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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
Commission file number: 0-20430
AZCO MINING INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1094315
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Bowie Avenue, Solomon, AZ 85551
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (520) 428-6881
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 Toronto Stock Exchange
- ----------------------------- -----------------------
Common Stock, $.002 par value American Stock Exchange
- ----------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by
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reference in Part III of this Form 10-K or any amendment to this Form 10-K. { }
The number of shares of the Company's Common Stock outstanding as of September
13, 1996 is 25,512,938.
Aggregate Market Value of Stock held by Non-Affiliates as of
September 13, 1996: $ 38,269,407 (U.S.)
Documents incorporated by reference: None.
PART I
ITEM 1. BUSINESS
AZCO Mining Inc. ("AZCO" or the "Company") is a U.S. mining company
with a general business strategy to acquire mineral properties with a prime
focus on gold. The Company plans to supplement its core asset, a 30% interest in
the Piedras Verdes project, through the acquisition of other mining projects.
The Company believes that numerous opportunities exist to acquire such
properties or companies, and that the Company will be an effective competitor
due to its strong cash position and experienced management team. The Company
plans to implement this strategy by entering into joint ventures or corporate
mergers, or making property or corporate acquisitions.
Prior to the sale of the majority of its copper assets the Company was
dedicated to development and production of low-cost copper utilizing solvent
extraction-electrowinning or the SX-EW process. AZCO's principal mineral
property was the SANCHEZ porphyry copper project ("Sanchez" or "Sanchez
Project") located about 10 miles northeast of the City of Safford in
southeastern Arizona, U.S.A. The Company also has interests in two other
porphyry copper properties, the Piedras Verdes and Suaqui Verde properties
located in Sonora State, Mexico.
On July 27, 1995, the Board of Directors of AZCO (the "Board") signed
definitive agreements with Phelps Dodge Corporation ("Phelps Dodge" or "PDC") to
sell a substantial portion of the Company's assets. AZCO's shareholders approved
the sale of 100% of the SANCHEZ and 70% of the Piedras Verdes project for gross
consideration of $40 million.
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A predecessor of AZCO was incorporated on July 13, 1988 under the laws
of Colorado to acquire the mining rights to the Sanchez, as well as certain
other mineral properties. On August 27, 1991, the predecessor was merged into
AZCO, a newly incorporated Delaware corporation. In October 1991, AZCO acquired
all of the shares of Filton Enterprises Limited, a Gibraltar corporation
("Filton"), in return for the issuance of 3,650,000 common shares. At that time,
Filton owned rights in two mining properties in Mexico, the Suaqui Verde project
in southeastern Sonora and the Piedras Verdes project in southern Sonora. Filton
was dissolved effective February 14, 1994 with its Mexican interests being
distributed to the Company.
On July 31, 1992, AZCO merged with AZCO Mining Inc., a Wyoming
corporation ("AZCO (Wyoming)"), with AZCO being the survivor of the merger (the
"Merger"). At the time of the completion of the Merger AZCO (Wyoming) had
3,946,550 shares issued and outstanding and the Company had 12,633,822 common
shares issued and outstanding. One common share of the Company was issued in
exchange for each share of AZCO (Wyoming) in connection with the Merger. AZCO
(Wyoming) was formerly a British Columbia corporation which was incorporated
under the laws of the Province of British Columbia on August 20, 1981 under the
name 241145 B.C. Ltd. 241145 B.C. Ltd. changed its name to Canarex Resources
Inc. on June 22, 1983, and to International Baron Resources Ltd. on January 25,
1988, and finally to AZCO Mining Inc. on February 20, 1992. AZCO (Wyoming) was
continued under the laws of Wyoming effective May 13, 1992 prior to merging with
AZCO.
SIGNIFICANT DEVELOPMENTS IN FISCAL 1996
The Company was not successful in implementing its initial corporate
objective of placing the Sanchez Project into production and then reinvesting
the funds generated by that project in other copper projects involving deposits
that were amenable to open pit mining and solvent extraction/electrowinning. For
the past three years the Company had pursued with diligence the debt and equity
financing required to place the Sanchez Project in production, and more
recently, it had pursued merger and joint venture partners for the development
of the Sanchez Project. Because these efforts were not successful, the Company
on December 20, 1995 completed the sale of the Sanchez as well as a 70% interest
in the Piedras Verdes project to Phelps Dodge for gross consideration of $40
million.
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The Company's sale of the Sanchez Property and the change in the
Company's corporate objective from a mine development to a mine evaluation and
acquisition company has made it necessary for the Company to drop its
designation as a development stage company.
On June 20, 1996, Azco's wholly-owned Mexican subsidiary, Cobre de
Suaqui Verde, S.A. de C.V., entered into an agreement with Minera Phelps Dodge
Mexico, S. de R.L. de C.V.("MPDM") for the exploration of its Suaqui Verde
property (the "Agreement").
Under the terms of the Agreement a new company may eventually be formed
to hold the Suaqui Verde mining rights. MPDM can earn 70% in the new company by
expending $2.0 million on the project over the next three years, funding
completion of a comprehensive feasibility study and paying AZCO $25,000
annually.
On September 9, 1996 the Company announced that it had received
confirmation from the Ministry of Mines of Indonesia that it had been accepted
to apply for a contract of work (the "Contract of Work") in the name of AZCO
over ground in Irian Jaya.
The Contract of Work was acquired for AZCO under agreement with Indotan
Inc. ("Indotan"), whereby AZCO has paid $416,750 (U.S.) as security for the
Contract of Work, and Indotan has retained a 15% participating interest, but
which interest is carried in the form of a non-interest-bearing, non-recourse
loan until the completion of a favorable, bankable feasibility study.
Thereafter, the parties shall bear costs pro rata in accordance with their
participating interest. The costs carried for Indotan's 15% participating
interest will be repaid firstly out of profits, in the event of commercial
production. Indotan will also retain a 2% net smelter return royalty, which may
be purchased by AZCO at any time by the issuance of $3,000,000 (U.S.) in cash or
shares at the discretion of AZCO, and subject to any regulatory requirements.
On September 17, 1996 the Company announced that it has contracted to
acquire 51% of a new company ("Sanou Mining Corporation") which has a 100%
working interest in the Medinandi and Dandoko concessions located in the Kenieba
Gold Mining District of western Mali. The Government of Mali has retained an
option to acquire up to a 15% working interest after completion of a favorable
feasibility study.
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The agreement between AZCO, West Africa Gold & Exploration Ltd., Eagle
River International Limited ("Eagle") and Lion Mining Finance Limited, provides
for the establishment of a joint venture holding company, Chaplin Holdings Ltd.,
which will be changing its name to Sanou Mining Corporation. Sanou is the sole
beneficial owner of a Malian subsidiary headquartered in Bamako and called
Western African Gold & Exploration Company S.A. ("Wag"), which owns the
concessions. Eagle, the original principal concession owner through a Malian
subsidiary, has caused that subsidiary to convey the concessions to Wag in
consideration of 3,500,000 shares and 4,000,000 warrants (exercisable at $1.00
(U.S.) per warrant) of Sanou Mining Corporation. As part of its contractual
commitment, AZCO has made available an exploration guarantee of $1,000,000
(U.S.) to the government of Mali, has the right to purchase 4,800,000 shares of
Sanou Mining Corporation at $0.25 (U.S.) per share and has the right to receive
and additional 1,000,000 shares of Sanou Mining Corporation by paying to Eagle
125,000 common shares of AZCO. Additionally, AZCO has contracted to arrange for
and itself provide (and has the right and obligation to purchase 50%) financing
in an amount of $1,000,000(U.S.) at $0.50 per Sanou Mining Corporation unit. At
initial capitalization of Sanou Mining Corporation AZCO will own approximately
51.33% of Sanou Mining Corporation and, in the event that it purchases 50% of
the referenced $1,000,000 (U.S.) financing of Sanou Mining Corporation, it will
own 55.28% of Sanou Mining Corporation. AZCO has an obligation to purchase 50%
of future financings and a first right to purchase any unbought portion of such
future financings.
EXPLORATION AND DEVELOPMENT
As the Company has no properties in production, it has received no material
revenues other than the proceeds received from the sale of assets to Phelps
Dodge. During fiscal 1996 the Company expensed $71,217 in exploration costs
related to the Suaqui Verde project. Exploration expenses of $667,380 were also
incurred as the Company funded its 30% share of the Piedras Verdes project.
EMPLOYEES
As of August 15, 1996 there were 9 full-time employees of AZCO. None of
these employees are represented by a labor union contract or a collective
bargaining agreement.
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LAWS AND REGULATIONS
AZCO's interests in its projects will be subject to various laws and
regulations concerning development, production, taxes, labor standards,
environmental protection, mine safety and other matters. In addition, new laws
or regulations governing operations and activities could have a material adverse
impact on AZCO.
SEASONABILITY
It is not anticipated that AZCO's Mexican interests in the state of
Sonora would be of a seasonable nature. The Company is aware of the fact that
circumstances in other parts of the world, such as Mali and Indonesia, do make
exploration, mining and mineral processing a seasonal endeavor.
COMPETITIVE CONDITIONS
Many companies are engaged in the exploration and development of
mineral properties. Since many of these companies have substantially greater
technical and financial resources than the Company, the Company may be at a
disadvantage with respect to some of its competitors.
The marketing of minerals is affected by numerous factors, many of
which are beyond the control of the Company. Such factors include the price of
the mineral in the marketplace, imports of minerals from other nations, the
availability of adequate refining and processing facilities, the price of fuel,
electricity, labor, supplies, reagents and the market price of competitive
minerals. In addition, sale prices for many commodities are determined by world
market forces or are subject to rapid and significant fluctuations that may not
necessarily be related to supply or demand or competitive conditions that in the
past have affected such prices.
ENVIRONMENTAL
In connection with its future mining and processing operations, the
Company will be required to comply with various federal, state and local laws
and regulations pertaining to the discharge of materials into the environment.
The Company will also be required to maintain various permits and licenses
necessary for its operations from appropriate regulatory agencies. Apart from
capital expenditures associated with the construction and
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maintenance of facilities required for usual mining and processing activities,
the Company does not anticipate that compliance with environmental laws will
have a material effect upon the capital expenditures, earnings and competitive
position of the Company for the remainder of the current fiscal year, the next
fiscal year or in subsequent periods deemed material by the Company. AZCO is not
currently subject to any material proceedings arising under environmental laws
and regulations.
In light of the nature of its business the Company could face
significant exposure from potential claims involving environmental matters.
These matters could involve alleged soil, air and water contamination, and
personal injuries or property damage allegedly caused by toxic materials handled
or used by the Company in connection with its mining activities. The Company's
policy is to accrue environmental and cleanup costs when it is probable that a
liability has been incurred and the amount of liability. However, future
environment-related expenditures cannot be reasonably quantified in many
circumstances due to the speculative nature of remediation and cleanup costs,
estimates and methods, the imprecise and conflicting data regarding the
characteristics of various types of materials and waste, the unknown number of
other potentially responsible parties involved, the extent to which such costs
may be recoverable from insurance, and changing environmental laws and
interpretations. As a result, the Company believes its future
environment-related expenditures potentially could become material at some
point, but the amount of such expenditures are uncertain at this time.
ITEM 2. PROPERTIES
PIEDRAS VERDES PROJECT
The Piedras Verdes property is leased by Cobre del Mayo, S.A. de
C.V.("Cobra del Mayo"), a Mexican corporation that is owned 30% by AZCO and 70%
by Minera Phelps Dodge Mexico S. de R.L. de C.V. The property consists of
approximately 640 hectares and is located in southern Sonora State, Mexico.
Activities at the Piedras Verdes property have consisted mainly of definition
drilling, surface trenching, sampling and metallurgical testing. The main
objective of the most recent program was to further define and expand in-place
copper resources.
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Prior to the sale of a 70% interest in Cobre del Mayo to Minera Phelps
Dodge Mexico S. de R.L. de C.V., the Company had drilled 242 reverse circulation
holes totalling 88,500 feet. About 350 feet of core drilling was done to obtain
geologic information and samples for metallurgical testing. Thru August 22,
1996, Minera Phelps Dodge has cored an additional 58 holes totaling 15,916
meters and has expanded the geologic mapping.
The Piedras Verdes property contains no proven or probable reserves at
this time. Based on 242 holes drilled by AZCO as described above, the Company
estimated in March 1995 that the mineral resource at Piedras Verdes contains
approximately 154 million tons of copper mineralization with an average grade of
0.41% copper.
SUAQUI VERDE PROJECT
The Suaqui Verde copper property is leased by Cobre de Suaqui Verde,
S.A. de C.V., a Mexican corporation that is owned 99.97% by AZCO. The project is
located in southeastern Sonora, Mexico, near the town of Suaqui Grande, which is
about 350 km south of the U.S.- Mexico border and 160 km southeast of Hermosillo
(population 600,000), the state capital.
On June 20, 1996 Cobre de Suaqui Verde, S.A. de C.V. entered into an
agreement (the "Agreement") with Minera Phelps Dodge Mexico, S. de R.L. de
C.V.("MPDM") for the exploration of its Suaqui Verde property.
Under the terms of the Agreement a new company may eventually be formed
to hold the Suaqui Verde mining rights. MPDM can earn 70% in the new company by
expending $2.0 million on the project over the next three years, funding
completion of a comprehensive feasibility study and paying AZCO $25,000
annually.
Approximately 27,000 feet of drilling completed by AZCO and others has
demonstrated the widespread nature of copper mineralization on the property.
Approximately 115 million pounds of oxide copper have been drill-inferred in 20
million tons of mineralization within a preliminary open pit mine plan. There
are no proven or probable reserves at the Suaqui Verde project at this time.
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ITEM 3. LEGAL PROCEEDINGS
On December 21, 1995 Sanchez Mining Inc. (the Company's wholly-owned
subsidiary) received notice commencing arbitration (the "Arbitration") in
respect of a claim by AIOC Corporation ("AIOC") claiming entitlement of a buyout
of $2.4 million plus additional damages in an unspecified amount and such other
relief as the tribunal may deem appropriate arising from an alleged breach by
Sanchez Mining Inc. of the copper purchase agreement between Sanchez and AIOC
dated December 30, 1994 (the "Copper Purchase Agreement"). AIOC has claimed that
the recent sale by Sanchez Mining Inc. and the Company of certain assets to
Phelps Dodge has resulted in the alleged breach of the Copper Purchase
Agreement. The Arbitration will be conducted in London, England, in accordance
with the arbitration rules of the London Metal Exchange("LME").
On December 28, 1995 AIOC instituted a legal proceeding against the
Company and Sanchez Mining Inc. in the court of Chancery of the State of
Delaware in and for New Castle County (Civil Action No.14765). In its complaint
AIOC claimed a breach of the Copper Purchase Agreement and the letter of
agreement, also dated December 30, 1994, among AIOC, Axel Johnson Ore & Metals,
Inc. and the Company, as a result of the Phelps Dodge transaction and alleged
the existence of a buyout agreement whereby the Company agreed, among other
things, to make a $2.4 million payment to AIOC. AIOC sought damages "in excess
of $5,000,000" and an injunction to prevent the Company and Sanchez Mining Inc.
from transferring the proceeds of the Phelps Dodge sale so as to preserve AIOC's
right to meaningful relief in the Arbitration before the LME.
On February 8, 1996 AIOC, the Company and Sanchez Mining Inc. entered
into a "Stipulation and Order of Compromise and Dismissal" whereby (i)the
Company placed $4,000,000 into escrow to satisfy any award in Arbitration, (ii)
the parties agreed to submit all their disputes to the exclusive forum of the
LME Arbitration, (iii) AIOC agreed to release Phelps Dodge from any liability
relating to AIOC's dispute with the Company and Sanchez Mining Inc. and (iv) the
Delaware Chancery Court Action would be dismissed. The Company and Sanchez
Mining Inc. anticipate that they will continue to contest vigorously the claims
of AIOC in the Arbitration. As a result of the release of Phelps Dodge by AIOC,
the Company received payment of a $1.5 million holdback amount from Phelps Dodge
(plus interest) that had been retained by Phelps Dodge pending the release of
Phelps Dodge in connection with the AIOC dispute. AIOC
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has filed a bankruptcy petition under the United States Bankruptcy Code. It is
uncertain what effect this will have on the Arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common shares are listed for trading on The Toronto Stock
Exchange in Canada and The American Stock Exchange in the U.S. The common
shares are listed on The Toronto and The American Stock Exchanges under the
stock symbol "AZC". The approximate number of shareholders of record for the
Company, as of September 26, 1996, was 977.
Shown below are high and low sale prices of the Common Stock of the
Company on The Toronto Stock Exchange and The American Stock Exchange for the
fiscal periods indicated.
<TABLE>
<CAPTION>
QUARTER ENDED TORONTO EXCHANGE AMERICAN EXCHANGE
- ------------- (Canadian Dollars) (U.S. Dollars)
------------------ -----------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1994
- --------
09/30/94 $3.75 $2.94 $2.75 $2.12
12/31/94 $3.30 $2.45 $2.38 $1.88
1995
- --------
03/31/95 $2.91 $2.20 $2.12 $1.56
06/30/95 $3.20 $1.50 $2.38 $1.19
09/30/95 $2.18 $1.60 $1.56 $1.06
12/31/95 $1.74 $1.00 $1.31 $0.75
1996
- --------
03/31/96 $2.00 $1.23 $1.50 $0.81
06/30/96 $2.84 $1.69 $2.06 $1.19
</TABLE>
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DIVIDEND POLICY
AZCO has not paid any dividends on its common shares to date. AZCO does
not anticipate paying any dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial
information regarding the financial position and operating results for the
Company. For each of the years ended June 30 the selected financial information
has been derived from the Company's consolidated financial statements. This
information should be read in conjunction with the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
For the Year Ended June 30
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues $26,893,607 $ 100,800 $ 96,268 $ 71,973 $ 48,788
Net income 17,127,455 (4,698,537) (3,508,702) (1,965,626) (1,417,828)
Per share $ .67 $ (.19) $ (.17) $ (.11) $ (.11)
Weighted Avg
# of common 25,554,322 25,006,637 20,495,454 17,598,790 12,802,076
shares and common
equity
BALANCE SHEET:
Mineral
Properties 12,573,096 10,971,142 7,527,995 4,119,811
Total Assets 30,033,118 15,791,656 15,792,370 8,845,921 8,193,644
Notes Payable 2,540,715 540,715 540,715 540,715
Total Liabilities 58,217 3,594,210 2,032,941 1,136,574 5,950,026
Total Stock- 29,974,901 12,197,446 13,759,429 7,709,347 2,243,618
holders' equity
</TABLE>
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
All material revenues received during fiscal 1996 were a result of the
proceeds of the sale of assets to Phelps Dodge. All funds raised prior to fiscal
1996 were used in the exploration and development of the Company's properties.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1996 COMPARED TO TWELVE MONTHS
ENDED JUNE 30, 1995.
AZCO had net income $17,127,455 for 1996 compared to a net loss of
$4,698,537 in 1995. This was the result of the gain on the sale of assets to
Phelps Dodge of $26,076,026, recognized in the year ended June 30, 1996.
Salaries expense was $774,461 during 1996 compared to $640,306 in 1995.
The increase was due primarily to severance payments of $114,884.
General and administrative expense was $772,997 during 1996 compared to
$920,246 during 1995. This decrease in 1996 was in large part due to a reduction
in investor relations expenditures of $127,888.
Exploration expense in 1996 was $738,597 as compared to no exploration
expense in 1995. The Company funded $667,380 for its 30% share of the costs
related to the Piedras Verdes project. In addition expenditures of $71,217 were
incurred to sustain the Suaqui Verde project.
The 1996 writedown of $848,487 in mineral properties, represents the
Company's Investment in Cobre del Mayo. AZCO holds a 30% interest in Cobre del
Mayo and, due to the uncertainties involved in the production decision on the
Piedras Verdes project, the Company has written-off this investment. This
writedown compares to the $503,797 of capitalized development costs that were
expensed in 1995 when it was determined that the Suaqui Verde project was
unlikely to be developed by the Company.
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Accounting and legal expenses decreased from $785,740 in 1995 to
$578,928 in 1996. This decrease in 1996 is the result of the 1995 expense of
$400,000 related to the settlement with Muzinich & Co. which is partially offset
in 1996 by proxy solicitation costs of $225,408 incurred over the same issue.
Interest expense increased to $171,173 during 1996 as compared to
$106,376 during 1995 as a result of the carrying of increased debt in the first
half of fiscal 1996. All debt was retired with the proceeds of the Phelps Dodge
sale.
Financing and acquisition expense decreased to $109,362 during 1996
compared to $1,686,168 during 1995. This decrease is due to the 1995 writeoff of
debt and equity costs associated with the attempted financing of the Sanchez
Project.
TWELVE MONTHS ENDED JUNE 30, 1995 COMPARED TO TWELVE MONTHS
ENDED JUNE 30, 1994.
AZCO incurred a net loss of $4,698,537 for 1995 compared to a net loss
of $3,508,702 for 1994. The increase in the net loss was due to increases in
financing expense of $453,272, accounting and legal expense of $511,562 and to
the $503,797 write-off of previously capitalized costs associated with the
Suaqui Verde project.
Financing expense increased by $453,272 in 1995 compared to 1994 as a
result of the write-off of the Barclays Bank PLC fees which were capitalized
during 1994. It was believed Barclays Bank PLC syndicate would provide the debt
financing for the Sanchez Project and the costs would have been written-off over
the life of the loan. However, when the agreement with Barclays Bank PLC was
terminated in fiscal year 1995, due to a better financing commitment from
Prudential, the costs were expensed.
The increase in accounting and legal expense was a direct result of
expense incurred in the endeavor to secure the Phelps Dodge transaction and the
accrual of a $400,000 settlement with certain shareholders in relation to the
proposed sale of the Company's significant properties to Phelps Dodge.
Due to limited capital resources and the inherent quality of the
Sanchez project and the Piedras Verdes property it was unlikely
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the Suaqui Verdi project would be developed by AZCO and, accordingly, all costs
associated therewith were expensed.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended June 30, 1996 the Company met its capital
requirements principally through the proceeds of the sale of assets to Phelps
Dodge.
At June 30, 1996 and June 30, 1995 the Company had cash and cash
equivalents of $24,295,805 and $1,794,638, respectively, and working capital of
$25,682,136 and $(1,734,453), respectively. Total liabilities decreased from
$3,594,210 on June 30, 1995 to $58,217 on June 30, 1996. The following payments,
in large part from the proceeds of the sale of assets, are responsible for the
decrease in liabilities on June 30, 1996: $2,540,715 repayment of convertible
debentures, $400,000 payment in shareholder settlement and $450,000 Magma
contractual payment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section at the end
of this report on page F-1 of the Form 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the names and positions of the executive officers
and directors of the Company as of September 13, 1996. All executive officers
and directors have been elected and appointed to serve until their successors
are elected and qualified. Additional information regarding the age, business
experience, length of time served in each capacity and other matters relevant to
each individual is set forth below the table.
<TABLE>
<CAPTION>
NAME POSITION HELD
- --------------------------------------------------------------------------------
<S> <C>
Alan Peter Lindsay..................... Chairman, Chief Executive Officer
and Director
David Coates Beling.................... President, Chief Operating
Officer and Director
Anthony Richard Harvey................. Vice-Chairman of the Board,
Executive Vice-President,
Secretary and Director
Andrew Frederic de Paula Malim......... Director of the Company
Paul Arthur Hodges..................... Director of the Company
Dr. Ian McFarlane Gray................. Director of the Company
Ryan Andrew Modesto.................... Corporate Controller and
Principal Accounting Officer
</TABLE>
All the directors and officers of the Company have held their principal
occupations as set out above, except as follows, during at least the last five
years:
Mr. Lindsay, aged 46, one of the Company's founders, has been
responsible for arranging the financing, the corporate development and the
building of the organization important to the success of the Company. Mr.
Lindsay has an extensive background in business management and marketing. Mr.
Lindsay has been involved in the mining business for the past eight years and
since 1989 has been engaged full time on AZCO's business. From 1982 to 1989
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Mr. Lindsay was the Manager of the Financial Services Division of the North
American Life Assurance Company in Vancouver.
Mr. Beling, aged 55, joined the Company in January 1992, became a
Director and the Chief Operating Officer of the Company and the President of
Sanchez Mining Inc. in March 1993 and President of AZCO in February 1994. Mr.
Beling has primary responsibility for all exploration, development and operating
activities of the Company. Mr. Beling has been working in the mining industry
since 1964, and has been involved in the exploration, development and production
operations of copper, gold, zinc, oil shale, talc, uranium and coal mines. From
1987 through January 1992 he was both the Senior Vice-President of Hycroft
Resources and the Vice-President of Operations (U.S.A.) of Granges Inc., where
he was responsible for start-up and management of a 40,000 ton per day open pit
gold mine and a 16,000 ton per day heap leach process.
Mr. Harvey, aged 62, one the Company's founders, has been associated
with the Company since July 13, 1988. He has been a full-time employee since May
18, 1989, prior to which he spent 30 years with Wright Engineers Limited, where
he gained extensive experience in the mining industry in various management
positions, including mine construction and ore extraction, bulk handling and
processing, project management and corporate marketing and development, in many
countries including the U.S. As a senior project manager he was responsible for
the overall management and direction of many mining projects worldwide,
including the Copper Flat Project 15,000 ton per day copper/moly open pit mining
and processing plant located in New Mexico, for Quintana Minerals Corporation,
and a 3,000 tpd underground copper mine rehabilitation expansion located in
Ireland, for Avoca Mines Limited.
Mr. Malim, aged 53, became a director of the Company on July 16, 1991.
Mr Malim has been associated with Lion Mining Group since 1981 and currently is
the managing director of that company. Mr. Malim also has majority ownership of
the Lion Mining Group. The Lion Mining Group has been associated with the
Company since March 1989 and has been responsible for the Company's European
representation and for raising a significant portion of the Company's financing
to date. Mr. Malim was one of the original members of the James Capel & Company
mining team, and for ten years was a member of the International Stock Exchange,
London.
16
<PAGE> 17
Mr. Hodges, aged 69, director, has a degree of Engineer of Mines from
the Colorado School of Mines and is a Registered Professional Engineer in
Arizona. Mr. Hodges has over 40 years experience in the mining industry covering
exploration, operations, project startup, management and financing and has
worked for Anaconda, Asarco, RTZ and St. Joe. Mr. Hodges was the Chief Engineer
worldwide for open pit mining for RTZ and was President of Anamax Mining Company
at Twin Buttes. Most recently Mr. Hodges was President of Compania Minera El
Indio. He was a director of Lac Minerals Limited, a publicly traded company
acquired by American Barrick in late 1994. Mr. Hodges joined the Board as a
voting member in August 1993.
Dr. Gray, director, became a director September 4, 1996. Most recently
Dr. Gray has been involved in the assessment, acquisition and development of
gold and copper properties in Indonesia, Peru and Brazil. For much of his career
Dr. Gray held senior operations and management positions with INCO Ltd. and BP
Minerals International Ltd. and has been involved in mineral exploration,
project development, mine production, formation and general management of public
companies in North America, Australia, Central Southern Africa, S.E. Asia and
South America.
Mr. Modesto, aged 41, Corporate Controller and Principal Accounting
Officer since January 1, 1996, joined the Company in June 1994 as Controller of
the Sanchez Project. Mr. Modesto earned a B.S. in Accounting from the University
of Utah in 1977 and has 18 years of accounting and administrative experience in
the mining industry. For the six years prior to joining the Company Mr. Modesto
was the Controller for Corona Gold's Santa Fe project in Nevada.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission (the
"SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
17
<PAGE> 18
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons, the Company believes
that, during the fiscal year ended June 30, 1996, all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with, except that each of Messrs. Lindsay, Harvey, Beling,
Malim, Hodges and Modesto had one late filing, each reporting one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief
Executive Officer and the other most highly compensated executive officers
(collectively, the "Named Executive Officers") of the Company earning in excess
of $100,000 for the year ended June 30, 1996, as well as the total compensation
paid to each such individual for the Company's three previous fiscal years:
Summary Compensation Table
(As at year ended June 30, 1996)
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------------- ------------
Securities
Underlying
Options/
Other Annual SARs
Name and Principal Salary Bonus Compensation Granted
Position Year ($) ($) ($) (#)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alan P. Lindsay(1) 1996 99,482 0 6,000(4) 300,000
Chairman of the 1995 92,400 0 2,500(4) 0
Board and CEO 1994 92,400 0 1,000(3) 0
- ----------------------------------------------------------------------------------------------
Anthony R. Harvey(2) 1996 99,482 0 6,000(4) 300,000
Vice-Chairman, Vice 1995 92,400 0 2,500(4) 0
President, Secretary 1994 92,400 0 1,000(3) 0
- ----------------------------------------------------------------------------------------------
David C. Beling 1996 175,000 0 0 155,000
President and Chief 1995 142,178 65,000 6,490(5) 0
Operating Officer 1994 135,000 7,000 1,000(3) 118,000
- ----------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
(1) These amounts were actually paid to Alan Lindsay and Associates Ltd., a
management company under the control of Mr. Lindsay pursuant to a
management agreement dated May 1, 1989 with the Company.
(2) These amounts were actually paid to ARH Management Ltd., a management
company under the control of Mr. Harvey pursuant to a management
agreement dated May 1, 1989 with the Company.
(3) These amounts were paid as director's fees.
(4) These amounts were paid as reimbursement of medical insurance premiums.
(5) These amounts were paid as a premium on a life insurance policy.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Number % of Total Potential
of Options/ Realized Value
Securities SARs (Cnd $) at
Underlying Granted to Exercise or Assumed Annual
Options/ Employees Base Price Rates
SARs in Fiscal (Cdn $/Sh) of Stock Price
Granted (#) Year Expiration Appreciation
Name Date For Option Term
5% 10%
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alan P. Lindsay 300,000(1) 0.34% 1.80 March 8, 2001 27,000 54,000
- ---------------------------------------------------------------------------------------------------------------
David C. Beling 155,000(1) 0.18% 1.80 March 8, 2001 13,950 27,900
- ---------------------------------------------------------------------------------------------------------------
Anthony R. Harvey 300,000(1) 0.34% 1.80 March 8, 2001 27,000 54,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These options are exercisable on the date of grant (March 8, 1996).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS VALUES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Name Number of Securities Underlying Value of Unexercised
Unexercised Options at FY-End In-The-Money Options at FY-End
($)(1)
- ------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alan P. Lindsay 0 300,000 0 72,000
- -------------------------------------------------------------------------------------------------
David C. Beling 268,000 155,000 58,000 37,200
- -------------------------------------------------------------------------------------------------
Anthony R. Harvey 0 300,000 0 72,000
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the closing price of $1.56 of the Company's common stock as
quoted on The American Stock Exchange on June 30, 1996.
19
<PAGE> 20
COMPENSATION OF DIRECTORS
Effective September 30, 1994 the Company's Board of Directors
authorized the payment of directors' fees only to outside, or non-officer
directors, at the rate of $1,000 per month. Effective February 6, 1996 the
Company's Board of Directors authorized an increase in directors' fees to
outside, non-officer directors, to $1,500 per month. The Company also reimburses
its directors for reasonable expenses incurred by them in attending meetings of
the Board of Directors. During fiscal 1996 Mr. Malim and Mr. Hodges, both
non-officer directors, were granted stock options of 125,000 and 50,000,
respectively.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS.
Effective May 1, 1989 the Company entered into a management agreement
with Alan Lindsay and Associates Ltd. ("Associates"), a British Columbia
corporation owned and controlled by Mr. Lindsay, the Company's Chief Executive
Officer. This agreement requires all salary amounts otherwise payable by the
Company to Mr. Lindsay to be paid to Associates. This agreement is automatically
renewed for two year terms unless either party gives the other party notice of
non-renewal at least 30 days prior to the end of any term. The agreement may be
terminated by the Company without notice if Mr. Lindsay is no longer a principal
of Associates, or upon the occurrence of certain other events such as Mr.
Lindsay's bankruptcy or disability. The agreement may be terminated by either
party, without notice, upon breach of the material terms of the Agreement,
commission of fraud, or misconduct or declaration of bankruptcy by either party.
Effective May 1, 1989 the Company entered into a management agreement
with ARH Management Ltd. ("Management"), a British Columbia corporation owned
and controlled by Mr. Harvey, the Company's Vice-Chairman. This agreement
requires all salary amounts otherwise payable by the Company to Mr. Harvey to be
paid to Management. This agreement is automatically renewed for two year terms
unless either party gives the other party notice of non-renewal at least 30 days
prior to the end of any term. The agreement may be terminated by the Company
without notice if Mr. Harvey is no longer a principal of Management, or upon the
occurrence of certain other events such as Mr. Harvey's bankruptcy or
disability. The agreement may be terminated by either party, without notice,
upon breach of the material terms of the Agreement,
20
<PAGE> 21
commission of fraud, or misconduct or declaration of bankruptcy by either party.
Mr. Beling has an employment agreement with the Company providing for a
base salary of $135,000 per year. Effective April 27,1995 Mr. Beling's salary
was increased to $175,000 per year. The agreement also provides that in the
event of termination of Mr. Beling's employment for reasons beyond his
reasonable control, Mr. Beling will receive severance pay equal to six months of
base salary plus any prorated bonuses and vacation accrued to the time of
termination. In addition, the agreement provides that in the event of merger,
consolidation, divestiture, takeover, sale or other similar circumstances which
result in conditions or terms unacceptable to Mr. Beling within the first year
after such event, Mr. Beling will be paid 12 months base salary plus any
prorated bonuses and vacation accrued to the time of termination.
Effective August 15, 1994 management agreements (collectively, the
"Management Agreements") were provided to each of Messrs. Beling, Harvey and
Lindsay that are effective in the event of a change in control of the Company.
The Management Agreements provide for a lump sum distribution in an amount
(taking into account all other applicable change in control payments by the
Company) not to exceed 299% of the base amount as defined in IRC Section 280G
(b). Such "base amount" is generally equivalent to the applicable person's
average annual compensation from the Company includable in his gross income over
the preceding five years. Change of control is therein defined to include only
the following:
(i) the acquisition of (whether direct or indirect) shares in
excess of 20 percent of the outstanding shares of Common Stock
of the Company by a person or group of persons, other than
through a public equity offering by the Company; or
(ii) the occurrence of any transaction relating to the Company
required to be described pursuant to the requirements of item
6(e) of Schedule 14A of Regulation 14A of the Securities and
Exchange Commission under the Securities and Exchange Act of
1934; or
(iii) any change in the composition of the Board of Directors
of the Company resulting in a majority if the present
directors not constituting a majority, provided, that in
21
<PAGE> 22
making such determination directors who were elected by, or on
the recommendation of, such present majority, shall be
excluded.
Effective August 15, 1994 director's agreements (collectively, the
"Director's Agreements") were provided to each of Messrs. Malim and Hodges that
are effective in the event of a change in control of the Company. These
Director's Agreements provide for a lump sum distribution in the amount of
$100,000. Change in control has the same definition as set forth above in
connection with the Management Agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
During the fiscal year ending 1996 the Company had no compensation
committee. Each of the Company's officers and directors participated in
deliberations of the Company's Board of Directors concerning officer
compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The table below sets forth information, as of June 30, 1996 with
respect to beneficial ownership of the Company's Common Stock by each person
known by the Company to be the beneficial owner of more than 5% of its
outstanding Common Stock, by each director of the Company, by each Named
Executive Officer, and by all officers and directors of the Company as a group.
Unless otherwise noted, each shareholder has sole investment and voting power
over the shares owned.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Name and Address Type of Number of Percent of
of Beneficial Owner Ownership Shares Class
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alan P. Lindsay Record and 978,569(1) 3.84%
999 W. Hastings, Ste 1250 Beneficial
Vancouver, BC V6C 2W2
CANADA
- ------------------------------------------------------------------------------------
David C. Beling Record and 423,000(2) 1.66%
PO Box 747 Beneficial
Safford, AZ 85548
- ------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Anthony R. Harvey Record and 453,252(3) 1.77%
999 W. Hastings, Ste 1250 Beneficial
Vancouver, BC V6C 2W2
CANADA
- --------------------------------------------------------------------------------
Andrew F de P Malim Record and 171,541(4) 0.67%
7-8 Kendrick Mews Beneficial
London, England SW7 3HG
- --------------------------------------------------------------------------------
Paul A. Hodges Record and 116,524(5) 0.46%
4536 N. Via Bellas Catali Beneficial
Tucson, AZ 85718
- --------------------------------------------------------------------------------
Officers & Directors Record and 2,179,886 8.54%
as a Group (6 persons) Beneficial
================================================================================
</TABLE>
(1) Includes 605,308 shares owned by a corporation controlled by
Mr. Lindsay. Includes options to acquire 300,000 shares at an
exercise price of CDN $1.80 per share.
(2) Includes options to acquire (i) 100,000 shares at an exercise price of
$2.00 per share, (ii) 50,000 shares at an exercise price of $.40 per
share, (iii) 118,000 shares at an exercise price of CDN $2.89 per
share, and (iv) 155,000 shares at an exercise price of CDN $1.80 per
share.
(3) Includes 122,224 shares owned by Mr. Harvey's wife. Includes
options to acquire 300,000 shares at an exercise price of CDN
$1.80 per share.
(4) Includes an option to acquire 125,000 shares at an exercise
price of CDN $1.80 per share.
(5) Includes options to acquire (i) 50,000 shares at an exercise price of
$2.00 per share and (ii) 50,000 shares at an exercise price of CDN
$1.80 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Andrew F de P Malim, a non-officer director of the Company, is the
chairman, managing director and majority shareholder of Lion Mining Finance, a
United Kingdom registered company. AZCO has entered into a memorandum of
agreement with Eagle River International Limited, West African Gold and
Exploration, Ltd. and Lion Mining Finance concerning the development of mining
concessions in Mali. Lion Mining Finance is currently being paid
23
<PAGE> 24
$7,000 a month to manage the Malian Project. See Item 1 herein above for a more
detailed description of the agreement for the development of mining concessions
in Mali.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8K
(a) 1. Financial Statements - Reference is made to the Financial Statements
appearing on Pages F-1, F-2, F-3, F-4, F-5, F-6, F-8-F- 18 hereof.
2. Financial Statement Schedules - Reference is made to the Financial
Statement Schedules on Page F-19.
3. Exhibits
3.1 Registrant's Certificate of Incorporation dated August 8, 1991(1)
3.2 Articles of Amendment to the Certificate of Incorporation dated
December 5, 1991(1)
3.3 Registrant's Amended Bylaws(2)
3.4 Rights Agreement dated July 19, 1995 between the Registrant and
Montreal Trust Company of Canada(2)
4.1 Specimen stock certificate.(3)
10.1 Management Agreement dated May 1, 1989 between the Registrant and
ARH Management Ltd.(1)
10.2 Management Agreement dated May 1, 1989 between the Registrant and
Alan Lindsay and Associates, Ltd.(1)
10.3 Distribution Agreement dated August 15, 1991 between the Registrant
and Axel Johnson Ore & Metals, Inc.(1)
10.4 Agreements for Suaqui Verde Property(1)
10.5 Agreements for Piedras Verdes Property(1)
24
<PAGE> 25
10.6 Employment Agreement with David Beling dated September 10, 1991(1)
10.7 Copper Purchase Agreement dated December 30, 1994 between AIOC
Corporation and Sanchez Mining Inc.(2)
10.8 Purchase Agreement dated July 27, 1995 between the Registrant,
Sanchez Mining, Inc. and Phelps Dodge Corporation.(2)
10.9 Settlement Agreement dated August 3, 1995 between the Registrant
and Muzinich & Co., Inc.(2)
10.10* Memorandum of Agreement between West Africa Gold & Exploration Ltd.,
Eagle River International Limited, Lion Mining Finance Limited and
AZCO Mining Inc.
10.11* Suaqui Verde Mineral exploration agreement and option to form company
among AZCO Mining, Inc., Cobre de Suaqui Verde, S.A. de C.V. and
Minera Phelps Dodge Mexico, S. de R.L. de C.V.
10.12* Letter agreement relating to the Irian Jaya property offer.
11.1* Statement regarding computation of per share earnings
21.1* Subsidiaries of the Registrant
24.1* Consent of Coopers and Lybrand
27* Financial Data Schedule
- ------------
(1) Exhibit Nos. 3.1, 3.2, 10.1, 10.2, 10.3, 10.4, 10.5, and 10.6 are
incorporated by reference from Exhibit Nos. 3.1, 3.2, 10.1, 10.2, 10.3,
10.10, 10.11 and 10.15 respectively, from the Registrant's Registration
Statement on Form S-4 (File No. 33-45162).
(2) Exhibit Nos. 3.3, 3.4, 10.7, 10.8 and 10.9 are incorporated by
reference from exhibits Nos. 3.3, 3.4, 10.19, 10.20 and 10.21 from the
Registrant's Annual Report on Form 10-K(a) for the fiscal year ended
June 30, 1995.
25
<PAGE> 26
(3) Exhibit No. 4.1 is incorporated by reference from exhibit No. 1 from
the registrant's Registration Statement on Form 8-A filed with the SEC
on July 21, 1992.
* Filed herewith.
(b) Reports on Form 8K: None
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AZCO MINING INC.
Date: September 25, 1996 By: /s/ David C. Beling
------------------------ ----------------------------------
David C. Beling
President and Chief Operating Officer
Date: September 25, 1996 By: /s/ Ryan A. Modesto
------------------------ ----------------------------------
Ryan A. Modesto
Corporate Controller and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alan P. Lindsay Chairman of the Board September 25, 1996
- ---------------------------- and CEO
Alan P. Lindsay
/s/ David C. Beling President, Chief Operating September 25, 1996
- ---------------------------- Officer and Director
David C. Beling
/s/ Anthony R. Harvey Vice Chairman, Executive September 25, 1996
- ---------------------------- Vice President, Secretary
Anthony R. Harvey and Director
/s/ Andrew Malim Director September 25, 1996
- ----------------------------
Andrew F de P Malim
/s/ Paul A. Hodges Director September 25, 1996
- ----------------------------
Paul A. Hodges
/s/ Dr. Ian M. Gray Director September 25, 1996
- ----------------------------
Dr. Ian M. Gray
</TABLE>
27
<PAGE> 28
AZCO MINING, INC. (DELAWARE)
FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2)
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
<TABLE>
<CAPTION>
THE FOLLOWING FINANCIAL STATEMENTS REQUIRED TO BE
INCLUDED IN ITEM 8 ARE LISTED BELOW:
<S> <C>
PAGE
----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995 F-3
Consolidated Statements of Operations for the fiscal years
ended June 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity
for the fiscal years ended June 30, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 - F-18
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, 1996, 1995 and 1994 F-19
</TABLE>
Schedules other than the one listed above have been omitted since they are
either not required or not applicable, or since the required information is
shown in the financial statements or related notes.
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Azco Mining, Inc. (Delaware):
We have audited the consolidated financial statements and the financial
statement schedule of Azco Mining, Inc. (Delaware) and Subsidiary listed in the
index on page F-1 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Azco Mining, Inc.
(Delaware) and Subsidiary as of June 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles. In addition in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
August 29, 1996
F-2
<PAGE> 30
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,295,805 $ 1,794,638
Short-term investments 1,400,687
Prepaids and other 43,861 65,119
------------ ------------
Total current assets 25,740,353 1,859,757
------------ ------------
Property and equipment:
Mineral properties 12,573,096
Furniture and equipment 188,080 262,040
Construction in progress 856,082
------------ ------------
188,080 13,691,218
Less accumulated depreciation (127,450) (123,824)
------------ ------------
60,630 13,567,394
------------ ------------
Restricted cash 51,610 350,120
Deposit 4,000,000
Other assets 180,525 14,385
------------ ------------
$ 30,033,118 $ 15,791,656
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 58,217 $ 603,495
Notes payable 2,540,715
Deferred liability 450,000
------------ ------------
Total current liabilities 58,217 3,594,210
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock: $.002 par value, 50,000,000 shares
authorized; 25,512,938 shares issued and outstanding
as of June 30, 1996 and 1995, respectively 51,026 51,026
Additional paid-in capital 25,587,549 24,937,549
Retained earnings (accumulated deficit) 4,336,326 (12,791,129)
------------ ------------
Total stockholders' equity 29,974,901 12,197,446
------------ ------------
$ 30,033,118 $ 15,791,656
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 31
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the fiscal years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income:
Interest income $ 817,581 $ 100,800 $ 96,268
Gain on sale of assets 26,076,026
------------ ------------ ------------
26,893,607 100,800 96,268
------------ ------------ ------------
Operating
expenses:
Salaries 774,461 640,306 654,552
General and administrative 772,997 920,246 1,134,798
Write-down of mineral properties 848,487 503,797
Exploration 738,597
Accounting and legal 578,928 785,740 274,178
Amortization and depreciation 57,147 156,704 131,959
Stock compensation expense 150,451
Interest expense, net of amount capitalized 171,173 106,376 26,136
Financing and acquisition 109,362 1,686,168 1,232,896
------------ ------------ ------------
4,051,152 4,799,337 3,604,970
------------ ------------ ------------
Income (loss) before income taxes 22,842,455 (4,698,537) (3,508,702)
Income tax provision (5,715,000)
------------ ------------ ------------
Net income (loss) $ 17,127,455 $ (4,698,537) $ (3,508,702)
============ ============ ============
Net $ 0.67 $ (0.19) $ (0.17)
income (loss) per common ============ ============ ============
and common equivalent share
Weighted average number of common
and common equivalent shares outstanding
25,554,322 25,006,637 20,495,454
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 32
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the fiscal years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
----------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 17,701,684 $35,404 $12,257,833 $(4,583,890) $7,709,347
Stock options exercised 961,254 1,922 596,487 598,409
Private placement, net of issuance costs of 2,000,000 4,000 4,014,866 4,018,866
$215,814
Warrants issued, net of issuance costs of 4,791,058 4,791,058
$872,716
Warrants exercised 3,200,000 6,400 (6,400)
Stock compensation expense 150,451 150,451
Net income (loss) (3,508,702) (3,508,702)
----------- ----------- ------------- -------------- ------------
Balance, June 30, 1994 23,862,938 47,726 21,804,295 (8,092,592) 13,759,429
Private placement, net of issuance costs of 1,650,000 3,300 3,133,254 3,136,554
$346,366
Net income (loss) (4,698,537) (4,698,537)
----------- ----------- ------------- -------------- ------------
Balance, June 30, 1995 25,512,938 51,026 24,937,549 (12,791,129) 12,197,446
----------- ----------- ------------- -------------- ------------
Tax benefit of stock options 650,000 650,000
Net income 17,127,455 17,127,455
----------- ----------- ------------- -------------- ------------
Balance, June 30, 1996 25,512,938 $51,026 $25,587,549 $4,336,326 $29,974,901
=========== ========== ============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 33
AZCO MINING, INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the fiscal years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 17,127,455 $(4,698,537) $(3,508,702)
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operations:
Depreciation and amortization 57,147 156,704 131,959
Stock compensation expense 150,451
Tax benefit of stock options 650,000
Write-off of financing costs 434,989 561,692
Amortization of (discount) premium on investment securities 1,284 (23,317)
Write-down of mineral properties 848,487 503,797
Loss on sale of furniture and equipment 4,461
Gain on sale of assets (26,076,026)
Changes in assets and liabilities, net:
Restricted cash 298,510 4,750 (354,870)
Other assets (151,542) 58,298 (11,829)
Accounts payable and accrued liabilities (545,278) (22,479) 30,115
Deferred liability (450,000) 450,000
Deposit (4,000,000)
Proceeds from sale of mineral properties 39,173,295
Net cash provided by (used in) operating activities 26,937,793 (3,585,795) (2,551,184)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (1,401,971) (1,276,683)
Proceeds from maturity of investment securities 1,300,000
Proceeds from certificate of deposit 100,000
Purchases of furniture and equipment and construction in progress (6,245) (615,014) (393,313)
Proceeds from sale of furniture and equipment 28,882
Development of mineral properties (516,577) (2,105,751) (3,443,147)
------------ ----------- -----------
Net cash provided by (used in) investing activities (1,895,911) (1,320,765) (5,113,143)
------------ ----------- -----------
Cash flows from financing and offering activities:
Payments for finance costs (145,649)
Payments for offering costs (346,366) (1,214,604)
Proceeds from sale of common stock 3,482,920 4,234,680
Proceeds from exercised stock options 598,409
Proceeds from sale of warrants 5,663,774
Proceeds from issuance of debt 500,000 2,000,000
Payments of debt (3,040,715)
Borrowings on line of credit 508,348 416,252
Payments on line of credit (924,600)
------------ ----------- -----------
Net cash provided by (used in)
financing and offering activities (2,540,715) 4,720,302 9,552,862
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 22,501,167 (186,258) 1,888,535
Cash and cash equivalents, beginning of period 1,794,638 1,980,896 92,361
------------ ----------- -----------
Cash and cash equivalents, end of period $ 24,295,805 $ 1,794,638 $ 1,980,896
============ =========== ===========
Cash paid during the period for:
Interest paid net of amount capitalized $ 230,453 $ 89,374 $ 54,072
============ =========== ===========
Taxes $ 5,715,000 $ $
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 34
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Azco Mining, Inc. (Delaware) (the "Company") was formed on July 13,
1988 to acquire base metal and precious metal properties and either
develop or sell them. The Company will consider properties of merit
in almost any geographical location.
At June 30, 1996, the Company had a 30% interest in Cobre del Mayo, a
company which owns the Piedras Verde Project located in Southern
Sonora, Mexico and a 99.97% interest in the Suaqui Verde copper
deposit located in Southeastern Sonora Mexico. At that date, neither
location had proven reserves of commercial ore.
2. BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiary. All intercompany balances
have been eliminated.
3. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost which approximates market value.
SHORT-TERM INVESTMENTS
Short-term investments consist of United States Treasury Notes with
maturities between three and twelve months and are classified as
"held to maturity" investments at June 30, 1996. Accordingly, these
investments are carried at amortized cost. Due to the short-term
maturity of these investments, amortized cost approximates fair
value. Net realized gains and losses, if any, on investments sold are
recorded in operations based on specific identification of the
investments on the trade date. Interest income is recorded as earned.
MINERAL PROPERTIES
The Company expenses prospecting and exploration costs and
capitalizes costs directly attributable to the acquisition of mining
properties, pending determination as to their commercial feasibility
(to contain a viable mineral deposit). Development costs are
capitalized and, upon commencement of production, will be amortized
using the units-of-production method. Gains or losses resulting from
the sale or abandonment of mineral properties are included in
operations. Proceeds from sales of properties in which the Company
has retained an economic interest are credited against property cost
and no gain is recognized until all costs have been fully recovered.
F-7
<PAGE> 35
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY EVALUATION
Recoverability of investments in non-operating properties is
evaluated periodically. Estimated future net cash flows from each
property are calculated using estimates of proven and probable ore
reserves, estimated future prices (considering historical and current
prices, price trends and related factors) and operating capital and
reclamation costs on an undiscounted basis. Reductions in the
carrying value of each property are recorded to the extent the
remaining investment exceeds the estimate of future net cash flows.
Where properties are held for sale, recoverability is assessed based
on management's estimate of fair value. Reductions in the carrying
value of each property are recorded to the extent the remaining
investment exceeds fair value, less costs of disposal.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Replacements,
maintenance and repairs which do not improve or extend the life of
the respective assets are expensed currently. Major renewals and
improvements are capitalized. Upon retirement, sale or other
disposition of furniture and equipment, the cost and accumulated
depreciation are eliminated from the accounts and the gain or loss is
included in operations.
The Company depreciates the non-mining assets over their estimated
useful lives using the straight-line method.
CONSTRUCTION IN PROGRESS
Construction in progress consisted of assets which were being
prepared for use at the Sanchez project. These assets were sold to
Phelps Dodge during the year ended June 30, 1996.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards 109, Accounting for Income Taxes. Income taxes
and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial
statements or income tax returns. Deferred tax assets and liabilities
are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
NET INCOME (LOSS) PER SHARE
Net income or loss per common and common equivalent share is based on
the weighted average number of common and common equivalent shares
outstanding during each year. The common equivalent shares of options
and warrants are excluded from the weighted average number of shares
if they are anti-dilutive.
F-8
<PAGE> 36
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
STOCK-BASED COMPENSATION
In October 1995 the Financial Accounting Standards Board issued
Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation ("FAS No. 123"), which defines a fair value based method
of accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue to account
for these plans according to Accounting Principles Board Opinion No.
25 ("APB No. 25"), provided proforma disclosures of net income and
earnings per share are made as if the fair value based method of
accounting defined by FAS No. 123 has been applied. The Company
anticipates electing to continue to measure compensation expense
related to employee stock purchase options using APB No. 25, and will
provide proforma disclosures as required.
4. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents. The Company places its cash and cash
equivalents with high quality financial institutions. The Company, in
the normal course of business, maintains cash balances in excess of
the Federal Deposit Insurance Corporation's insurance limit. At June
30, 1996, cash equivalents of $24.2 million were invested in a mutual
fund.
F-9
<PAGE> 37
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. MINERAL PROPERTIES:
As of June 30, 1995, mineral properties consisted of the following:
1995
Acquisition costs, including mineral claims:
Sanchez Project 440,000
Piedras Verdes Project 85,000
Deferred development costs:
Sanchez Project 8,536,356
Piedras Verdes Project 3,511,740
----------
12,573,096
==========
SANCHEZ PROJECT
During the second quarter of the year ended June 30, 1996, the
Company sold 100% of its investment in the Sanchez property located
in Graham County, Arizona. Proceeds of $37,000,000 from the sale were
received and a gain of $26,076,026 was recorded.
COBRE DEL MAYO (PIEDRAS VERDES PROJECT)
The Piedras Verdes project is located in southern Sonora, Mexico.
During the second quarter of the year ended June 30, 1996, the
Company sold 70% of its investment in the Piedras Verdes project. In
accordance with the Company's policy regarding sales of mineral
properties, proceeds of $3,000,000 from the sale were credited
against the remaining development costs and no gain was recognized.
The Company is expensing all costs related to the project.
SUAQUI VERDE PROJECT
During 1995 the Company wrote off all costs related to the Suaqui
Verde Project due to the cessation of activities.
On June 20, 1996, Azco entered into a Mineral Exploration and Option
to Form Company Agreement with Minera Phelps Dodge Mexico for the
mineral exploration and evaluation of certain mineral concessions in
Sonora, Mexico. The Company is expensing all costs related to the
project.
MALI PROJECT (NORTHWESTERN AFRICA)
On May 9, 1996, Azco entered into a Memorandum of Agreement with the
West African Gold and Exploration, Ltd. ("WAG"), a British Virgin
Islands company, Eagle River International Limited ("Eagle River"), a
Vanuatu corporation, and Lion Mining Finance Limited ("Lion Mining"),
a United Kingdom corporation. Eagle River has purchased properties in
Mali, Africa from Guefest, a Russian mining consortium. Under terms
of this agreement, the properties will be transferred to a new Malian
corporation. Shares in this corporation will be transferred to an
offshore company. Upon fulfillment of conditions precedent to Azco's
participation, Azco has committed to purchase 4,800,000 shares of the
offshore company at a price of ($0.25) (U.S.) per share and receive
1,000,000 shares of the offshore company in consideration for 125,000
common shares of Azco to be issued to Eagle River.
On May 17, 1996, under terms of the above agreement, the Company
issued an irrevocable standby letter of credit in the amount of
$1,000,000 to guarantee the development of certain mineral
concessions in Mali. The Company, on behalf of Eagle
F-10
<PAGE> 38
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
River, Lion Mining, and WAG, has guaranteed $1,000,000 of development
by May 15, 1997 to keep the properties in good standing. Costs
associated with obtaining the line of credit and cash advances are
recoverable from Eagle River and WAG and are collateralized by
promissory notes.
6. NOTES PAYABLE:
In May 1991, the Company commenced an offering to issue $1,000,000,
10% unsecured Convertible Redeemable Debentures, (the "Debentures").
Under this offering, the Company sold $540,715 of the Debentures,
$500,000 of which were sold to a stockholder of the Company. Interest
was 10% per annum until May 31, 1995 and 14% per annum until
maturity. The Debentures could have been converted to common stock at
the option of the investor after one year for $4 per share. The
Debentures were subject to prepayment, in whole or in part, without
penalty or premium, at any time at the option of the Company. The
Debentures were subordinate to any Senior Debt, as defined in the
debenture agreement, that the Company may have obtained. The
Debentures matured and were paid in full on December 31, 1995.
On May 12, 1995, the Company issued $2,000,000, 14% Convertible
Debentures. Interest at 14% per annum is payable semi-annually from
the issue date. The Convertible Debentures could have been converted
to common stock at the option of the investor at any time during the
two-year term of the Convertible Debentures for $2.00 per share. The
Convertible Debentures were subordinated to any and all security or
obligations which may have been issued or incurred by the Company in
connection with the Company's debt financing requirement for its
mineral properties. The Convertible Debentures were paid in full on
December 19, 1995. No penalty was assessed for early extinguishment
of the debt.
Interest expense for the years ended June 30, 1996, 1995 and 1994 was
$171,173, $106,376 and $26,136, respectively, after capitalization of
interest of $0, $13,940 and $31,275, respectively.
7. DEFERRED CREDIT:
Under a contract dated February 25, 1994, the Company had agreed to
acquire sulfuric acid for its Sanchez Project. A total commitment of
$5,070,000, inclusive of the $450,000 deferred credit, was to have
been paid over a four-year period. In connection with the sale of the
Sanchez mine, the Company was required to pay and has paid the
$450,000.
F-11
<PAGE> 39
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 . COMMON STOCK, STOCK OPTIONS AND WARRANTS:
COMMON STOCK
In October 1994, the Company received $3,136,554, net of issuance
costs of $346,366 as the result of a private placement of 1,650,000
common shares with warrants at a price of $2.85 (Cdn.) per unit. Each
warrant entitles the holder to purchase one additional common share
of the Company for a period of two years from the closing at a
purchase price of $2.95 (Cdn.) per common share.
STOCK OPTIONS
The Company has a Stock Option Plan (the "Plan") dated July 24, 1989,
as amended, for the granting of options to purchase common stock. The
Board of Directors may grant options to key personnel and others as
it deems appropriate. There are no vesting requirements under the
Plan. The options are exercisable over a maximum term of five years.
Plan activity for the years ended June 30, 1996, 1995 and 1994, was
as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE RANGE
SHARES OF OPTIONS
<S> <C> <C>
Balance outstanding at June 30, 1993 1,443,662 $0.40 U.S. to $2.00 U.S.
Granted 908,000 $2.23 Cdn and $3.50 Cdn.
Canceled (143,000) $3.10 Cdn.
Exercised (961,254) $0.40 U.S. and $2.00 U.S.
---------
Balance outstanding at June 30, 1994 1,247,408 $0.40 U.S. to $3.50 Cdn.
Canceled (50,000) $2.00 U.S.
---------
Balance outstanding at June 30, 1995 1,197,408 $0.40 U.S. to $3.50 Cdn.
---------
Granted 1,147,500 $1.20 Cdn. to $3.00 U.S.
Canceled (157,500) $2.40 Cdn. to $3.40 Cdn.
---------
Exercisable at June 30, 1996 2,187,408
=========
</TABLE>
At June 30, 1996 and 1995, there were 363,886 and 1,353,886 shares of
common stock reserved for future grants of options.
Of the 2,187,408 stock options outstanding at June 30, 1996, all
stock options were issued to directors, employees or key advisors of the
Company.
F-12
<PAGE> 40
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK, STOCK OPTIONS AND WARRANTS: (CONTINUED)
WARRANTS
Changes to outstanding warrants were as follows:
<TABLE>
<CAPTION>
OTHER SPECIAL SPECIAL TOTAL
<S> <C> <C> <C> <C>
Exercise Price $ 2.00 to $2.25 Cdn. $2.95 Cdn.
$4.00 U.S.
Expiration Date 07/31/93 to 10/19/96
07/31/95
Balance outstanding at June 30, 1993 100,000 100,000
Issued 3,200,000 3,200,000
Exercised (3,200,000) (3,200,000)
-------- ---------- --------- ----------
Balance outstanding at June 30, 1994 100,000 100,000
Issued 1,650,000 1,650,000
-------- ---------- --------- ----------
Balance outstanding at June 30, 1995 100,000 1,650,000 1,750,000
Canceled (100,000) (100,000)
-------- ---------- --------- ----------
Balance outstanding at June 30, 1996 0 0 1,650,000 1,650,000
======== ========== ========= ==========
</TABLE>
In July 1993, the Company sold 3,200,000 special warrants at Cdn. $2.25 per
Special Warrant. Each Special Warrant was exchangeable into one common share of
the Company at no extra cost. The obligation of the holders of the Special
Warrants to complete the purchase was conditional upon the fulfillment of
various conditions, the most significant condition was the approval by the
Toronto Stock Exchange of the issuance and listing of the underlying common
shares of the Company. The Company fulfilled those conditions on November 30,
1993 at which time the Special Warrants were convertible for one common share.
The Company received net proceeds of $4,791,058, net of issuance costs of
$872,716, in connection with the sale.
F-13
<PAGE> 41
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
The income tax expense is as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
Current:
Federal 4,080,000
State 1,635,000
----------
Total current 5,715,000
----------
Total tax expense 5,715,000
==========
</TABLE>
Income tax expense differs from the amount computed by applying the
U.S. federal income tax rate to net income before income taxes, as shown.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Tax expense (benefit) at the
federal statutory rate 7,995,803 (1,644,488)
State tax, net of federal benefit 1,142,257 (274,864)
Change in valuation allowance (4,207,230) 2,140,751
Stock options 650,000
Other 134,170 (221,399)
----------- -----------
Tax expense 5,715,000 0
=========== ===========
</TABLE>
The components of the net deferred tax asset as of June 30, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward 7,134,097
Stock options 126,192 129,693
Investment in foreign subsidiaries 971,457 201,519
Other 30,759 151,696
Valuation allowance (1,128,408) (5,335,638)
----------- -----------
Total deferred tax asset 2,281,367
Deferred tax liability:
Development costs (2,281,367)
----------- -----------
Net deferred tax asset 0 0
=========== ===========
</TABLE>
F-14
<PAGE> 42
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES: (CONTINUED)
The net change in the valuation allowance for the deferred tax asset
of the Company is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Valuation allowance as of July 1 5,335,638 3,194,887
Increase (decrease) in valuation allowance (4,207,230) 2,140,751
------------ ----------
Valuation allowance as of June 30 1,128,408 5,335,638
=========== ==========
</TABLE>
Included in the June 30, 1995 valuation allowance was $650,000 which
was allocated to shareholders equity during 1996.
At June 30, 1995, the Company had income tax reporting net operating
loss carryforwards for United States income tax purposes of
approximately $17.5 million. The Company also had state tax and
alternative minimum tax net operating loss carryforwards.
At June 30, 1996, the Company had fully utilized all net operating
loss carryforwards for federal, state and alternative minimum tax
purposes.
10. CONTINGENCIES AND COMMITMENTS:
MINERAL PROPERTIES
As described in Note 5, the Company sold 70% of its interest in the
Piedres Verdes Project. Under terms of the sales agreement with
Phelps Dodge Corporation ("Phelps Dodge") all assets and commitments
related to this project were transferred to a separate company
incorporated as Cobre del Mayo, S.A. de C.V. The Company maintains a
30% interest and Phelps Dodge a 70% interest in Cobre del Mayo, S.A.
de C.V. Under terms of the Shareholders and Operator's Agreement
among P.D. Cobre del Mayo, Inc., the Company and Cobre del Mayo S.A.
de C.V., the Company is committed to provide up to $3,000,000 for
costs required to bring the Piedres Verdes Project to the feasibility
stage. During the year ended June 30, 1996, the Company advanced
$667,380 under terms of this agreement.
The Piedras Verdes lease has the following commitments:
- $5,000 per month from the signing of the agreement for a
period of 38 months, $7,500 a month for the subsequent 12
months, and $10,000 a month until production begins;
- payment of $1,350,000 over a ten-year period with interest
commencing at the initiation of production, with an advance
payment of $400,000 commencing February 10, 1995 at $30,000 a
month for the subsequent 13 months and a final payment of
$10,000;
- 3% royalties on the net value of mineral production;
- Cobre del Mayo, S.A. de C.V., of which the Company has 30%
interest, has an option to purchase the rights to the mining
claims for $10,000,000 once the referenced exploration rights
have been exercised and production begins.
F-15
<PAGE> 43
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10.CONTINGENCIES AND COMMITMENTS: (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has entered into agreements with three of its officers
and two of its directors. The agreements provide that if there is a
change in control of the Company and the officer leaves the
employment of the Company, for whatever reason (other than discharge
for cause, death, or disability) within six months after such
acquisition of control the officer shall receive a lump sum cash
payment pursuant to certain limitations of the Internal Revenue Code.
In addition, the officers will continue to be covered by all of the
Company's medical, health, life and dental plans for 24 months after
such change of control. The directors shall receive a lump sum cash
payment in the amount not to exceed $100,000.
In addition, the Company has entered into a separate employment
agreement with its President. The agreement provides that in the
event of merger, consolidation, divestiture, takeover, sale or other
similar circumstances which result in conditions or terms
unacceptable to the President within the first year after such event,
the President will have the option to be paid 12 months' base salary
plus any prorated bonuses and vacation accrued from the time of
termination. The President is only covered by one of the
above-mentioned agreements in the event he leaves the employment of
the Company.
LEASE COMMITMENTS
The Company is obligated under a long-term operating lease for its
office space in Vancouver, British Columbia through April 1999. The
lease contains a renewal option of 5 years. The Company was required
to provide a letter of credit in the amount of $51,610. The letter of
credit is collateralized by a term deposit of $51,610, which is
recorded in financial statements as other assets. The annual rental
commitment under the lease is as follows:
<TABLE>
<CAPTION>
JUNE 30,
<C> <C>
1997 62,169
1998 62,169
1999 51,808
--------
176,146
=======
</TABLE>
Rental expense, net of sublease income, for the years ended June 30,
1996, 1995 and 1994 was $69,140, 62,737 and $38,270, respectively.
COPPER PURCHASE AGREEMENT
The Company had formerly entered into a Copper Purchase Agreement
relating to the copper output of the Sanchez Project. After sale of
the Sanchez Project, the Company was informed that it was in
violation of this agreement. A lawsuit was filed against the Company
by AIOC Corporation. The Company agreed to binding arbitration with
AIOC Corporation and received a dismissal of the lawsuit under terms
of the Stipulation and Order of Compromise and Dismissal.
F-16
<PAGE> 44
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONTINGENCIES AND COMMITMENTS: (CONTINUED)
DEPOSIT
Under the terms of the Company's Stipulation and Order of Compromise and
Dismissal with AIOC Corporation, the Company placed $4,000,000 into
escrow to satisfy any award in the arbitration. The amount of the
settlement, if any, will be applied as an adjustment on the gain on sale
of assets. Management does not believe that there will be any settlement
amounts paid as a result of this arbitration and therefore, has not
accrued any liability.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments, note receivable, restricted cash and
accounts payable approximated fair value as of June 30, 1996 because of
the relatively short maturity of these instruments.
12. FOURTH QUARTER CHARGES:
During the fourth quarter of fiscal 1996, the Company wrote-off its
investment in Cobre del Mayo, S.A. de C.V. in the amount of $848,487 due
to the uncertainty regarding the feasibility of the Piedras Verdes
property located in Mexico.
During the fourth quarter of fiscal 1995, the Company wrote-down its
capitalized development costs for the Suaqui Verde property located in
Mexico because it was unlikely that the property would be developed
unless warranted by favorable future exploration results. This write-down
was $503,797 plus the write-off of deferred financing costs of $595,530.
The deferred financing costs related primarily to the Prudential Power
Funding Associates debt commitment. Since the Company had agreed to sell
its interest in the Sanchez Project, the Board of Directors concluded
that the debt commitment would, in all likelihood, not be utilized.
F-17
<PAGE> 45
AZCO MINING, INC. (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. NEW PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS
121). SFAS 121 requires that companies review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement is
effective for financial statements for fiscal years beginning after
December 15, 1995. The Company does not believe that the ultimate
adoption of the new Standard will have a material effect on the Company's
financial position or results of operations.
As of June 30, 1996, the Company has not adopted SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) and has not
determined the effects, if any, on the consolidated financial statements.
However, the Company intends to adopt the disclosure provisions of SFAS
123. The disclosure requirements, which are effective for fiscal years
beginning after December 15, 1995, require companies to provide proforma
disclosures of net income and net income per share as if they had adopted
the fair value accounting method for options granted in 1995 and 1996.
F-18
<PAGE> 46
AZCO MINING, INC. (DELAWARE)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------- ----------- -------- --------- ----------
BALANCE AT BALANCE AT
BEGINNING END
DESCRIPTIONS OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C>
Valuation allowance for deferred tax
assets(1):
June 30, 1996 $5,335,638 $ $4,207,230 $1,128,408
June 30, 1995 3,194,887 2,140,751 5,335,638
June 30, 1994 1,879,654 1,315,233 3,194,887
</TABLE>
(1) For further information, refer to Note 9, Income Taxes, in the notes to the
Consolidated Financial Statements included in the Form 10-K
F-19
<PAGE> 47
EXHIBIT NO. 11.1
AZCO MINING, INC. (DELAWARE)
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
for the fiscal years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net income (loss) applicable to computation $ 17,127,455 $ (4,698,537) $ (3,508,702)
Weighted average common shares assuming no dilution 25,512,938 25,006,637 20,495,454
------------ ------------ ------------
Stock options and warrants that had a dilutive
effecting on net income (based on relationship
of market value to exercise price), assumed to
have been exercised on the first day of each
period (or date of grant, if later), less the
number of shares which could have been purchased
from the proceeds of such assumed exercise;
number of shares using the weighted average
market price for the assumed purchase of shares
described above 41,384 48,379 997,154
------------ ------------ ------------
Weighted average common shares applicable to
earnings per common and common equivalent share 25,554,322 25,055,016 21,492,608
------------ ------------ ------------
Additional shares using the market close price at
the end of the period for the assumed purchase
of shares described above 77,801 14,184 45,867
Conversion of convertible debentures at the stated
rate assumed to have been converted at the
beginning of the earliest period reported 135,179 135,179
------------ ------------ ------------
Weighted average common shares assuming full
dilution 25,632,123 25,204,379 21,673,654
============ ============ ============
Earnings per common and common equivalent share:
Net income (loss) $ 0.670 $ (0.188) $ (0.163)
============ ============ ============
Earnings per common share assuming full dilution:
Net income (loss) $ 0.668 $ (0.186) $ (0.162)
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT NO. 10.10
MEMORANDUM OF AGREEMENT
THIS AGREEMENT is made effective the 9th day of May}, 1996, as executed the 7th
day of June, 1996}.
BETWEEN:
WEST AFRICAN GOLD & EXPLORATION LTD.}, a British Virgin Islands company,
with an office for mailing at 7-8 Kendrick Mews, London, England, SW7 3HG
(hereinafter referred to as "WAG}")
OF THE FIRST PART
AND:
EAGLE RIVER INTERNATIONAL LIMITED}, a Quebec corporation, with its
principal business office at 201, 212 Labrosse Boulevard, Gatineau, Quebec,
J8P 7Z6
(hereinafter referred to as "Eagle River}")
OF THE SECOND PART
AND:
LION MINING FINANCE LIMITED}, a United Kingdom corporation, with its
business office at 7-8 Kendrick Mews, London, England, SW7 3HG
(hereinafter referred to as "Lion Mining}")
OF THE THIRD PART
AND:
AZCO MINING INC.}, a Delaware corporation, in trust for a subsidiary, with
a business office at Suite 1250 - 999 West Hastings Street, Vancouver,
B.C., V6C 2W2
(hereinafter referred to as "AZCO }")
OF THE FOURTH PART
<PAGE> 2
2
WHEREAS:
A. }Eagle River has entered into an agreement with Guefest (hereinafter called
"Guefest"), a Russian mining consortium, and which agreement (hereinafter
called the "Guefest Agreement") has been executed March 15, 1996, and which
Guefest Agreement obliges Guefest to transfer the properties set forth in
Annex "A" to the Guefest Agreement (such properties described in the
Guefest Agreement are hereinafter called the "Properties") to a new Malian
corporation in consideration of twenty-five percent (25%) of the
contemplated Malian company (hereinafter called "SOF") and the monetary
consideration set forth in the Guefest Agreement;
B. Lion Mining and Eagle River have entered into a joint corporate endeavour
to acquire the Properties and to develop the same through the facilities of
WAG and, accordingly, Eagle River will cause SOF to transfer the Properties
to a new Malian corporation (hereinafter called "Property Holdco") and
cause all of the issued and outstanding shares of Property Holdco to be
owned by WAG;
C. In consideration of AZCO providing financial services and investment,
Eagle River, Lion Mining and WAG have agreed to transfer one hundred
percent (100%) of the shares of Property Holdco to a private, off-shore
corporation (hereinafter called "Offco"), which is presently anticipated to
be Chaplin Holdings, a Bahamian private corporation, but may be some other
suitable private corporation, as may be selected by AZCO in consultation
with its tax advisors, subject only to such selection not resulting in
immediate tax liability to the other parties hereto.
NOW THEREFORE THIS AGREEMENT WITNESSES THAT, in consideration of the premises
hereof and of other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. Eagle River, as contracting party to the Guefest Agreement, }agrees and
warrants as follows:
(a) to perform the Guefest Agreement diligently and in accordance with
its terms and to cause the Properties to be transferred to SOF and,
further, to cause Malian governmental confirmations of transfer to be
issued evidencing registration of a one hundred percent (100%) legal
and beneficial interest in the Properties in SOF and, further, to
cause to be issued to the other parties hereto such governmental and
legal opinions, from time to time, as the parties may require for
their comfort and investment purposes;
(b) as soon as possible following the date of this Agreement, to cause
Property Holdco to be incorporated in Mali, employing the name "West
Africa Gold (Mali) Inc.", or such other name as may be acceptable to
the Malian regulatory authorities and the parties hereto;
<PAGE> 3
3
(c) upon SOF acquiring 100% legal and beneficial interest in the
Properties and upon Property Holdco being incorporated in Mali and
eligible to hold the Properties, to cause the Properties to be
transferred as to a one hundred percent (100%) beneficial and legal
interest, without encumbrance of any nature whatsoever, to Property
Holdco and, with full advice and consent of the other parties hereto,
to enter into an agreement between Property Holdco (and the parties
hereto as required) and the Minister of Mines for the Republic of
Mali, and such other ministries as shall be appropriate including the
Ministry of Labour and the Ministry of Taxation, to use reasonable
efforts to acquire governmental concessions most advantageous to
Property Holdco by acquiring exemptions from mining laws and
restrictions, labour restrictions or guidelines, or taxation
encumbrances; and
(d) immediately upon Property Holdco being incorporated, to cause all
shares issuable or issued therefrom to be issued to or transferred to
WAG, it being acknowledged that upon the Properties changing from an
exploration venture to an exploitation venture (which is understood
to occur when a bankable feasibility study is filed with the Malian
government) that the exploitation company will be required to issue
fifteen percent (15%) of its equity to the Malian government,
pursuant to the mining law. Eagle River will employ best efforts to
seek an exemption from or a reduction of this equity requirement and
use reasonable efforts to acquire the most beneficial structure which
allows recovery of expenditures for exploration and development prior
to a profit participation by the Malian government, permits
appropriate management fees and interests costs and service costs to
be deducted, and provides the most favourable tax regime permissible.
2. Eagle River and Lion Mining hereby represent and warrant that they are
the sole controlling shareholders of WAG and covenant and warrant as
follows:
(a) that they shall ensure and cause WAG to be the sole owner of Property
Holdco, without lien or encumbrance or contractual obligation as to
the shares of Property Holdco or as to the Properties; and
(b) at such time as Property Holdco has acquired title to the Properties
as aforesaid and WAG has acquired the shares of Property Holdco as
aforesaid, and upon AZCO advising that it is prepared to advance its
first placement hereunder, 100% of the legal and beneficial
unencumbered interest of the shares of WAG owned in Property Holdco
shall be transferred to Offco.
3. The parties hereto agree that, upon WAG transferring the Property
Holdco shares to Offco and the private placement of clause 5 hereof
completing, the parties shall vote the hereinafter stated shares issued
by Offco to appoint a Board of Directors of not
<PAGE> 4
4
less than three (3) persons, of which one-third (1/3rd) shall be appointed
by WAG, one-third (1/3rd) by AZCO, and one-third (1/3rd) by mutual consent.
Each director of Offco shall be permitted to grant a director's proxy to
any appointee to attend and vote at directors' meetings of Offco. The
parties further agree that upon the creation of the company targeted for
public flotation pursuant to clause 7 hereof, that a board of directors of
no less than five (5) shall be elected by mutual proxy, of which WAG and
AZCO shall have equal numbers (in the case of a board of five, two for WAG
and two for AZCO) and shall appoint an additional director, as a
tie-breaker in the event of disagreement, by mutual consent, such that the
board of directors, absent subsequent agreement, shall always be an odd
number.
4. It is acknowledged that, at the urgent request of Eagle River, Lion Mining,
and WAG, AZCO has made available a guarantee for a One Million Dollar
($1,000,000.00) (U.S.) line of credit issued to the Malian government as a
bond for One Million Dollars ($1,000,000.00) of exploration work required
by May 15, 1997 by the Malian government to keep the Properties in good
standing and, by the intercession of AZCO, Lines Management has advanced a
total of Five Hundred Thousand Dollars ($500,000.00) (U.S.) as a loan to
Eagle River/Lion Mining/WAG, as bridge funding for payments due and owing
under the Guefest Agreement. Eagle River and WAG hereby agree that all
costs and liabilities incurred by AZCO for the aforesaid line of credit and
the advance by Lines Management are a debt of Eagle River and WAG, will be
immediately upon execution of this Agreement secured by promissory notes,
and will be due on demand in the event of termination of this Agreement. It
is agreed and acknowledged that, upon Offco acquiring the shares of
Property Holdco and AZCO proceeding with this Agreement by completing the
first investment of clause 5(c) hereof, the AZCO guarantee and Lines
Management advance will be assumed by Offco and Eagle River, Lion Mining
and WAG will be relieved of liability therefor.
5. Subject to counsel advice as to any appropriate amendment in regard to
Malian law or law applicable to the parties hereto or to the structure
contemplated hereby, whether corporate or tax, and subject to the
below-stated conditions precedent to the investment by AZCO, the corporate
structure and initial financing and financial obligations contemplated by
the parties hereto shall be as follows:
(a) the authorized capital of Offco shall be no less than twenty-five
million (25,000,000) common shares;
(b) WAG shall sell to Offco one hundred percent (100%) of its right,
title and interest in the shares of Property Holdco (which shall be
100% of all issued shares of Property Holdco and which shall own a
100% unencumbered interest in the Properties), in consideration of:
<PAGE> 5
5
(i) three million, five hundred thousand (3,500,000) shares of
Offco and four million (4,000,000) warrants of Offco,
exercisable at One Dollar ($1.00) (U.S.) per warrant to
purchase one (1) common share, subject to adjustment for any
alteration in capital of Offco, and exercisable (commencing
on the date that Offco, or its successor, becomes a reporting
trading issuer) as to one million (1,000,000) warrants for a
period of two (2) years, one million (1,000,000) warrants for
a period of three (3) years, and two million (2,000,000)
warrants for a period of four (4) years;
(ii) an aggregate of Two Million Dollars ($2,000,000.00) (U.S.),of
which Five Hundred Thousand Dollars ($500,000.00) (U.S.) has
been provided by the aforesaid loan of Lines Management (and
shall be converted to equity subject to the terms of this
Agreement), One Hundred Thousand Dollars ($100,000.00) (U.S.)
as soon as possible after execution of this Agreement, Five
Hundred Thousand Dollars ($500,000.00) (U.S.) shall be paid
by August 15, 1996 and the balance by February, 1997 (the
contract between WAG and Offco shall recognize the advances
made and acknowledged pursuant to this Agreement, as applying
to the aggregate monetary consideration thereof);
(iii) one hundred and twenty-five thousand (125,000) common shares
of AZCO issued in the name of Eagle River or its affiliate;
and
(iv) a two point five percent (2.5%) net smelter return royalty
payable upon production until an aggregate of Two Million
Dollars ($2,000,000.00) (U.S.) has been paid, whereupon the
same shall terminate (the grant of this net smelter return
royalty is subject to Eagle River negotiating the elimination
of a three percent (3%) VAT and three percent (3%) GST
equivalent taxes normally imposed by the Malian government);
(c) upon removal of the below-stated conditions precedent to AZCO's
participation, Offco shall cause to be issued to AZCO and Lines
Management the following:
(i) to AZCO, four point eight million (4,800,000) shares of
Offco, for a consideration of Twenty-Five Cents ($0.25)
(U.S.) per share;
(ii) an additional one million (1,000,000) shares of Offco to AZCO
for a consideration of one hundred and twenty-five thousand
(125,000) common shares of AZCO issued in the form provided
by clause 5(b)(iii); and
<PAGE> 6
6
(iii) two million Offco shares at a price of Twenty-Five Cents
($0.25) (U.S.) per share as repayment of the Lines advance,
subject to Lines Management approval (which AZCO shall employ
best efforts to acquire).
6. Upon conclusion of the placement of clause 5 above, the parties hereto will
employ best efforts and due diligence to cause Offco to effect a private
placement on or before December 31, 1996 of two million (2,000,000) units,
composed of one (1) share and one (1) warrant, at Fifty Cents ($0.50)
(U.S.) per unit, with each warrant of each unit exercisable for a period of
one (1) year at Seventy-Five Cents ($0.75) (U.S.) to purchase an additional
share. AZCO shall have the right and obligation to purchase one million
(1,000,000) of the two million (2,000,000) unit private placement offering
and the parties shall use best efforts to place the other 1,000,000 units
with institutional or exempt purchasers. In the event that there is any
shortfall in the sale of the units, AZCO and WAG shall, pro rata firstly,
and thereafter completely as to either if a party does not participate,
have first right to purchase any unbought portion.
7. Following the private placement of clause 6 hereof, the parties
acknowledge that it is their intention, and they hereby agree and
warrant to use best efforts to effect the same, to cause a public
flotation of the parties' interests by one of the following methods:
(a) to cause the interests of the parties hereto to be vended to a
private corporation in Canada which will issue a prospectus (with the
intention of listing on a Canadian exchange), with a planned offering
(subject to financial agent advice) of two million (2,000,000) units
at One Dollar, Fifty Cents ($1.50) (U.S.) per unit, composed of one
(1) share and one (1) warrant exercisable for a period of one (1)
year to purchase an additional share at Two Dollars ($2.00) (U.S.)
per share, with the intent of raising Three Million Dollars
($3,000,000.00) (U.S.). AZCO will have the obligation to purchase one
million (1,000,000) units of the 2,000,000 unit offering and AZCO and
WAG will, pro rata firstly, and thereafter completely as to either if
a party does not participate, have first right to purchase any
unbought portion of the additional 1,000,000 units; or
(b) to acquire a publicly-listed corporation and thereafter to effect an
offering (by way of prospectus, private placement, or other funding
mechanism appropriate at the time), with the intent to raise Three
Million Dollars ($3,000,000.00) (U.S.), of which AZCO shall have the
right and obligation to participate as to one-half (1/2) of the
offering and AZCO and WAG, as above, will have first right to
purchase any unbought portion of the remainder of the offering.
<PAGE> 7
7
8. Eagle River, Lion Mining and WAG warrant to use best efforts and due
diligence to effect the following, which shall be preconditions to AZCO's
participation in funding Offco, and such former parties shall:
(a) provide confirmation that SOF is in the process of completing and has
completed its incorporation, which is estimated to occur
approximately one (1) week from the date of this Agreement;
(b) acquire confirmation from the Malian government that upon SOF being
incorporated, the government will permit the transfer of the
Properties to SOF and it will provide a representation as to the
conditions of that transfer and of the concession licence given
thereby;
(c) acquire confirmation from the Malian government that it will permit
the transfer of the Properties from SOF to Property Holdco and
confirmation of the conditions of such transfer and concession
licence; and
(d) upon formation of Property Holdco and the transfer of 100% of legal
and beneficial ownership of the Properties to Property Holdco,
provide warranties, officers' certificates, or legal opinions, as
reasonably required by AZCO's solicitors, to the following general
effect:
(i) that WAG is the 100% legal and beneficial owner of the shares
of Property Holdco or of the Properties, without lien,
encumbrance, or right therein to any other party of
whatsoever nature (excepting only the Malian government as
aforesaid);
(ii) that the shares issued in Property Holdco to WAG are the only
shares issued of Property Holdco and there are no rights of
any nature whatsoever to issue or cause to be issued shares
to any other party;
(iii) that Property Holdco or WAG, or an acceptable alternate
holder, is the 100% beneficial and legal owner of the
Properties, without lien or
encumbrance, and there are no rights in any party to any interests in
the Properties, nor are there any debts, encumbrances or liabilities;
(iv) the satisfaction of AZCO and its counsel as to the terms of
licence concession by the Malian government to Property
Holdco in respect to the Properties; and
(v) Offco will have effected an agreement with WAG to purchase
its shares in Property Holdco in consideration of the
aforesaid
<PAGE> 8
8
consideration of clause 5(b) and Offco will have agreed to
the terms of this Agreement; and
(e) acquire evidence reasonably satisfactory to AZCO, acting in good
faith, that the value of the Properties and Property Holdco is
adequate, within reasonable industry valuation standards, to justify
a consideration equal to that paid and assumed for the Properties and
Property Holdco, that is to say, equal to or greater than
approximately Three Million, One Hundred and Twenty-Five Thousand
Dollars ($3,125,000.00) (U.S.).
The foregoing conditions are for the sole benefit of AZCO and may be
waived in whole or in part as to any condition. Any waiver of a
condition must be in writing and a particular waiver shall not extend
to any other condition.
9. It is hereby acknowledged that any advances or obligations which AZCO or
its associates, such as Lines Management, have incurred or may incur or
make for the benefit of the Properties prior to removal of the
preconditions, shall be considered a loan to Eagle River, Lion Mining, WAG,
and SOF, and due on demand at any time that AZCO considers that it cannot
proceed with this Agreement due to the inability of the said parties to
perform the terms of this Agreement including, without restricting the
generality, inability to remove preconditions or to cause the Properties to
be transferred and vested in accordance with the terms of this Agreement.
All such advances or obligations made to the date of this Agreement and all
advances, obligations, or expenses incurred by AZCO or its associates, such
as Lines Management, hereafter in respect to the Properties (including
property payments, exploration, value assessment, corporate reorganization,
or otherwise) shall be considered as loans and shall, at the demand of
AZCO, or its associates, be secured in such manner as AZCO or its
associates may consider reasonable, including promissory notes, pledge of
securities, or other appropriate security. It is hereby agreed and
acknowledged that AZCO shall itself, or cause, a loan of One Hundred
Thousand Dollars ($100,000.00) (U.S.) to be made to Eagle River as soon as
possible after execution of this Agreement for Properties requirements, as
contemplated by clause 5(b)(ii) hereof.
10. Eagle River, Lion Mining and WAG hereby agree and warrant to make available
to AZCO, and its counsel, agents, or servants, all such information and all
such documents and all such assistance as it may require for the purpose of
effecting due diligence. The said parties further agree and warrant to
provide AZCO with all such reasonable advices and comforts as it may
require for its comfort as to the status of the Properties, rights to
exploration and exploitation of the Properties with respect to mining; the
ownership of SOF and Property Holdco in and to the Properties, to make
reasonable endeavours to ascertain any risks or opportunities, and to
effect any other inquiry which it may deem necessary or appropriate.
<PAGE> 9
9
11. It is hereby agreed by the parties hereto that AZCO shall have the first
right to provide or acquire for Offco, or its successor company, any
financing in addition to that hereinbefore stipulated. It is further
acknowledged by the parties hereto that AZCO has an anti-dilution right to
participate in any financing or to provide financing in order to maintain
its percentage interest in Offco, or any successor.
12. It is hereby acknowledged and agreed that WAG shall be the manager of
Property Holdco and of the Properties on normal commercial terms. It is
agreed that, following the financing of clause 6 hereof, AZCO may elect to
be joint manager and operator of the Properties and, after completion of a
bankable feasibility study, AZCO may elect to be the sole manager and
operator, on normal commercial terms, such management and operating
agreement to be negotiated at the time of election.
13. Eagle River hereby acknowledges its representations to AZCO (and
acknowledges that it is one of the conditions under which AZCO has entered
into this Agreement) that it has special expertise and ability to deal with
the Malian government and to acquire appropriate concessions and approvals
in relation to mining and the conduct of business in Mali. Eagle River
agrees and warrants that it shall use best efforts and due diligence to act
as governmental liaison for the parties hereto, and the corporations herein
contemplated, to ensure the best relations with the government of Mali and
the best advantage for the purpose of fulfilling the terms of this
Agreement and, further, that Eagle River will continue to fulfill such
function during the term of this Agreement and any successor agreement, and
for so long as Offco or its successors may require such services during the
currency of Properties development and exploitation and, at the requirement
of AZCO or Offco, Eagle River will enter into a separate governmental
relations agreement for a fair and reasonable fee, plus reimbursement of
expenses.
14. It is agreed and acknowledged by the parties hereto that the parties hereto
will enter into a voting trust/shareholders' agreement containing normal
commercials terms but, not to derogate from the generality, will contain
the following:
(a) a pooling agreement of the shares of the party
(b) a right of first refusal for any contemplated sale of any shares of
the parties;
(c) a voting trust where by the parties will agree to nominate and vote
for directors in accordance the intent of clause 3 hereof;
(d) representations as to WAG's acceptance of any escrow required by
regulatory authorities in the event of any uncertainty of the value
of the Properties at the time that such is before regulatory
authorities. The same shall apply to the other parties hereto,
mutatis mutandis for any cash paid shares should regulators so
require.
<PAGE> 10
10
15. It is acknowledged by the parties hereto that all properties acquired which
are partly or wholly within an area extending from the outer boundary of
the Properties to a limit of fifteen (15) kilometres therefrom, or are
contiguous to the Properties, or the Properties as they may be expanded
(whether situate in Mali or otherwise) shall be acquired for the purpose of
this Agreement and made part of this Agreement. In particular, but not so
as to derogate from the foregoing, it is acknowledged that the work on the
Properties has indicated a mineralized trend which proceeds outside of the
Properties' boundaries into Senegal, and the parties hereto shall use best
efforts to cause Offco, and its subsidiaries or successors, to acquire
properties which contain this trend for the purpose of this Agreement.
16. It is agreed and acknowledged that in addition to the Properties as herein
described and the additional area of interest of clause 15 hereof, that
Eagle River and WAG shall, upon AZCO's request, make available for the
purpose of this Agreement all other properties, or interests thereof, in
Mali for which Eagle River or WAG, as the case may be, shall receive
reimbursement of costs and a reasonable allocation for administration,
overhead, and ancillary costs.
17. The parties hereto agree and acknowledge that they shall immediately form a
technical committee composed of one (1) representative of each of Eagle
River, Lion Mining, and AZCO, to investigate the history of the Properties,
generate appropriate reports and valuations of the Properties, and
recommend exploration programmes to confirm the Properties'
characteristics, value, and extend the data and value of the Properties. It
is acknowledged that this committee shall proceed with diligence to achieve
the aforesaid geological evaluation while the parties hereto are effecting
the appropriate corporate structure.
18. It is acknowledged by the parties hereto that this Agreement shall be
superseded by a more definitive agreement, once all appropriate tax and
corporate advices have been received and the aforesaid preconditions have
been fulfilled by the stated responsible parties. The parties hereto
warrant and agree to use best efforts and due diligence to perform the
terms of this Agreement and to conclude a more detailed agreement.
19. The parties hereto acknowledge that AZCO is a reporting issuer and,
accordingly, acknowledge that the matters hereof shall remain strictly
confidential between the parties hereto and no person shall be advised of
the contents or of the nature of this Agreement or of the relationship of
the parties until appropriate public disclosure has been made by AZCO. AZCO
agrees that it shall circulate any press release which it intends to issue
relating to this Agreement to the other parties hereto for their approval
in draft.
<PAGE> 11
11
20. Any notices required to be given to the parties shall be delivered or faxed
to the addresses first herein set forth, and as to AZCO, a copy shall be
provided to Devlin Jensen, and as to Lion Mining, a copy shall be provided
to Penningtons.
21. This Agreement shall enure to the benefit of and bind the parties hereto
and their heirs, successors, administrators and permitted assigns. This
Agreement may not be assigned without the written permission of the other
parties hereto.
22. This Agreement is subject to approval of all relevant securities
regulators, where applicable, having authority in respect to AZCO.
23. In the event that the preconditions of clause 8 hereof to AZCO's investment
have not been satisfied on or before July 22, 1996, AZCO may withdraw from
this Agreement if preconditions have not been satisfied within ten (10)
business days of notice by AZCO of its intention to withdraw.
IN WITNESS WHEREOF the parties have hereunto executed by their authorized
signatories.
AZCO MINING INC.
Per:
Authorized Signatory
EAGLE RIVER INTERNATIONAL LIMITED
Per:
Authorized Signatory
WEST AFRICAN GOLD & EXPLORATION LTD.
Per:
Authorized Signatory
LION MINING FINANCE LIMITED
Per:
Authorized Signatory
<PAGE> 1
EXHIBIT 10.11
SUAQUI VERDE
MINERAL EXPLORATION AGREEMENT AND
OPTION TO FORM COMPANY
AMONG
AZCO MINING, INC.
COBRE DE SUAQUI VERDE, S.A. DE C.V.
AND
MINERA PHELPS DODGE MEXICO, S. de R.L. de C.V.
Dated: June 20, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS.......................................................... 1
2. EXPLORATION.......................................................... 4
2.1 Grant of Exploration Rights.................................. 4
2.1.1 Exploration and Evaluation......................... 4
2.1.2 Consents; Surface Consents......................... 4
2.1.3 Removal of Ore for Testing......................... 4
2.2 Control of Exploration....................................... 5
2.3 Data and Information......................................... 5
2.4 Exploration Expenditures..................................... 5
2.4.1 Amount............................................. 5
2.4.2 Notice of Completion............................... 5
2.4.3 Allowances......................................... 5
2.4.4 Statement of Expenditures.......................... 6
2.4.5 Expenditures Cumulative............................ 6
2.5 Dropping Property............................................ 6
2.6 Failure to Make Expenditures................................. 6
3. PAYMENTS TO CDSV..................................................... 6
3.1 Payment Schedule............................................. 6
3.2 Condition to Payment......................................... 6
3.3 Royalty .................................................. 7
3.4 Underlying Agreements........................................ 7
4. INTERESTS............................................................ 7
5. OPERATING COMPANY.................................................... 7
5.1 Exercise of Company Option................................... 7
5.2 Formation of Operating Company............................... 8
5.3 Execution of Operator's Agreement............................ 8
6. OPERATIONS DURING THE EXPLORATION PERIOD............................. 8
6.1 Standard of Performance...................................... 8
6.2 Preexisting Conditions....................................... 8
6.3 Maintenance of Property...................................... 9
6.3.1 Before Formation of Operating Company............. 9
6.3.2 After Formation of Operating Company.............. 9
6.3.3 Upon Termination.................................. 9
6.3.4 Costs Applicable to Exploration Expenditures...... 9
6.4 Dealings with Affiliates..................................... 9
7. REPRESENTATIONS; TITLE............................................... 10
7.1 Representations and Warranties............................... 10
7.1.1 Effective Date..................................... 10
7.1.2 Transfer Date...................................... 11
7.1.3 Title Indemnity.................................... 11
7.2 Complete Disclosure.......................................... 11
7.3 Title Defect; Defense........................................ 11
8. LIENS................................................................ 11
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
9. INDEMNITY............................................................ 12
9.1 Indemnification by MPDM...................................... 12
9.2 Indemnification by CDSV...................................... 12
10. RIGHT OF ACCESS BY CDSV.............................................. 12
10.1 Reports...................................................... 12
10.2 Meetings..................................................... 12
10.3 Documents.................................................... 12
10.4 Audits; Inspections.......................................... 13
10.5 Disclaimer................................................... 13
11. TERMINATION.......................................................... 13
11.1 Termination by MPDM.......................................... 13
11.2 Termination for Default...................................... 13
11.3 Continuing Liability......................................... 13
11.4 Surrender of Possession...................................... 14
11.5 Delivery of Data............................................. 14
11.6 Removal of Property.......................................... 14
12. FORCE MAJEURE........................................................ 14
13. ADDITION OF PROPERTIES............................................... 14
14. OTHER BUSINESS OPPORTUNITIES......................................... 15
15. CONFIDENTIALITY...................................................... 15
16. TRANSFER OF INTEREST................................................. 15
17. NOTICES.............................................................. 15
18. NO IMPLIED COVENANTS................................................. 17
19. FURTHER ASSURANCES................................................... 17
20. BINDING EFFECT....................................................... 17
21. AMENDMENTS, WAIVERS, ETC............................................. 17
22. LANGUAGE; GOVERNING LAW.............................................. 17
23. ENTIRE AGREEMENT..................................................... 18
24. CONSTRUCTION OF AGREEMENT............................................ 18
25. ARBITRATION.......................................................... 18
</TABLE>
EXHIBIT A CONCESSIONS
EXHIBIT A-1 PLAT OF CONCESSIONS
EXHIBIT B UNDERLYING AGREEMENTS (Dausinger)
Page ii
<PAGE> 4
SUAQUI VERDE
MINERAL EXPLORATION AGREEMENT AND OPTION TO FORM COMPANY
This Mineral Exploration Agreement and Option to Form Company is made
effective as of June 20, 1996, by and among:
AZCO MINING, INC. ("AZCO"), a Delaware corporation, with a principal
address at 30 South Bowie, Solomon, Arizona, 85551;
COBRE de SUAQUI VERDE, S.A. de C.V. ("CDSV"), a corporation organized
and existing under the laws of the United Mexican States, with domicile
at Ramon Corral No. 15, Colonia Country Club, 83010, Hermosillo,
Sonora, Mexico; and
MINERA PHELPS DODGE MEXICO, S. de R.L. de C.V. ("MPDM"), a corporation
organized and existing under the laws of the United Mexican States,
with domicile at Blvd. Garcia Morales Km. 9.5, Colonia La Manga, 83220,
Hermosillo, Sonora, Mexico.
RECITALS:
CDSV owns or controls mineral concessions on certain lands situated in
Sonora, Mexico as described in Exhibit A;
CDSV is a subsidiary of AZCO, which owns 99.97% of CDSV.
CDSV has agreed that MPDM shall have the right to explore and evaluate
the concessions described in Exhibit A with the objective of identifying one or
more mineral deposits that can be brought into production under economically and
technically feasible conditions in a joint effort;
If such exploration is successful, CDSV and MPDM shall form an
Operating Company under the laws of the United Mexican States, to which CDSV
will transfer the concessions described in Exhibit A;
CDSV and MPDM intend that if the Operating Company is formed it will
further explore and, if warranted, develop and mine one or more mineral deposits
within the Area of Interest.
AGREEMENTS:
In consideration of the covenants and agreements contained herein, the Parties
agree as follows:
1. DEFINITIONS. In addition to words and phrases defined elsewhere in
this Agreement, the following words and phrases shall have the meanings set
forth below:
1.1
"Affiliate" means any Person directly or indirectly controlling,
controlled by or under common control with a Party. For purposes of the
preceding sentence, "control" means possession, directly or indirectly, of the
right to direct management and policies through ownership of voting securities,
contract, voting trust or otherwise.
1.2
"Agreement" means this Mineral Exploration Agreement and Option to
Form Company, including all schedules and exhibits hereto, which are
incorporated herein by this reference, as amended, modified or supplemented from
time to time.
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<PAGE> 5
1.3
"Area of Interest" means the area enclosed by the exterior boundaries
of the mineral concessions described in Exhibit A and the peripheral area
enclosed by lines drawn parallel to and one mile distant from said exterior
boundaries. The acquisition of mineral concessions within such peripheral area
shall not operate to enlarge the Area of Interest.
1.4
"AZCO" shall have the meaning given in the first paragraph of this
Agreement.
1.5
"Bylaws" means the Bylaws which the Parties shall cause to be adopted
by the Operating Company promptly following its formation.
1.6
"CDSV" shall have the meaning given in the first paragraph of this
Agreement.
1.7
"Company Option" means the right and option to form an Operating
Company as provided by Section 5.
1.8
"Concessions" means the mineral concessions described in Exhibit A and
depicted on the plat attached hereto as Exhibit A-1 and all other rights and
interests in property, real or mixed, within the Area of Interest that become
subject to this Agreement pursuant to Section 13.
1.9
"Dollars" or "$" means currency of the United States of America,
except as otherwise expressly stated.
1.10
"Effective Date" means the effective date of this Agreement which
shall be the date set forth in the first paragraph of this Agreement.
1.11
"Exploration" means all activities directed toward ascertaining the
existence, location, quantity, quality, or commercial value of deposits of
minerals, including preparation of one or more feasibility studies.
1.12
"Exploration Expenditures" means all expenses, costs and liabilities
paid or accrued incident to Exploration within the Area of Interest, including
without limitation amounts paid pursuant to the Underlying Agreement, for taxes
and other amounts paid or accrued to maintain the Concessions in good standing,
and for preparation of feasibility studies, engineering and metallurgical
testing.
1.13
"Exploration Period" means the period beginning on the Effective Date
and ending on the earlier of (a) the termination of this Agreement by MPDM or
CDSV pursuant to Section 11, or (b) the lapse of 36 months after the Effective
Date, or (c) the lapse of 60 days following MPDM's notice of completion of
Exploration Expenditures prescribed by Section 2.4.1 and payments prescribed by
Section 3.
1.14
"Force Majeure" means an event which is not within the reasonable
control of a Party claiming suspension of an obligation or extension of the time
for performance, including but not limited to an act of God; strike, lockout or
other industrial disturbance (however arising and whether or not employee
demands are reasonable or within the power of the Party to grant); accident; act
of the public enemy; war (declared or undeclared), blockade, terrorism,
revolution, or public riot; port closing; lightning, fire, storm, flood,
earthquake, landslide, avalanche, drought or other adverse weather condition;
explosion; arrests, title disputes or other litigation;
2
<PAGE> 6
governmental requests, restraints or actions; shortage or unavailability of
equipment, materials, fuel, supplies, utilities, services or labor or
limitations upon the use thereof; delays in or unavailability of transportation;
judgments or orders of any court; inability to obtain on reasonably acceptable
terms any public or private license, permit, approval or other authorization;
curtail ment or suspension of activities to remedy or avoid an actual or
alleged, present or prospective violation of national, state, or local
environmental standards; or any other cause of whatsoever nature, whether
similar or dissimilar to the foregoing.
1.15
"Lots" means the geographical area encompassed by the Concessions.
1.16
"Interest" means the ownership interest of CDSV in the Concessions or
the rights of a Party in the Concessions under this Agreement.
1.17
"MPDM" shall have the meaning given in the first paragraph of this
Agreement.
1.18
"Notice" means a notice, advice, election, request, order, demand,
offer or other communication permitted or required by this Agreement.
1.19
"Operating Company" means the corporation to be formed by MPDM and
CDSV for the purposes of further Exploration and, if warranted, development and
exploitation of the Concessions.
1.20
"Operator's Agreement" means the Operator's Agreement which shall be
executed by the operator and the Operating Company promptly following the
formation of the Operating Company.
1.21
"Party" or "Parties" means MPDM, CDSV and AZCO and any other Person
that from time to time acquires an Interest.
1.22
"Person" means any individual, estate, trust, general partnership,
limited partnership, limited liability company, corporation, association,
governmental body or other organization or entity and their respective heirs,
legal representatives, successors and assigns, other than a Party.
1.23
"Shareholders Agreement" means the agreement which MPDM and CDSV shall
execute promptly following the exercise of a Company Option.
1.24
"Transfer" means sell, grant, assign, encumber, pledge or otherwise
commit or dispose of.
1.25
"Underlying Agreements" means the agreement between Maria Loreto de la
Luz Gutierrez Badilla de Dausinger, as concessionaire, and CDSV consisting of
the binding letter of agreement signed on October 19, 1990, the Contract of
Cession of Rights, dated June 13, 1991, registered at Folio 4, page 3 front side
and page 4 reverse side, Vol. 265 of the Mining Concessions Book of the Public
Registry of Mining, and the Amendatory Agreement dated June 17, 1991, and any
other agreement by which a Party or the Operating Company controls mineral
concessions within the Area of Interest.
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<PAGE> 7
1.26
"Work Year" means the annual period commencing on the Effective Date
or any anniversary thereof.
2. EXPLORATION.
2.1
Grant of Exploration Rights
2.1.1
Exploration and Evaluation. CDSV hereby gives and grants to MPDM on
and subject to the terms, covenants and conditions hereinafter set forth, the
exclusive and irrevocable right to enter upon the Lots during the Exploration
Period for the purpose of conducting mineral Exploration and evaluations on all
or part of the Lots with the objective of identifying one or more mineral
deposits which could be brought into production under economically and
technically feasible conditions. The rights granted by this Section shall be
mandatory for CDSV, but voluntary for MPDM.
2.1.2
Consents; Surface Consents. Promptly following the exercise of the
Company Option, CDSV shall obtain such consent of the concessionaire under the
Underlying Agreement to the transfer to the Operating Company of the rights and
obligations of CDSV under the Underlying Agreement as MPDM may request. If CDSV
has not already obtained the same, promptly following the Effective Date MPDM
shall seek from the owner or owners of the surface of the Concessions, upon
terms and conditions satisfactory to MPDM, such surface use rights as are
necessary or convenient to the Exploration and evaluation of the Concessions. If
MPDM is unable to obtain such surface use rights upon reasonably acceptable
terms within 30 days after the Effective Date, MPDM shall have the right within
45 days after the Effective Date in which to terminate this Agreement pursuant
to Section 11.1 and receive from AZCO the return of any payment theretofore made
by MPDM pursuant to Section 3.1. During the Option Period, CDSV shall not
transfer or encumber the Concessions or the Underlying Agreements without the
prior written consent of MPDM.
2.1.3
Removal of Ore for Testing. MPDM may remove from the Concessions
appropriate quantities of ore which it deems necessary or appropriate to the
proper testing and evaluation of the Concessions and may process and dispose
thereof in MPDM's reasonable discretion.
2.2
Control of Exploration. Subject to the provisions of Section 2.4.1,
Exploration on the Concessions shall be conducted at the sole and exclusive
discretion of MPDM. MPDM may cause any potential target within the Area of
Interest to be explored and all Exploration will be prioritized by MPDM based
upon its sole understanding and evaluation of the economic and technical
potential or feasibility of any mineralized zone.
2.3
Data and Information. CDSV shall make available for inspection and
copying by MPDM and MPDM shall have the right at all times relevant to this
Agreement to inspect and copy, as appropriate, all technical, financial,
environmental, title and other data, drill core and information pertaining to
the Concessions or the Area of Interest in CDSV's or its Affiliates' possession
or subject to their control.
4
<PAGE> 8
2.4
Exploration Expenditures.
2.4.1
Amount. Subject to the right of MPDM to terminate this Agreement and
further subject to Force Majeure, MPDM shall cause Exploration Expenditures to
be made within the Area of Interest in the amounts and during the Work Years as
follows in order to continue this Agreement in effect:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Work Year 1 $ 500,000
Work Year 2 500,000
Work Year 3 1,000,000
-----------
Total 2,000,000
</TABLE>
Exploration Expenditures made in pesos shall be credited at the rate of exchange
in effect on the date such expenditures are paid, as such rate is published in
the Diario Oficial de la Federacion.
2.4.2 Notice of Completion. MPDM shall promptly give CDSV
notice when MPDM has completed Exploration Expenditures totalling $2,000,000 in
the aggregate. MPDM shall have the Interest as provided by Section 4 and the
right to exercise the Company Option within the time provided by Section 5.1.
2.4.3 Allowances. For purposes of determining Exploration
Expenditures made by MPDM, Exploration Expenditures shall include:
(a) The payroll burden for the employees of MPDM or its
Affiliates directly engaged in Exploration within the Area of Interest,
including the costs of workers' compensation and unemployment insurance,
pensions, severance pay, other statutory employee benefits and fringe benefits;
and
(b) An allowance for general and administrative costs
equal to 5% of direct Exploration Expenditures within the Area of Interest.
2.4.4 Statement of Expenditures. Quarterly, MPDM shall furnish
to CDSV a statement of Exploration Expenditures made during the preceding
quarter, supported by such documentation as may be reasonably requested by CDSV.
2.4.5 Expenditures Cumulative. For purposes of determining
Exploration Expenditures made by MPDM, expenditures shall be cumulative so that
Exploration Expenditures in excess of the minimum expenditure required for a
Work Year shall be carried forward and applied to the Exploration Expenditures
required for the succeeding Work Year(s).
2.5 Dropping Property. MPDM may elect to drop from this Agreement and
exclude from the Concessions part or all of any one or more of the concessions
comprising the Concessions by giving notice of such election to CDSV.
Thereafter, the excluded concession(s) shall no longer be part of the
Concessions, but such exclusion shall not operate to reduce the amount of the
minimum Exploration Expenditures needed to continue this Agreement in effect;
provided that MPDM shall comply with all requirements of law, including making
any governmental payments, required to maintain in good standing such
concession(s) and shall keep and perform any covenants or conditions of the
Underlying Agreements that become due and delinquent less than 30 days after
such concession(s) is(are) dropped and excluded. MPDM, will execute and deliver
to CDSV or its nominee such instruments as may be reasonably necessary to
evidence the relinquishment of the excluded concession(s). MPDM's election to
drop and exclude one or more concessions shall not reduce the payments required
by Section 3. If MPDM decides not to proceed further with Exploration as to all
of the Concessions, MPDM shall give notice to CDSV of such decision pursuant to
Section 11.1.
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<PAGE> 9
2.6 Failure to Make Expenditures. CDSV's sole remedy for the failure of
MPDM to complete timely and substantially Exploration Expenditures specified by
Section 2.4.1 in excess of $500,000 up to an aggregate amount of $2,000,000
shall be to terminate this Agreement in the manner provided by Section 11.2. If
MPDM fails to complete timely and substantially any expenditure specified by
Section 2.4.1 for a Work Year, MPDM may elect to cure such failure by (i)
expending or (ii) paying to CDSV, during the first quarter of the following Work
Year, the difference between the minimum Exploration Expenditures to be
completed by the end of such Work Year and the amount actually expended prior to
the end of such Work Year. Notwithstanding any other provision of this Agreement
to the contrary, MPDM shall make Exploration Expenditures of not less than
$500,000 in the aggregate prior to the termination of this Agreement.
3. PAYMENTS TO CDSV.
3.1 Payment Schedule. Unless this Agreement is sooner terminated, MPDM
will pay AZCO $25,000 per year, beginning on the later of (i) the execution of
this Agreement by all parties or (ii) satisfaction of the condition provided by
Section 3.2, and continuing annually thereafter on the anniversary of the
Effective Date until MPDM has completed Exploration Expenditures of $2,000,000.
Upon completion of such Exploration Expenditures, no further payments to AZCO
will be required under this Section. The amount of such payments shall be in
addition to Exploration Expenditures.
3.2 Condition to Payment. Promptly following the signing of this
Agreement and as a condition precedent to MPDM's duty to make the payments
required by Section 3.1, CDSV shall duly register in the Public Registry of
Mines such of the Underlying Agreements as are entitled by law to be registered.
3.3 Royalty. Subject to the provisions of Section 3.4 below, the Parties
agree that the Company to be formed pursuant to Section 5 below, commencing upon
formation of said Company and continuing as long as said Company holds the
Concessions described in Part I of Exhibit A hereto, shall pay CDSV the greater
of (a) $2,000 per month as advance royalty, or (b) 3% of net smelter returns, as
such term is defined in the Underlying Agreements, derived monthly from the sale
of minerals produced from said Concessions described in Part I of said Exhibit
A.
3.4 Underlying Agreements. Upon formation of the Company to be formed
pursuant to Section 5 below and commencement of payment by the Company of
advance minimum royalties pursuant to Section 3.3 above, CDSV shall pay and
shall agree to continue to pay all sums that become due and payable under
paragraphs (a) and (b) of Clause Fourth of the Underlying Agreements between
CDSV (or its predecessors) and Maria Loreto de la Luz Gutierrez Badilla de
Dausinger described in Section 1.25 above. If CDSV fails to make any such
payment, the Company shall have the right to make such payment and deduct the
amount thereof from any royalty payable by the Company to CDSV. CDSV shall
indemnify, defend and hold harmless the Company for, from and against any and
all loss, cost, expense, damage, liability or claim therefor, including
reasonable costs and attorneys fees, arising from the failure of CDSV to make
any and all such payments that become due and payable under said Underlying
Agreements. If the obligation of CDSV to make any such payments under said
Underlying Agreements shall cease, the obligation of the Company to make the
payment to CDSV puruant to Section 3.3 above shall cease to the same extent.
Notwithstanding anything in Section 3.3 or this Section 3.4 to the contrary, if
said Underlying Agreements are amended in a manner satisfactory to MPDM whereby
advance minimum royalties and production royalties shall be payable to
Dausinger, the Company shall make such payments directly to Dausinger and the
Company shall have no further duty to make any advance minimum royalty or
production royalty payment to CDSV pursuant to Section 3.3 or otherwise.
4. INTERESTS. MPDM shall have a 70% Interest and CDSV shall have a 30% Interest
in the Operating Company when it is formed. Each of the Parties shall have the
right to subscribe for shares of the Operating Company in proportion to its
Interest. If MPDM fails timely to make the Exploration Expenditures provided by
Section 2.4.1 or fails timely to make the payments required by Section 3, upon
termination of this Agreement in the manner provided by Section
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<PAGE> 10
11.2, MPDM shall have no further rights with respect to the Concessions or the
Underlying Agreements and MPDM shall surrender and transfer to CDSV all of
MPDM's shares of the Operating Company, if one has theretofore been formed.
5. OPERATING COMPANY.
5.1 Exercise of Company Option. At any time during the Exploration
Period, regardless of whether MPDM has completed any or all of the Exploration
Expenditures specified by Section 2.4.1, MPDM shall have the right and option to
elect to form an Operating Company to further explore the Concessions and to
develop and exploit any exploitation concessions held by the Operating Company
within the Area of Interest. Nothing herein is intended to authorize
exploitation unless and until an exploitation concession has been issued. The
Company Option shall be exercised, if at all, by written notice to CDSV. Such
notice may be given, if at all, at any time during the Exploration Period, but
not later than 60 days after notice is given by MPDM to CDSV that MPDM has
completed Exploration Expenditures totalling $2,000,000.
5.2 Formation of Operating Company. Promptly following the exercise by
MPDM of the Company Option, MPDM, directly or through an Affiliate, and CDSV
shall each execute and deliver to the other a Shareholders Agreement in a form
mutually satisfactory to the Parties and shall form or cause to be formed a
variable capital stock company under the laws of Mexico. The Operating Company
shall be structured in such manner and with such Bylaws as are mutually
agreeable to the Parties. The Parties shall execute and file in the appropriate
governmental office such documents of incorporation and organization as shall be
necessary or convenient to the organization of the Operating Company. The
Interests of MPDM and CDSV at the time the Company Option is exercised, as
determined by Section 4, shall determine the number of the total issued and
outstanding shares of the Operating Company for which each may subscribe. The
Parties shall share in proportion to their respective Interests the costs of
forming the Operating Company. Upon formation of the Operating Company, CDSV
shall contribute and transfer to the Operating Company, in payment of its
shares, the concessions described in Exhibit A, or so much thereof as is
designated by MPDM, free and clear of all defects, liens, encumbrances,
restrictions, taxes, duties, and rights and claims of others claiming by,
through or under CDSV or its Affiliates, subject only to the Underlying
Agreements, and on the condition that a 5% net proceeds royalty payable to a
shareholder of the Operating Company who ceases to be a shareholder because its
shares in the Operating Company are reduced by dilution to less than 10% of the
total issued and outstanding shares of the Operating Company. Such royalty shall
be held subject to the remaining shareholder's right of first refusal to acquire
such royalty. Such right of first refusal shall be upon the same terms and
conditions provided by the Bylaws for the sale, assignment, transfer or other
disposition of the shares of the Operating Company. Upon formation of the
Operating Company, MPDM shall transfer to the Operating Company (i) any and all
rights it may have in mineral concessions within the Area of Interest and (ii)
its rights and obligations under this Agreement, including the value of its
Exploration Expenditures to such date. Any taxes payable on any transfer to the
Operating Company shall be borne and paid exclusively by the transferor.
5.3 Execution of Operator's Agreement. Promptly after the formation of
the Operating Company the Parties shall cause the Operating Company and an
operator to execute an Operator's Agreement in a form which is mutually
satisfactory to the Parties.
6. OPERATIONS DURING THE EXPLORATION PERIOD.
6.1 Standard of Performance. All work relating to the Concessions shall
be performed in a good and minerlike manner and in compliance with all
applicable laws, statutes, ordinances, rules and regulations.
6.2 Preexisting Conditions. MPDM shall have no liability for any
condition existing on the Concessions at the Effective Date and MPDM shall have
no obligation to reclaim, clean up or otherwise be responsible for any such
condition.
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<PAGE> 11
6.3 Maintenance of Property.
6.3.1 Before Formation of Operating Company. Prior to the
transfer of the Concessions to the Operating Company, MPDM, acting on behalf of
and in the name of CDSV as its attorney-in-fact, shall keep and perform the
covenants and conditions of the Underlying Agreements to be kept or performed by
CDSV after the Effective Date and shall maintain the Concessions in good
standing by making payments to and filings with the Mexican government that are
required after the Effective Date in order to maintain the Concessions in good
standing until this Agreement is terminated or any such Concession is dropped or
the Concessions are transferred to the Operating Company. CDSV shall execute
such powers of attorney or other written authorizations as MPDM may reasonably
deem necessary to carry out its responsibilities under this Section.
6.3.2 After Formation of Operating Company. The Operating
Company shall keep and perform the covenants and conditions of the Underlying
Agreements within the Area of Interest and shall maintain the Concessions after
the Concessions are transferred to it. CDSV shall continue to keep and perform
any covenant or condition of the Underlying Agreement required to be kept or
performed by CDSV outside the Area of Interest after the transfer of the
Concessions to the Operating Company.
6.3.3 Upon Termination. MPDM shall not be required to
reimburse CDSV for any costs incurred by it to keep or perform any condition or
covenant of the Underlying Agreements or make any payment to or filing with the
Mexican government to maintain the Concessions that become due 30 days or more
after the effective date of the termination of this Agreement or 30 days or more
after the effective date on which such concession has been dropped and excluded
from the Concessions. If MPDM terminates this Agreement in whole or in part by
relinquishing part or all of the Concessions, then MPDM shall not be required to
maintain such relinquished property, except as provided in the preceding
sentence.
6.3.4 Costs Applicable to Exploration Expenditures. All costs
and expenses paid or accrued or reimbursed by MPDM or the Operating Company to
comply with, or to exercise any right afforded by, the Underlying Agreements or
to maintain the Concessions shall qualify as Exploration Expenditures.
6.4 Dealings with Affiliates. The cost of goods and services owned or
furnished by MPDM or an Affiliate and used in or for the benefit of the Area of
Interest shall be charged as Exploration Expenditures at a cost that is
consistent with MPDM's policy regarding similar charges for similar intracompany
transactions, but such charges shall not exceed the cost of obtaining such goods
and services in an arm's-length transaction between unrelated Persons in the
market for such goods and services nearest the Area of Interest.
7. REPRESENTATIONS; TITLE.
7.1 Representations and Warranties. To the best information and belief
of the officers, directors and shareholders of CDSV, CDSV hereby represents and
warrants to MPDM the following:
7.1.1 Effective Date. As of the Effective Date:
(i) Each of the mineral concessions comprising the
Concessions has been established, registered and maintained in conformity with
applicable law. CDSV holds the Concessions free and clear of all liens,
encumbrances, restrictions, taxes, duties, and rights and claims of others,
subject only to the Underlying Agreements.
(ii) All taxes and duties levied and assessed upon the
Concessions have been paid, except such taxes and duties, if any, as are not yet
delinquent.
(iii) The Underlying Agreements, true and complete
copies of which are attached hereto as Exhibit B, are in full force and effect
and have not otherwise been amended or supplemented; no default exists under the
Underlying Agreements and no condition
8
<PAGE> 12
exists or event has occurred which with the passage of time or the giving of
notice will give rise to a default thereunder; CDSV owns 100% of the rights
conferred by the Underlying Agreements free and clear of all liens,
encumbrances, taxes, duties, and rights of others, subject only to the covenants
and conditions of the Underlying Agreements; and such of the Underlying
Agreements that are entitled to be registered under Mexican law have been duly
registered in the Public Registry of Mining.
(iv) CDSV has the full, complete and legally
enforceable right to enter on the Concessions and to carry out thereon mineral
exploration and evaluation operations and to authorize MPDM to enter thereon and
conduct Exploration as contemplated by this Agreement.
(v) CDSV has the right and power to legally
transfer to the Operating Company the Concessions and its rights and obligations
under the Underlying Agreements without the consent of any Person or, if such
consent is required, such consent will be timely obtained by CDSV.
(vi) CDSV is not a party to and CDSV has no
knowledge of any threatened or pending action, suit, claim or proceeding
(whether judicial, administrative or otherwise) which will or may affect the
Concessions.
(vii) CDSV is duly organized and is duly authorized
to do business in Sonora, Mexico.
(viii) CDSV is not a party to and has not received any
notice of any order, judgment, decree or governmental restriction or requirement
which imposes a material economic burden on the Concessions or materially
adversely affects MPDM's or the Operating Company's ability to explore,
evaluate, develop and mine the Concessions and, to CDSV's knowledge, no basis
exists therefor.
(ix) There are no easements, subleases,
arrangements, agreements, understandings, options, contracts, rights of first
refusal or preemptive rights affecting or relating to the Concessions or CDSV's
rights under the Underlying Agreements, except for the covenants and conditions
of the Underlying Agreements.
(x) CDSV has not and no one else has treated,
stored or released any hazardous substance in or on the Concessions.
(xi) CDSV has paid all of the purchase price
required by the Underlying Agreements. There is no continuing payment obligation
to the concessionaires under the Underlying Agreements, except the duty to pay
$2,000 per month or a 3% net smelter return royalty on production.
7.1.2 Transfer Date. As of the date of transfer of the
Concessions and the Underlying Agreements to the Operating Company, the
Concessions and Underlying Agreements so transferred shall be owned by the
Operating Company free and clear of defects, liens, encumbrances, restrictions,
taxes, duties, and rights and claims of others arising by, through or under CDSV
or its Affiliates, subject only to the covenants and conditions of the
Underlying Agreements.
7.1.3 Title Indemnity. CDSV shall hold harmless, defend and
indemnify MPDM for, from and against any and all loss, cost, expense, damage,
liability or claim therefor, including attorneys fees and costs, arising out of
or relating to a breach of any of the foregoing representations or warranties.
7.2 Complete Disclosure. CDSV represents and warrants to MPDM that it is
unaware of any material fact or circumstance which has not been disclosed to
MPDM which should be disclosed in order to prevent the representations in this
Section 7 from being materially misleading.
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<PAGE> 13
7.3 Title Defect; Defense. During the Exploration Period, MPDM may, but
need not, cure defects in or defend CDSV's rights to the Concessions or the
Underlying Agreement or the rights of the concessionaire to the Underlying
Agreement Concessions. MPDM shall have the further right, but not the duty, to
apply for, receive, register and maintain new concessions, including
exploitation concessions, over or adjacent to the existing concessions
comprising the Concessions, subject to the limitations, if any, of the
Underlying Agreements. Such new concessions shall also be Concessions. All costs
paid or accrued by MPDM to cure title defects in or to defend title to the
Underlying Agreement or to the Concessions or to acquire new or additional
concessions within the Area of Interest shall be credited to MPDM's Exploration
Expenditures. Upon request by MPDM, CDSV shall cure or cause to be cured defects
in its title and shall defend its title to the Concessions or the Underlying
Agreement against any and all claims arising out of or resulting from breach of
the representations or warranties of CDSV and the cost thereof shall be paid and
borne solely by CDSV and not by MPDM or the Operating Company.
8. LIENS. During the Exploration Period, neither MPDM nor CDSV nor their
respective Affiliates will by any action or inaction cause or permit any lien,
charge or other encumbrance to be placed or maintained upon or against CDSV's
rights under the Underlying Agreement or in the Concessions or any part thereof,
other than liens for taxes not yet due and delinquent or being contested, except
that if MPDM reasonably and in good faith disputes the validity or amount of any
claim or liability asserted against it for work performed by MPDM in the Area of
Interest, MPDM shall not be required to pay the same until the amount and
validity thereof have been finally determined.
9. INDEMNITY.
9.1 Indemnification by MPDM. MPDM shall indemnify, defend and hold
harmless CDSV for, from and against any and all liability, loss, cost, expense,
damage or claim therefor (including attorneys fees and costs), including without
limitation injury to or death of any person or persons or damage to property,
including costs of environmental clean up, reclamation and remedial action,
compliance costs, fines and penalties, arising out of or in connection with the
operations and activities of MPDM on the Concessions during the Exploration
Period. All such liabilities, losses, costs, expenses, damages and claims
therefor which are made or suffered after the Concessions are transferred to the
Operating Company shall be borne by the Operating Company.
9.2 Indemnification by CDSV. CDSV shall indemnify, defend and hold
harmless MPDM for, from and against any and all liability, loss, cost, expense,
damage or claim therefor (including attorneys fees and costs), including without
limitation injury to or death of any person or persons or damage to property,
including costs of environmental clean up, reclamation and remedial action,
compliance costs, fines and penalties, arising from or relating in whole or in
part to conditions existing or activities conducted on the Concessions before
the Effective Date or operations and activities of CDSV or its Affiliates on the
Concessions during the Exploration Period or after the termination of this
Agreement pursuant to Section 11. All such liabilities, losses, costs, expenses,
damages and claims therefor which are made or suffered after the expiration of
the Exploration Period shall be borne by the Operating Company. CDSV shall
indemnify, defend and hold harmless MPDM and the Operating Company for, from and
against any and all liability, loss, cost, expense, damage or claim therefor
(including attorneys fees and costs) arising in whole or in part from the
failure of CDSV to keep or perform any covenant or condition of the Underlying
Agreements to be kept or performed by CDSV outside the Area of Interest of this
Agreement, but within the area of interest, if any, of any of the Underlying
Agreements.
10. RIGHT OF ACCESS BY CDSV.
10.1 Reports. During the Exploration Period, MPDM shall provide to CDSV
quarterly reports summarizing MPDM's operations within the Area of Interest,
including a summary of MPDM's technical activities on the Concessions, together
with copies of all factual data developed by MPDM during the preceding quarter.
10
<PAGE> 14
10.2 Meetings. During the Exploration Period, representatives of MPDM
and CDSV shall meet periodically as circumstances warrant to discuss the status
of Exploration, but in no event less frequently than six-month intervals.
10.3 Documents. During the Exploration Period, MPDM will make available
to CDSV for inspection and copying at reasonable times and intervals factual
data and interpretations relating to the Concessions which have been developed
by MPDM, including but not limited to drilling logs, assay results, survey
information and maps.
10.4 Audits; Inspections. During the Exploration Period, CDSV shall have
the right to inspect and audit the books and records of MPDM relating to its
Exploration Expenditures. CDSV shall also have access to and the right to
inspect the Concessions at reasonable times and intervals and at CDSV's risk and
expense, provided that CDSV shall not unreasonably interfere with the operations
of MPDM, CDSV shall indemnify, defend and hold MPDM harmless for, from and
against any and all loss, cost, expense, damage, liability or claim therefor
suffered by CDSV or MPDM arising from such inspection, and CDSV shall comply
with MPDM's safety regulations.
10.5 Disclaimer. MPDM shall not be liable for any errors or omissions in
information, data or interpretations furnished to CDSV and CDSV shall have no
right to rely thereon. CDSV shall indemnify, defend and hold harmless MPDM for,
from and against any and all loss, cost, expense, damage, liability or claim
therefor, including attorneys fees and costs, suffered by CDSV or MPDM arising
in whole or in part from the delivery to or use by CDSV of such information,
data or interpretations, unless such liability results from the gross negligence
or willful misconduct of MPDM.
11. TERMINATION.
11.1 Termination by MPDM. Anything herein to the contrary
notwithstanding, MPDM shall have the right to terminate this Agreement at any
time during the Exploration Period by giving CDSV written notice of such
termination. Such termination shall be effective as of the day such notice is
given, subject to the provisions of Section 6.3.3.
11.2 Termination for Default. If MPDM fails timely to make Exploration
Expenditures as specified by Section 2.4.1 or any payment specified by Section 3
of this Agreement, MPDM shall be in default and CDSV may give MPDM written
notice specifying the default. If MPDM does not, within 10 days after it has
received notice of a default relating to the payment of money or within 30 days
after it has received notice of any other default: (i) cure the default, or (ii)
begin action to cure the default and thereafter diligently prosecute such action
to completion, or (iii) institute arbitration proceedings seeking determination
of whether the alleged default exists and thereafter diligently prosecute such
proceedings to completion and cure or commence to cure, within 30 days after
such proceedings are completed, any default determined thereby to exist, CDSV
may terminate this Agreement by delivering to MPDM written notice of such
termination, subject to MPDM's right to remove its property and equipment from
the Concessions as hereinafter provided. CDSV shall have no right to terminate
this Agreement except as set forth in this Section and CDSV shall have no such
right of termination on account of any default occurring after MPDM has
completed Exploration Expenditures of $2,000,000 in the aggregate.
11.3 Continuing Liability. After a termination pursuant to Section 11.1
or 11.2, except as otherwise provided by Section 13, neither Party shall have
any rights or obligations under this Agreement, provided that neither Party
shall thereby be relieved of any of its obligations or liabilities accrued prior
to the effective date of such termination. It is understood, however, that MPDM
shall not be liable for the failure to make any Exploration Expenditures
contemplated by this Agreement in excess of $500,000, or for the failure to make
any payment under this Agreement or any of the Underlying Agreements, whether to
CDSV or to any Person, which becomes due after the effective date of such
termination, except as required by Section 2.6 or 6.3.3.
11.4 Surrender of Possession. Upon termination of this Agreement
pursuant to Section 11.1 or 11.2, MPDM shall surrender to CDSV the possession of
the Concessions and
11
<PAGE> 15
MPDM shall execute and deliver to CDSV such instruments as may be reasonably
necessary to evidence the relinquishment by MPDM of all its Interest in such
relinquished Concessions and the Underlying Agreement.
11.5 Delivery of Data. Within 90 days after termination of this
Agreement pursuant to Section 11.1 or 11.2, MPDM shall deliver to CDSV all
documents, maps and data delivered to it by CDSV, and factual data relating to
the Concessions, developed by MPDM during the term hereof on the Concessions.
MPDM shall also make available for pick up by CDSV, at the place where stored,
all drill core developed by MPDM on the Concessions, except those portions
consumed in assaying, metallurgical testing or specific geologic studies. MPDM
shall not be liable for any errors or omissions in such information or data,
CDSV shall have no right to rely thereon and CDSV shall indemnify, defend and
hold harmless MPDM as provided by Section 10.5.
11.6 Removal of Property. Subject to authorization by the owner of the
surface of the mineral concessions, MPDM shall have the right, within 90 days
following the termination of this Agreement, in whole or as to any
concession(s), to remove, if it so elects, and the right of ingress and egress
for such purpose, any and all pipes and pipelines, improvements, machinery,
equipment, tools and supplies constructed, installed or placed by MPDM upon the
Concessions or such concession(s) (except timbering or other underground
supports). Any such property not removed by MPDM within such time shall be
deemed abandoned and shall become the property of CDSV.
12. FORCE MAJEURE. The obligation of MPDM to make or cause to be made
Exploration Expenditures during the Exploration Period shall be suspended and
the time for performance thereof extended during the continuance of any event of
Force Majeure which materially prevents or delays the performance of such
obligation or which renders performance of such obligation imprudent, and for a
reasonable time following the removal of such Force Majeure event to permit
performance of the obligation. MPDM shall give CDSV reasonably prompt written
notice of the existence of an event of Force Majeure with reasonably full
particulars.
13. ADDITION OF PROPERTIES. During the Exploration Period, any right or interest
in property, including but not limited to mineral rights, surface rights and
water rights, acquired by a Party or an Affiliate of a Party within the Area of
Interest shall be offered to the other Party and shall become subject to this
Agreement and included in the Concessions if accepted by the nonacquiring Party
within 30 days after notice of the acquisition is given by the acquiring Party.
This Section will be in effect as to any right or interest in property which is,
as of the Effective Date, or which hereafter becomes subject to this Agreement
and is subsequently relinquished from the Concessions, for a period of six
months after the date of relinquishment. Entirely excluded from this Section are
rights and interests in property outside the Area of Interest whenever acquired.
14. OTHER BUSINESS OPPORTUNITIES. Except as provided in Section 13, nothing
shall prevent a Party or any Affiliate of a Party, at any time and without
notice to or agreement by any Party, from entering into or continuing any
business, whether or not competitive with the activities contemplated by this
Agreement, or acquiring or exploiting any mining right outside the Area of
Interest during the term of this Agreement or within the Area of Interest after
the expiration of the six-month period following the relinquishment of
Concessions and neither Party nor their respective Affiliates shall have any
obligation to offer business or other opportunities to another Party or to the
Operating Company.
15. CONFIDENTIALITY. The terms and provisions of this Agreement and all
information obtained in connection with the performance of this Agreement not
otherwise generally available to the public ("confidential information") shall
be maintained on a confidential basis by the Parties. A Party shall not make any
disclosure to any Person or to the public of, or give or provide for, any
publicity, press release or written material containing confidential information
without the prior written consent of the other Party, which consent shall not be
unreasonably withheld, delayed or conditioned. The requirement for consent shall
not apply to a disclosure:
12
<PAGE> 16
(a) To an Affiliate, attorney, accountant or consultant that has
a bona fide need to be informed;
(b) To a Person to whom the disclosing Party intends to transfer
its Interest in accordance with the provisions of this Agreement;
(c) To a governmental agency or to the public when the disclosing
Party believes in good faith such disclosure is required by applicable law,
rules or regulations; or
(d) Of information which now or at the time of disclosure is part
of the public domain through no fault of the disclosing Party.
Any disclosure pursuant to subsection (a) or (b) above shall include only such
confidential information as such Person shall have a legitimate business need to
know and such Person shall first agree in writing to protect the confidential
information from further disclosure to the same extent as the Parties are
obligated under this Section. No disclosure to the public pursuant to subsection
(c) above shall be made until 48 hours after delivery to the nondisclosing Party
of notice containing a verbatim transcript of the intended disclosure, it being
the intention of the Parties that no such delivery shall be required with
respect to any regulatory reports required to be made to any governmental
agency.
16. TRANSFER OF INTEREST. Prior to transfer of the Concessions to the
Operating Company, a Party may not Transfer in whole or in part its Interest
under this Agreement without the consent of the other Party.
17. NOTICES. CDSV shall promptly deliver to MPDM all notices concerning the
Concessions or operations thereon that CDSV or AZCO receives from any Person.
All notices required or permitted to be given by a Party under this Agreement
shall be in writing and in the English language, and (unless some other mode of
giving the same is specified or accepted in writing by the recipient) shall be
effective (a) when delivered during normal business hours at the addressee
Party's principal address, or (b) on the day after the day on which it shall
have been received by facsimile transmission at the addressee Party's principal
address, whichever of the foregoing shall first occur. Until otherwise specified
by notice, the addresses for any notice, shall be:
If to CDSV:
To its principal address at:
Mail:
AZCO Mining Inc.
P.O. Box 747
Safford, AZ 85548
Attn: David C. Beling
Courier:
AZCO Mining Inc.
30 South Bowie Ave.
Solomon, AZ 85551
Telephone: 520/428-6881
Telecopier: 520/428-5865
with copy to:
AZCO Mining Inc.
999 West Hastings St., Ste. 1250
Vancouver, B.C. V6C 2W2
Attn: Alan Lindsay
Telephone: 604/682-7286
Telecopier: 604/685-4320
13
<PAGE> 17
If to MPDM:
To its principal address at:
Minera Phelps Dodge Mexico, S. de R.L. de C.V.
Blvd. Garcia Morales Km. 9.5
Col. La Manga, 83220
Hermosillo, Sonora, Mexico
Attn: Gary R. Heinemeyer, Exploration Mgr.
Telephone: 52-62 61-04-78
Telecopier: 52-62 61-04-77
with copy to:
Phelps Dodge Exploration Corporation
2600 N. Central Avenue
Phoenix, AZ 85004-3014
Attention: A. L. Lawrence, President
Telephone: (602) 234-8100
Telecopier: (602) 234-4847 or 234-8337
Failure to give notice at the copy address shall not affect the validity of any
notice given at the principal address.
18. NO IMPLIED COVENANTS. It is expressly understood and agreed that no implied
covenant or condition whatsoever shall be read into this Agreement relating to
Exploration, development, mining, production or marketing or to any obligation
of the Parties hereunder, or to the time therefor or the measure of diligence
thereof. The covenants of good faith and fair dealing which are sometimes
implied are hereby expressly included in this Agreement.
19. FURTHER ASSURANCES. Either Party, at any time upon request of the other,
shall execute and acknowledge in form required by law for recording or
registering with the proper Person and shall deliver to the requesting Party
such notices, deeds or other instruments incorporating, referring to or carrying
out the provisions of this Agreement as the requesting Party may reasonably deem
necessary in order to preserve and protect its interest under this Agreement or
to effectuate the provisions hereof.
20. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the
benefit of the Parties and their respective legal successors and permitted
assigns.
21. AMENDMENTS, WAIVERS, ETC. This Agreement may not be amended or modified
except by a written instrument signed by all of the Parties. No Party shall be
bound by any modification or amendment of this Agreement or waiver of any
provision hereof unless such modification, amendment or waiver is set forth in a
written instrument signed by each of the Parties. Except as otherwise provided
in this Agreement, failure on the part of any Party to exercise any right
hereunder or to insist upon strict compliance by any other Party with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such
right, term, covenant or condition. No provision of this Agreement shall be
construed to be a waiver by any of the Parties of any rights or remedies such
Party may have against any other Party for failure to comply with the provisions
of this Agreement and, except as provided in Section 25 or otherwise expressly
provided in this Agreement, no remedy or right herein conferred is intended to
be exclusive of any other remedy or right, but every such remedy or right shall
be cumulative and shall be in addition to every other remedy or right herein
conferred or now or hereafter existing at law or in equity.
22. LANGUAGE; GOVERNING LAW. This Agreement is executed in English and English
shall be the language to govern. A Spanish language translation of this document
approved by the Parties shall be executed by the Parties as a public deed and
registered in the appropriate Public Mining Registry. All matters concerning
title to Concessions, including the acquisition, transfer and abandonment of
mineral, surface and water rights, shall be governed by the laws of Mexico. All
other matters under this Agreement shall be construed and enforced in accordance
14
<PAGE> 18
with and governed by the laws of the State of Arizona without regard for choice
of laws or conflict of laws principles that would require or permit the
application of the law of any other jurisdiction. Each of the Parties consent to
the personal jurisdiction of the state and federal courts of record in Arizona
for the confirmation of or entry of judgment upon any award in arbitration.
23. ENTIRE AGREEMENT. This Agreement, including the schedules attached hereto,
sets forth the entire understanding of the Parties with respect to the matters
set forth herein as of the date hereof and supersedes all prior oral and written
discussions and understandings between them.
24. CONSTRUCTION OF AGREEMENT. This Agreement is the result of negotiations
between the Parties, and the terms and provisions hereof shall be construed in
accordance with their usual and customary meanings. The captions or headings of
sections or subsections of this Agreement are for purposes of reference only and
shall not limit or define the meaning of any provision of this Agreement. The
Parties hereby waive the application of any rule of law which otherwise would be
applicable in connection with the construction of this Agreement that ambiguous
or conflicting terms or provisions should be construed against the Party who (or
whose attorney) prepared the executed agreement or any earlier draft of the
same.
25. ARBITRATION. Any dispute, controversy or claim arising out of or relating to
this Agreement or the subject matter of this Agreement, or the execution,
validity, interpretation, implementation, breach or termination of this
Agreement shall be settled by nonbinding mediation or by binding arbitration in
accordance with procedures which shall be mutually satisfactory to the Parties.
All notices in connection with the arbitration or mediation, including the
notice of arbitration or mediation and the response thereto, shall be served in
the same manner as provided for notices generally under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
COBRE de SUAQUI VERDE, S. A. de C. V.
By____________________________________
CDSV
AZCO MINING, INC.
By____________________________________
President
AZCO
MINERA PHELPS DODGE MEXICO, S. de R.L.
de C. V.
By____________________________________
MPDM
15
<PAGE> 19
EXHIBIT A TO MINERAL EXPLORATION AGREEMENT AND
OPTION TO FORM COMPANY
Concessions
SUAQUI VERDE PROJECT
State of Sonora
Municipality of Suaqui Grande
Republic of Mexico
<TABLE>
<CAPTION>
========================================================================================================================
CONCESSION EXPEDIENTE TITLE NO. AREA ISSUANCE EXPIRATION RECORD OWNER
- ------------------------------------------------------------------------------------------------------------------------
PART I
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rosa Elena 16696 189164 21.4044 Cobre de Suaqui
Numero Uno Verde
- ------------------------------------------------------------------------------------------------------------------------
Rosa Elena 16699 193916 73.3156 Cobre de Suaqui
Numero Dos Verde
- ------------------------------------------------------------------------------------------------------------------------
Rosa Elena 16698 149783 166.0000 Cobre de Suaqui
Numero Tres Verde
- ------------------------------------------------------------------------------------------------------------------------
Suaqui Verde 195061 100.0000 Cobre de Suaqui
Numero Uno Verde
- ------------------------------------------------------------------------------------------------------------------------
PART II
- ------------------------------------------------------------------------------------------------------------------------
Ampliacion Las 4/1.122/1136 200952 768.0819 10/17/94 12/18/97 Cobre de Suaqui
Planchas 1 Verde
========================================================================================================================
</TABLE>
<PAGE> 20
EXHIBIT B TO MINERAL EXPLORATION AGREEMENT AND
OPTION TO FORM COMPANY
Underlying Agreements - Dausinger
<PAGE> 1
EXHIBIT 10.12
August 15, 1996
Ferry Yeong and
Indotan Inc.
3rd Floor, 25 Church Street
Hamilton, HMLX, Bermuda
Dear Mr. Yeong:
RE: IRIAN JAYA PROPERTY OFFER
This letter constitutes an offer by AZCO Mining Inc. to acquire an 85%
participating interest to explore and develop a property (the "Property") in
Irian Jaya (which description is attached hereto as Schedule "A" and comprising
83,350 hectares, and previously registered under the name description of "EKS PT
FREEPORT INDONESIA"), free and clear of all liens and encumbrances, on the
following terms:
1. The payment by AZCO to Indotan of an aggregate of $200,000 (U.S.) on
the following terms and conditions:
(a) $100,000 (U.S.) will be placed in trust with AZCO's lawyers,
Devlin Jensen, of which $5,000 will be released to you
immediately for acquisition of all available data pertaining to
the Property, and $95,000 released to Indotan upon the issuance
of the contract of work ("COW") from the Department of Mines of
Indonesia, pursuant to AZCO having instructed your application
for the COW upon its assessment of the data and upon AZCO having
confirmed the acceptability of the COW coordinates;
(b) $100,000 (U.S.) will be paid to Indotan within six (6) months of
the issuance of the COW and subject to AZCO having determined to
proceed with analysis and development of the Property.
2. AZCO will pay to the Department of Mines of Indonesia the deposit
required by the mining law of Indonesia in respect to the granted COW
and which is presently estimated at $416,750 (U.S.), which will be
refundable to AZCO if the Property is surrendered.
<PAGE> 2
2
3. By this offer, and your acceptance, AZCO will purchase and 85%
participating interest, free of liens and encumbrances, in the Property
and Indotan will retain a 15% participating interest. Indotan's 15%
participating interest will be carried as to expenditures by AZCO (in
the form of a non-interest-bearing, non-recourse loan) until the
completion of a favourable bankable feasibility study and such loan
will be repaid firstly out of profits from commercial production.
4. Indotan will retain a 2% net smelter return, which may be purchased by
AZCO at any time by the issuance of Three Million Dollars
($3,000,000.00) (U.S.) in cash or shares of AZCO.
5. The parties hereto will, within a reasonable period of time after your
acceptance of this offer, enter into a more detailed agreement which
shall provide for, amongst other matters, the following:
(a) the form of joint venture agreement regarding the Property;
(b) that AZCO shall be operator of the Property and terms thereof;
(c) dilution provisions for non-participation in post-bankable
feasibility development;
(d) such other standard provisions as are common in the industry.
6. AZCO shall have the right to transfer its interest, in whole or in
part, to a subsidiary or affiliate. AZCO shall have a right of first
refusal on any sale of Indotan's participating interest.
If the terms of this offer are acceptable to you, we ask that you execute and
return a copy of this letter (a faxed copy will be sufficient), and the same
will constitute our binding agreement. Upon receipt of your agreement hereto, we
will instruct our counsel to commence drafting a more detailed agreement and we
will deposit with our counsel, Devlin Jensen, the sum of $100,000 (U.S.) in
compliance herewith.
Yours truly,
AZCO MINING INC.
Per: ______________________________________
THIS OFFER IS HEREBY ACCEPTED the ___________ day of August, 1996 by the
authorized signatory of INDOTAN INC.
Per: ______________________________________
ROBERT JENNINGS
<PAGE> 1
EXHIBIT NO. 11.1
AZCO MINING, INC. (DELAWARE)
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
for the fiscal years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net income (loss) applicable to computation $ 17,127,455 $ (4,698,537) $ (3,508,702)
Weighted average common shares assuming no dilution 25,512,938 25,006,637 20,495,454
------------ ------------ ------------
Stock options and warrants that had a dilutive
effecting on net income (based on relationship
of market value to exercise price), assumed to
have been exercised on the first day of each
period (or date of grant, if later), less the
number of shares which could have been purchased
from the proceeds of such assumed exercise;
number of shares using the weighted average
market price for the assumed purchase of shares
described above 41,384 48,379 997,154
------------ ------------ ------------
Weighted average common shares applicable to
earnings per common and common equivalent share 25,554,322 25,055,016 21,492,608
------------ ------------ ------------
Additional shares using the market close price at
the end of the period for the assumed purchase
of shares described above 77,801 14,184 45,867
Conversion of convertible debentures at the stated
rate assumed to have been converted at the
beginning of the earliest period reported 135,179 135,179
------------ ------------ ------------
Weighted average common shares assuming full
dilution 25,632,123 25,204,379 21,673,654
============ ============ ============
Earnings per common and common equivalent share:
Net income (loss) $ 0.670 $ (0.188) $ (0.163)
============ ============ ============
Earnings per common share assuming full dilution:
Net income (loss) $ 0.668 $ (0.186) $ (0.162)
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C>
Sanchez Mining, Inc. Delaware
Cobre de Suaqui Verde, S.A. de C.V. Mexico
</TABLE>
<PAGE> 1
Exhibit 24.1
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the incorporation by reference in the registration statement of
AZCO Mining Inc. on Form S-8 (File Numbers 33-56468 and 33-61434) of our report
dated August 29, 1996, on our audits of the consolidated financial statements
and financial statement schedules of AZCO Mining Inc. as of June 30, 1996 and
1995 and for the years ended June 30, 1996, 1995 and 1994, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND, L.L.P.
Phoenix, Arizona
September 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000851726
<NAME> AZCO MINING INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 25,696,492
<SECURITIES> 0
<RECEIVABLES> 43,861
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,740,353
<PP&E> 4,420,215
<DEPRECIATION> 127,450
<TOTAL-ASSETS> 30,033,118
<CURRENT-LIABILITIES> 58,217
<BONDS> 0
0
0
<COMMON> 25,638,575
<OTHER-SE> 4,336,326
<TOTAL-LIABILITY-AND-EQUITY> 30,033,118
<SALES> 0
<TOTAL-REVENUES> 26,893,607
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,879,979
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,173
<INCOME-PRETAX> 22,842,455
<INCOME-TAX> 5,715,000
<INCOME-CONTINUING> 17,127,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,127,455
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
