<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20430
AZCO MINING INC.
(A DELAWARE CORPORATION)
I.R.S. Employer Identification Number 84-1094315
P.O. Box 747
Safford, Arizona 85548
(520) 428-6881
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 25,512,938 shares of the
Company's Common Stock were outstanding as of May 13, 1996.
<PAGE> 2
AZCO MINING INC. (DELAWARE)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets ................... 3
Consolidated Statements of Operations ......... 4
Consolidated Statements of Cash Flows ......... 5
Consolidated Statement of Stockholders' Equity. 6
Notes to Interim Consolidated
Financial Statements ........................ 7
<PAGE> 3
AZCO MINING INC. (DELAWARE)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, JUNE 30,
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,255,758 $ 1,794,638
Short-term investments 285,397
Prepaids and other 83,099 65,119
------------ ------------
Total current assets 26,624,254 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 (118,344) (123,824)
------------ ------------
69,736 13,567,394
------------ ------------
Investment in Cobre del Mayo (Note 3) 1,145,547
Restricted cash 68,643 350,120
Deposit (Note 4) 4,000,000
Other assets 7,725 14,385
------------ ------------
$ 31,915,905 $ 15,791,656
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 55,263 $ 603,495
Notes payable 2,540,715
------------ ------------
Total current liabilities 55,263 3,144,210
Deferred liability 450,000
------------ ------------
Total liabilities 55,263 3,594,210
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock: $.002 par value, 100,000,000 shares authorized:
25,512,938 shares issued and outstanding as of both
June 30,1995 and March 31, 1996 51,026 51,026
Additional paid-in capital 25,587,549 24,937,549
Retained earnings (deficit) 6,222,067 (12,791,129)
------------ ------------
31,860,642 12,197,446
------------ ------------
Total liabilities and stockholders' equity $ 31,915,905 $ 15,791,656
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
AZCO MINING INC. (DELAWARE)
CONSOLIDATED STATEMENTS of OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------- --------------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INCOME:
Interest income $ 362,308 $ 34,415 $ 388,596 $ 81,473
Gain on sale of assets (Note 2) 26,473,086
------------ ------------ ------------ ------------
362,308 34,415 26,861,682 81,473
------------ ------------ ------------ ------------
EXPENSES:
Salaries 188,067 196,998 585,310 497,524
General and administrative 189,057 202,875 525,875 702,107
Exploration 130,123 183,954
Accounting and legal 139,359 59,784 565,310 233,396
Amortization and depreciation 11,782 36,177 48,041 109,086
Interest expense, net of amount capitalized 13,518 171,173 42,590
Financing 40,000 94,750 49,362 860,090
Miscellaneous 2,101 5,413 4,461 23,842
------------ ------------ ------------ ------------
700,489 609,515 2,133,486 2,468,635
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES: (338,181) (575,100) 24,728,196 (2,387,162)
Income Taxes 165,000 -- 5,715,000 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (503,181) $ (575,100) $ 19,013,196 $ (2,387,162)
============ ============ ============ ============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
NET INCOME (LOSS) $ (0.02) $ (0.02) $ 0.74 $ (0.10)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES APPLICABLE TO
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE 25,540,490 25,374,288 25,581,936 24,483,445
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
AZCO MINING INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------------
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 19,013,196 $ (2,387,162)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization (5,480) 109,085
Write-off of financing costs 727,542
Changes in assets and liabilities, net:
Certificate of deposit 1,379
Restricted cash 281,477 (322)
Other assets (11,320) 18,488
Deposit (4,000,000)
Accounts payable and accrued liabilities (548,232) (509,210)
Deferred liability (450,000)
------------ ------------
Net cash provided by (used in) operating activities 14,279,641 (2,040,200)
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments (285,397) 1,276,683
Proceeds from certificates of deposit 100,000
Purchases of furniture and equipment and construction in progress 930,042 (666,952)
Acquisition of mineral properties, including claims 525,000
Development of mineral properties 10,902,549 (1,699,685)
------------ ------------
Net cash provided by (used in) investing activities 12,072,194 (989,954)
------------ ------------
Cash flows from financing activities:
Payments for finance costs (773,736)
Payments for offering costs (413,782)
Proceeds from sale of common stock 650,000 3,484,554
Payments of debt (2,540,715)
Payments on line of credit (416,252)
------------ ------------
Net cash provided by (used in) financing activities (1,890,715) 1,880,784
------------ ------------
Net increase (decrease) in cash and cash equivalents 24,461,120 (1,149,370)
Cash and cash equivalents at beginning of period 1,794,638 1,980,896
------------ ------------
Cash and cash equivalents at end of period $ 26,255,758 $ 831,526
============ ============
Cash paid during the period for:
Income taxes $ 5,065,000
Interest $ 230,453 $ 70,047
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
AZCO MINING INC. (DELAWARE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common
Stock Additional Retained
----------------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
<S> <C> <C> <C> <C> <C>
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 19,013,196 19,013,196
----------- ----------- ----------- ------------ -----------
Balance, March 31, 1996 25,512,938 $ 51,026 $25,587,549 $ 6,222,067 $31,860,642
========== =========== =========== ============ ===========
</TABLE>
6
<PAGE> 7
AZCO MINING INC. (DELAWARE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position, the results
of operations, and the cash flows of the Company and its consolidated
subsidiaries for the interim periods. Users of financial information
produced for interim periods are encouraged to refer to the footnotes
contained in the Annual Report on Form 10-K when reviewing interim
financial results.
The Company's general business strategy is to acquire base metal and
precious metal properties and either develop or sell them. The Company will
consider properties of merit in almost any geographic location, but its
preferred sphere of operations is North and South America. Within this
sphere, the Company's preference sphere is for operating and advanced
development properties in North America, particularly those in established
mining areas having acceptable infrastructures and good operating
conditions.
During the second quarter of fiscal 1996, the Company sold its Sanchez
project and a 70% interest in its Mexican Project, the Piedras Verdes
Project (see Note 2). As a result, the Company does not consider itself a
development stage company.
NOTE 2. CALCULATION OF GAIN ON SALE OF ASSETS TO PHELPS DODGE
The Company realized a $26,473,086 gain on the $40,000,000 sale of assets
to Phelps Dodge Corporation ("Phelps Dodge"). An outline of the calculation
of the gain follows:
<TABLE>
<S> <C> <C>
Proceeds from the Sale $40,000,000
Cost of the Sale:
Legal and accounting 126,114
Proxy solicitation 280,235
Investment advisor 350,356 756,705
--------- -----------
Net Proceeds 39,243,295
Book value of assets sold:
70% of Piedras Verdes acquisition costs 59,500
70% of Piedras Verdes development costs 2,613,440
Sanchez acquisition costs 440,000
Sanchez development costs 8,808,870
Sanchez construction costs 848,399 12,770,209
--------- -----------
Gain on sale of assets to Phelps Dodge $26,473,086
===========
</TABLE>
NOTE 3. MINERAL PROPERTIES - COMPANY'S INVESTMENT IN COBRE DEL MAYO
The Company's investment in Cobre del Mayo consists of 30% of the Company's
acquisition and development costs in the Piedras Verdes Project at the time
of the sale of assets to Phelps Dodge.
NOTE 4. DEPOSIT
Under the terms of the Company's Stipulation and Order of Compromise and
Dismissal with AIOC Corporation ("AIOC"), 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.
7
<PAGE> 8
AZCO MINING INC. (DELAWARE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Company was formed on July 13, 1988. On December 21, 1995 the Company
announced that it had completed the sale of its Sanchez Project and a 70%
interest in its Mexican project, the Piedras Verdes, to Phelps Dodge for $40
million (US).
The Company is currently evaluating a number of opportunities in the mining
industry for the purpose of merger, joint venture or project acquisition.
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995.
Net income for the nine month period ended March 31, 1996 was $19,013,196
compared to a net loss of $2,387,162 for the same period ended March 31, 1995.
This is the result of the gain on sale of assets to Phelps Dodge, of $26,473,086
recognized in the period ended March 31,1996.
Exploration expense was $183,954 for the period ended March 31, 1996 compared to
$-0- for the same period ended March 31, 1995. The increase in exploration
expense for the period ended March 31, 1996 is the result of the expensing of
costs associated with the Suaqui Verde Project. These costs were capitalized in
previous periods and subsequently written-off during the fourth quarter of
fiscal 1995. In addition, all funds currently invested in Cobre del Mayo are
being expensed as exploration costs until a development decision has been
reached by Phelps Dodge.
Accounting and legal expense was $565,310 for the period ended March 31, 1996 as
compared to $233,396 for the same period ended March 31, 1995. The increase is
primarily due to costs associated with the consent solicitation initiated by
Muzinich & Co and the AIOC LME arbitration.
Interest expense increased for the nine month period ended March 31, 1996 to
$171,173 as compared with $42,590 for the same period ended March 31, 1995. This
is the result of $2,000,000 in 14% convertible debentures issued on May 12, 1995
and retired December 19,1995.
Financing costs for the nine month period ended March 31, 1996 of $49,362 are
substantially less than the $860,090 incurred in the same period ended March
31,1995 due to the fact that the Company is currently pursuing mining ventures
while in the previous period the Company was attempting to finance the Sanchez
Project.
8
<PAGE> 9
AZCO MINING INC. (DELAWARE)
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995.
The net loss for the three month period ended March 31, 1996 was $503,181
compared to a net loss of $575,100 for the same period ended March 31, 1995.
This is the result of increased interest income due to larger cash balances in
the period ended March 31, 1996.
Legal and accounting expense was $139,359 for the quarter ended March 31, 1996
as compared to $59,784 for the quarter ended December 31, 1995. The increase is
due primarily to the LME arbitration brought by AIOC.
Income tax expenses increased to $165,000 in the quarter ended March 31, 1996 as
compared to $-0- for the quarter ended March 31, 1995 as a result of the
estimated $5,065,000 income tax liability incurred with the close of the sale of
assets to Phelps Dodge.
Exploration expense was $130,123 for the quarter ended March 31, 1996 compared
to $-0- for the same period ended March 31, 1995. The increase in exploration
expense for the period ended March 31, 1996 is the result of expensing costs
associated with the Suaqui Verdes Project. These costs were capitalized in
previous periods and subsequently written-off during the fourth quarter of
fiscal 1995. In addition, all funds currently invested in Cobre del Mayo are
being expensed as exploration costs until a development decision has been
reached by Phelps Dodge.
FINANCIAL CONDITION
As of March 31, 1996 the Company had cash and cash equivalents of $26,255,758.
Under the terms of the Company's Purchase Agreement with Phelps Dodge,
$1,500,000 was held-back by Phelps Dodge for potential costs which might be
incurred as a result of the Company's existing Copper Purchase Agreement with
AIOC. The Company received the $1,500,000 hold-back from Phelps Dodge along with
interest on February 21, 1996 after $4,000,000 was deposited into escrow to
satisfy any potential award in the AIOC LME arbitration with the Company.
9
<PAGE> 10
AZCO MINING INC. (DELAWARE)
PART II. OTHER INFORMATION
ITEM 1: 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 claiming 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. 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 seeks damages "in excess of
$5,000,000" and an injunction that would 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.
ITEMS 2-5: Not Applicable
10
<PAGE> 11
AZCO MINING INC. (DELAWARE)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
1. Statement regarding computation of per share earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
1. On January 4, 1996 the Company filed Form 8-K reporting the
December 20, 1995 completion of the sale of assets to Phelps Dodge. This filing
contained a proforma unaudited balance sheet of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
AZCO MINING, INC.
DATE: MAY 13, 1996 BY: DAVID C BELING
-------------------- -----------------------------------
DAVID C. BELING
PRESIDENT
DATE: MAY 13, 1996 BY: RYAN A. MODESTO
-------------------- -----------------------------------
RYAN A. MODESTO
PRINCIPAL ACCOUNTING OFFICER
11
<PAGE> 1
Exhibit 1
AZCO MINING INC. (DELAWARE)
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) applicable to
computation................................. $ (503,181) $ (575,100) $19,013,196 $(2,387,162)
Weighted average common shares assuming
no dilution................................. 25,512,938 25,311,272 25,512,938 24,338,668
----------- ----------- ----------- -----------
Stock options and warrants that had a
dilutive effect 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.. 27,552 63,016 68,998 144,777
----------- ----------- ----------- -----------
Weighted average common shares applicable
to earnings per common and common
equivalent share............................ 25,540,490 25,374,288 25,581,936 24,483,445
----------- ----------- ----------- -----------
Additional shares using the market close
price at the end of the period for the
assumed purchase of shares described above.. -- -- -- --
Conversion of convertible debentures at the
stated rate assumed to have been converted
at the beginning of the earliest period
reported.................................... X 135,179 X 135,179
----------- ----------- ----------- -----------
Weighted average common shares assuming
full dilution............................... 25,540,490 25,509,467 25,581,936 24,618,624
=========== =========== =========== ===========
Earnings per common and common equivalent
share
Net income (loss)........................... $ (0.0197) $ (0.0227) $ 0.7432 $ (0.0975)
============ =========== =========== ===========
Earnings per common share assuming full
dilution:
Net income (loss)........................... $ (0.0197) $ (0.0225) $ 0.7432 $ (0.0970)
============ =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000851726
<NAME> AZCO MINING INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 26,541,155
<SECURITIES> 0
<RECEIVABLES> 83,099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,624,254
<PP&E> 5,409,995
<DEPRECIATION> 118,344
<TOTAL-ASSETS> 31,915,905
<CURRENT-LIABILITIES> 55,263
<BONDS> 0
0
0
<COMMON> 25,638,575
<OTHER-SE> 6,222,067
<TOTAL-LIABILITY-AND-EQUITY> 31,915,905
<SALES> 0
<TOTAL-REVENUES> 26,861,682
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,962,313
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,173
<INCOME-PRETAX> 24,728,196
<INCOME-TAX> 5,715,000
<INCOME-CONTINUING> 19,013,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,013,196
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
