<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, 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: 25,680,497 shares of the
Company's Common Stock were outstanding as of May 14, 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
----
<S> <C>
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 7-9
</TABLE>
2
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AZCO MINING INC. (DELAWARE)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH, 31 JUNE, 30
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,457,513 $ 17,080,260
Prepaids and other 219,807 80,893
Income tax receivable 566,000 479,728
------------ ------------
Total current assets 20,243,320 17,640,881
------------ ------------
Property and equipment:
Furniture and equipment 146,862 158,539
Less accumulated depreciation (117,362) (111,259)
------------ ------------
29,500 47,280
------------ ------------
Refundable deposits 370,505 615,255
Restricted cash 34,106 34,106
Deposit (Note 6) 4,000,000
Other assets 7,725 7,725
------------ ------------
$ 20,685,156 $ 22,345,247
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 181,800 $ 337,050
------------ ------------
Total current liabilities 181,800 337,050
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock: $.002 par value, 100,000,000 shares authorized:
25,680,497 and 25,579,834 shares issued and outstanding as
of March 31, 1998 and June 30,1997 respectively 51,361 51,160
Additional paid-in capital 25,880,503 25,776,411
Deficit (5,428,508) (3,819,374)
------------ ------------
20,503,356 22,008,197
------------ ------------
Total liabilities and stockholders' equity $ 20,685,156 $ 22,345,247
============ ============
</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 MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME:
Interest income $ 240,508 $ 301,512 $ 785,522 $ 1,023,413
Other income 9,852 9,852 25,000
------------ ------------ ------------ ------------
250,360 301,512 795,374 1,048,413
------------ ------------ ------------ ------------
EXPENSES:
Salaries 213,449 377,016 630,843 738,124
General and administrative 254,055 271,346 863,701 724,308
Exploration 652,261 3,813,595 2,076,276 5,447,490
Accounting and legal 81,882 106,956 311,347 236,943
Amortization and depreciation 4,666 8,386 15,578 26,238
Financing and acquisitions 113,031
Legal settlement costs (Note 6) 400,000
------------ ------------ ------------ ------------
1,206,313 4,577,299 4,297,745 7,286,134
------------ ------------ ------------ ------------
Loss before income taxes (955,953) (4,275,787) (3,502,371) (6,237,721)
Income Taxes (178,000) (200,284) (1,893,237) (334,580)
------------ ------------ ------------ ------------
NET (LOSS) $ (777,953) $ (4,075,503) $ (1,609,134) $ (5,903,141)
============ ============ ============ ============
BASIC LOSS PER COMMON SHARE (NOTE 8) $ (0.03) $ (0.16) $ (0.06) $ (0.23)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES 25,678,410 25,520,160 25,631,358 25,515,310
============ ============ ============ ============
</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>
NINE MONTHS ENDED MARCH 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,609,134) $ (5,903,141)
Adjustments to reconcile net loss to net cash
Used in operations:
Stock issued for mineral properties 50,000
Depreciation and amortization 15,578 26,238
Changes in assets and liabilities, net:
Other assets (138,914) 102,732
Deposit 4,000,000
Accounts payable and accrued liabilities (155,250) 1,175
Income tax refund (86,272) (217,775)
------------ ------------
Net cash provided by (used for) operating activities 2,076,008 (5,990,771)
------------ ------------
Cash flows from investing activities:
Advances from (to) Indonesian projects 244,750 (1,116,983)
Purchases of furniture and equipment (2,900) (6,348)
Proceeds from sale of furniture and equipment 5,101
Proceeds from maturity of investment securities 699,595
------------ ------------
Net cash provided by (used for) investing activities 246,951 (423,736)
------------ ------------
Cash flows from financing and offering activity:
Proceeds from sale of common stock 54,293 20,000
------------ ------------
54,293 20,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,377,252 (6,394,507)
Cash and cash equivalents at beginning of period 17,080,260 24,295,805
------------ ------------
Cash and cash equivalents at end of period $ 19,457,512 $ 17,901,298
============ ============
Cash paid during the period for:
Interest $ 0 $ 0
============ ============
</TABLE>
5
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AZCO MINING INC.
(DELAWARE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common
Stock Additional
--------------------------------- Paid-In
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, June 30,1997 25,579,834 $ 51,160 25,776,411 $ (3,819,374)
Shares issued:
Purchase of mineral properties 41,091 82 49,918
Exercise of stock options 59,572 119 54,174
Net Loss (1,609,134)
------------ ------------ ------------ ------------
Balance, March 31, 1998 25,680,497 $ 51,361 $ 25,880,503 $ (5,428,508)
============ ============ ============ ============
</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. MALI PROJECT (NORTHWESTERN AFRICA)
During the quarter ended March 31, 1998 the Company provided the Mali Project
$173,457 for operating costs. The operating costs are included in exploration
costs in the accompanying statement of operations. The Company, as of March 31,
1998, had advanced to the Mali Project a total of $4,685,256. On December 18,
1997, Western African Gold and Exploration Company - SA, owned 100% by the
Company, was granted a new exploration agreement on the property holdings of the
Mali Project. This new agreement runs through the year 2002 and has a total work
commitment of approximately $3,360,000 assigned to it, which has been surpassed
to date. The Company is currently engaged in discussions with several companies
interested in the Mali Project and it is the Company's intent to joint venture
the project.
Effective November 18, 1997 the Company and Lion Mining Corporation Limited
("Lion") entered into an agreement whereby Lion assigned to the Company all of
its interest in the Mali agreement and Lion agreed to grant the Company first
right on all mining opportunities which are brought to it for a minimum three
year period. For this consideration the Company indemnifies and holds harmless
Lion from all manner of action in connection with the Mali Project. Mr. Andrew
Malim, Managing Director of Lion, was a member of the Company's Board of
Directors until his resignation from such directorship effective April 24, 1998.
NOTE 3. PONGKOR PROJECT (INDONESIA)
The Company is attempting to establish ownership of an Indonesian company to
hold its interest in the Pongkor Properties. Once this has been established it
is the intent of the Company to find a joint venture partner for the Pongkor
Properties.
7
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AZCO MINING INC. (DELAWARE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 4. 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.
The Company has begun its due diligence on the project, which includes drilling,
bulk sampling and district reconnaissance. In addition to the technical
evaluation, the Company has retained MVI Marketing Ltd. of Beverly Hills to
conduct a market feasibility study.
NOTE 5. REFUNDABLE INCOME TAXES
The Company's federal taxable loss for the nine months ended March 31, 1998 can
be carried back to recover federal income taxes paid for the year ended June 30,
1996. Accordingly, the statement of operations for the nine months ended March
31, 1998 includes an income tax credit of $566,000.
NOTE 6. AIOC DEPOSIT
During the nine months ended March 31, 1998 the Company settled all outstanding
differences with AIOC and the $4,000,000 held in escrow to satisfy any award in
the AIOC arbitration was returned to the Company. The Company paid $400,000 to
AIOC in full and final settlement of all matters and claims.
NOTE 7. OUTSTANDING OPTIONS
At March 31, 1998 the Company had 2,285,500 options outstanding which are
exercisable between $0.85 and $2.50 per common share at varying dates through
2002.
8
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AZCO MINING INC. (DELAWARE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 8. CHANGE IN METHOD OF CALCULATING EARNINGS PER SHARE
Effective for the interim period ended December 31, 1997, the Company adopted
SFAS 128, Earnings per Share, a simplified standard for computing earnings per
share. Basic earnings per share calculated in accordance with SFAS 128 are the
same as primary earnings per share calculated and presented by the Company under
the previous method, for all periods presented. Stock options, which could
potentially dilute basic earnings per share in the future, have not been
included in the computation of dilutive earnings per share because they are
anti-dilutive for the periods presented.
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.
Effective March 4, 1998 Minera Phelps Dodge Mexico s. de R.L. de C.V. terminated
the Suaqui Verde Mineral Exploration Agreement with AZCO Mining Inc. and Cobre
de Suaqui Verde S.A. de C.V. It is the intent of AZCO to analyze the results of
the recent work on the Suaqui Verde project and make a decision as to its
continued involvement with the project.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997.
The net loss for the nine months ended March 31, 1998 was $1,609,134 compared to
a net loss of $5,903,141 for the nine months ended March 31, 1997. The decrease
in the current period net loss is the result of reduced exploration expenses and
increased federal income tax refunds in fiscal 1998.
Exploration expense was $2,076,276 for the nine months ended March 31, 1998
compared to $5,447,490 for the nine months ended March 31, 1997. The decrease in
exploration expense for the current period is the result of decreased activity
on the Mali Project.
10
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AZCO MINING INC. (DELAWARE)
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
Net loss for the three months ended March 31, 1998 was $777,953 compared to a
net loss of $4,075,503 for the three months ended March 31, 1997. The decrease
in the current period net loss is the result of reduced exploration expenses for
the current period.
Salary expense was $213,449 for the three months ended March 31, 1998 compared
to $377,016 for the three months ended March 31, 1997. The decrease was due to a
severance payment expensed in the three months ended March 31, 1997.
Exploration expense was $652,261 for the three months ended March 31, 1998
compared to $3,813,595 for the three months ended March 31, 1997. The decrease
in exploration expense for the current period is the result of decreased
activity on the Mali Project.
FINANCIAL CONDITION
As of March 31, 1998 the Company had cash and cash equivalents of $19,457,513.
The Company believes that for the current fiscal year end June 30, 1998 all
capital requirements will be funded with present cash and cash equivalents.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
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AZCO MINING INC. (DELAWARE)
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On November 24, 1997 a Deed of Release and Compromise was entered into by AZCO
Mining Inc, Sanchez Mining Inc. and AIOC Corporation settling all outstanding
differences between the parties including, in particular, certain matters being
arbitrated under the rules of the London Metal Exchange. During the nine months
ended March 31, 1998 the Company received the $4,000,000 held in escrow to
satisfy any award in the AIOC arbitration and paid $400,000 to AIOC in full and
final settlement of all matters and claims.
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.
12
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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: May 14, 1998 BY: /s/ Alan P. Lindsay
------------------- --------------------
Alan P. Lindsay
CEO, President and Chairman
Date: May 14, 1998 BY: /s/ Ryan A. Modesto
------------------- -------------------
Ryan A. Modesto
Principal Accounting Officer
13
<PAGE> 14
EXHIBIT INDEX
Exhibit Number Description
- -------------- ------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 19,457,513
<SECURITIES> 0
<RECEIVABLES> 785,807
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,243,320
<PP&E> 559,198
<DEPRECIATION> (117,362)
<TOTAL-ASSETS> 20,685,156
<CURRENT-LIABILITIES> 181,800
<BONDS> 0
0
0
<COMMON> 51,361
<OTHER-SE> 20,451,995
<TOTAL-LIABILITY-AND-EQUITY> 20,685,156
<SALES> 0
<TOTAL-REVENUES> 795,374
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,297,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,502,371)
<INCOME-TAX> (1,893,237)
<INCOME-CONTINUING> (1,609,134)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,609,134)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
