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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 SEPTEMBER 30, 1998
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
2068 Main Street Suite C, P.O. Box 1895
Ferndale, WA 98248
(360) 380-4467
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: 25,423,221 shares of the
Company's Common Stock were outstanding as of November 11, 1998.
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AZCO MINING INC. (DELAWARE)
Statements contained in the quarterly report that are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from the estimated results. Such risks and uncertainties are detailed in
filings with the Securities and Exchange Commission.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Stockholders' Equity 6
Notes to Interim Consolidated Financial
Statements 7-9
</TABLE>
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AZCO MINING INC. (DELAWARE)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPT., 30 JUNE, 30
1998 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $16,458,216 $18,320,882
Restricted cash 16,165 16,165
Prepaid and other 226,261 201,061
Income tax receivable 782,000 782,000
------------ -----------
Total current assets 17,482,642 19,320,108
------------ -----------
Property and equipment:
Furniture and equipment 90,440 90,440
Less accumulated depreciation (70,463) (66,382)
------------ -----------
19,977 24,058
------------ -----------
Investments and advances 1,103,269 134,778
Other assets 7,725 7,725
------------ -----------
$ 18,613,613 $ 19,486,669
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 88,869 $ 299,061
------------ -----------
Total current liabilities 88,869 299,061
------------ -----------
Commitments and contingencies
Stockholders' equity
Common stock: $.002 par value, 100,0000,000 shares
authorized; 25,423,221 and 25,680,497 shares
outstanding as of September 30, 1998 and June 30,
1998 respectively 51,559 51,361
Additional paid-in capital 26,065,830 25,999,733
Deficit (7,592,645) (6,863,486)
------------ -----------
18,524,744 19,187,608
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Total liabilities and stockholders' equity $ 18,613,613 $ 19,486,669
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AZCO MINING INC.
(DELAWARE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
<S> <C> <C>
INCOME:
Interest income $ 261,965 $ 280,143
---------- -----------
261,965 280,143
---------- -----------
EXPENSES:
Salaries 195,805 179,078
General and administrative 197,606 281,080
Exploration 570,412 847,658
Accounting and legal 23,220 71,532
Amortization and depreciation 4,081 6,247
---------- -----------
991,124 1,385,595
---------- -----------
Loss before income taxes (729,159) (1,105,452)
Income Taxes (87,000)
---------- -----------
NET LOSS $ (729,159) $(1,018,452)
========== ===========
Basic loss per common share $ (0.03) $ (0.04)
========== ===========
Diluted loss per common share $ (0.03) $ (0.04)
========== ===========
WEIGHTED AVERAGE COMMON SHARES 25,657,133 25,636,979
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AZCO MINING INC. (DELAWARE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (729,159) $(1,018,452)
Adjustments to reconcile net loss to net cash
Used in operations:
Stock issued for mineral properties 234,375 50,000
Depreciation and amortization 4,081 6,246
Changes in assets and liabilities, net:
Prepaid and other assets (25,200) (182,912)
Accounts payable and accrued liabilities (210,192) (159,750)
Income tax refund (87,000)
------------- ------------
Net cash used for operating activities (726,095) (1,391,868)
------------- ------------
Cash flows from investing activities:
Advances from Indonesian projects 244,750
Purchases of furniture and equipment (2,900)
Investments and advances (968,491)
------------- ------------
Net cash provided by (used for) investing activities (968,491) 241,850
------------- ------------
Cash flows from financing activity:
Purchase of treasury stock (168,080)
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Net cash used for financing activity: (168,080)
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Net decrease in cash and cash equivalents (1,862,666) (1,150,018)
Cash and cash equivalents at beginning of period 18,320,882 17,080,260
------------- ------------
Cash and cash equivalents at end of period $ 16,458,216 $ 15,930,242
============= ============
</TABLE>
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AZCO MINING INC.
(DELAWARE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Additional
Stock Paid-In
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
Balance, June 30, 1998 25,680,497 $51,361 25,999,733 $(6,863,486)
Shares issued:
Property payments 375,000 750 233,625
Shares purchased:
Treasury stock (275,976) (552) (167,528)
Net Loss (729,159)
---------- ------- ----------- -----------
Balance September 30, 1998 25,779,521 $51,559 $26,065,830 $(7,592,645)
========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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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 period. 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.
AZCO Mining Inc. (Delaware) (the "Company") was formed on July 13, 1988 to
acquire mining properties and either develop or sell them. The Company will
consider properties of merit in almost any geographical location.
NOTE 2. PIEDRAS VERDES PROJECT (MEXICO)
The Company recently received a pre-feasibility study on the Piedras Verdes
project from its 70% project partner Phelps Dodge Corporation. The study,
assuming a copper price of $1.00/lb. estimates project operating costs below
$0.50 per pound, over a 10-year life with annual copper production of 130
million pounds. A $3 million work budget advancing the project towards a
bankable feasibility study over the next 18 months has been approved and is
being initiated by Phelps Dodge Corporation.
NOTE 3. MALI PROJECT (NORTHWESTERN AFRICA)
During the quarter ended September 30, 1998 the Company expensed $287,654
against its Mali Project. Included in project operating costs was $234,375 that
represented 375,000 shares of the Company's stock issued under the terms of the
Lines Overseas Management Agreement of April 6, 1998. The operating costs are
included in exploration costs in the accompanying statement of operations. The
Company, as of September 30, 1998, had advanced to the Mali Project a total of
$5,123,642.
Effective August 5, 1998 the Company signed a Heads of Agreement with Randgold
Resources Limited ("Randgold") whereby Randgold acquired the right to earn up
to 75% of the Company's interest in West Africa Gold and Exploration S.A.
("WAG"). To earn this consideration Randgold has agreed, over the next 36
months, to conduct exploration on the WAG concessions at a minimum cost of $2
million, with the aim of establishing whether there is a viable economic gold
resource, as defined in the heads of agreement, of at least one million ounces.
Thereafter Randgold shall prepare a Bankable Feasibility Study on any such
resource for WAG within a further 12 months in order to earn its interest
therein.
7
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AZCO MINING INC. (DELAWARE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 4. PONGKOR PROJECT (INDONESIA)
The Company has completed a geologic evaluation of the Pongkor properties and
has compiled an extensive report that is currently being disseminated to a
number of companies, which have expressed an interest in joint-venturing the
properties.
NOTE 5. BENITOITE PROJECT (SAN BENITO COUNTY, CALIFORNIA)
On December 5, 1997 the Company announced that it had acquired the option to
purchase a Benitoite Gem Mine in San Benito County, California. The Company
paid $20,000 to have the exclusive right to evaluate the property until
February 1, 1999. On or before this date the Company may elect to purchase the
Project outright for $1,500,000, unencumbered by royalty. The Company may elect
to relinquish the option to purchase the Project with no further obligations at
anytime prior thereto.
The Company is currently evaluating the results of its due diligence on the
project and its Benitoite market feasibility study. The Company is also in
negotiations with potential joint-venture partners interested in participating
in the Benitoite project.
NOTE 6. LA ADELITA PROPERTY (MEXICO)
On July 21, 1998, the Company entered into an option agreement with Minera
Cortez whereby the Company was granted an option to earn up to a 70% interest
in the La Adelita property in Sonora, Mexico under the following terms:
i. by subscribing for 100,000 common shares of Cortez at Cdn. $0.25 per share
ii. by making option payments and paying finder's fees on behalf of Cortez
totaling $165,000 over the next five years
iii. by incurring exploration expenditures on the property totaling $500,000
over the next three years.
NOTE 7. SHARE REPURCHASE
On August 6, 1998 the Company approved the repurchase of up to 1,284,024 shares
of its issued and outstanding common stock on the American Stock Exchange
commencing August 13, 1998 and continuing up until August 13, 1999. The maximum
authorized repurchase price is $1.50 per common share. The Company repurchased
632,276 shares through November 11, 1998.
8
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AZCO MINING INC. (DELAWARE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 8. INVESTMENTS AND ADVANCES
On May 22, 1998 the Company entered into an agreement to purchase a $1,500,000
convertible debenture of Oro Argentina Limited (OAL) for the purpose of
financing the first phase of the Chiqua White Bentonite Project. At September
30, 1998, $1,040,185 has been drawn against the debenture by OAL.
The debenture draws interest at 12% per annum and is due on September 1, 2000.
During this term, the Company can convert the debenture into shares of OAL at
$0.50 per unit, where each unit consists of one common share and one warrant,
convertible into common shares within two years of issue at $0.60 per share.
The ultimate recovery of the debenture is dependent on the ability of OAL to
realize its exploration and development assets, which are subject to the
measurement uncertainty inherent in such assets.
NOTE 9. OUTSTANDING OPTIONS
At September 30, 1998 the Company had 2,189,500 options outstanding which are
exercisable between $0.52 and $3.00 per common share at varying dates through
2003.
9
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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
Corporation for $40 million. All material revenues since the sale have been a
result of interest earned on the proceeds of the sale of assets to Phelps Dodge
Corporation.
The Company is currently evaluating a number of opportunities in the mining
industry for the purpose of merger, joint venture or project acquisition.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997.
Net loss for the three months ended September 30, 1998 was $729,159 compared to
a net loss of $1,018,452 for the three months ended September 30, 1997. The
decreased net loss is the result of reduced exploration expense for the current
period.
Exploration expenses was $570,412 for the three months ended September 30, 1998
compared to $847,658 for the three months ended September 30, 1997. The
decrease in exploration expense for the current period is the result of
decreased cash calls by Cobre de Mayo on the Piedras Verdes project.
During the three month period ended September 30, 1998 the Company advanced an
additional $940,185 against the OAL debenture. Through September 30, 1998 the
Company has advanced $1,040,185 to OAL under the May 22, 1998 debenture
agreement.
FINANCIAL CONDITION
As of September 30, 1998 the Company had cash and cash equivalents of
$16,458,216.
The Company believes that for the current fiscal year ended June 30, 1999 all
capital requirements will be funded with present cash and cash equivalents.
10
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AZCO MINING INC. (DELAWARE)
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEMS 2-4: NOT APPLICABLE
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K
None.
11
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AZCO MINING INC. (DELAWARE)
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.
Date: November 13, 1998 BY: /s/ Alan P. Lindsay
----------------- --------------------------
Alan P. Lindsay
CEO, President and Chairman
Date: November 13, 1998 BY: /s/ Ryan A. Modesto
----------------- ---------------------------
Ryan A. Modesto
Vice President of Finance
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,458,216
<SECURITIES> 0
<RECEIVABLES> 1,024,426
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,482,642
<PP&E> 1,201,434
<DEPRECIATION> (70,463)
<TOTAL-ASSETS> 18,613,613
<CURRENT-LIABILITIES> 88,869
<BONDS> 0
0
0
<COMMON> 51,559
<OTHER-SE> 18,473,185
<TOTAL-LIABILITY-AND-EQUITY> 18,613,613
<SALES> 0
<TOTAL-REVENUES> 261,965
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 991,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (729,159)
<INCOME-TAX> 0
<INCOME-CONTINUING> (729,159)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (729,159)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
