UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ......................................... to
.........................................
Commission file number 0-20430
AZCO MINING INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 84-1094315
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7239 N. El Mirage Road
Glendale, Arizona 85307
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (623) 935-0774
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The Company had 31,110,621
shares of Common Stock outstanding as of May 10, 2002.
AZCO MINING INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statement of Stockholders' Equity 6
Notes to Interim Consolidated Financial Statements 7-12
AZCO MINING INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS
March 31, 2002 June 30, 2001
-------------- -------------
Current assets:
Cash and cash equivalents $ 845,812 $ 39,920
Income tax receivable (Note 7) 998,053
Prepaids and other 201,925 74,689
Inventories (Note 3) 1,097,501 1,061,447
Total current assets 3,143,291 1,176,056
Property and equipment:
Mineral properties, plant & equipment (Note 2) 10,247,005 10,130,668
Capital assets 313,850 407,421
10,560,855 10,538,089
Restricted cash 290,400 190,400
Total assets $ 13,994,546 $ 11,904,545
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 171,108 $ 690,719
Notes payable (Note 4) 1,046,657 715,280
Total current liabilities $ 1,217,765 $ 1,405,999
Other liabilities 302,439 341,143
Long-term financing lease (Note 4) 1,933,587
Contingencies and commitments (Note 5)
Stockholders' equity
Common stock: $.002 par value, 100,000,000 shares authorized 60,941 60,101
30,070,621 shares outstanding as of March 31, 2002 and
30,050,621 shares outstanding as of June 30, 2001
Additional paid-in capital 30,564,591 28,753,656
Deficit (20,084,777) (18,656,354)
10,540,755 10,157,403
Total liabilities and stockholders' equity $ 13,994,546 $ 11,904,545
The accompanying notes are an integral part of these financial statements.
AZCO MINING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenue:
Sales of mica
31,280 17,600 56,080 17,600
Expenses:
Cost of sales 14,400 8,800 27,200 8,800
Salaries 75,954 56,739 242,202 375,934
General and administrative 274,833 130,214 554,666 500,249
Exploration & development 89,839 166,134 173,425 360,626
Write-down of inventory 438,326 252,888 891,891 1,132,532
Amortization & depreciation 33,429 15,841 103,095 47,605
Reclamation expense 41 - 133 371
$ 926,822 $ 630,616 $ 1,992,612 $ 2,426,117
Other income/expense:
Interest expense (284,721) - (496,047) -
Interest Income 4,190 16,083 6,103 120,768
Other income 980 980
(280,531) 17,063 (489,944) 121,748
Income tax benefit (998,053) - (998,053) -
Net loss $ (178,020) $ (595,953) $(1,428,423) $(2,286,769)
Basic loss per common share $ (0.01) $ (0.02) $ (0.05) $ (0.08)
Diluted loss per common share $ (0.01) $ (0.02) $ (0.05) $ (0.08)
Weighted average common shares 30,052,843 30,021,277 30,051,351 29,934,234
The accompanying notes are an integral part of these financial statements.
AZCO MINING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (1,428,423) $ (2,286,769)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 103,228 59,482
Write down of inventory 891,891 1,132,532
Gain on sale of furniture and equipment (980)
Amortization debt discount 303,689 -
Changes in assets and liabilities, net:
Prepaid and other (130,036) 55,577
Income tax receivable (998,053)
Inventories (927,945) (1,193,201)
Accounts payable and accrued liabilities (519,611) (53,142)
Net cash used in operating activities (2,705,260) (2,286,501)
Cash flows from investing activities:
Proceeds from sale of furniture and equipment - 980
Purchase of investment (100,000) -
Mineral properties, plant & equipment (123,194) (2,097,437)
Net cash used for investing activities (223,194) (2,096,457)
Cash flows from financing activities:
Issuance of notes payable 843,500 800,000
Payments on notes payable (243,500) -
Issuance of financing lease 3,000,000 -
Proceeds from stock sale 164,250 -
Payments on capital lease obligations (38,704) -
Proceeds from exercise of options 8,800 96,891
Net cash provide by financing activities 3,734,346 896,891
Net increase (decrease) in cash and cash equivalents 805,892 (3,486,067)
Cash and cash equivalents at beginning of period 39,920 4,324,886
Cash and cash equivalents at end of period $ 845,812 $ 838,819
The accompanying notes are an integral part of these financial statements.
AZCOM MINING INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Paid-In
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance June 30, 2001 30,050,621 $ 60,101 $ 28,753,656 $ (18,656,354) $10,157,403
Warrants issued (Note 4) 1,638,725 1,638,725
Subscription of Stock (Note 6) 800 163,450 164,250
Exercise of options 20,000 40 8,760 8,800
Net loss (1,428,423) (1,428,423)
Balance March 31, 2002 (unaudited) 30,070,621 $ 60,941 $ 30,564,591 $ (20,084,777) $10,540,755
The accompanying notes are an integral part of these financial statements.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Basis of Presentation and Going Concern
The unaudited consolidated financial information presented herein has been
prepared in accordance with the instructions to Form 10-Q and does not include
all of the information and note disclosures required by generally accepted
accounting principles. Therefore, this information should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Azco Mining Inc. ("Azco" or "the Company") Annual Report on Form 10-K for the
fiscal year ended June 30, 2001. This interim financial information reflects all
adjustments that are, in the opinion of management, necessary to a fair
statement of the results for the interim period.
Azco Mining Inc. is a mining company incorporated in Delaware. Its general
business strategy is to acquire, explore and develop mineral properties. The
Company's principal assets are the 100% owned Black Canyon Mica Project in
Arizona and a 30% interest in the Piedras Verdes Project in Sonora, Mexico.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue to operate as a going concern. The Company has
suffered recurring losses from operations and the Company will require
additional funds to continue operations. On January 17, 2002, the Company
completed a financing lease transaction that yielded the Company net proceeds of
$2,842,500. The Company will need additional funds to continue operations into
fiscal 2003. Management is actively seeking additional financing however, there
is no assurance that these efforts will be successful on terms acceptable to the
Company. These matters raise some doubt about the Company's ability to continue
as a going concern. These consolidated financial statements do not include the
adjustments that would be necessary, including a provision of impairment for
plant and equipment which could be significant, should the Company be unable to
continue as a going concern.
Construction of the Black Canyon Mica Project production facilities was
completed in the previous fiscal year. Due to earlier cash constraints,
production and marketing efforts progressed on a limited basis through March 31,
2002. If the mica project does not achieve commercial production levels or if
the Company is unable to successfully market the mica product during the next 6
months, the Company will need increased additional financing to meet its
operating expenses and pay obligations as they become due.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Note 2. Black Canyon Mica Project (Arizona)
During the quarter ended March 31, 2002, production and commissioning of
production circuits progressed on a limited basis. Marketing efforts continued
as well but additional funding will be necessary to advance the project further.
Detail of mica project mineral properties, plant and equipment is as follows:
March 31, June 30,
2002 2001
---------------- -----------------
Acquisition of mineral properties $ 2,219,996 $ 2,219,996
Mining and processing plant and equipment 7,006,063 6,882,869
Development costs 1,104,966 1,104,966
Accumulated amortization (84,020) (77,163)
---- ---------------- ---- -----------------
Total $ 10,247,005 $ 10,130,668
---- ---------------- ---- -----------------
Detail of other capital assets is as follows:
March 31, June 30,
2002 2001
---------------- -----------------
Office building $ 152,997 $ 152,997
Furniture and equipment 381,383 381,383
Vehicles 81,146 81,146
Accumulated depreciation (301,676) (208,105)
---- ---------------- -----------------
Total $ 313,850 $ 407,421
---- ---------------- ---- -----------------
Note 3. Inventories
March 31, June 30,
2002 2001
---------------- ---------------
Broken ore $ 778,221 $ 814,107
Work-in-process 252,080 187,540
Finished goods 67,200 59,800
---------------- ---------------
Total $ 1,097,501 $ 1,061,447
---------------- ---------------
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
During the three-month and nine month periods ended March 31, 2002, the Company
expensed $438,326 and $891,891, respectively, as inventory write downs
representing mica project operating costs incurred in excess of the estimated
realizable value of inventories produced during the quarter.
Note 4. Notes payable and warrants
On October 12, 2001, the Company restructured its $800,000 loan agreement with
Mr. Olson the Company's Chairman, CEO and President. Mr. Olson agreed to extend
the note payable an additional year to March 15, 2003 in consideration for
700,000 warrants to purchase the Company's stock at an exercise price of $0.40.
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 $800,000
Olson loan was adjusted from prime plus 1% to 12% annually.
On October 19, 2001, the Company received a one-year $100,000 loan, bearing
interest at 12% per annum, from a sophisticated investor and 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 excercisable through October 19, 2002.
On December 3, 2001, the Company received an additional one-year $100,000 loan,
bearing interest at 12% per annum, from the same sophisticated investor and
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 vests in February 2002 and is excercisable through December 3, 2002.
During the quarter ended December 31, 2001 and through January 17,2002, an
insider 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 January 2002, Azco completed a financing lease transaction that yielded the
Company net procedds 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 purchase price after the second year. The repurchase price of the
property increases by 10 percent of the purchase price each year the option
remains unexercised up to a maximum of 150 percent of the purchase price.
Payments for the first 6 months under the lease agreement are $30,000, for he
second 6 months they increase to $37,500 after which time they are $45,000 per
month.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
In connection with this transaction, the Company issued a warrant to purchase
2,550,000 shares of the Company's common stock at $.50 per share. This warrant
vested in January 2002 and is exercisable through January 16, 2007.
The notes payable, financing lease and related warrants have been reflected in
the accompanying balance sheet at their relative fair values. The discount
associated with the notes payable and financing lease is being amortized over
the term of the respective instrument using an effective interest method.
The fair value of the warrants have been determined by the Company using a Blach
Scholes valuation model and have been reflected as additional paid in capital.
Notes payable at March 31, 2002 consisted of the following:
Principal Unamortized Discount
- -------------------------------------------------- ----------------- --------------------------------
12% note due August 27, 2002 200,000 $ 34,938
12% note due September 4, 2002 200,000 36,823
12% note due October 19, 2002 100,000 20,349
12% note due March 15, 2003 800,000 239,926
12% note due December 3, 2002 100,000 21,307
Total $1,400,000 $ 353,343
- -------------------------------------------------- ----------------- --------------------------------
Financing lease $1,933,587 $ 2,566,413
Note 5. Contingencies
Termination of Management Agreements
- ------------------------------------
In October 2000, the Company notified two of its former officers of its
intention to not renew the contracts with each of their personal management
companies contracts which were scheduled to expire in February 2001.
The parties have demanded payment of termination fees of $297,675 each, pursuant
to their personal management company contracts. The Company has disputed its
obligation to pay these amounts and, in December 2000, filed a declaratory
judgment action in United States District Court for the district of Arizona
seeking a declaration that the dispute is not subject to arbitration and further
that the Company was not obligated to pay a termination fee under the management
contracts. In January 2001, the named defendants filed an answer and
counterclaim each seeking an award of damages and prejudgment interest alleged
to be owed as termination fee under the management contracts and declaration of
stock option rights alleged to be owed them after termination of the management
contracts. The litigation is pending with a pretrial conference set for June 3,
2002. No accrual has been made for the termination fees as a liability, if any,
is not yet determinable.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Litigation
- ----------
On January 22, 1999, the trustee (Petitioner) in bankruptcy proceedings against
Eagle River served a petition, in the Quebec Superior Court, District of Hull,
upon the Company in order to recover assets from the Company. The Petitioner
alleges that, through the Company's involvement with Eagle River in the Mali
Project, the Company is guilty of contractual breaches in excess of $3,400,000.
In management's opinion, this claim is unfounded although the eventual outcome
of the case is not yet determinable. No accrual has been made for this claim
because the Company does not believe it is probable that the case will be
determined against the Company.
Note 6. Capital Stock and Outstanding Options
Options to purchase 2,305,500 and 2,765,500 shares of the Company's common stock
were outstanding under the Company's Stock Option Plan at March 31, 2002 and
2001, respectively. The impact of these options has been excluded from the
diluted EPS calculation, as their effect would be anti-dilutive. These options
are exercisable between $0.44 and $1.20 per common share at varying dates
through 2007.
As of March 31, 2002, 375,000 shares of the Company's common stock subscribed to
by an investor on August 10, 2001 had not been issued. In addition, as of March
31, 2002, the Company had not issued but has agreed to issue 25,000 shares of
the Company's common stock as a legal retainer. The shares were issued under
Rule 144 of the Securities and Exchange Act of 1933 on April 9, 2002.
Note 7. Income Tax Recevable
The Company recorded an income tax receivable during the quarter ended March 31,
2002 due to a $998,053 income tax refund from the IRS associated with the
carryback of net operating losses resulting from the March 2002 enactment of the
Job Creation and worker Assistance Act of 2002.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Note 8. New Pronouncements
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations." The Statement addresses
financial accounting and reporting obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. Under this
Statement, retirement obligations will be recognized when they are incurred and
displayed as liabilities and the initial measurement will be at fair value. In
addition, the asset cost will be capitalized as part of the asset's carrying
value and subsequently allocated to expense over the asset's useful life. This
Statement is required to be adopted by the Company on July 1, 2003.
The Company is currently in the process of assessing the impact of these
statements on its financial condition and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements concerning trends and other forward-looking
information, within the meaning of the federal securities laws. Such
forward-looking statements are subject to uncertainties and factors relating to
our operations and business environment, all of which are difficult to predict
and many of which are beyond our control. We believe that the following factors,
among others, could affect our future performance and cause actual results to
differ materially from those expressed or implied by forward-looking statements
made by us or on our behalf: (1) 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; (2) the lack of commercial acceptance of our
mica product or by-products; (3) changes in environmental laws; (4) problems
regarding availability of materials and equipment; (5) failure of the mica
project equipment to process or operate in accordance with specifications,
including expected throughput, which could prevent the project from producing
commercially viable output; and (6) 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.
References to "we", "us", "our", and Azco Mining, refer to Azco Mining Inc. and
its subsidiaries, on a consolidated basis, unless the context otherwise
requires.
General
- -------
We were formed in 1988. In December 1995, we sold our Sanchez copper project and
a 70% interest in our Mexican copper project, the Piedras Verdes Project, to
Phelps Dodge Corporation for $40 million. Material income since the sale has
been a result of interest earned on the proceeds of the sale of these assets.
We are currently focused on the start up of our recently constructed operating
facilities to produce high quality muscovite mica and feldspathic sand from our
100% owned Black Canyon mica project located near Phoenix, Arizona. The recent
funding obtained by the Company has enabled limited production and marketing
efforts to continue. It is most likely that additional financing will be
necessary, in fiscal 2003, to bring our mica project to commercial production
levels.
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 estimating 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 the amortization of accrued reclamation
costs. Changes in ore reserve estimates could materially influence these items.
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.
Results of Operations
- ---------------------
Three Months ended March 31, 2002 compared to Three Months ended
March 31, 2001
The net loss for the three months ended March 31, 2002 was $178,020 ($0.01 per
share) compared to a net loss of $595,953 ($0.02 per share) for the three months
ended March 31, 2001. The decreased net loss is the result of a $998,053 income
tax refund booked in the current quarter. This has been partially offset, during
the quarter ended March 31, 2002, by increased operating costs expensed as an
inventory write-down and increased general and administrative expenses due to
financing efforts.
General and administrative expense was $274,833 for the three months ended March
31, 2002 compared to $130,214 for the three months ended March 31, 2001. The
increase in general and administrative expense is due to increased investor
relations and financing activity.
Write-down of inventory expense for the three months ended March 31, 2002 was
$438,326 compared to $252,888 for the three months ended March 31, 2001. This
increase is due to increased production activities in the current quarter.
Interest expense was $284,721 for the three months ended March 31, 2002 compared
to $0 for the three months ended March 31, 2001. The increase is due to interest
expense associated with loans, entered into over the last year, and with the
amortization of the value of the warrants attached to the loans.
Nine Months ended March 31, 2002 compared to Nine Months ended
March 31, 2001
The net loss for the nine months ended March 31, 2002 was $1,428,423 ($0.05 per
share) compared to a net loss of $2,286,769 ($0.05 per share) for the nine
months ended March 31, 2001. The decreased net loss is the result of a $998,053
income tax refund discussed earlier.
Salaries expense was $242,202 for the nine months ended March 31, 2002 compared
to $375,934 for the nine months ended March 31, 2001. The decrease in salary
expense is due to the closure of the Vancouver office and the non-renewal of the
contracts with the personal management companies of two former officers.
Write-down of inventory expense for the nine months ended March 31, 2002 was
$891,891 compared to $1,132,532 for the nine months ended March 31, 2001. This
decrease is due to reduced operating activities in the current period.
Interest expense was $496,047 for the nine months ended March 31, 2002 compared
to $0 for the nine months ended March 31, 2001. The increase is due to interest
expense associated with loans, entered into over the last year, and with the
amortization of the value of the warrants attached to the loans.
FINANCIAL CONDITION
- -------------------
As of March 31, 2002, we had unrestricted cash of $845,812.
Net cash used in operating activities was $2,705,260 for the first nine months
of fiscal 2002 as compared to $2,286,501 in the same period of the prior year.
The increase was due to an increase in unamortized lease costs.
Azco used $123,194 in cash flows from investing activities for the nine months
ended March 31, 2002 as compared to $2,096,457 used in the same period of the
prior year for purchases of mineral property, plant and equipment. An additional
$100,000 was expended on the purchase of an investment as collateral for a loan
in the current period.
Net cash flows from financing activities was $3,734,346 for the first nine
months of fiscal 2002 as compared to $896,891 in the same period of the prior
year.
In January 2002 Azco completed a financing lease transaction that yielded the
Company net proceeds of $2,842,500. Under the terms of the transaction, the
Company sold a 40 percent ownership in 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 purchase price after the second year. The repurchase price of the
property increases by 10 percent of the purchase price each year the option
remains unexercised up to a maximum of 150 percent of the purchase price.
Payments for the first 6 months under the lease agreement 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 $.50 per share. This warrant
vested in January 2002 and is exercisable through January 16, 2007.
The financing lease transaction enables production and marketing efforts to
continue. Depending on the success of the Company's marketing efforts,
additional funds could be necessary as early as the first quarter of fiscal 2003
to bring our mica project to commercial production levels
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. Azco owns 30% of
Cobre del Mayo and in March 2002 Minera Phelps Dodge Mexico sold its 70%
operating interest in Cobre del Mayo to a Canadian privately held company,
Frontera Copper Corporation ("Frontera"). Frontera plans to secure necessary
financing for the Piedras Verdes Proect and to advance it to a bankable
feasability 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 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. Under the terms of the
Cobre del Mayo shareholders agreement Azco's ownership in Cobre del Mayo S.A. de
C.V. will be diluted proportionate to the contributions at any time at a rate
equal to its ownership level at that time. During the nine months ended March
31, 2002 our share of these development costs was $116,895.
In conjunction with the departure of Alan Lindsay and Anthony Harvey on October
25, 2000, we may be obliged to pay termination fees under the terms of the
management agreements between us and the personal management companies pursuant
to which we employed each of Messrs. Lindsay and Harvey. Messrs. Lindsay and
Harvey had demanded payment of termination fees of $297,675 each, pursuant to
their personal management company contracts. We have disputed any obligation to
pay these amounts and, in December 2000, filed a declaratory judgement action in
the United States District Court for the District of Arizona to determine our
duties in this regard. This litigation is pending.
Lease Arrangements and Contractual Obligations
- ----------------------------------------------
Azco leases its heavy equipment. Certain equipment leases are classified as
capital leases and, accordingly, the equipment and related obligation are
recorded on our balance sheet. The Company is committed to lease its former
executive office in Vancouver BC through April 2004 and currently has a tenant
under a sub-lease contract.
Currently Azco has a total of $1,400,000 of short-term notes due and payable
before March 15, 2003. In addition, the Company has entered into a
sale-leaseback financing arrangement where it plans to re-purchase the equipment
it sold under this transaction in January of 2004, but is not contractually
obligated to do so until 2011.
The following table is provided to detail our contractual obligations and lease
commitments:
Payments due Payments due Payments due in Payments due
through 12/31/02 in 1-3 years 4-5 years after
2003-2005 2006-2007 2007
- -------------------------- ----------------- ---------------- ----------------- ----------------
Equipment leases 104,663 100,669 - -
Office lease 44,500 60,790 - -
Notes payable 707,000 823,000 - -
Financing lease 315,000 1,620,000 1,080,000 4,875,000
Total contractual
obligations 1,171,163 2,604,459 1,080,000 4,875,000
The Company is currently sub-leasing its leased office space in Vancouver B.C.
for $3,140 per month.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
None.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
In October 2000, the Company notified two of its former officers of its
intention to not renew the contracts with each of their personal management
companies contracts which were scheduled to expire in February 2001.
The parties have demanded payment of termination fees of $297,675 each, pursuant
to their personal management company contracts. The Company has disputed its
obligation to pay these amounts and, in December 2000, filed a declaratory
judgment action in United States District Court for the district of Arizona
seeking a declaration that the dispute is not subject to arbitration and further
that the Company was not obligated to pay a termination fee under the management
contracts. In January 2001, the named defendants filed an answer and
counterclaim each seeking an award of damages and prejudgment interest alleged
to be owed as termination fee under the management contracts and declaration of
stock option rights alleged to be owed them after termination of the management
contracts. The litigation is pending with a pretrial conference set for June 3,
2002. No accrual has been made for the termination fees as a liability, if any,
is not yet determinable.
On January 22, 1999, the trustee (Petitioner) in bankruptcy proceedings against
Eagle River served a petition, in the Quebec Superior Court, District of Hull,
upon the Company in order to recover assets from the Company. The Petitioner
alleges that, through the Company's involvement with Eagle River in the Mali
Project, the Company is guilty of contractual breaches in excess of $3,400,000.
In management's opinion, this claim is unfounded although the eventual outcome
of the case is not yet determinable. No accrual has been made for this claim
because the Company does not believe it is probable that the case will be
determined against the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AZCO MINING INC.
(Registrant)
Date: May 14, 2002 BY: /s/ Lawrence G. Olson
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Lawrence G. Olson
CEO, President and Chairman
Date: May 14, 2001 BY: /s/ Ryan A. Modesto
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Ryan A. Modesto
Vice President Finance,
Corporate Secretary