<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 DECEMBER 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)
IRS 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: 25,252,121 shares of the
Company's Common Stock were outstanding as of February 11, 1999.
<PAGE> 2
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
<PAGE> 3
AZCO MINING INC. (DELAWARE)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS DEC., 31 JUNE, 30
1998 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,071,504 $ 18,320,882
Restricted cash 16,165 16,165
Prepaids and other 170,900 201,061
Income tax receivable 782,000 782,000
------------ ------------
Total current assets 16,040,569 19,320,108
------------ ------------
Property and equipment:
Furniture and equipment 97,925 90,440
Less accumulated depreciation (74,088) (66,382)
------------ ------------
23,837 24,058
------------ ------------
Investments and advances 1,195,262 134,778
Other assets 7,725 7,725
------------ ------------
$ 17,267,393 $ 19,486,669
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 43,215 $ 299,061
------------ ------------
Total current liabilities 43,215 299,061
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock: $.002 par value, 100,000,000 shares authorized:
25,252,121 and 25,680,497 shares outstanding as
of December 31, 1998 and June 30,1998, respectively 50,504 51,361
Additional paid-in capital 25,767,591 25,999,733
Deficit (8,593,917) (6,863,486)
------------ ------------
17,224,178 19,187,608
------------ ------------
Total liabilities and stockholders' equity $ 17,267,393 $ 19,486,669
============ ============
</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 SIX MONTHS ENDED DECEMBER
DECEMBER 31, DECEMBER 31,
----------------------------------- -----------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INCOME:
Interest income $ 241,853 $ 264,871 $ 503,817 $ 545,014
------------ ------------ ------------ ------------
241,853 264,871 503,817 545,014
------------ ------------ ------------ ------------
EXPENSES:
Salaries 244,900 238,314 440,705 417,392
General and administrative 283,436 328,566 481,042 609,646
Exploration 657,469 576,357 1,227,881 1,424,015
Accounting and legal 53,693 157,934 76,913 229,466
Amortization and depreciation 3,626 4,666 7,707 10,913
Legal settlement costs 400,000 400,000
------------ ------------ ------------ ------------
1,243,124 1,705,837 2,234,248 3,091,432
------------ ------------ ------------ ------------
Loss before income taxes (1,001,271) (1,440,966) (1,730,431) (2,546,418)
Income Taxes (1,628,237) (1,715,237)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,001,271) $ 187,271 $ (1,730,431) $ (831,181)
============ ============ ============ ============
BASIC INCOME (LOSS) PER COMMON SHARE $ (0.04) $ 0.01 $ (0.07) $ (0.03)
============ ============ ============ ============
DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.04) $ 0.01 $ (0.07) $ (0.03)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES 25,438,745 25,627,392 25,547,939 25,608,343
============ ============ ============ ============
</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>
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,730,431) $ (831,181)
Adjustments to reconcile net loss to net cash
Used in operations:
Stock issued for mineral properties 234,375 50,000
Depreciation and amortization 7,706 10,913
Changes in assets and liabilities, net:
Prepaid and other assets 30,161 (136,671)
Deposit 4,000,000
Accounts payable and accrued liabilities (255,846) 254,746
Income tax refund (1,715,237)
------------ ------------
Net cash provided by (used for) operating activities (1,714,035) 1,632,570
------------ ------------
Cash flows from investing activities:
Advances from Indonesian projects 244,750
Investments and advances (1,060,484)
Purchases of furniture and equipment (7,485) (2,900)
Proceeds from sale of furniture and equipment 5,101
------------ ------------
Net cash provided by (used for) investing activities (1,067,969) 246,951
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock 35,658
Purchase of treasury stock (467,374)
------------ ------------
Net cash provided by (used for) financing activity: (467,374) 35,658
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,249,378) 1,915,179
Cash and cash equivalents at beginning of period 18,320,882 17,080,260
------------ ------------
Cash and cash equivalents at end of period $ 15,071,504 $ 18,995,439
============ ============
</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 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 (803,376) (1,607) (465,767)
Net Loss (1,730,431)
------------ ------------ ------------ ------------
Balance December 31, 1998 25,252,121 $ 50,504 $ 25,767,591 $ (8,593,917)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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 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 $3.6 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 six month period ended December 31, 1998 the Company expensed
$379,983 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 December 31, 1998, had advanced to the Mali
Project a total of $5,215,971.
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 deposit, as
defined in the heads of agreement, of at least one million ounces. Thereafter
Randgold shall prepare a Bankable Feasibility Study on any such deposit for WAG
within a further 12 months in order to earn its interest therein.
7
<PAGE> 8
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. The Company has since received an extension through March 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 any time 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; and
iii. by incurring exploration expenditures on the property totaling $500,000
over the next three years.
8
<PAGE> 9
AZCO MINING INC. (DELAWARE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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
803,376 shares through December 31, 1998.
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 December 30,
1998, $1,123,711 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 December 31, 1998 the Company had 2,589,500 options outstanding which are
exercisable between $0.52 and $3.00 per common share at varying dates through
2003.
9
<PAGE> 10
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.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997.
The net loss for the six months ended December 31, 1998 was $1,730,431 compared
to a net loss of $831,181 for the six months ended December 31, 1997. The
increase in the current period net loss is the result of the accrual of a
$1,715,237 federal income tax refund during the six months ended December 31,
1997 off set by legal settlement costs of $400,000 for the same period.
Accounting and legal expense was $76,913 for the six months ended December 31,
1998 compared to $229,466 for the six months ended December 31, 1997. The
decrease in accounting and legal expense as well as legal settlement costs was
the result of the full and final settlement of all matters and claims with AIOC
Corporation.
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997.
Net loss for the three months ended December 31, 1998 was $1,001,271 compared to
a gain of $187,271 for the three months ended December 31, 1997. The increase in
the current period net loss is the result of the accrual of a $1,628,237 federal
income tax refund during the three months ended December 31, 1997 off set by
legal settlement costs of $400,000 for the same period.
10
<PAGE> 11
AZCO MINING INC. (DELAWARE)
RESULTS OF OPERATIONS
(CONTINUED)
Accounting and legal expense was $53,693 for the three months ended December 31,
1998 compared to $157,934 for the six months ended December 31, 1997. The
decrease in accounting and legal expense as well as legal settlement costs was
the result of the full and final settlement of all matters and claims with AIOC
Corporation.
During the three month period ended December 31, 1998 the Company advanced an
additional $83,526 against the OAL debenture. Through December 31, 1998 the
Company has advanced $1,123,711 to OAL under the May 22, 1998 debenture
agreement.
FINANCIAL CONDITION
As of December 30, 1998 the Company had cash and cash equivalents of
$15,071,504.
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.
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
<PAGE> 12
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: February 12, 1999 BY: /s/ Alan P. Lindsay
---------------------------------
Alan P. Lindsay
CEO, President and Chairman
Date: February 12, 1999 BY: /s/ Ryan A. Modesto
---------------------------------
Ryan A. Modesto
Vice President of Finance
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,071,504
<SECURITIES> 0
<RECEIVABLES> 969,065
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,040,569
<PP&E> 1,300,912
<DEPRECIATION> (74,088)
<TOTAL-ASSETS> 17,267,393
<CURRENT-LIABILITIES> 43,215
<BONDS> 0
0
0
<COMMON> 50,504
<OTHER-SE> 17,173,674
<TOTAL-LIABILITY-AND-EQUITY> 17,267,393
<SALES> 0
<TOTAL-REVENUES> 503,817
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,234,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,730,431)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,730,431)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,730,431)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
