SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-9416
WCM CAPITAL, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-2879202
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
76 Beaver Street, Suite 500, New York, New York 10005
(Address of principal executive offices)
Issuer's telephone number, including area code: (212) 344-2828
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at September 30, 1999
Common Stock, par value 3,955,169 Shares
$.01 per share
Transitional Small Business Format (check one); Yes[_] No [X]
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, 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
$2,125,545 and $2,105,515 4,788,550 4,808,580
Mining reclamation bonds 136,334 134,602
------------ ------------
$ 4,924,891 $ 4,943,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 671,458 $ 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 1,414,756 1,191,586
------------ ------------
TOTAL CURRENT LIABILITIES 2,480,139 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 (15,958,793) (15,700,041)
------------ ------------
2,444,755 2,703,507
------------ ------------
$ 4,924,891 $ 4,943,182
============ ============
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months Cumulative
Ended September 30, Ended September 30, From
1999 1998 1999 1998 Inception
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales $ -- $ -- $ -- $ -- $ 876,082
Interest income 1,743 18,593 672 13,230 550,438
Other income -- -- -- -- 79,397
--------- --------- --------- --------- ------------
1,743 18,593 672 13,230 1,505,917
--------- --------- --------- --------- ------------
EXPENSES:
Mine expenses and environmental remediation costs 38,992 52,796 13,399 14,305 3,625,289
Write-down of mining and milling and other property
and equipment -- 265,000 -- -- 1,665,000
Depreciation and depletion 20,030 135,276 6,676 71,769 2,320,890
General and administrative expenses 93,442 301,322 24,018 86,102 6,341,819
Interest expense 108,031 89,505 37,350 32,108 1,249,510
Amortization of debt issuance expense -- -- -- -- 683,047
Equity in net loss and settlement of claims of Joint Venture -- -- -- -- 1,059,971
Other -- -- -- -- 519,179
--------- --------- --------- --------- ------------
260,495 843,899 181,443 204,284 17,464,709
--------- --------- --------- --------- ------------
NET LOSS $(258,752) $(825,306) $(180,771) $(191,054) $(15,958,792)
========= ========= ========= ========= ============
BASIC LOSS PER COMMON SHARE $ (.07) $ (.21) $ (.02) $ (.05)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,955,173 3,955,173 3,955,173 3,955,173
========= ========= ========= =========
</TABLE>
See notes to condensed financial statements
3
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
1999 1998 Inception
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (35,752) $ (825,305) $(15,958,792)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and depletion 20,030 135,276 2,320,894
Provision for bad debt -- -- 350,000
Write-down of mining and milling and other
property and equipment -- 265,000 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 (1,743) (18,594) (11,345)
Accounts payable and accrued expenses 17,295 199,937 933,674
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (223,170) (243,686) (6,505,380)
------------ ------------ ------------
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 223,170 242,608 1,826,239
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 223,170 242,608 12,006,053
------------ ------------ ------------
</TABLE>
(Continued)
4
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
1999 1998 Inception
------------ -------- ----------
<S> <C> <C> <C>
Inception
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
SEPTEMBER 30, 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 September 30, 1999, and its
results of operations and cash flows for the nine and three months
ended September 30, 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 nine and three months ended
September 30, 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
September 30, 1999, the Company has an accumulated deficit of
approximately $16,059,000, current liabilities of $2,480,139, and a
working capital deficiency of $2,480,139. Also, the Company was in
default on the payment of the principal balance and accrued interest
on certain notes and debentures and certain accounts payable 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 the remainder of
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, Inc. ("USM") 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. Notwithstanding the foregoing, USM
has not committed to fund the Company past January 1, 2000. In the
event that, subsequent to January 1, 2000, the Company is unable to
obtain additional funding from USM or from any other funding source,
the Company will be unable to continue its operations. In addition to
the foregoing expenses, the Company estimates that it will need
approximately $750,000 of funds to ready the Franklin Mine and Milling
properties for the commencement of extraction and milling and it will
need additional funds 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. USM had indicated that it
would assist the Company with regard to the $750,000 discussed above.
However, USM has not renewed this offer past January 1, 2000 and, at
this date, management has no reason to believe that USM actually will
assist the Company with regard to the $750,000.
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 Company's
ability to continue operations.
6
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 2 - BASIS OF PRESENTATION (Continued)
Substantially all of the approximately $4,800,000 of mineral
properties and equipment included in the accompanying balance sheet as
of September 30, 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.
See also, "Note 5 - Note Payable - Related Party" below.
NOTE 3 - NOTES PAYABLE RELATED PARTY AND OTHERS
Notes payable to related party and others consist of the following at
September 30, 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 September 30, 1999. Interest is being accrued at rates
between 8% and 17% per annum.
Accrued interest on the above notes at September 30, 1999 aggregated
approximately $61,000.
NOTE 4 - CONVERTIBLE DEBENTURES
The Company's convertible debt at September 30, 1999 consist of:
12.25% convertible debenture originally due 12/31/94 $145,000
As of September 30, 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 $80,000. 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. See
"Note 6 - Commitments and Contingencies; Litigation" below.
7
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 5 - NOTE PAYABLE - RELATED PARTY
The Company had outstanding a 8% promissory note (the "USM Note") and
additional indebtedness (collectively, the "USM Indebtedness") with a
balance of $1,414,756, at September 30, 1999, which represents monies
advanced to the Company by USM, a company owned by a Company Director,
and its affiliates, and obligations assumed in connection with the
contributions of Joint Venture interests in 1997. The USM 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 USM Note was 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, an affiliate
of USM assigned the USM Note to USM. Accrued interest at September 30,
1999 on the USM Indebtedness was approximately $171,000.
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 and
Minerals Corp. ("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, USM entered into an agreement with Hayden to
purchase her interest in the Hayden/Kennec Lease for a purchase price
of $70,000 (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 then in effect
through March 13, 1998. As of the date hereof, USM has not consummated
the transaction contemplated by the Hayden-USM Purchase Agreement.
However, on October 4, 1999, Mrs. Hayden agreed to extend USM's time
to complete the purchase under the Hayden-USM Purchase Agreement until
January 12, 2000, provided USM continues to make payments to Mrs.
Hayden at the rate of $1,000 per month through January 13, 2000. No
assurance can be given as to whether the Hayden-USM Purchase Agreement
will be consummated. In the event
8
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
that the Hayden-USM Purchase Agreement is not consummated the lease
will become invalid and there is no assurance can be given that the
Company will not lose its rights to the leasehold properties.
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.
Environmental Matters
On January 31, 1997, the Company received approval from the Colorado
Department of Minerals and Geology ("DMG") of its March 6, 1996
amended application and, as of the date hereof, to management's
knowledge, 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 (the Franklin Mines
and related assets previously were owned by a joint venture between
the Company and another corporate 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 September 30, 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 litigations 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 remanded the case
to arbitration. The parties settled the matter in September 1999.
Pursuant to the settlement, a third party purchased the Company's
shares owned by plaintiff and the Company was released from
liability. An accrued liability of $135,000, which the Company
estimated to be its portion of the total claim, has been recorded
in the accompanying December 31, 1998 and September 30, 1999
financial statements.
(b) In September 1997, certain of the Company's 12.25% Convertible
Debenture holders 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
9
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Note 6 - COMMITMENTS AND CONTINGENCIES (Continued)
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
(c) The Company recently settled 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 asserted claims for damages in an amount in
excess of the market value of the shares 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. 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 believed that it sustained damages of
approximately $6,000,000 plus costs and expenses. In September 1999,
the parties settled the matter. Pursuant to the settlement, a third
party purchased the Company shares owned by Redstone and Redstone
released the Company from liability.
As a result of the settlements referred to in (a) and (c), the Company
reversed accrued litigation expenses for $100,000. The $100,000 expense
reduction is included in general and administrative expenses during the
period September 30, 1999.
NASDAQ Notification
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 ten consecutive days, thereby bringing it into compliance with NASDAQ
rules.
On or about June 9, 1999, the Company received notification from NASDAQ
that it was not in compliance with the minimum bid price requirement and
had until September 9, 1999 to come into compliance.
10
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Note 6 - COMMITMENTS AND CONTINGENCIES (Continued)
During the middle and latter part of June, the Company's stock price
maintained a bid price above $1.00 for ten consecutive days but
subsequently dropped below $1.00. On September 17, 1999 NASDAQ
notified the Company that it would delist the Company's Common Stock
from the NASDAQ SmallCap Market on September 24, 1999. The Company
appealed this decision before a NASDAQ Listing Qualifications Panel.
The oral hearing was held on October 28, 1999 and the Company is
waiting for its decision . However, at the hearing, the hearing Panel
suggested that the Company effect a reverse split of its outstanding
shares of Common Stock on a one-for-three basis to see if the bid
price would rise above the $1.00 minimum bid price required for
continued listing on the NASDAQ SmallCap Market. The Company has
scheduled a Special Meeting of Stockholders for December 13, 1999 to
approve such a reverse split. In addition, the Panel has requested
additional information and documentation concerning certain of the
Company's indebtedness. The Company is in the process of responding to
this request. No assurance can be given that the NASDAQ Listing
Qualifications Panel will not uphold NASDAQ's determination to delist
the Company's Common Stock or that the Company will continue to be in
compliance with the minimum maintenance requirements for continued
listing on NASDAQ.
11
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Cautionary Statement on Forward-Looking Statements
Except for the historical information contained herein, certain of the matters
discussed in this quarterly report are "forward-looking statements," as defined
in Section 21E of the Securities Exchange Act of 1934, which involve certain
risks and uncertainties, which could cause actual results to differ materially
from those discussed herein including, but not limited to, risks relating to
changing economic conditions, changes in the prices of minerals, the results of
development and testing of the properties and actual mining and other risks
disclosed in this quarterly report.
The Company cautions readers that any such forward-looking statements are based
on management's current expectations and beliefs but are not guarantees of
future performance. Actual results could differ materially from those expressed
or implied in the forward-looking statements.
Liquidity and Capital Resources
The Company had no active mining or milling operations during the first and
second quarters of 1999, however, remediation work was substantially completed
at the Franklin Mine and Mill in preparation for the anticipated commencement of
mining operations.
The Company has had recurring losses and cash flow deficiencies since inception.
As at September 30, 1999, the Company had an accumulated deficit of
approximately $15,959,000, current liabilities of $2,480,139, and a working
capital deficiency of $2,480,139. Also, the Company was in default on the
payment of the principal balance and accrued interest on certain notes and
debentures and certain accounts payable 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. Moreover, the
report of the Company's independent auditors on the audited financial statements
as of and for the fiscal years ended December 31, 1998 and 1997 contained an
explanatory paragraph concerning the Company's ability to continue as a going
concern. Such matters raise substantial doubt about the Company's ability to
continue as a going concern.
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.
USM 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 funds received from
USM and its affiliates will cover the general, administrative and other costs
approximated at $20,000 per month plus interest. Notwithstanding the foregoing,
USM has not committed to fund the Company past January 1, 2000. In the event
that, subsequent to January 1, 2000, the Company is unable to obtain additional
funding from USM or from any other funding source, the Company will be unable to
continue its operations. In addition to the foregoing expenses, the Company
estimates that it will need approximately $750,000 of funds to ready the
Franklin Mine and Milling properties for the commencement of extraction and
milling and it will need additional funds 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. USM had indicated that it would
assist the Company with regard to the $750,000 discussed above. However, USM has
not renewed this offer past January 1, 2000 and, at this date, management has no
reason to believe that USM actually will assist the Company with regard to the
$750,000
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 Company's ability to continue operating.
12
<PAGE>
During the nine months ended September 30, 1999 and 1998, USM, and its
affiliates provided financing in the amount of $223,170 and 242,608,
respectively, to finance cash flows from operating activities.
Results of Operations:
Nine and Three Months Ended September 30, 1999 Compared to Nine and Three Months
Ended September 30, 1998
The Company had a net loss of $258,752 and $80,771 for the nine and three months
ended September 30, 1999 respectively, as compared to a net loss of $825,306 and
$191,054 during the same periods in 1998. The loss in 1998 was higher due to a
$265,000 loss on sale of the Gold Hill Mill Properties in 1998 and higher
depreciation and depletion in 1998 ($135,276) than in 1999 ($20,030). In
addition, during September 1999, as a result of the settlement of certain
matters in litigation, the Company reversed accrued litigation expenses of
$100,000. The $100,000 expense reduction is included in general and
administrative expenses.
Mine expenses and environmental remediation costs were $38,992 and $13,399 for
the nine and three months ended September 30, 1999, respectively, compared to
$52,796 and $14,305 during the same periods in 1998. This decrease was due to
lower levels of activities in the 1999 periods.
General and administrative expenses were $93,442 and $24,018 for the nine and
three months ended September 30, 1999, respectively, compared with $301,322 and
$86,102 during the same periods in 1998. This decrease was due to a decrease in
legal and professional fees, as well as settlements with venders and certain
lawsuits resulting in a reduction of accounts payable of approximately $138,000.
Interest expense was $108,031 and $37,350 during the nine and three months ended
September 30, 1999, respectively, as compared to $89,505 and $32,108 during the
same periods in 1998. This increase was due to interest incurred on the USM
Indebtedness.
13
<PAGE>
PART II
Item 1. Legal Proceedings
Convertible Debentures
On June 1, 1994, the Company advised its 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.
In September 1997, certain of the Company's 12 1/4% Convertible Debenture
holders, including the Hopis Trust (the "Plaintiff Debenture holders")
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 Debenture holders moved for summary judgment against
the Company. The Company did not 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 was
severed from the case and all to be set down for an inquest.
In February, 1998, USM entered into an agreement with the Plaintiff Debenture
holders agreeing to pay the Default plus certain additional costs in the event
that the Company fails to pay the Default and USM consummates its then
contemplated transaction with the Company. In the event that USM did not
consummate that transaction by July 12, 1998, USM agreed to pay the Plaintiff
Debenture holders $5,100 for their agreement not to enter the Judgment against
the Company or pursue the inquest. Plaintiff Debenture holders agreed not to
enter the Judgment against the Company until July 12, 1998 or until USM notified
them that it would not pursue the transaction.
On or about April 6, 1998, USM determined terminated its letter of intent to
consummate the then contemplated 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 Judgment been
entered.
If the proposed settlement ("Proposed Settlement") is not consummated, there can
be no assurance that the Judgment will not be entered and the Company will be
required to pay the amount of the Judgment, including any costs, interest, and
penalties related thereto.
The continued default under the Debentures 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. See "PART I. FINANCIAL
INFORMATION; Item 1. Financial Statements; Note 6 - Commitments And
Contingencies - Litigation ."
Golder Litigation
On or about February 5, 1996, Bradley, Campbell, Carney & Madsen, P.C. ("BCCM"),
Colorado counsel to the Company, Gems and Minerals Corp. ("Gems"), Zeus No. 1
Investments ("Zeus") - a California general partnership between the Company and
Island Investment Corp., a Nevada corporation ("Island"), and Newmineco, 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.
14
<PAGE>
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.
The parties settled the matter in September 1999 for $100,000. An accrued
liability of $135,000 which the Company estimated to be its portion of the total
claim has been recorded in the accompanying December 31, 1998 and September 30,
1999 financial statements See "PART I. FINANCIAL INFORMATION; Item 1. Financial
Statements; Note 6 - Commitments And Contingencies - Litigation ."
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 believed that it sustained damages of approximately
$6,000,000 plus costs and expenses. In September 1999, the parties settled the
matter. Pursuant to the settlement, a third party purchased the Company shares
held by Redstone for $150,000 and Redstone released the Company See "PART I.
FINANCIAL INFORMATION; Item 1. Financial Statements; Note 6 - Commitments And
Contingencies - Litigation
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.
15
<PAGE>
On or about November 10, 1998, the Company received notification from NASDAQ
hat 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.
On or about June 9, 1999, the Company received notification from NASDAQ that it
was not in compliance with the minimum bid price requirement and had until
September 9, 1999 to come into compliance.
During the middle and latter part of June, the Company's stock price maintained
a bid price above $1.00 for ten consecutive days but subsequently dropped below
$1.00. On September 17, 1999 NASDAQ notified the Company that it would delist
the Company's Common Stock from the NASDAQ SmallCap Market on September 24,
1999. The Company appealed this decision before a NASDAQ Listing Qualifications
Panel. The oral hearing was held on October 28, 1999 and the Company is waiting
for its decision . However, at the hearing, the hearing Panel suggested that the
Company effect a reverse split of its outstanding shares of Common Stock on a
one-for-three basis to see if the bid price would rise above the $1.00 minimum
bid price required for continued listing on the NASDAQ SmallCap Market. The
Company has scheduled a Special Meeting of Stockholders for December 13, 1999 to
approve such a reverse split. In addition, the Panel has requested additional
information and documentation concerning certain of the Company's indebtedness.
The Company is in the process of responding to this request. No assurance can be
given that the NASDAQ Listing Qualifications Panel will not uphold NASDAQ's
determination to delist the Company's Common Stock or that the Company will
continue to be in compliance with the minimum maintenance requirements for
continued listing on NASDAQ.
See "PART I. FINANCIAL INFORMATION; Item 1. Financial Statements; Note 7 -
Subsequent Events - Nasdaq Notification."
In the event that the Company cannot maintain its listing on the NASDAQ Small
Cap Market, management is hopeful that one or more market makers will take the
requisite action to have the Company's Common Stock quoted on the
Over-The-Counter Bulletin Board ("OTC") market and the Company will make every
effort to assist in the process of having its Common Stock quoted on the OTC in
the event of a delisting by NASDAQ.
In the event that the Company's Common Stock is delisted from NASDAQ, 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 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.
16
<PAGE>
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.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Form 8-K filed with the Commission on June 25, 1999.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WCM CAPITAL, INC.
Date: November 12, 1999 s/Robert Waligunda
----------------------
Robert Waligunda
President
17
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