U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999 Commission File No. 0-9416
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(Exact name of registrant as specified in its charter)
Delaware #13-2879202
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
76 Beaver Street, Suite 500, New York, New York 10005
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area code (212) 344-2828
The Number of Shares Outstanding of Common Stock
$.01 Par Value, at March 31, 1999 3,955,169
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 |_|
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ --
------------ ------------
TOTAL CURRENT ASSETS -- --
Mining, milling and other property and equipment,
net of accumulated depreciation and depletion of
$2,112,192 and $2,105,515 4,801,903 4,808,580
Mining reclamation bonds 135,001 134,602
------------ ------------
$ 4,936,904 $ 4,943,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 607,116 $ 654,164
Payroll and other taxes payable 29,960 29,960
Convertible debentures 145,000 145,000
Notes payable - related party and others 218,965 218,965
Note payable - related party 1,313,551 1,191,586
------------ ------------
TOTAL CURRENT LIABILITIES 2,314,592 2,239,675
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share;
100,000,000 shares authorized; 3,955,169 shares
issued and outstanding 988,793 988,793
Additional paid-in capital 17,414,755 17,414,755
Deficit accumulated during the development stage (15,781,236) (15,700,041)
------------ ------------
2,622,312 2,703,507
------------ ------------
$ 4,936,904 $ 4,943,182
============ ============
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
1999 1998 Inception
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales $ -- $ -- $ 876,082
Interest income 399 980 549,094
Other income -- -- 79,397
------------ ------------ ------------
399 980 1,504,573
------------ ------------ ------------
EXPENSES:
Mine expenses and environmental remediation costs 14,677 12,346 3,600,974
Write-down of mining and milling and other property
and equipment -- -- 1,665,000
Depreciation and depletion 6,677 30,495 2,307,541
General and administrative expenses 25,642 101,494 6,274,019
Interest expense 34,599 27,095 1,176,078
Amortization of debt issuance expense -- -- 683,047
Equity in net loss and settlement of claims of Joint Venture -- -- 1,059,971
Other -- -- 519,179
------------ ------------ ------------
81,595 171,430 17,285,809
------------ ------------ ------------
NET LOSS $ (81,196) $ (170,450) $(15,781,236)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (.02) $ (.04)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 3,955,169 3,955,169
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
1999 1998 Inception
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (81,196) $ (170,450) $(15,781,236)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and depletion 6,677 30,495 2,307,541
Provision for bad debt -- -- 350,000
Write-down of mining and milling and other
property and equipment -- -- 1,400,000
Amortization of debt issuance expense -- -- 683,047
Loss on Sale of Equipment -- -- 265,000
Value of common stock issued for:
Services and interest -- -- 1,934,894
Settlement of litigation -- -- 100,000
Settlement of claims by joint venture partner -- -- 936,000
Compensation resulting from stock options granted -- -- 311,900
Value of stock options granted for services -- -- 112,500
Equity in net loss of joint venture -- -- 123,971
Other -- -- (7,123)
Changes in operating assets and liabilities:
Interest accrued on mining reclamation bonds (399) (980) (10,001)
Accounts payable and accrued expenses (47,047) 99,840 869,332
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (121,965) (41,095) (6,404,175)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to mining, milling and other
property and equipment -- -- (5,120,354)
Purchases of mining reclamation bonds, net -- -- (125,000)
Deferred mine development costs and other expenses -- -- (255,319)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES -- -- (5,500,673)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock -- -- 8,758,257
Issuance of underwriter's stock warrants -- -- 100
Commissions on sales of common stock -- -- (381,860)
Purchases of treasury stock -- -- (12,500)
Payments of deferred underwriting costs -- -- (63,814)
Proceeds from exercise of stock options -- -- 306,300
Issuance of convertible debentures and notes -- -- 1,505,000
Proceeds of advances from joint venture partner -- -- 526,288
Advances to joint venture partner -- -- (181,017)
Payments of debt issuance expenses -- -- (164,233)
Proceeds of other notes and loans payable 121,965 40,017 1,725,034
Repayments of other notes and loans payable -- -- (120,000)
Proceeds of loans from affiliate -- -- 55,954
Repayments of loans from affiliate -- -- (48,661)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 121,965 40,017 11,904,848
------------ ------------ ------------
</TABLE>
(Continued)
4
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
1999 1998 Inception
------------ ------------ ------------
<S> <C> <C> <C>
DECREASE IN CASH $ -- $ (1,078) $ --
CASH - beginning of period -- 1,078 --
------------ ------------ ------------
CASH - end of period $ -- $ -- $ --
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ -- $ 3,889 $ 299,868
============ ============ ============
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position of
WCM CAPITAL, INC. (the "Company") as of March 31, 1999, and its results of
operations and cash flows for the three months ended March 31, 1999 and
1998. Information included in the condensed balance sheet as of December
31, 1998 has been derived from the audited balance sheet in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998
(the"10-KSB") filed with the Securities and Exchange Commission. Certain
terms used herein are defined in the 10-KSB. Accordingly, these unaudited
condensed financial statements should be read in conjunction with the
financial statements, notes to financial statements and the other
information in the 10-KSB.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results of operations for the full year
ending December 31, 1999.
NOTE 2 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. However, the Company has had
recurring losses and cash flow deficiencies since inception. As at March
31, 1999, the Company has an accumulated deficit of $15,781,236, current
liabilities of $2,314,592, and a working capital deficiency of $2,314,592.
Also, the Company was in default on the payment of the principal balance
and accrued interest on certain notes and debentures and certain accounts
payables are past due. In addition to the payment of its current
liabilities, management estimates that the Company will incur general,
administrative, and other costs and expenditures, exclusive of any costs
and expenditures related to any mining and milling operations, at the rate
of approximately $20,000 per month plus interest during 1999. Such matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that may
result from the outcome of the above uncertainty.
U.S. Mining Co. and its affiliates have pledged to provide financing to the
Company on an as needed basis until on or about January 1, 2000. The funds
received from USM and its affiliates will cover the general, administrative
and other costs approximated at $20,000 per month plus interest. Additional
monies raised from USM will help finance $750,000 of funds the Company
estimates will be needed to ready the Franklin Mine and Milling properties
for the commencement of extraction and milling. Additional funds will be
needed to support the extraction and milling processes once underway as
well as to upgrade the processing facilities to allow for an increase in
ore processing capacity.
There can be no assurance that the Company will have adequate funds
available to repay the funds advanced by USM and its affiliates. In the
event that the Company defaults on its obligations, USM may foreclose on
the assets secured by the USM note. Such foreclosure actions by USM would
have a material adverse effect on the future operations of the Company and
the Company's ability to explore the Franklin Mines.
Substantially all of the $4,801,903 of mineral properties and equipment
included in the accompanying balance sheet as of March 31, 1999, is related
to exploration properties. The ultimate realization of the Company's
investment in exploration properties and equipment is dependent upon the
success of future property sales, the existence of economically recoverable
reserves, the ability of the Company to obtain financing or make other
arrangements for development, and upon future profitable production.
6
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 3 - NOTES PAYABLE RELATED PARTY AND OTHERS
Notes payable related party and others consist of the following at March
31, 1999:
12% unsecured demand note due to an affiliate of the
former president of the Company $ 71,965
Secured promissory note (a) 60,000
Unsecured promissory notes (b) 87,000
--------
$218,965
========
(a) The outstanding principal balance of the note became payable on July
18, 1996 and the Company is in default. The note is guaranteed by
certain officers of Gems and is collateralized through a subordinated
security interest in the Company's mining reclamation bond. Interest
on the note is payable based on the rate of interest applicable to the
mining reclamation bond.
(b) This principal amount represents four unsecured promissory notes
comprised of one $36,000 note and three $17,000 notes payable. The
Company assumed these obligations on November 25, 1997, as part of the
acquisition from USM of the remaining interest in the Joint Venture.
These notes were in default when assumed by the Company, and remain in
default as of March 31, 1999. Interest is being accrued at rates
between 8% and 17% per annum.
Accrued interest on the above notes at March 31, 1999 aggregated
approximately $51,000.
NOTE 4 - CONVERTIBLE DEBENTURES
The Company's convertible debt at March 31, 1999 consist of:
12.25% convertible debenture originally due 12/31/94 $145,000
As of March 31, 1999, the Company was in default with respect to the
payment of the $145,000 principal balance of the debenture and accrued
interest of approximately $71,000. As a result of its default, the Company
is subject to and may be subject to further litigation by the Transfer
Agent/Trustee under the Indenture Agreement or from debenture holders
seeking immediate repayment of principal plus interest and other costs.
Management cannot assure that there will be funds available for the
required payments or what the effects will be of any actions brought by or
on behalf of the debenture holders.
NOTE 5 - NOTE PAYABLE - RELATED PARTY
The Company had outstanding a 8% promissory note balance of $1,313,551, at
March 31, 1999, which represents monies advanced to the Company by U.S.
Mining, Inc. ("USM") and obligations assumed in connection with the
contributions of Joint Venture interests in 1997. The note was payable on
May 4, 1998, and is secured by all the Company's mining claims and mining
properties, as well as its interests in the Hayden/Kennec Leases. The note
is subject to successive 30-day extensions throughout 1998 upon the mutual
agreement of the maker and lender for no additional consideration. On March
5, 1998, POS assigned this note to USM. Both POS and USM are considered
related parties because they can exert significant influence over the
Company. Accrued interest at March 31, 1999 was approximately $117,000.
7
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Lease Agreements
The original Hayden/Kennec Leases provided for payment by the Company of
certain liabilities relating to the leased property and a minimum royalty
payment of $2,000 per month or 5% of the Company's net smelter royalties
realized from production, whichever is greater to Mrs. Hayden and Mrs.
Kennec. The original Hayden/Kennec Leases expired in November 1996, at
which time the Company had the option to purchase the leasehold rights for
a purchase price of $1,250,000 less any royalties previously paid as of the
expiration date. As of November 1996, the Company had paid approximately
$480,000 in royalties.
To further secure the ability of the Company and the Joint Venture to
utilize the leasehold covered by the Hayden/Kennec Leases, Gems entered
into an agreement with Mrs. Hayden to purchase her interest in the
Hayden/Kennec Leases (the "Hayden Interest".) Gems had advised the Company
that under Colorado Law, if an owner of 50% of mineral rights desires to
exploit those rights, then the remaining 50% owner could not object to the
exploitation of the rights, provided the non-participating owner received
50% of the net profits generated from such exploitation. Therefore, by
acquiring the Hayden Interest, the Company would be free to exploit the
leasehold interests comprising the Franklin mining properties irrespective
of whether Mrs. Kennec elected not to renew her portion of the
Hayden/Kennec Leases or sell her interest to the Company as per the terms
of the Agreement. However, on or about November 11, 1997, Gems defaulted on
its obligations under the terms of the purchase agreement and the agreement
terminated.
On November 13, 1997, Hayden entered into an agreement to sell the Hayden
interests to USM for a purchase price of $75,000 (the "Hayden-USM Purchase
Agreement"). The purchase price is evidenced by note, due on February 2,
1998. Upon the execution of the Hayden-USM Purchase Agreement, USM agreed
to extend the Hayden/Kennec Leases upon the same terms and conditions
currently in effect through March 13th, 1998 (the "Extended Expiration
Date"). As of the date hereof, USM has not consummated the transaction
contemplated by the Hayden-USM Purchase Agreement; however, it is expected
that the transactions will close upon delivery by Hayden of clear title to
the interests being conveyed to USM. USM has continued to make royalty
payments to Mrs. Hayden as required by the Hayden-USM Purchase Agreement.
As of the date hereof, the Company has been advised by USM that the
Hayden-USM Purchase Agreement is in full force and effect.
On or about November 19, 1996, the Company entered into an agreement with
Mrs. Dorothy Kennec to extend her portion of the Hayden/Kennec Leases
through November 12, 1997. This agreement was further extended through
March 12, 1998; however, as of the date hereof, Mrs. Kennec has granted no
further extensions. There can be no assurance that the Company and Mrs.
Kennec will come to any agreement with respect to the use of her leasehold
interest or to purchase her interest in the future.
8
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
Environmental Matters
On January 31, 1997, the Company received approval from the DMG of its
March 6, 1996 amended application and, as of the date hereof, the Company
has no violations against it with respect to the Franklin Mines and Mill.
In addition, the Company posted a $252,000 bond required by the DMG from an
independent bonding company in exchange for (i) the deposit by the Company
of $125,000 in a trust account maintained for the benefit of the bonding
company, (ii) guarantees from the former Joint Venture partner and certain
of its principals and (iii) the posting of a performance bond from an
independent bonding company by one of the Joint Venture's contractors with
respect to the completion of the technical and remediation work required by
the regulatory authorities which was subsequently completed. As a result,
management believes that substantially all of the necessary environmental
and regulatory approvals have been obtained from DMG.
As of March 31, 1999, there are no formal violations against the Company
with respect to the Franklin Mines and Franklin Mill. However, there can be
no assurance that the Company will be able to adequately comply with the
conditions set forth in its permit approval or that future violations will
not arise and that such violations will not lead to interruptions in
operations at the Franklin Mines or Franklin Mill.
Litigation
The Company is involved in various litigation as explained below:
(a) The Company and others are defendants in the action related to a
dispute over fees for engineering consulting services supplied in the
amount of approximately $268,000. The Court has remanded the case to
arbitration. The case is currently in negotiation for settlement. An
accrued liability of $135,000 which the Company estimates to be its
portion of the total claim has been recorded in the accompanying
December 31, 1998 and March 31, 1999 financial statements.
(b) In September 1997, certain of the Company's 12.25% Convertible
Debenture holders (see Note 6) instituted an action against the
Company for payment of approximately $42,500 principal amount of its
12.25% Convertible Debentures plus accrued and unpaid interest
totaling approximately $13,000 and other costs and expenses related
thereto. The Company has answered the aforesaid complaint. Default was
entered against the Company in the amount of $42,500 plus interest,
costs and disbursements. The Company and USM have been negotiating
with the debenture holders but to this point no settlement agreement
has been reached. The continued default of the Company could result in
the Company being subject to additional legal proceedings. In
addition, there is no assurance that funds will be available to cure
the default or reach an acceptable settlement.
9
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
Note 6 - COMMITMENTS AND CONTINGENCIES (Continued)
(c) The Company is in litigation with Redstone Securities, Inc.
("Redstone") a company, which in the past had provided investment
banking and consulting services to the Company. Redstone was issued
stock as compensation for these services. Redstone alleged that it has
been restricted by the Company in its efforts to sell and/or trade
this stock. Redstone is now asserting claims for damages in an amount
in excess of the market value of the 120,000 shares, as adjusted, of
Company stock along with punitive damages (not less than $600,000)
allegedly premised upon the Company's intentional conduct in
restricting the sale of the aforementioned stock. Plaintiffs counsel
has expressed a willingness to settle the present demand is
approximately $350,000. Management of the Company feels Redstone's
charges are unfounded and plans to vigorously defend against these
charges. The shares received by Redstone are currently unrestricted.
Attorneys for the Company feel minimal liability if any appears to
exist, but in the unlikely event the Company is found 100% liable,
damages most likely will be limited to $127,200. An unfavorable
resolution of these matters could result in material liabilities or
charges that have not been reflected in the accompanying financial
statements.
NASDAQ Notification
In 1996, the Securities and Exchange Commission approved certain amendments
to the listing requirements for continued listing on the NASDAQ Small-Cap
Market. On February 27, 1998, subsequent to the balance sheet date, the
Company received a notification letter from NASDAQ informing the Company
that as of that date, the Company's common stock is not in compliance with
the new minimum bid price requirement of $1.00 which became effective on
February 23, 1998. The review of the Company's common stock price was based
upon the price data covering the previous 30 consecutive trade dates. The
Company has been given 90 calendar days, expiring May 28, 1998, in order to
regain compliance. The Company would be able to regain compliance if its
common stock trades at or above the minimum requirement of $1.00 for at
least 10 consecutive trade days. In the event that the Company's common
stock does not regain compliance within the 90-day period, NASDAQ has
advised the Company that it will issue a delisting letter which will
identify the review procedures available to the Company.
In order to mitigate the minimum bid price requirement the Company, on May
26, 1998 effectuated a twenty-five for one reverse stock split. After the
reverse split the Company's stock price remained above the $1.00 minimum
bid price requirement for the necessary ten-day period. On or about
November 10, 1998, the Company received another notification about
non-compliance with the minimum bid price requirement. During the month of
January 1999, the Company's stock price maintained a bid price above $1.00
for ten consecutive days, thereby bringing it back into compliance.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
The Company had no active mining or milling operations during the first quarter
of 1999, however, remediation work was substantially completed at the Franklin
Mine and Mill in preparation for the anticipated commencement of mining
operations.
Management estimates that the Company will incur general, administrative and
other costs and expenditures, exclusive of any costs and expenditures related to
any mining and milling operations and interest, at the rate of approximately
$20,000 per month for the remainder of 1999.
U.S. Mining Co. and its affiliates have verbally pledged to provide financing to
the Company on an as needed basis until on or about January 1, 2000. The Company
cannot assure, however, that USM will fulfill its commitment to fund the
Company's operations through January 2000. The funds received from USM and its
affiliates will cover the general, administrative and other costs approximated
at $20,000 per month plus interest. Additional monies raised from USM will help
finance $750,000 of funds the Company estimates will be needed to ready the
Franklin Mine and Milling properties for the commencement of extraction and
milling. Additional funds will be needed to support the extraction and milling
processes once underway as well as to upgrade the processing facilities to allow
for an increase in ore processing capacity.
There can be no assurance that the Company will have adequate funds available to
repay the funds advanced by USM and its affiliates or that USM will fulfill its
obligations to fund the Company through January 2000. In the event that the
Company defaults on its obligations, USM may foreclose on the assets secured by
the USM note. Such foreclosure actions by USM would have a material adverse
effect on the future operations of the Company and the Company's ability to
explore the Franklin Mines.
Results of Operations:
Three months ended March 31, 1999 and 1998
The Company had a net loss of $81,196 for the three months ended March 31, 1999
as compared to a net loss of $171,430 during the same period in 1998.
General and administrative expenses were $25,642 for the first quarter 1999
compared with $101,494 during the same period in 1998. This decrease was due to
a substantial decrease in legal and professional fees, as well as settlements
with venders resulting in a reduction of accounts payable of approximately
$38,000.
Interest expense was $34,599 during the 1999 quarter as compared to $27,095 in
the 1998 quarter. This increase was due to interest incurred on the USM note.
Three months ended March 31, 1998 and 1997
The Company had no active mining or milling operations during the quarters ended
March 31, 1998 and 1997.
The Company had a net loss of $171,431 for the three months ended March 31, 1998
as compared to a net loss of $155,907 during the same period in 1997. The loss
in 1998 was higher due to higher general and administrative costs $15,476 and
the assumption of $12,346 of mine expenses and environmental remediation costs
which, during the three months ended March 31, 1997, had been paid by the Zeus
joint venture.
11
<PAGE>
General and administrative expenses were $101,494 for the first quarter 1998
compared with $86,018 during the same period in 1997. This increase was due to
an increase in professional fees associated with ongoing litigation, and SEC
reporting and compliance.
Interest income was $980 for the three months ended March 31, 1999 compared with
$952 during the same period in 1997. Interest expense was $27,096 during the
1998 quarter as compared to $37,953 in the 1997 quarter. This decrease was due
to interest incurred on notes in connection with the Gold Hill Mill and
Newmineco acquisitions in 1997 but not during 1998.
PART II
Item 1. Legal Proceedings
Convertible Debentures
On June 1, 1994, the Company advised the Transfer Agent/Trustee that the Company
was not in compliance with certain of the terms of the indenture (the
"Indenture") relating to the Company's 12 1/4% Convertible Debentures (the
"Debentures") in that it had not maintained current filings with the Securities
and Exchange Commission (the "Commission") as required. Accordingly, the
Transfer Agent/Trustee was instructed not to convert any of the Debentures into
Common Stock of the Company until such time as the Company notified the Transfer
Agent. The Company failed to make required sinking fund payments in 1994 and was
unable to pay the principal balance of the Debentures due on December 31, 1994
resulting in default under the terms of the Indenture.
Although the Company was in default, it agreed to continue to make quarterly
interest payments to the Debenture Holders during fiscal year 1995 until such
time as the principal amount of the Debentures could be paid in full. It was
anticipated that the Company would have the funds available to make such
payments by December 31, 1995. The Company made the first quarterly interest
payment due on the Debentures in 1995 but has failed to make any additional
payments with respect to such interest thereafter.
On or about December 1995, all but 1,000 of the Debentures agreed to extend the
maturity date of the Debentures to December 31, 1996; however, the Company was
unable to make any principal or interest payments since March 31, 1995.
In September, 1997, certain of the Company's 12 1/4% Convertible Debenture
holders, including the Hopis Trust (the "Plaintiff Debentureholders") instituted
an action in the Supreme Court of the State of New York against the Company for
payment on approximately $42,500 principal amount of Debentures plus accrued and
unpaid interest totaling approximately $13,000 and other costs and expenses
related thereto.
Thereafter, the Plaintiff Debentureholders moved for summary judgment against
the Company. The Company did not to oppose the motion and default was entered
against the Company in the amount of $42,500 plus interest, costs and
disbursements (the "Default"). Moreover, the issue of attorney's fees were
severed from the case and all to be set down for an inquest.
In February, 1998, USM entered into an agreement with the Plaintiff
Debentureholders agreeing to pay the Default plus certain additional costs in
the event that the Company fails to pay the Default and USM consummates the
Transaction with the Company. In the event that USM did not consummate the
Transaction by July 12, 1998, USM agreed to pay the Plaintiff Debentureholders
$5,100 for their agreement not to enter the Judgment against the Company or
pursue the inquest. Plaintiff Debentureholders agreed not to enter the Judgment
against the Company until July 12, 1998 or until USM notifies them that it will
not pursue the Transaction.
12
<PAGE>
On or about April 6, 1998, Martucci terminated his letter of intent to
consummate the Transaction with the Company. Despite such termination, Plaintiff
Debenture holders agreed to extend the terms of their agreement with USM through
December 1998. As of date hereof, the Company is not aware of any further
extension nor, to its knowledge has the Judgement been entered. There can be no
assurance, however, that the Judgement will not be entered and the Company will
be required to pay the amount of the Judgement, including any costs, interest
and penalties related thereto.
The continued default by the Company may result in Company being subject to
additional legal proceedings by the Transfer Agent/Trustee under the Indenture
or from other holders seeking immediate payment of the $102,500 plus related
interest and penalties. While the Company hopes to cure the default or, in the
alternative, reach an acceptable settlement arrangement with the holders, there
can be no assurance that the funds will be available in the future to meet all
of the Company's obligations. Management remains hopeful that payment or, in the
alternative, commencement of settlement negotiations, will delay the
commencement of any legal action until the Company can make the appropriate
arrangements to repay the Debentureholders.
Golder Litigation
On or about February 5, 1996, Bradley, Campbell, Carney & Madsen, P.C., Colorado
counsel to the Company, Gems, Zeus and Newmineco ("BCCM") entered into a
contract with Golder Associates, Inc. ("Golder"), pursuant to which Golder
agreed to perform certain services at the Mogul Mine (the "Mogul Tunnel
Contract"). At the time of the Mogul Tunnel Contract, BCCM allegedly entered
into said contract as an agent of Durango, the lessee of the Mogul Mine at that
time.
On or about February 5, 1996, BCCM entered into a second contract with Golder,
pursuant to which Golder agreed to perform certain services at the Franklin
Mines and Franklin Mill pertaining to various environmental issues (the
"Franklin Mines Contract").
At the time of the Franklin Mines Contract, BCCM allegedly entered into said
contract as an agent of the Zeus Joint Venture.
On or about August 23, 1996, Gems executed a note to Golder in the aggregate
principal amount of $268,683.75 and a note to BCCM in the aggregate principal
amount of $109,785.35 to secure legal and engineering fees outstanding as of
such date. Each note was due and payable on or before December 23, 1996 and was
secured by a pledge of approximately 144,000 as adjusted shares of Common Stock
of the Company owned by Gems. Gems failed to make the required payments on the
note by December 23, 1996.
On or about January 28, 1997, Golder commenced an action against BCCM, Zeus, the
Company, Gems, Island, and Durango in the United States District Court of the
District of Colorado to recover sums due and owing from the Defendants for
breach of contract, breach of implied warranty, misrepresentation, negligent
misrepresentation, default under the Golder note and quantum merit arising out
of each of the Mogul Tunnel Contract and the Franklin Mine Contract. The Company
is a named defendant to this litigation by virtue of its general partnership
interest in Zeus, it being joint and severally liable with Gems and Nuco as
general partners in the Joint Venture.
The aggregate amount of the Golder claims are approximately $281,670.99 plus
prejudgment and post judgment interest, costs and expenses (including attorney's
fees) and any additional relief granted by the court, $124,159.87, exclusive of
interest and other costs and expenses, of which is attributable to the Mogul
Tunnel Contract and $157,511.12, exclusive of interest and other costs and
expenses, of which is attributable to the Franklin Mines Contract.
13
<PAGE>
The Company is currently in active settlement negotiations with Golder and BCCM;
however, there can be no assurance that a final settlement will be reached.
Environmental Matters:
As of the date hereof, the Company has no violations against it with respect to
the Franklin Mines and Franklin Mill. While there are no outstanding violations
against the Company at this time, there can be no assurance that the Company
will be able to adequately comply with the conditions set forth in its permit
approval or that future violations will not arise and that such violations will
not lead to interruptions in operations at the Franklin Mines or Franklin Mill.
NASDAQ Delisting
In 1996, the Commission approved certain amendments to the requirements for
continued listing on the NASDAQ Small-Cap Market. On February 27, 1998, the
Company received a notification letter from NASDAQ informing the Company that
the Company's Common Stock was not in compliance with the new minimum bid price
requirement of $1.00, which became effective on February 23, 1998.
The Company was given until May 28, 1998 to come into compliance or it would
face delisting proceedings. On or about May 21, 1998, the Company effectuated a
25 for 1 reverse stock split which, when consummated, caused it stock price to
rise above the $1.00 threshold. Therefore, the Company was not subject to
delisting proceedings and remained in compliance until November 1998.
On or about November 10, 1998, the Company received notification from NASDAQ
that it was not in compliance with the minimum bid price requirement and had
until February 10, 1999 to come into compliance. During the month of January,
the Company's stock price maintained a bid price above $1.00 for 10 consecutive
days, thereby bringing it into compliance with NASDAQ rules.
While the Company is currently in compliance with the minimum bid price
requirement, there can be no assurance that in the future the company's common
stock will, in the future to able to maintain such compliance. In the event that
the Company cannot maintain compliance with the maximum bid price requirement
the Company, may, in the future, be subject to delisting causing the Company's
common stock to no longer be listed for trading on the NASDAQ Small Cap Market.
However in such event, Management is hopeful that the Company's Common Stock
will qualify for trading on the Over-The-Counter/Bulletin Board ("OTC") market
and the Company will make every effort to include its Common Stock on the OTC in
the event of a delisting by NASDAQ.
In the event that the Company's Common Stock is traded on the OTC, it may become
subject to the "penny stock" trading rules. The penny stock trading rules impose
additional duties and responsibilities upon broker-dealers recommends the
purchase of a penny stock (by a purchaser that is not an accredited investor as
defined by Rule 501(a) promulgated by the Commission under the Securities Act)
or the sale of a penny stock. Among such duties and responsibilities, with
respect to a purchaser who has not previously had an established account with
the broker-dealer, the broker-dealer is required to (i) obtain information
concerning the purchaser's financial situation, investment experience, and
investment objectives, (ii) make a reasonable determination that transactions in
the penny stock are suitable for the purchaser and the purchaser (or his
independent adviser in such transactions) has sufficient knowledge and
experience in financial matters and may be reasonably capable of evaluating the
risks of such transactions, followed by receipt of a manually signed written
statement which sets forth the basis for such determination and which informs
the purchaser that it's unlawful to effectuate a transaction in the penny stock
without first obtaining a written agreement to the transaction. Furthermore,
until the purchaser becomes an established customer (i.e., having had an account
with the dealer for at least one year or, the dealer
14
<PAGE>
had effected three sales or more of penny stocks on three or more different days
involving three or more different issuers), the broker-dealer must obtain from
the purchaser a written agreement to purchase the penny stock which sets forth
the identity and number of shares of units of the security to be purchased prior
to confirmation of the purchase. A dealer is obligated to provide certain
information disclosures to the purchaser of penny stock, including (i) a generic
risk disclosure document which is required to be delivered to the purchaser
before the initial transaction in a penny stock, (ii) a transaction-related
disclosure prior to effecting a transaction in the penny stock (i.e.,
confirmation of the transaction) containing bid and asked information related to
the penny stock and the dealer's and salesperson's compensation (i.e.,
commissions, commission equivalents, markups and markdowns) connection with the
transaction, and (iii) the purchaser-customer must be furnished account
statements, generally on a monthly basis, which include prescribed information
relating to market and price information concerning the penny stocks held in the
customer's account. The penny stock trading rules do not apply to those
transactions in which the broker-dealer or salesperson does not make any
purchase or sale recommendation to the purchaser or seller of the penny stock.
Required compliance with the penny stock trading rules affect or will affect the
ability to resell the Common Stock by a holder principally because of the
additional duties and responsibilities imposed upon the broker-dealers and
salespersons recommending and effecting sale and purchase transactions in such
securities. In addition, many broker-dealers will not effect transactions in
penny stocks, except on an unsolicited basis, in order to avoid compliance with
the penny stock trading rules. The penny stock trading rules consequently may
materially limit or restrict the liquidity typically associated with other
publicly traded equity securities. In this connection, the holder of Common
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control the market in such securities and may set prices
that are not based on competitive forces. Furthermore, at times there may be a
lack of bid quotes which may mean that the market among dealers is not active,
in which case a holder of Common Stock may be unable to sell such securities.
Because market quotations in the over-the-counter market are often subjected to
negotiation among dealers and often differ from the price at which transactions
in securities are effected, the bid and asked quotations of the Common Stock may
not be reliable.
Redstone Litigation
On or about May 14, 1998, Redstone Securities Inc. ("Redstone") commenced an
action against the Company in the Supreme Court of the State of New York, County
of Nassau, Index No. 98-013668, claiming, among other things, breach of
contract, fraudulent inducement, and unjust enrichment in connection with an
Investment Banking Agreement dated August 28, 1996, between Redstone and the
Company. The complaint requests relief in the amounts of not less than $600,000
plus punitive damages, costs, interest and other expenses. On or about July 31,
1998, the Company answered the complaint and filed a cross complaint against
Redstone alleging, among other things, abuse of process, fraud, breach of
fiduciary duty, breach of contract and interference with prospective financial
advantage. The Company believes that it sustained damages of approximately
$6,000,000 plus costs and expenses. The Company intends to vigorously defend
this suit and aggressively pursue its claims against Redstone.
Item 5. Other Information
On or about January 11, 1999, USM executed into a letter of intent with
agents for the Alamosa Mining and Leasing Company, Inc. and the Renegade, LLC to
enter into a joint venture arrangement for the exploitation of the Shafter
Mining Property in Clean Creek County, Colorado. This letter of intent was
thereafter assigned to the Company on January 11, 1999.
15
<PAGE>
After consultation with USM and completion of preliminary due diligence with
respect to the feasibility of commencing mining operations at the Shafter Mining
properties, the Company decided not to pursue this venture at this time and
notified the other parties of its decision on or about April 1999.
Item 6. Exhibits and Reports on Form 8-K (all filed in original filing)
A. Exhibits
(a)
B. Reports on Form 8-K
NONE
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WCM CAPITAL, INC.
(formerly FRANKLIN CONSOLIDATED MINING CO, INC.)
/s/ Robert Waligunda
Date: April 12, 1999 -------------------------------
Robert Waligunda
President
16
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