500 $ 1.32 - $ -
Granted 390,000 1.46 - -
Canceled (200,000) 0.63 - -
Expired (100,000) 3.00 - -
Exercised (55,000) 1.02 - -
Balance-outstanding June 30, 2000 3,549,500 1.28 - -
Granted 250,000 1.15 300,000 0.70
Canceled (360,000) 1.22 - -
Expired (460,500) 1.18 - -
Exercised (163,500) 0.91 - -
Balance-outstanding June 30, 2001 2,815,500 1.13 300,000 0.70
Granted 190,000 0.67 4,050,000 0.49
Canceled (80,000) 1.05 - -
Expired (600,000) 1.02 - -
Exercised (61,500) 0.46 (250,000) 0.40
Balance-outstanding June 30, 2002 2,264,000 0.67 4,100,000 0.51
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock option plan under the fair value based method
prescribed by SFAS No. 123. The fair value of options was estimated at the
date of grant using a Black-Scholes options valuation model with the
following weighted-average assumptions for fiscal 2002: risk-free interest
rate of 3.58%, no dividend, volatility factor of the expected market price
of the Company's common stock of 90%, and an expected life of three years.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options that have no vesting or trading
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Changes in the subjective assumptions can
materially affect the fair value estimate.
F-17
Azco Mining Inc.
Notes to Consolidated Financial Statements
11. Stockholders' Equity (Continued)
For the purposes of pro forma disclosure, the weighted-average fair value
of the options of $77,133 (2001 - $116,012; 2000 - $34,870) is expensed
when the options are granted as the Company's stock options are fully
vested when granted. The Company's pro forma information for fiscal 2002,
2001 and 2000 is as follows:
2002 2001 2000
---- ---- ----
Net loss:
As reported $ (4,247,586) $ (3,365,376) $ (3,899,486)
Pro forma (4,324,719) (3,481,388) (3,934,356)
Loss per share:
As reported (0.14) (0.11) (0.13)
Pro forma (0.14) (0.12) (0.13)
At June 30, 2002 and 2001, 2,746,763 and 2,256,763 shares of common stock,
respectively, were reserved for future grants of options. Additionally, the
Company has reserved 687,525 shares of common stock for issuance under
various other commitments.
Of the 2,264,000 stock options outstanding at June 30, 2002, 1,100,000
stock options were issued to directors, employees or key advisors of the
Company.
Stock options exercisable at June 30, 2002 include the following:
Weighted
Weighted Average
Number of Average Remaining
Shares Exercise Price Life
------ -------------- ----
Cdn $0.70 to Cdn $1.05 1,740,000 Cdn. $0.96 20 months
U.S. $0.58 to U.S. $1.20 524,000 U.S. $0.79 43 months
F-18
Azco Mining Inc.
Notes to Consolidated Financial Statements
12. Income Taxes
The income tax benefit differs from the amount computed by applying the
U.S. federal income tax rate to net income before income taxes, as shown:
2002 2001 2000
---- ---- ----
Tax benefit at the federal statutory
rate $ 1,783,517 $ 1,144,228 $ 1,325,825
State tax 262,282 168,269 194,974
Utilization of net operating loss 998,053 - -
Increase in valuation allowance (2,103,992) (1,354,345) (1,471,093)
Deferred tax asset recognized - - (77,700)
Other 58,193 41,848 27,994
------ ------ ------
Tax benefit $ 998,053 $ - $ -
The components of the deferred tax asset and deferred tax liability at June
30, 2002 and 2001 are as follows:
2002 2001
---- ----
Deferred tax asset:
Federal net operating loss
carry forwards $ 4,294,134 $ 3,226,553
State net operating loss
carry forwards 1,025,459 725,672
Foreign mineral properties 1,917,960 2,064,037
Inventories - 878,490
Executive severance 392,340 -
Other 102,708 -
Valuation allowance (6,838,746) (5,732,807)
----------- -----------
Net deferred tax asset 893,855 1,161,945
Deferred tax liability:
Mineral properties, plant and
equipment (893,855) (1,161,945)
$ - $ -
At June 30, 2002, the Company had net operating loss carryforwards for
Arizona income tax purposes of approximately $20.4 million (2001 - $14.5
million). On June 30, 2002, $1.5 million of losses expired. The remaining
losses expire in the amount of $5.0 million on June 30, 2003, $2.3 million
on June 30, 2004, $4.9 million on June 30, 2005, $4.3 million on June 30,
2006, and $3.9 million on June 30, 2007.
At June 30, 2002, the Company had net operating loss carryfowards for
federal income tax purposes of approximately $12.6 million (2001 - $9.5
million). These losses expire between June 30, 2019 and June 30, 2021.
F-19
Azco Mining Inc.
Notes to Consolidated Financial Statements
12. Income Taxes (Continued)
Due to the passage of 2002 Tax Payer Relief and Economic Stimulation Act in
early 2002, the Company was able to carryback the 2001 net operating loss
to the taxable year ended June 30, 1996, resulting in a current, federal
income tax refund of $998,053.
13. Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) excludes dilution and is computed by
dividing net income (loss) by the weighted average number of shares
outstanding. Diluted EPS reflects potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The following is the reconciliation of EPS for
the year ended June 30:
2002 2001 2000
---- ---- ----
Loss applicable to basic and diluted
loss per share $ (4,247,586) $ (3,365,376) $ (3,899,486)
Weighted average number of common
shares assuming no dilution 30,297,261 29,964,636 29,846,839
Weighted average number of common
shares assuming full dilution 30,297,261 29,964,636 29,846,839
Basic loss per common share $ (0.14) $ (0.11) $ (0.13)
Diluted loss per common share $ (0.14) $ (0.11) $ (0.13)
The impact of outstanding stock options and warrants (2002- 6,364,000;
2001- 3,115,500; 2000- 3,549,500) has not been included in the computation
of diluted loss per common share as it would be anti-dilutive.
14. Contingencies and Commitments
Eagle River International Ltd. litigation
-----------------------------------------
On January 22, 1999, the trustee (Petitioner) in bankruptcy proceedings
against Eagle River International Ltd. (Eagle River) served a petition, in
the Quebec Superior Court, District of Hull, Canada, upon the Company in
order to recuperate certain subsidiary stock and other assets from the
Company. The jurisdiction of the courts of Quebec is being currently
contested before the Supreme Court of Canada. It is the understanding of
the Company and its Canadian legal counsel that 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, based on information to date, this
claim is unfounded.
F-20
Azco Mining Inc.
Notes to Consolidated Financial Statements
14. Contingencies and Commitments (Continued)
Termination of Management Agreements
------------------------------------
In October 2000, the Company notified Mr. Alan Lindsay and Mr. Anthony
Harvey of its intention to not renew the contracts with each of their
personal management companies pursuant to which Mr. Lindsay was employed by
the Company as Chief Executive Officer and President and Mr. Harvey was
employed by the Company as Executive Vice President and Secretary. These
contracts were scheduled to expire in February 2001. Mr. Lindsay ceased
serving as an officer on October 25, 2000 and resigned as a director of the
Company on November 27, 2000. Mr. Harvey ceased serving as an officer on
October 25, 2000, and as a director of the Company on May 16, 2001. Messrs.
Lindsay and Harvey each demanded payment of termination fees of $297,675
each, pursuant to their personal management company contracts. In July
2002, Azco entered into a settlement with Messrs. Lindsay and 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 of this agreement is signed. In
addition, Azco agreed to pay $24,898 representing one half of the legal
fees incurred by the former directors. Under the terms of the agreement,
Azco is required to provide Messrs. Harvey and Lindsay each with 150,000
shares of unrestricted common stock. The aggregate amount of the settlement
is $1,030,900.
Employment Agreements
---------------------
The Company has entered into agreements with two officers and four
directors. The agreements provide that if there is a change in control of
the Company and the officer leaves the employment of the Company, for
whatever reason (other than discharge for cause, death, or disability)
within six months after such change 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 cessation of employment. The directors agreements provide for a
lump sum cash payment in an amount not to exceed $100,000 each in the event
of change in control and resignation from the Board.
Lease Commitments
-----------------
The Company is obligated under long-term operating and capital leases for
its office space in Vancouver, British Columbia and for mining equipment.
The aggregate annual commitments under the leases are as follows:
Capital Operating
------- ---------
2003 $ 68,818 $ 91,220
2004 57,483 51,400
2005 17,574 -
2006 9,670 -
Total minimum lease payments 153,545 $ 142,620
Current (68,818)
Long-term $ 84,727
Rental expense for the Company's office space, net of sublease income, for
the years ended June 30, 2002, 2001 and 2000 was $38,438, $34,892 and
$78,697, respectively.
F-21
Azco Mining Inc.
Notes to Consolidated Financial Statements
15. Related Party Transactions
During the year ended June 30, 2001, the Company paid $138,300 (2000 -
$490,200) in management fees to companies controlled during that time by
officers and/or directors. This amount has been included as salaries
expense on the Consolidated Statements of Operations. See also Note 9 for a
discussion of related party notes payable.
16. Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, accounts
payable and accrued liabilities approximated their related fair values as
of June 30, 2002 and 2001 due to of the relatively short term nature of
these instruments. The fair value of the Company's notes payable (carrying
value - $1,058,740; effective interest rate - 40.6%) are indeterminable as
they were entered into with parties in less than arms length transactions.
The carrying value of the Company's financing lease approximates the fair
value; fair value being determined based on the present value of future
cash flows.
17. Supplemental Cash Flow Information
During the fiscal year ended June 30, 2002, the Company had the following
non-cash transactions:
- Issuance of $100,000 of common stock as a form of payment on an
outstanding note payable
- Accrual of $267,750 of common stock as consideration for services
rendered (Note 11)
During the fiscal year ended June 30, 2002, the Company paid interest on
notes payable and financing lease of $316,478.
During the fiscal year ended June 30, 2001, the Company entered into
non-cash capital lease arrangements totaling $241,574 and paid interest on
the note payable of $12,101.
18. New Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." The Statement
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Statement is effective as of the beginning of fiscal
2003. 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 will be capitalized as part
of the asset's carrying value and subsequently allocated to expense over
the assets useful life. At June 30, 2002, the Company had recorded a net
asset of approximately $187,000 and a corresponding liability of $190,400
associated with its estimate of ultimate reclamation costs associated with
the Black Canyon site. The Company is currently in the process of
determining the impact of the pronouncement on its financial position,
results of operations and cash flows. Differences from those amounts
currently reported may result from the impact of discounting and its
estimate of third party costs of reclamation.
F-22
Azco Mining Inc.
Notes to Consolidated Financial Statements
18. New Pronouncements (Continued)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." 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 is
effective as of the beginning of fiscal 2003. The pronouncement is not
expected to have a material impact on the Company's financial position,
results of operations and 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". 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 relating to the rescission SFAS No. 4 are effective for fiscal
year 2003 and provisions of this Statement relating to the SFAS No. 13 are
effective for transactions occurring after May 15, 2002. The pronouncement
is not expected to 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)". The primary
difference from existing guidance is that SFAS No. 146 requires the
recognition cost 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.
F-23
Azco Mining Inc.
Notes to Consolidated Financial Statements
19. Quarterly Results (Unaudited)
The following table sets forth certain quarterly unaudited operating data
for fiscal 2002 and 2001. The unaudited quarterly information includes all
adjustments which management considers necessary for a fair presentation of
the information shown.
June 30, March 31, December 31, September 30,
2002 2002 2001 2001
---- ---- ---- ----
Sales $ 8,800 $ 31,280 $ 24,800 $ -
Operating loss (2,720,329) (895,542) (508,055) (532,935)
Net loss (2,819,163) (178,020) (696,841) (553,562)
Net loss per share (0.09) (0.01) (0.02) (0.02)
June 30, March 31, December 31, September 30,
2001 2001 2000 2000
---- ---- ---- ----
Sales $ - $ 17,600 $ - $ -
Operating loss (1,027,684) (613,016) (832,447) (963,055)
Net loss (1,078,607) (595,953) (793,273) (897,543)
Net loss per share (0.05) (0.02) (0.03) (0.03)
F-24
Azco Mining Inc.
Schedule II - Valuation and Qualifying Accounts
For the years ended June 30, 2002, 2001 and 2000
(a) (b) (c) (d) (e)
Balance at Balance at
Beginning End
Descriptions of Year Additions Deductions of Year
------------ ------- --------- ---------- -------
Valuation allowance for
deferred tax asset(1):
June 30, 2002 $ 5,732,807 $ 2,103,992 $ 998,053 $ 6,838,746
June 30, 2001 4,179,293 1,553,514 - 5,732,807
June 30, 2000 2,708,200 1,548,793 77,700 4,179,293
(1) For further information, refer to Note 12, Income Taxes, in the Notes
to Consolidated Financial Statements included in Form 10-K.
F-25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Azco's present directors and officers are as follows:
Name and Address Age Position Date Elected
---------------- --- -------- ------------
Lawrence G. Olson 65 President, Chairman, Chief 1999
Executive Officer and Director
Paul A Hodges 75 Director 1993
Stanley A. Ratzlaff 67 Director 2001
M. William Lightner Jr. 68 Director 2001
Ryan A. Modesto 47 Vice President Finance, 1996
Corporate Secretary
Gary L. Simmerman 52 Vice President Operations 1998
All of the directors and officers of Azco have held their principal
occupations as set out above during at least the last five years, except as
described below:
Lawrence G. Olson, aged 65, became a director of Azco on March 15, 1999 in
connection with the acquisition of Arizona Mica. Mr. Olson has owned and
operated his own business, Olson Precast of Arizona Inc., since 1973. In 1998,
Olson Precast of New Mexico, Inc., a company controlled by Mr. Olson, was
liquidated under bankruptcy laws in proceedings in the U.S. Bankruptcy Court for
the District of New Mexico. Mr. Olson received a B.S. in Civil Engineering from
the University of Southern California in 1959.
Paul A. Hodges, aged 75, a director, has a degree of Engineer of Mines from the
Colorado School of Mines and is a Registered Professional Engineer in Arizona.
Mr. Hodges has over 40 years experience in the mining industry covering
exploration, operations, project startup, management and financing and has
worked for Anaconda, Asarco, RTZ and St. Joe. Mr. Hodges was the Chief Engineer
worldwide for open pit mining for RTZ and was the President of Anamax Mining
Company at Twin Buttes. Most recently, Mr. Hodges was the President of Compania
Minera El Indio. Mr. Hodges was a director of Lac Minerals Limited, a publicly
traded company acquired by American Barrick in late 1994. Mr. Hodges joined the
Board of Azco in August 1993.
Stanley A. Ratzlaff, aged 67, became a director of Azco on February 13, 2001.
Mr. Ratzlaff, a Financial Consultant and CPA, has a B.A., cum laude, from San
Jose State University. He also completed the Advanced Management Program at
Harvard Business School. Mr. Ratzlaff worked from 1961 to 1969 for the public
accounting firm of Ernst & Young. Since that time, Mr. Ratzlaff has held the
following positions: Assistant Controller of Atlantic Richfield Company,
Corporate Controller of Standard Oil Company (Ohio), Vice President and
Controller of Occidental Petroleum Corporation and Vice President and Controller
of Pacific Enterprises. From 1994 to present, Mr. Ratzlaff has been a consulting
CFO for small companies.
M. William Lightner Jr., aged 68, became a director of Azco on March 6, 2001.
Mr. Lightner, a Financial Consultant and CPA, has a B.S. in Commerce from Grove
City College and a MBA from the University of Pennsylvania, Wharton School of
Business. Mr. Lightner spent 31 years with the public accounting firm Arthur
Andersen & Co., retiring in 1989 as a Partner. Mr. Lightner became involved in
leveraged buy-outs and held the positions of Chairman of Mica Resources and
Financial Vice President of Merit Energy. Most recently, Mr. Lightner held the
positions of CFO and Executive Vice President at Consumer Packaging, Inc. (1994
to 1999) and Anchor Glass Container Corp. (1997 to 2000
Ryan Modesto, aged 47, Vice President Finance since October 26, 1998 and
Corporate Secretary since October 25, 2000, joined Azco in June of 1994 as
Controller of the Sanchez Project. Mr. Modesto served as Azco's Corporate
Controller and Principal Accounting Officer from January of 1996 to October of
1998. Mr. Modesto earned a B.S. in Accounting from the University of Utah in
1977 and has 24 years of accounting and administrative experience in the mining
industry. For the six years prior to joining Azco, Mr. Modesto was the
Controller for Corona Gold Inc.'s Santa Fe Mine located in Nevada.
Gary L. Simmerman, aged 52, joined Azco in September 1992 as Chief Engineer of
the Sanchez Project, and in October of 1998 was appointed Vice-President of
Operations. Mr. Simmerman, a mining engineer from the University of Arizona, has
been working in the mining industry since 1974, and has been involved in
exploration, development and production operations in gold, silver, copper,
cobalt, coal and uranium. For the five years prior to joining Azco, Mr.
Simmerman was Chief Engineer for Santa Fe Pacific Gold's Rabbit Creek Mine and
was involved in the original determinations of the ore reserves and the
feasibility stage through startup, production and expansion to a 200,000-ton per
day operation.
Item 11. Executive Compensation
The following table summarizes the total compensation of the Chief
Executive Officer and the other most highly compensated executive officers of
Azco earning in excess of $100,000 for the year ended June 30, 2002, as well as
the total compensation paid to each such individual for Azco's three previous
fiscal years:
Summary Compensation Table
Annual Compensation Long-Term Compensation
Restricted LTIP
Other Annual Stock Options/SARs payouts All Other
Name and Title Year Salary Bonus Compensation Awarded (#) ($) Compensation
-------------- ---- ------ ----- ------------ ------- --- --- ------------
Lawrence G. Olson 2002 $0 $0 $0 0 100,000 0 0
President, CEO, 2001 $0 $0 $4,500(1) 0 0 0 0
Chairman 2000 $0 $0 $18,000(1) 0 0 0 0
Ryan A. Modesto 2002 $136,000 $0 $0 0 30,000 0 0
V.P. of Finance, 2001 $110,000 $0 $31,044(2) 0 0 0 0
Secretary 2000 $116,664 $5,583 $0 0 0 0 0
Gary L. Simmerman 2002 $189,592 $0 $0 0 0 0 0
V.P. of Operations 2001 $160,416 $0 $0 0 0 0 0
2000 $158,824 $7,750 $0 0 50,000 0 0
(1) These amounts represent directors fees paid to Mr. Olson prior to October
2000. Mr. Olson has received no salary or fees since he became Chairman of
the Board, President and CEO of the Company in October 2000.
(2) Mr. Modesto was reimbursed $31,044 in relocation costs in conjunction with
the move of Azco's corporate office from Ferndale, Washington to Glendale,
Arizona.
The following table contains information regarding options granted in the
year ended June 30, 2002, by Azco's named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
% of Total
Number of Options
Securities Granted to Exercise Potential Realized Value (US$) at Assumed
Underlying Employees or Annual Rates of Stock Price Appreciation
Options in Fiscal Base Price Expiration For Option Term
Name Granted (#) Year (US$/Share) Date 5% 10%
---- ----------- ---- ----------- ---- -- ---
Lawrence G. Olson 100,000 77% $0.67 February 12, 2007 $18,510 $40,904
Ryan A. Modesto 30,000 23% $0.67 February 12, 2007 $ 5,553 $12,271
The options represented in the above table are exercisable from the date of
grant (February 12, 2002).
The following table contains information regarding options exercised in the
year ended June 30, 2002, and the number of shares of common stock underlying
options held as of June 30, 2002, by Azco's named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS VALUES
Value of Unexercised
Number of Securities Underlying In-The-Money Options at FY-End
Unexercised Options at FY-End ($)(*)
Shares
Acquired on
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------------- ----------- ------------- ----------- -------------
Lawrence G. Olson -- -- 200,000 0 69,380 0
Gary L. Simmerman 25,000 $22,500 290,000 0 78,284 0
Ryan A. Modesto -- -- 200,000 0 107,752 0
(*) Based on the closing price of $1.02 of Azco's common stock as quoted on The
American Stock Exchange on June 28, 2002.
Compensation Of Directors
-------------------------
Azco pays to each of its outside, non-officer directors a fee of $1,500 per
month. Azco also reimburses its directors for reasonable expenses incurred by
them in attending meetings of the Board of Directors. During fiscal year 2002,
non-officer directors received a total of $-0- in consulting fees separate and
distinct from directors fees as a result of actual services rendered above and
beyond those typical of a non-officer director. It is Azco's policy to grant
immediately exercisable options to directors upon their initial election to
purchase 100,000 shares of Azco's common stock at an exercise price equal to the
fair market value of the stock.
Employment Contracts And Change In Control Arrangements
-------------------------------------------------------
Management agreements were provided to Mr. Modesto on November 19, 1996 and
to Mr. Simmerman on October 23, 1998. The management agreements provide for a
lump sum distribution in an amount (taking into account all other applicable
change in control payments by Azco) not to exceed 299% of the base amount as
defined in IRC Section 280G (b) upon a change in control. Such "base amount" is
generally equivalent to the applicable person's average annual compensation from
Azco includable in his gross income over the preceding five years. Change of
control is therein defined to include only the following:
(i) the acquisition (whether direct or indirect) of shares in excess of 20%
of the outstanding shares of common stock by a person or group of persons, other
than through a public equity offering;
(ii) the occurrence of any transaction relating to Azco 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 Azco
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.
On August 15, 1994 and on December 8, 1999, Azco provided director's
agreements to Messrs. Hodges and Olson. The same agreements were provided
Messrs. Ratzlaff and Lightner on April 26, 2002. The director's agreements are
effective in the event of a change in control of Azco. The director's agreements
provide for a lump sum distribution not to exceed $100,000 to each of Messrs.
Hodges, Olson, Lightner and Ratzlaff upon a change in control. The terms "change
in control" has the same definition as set forth above in connection with the
management agreements.
Stock Option Plan
-----------------
Azco has a Stock Option Plan (the Plan) dated July 24, 1989, as amended,
for the granting of options to purchase common stock. The board of directors may
grant options to key personnel and others as it deems appropriate provided the
number of options does not exceed 5,950,424. On June 30, 2002 there were
2,264,000 options outstanding under the Plan. There are no vesting requirements
under the Plan. The options are exercisable over a maximum term of five years.
The following table contains information regarding the Company's stock
option plan as of June 30, 2002:
Number of securities Number of securities
to be issued upon Weighted average exercise remaining available for
exercise of price of outstanding options future Issuance under equity
Plan Category outstanding options US$ compensation plan
------------- ------------------- --- -----------------
Equity compensation plan 2,264,000 $0.67 1,898,924
approved by security holders
Compensation Committee Interlocks And Insider Participation
-----------------------------------------------------------
Effective May 16, 2001, Mr. Hodges, Mr. Ratzlaff and Mr. Lightner were
appointed as Azco's Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 17, 2002, certain
information regarding beneficial ownership of Azco's common stock by: (i) each
person known by Azco to be the beneficial owner of more than 5% of Azco's
outstanding common stock; (ii) each director and director-nominee; (iii) each
named executive officer; and (iv) all executive officers and directors as a
group.
Common Stock Beneficially Owned
Name and Address Of Beneficial Owner Title of Class Number of Shares Percent of Class(8)
------------------------------------ -------------- ---------------- -------------------
Lawrence G. Olson Common Stock 2,878,700(1) 8.6%
3045 S. 35th Avenue
Phoenix, AZ 85009
Paul A. Hodges Common Stock 133,000(2) *
4536 N. Via Bellas Catalinas
Tucson, AZ 85718
Stanley A. Ratzlaff Common Stock 180,000(3) *
5025 Pathfinder Ave.
Oak Park, CA 91377
M. William Lightner Jr. Common Stock 125,000(4) *
23871 Sanctuary Lakes Court
Bonita Springs, FL 34134
Ryan A. Modesto Common Stock 205,000(6) *
13557 Fairway Loop N
Goodyear, AZ 85338
Gary L. Simmerman Common Stock 315,000(5) *
1211 W. Crystal Palace Place
Oro Valley, AZ 85737
Officers and Directors As a Group (6 Persons) Common Stock 3,836,700(7) 11.2%
Christian Mustad Common Stock 1,950,000 6.1%
Rue de l'Industrie 6
CH - 1630 BULLE, Switzerland
* Indicates less than 1%.
(1) Includes options to acquire (i) 100,000 shares at an exercise price of CDN
$1.05 per share and (ii) 100,000 shares at an exercise price of US $0.67
per share, (iii) warrants to acquire 300,000 shares at an exercise price of
US $0.69 per share, and (iv) warrants to acquire 700,000 shares at an
exercise price of US $0.40.
(2) Includes option to acquire (i) 50,000 shares at an exercise price of CDN
$1.05 per share (ii) 50,000 shares at an exercise price of CDN $0.70 per
share and (iii) 20,000 shares at an exercise price of US $0.67 per share.
(3) Includes options to acquire (i) 100,000 shares at an exercise price of US
$0.90 per share and (ii) 20,000 shares at an exercise price of US $0.67 per
share.
(4) Includes of options to acquire (i) 100,000 shares at an exercise price of
US $0.69 per share and (ii) 20,000 shares at an exercise price of US $0.67
per share.
(5) Consists of options to acquire (i) 30,000 shares at an exercise price of
CDN $0.80 per share (ii) 210,000 shares at an exercise price of CDN $1.05
per share and (iii) 50,000 shares at an exercise price of CDN $0.95 per
share.
(6) Includes options to acquire (i) 30,000 shares at an exercise price of CDN
$0.80 per share (ii) 20,000 shares at an exercise price of CDN $0.70 per
share (iii) 120,000 shares at an exercise price of CDN $1.05 per share and
(iv) 30,000 shares at an exercise price of US $0.67 per share.
(7) Includes options to acquire an aggregate of 2,050,000 shares.
(8) Applicable percentage of ownership is based on 32,159,646 shares of common
stock outstanding as of September 17, 2002, together with securities
exercisable or convertible into shares of common stock within 60 days of
September 17, 2002 for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Commission and generally includes
voting or investment power with respect to securities. Shares of common
stock subject to securities exercisable or convertible into shares of
common stock that are currently exercisable or exercisable within 60 days
of September 17, 2002 are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2002, Azco entered into a settlement agreement regarding fees
payable under terminated management agreements with two of its former officers
and directors, Mr. Alan P. Lindsay and Mr. 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 agreed to pay $24,898
representing one half of the legal fees incurred by the former directors. Under
the terms of the agreement, Azco is required to provide 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.
During the quarter ended December 31, 2001 and through January 17, 2002,
Lawrence G. Olson, Azco's Chairman, CEO and President provided unsecured
short-term financing amounting to a total of $243,500. These funds were offered
on a 6.5% short-term basis, until alternate financing could be secured.
Subsequent to the closing of the financing lease agreement in January 2002
whereby Azco secured alternate financing, these notes along with all interest
and fees associated were repaid in full.
In March 2001, Mr. Olson, Azco's Chairman, CEO and President, jointly with
his wife, made an unsecured loan to Azco in the amount of $800,000 at an
interest rate equal to the prime rate of interest as reported by Imperial Bank
plus one percentage point. In conjunction with the loan Mr. Olson received a
warrant to purchase 300,000 shares of common stock at an exercise price of $0.69
per share. The warrant vested in December 2001 and shall expire on October 12,
2003
On October 12, 2001, Azco restructured its $800,000 loan agreement with Mr.
Olson. Mr. Olson agreed to extend the note payable an additional year to March
15, 2003 in consideration for a warrant to purchase 700,000 shares of common
stock at an exercise price of $0.40 per share. The warrants vested in December
2001 and shall expire on October 12, 2003. In addition, effective October 1,
2001, the interest rate payable on the loan was adjusted from prime plus 1% to
12% annually.
In June 2002, the $800,000 Olson loan was extended an additional year, in
consideration for Azco entering into a security agreement with Mr. Olson,
whereby certain of Azco's assets secured the loan. The loan is currently due in
March 14, 2004.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
--------------------------------------------------------------------
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, Azco believes that,
during the fiscal year ended June 30, 2002, all filing requirements applicable
to its officers, directors and greater than ten percent beneficial owners were
complied with.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
Financial statements have been included under Part I, Item 8 of thie
report. The following exhibit table indicates all referenced and attached
exhibits.
Exhibit No. Description Location
----------- ----------- --------
2.1 Agreement and Plan of Merger of Arizona Mica Properties, Incorporated by reference to Exhibit 1 to
Inc. into Sanchez Mining, Inc., a wholly-owned subsidiary Registrant's 8-K dated March 9, 1999, as
of Registrant, dated as of March 9, 1999 filed with the SEC on March 24, 1999
3.1 Registrant's Certificate of Incorporation dated August 8, Incorporated by reference to Exhibit 3.1 to
1991 the Registrant's Registration Statement on
Form S-4 (File No. 33-45162)
3.2 Articles of Amendment to the Certificate of Incorporation Incorporated by reference to Exhibit 3.2 to
dated December 5, 1991 the Registrant's Registration Statement on
Form S-4 (File No. 33-45162)
3.3 Registrant's Amended By-laws Incorporated by reference to Exhibit 3.3 to
the Registrant's Registration Statement on
Form S-4 (File No. 33-45162)
4.1 Specimen stock certificate Incorporated by reference to Exhibit 1 to the
Registrant's Registration Statement on Form
8-A as filed with the SEC on July 21, 1992
4.2 Rights Agreement dated July 19, 1995 between the Incorporated by reference to Exhibit 3.4 to
Registrant and Montreal Trust Company of Canada the Registrant's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1995
10.1 Agreements for Piedras Verdes property Incorporated by reference to Exhibit 10.10 to
the Registrant's Registration Statement on
Form S-4 (File No. 33-45162)
10.2 Purchase Agreement dated July 27, 1995 between the Incorporated by reference to Exhibit 10.20 to
Registrant, Sanchez and Phelps Dodge the Registrant's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1995
10.3 Memorandum of Agreement dated June 7, 1996, by and among Incorporated by reference to Exhibit 10.10 to
West Africa Gold & Exploration Ltd., Eagle River the Registrant's Annual Report on Form 10-K
International Limited, Lion Mining Finance Limited and the for the fiscal year ended June 30, 1996 as
Registrant filed with the SEC on September 30, 1996
10.4 Stock Option Plan Incorporated by reference to Exhibit A to
Registrant's DEF 14A as filed with the SEC on
March 5, 1997
10.5 Memorandum of Agreement/Eagle River International Ltd. Incorporated by reference to Exhibit 10.13 to
Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997, as filed with
the SEC on September 30, 1997
10.6 Management Agreements dated February 1, 1998 between the Incorporated by reference to Exhibit 10.8 to
Registrant, Alan Lindsay and Associates, Ltd. and ARH the Registrant's Annual Report on Form 10-K
Management Ltd. for the fiscal year ended June 30, 1998 as
filed with the SEC on September 30, 1998
10.7 Management Agreements dated August 15, 1994, by and Incorporated by reference to Exhibit 10.15 to
between the Registrant and both of Alan P. Lindsay, the Registrant's Annual Report on Form 10-K
Anthony R. Harvey; Management Agreement dated November 19, for the fiscal year ended June 30, 1998 as
1996, by and between the Registrant and Ryan A. Modesto filed with the SEC on September 30, 1998
10.8 Director's Agreement dated August 15, 1994, by and between Incorporated by reference to Exhibit 10.16 to
the Registrant and Paul A. Hodges the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 as
filed with the SEC on September 30, 1998
10.9 Shareholders & Operator's Agreement dated December 19, Incorporated by reference to Exhibit 10.17 to
1995, by and among PD Cobre Del Mayo, Inc., the Registrant the Registrant's Annual Report on Form 10-K
and Cobre Del Mayo, SA de CV for the fiscal year ended June 30, 1998 as
filed with the SEC on September 30, 1998
10.10 Right of First Refusal Agreement dated June 18, 1998 by Incorporated by reference to Exhibit 10.12 to
and among the Registrant, Seville Mineral Developments SA the Registrant's Annual Report on Form 10-K
de CV and Minera Cortez Resources Ltd. for the fiscal year ended June 30, 1998 as
filed with the SEC on September 30, 1998
10.11 Mineral Property Option Agreement dated July, 1998, by and Incorporated by reference to Exhibit 10.13 to
between the Registrant and Minera Cortez Resources Ltd. the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 as
filed with the SEC on September 30, 1998
10.12 Shareholders' Agreement by and among Registrant, Sanou Incorporated by reference to Exhibit 10.5 to
Mining Corporation, West African Gold & Exploration, S.A. the Registrant's Annual Report on Form 10-K
and Randgold Resources Ltd. for the fiscal year ended June 30, 1999 as
filed with the SEC on September 29, 1999
10.13 Mineral Property Option Agreement dated May 20, 1999, by Incorporated by reference to Exhibit 10.16 to
and between the Registrant and Minera Cortez Resources the Registrant's Annual Report on Form 10-K
Ltd. for the fiscal year ended June 30, 1999 as
filed with the SEC on September 29, 1999
10.14 Agreement in Principal dated August 9, 1999 between the Incorporated by reference to Exhibit 10.17 to
Registrant, Thomas Ford and Calgem, Inc. the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999 as
filed with the SEC on September 29, 1999
10.15 Non-Revolving Credit Line Agreement dated March 14, 2001, Incorporated by reference to Exhibit 10.16 to
by and between the Registrant and Lawrence G. Olson Registrant's 10-K as filed with the SEC on
October 15, 2001
10.16 Settlement Agreement and Release by and among the Incorporated by reference to Exhibit 99 to
Registrant, Anthony Harvey, ARH Management, Ltd., Alan the Registrant's 8-K as filed with the SEC on
Lindsay and Alan Lindsay and Associates, Ltd. July 25, 2002
10.17 $5,000,000 Equity Line of Credit Agreement, by and between Provided herewith
the Registrant and Cornell Capital Partners, LP dated June
19, 2002
10.18 Registration Rights Agreement by and between the Provided herewith
Registrant and Cornell Capital Partners, LP dated June 19,
2000
10.19 Escrow Agreement by and among the Registrant, Cornell Provided herewith
Capital Partners, LP, Wachovia, NA and Butler Gonzales
LLP, dated June 19, 2002.
10.20 Placement Agent Agreement by and between the Registrant Provided herewith
and Westrock Advisors, Inc. dated June 19, 2002.
10.21 $150,000 Subscription Agreement between the Registrant and Provided herewith
Floyd R. Bleak dated August 13, 2001
10.22 300,000 share Stock Loan Agreement between the Registrant Provided herewith
and Floyd R. Bleak dated October 11, 2001
10.23 $200,000 Loan Agreement between the Registrant and Patty Provided herewith
J. Ryan dated August 27, 2001
10.24 $200,000 Loan agreement between the Registrant and Luis Provided herewith
Barrenchea dated September 4, 2002
10.25 Amendment to March 15, 2001 $800,000 Loan Agreement Provided herewith
between the Registrant and Lawrence G. Olson dated October
12. 2002
10.26 $100,000 Loan agreement between the Registrant and Luis Provided herewith
Barrenchea dated October 19, 2002
10.27 $100,000 Loan agreement between the Registrant and Luis Provided herewith
Barrenchea dated December 4, 2002
10.28 $3,000,000 Purchase Agreement between the Registrant and Provided herewith
Muzz Investments, LLC dated January 17, 2002
10.29 Lease Agreement between the Registrant and Muzz Provided herewith
Investments, LLC dated January 17, 2002
10.30 Amendment No. 2 to Loan Agreement dated March 15, 2001 for Provided herewith
$800,000 between the Registrant and Lawrence G. Olson
dated June 28, 2002
10.31 Director's Agreements dated April 26, 2002, by and between Provided herewith
the Registrant and Stanley A. Ratzlaff and M. William
Lightner
21.1 Subsidiaries of the Registrant Incorporated by reference to Exhibit 21.1 to
the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001 as
filed with the SEC on October 15, 2001
23.1 Consent of PricewaterhouseCoopers LLP Provided herewith
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.
By: /s/ Lawrence G. Olson
Name: Lawrence G. Olson
Title: President,
Chief Executive Officer
and Chairman of the Board
By: /s/ Ryan A. Modesto
Name: Ryan A. Modesto
Title: Vice-President,
Finance and Corporate
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report below.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Lawrence G. Olson
Lawrence G. Olson President, Chief Executive Officer and Chairman of the September 23, 2002
Board
/s/ Ryan A. Modesto
Ryan Modesto Vice-President, Finance and Corporate Secretary September 23, 2002
/s/ Paul A. Hodges
Paul A. Hodges Director September 23, 2002
/s/ Stanley A. Ratzlaff
Stanley A. Ratzlaff Director September 23, 2002
/s/ M. William Lightner
M. William Lightner Director September 23, 2002
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 Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
/s/ Ryan Modesto
----------------
Ryan Modesto
September 23, 2002
FORM OF OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302
The undersigned Chief Financial Officer of Azco Mining Inc, hereby
certifies that:
1. he has reviewed the report;
2. based on his knowledge, the report does not contain any untrue statement of
a material fact or omit to state a material fact necessary in order 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
the report;
3. based on his knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects
the financial condition, results of operations and cash flows of the issuer
as of, and for, the periods presented in the report;
/s/ Lawrence G. Olson
---------------------
Lawrence G. Olson, Chief Executive Officer
/s/ Ryan Modesto
----------------
Ryan Modesto, Vice President Finance