SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Solicitation Material Pursuant to Rule 14a-11(c) or rule 14a-12
WCM CAPITAL, INC.
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Common
2) Aggregate number of securities to which transaction applies: 7,473,013
shares
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): $2.375 per share*
4) Proposed maximum aggregate value of transaction: $17,748,406*
5) Total fee paid: $3,549.68
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ______________________________________
(2) Form, Schedule or Registration Statement No.: ________________
(3) Filing Party: ________________________________________________
(4) Date Filed: ___________________________________________________
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* Based upon $2.375 (the last sale price on January 13, 2000) times
7,473,013 shares. Notwithstanding the foregoing, the Company believes
that the value of the transaction is significantly less than the
maximum aggregate value of the transaction.
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PRELIMINARY COPY
WCM CAPITAL, INC.
76 Beaver Street
Suite 500
New York, NY 10005-3402
Telephone (212) 344-2828
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held Tuesday, February 22, 2000
An Special Meeting of Stockholders of WCM Capital, Inc., a Delaware
corporation (the "Company"), will be held at the Holiday Inn, 304 Rte. 22 West,
Springfield, N.J. 07081 on February 22, 2000 at 10:00 a.m., for the following
purposes:
(1) To approve the acquisition of 100% of the issued and outstanding shares
of common stock of U.S. Mining, Inc. in exchange for such number of shares of
the Company's common stock that equals 85% of the issued and outstanding shares
of the Company's common stock immediately following consummation of the
acquisition; and
(2) To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only holders of the Company's common stock, par value $0.01 per share (the
"Common Stock") of record on January 17, 2000 are entitled to notice of, and to
vote at, the meeting or any adjournment thereof. At January 17, 2000, the record
date for determination of stockholders entitled to vote at the meeting or any
adjournments thereof, shares of Common Stock were issued and outstanding.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
FILL OUT, SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. PROXIES FORWARDED BY OR FOR BROKERS OR FIDUCIARIES SHOULD BE RETURNED
AS REQUESTED BY THEM. THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE
INVOLVED IN FURTHER COMMUNICATION.
By Order of the Board of Directors,
New York, New York
January 31, 2000
Robert Waligunda,
President
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TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information..................................................................................-1-
Vote Required for Approval; Shares Entitled to vote; Record Date.....................................-1-
Revocability Of Proxies..............................................................................-2-
Board Of Directors Proxy Solicitation................................................................-2-
Certain Transactions With Executive Officers And Directors and Interest Of A
Director In The Transaction To Be Voted Upon At This Special Meeting.................................-2-
Business Of The Company..............................................................................-5-
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations............................................................................-5-
Legal Proceedings....................................................................................-7-
Beneficial Ownership Of Common Stock.................................................................-9-
Market For Company's Common Equity and Related Stockholders Matters.................................-10-
Description Of the Company's Common Stock...........................................................-11-
Acquisition Of 100% Of The Issued And Outstanding Shares Of Common
Stock Of U.S. Mining, Inc. In Exchange For 85% Of The Company's Common Stock
Immediately Following Consummation Of The Acquisition...............................................-12-
Business of USM.....................................................................................-13-
Reasons for The Transaction.........................................................................-13-
Federal Tax Consequences Of The USM Acquisition....................................................-13-
Accounting Treatment Of The USM Acquisition.........................................................-14-
Other Business......................................................................................-16-
Financial Statements.................................................................................F-1
EXHIBIT A: Stock Purchase Agreement to Acquire 100% of the USM Stock...............................A-1
EXHIBIT B: Items 1 and 2 of Part I To The Company's Annual Report on Form 10-KSB
For the Year ended December 31, 1998...............................................B-1
</TABLE>
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PRELIMINARY COPY
WCM CAPITAL, INC.
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SPECIAL MEETING OF STOCKHOLDERS
Tuesday, February 22, 2000
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PROXY STATEMENT
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GENERAL INFORMATION
This Proxy Statement (the "Proxy Statement") is furnished in connection
with the solicitation of proxies by the Board of Directors of WCM Capital, Inc.,
a Delaware corporation (the "Company"), for use at the Special Meeting of
Stockholders of the Company to be held on Tuesday, February 22, 2000 or any and
all adjournments thereof, with respect to the following matters:
(1) To approve the acquisition of 100% of the issued and outstanding shares
of common stock of U.S. Mining, Inc. in exchange for such number of shares of
the Company's common stock that equals 85% of the issued and outstanding shares
of the Company's common stock immediately following consummation of the
acquisition; and
(2) To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Special Meeting (the "Meeting") will be held on February 22, 2000 at
10:00 a.m. at the Holiday Inn, 304 Rte. 22 West, Springfield, N.J. 07081. The
Notice of Special Meeting, Proxy Statement, Proxy Card, and the Special Report
will be mailed on or about January 31, 2000 to stockholders of record of the
Company as of January 17, 2000.
If the enclosed proxy card is properly executed and returned in time to be
voted at the meeting, the shares of Common Stock represented will be voted in
accordance with the instructions contained therein. Executed proxies that
contain no instructions will be voted in favor of all of the proposals set forth
above.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Special Meeting (except for proxies which have theretofore effectively been
revoked or withdrawn), notwithstanding that they may have been effectively voted
on the same or any other matter at a previous meeting.
VOTE REQUIRED FOR APPROVAL; SHARES ENTITLED TO VOTE; RECORD DATE
The presence at the Special Meeting, whether in person or by proxy, of the
holders of at least a majority of the outstanding shares of Voting Stock
entitled to vote thereat constitutes a quorum for the transaction of business.
For purposes of the quorum and the discussion below regarding the votes
necessary to take stockholder action, Stockholders of record who are present at
the meeting in person or by proxy and who abstain, including brokers holding
customers' shares of record who cause abstentions to be recorded at the meeting,
are considered Stockholders who are present and entitled to vote and they count
toward the quorum.
Brokers holding shares of record for customers generally are not entitled
to vote on certain matters unless they receive voting instructions from their
customers. As used herein, "uninstructed shares" means shares held by a broker
who has not received instructions from its customers on such matters and the
broker has so notified the Company on a proxy form in accordance with industry
practice or has otherwise advised the Company that it lacks voting authority. As
used herein, "broker non-votes," means the votes that could have been cast on
the matter in question by brokers with respect to uninstructed shares if the
brokers had received their customers' instructions.
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Approval of the Acquisition. Approval of the Company's acquisition of 100%
of the issued and outstanding shares of Common Stock of USM (the "USM
Acquisition") requires the affirmative vote of the majority of the shares
present or by proxy at the Special Meeting and entitled to vote. Uninstructed
shares are entitled to vote on this matter. Therefore, abstentions and broker
non-votes have the effect of negative votes.
On January 17, 2000 (the "Record Date"), there were outstanding 1,318,767
shares of Common Stock. Only holders of record of Common Stock at the close of
business on the Record Date will be entitled to notice of, and to vote at, the
Special Meeting. Each share of Common Stock is entitled to one vote for each
director to be elected and upon all other matters to be brought to a vote by the
Stockholders at the forthcoming Special Meeting.
Commencing 11 days prior to the date of the Special Meeting, a complete
record of the stockholders entitled to vote at the Special Meeting, or any
adjournment thereof, shall be available for inspection at the Company's
executive office during normal business hours by any stockholder for any purpose
germane to the Special Meeting. This record will also be available to
stockholders for such purposes at the place of and during the Special Meeting.
The Company's executive offices are currently located at 76 Beaver Street,
Suite 500, New York, New York 10005.
REVOCABILITY OF PROXIES
Stockholders who execute proxies for the Special Meeting may revoke their
proxies at any time prior to their exercise, by delivering written notice of
revocation to the Company at the address on the Notice of Special Meeting, by
delivering a duly executed proxy bearing a later date, or by attending the
Special Meeting and voting in person.
BOARD OF DIRECTORS PROXY SOLICITATION
The costs of soliciting the proxies and of the meeting, including the costs
of preparing and mailing this Proxy Statement and other material, will be borne
by the Company. In addition to solicitation by mail, certain directors,
officers, and regular employees of the Company may, without additional
compensation, solicit proxies by telephone, personal interview, or facsimile
transmission to encourage stockholder participation in the voting process. The
Company also will request banks, brokers, and others who hold shares in the
Company in nominee names to distribute proxy soliciting material to beneficial
owners, and will reimburse such banks and brokers for reasonable out-of-pocket
expenses which they may incur in so doing.
CERTAIN TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS AND INTEREST OF A
DIRECTOR IN THE TRANSACTION TO BE VOTED UPON AT THIS SPECIAL MEETING
William C. Martucci, a director of the Company, controls and is the sole
shareholder of USM.
During fiscal year 1998, J. Terry Anderson, former director and officer of
the Company, loaned the Company approximately $23,000 and Anderson Chemical
Company, a company for which Mr. Anderson serves as director and president,
loaned the Company approximately $85,000 for working capital and other expenses.
Additionally, in July 1996, Anderson Chemical Company loaned the Company $20,000
evidenced by a Promissory Note bearing interest at a rate of 12% per annum. As
of the Record Date, these loans remain outstanding.
On December 25, 1976, the Company leased 28 patented mining claims from
Audrey and David Hayden ("Hayden") and Dorothy Kennec pursuant to a mining lease
and option to purchase dated November 12, 1976 (the "Hayden/Kennec Lease"). The
leases expired. However, 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 January 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
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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. On December 24, 1999, Mrs. Hayden further
extended USM's time to complete the purchase until July 31, 2000. No assurance
can be given as to whether the Hayden-USM Purchase Agreement will be
consummated. In the event 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.
The Company had outstanding an 8% promissory note (the "USM Note") plus
additional liabilities (collectively, the "USM Indebtedness") with an aggregate
balance of approximately $1,670,000 at December 31, 1999. The USM Indebtedness
represents monies advanced to the Company by an affiliate of USM, obligations
assumed in connection with the contributions of Joint Venture interests in 1997
and additional advances by USM. 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. The USM Note was assigned to USM on
March 5, 1998. As of the date hereof, the Company has not made any payments of
principal and/or interest accrued on the USM Indebtedness. USM has agreed to
fund the Company's general expenses based upon 1999 expenditures through
December 31, 2000 and the expenses of the USM Acquisition. The Company cannot
assure, however, that USM will fulfill its commitment to fund the Company's
operations.
History of Transactions between the Company and Mr. Martucci and His Affiliated
Companies
In early 1997, an officer of the Company introduced Gems and Minerals Corp.
("Gems") to William C. Martucci ("Martucci"). Martucci began negotiations with
Gems to enter into a possible business combination between Martucci's
businesses, on the one hand, and businesses owned and/or operated by or
affiliated with Gems (the "Gems Businesses"), on the other hand. The Gems
Businesses included an 82.5% interest in the Zeus No. 1 Investments Zeus Joint
Venture ("Zeus Joint Venture") - a California general partnership between the
Company and Island Investment Corp., a Nevada corporation ("Island").
By mid to late 1997, it became apparent to the Company that Gems did not
possess the technical and financial resources required to bring the Franklin
Mines into operation as contemplated by the Zeus Joint Venture. Also, during
this period, the Company had established a relationship with Martucci
independent of Gems. On September 25, 1997, the Company entered into a letter of
intent (the "Martucci Letter of Intent") with Martucci to acquire (the
"Transaction") all of the outstanding shares of certain entities owned by him
including USM, in exchange for newly issued shares of Common Stock of the
Company.
Pursuant to the Martucci Letter of Intent, Martucci would receive 85% of
the outstanding shares of the Company, upon the closing of the completion of
customary due diligence, the execution of definitive agreements and the approval
of Company stockholders. Additionally, Martucci agreed to cover expenses
incurred with respect to the Transaction in the form of loans to the Company.
Management believed that the financial support to be supplied by Martucci
pursuant to the Martucci Letter of Intent would be sufficient to fund the
Company prior to the consummation of the Transaction.
On November 25, 1997, in a step transaction, USM acquired an aggregate of
82.5% interest in the Zeus Joint Venture from Gems and Nuco in exchange for the
assumption of approximately $100,000 in liabilities of Gems (the "Gems
Liabilities"). USM thereafter simultaneously assigned the acquired interest to
the Company in exchange for the assumption of the Gem's liabilities. Upon the
acquisition of the 82.5% interest of the Zeus Joint Venture by the Company, the
Zeus Joint Venture relationship with Gems was terminated and the Zeus Joint
Venture was effectively dissolved. The result of the termination of the Zeus
Joint Venture is that the Company has reacquired the right to received 100% of
the profits generated from the Franklin Mines and Franklin Mill once these
properties come into operation.
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On April 6, 1998, Martucci terminated the Martucci Letter of Intent.
On or about August 3, 1998, the Company entered into agreements with each
of USM (the "USM Agreement") and Martucci (the "Martucci Agreement"). Pursuant
to the USM Agreement, USM agreed to forgive the indebtedness of the Company
evidenced by the USM Note; release the security interests in the collateral of
the Company securing the USM Note and assign its rights to the Hayden-USM
Purchase Agreement in exchange for 42.5% of the issued and outstanding shares of
the Company.
Under the terms of the USM Agreement, Martucci agreed to sell to the
Company 100% of the outstanding shares of USM in exchange for 42.5% of the
issued and outstanding shares of the Company. The Company intended to seek
stockholders' approval of these transactions at its Annual Meeting of
Stockholders held in October 1998.
In August 1998, the Company filed a preliminary proxy statement with the
Securities and Exchange Commission (the "Commission") for its annual meeting of
stockholders, which included proposals to approve each of the USM Agreement and
the Martucci Agreement. Shortly after the filing of the preliminary proxy
materials, the Commission informed the Company that the staff of the Commission
(the "Staff") would be conducting a review of the proxy materials and the
proposals. The Company informed USM of the Staff's inquiry and was thereafter
notified that USM wished to terminate the agreements under the premise that the
Company could not secure stockholder approval of the transactions in a timely
manner.
On September 21, 1998, the Company received a letter from USM concerning
the monies loaned to the Company by USM, which included the monies owed to USM
by the Company pursuant to the terms of the USM Note and an additional $144,280
loaned to the Company subsequent to the date of the USM Note. At a meeting of
the Board of Directors of the Company on October 8, 1998, a negotiated
settlement agreement was approved by the Board, whereby USM agreed to convert
the USM Indebtedness into shares of common stock of the Company at a conversion
price equal to 50% of the closing bid price as of the close of business October
7, 1998. The price of the Company's common stock at the close of business on
October 7, 1998 was $.66 per share. Therefore, the conversion rate under the
settlement agreement would be one share of common stock of the Company for each
$.33 of the USM Indebtedness. The foregoing prices and the prices in the next
two paragraphs do not take into account the subsequent reverse split.
It was further agreed that the settlement plan would be implemented in a
two step transaction. Approximately $306,160 of loans would be paid by
converting that portion into 927,757 shares of common stock of the Company
resulting in USM holding approximately 19% of the total issued and outstanding
shares of common stock of the Company. The conversion of the remaining USM
Indebtedness would be predicated upon either (i) stockholder approval of the
issuance of more than 20% of the Company's common stock in the aggregate to USM
at a discount to market price as required by the rules of corporate governance
promulgated by the NASDAQ Small Cap Market ("NASDAQ"), or (ii) the issuance of a
waiver by the NASDAQ excepting the Company for compliance with this rule. USM
also agreed that it would continue to provide the Company with financing going
forward as further inducement to consummate the settlement agreement set forth
above.
Due to the fact that the Company had already expended significant monies to
conduct a proxy solicitation for its annual meeting scheduled on October 12,
1998, on October 19, 1998, the Company made a formal application to NASDAQ in
accordance with Rule 4310(C)(25)(H)(ii) of the NASDAQ Stock Market for a waiver
of the requirement that the Company call a meeting of its stockholders to
approve the issuance of over 20% in the aggregate of its stock to USM at a price
below market price. The rule allows for a waiver of this requirement when, among
other things, a delay in securing stockholder approval would seriously
jeopardize the financial viability of the Company. On or about October 24, 1998,
the NASDAQ Stock Market contacted the Company and indicated that it was inclined
to deny the Company's application unless additional information was submitted
for review. The Company thereafter withdrew its application and re-opened
negotiations with USM. Although the Board of Directors of the Company had
approved the issuance of 927,757 shares of common stock of the Company, such
shares were never issued. The Company however, continues to be in default of the
USM Indebtedness and has not, as of the date hereof, repaid any of the amounts
owed to USM. The Company and USM are continuing negotiations with respect to the
outstanding monies owed to USM and USM is still funding the Company.
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In June 1999, the Company and USM mining executed a letter of intent
pursuant to which the Company proposed to purchase certain assets of USM in
exchange for 69% of the Company's common stock and forgiveness of the USM
Indebtedness. This proposed transaction was never consummated.
In December 1999, the Company and Martucci entered into a letter of intent
with regard to the USM Acquisition. The parties entered into a definitive
agreement in January 2000. See "Acquisition Of 100% Of The Issued And
Outstanding Shares Of Common Stock Of U.S. Mining, Inc. In Exchange For 85% Of
The Company's Common Stock Immediately Following Consummation Of The
Acquisition" below.
BUSINESS OF THE COMPANY
The Company owns or has an interest in certain precious and nonferrous
metal properties primarily located near Idaho Springs in Clear Creek County,
Colorado. While none of its properties are operational, the Company continues,
to a limited extent, its rehabilitation of the Franklin Mines and Franklin Mill.
For a more detailed discussion of the Company's current business, see "Item
1. Description of Business" and "Item 2. Property" in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998, as amended
and filed with the Commission on April 4, 1999. Copies of these items are
attached hereto as Exhibit B. Management believes that the disclosure in Exhibit
B is materially accurate as of the date that the annual report was filed with
the Commission. However, it should be read in conjunction with and is amended by
the disclosure herein. To the extent that there is a conflict be the disclosure
in Exhibit B and the disclosure herein, the disclosure herein takes precedence.
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 proxy statement, the Company's Annual Report on 10-KSB
for the year ended December 31, 1998 and other periodic reports prepared by the
Company and filed with the Commission 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 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
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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 the USM Acquisition and any mining and milling operations and
interest, at the rate of approximately $20,000 per month through 2000.
USM has agreed to fund the Company's general expenses based upon 1999
expenditures through December 31, 2000 and the expenses of the USM Acquisition.
Martucci has agreed to guarantee this obligation of USM in the event that the
USM Acquisition is consummated. USM also has agreed to fund the reactivation of
the Franklin Mine and Mill provided that the gold prices stabilize at $350 per
ounce. No assurance can be given that, in the event that USM (and/or Martucci)
ceases to fund, or is unable to fund, the Company's operations and the Company
is unable to obtain additional funding from any other funding source, the
Company will be able to continue its operations.
If the USM Acquisition is not consummated, 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 December 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.
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. Between October
1, 1999 and December 31, 1999, USM has provided an additional funding of
approximately $55,000.
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.
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.
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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.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company had no active mining or milling operations during 1998.
The Company had a net loss of $1,531,317 for 1998 as compared to a net loss
of $1,908,475 during 1997. The decrease of $577,158 was primarily attributable
to an increase in general and administrative expense in 1998 of $274,230 offset
by the effects of a loss on sale/write down of mining and milling and other
property and equipment ($465,000 in 1998 and $1,200,000 in 1997).
General and administrative expenses were $642,592 for 1998 as compared with
$368,353 during 1997 due primarily to increases in professional fees and costs
of investment banking services.
Interest expense was $123,127 during 1998 as compared to $33,334 during
1997 due to increased interest incurred in connection with the Company's notes
payable.
LEGAL PROCEEDINGS(1)
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 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
- --------
(1) All references to numbers of Shares and per Share prices in this section do
not take into account reverse splits effected prior to or subsequent to the
dates of the transactions discussed in the section.
7
<PAGE>
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.
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.
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.
8
<PAGE>
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.
NASDAQ
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 one-for-25 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.
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. On January 11, 2000, NASDAQ informed the Company that the
Company's stock was now in compliance with the requirements for continued
listing and that the stock would continue to be listed.
BENEFICIAL OWNERSHIP OF COMMON STOCK
Directors, Executive Officers and Principal Stockholders
The following table lists the beneficial ownership of shares of the
Company's Common Stock as of January 11, 2000 (giving retroactive effect to the
three-for-one reverse split effected on December 20, 1999) before and after
consummation of the USM Acquisition for (a) each director, (b) each executive
officer, (c) each person who is known by the Company to be the beneficial owner
of five percent or more of the outstanding shares of Common Stock and (d) all
directors and executive officers as a group.
9
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Percentage of Percentage of
Total Shares Shares Owned Total Shares Owned
Names of Shares Owned Owned Prior to USM Following Following USM
Beneficial Owners (1) Acquisition USM Acquisition Acquisition (6)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J Terry Anderson (2) 6,554 * 6,554 *
- -------------------------------------------------------------------------------------------------------------------
Robert L. Waligunda (3) 2,567(4) * 2,567 *
- -------------------------------------------------------------------------------------------------------------------
William C. Martucci(3)(5) 0 * 7,473,013(6) 85.0%
- -------------------------------------------------------------------------------------------------------------------
George E. Otten (2) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
Robert W. Singer (2) 40,000 3.0% 40,000 *
- -------------------------------------------------------------------------------------------------------------------
Steven R. Schurman (2) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
Richard Brannon (3) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
Ronald Ginsberg (2) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
William H. Wishinsky(3) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
Casey Myhre (3) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
John R. Bruno (3) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------
All Officers and
Directors as a Group
(11 persons, including the 49,121 3.7% 7,522,134 85.6%
above-listed former officers
and directors)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%
(1) Except as otherwise noted, all shares are beneficially owned and the sole
voting and investment power is held by the persons indicated.
(2) Former officer and/or director of the Company.
(3) Executive officer and/or director of the Company.
(4) Includes 1,200 shares pledged as collateral to a non-affiliate individual.
(5) Mr. Martucci's address is at the facilities of USM.
(6) Assumes that no additional shares will be issued by the Company prior to
consummation of the USM Acquisition.
Following consummation of the USM Acquisition, Mr. Martucci will own 85% of
the Company's issued and outstanding shares of Common Stock and will control the
Company. Mr. Martucci has indicated to the Company that he has had discussions
concerning the possible sale of the Company Shares he will receive in the USM
Acquisition but has not come to any definitive agreements concerning such sale.
MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal U.S. market on which shares of the Company's Common Stock
(all of which are of one class, $.01 per share) are traded is on the Nasdaq
SmallCap market (symbol "WCMC"). For Information regarding possible delisting of
the Company's Common Stock, see "Legal Proceedings -- Possible NASDAQ Delisting"
above.
10
<PAGE>
The following table sets forth the range of high and low bid quotes of the
Company's Common Stock per quarter since the beginning of fiscal year 1998 as
reported by NASDAQ (which reflects inter-dealer prices without retail mark-up,
markdown, or commission and may not necessarily represent actual transactions).
The following stock prices have been adjusted to reflect a one-for-25 reverse
stock split which occurred on May 26, 1998; but have not been adjusted to
reflect the one-for-three reverse stock split effected on December 20, 1999,
except as noted.
High Low
Quarter Ended Bid Price Bid Price
- ------------- --------- ---------
March 31, 1998 $ 1.5625 $ 1.5625
June 30, 1998 $ 2.25 $ 1.5625
September 30, 1998 $ 1.50 $ 1.00
December 31, 1998 $ .875 $ .4375
March 31, 1999 $ 1.125 $ 1.06
June 30, 1999 $ 1.50 $ .4375
September 30, 1999 $ 1.375 $ .5625
10/1/99 - 12/19/99 $ 1.1875 $ .5625
12/20/99 - 12/31/99* $ 2.50 $ 1.00
- ----------
* Takes into account one-for-three reverse split effective December 20, 1999
As of December 17, 1999, the last business day before the Company announced
its plans concerning the Acquisitions, the high and low bid quotes of the
Company's Common Stock (which do not give effect to the subsequent one-for-three
reverse split) as reported by NASDAQ (which reflects inter-dealer prices without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions), were $.9375 and $.625, respectively.
As of January 17, 2000, the approximate number of record holders of the
Company's Common Stock is 2877 inclusive of those brokerage firms and/or
clearing houses holding the Company's Common Shares in street name for their
clientele (with each such brokerage house and/or clearing house being considered
as one holder). The aggregate number of shares of Common Stock issued and
outstanding is 1,318,767 as of January 17, 2000. No dividends on Common Shares
have ever been paid by the Company due to the lack of excess capital and the
Company does not anticipate that dividends will be paid in the foreseeable
future. In addition, pursuant to the terms of the Company's 12 1/4% Convertible
Debentures, the Company is prohibited from paying dividends on its Common Stock
unless and until it no longer is in default under the debentures (see "Legal
Proceedings -- Convertible Debentures").
DESCRIPTION OF THE COMPANY'S COMMON STOCK
The Company has 40,000,000 shares of authorized Common Stock, $.01 par
value. As of January 17, 2000, there were 1,318,767 shares issued and
outstanding. Upon consummation of the Acquisitions, there will be 8,791,780
shares issued and outstanding (assuming that no additional shares will be issued
by the Company prior to consummation of the USM Acquisition).
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do not
have cumulative voting rights. Holders of Common Stock are entitled to receive
ratably such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefore. In addition, pursuant to the
terms of the Company's 12 1/4% Convertible Debentures, the Company is prohibited
from paying dividends on its Common Stock unless and until it no longer is in
default under the debentures (see "Legal Proceedings -- Convertible
Debentures"). In the event of a dissolution, liquidation, or winding-up of the
Company, holders of
11
<PAGE>
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities. Holders of Common Stock have no right to convert their Common
Stock into any other securities. The Common Stock has no preemptive or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
the Common Stock to be outstanding upon completion of the Acquisitions will be,
duly authorized, validly issued, fully paid and nonassessable.
ACQUISITION OF 100% OF THE ISSUED AND OUTSTANDING SHARES OF COMMON
STOCK OF U.S. MINING, INC. IN EXCHANGE FOR 85% OF THE COMPANY'S
COMMON STOCK IMMEDIATELY FOLLOWING CONSUMMATION OF THE ACQUISITION
Item 1 on Proxy Card
TERMS OF THE TRANSACTION
The Company has entered into an agreement with USM and William C. Martucci,
USM's sole shareholder (the "USM Agreement"), pursuant to which, the Company
will acquire 2,500 shares of USM's Common Stock, which represents 100% of USM's
issued and outstanding shares of Common Stock, in exchange for such number of
shares of the Company's Common Stock that equals 85% of the issued and
outstanding shares of the Company's Common Stock immediately following
consummation of the acquisition (approximately 7,473,013 shares).
Consummation of the USM Acquisition ("Closing") requires the approval by
the Company's stockholders. It is contingent upon the representations and
warrantees of all parties to the USM Agreement being true and correct at the
Closing. These representations and warrantees relate to such issues as proper
corporate power and authority to enter into and consummate the transaction, the
organization and good standing of the corporate parties, the capitalization of
the corporate parties, the financial statements of the corporate parties, the
absence of undisclosed liabilities, taxes, litigation and compliance with laws.
The issuance of Company Common Stock in the USM Acquisition will be exempt
from registration under applicable Federal and State securities laws. No Federal
or State regulatory approval is required. However, since Mr. Martucci will
become a "Interested Stockholder" as that term is defined in section 203 of the
Delaware General Corporation Law ("GCL"). Section 203 of the GCL governs
business combinations with interested stockholders. Pursuant to Section
203(a)(1), a Delaware corporation shall not engage in any business combination
with any interested stockholder for a period of three years following the time
that such stockholder became an interested stockholder, unless, prior to such
time, the corporations Board of directors approved the transaction in which the
stockholder became an interested stockholder. On December 17, 1999, the
Company's Board of Directors approved the Letter of Intent with regard to the
USM Acquisitions and on January 13, 2000, the Board reconfirmed its decision to
proceed (see "Reasons for the Transaction" below).
The USM Agreement may be terminated and the transactions contemplated
therein abandoned at any time prior to the closing by any party if: (i) the
other party shall have breached in any material respect any of its
representations or warranties; (ii) any such representation or warranty shall
not be correct or accurate in all material respects at the date of the Closing;
(iii) the other party shall have failed to comply in all material respects with
any of its convents or agreements contained in the USM Agreement; (iv) if a
permanent injunction is entered, enforced or deemed applicable to the USM
Agreement which prohibits the consummation of the USM Acquisition; (v) if any
governmental entity, the consent of which is a condition to the obligation of
such party to consummate the USM Acquisition shall have determined not to grant
its consent; or (vi) the Closing shall not have occurred within 180 days of the
date upon which the USM Agreement was signed.
Pursuant to the USM Agreement, USM has agreed to pay the expenses of all
parties.
At present, although Mr. Martucci does not own and equity in the Company,
he may be deemed to be a control person of the Company by reason of his status
as a Director and the principal creditor of the Company. Upon consummation of
the USM Acquisition, William Martucci will own a majority (85%) of the Company's
issued and outstanding shares of Common Stock. The Company's Certificate of
Incorporation does not provide for cumulative voting.
12
<PAGE>
Accordingly, after consummation of the USM Acquisition, Mr. Martucci will be in
a position to elect all of the Company's directors, appoint its officers, and
control the Company's affairs and operations. See "Beneficial Ownership of
Common Stock" above.
BUSINESS OF USM
USM was incorporated under the laws of the State of New Jersey in October
1997. To date, its sole business has been provide financial assistance to the
Company and acquire an option to purchase certain mining property leasing rights
(see, "Certain Transactions With Executive Officers And Directors And Interest
Of A Director In The Transaction To Be Voted Upon At This Special Meeting"
above).
USM's facilities are located at 3 Dundar Road, Springfield, New Jersey
07081. Its telephone number is 973 467-9330.
REASONS FOR THE TRANSACTION
The Board of Directors believes that the there are two related principal
reasons for proceeding with the USM Acquisition. Both stem from the fact that
the Company's sole source of funding has been the USM Indebtedness (loans from
USM and its affiliates). Through December 31, 1999, the aggregate amount of the
USM Indebtedness, including interest, is approximately $1,670,000. The first
reason is the likelihood that, if the Company does not proceed with the USM
Acquisition and USM determines not to continue funding the Company's operations,
the Company most likely will be required to cease all operations. The second is
that, while Mr. Martucci will become the majority stockholder of the Company
upon consummation of the USM Acquisition, his status will change from creditor
to equity holder and USM, as a wholly-owned subsidiary of the Company, will not
foreclose on the USM Indebtedness. Foreclosure by USM on the USM Indebtedness
most likely would bankrupt the Company.
In addition, as discussed above in "Certain Transactions with Executive
Officers and Directors and Interest of A Director in the Transaction To Be Voted
Upon At This Special Meeting," USM entered into an agreement with Hayden to
purchase her interest in the Hayden/Kennec Lease. The rights contained in the
Hayden/Kennec Lease (which has expired) represent a substantial portion of the
Company's mining properties and rights. Although as of the date hereof, USM has
not consummated the transaction contemplated by the Hayden-USM Purchase
Agreement (the right to which has been extended to July 31, 2000), USM continues
to make royalty payments to Mrs. Hayden pursuant to the terms of the Hayden-USM
Purchase Agreement. Assuming that USM is able to acquire Hayden's interest in
the Hayden/Kennec Lease, the Company will, through USM, own Hayden's interest.
For a discussion of the Federal Tax consequences and accounting treatment
for the USM Acquisition, see "Federal Tax Consequences Of The USM Acquisition"
and "Accounting Treatment Of The USM Acquisition" below.
For the reasons stated above, the Board of Directors recommends a vote IN
FAVOR OF the USM Acquisition.
FEDERAL TAX CONSEQUENCES OF THE USM ACQUISITION
The following discussion regarding certain federal income tax consequences
is based on current law and is included for general information only.
Stockholders should consult their own tax advisors as to the federal, state,
local and foreign tax effects of the contemplated transactions in light of their
individual circumstances.
It is anticipated that the contemplated transactions will be accomplished
on a tax-free basis to the Company and its Stockholders. However, a portion of
the Company's net operating loss will no longer be available for offset to
future corporate taxable income as a result of the transactions.
13
<PAGE>
ACCOUNTING TREATMENT OF THE USM ACQUISITION
The following pro-forma consolidation presents the effect of the USM
acquisition on the Company's historical September 30, 1999 Balance Sheet as if
it had occurred on the balance sheet date. The pro-forma consolidation assumes
that a total of 7,470,877 shares of the Company's common stock (85% of the total
issued and outstanding shares after the USM Acquisition) will be issued to
Martucci for 100% of the issued and outstanding shares of common stock of USM.
Simultaneously, USM's loan payable to stockholder will be contributed as equity.
The unaudited pro-forma balance sheet is not necessarily indicative of what the
Company's financial position would have been if the contemplated transactions
had been effected on the dates indicated, or will be in the future.
With the exception of the elimination of interest on the related party and
shareholder indebtedness, the USM Acquisition has no material impact on the
consolidated results of operations, which have not been presented herewith.
As a result of the USM Acquisition, Mr. Martucci, the sole shareholder of
USM, will become the controlling (85%) stockholder of the Company.
The unaudited interim financial statements of USM should be read in
conjunction with the historical year-end (March 31, 1999) financial statements
and accompanying footnotes of USM contained herein.
14
<PAGE>
<TABLE>
<CAPTION>
Historical Historical
BALANCE SHEETS WCM Capital, Inc. US Mining, Inc. Consolidated
30-Sep-99 31-Dec-99 Adjustments Notes Pro-Forma
ASSETS (4)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ -- $ 715 -- $ 715
------------ ------------ ------------ ------------
Other assets
Mining, milling and other property & equipment 4,788,550 75,000 4,863,550
Mining reclamation bonds 136,344 -- 136,344
Note receivable-related party -- 1,668,770 $ (1,668,770) 1 --
------------ ------------ ------------ ------------
4,924,884 1,743,770 (1,668,770) 4,999,894
------------ ------------ ------------ ------------
$ 4,924,894 $ 1,744,485 $ (1,668,770) $ 5,000,609
============ ============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 671,458 $ 28,303 $ 699,761
Payroll and other taxes payable 29,960 -- 29,960
Convertible debentures 145,000 -- 145,000
Notes payable - related party and others 218,965 70,000 288,965
Note payable - related party 1,414,756 -- $ (1,414,756) 1 --
------------ ------------ ------------ ------------
2,480,139 98,303 (1,414,756) 1,163,686
------------ ------------ ------------ ------------
Noncurrent liabilities
Loan payable to shareholder -- 1,804,297 (1,804,297) 3 --
------------ ------------ ------------ ------------
Stockholders' equity
Common stock
Authorized 40,000,000 shares, $.01 par value (2) 13,184 -- 74,709 3 87,893
Authorized 2,500 shares, no par value -- 25 (25) --
Additional paid-in capital 18,390,364 -- 1,729,613 3 20,119,977
Deficit accumulated during development stage (15,958,793) (158,140) (254,014) 1 (16,370,947)
------------ ------------ ------------ ------------
2,444,755 (158,115) 1,550,283 3,836,923
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 4,924,894 $ 1,744,485 $ (1,668,770) $ 5,000,609
============ ============ ============ ============
Common shares issued and outstanding 1,318,390 2,500 8,789,267
============ ============ ============
</TABLE>
Notes:
1 Intercompany balance eliminated in consolidated
2 Retroactively restated for WCM Capital, Inc.'s one-for-three stock split on
December 20, 1999.
3 Consolidated column reflects contribution to equity of US Mining Inc.'s
loan payable to shareholder.
4 Consolidated column gives effect to issuance of 7,470,877 shares of common
stock of WCM Capital, Inc. (85% of total issued and outstanding after
transaction) for 2,500 common shares of US Mining, Inc.
See the Company's audited financial Statements as of and for the fiscal
years ended December 31, 1998 and 1997 and the Company's unaudited interim
financial statements as of and for the three and nine months ended September 30,
1999 and 1998 attached hereto. See also USM's audited financial Statements as of
and for the fiscal year ended March 31, 1999 and 1998 and USM's unaudited
interim financial statements as of and for the nine months ended December 31,
1999 attached hereto.
15
<PAGE>
OTHER BUSINESS
The Board of Directors is not aware of any other matters to be presented
at the meeting. If any other matters would properly come before the
meeting, the
persons named in the enclosed proxy form will vote the proxies in accordance
with their best judgment.
The Company files annual, quarterly, and special reports, proxy statements,
and other information with the Commission. You may read and copy any reports,
statements, and other information that the Company files at the Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Commission at 1-800-SEC-0330 for further information on the operations
of the Public Reference Room. The Company's Commission filings also are
available on the Commission's Internet site which is http://www.sec.gov.
Date: January 31, 2000 By Order of the Board of Directors
/s/ Robert Waligunda
Robert Waligunda, President
16
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
- INDEX -
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Auditors F - 2
Financial Statements:
Balance Sheets, December 31, 1998 and 1997 F - 3
Statements of Operations, Years Ended December 31, 1998 and 1997 and
Cumulative Period From December 1, 1977 (Inception) to December 31, 1998 F - 4
Statements of Stockholders' Equity, Years Ended December 31, 1998 and 1997 and
Cumulative Period From December 1, 1977 (Inception) to December 31, 1998 F - 5
Statements of Cash Flows, Years Ended December 31, 1998 and 1997 and
Cumulative Period From December 1, 1977 (Inception) to December 31, 1998 F - 10
Notes to Financial Statements F - 12
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
WCM Capital, Inc.
We have audited the balance sheets of WCM Capital, Inc. (formerly Franklin
Consolidated Mining Co., Inc.) as of December 31, 1998 and 1997, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the accumulated
amounts from inception through December 31, 1996, which includes an accumulated
deficit as of December 31, 1996 of $(12,260,249). Those amounts were audited by
other auditors whose report has been furnished to us and our opinion insofar as
it relates to those accumulated amounts is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of WCM Capital, Inc., and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage enterprise whose
operations have generated recurring losses and cash flow deficiencies from
inception and, as of December 31, 1998, has a substantial working capital
deficiency. As a result, it was in default with respect to payments on several
notes and on convertible debentures and substantially dependent on outside
funding for financing. Such matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
As discussed in Note 11 to the financial statements, the Company changed its
method of valuing certain issuances of securities.
LAZAR LEVINE & FELIX LLP
New York, New York
April 13, 1999
F-2
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ASSETS -
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 1,078
------------ ------------
TOTAL CURRENT ASSETS -- 1,078
------------ ------------
OTHER ASSETS:
Mining, milling and other property and equipment, net of accumulated
depreciation and depletion of $2,105,515 and $1,959,160 (Notes 4 and 7) 4,808,580 5,424,935
Land - held for sale (Note 3) -- 345,000
Mining reclamation bonds (Note 5a) 134,602 130,681
------------ ------------
$ 4,943,182 $ 5,901,694
============ ============
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 654,164 $ 367,933
Payroll and other taxes payable 29,960 31,181
Convertible debentures (Note 6) 145,000 145,000
Notes payable - related party and others (Note 5) 218,965 167,000
Note payable - related party (Note 7) 1,191,586 955,756
------------ ------------
TOTAL CURRENT LIABILITIES 2,239,675 1,666,870
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 10 and 11):
Common stock, par value $.25 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 (15,700,041) (14,168,724)
------------ ------------
2,703,507 4,234,824
------------ ------------
$ 4,943,182 $ 5,901,694
============ ============
</TABLE>
See auditors' report and notes to financial statements.
F-3
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Cumulative
from
1998 1997 Inception
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales $ -- $ -- $ 876,082
Interest income 3,920 3,888 548,695
Other income 4,397 -- 79,397
------------
8,317 3,888 1,504,174
------------ ------------ ------------
EXPENSES:
Mine expenses and environmental remediation costs 62,560 162,945 3,586,298
Loss on sale/write-down of mining and milling and other property
and equipment 465,000 1,200,000 1,665,000
Depreciation and depletion 146,355 121,980 2,300,864
General and administrative expenses 642,592 368,353 6,248,377
Interest expense 123,127 33,334 1,141,479
Amortization of debt issuance expense -- -- 683,047
Equity in net (income) loss and settlement of claims of Joint Venture -- (9,249) 1,059,971
Other 100,000 35,000 519,179
------------ ------------ ------------
1,559,634 1,912,363 17,204,215
------------ ------------ ------------
NET LOSS (Note 9) $ (1,531,317) $ (1,908,475) $(15,700,041)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (.39) $ (.48)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 3,955,169 3,940,000
============ ============
</TABLE>
See auditors' report and notes to financial statements.
F-4
<PAGE>
WCM CAPITAL, INC.
FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 1 of 5
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
-=----- ----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 6,200 $ 1,550 $ 41,550 $ -- $ -- $ 43,100
Non-cash:
Related parties 37,000 9,250 -- -- -- 9,250
In exchange for shares of Gold
Developers and Producers, Inc. 43,800 10,950 6,484 -- -- 17,434
Net loss -- -- -- (45,584) --
------- ----------- ----------- ----------- --------- -----------
(45,584)
Balance, December 31, 1977 87,000 21,750 48,034 (45,584) -- 24,200
Issuance of common stock:
Pursuant to public offering, net of
underwriting expenses of $11,026 23,528 5,882 278,113 -- -- 283,995
Cash 9,000 2,250 240,627 -- -- 242,877
Non-cash 200 50 4,950 -- -- 5,000
Net loss -- -- -- (66,495) --
------- ----------- ----------- ----------- --------- -----------
(66,495)
Balance, December 31, 1978 119,728 29,932 571,724 (112,079) -- 489,577
Issuance of common stock:
Cash 9,274 2,318 438,932 -- -- 441,250
Non-cash - related parties 1,600 400 59,600 -- -- 60,000
Non-cash - other 267 67 13,283 -- -- 13,350
Net loss -- -- -- (128,242) --
------- ----------- ----------- ----------- --------- -----------
(128,242)
Balance, December 31, 1979 130,869 32,717 1,083,539 (240,321) -- 875,935
Issuance of common stock:
Cash 11,590 2,898 837,102 -- -- 840,000
Non-cash 2,380 595 118,405 -- -- 119,000
Net loss -- -- -- (219,021) -- (219,021)
------- ----------- ----------- --------- --------- -----------
Balance, December 31, 1980 144,839 36,210 2,039,046 (459,342) -- 1,615,914
Issuance of common stock:
Cash 2,625 656 261,844 -- -- 262,500
------- ----------- ----------- ----------- --------- -----------
Balance, pre-stock split 147,464 36,866 2,300,890 (459,342) -- 1,878,414
Issuance of common stock:
Pursuant to a four-for-one stock split 442,392 110,598 (110,598) -- -- --
Cash 23,120 5,780 552,220 -- -- 558,000
Non-cash 4,160 1,040 102,960 -- -- 104,000
Commission on sale of common stock -- -- (57,300) -- -- (57,300)
Net loss -- -- -- (288,105) -- (288,105)
------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1981 617,136 154,284 2,788,172 (747,447) -- 2,195,009
</TABLE>
See auditors' report and notes to financial statements.
F-5
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 2 of 5
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 34,440 $ 8,610 $ 755,516 $ -- $ -- $ 764,126
Non-cash 6,480 1,620 160,380 -- -- 162,000
Commission on sale of common stock -- -- (56,075) -- -- (56,075)
Net loss -- -- -- (287,291) -- (287,291)
------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1982 658,056 164,514 3,647,993 (1,034,738) -- 2,777,769
Issuance of common stock:
Cash 50,925 12,732 1,176,818 -- -- 1,189,550
Non-cash 2,833 708 70,126 -- -- 70,834
Exercise of stock options by:
Related parties 10,700 2,675 264,825 -- -- 267,500
Others 160 40 3,960 -- -- 4,000
Commission on sale of common stock -- -- (124,830) -- -- (124,830)
Net loss -- -- -- (749,166) -- (749,166)
------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1983 722,674 180,669 5,038,892 (1,783,904) -- 3,435,657
Issuance of common stock:
Cash 48,068 12,017 1,139,683 -- -- 1,151,700
Non-cash 1,100 275 27,225 -- -- 27,500
Exercise of stock options by related parties 8,000 2,000 198,000 -- -- 200,000
Commission on sale of common stock -- -- (90,950) -- -- (90,950)
Net loss -- -- -- (301,894) -- (301,894)
------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1984 779,842 194,961 6,312,850 (2,085,798) -- 4,422,013
Issuance of common stock:
Cash 16,853 4,213 295,866 -- -- 300,079
Non-cash 400 100 7,400 -- -- 7,500
Exercise of stock options by:
Related parties 8,000 2,000 148,000 -- -- 150,000
Others 40 10 740 -- -- 750
Commission on sale of common stock -- -- (3,462) -- -- (3,462)
Net loss -- -- -- (133,929) -- (133,929)
------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1985 805,135 201,284 6,761,394 (2,219,727) -- 4,742,951
</TABLE>
See auditors' report and notes to financial statements.
F-6
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 3 of 5
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- ----------- ----------- ----------- --------- -----------
Issuance of common stock:
<S> <C> <C> <C> <C> <C> <C>
Cash 22,760 $ 5,690 $ 294,810 $ -- $ -- $ 300,500
Non-cash - related parties 6,400 1,600 78,400 -- -- 80,000
Non-cash - others 5,400 1,350 52,650 -- -- 54,000
Net loss -- -- -- (227,788) -- (227,788)
--------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1986 839,695 209,924 7,187,254 (2,447,515) -- 4,949,663
Issuance of common stock:
Cash 104,175 26,044 1,261,257 -- -- 1,287,301
Non-cash - related parties 8,080 2,020 68,880 -- -- 70,900
Non-cash - other 1,500 375 36,875 -- -- 37,250
Commission on sale of common stock -- -- (110,243) -- -- (110,243)
Net loss -- -- -- (730,116) -- (730,116)
--------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1987 953,450 238,363 8,444,023 (3,177,631) -- 5,504,755
Issuance of common stock - non-cash - related
parties 8,000 2,000 48,000 -- -- 50,000
Net loss -- -- -- (386,704) -- (386,704)
Purchase of 50,000 shares of treasury stock -
at cost -- -- -- -- (12,500) (12,500)
--------- ----------- ----------- ----------- ----------- -----------
Balance, at December 31, 1988 961,450 240,363 8,492,023 (3,564,335) (12,500) 5,155,551
Issuance of common stock:
Cash 27,120 6,780 103,720 -- -- 110,500
Non-cash - others 11,346 2,836 31,030 -- -- 33,866
Non-cash -related parties 8,400 2,100 29,400 -- -- 31,500
Private placement:
Cash 91,000 22,750 -- -- -- 22,750
Debt issuance expense -- -- 455,000 -- -- 455,000
Conversion of debentures 42,000 10,500 94,500 -- -- 105,000
Exercise of stock options 12,000 3,000 42,000 -- -- 45,000
Commission on sale of common stock -- -- (1,500) -- -- (1,500)
Compensation resulting from stock options
granted -- -- 39,000 -- -- 39,000
Net loss -- -- -- (1,279,804) -- (1,279,804)
--------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1989 1,153,316 288,329 9,285,173 (4,844,139) (12,500) 4,716,863
</TABLE>
See auditors' report and notes to financial statements.
F-7
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 4 of 5
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Sale of underwriter's stock warrants -- $ -- $ 100 $ -- $ -- $ 100
Issuance of common stock:
Cash 13,400 3,350 41,875 -- -- 45,225
Non-cash - others 1,594 399 5,579 -- -- 5,978
Conversion of debentures 6,400 1,600 30,400 -- -- 32,000
Net loss -- -- -- (1,171,962) -- (1,171,962)
--------- ------------ ------------ ------------ ------------ -------------
Balance, December 31, 1990 1,174,710 293,678 9,363,127 (6,016,101) (12,500) 3,628,204
Issuance of common stock:
Cash - others 71,984 17,996 78,935 -- -- 96,931
Cash - related parties 72,000 18,000 72,000 -- -- 90,000
Non-cash - others 47,348 11,837 47,350 -- -- 59,187
Conversion of debentures 149,240 37,310 588,690 -- -- 626,000
Exercise of stock options 10,000 2,500 10,000 -- -- 12,500
Conversion of notes payable 10,000 2,500 12,500 -- -- 15,000
Net loss -- -- -- (764,926) -- (764,926)
--------- ------------ ------------ ------------ ------------ -------------
Balance, December 31, 1991 1,535,282 383,821 10,172,602 (6,781,027) (12,500) 3,762,896
Issuance of common stock:
Cash - others 80,877 20,219 149,389 -- -- 169,608
Cash - related parties 25,200 6,300 42,700 -- -- 49,000
Non-cash - others 69,185 17,296 348,762 -- -- 366,058
Non-cash - related parties 484 121 485 -- -- 606
Non-cash - exercise of options
by related parties 82,000 20,500 82,000 -- -- 102,500
Conversion of debentures 21,600 5,400 156,600 -- -- 162,000
Commission on sale of common stock -
related parties -- -- (7,123) -- -- (7,123)
Net loss -- -- -- (1,343,959) -- (1,343,959)
--------- ------------ ------------ ------------ ------------ -------------
Balance, December 31, 1992 1,814,628 453,657 10,945,415 (8,124,986) (12,500) 3,261,586
Issuance of common stock:
Cash - others 34,936 8,734 125,230 -- -- 133,964
Cash - related parties 31,080 7,770 69,930 -- -- 77,700
Non-cash - others 6,000 1,500 13,500 -- -- 15,000
Non-cash - settlement of litigation 40,000 10,000 90,000 -- -- 100,000
Non-cash - exercise of options
by related parties 8,000 2,000 8,000 -- -- 10,000
Conversion of debentures 5,600 1,400 33,600 -- -- 35,000
Conversion of loan 4,000 1,000 9,000 -- -- 10,000
Net loss -- -- -- (797,619) -- (797,619)
--------- ------------ ------------ ------------ ------------ -------------
Balance, December 31, 1993 1,944,244 486,061 11,294,675 (8,922,605) (12,500) 2,845,631
</TABLE>
See auditors' report and notes to financial statements.
F-8
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 5 of 5
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- ------------- ------------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Retirement of treasury stock (2,000) $ (500) $ (12,000) $ -- $12,500 $ --
Net loss -- -- -- (381,596) -- (381,596)
--------- ------------- ------------- ------------ -------- -----------
Balance, December 31, 1994 1,942,244 485,561 11,282,675 (9,304,201) -- 2,464,035
Issuance of common stock:
Settlement of claims by joint venture partner
as restated 240,000 60,000 876,000 -- -- 936,000
Repayments of loan from joint venture partner
as restated 128,000 32,000 467,200 -- -- 499,200
Repayments of long-term loans from related
parties and accrued interest 347,192 86,798 590,227 -- -- 677,025
Exchange of shares for profit participation
interests 108,000 27,000 (27,000) -- -- --
Net loss, as restated -- -- -- (1,641,944) -- (1,641,944)
--------- ------------- ------------- ------------ --------- ------------
Balance, December 31, 1995, as restated 2,765,436 691,359 13,189,102 (10,946,145) -- 2,934,316
Issuance of common stock for:
Cash 70,136 17,534 280,066 -- -- 297,600
Services and interest, as restated 148,640 37,160 525,277 -- -- 562,437
Conversion of convertible notes 171,790 42,948 515,372 -- -- 558,320
Repayments of loan from joint venture partner 92,640 23,160 338,715 -- -- 361,875
Repayments of long-term loans from related
party 374,677 93,669 1,369,912 -- -- 1,463,581
Net loss, as restated -- -- -- (1,314,104) -- (1,314,104)
--------- ------------- ------------- ------------ --------- ------------
Balance, December 31, 1996, as restated 3,623,319 905,830 16,218,444 (12,260,249) -- 4,864,025
Issuance of common stock for:
Extension of lease rights 4,160 1,040 11,960 -- -- 13,000
Conversion of note payable 307,692 76,923 523,077 -- -- 600,000
Conversion of debt 20,000 5,000 45,500 -- -- 50,500
Acquisition of joint venture -- -- 615,774 -- -- 615,774
Net loss -- -- -- (1,908,475) -- (1,908,475)
--------- ------------- ------------- ------------ -------- ------------
Balance, December 31, 1997, as restated 3,955,169 988,793 17,414,755 (14,168,724) -- 4,234,824
Net loss -- -- -- (1,531,317) -- (1,531,317)
--------- ------------- ------------- ------------ --------- ------------
BALANCE, DECEMBER 31, 1998 3,955,169 $ 988,793 $ 17,414,755 $(15,700,041) $ -- $ 2,703,507
========= ============= ============= ============ ========= ============
</TABLE>
See auditors' report and notes to financial statements.
F-9
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 Page 1 of 2
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Cumulative
from
1998 1997 Inception
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,531,317) $ (1,908,475) $(15,700,041)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and depletion 146,355 121,980 2,300,864
Provision for bad debt 350,000 -- 350,000
Write-down of mining and milling and other property and
equipment 200,000 1,200,000 1,400,000
Amortization of debt issuance expense -- 683,047
Loss on sale of equipment 265,000 -- 265,000
Value of common stock issued for:
Services and interest 13,000 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 (income) loss of joint venture (9,249) 123,971
Other -- (7,123)
Changes in operating assets and liabilities:
Prepaid expenses 107,979 --
Interest accrued on mining reclamation bonds (3,921) (3,806) (9,602)
Accounts payable and accrued expenses 285,010 (104,986) 916,380
------------ ------------ ------------
Net cash used in operating activities (288,873) (583,557) (6,282,210)
------------ ------------ ------------
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)
------------ ------------ ------------
</TABLE>
See auditors' report and notes to financial statements.
F-10
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
STATEMENTS OF CASH FLOW Page 2 of 2
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM DECEMBER 1, 1977 (INCEPTION)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Cumulative
from
1998 1997 Inception
------------ ------------ -------------
<S> <C> <C> <C>
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 37,234 (181,017)
Payments of debt issuance expenses -- (164,233)
Proceeds of other notes and loans payable 287,795 547,274 1,603,069
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 287,795 584,508 11,782,883
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (1,078) 951 --
Cash, beginning of period 1,078 127 --
------------ ------------ ------------
CASH, END OF PERIOD $ -- $ 1,078 $ --
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ -- $ -- $ 299,868
============ ============ ============
</TABLE>
NON-CASH ITEMS:
During 1998: The Company sold its Gold Hill Properties with a book value of
$1,340,000 for property having a fair market value of $725,000 and a note
receivable of $350,000. A loss of $265,000 was recognized on the transaction.
During 1997: (1) the Company converted a $600,000 note payable to a former joint
venture partner to 307,692 shares of Company stock (2) the Company also issued
20,000 shares of common stock as consideration for a liability of approximately
$50,000 due to an unaffiliated third party (3) in connection with the
elimination of the Zeus Joint Venture, the Company acquired net assets of
$615,774 and recorded additional paid-in capital of the same amount and (4) the
Company wrote down the remaining $150,000 investment associated with the 20%
purchase of Newmineco and simultaneously reduced a note payable to a party
related to Newmineco.
See auditors' report and notes to financial statements.
F-11
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
WCM Capital, Inc. (formerly Franklin Consolidated Mining Co., Inc.)
(the "Company") originally incorporated on December 1, 1976 under the
laws of the State of Delaware, is engaged in the exploration,
development and mining of precious and non-ferrous metals, including
gold, silver, lead, copper and zinc. The Company owns or has an
interest in a number of precious and non-ferrous metal properties. The
Company's principal mining properties are (i) the Franklin Mines,
located near Idaho Springs in Clear Creek County, Colorado, for which
the Company acquired the exclusive right to explore, develop, mine,
and extract all minerals located in approximately 51 mining claims
(the "Franklin Mines"), (ii) the Franklin Mill, a crushing and
flotation mill which is located on the site of the Franklin Mines (the
"Franklin Mill"), and up until its sale on June 5, 1998 (iii) the Gold
Hill Mill (see Note 2d), a fully permitted modern facility located in
Boulder County, Colorado (the "Gold Hill Mill"). The Company is a
development stage enterprise because it did not generate any
significant revenues through December 31, 1998. On October 13, 1998,
the Company held its annual meeting of shareholders at which time the
shareholders approved an amendment to its certificate of incorporation
changing the name of the Company to WCM Capital, Inc. The name change
was effective October 16, 1998.
In February 1993, the Company entered into a joint venture arrangement
with Island Investment Corp., a Nevada corporation ("Island"),
pursuant to which the parties formed Zeus No. 1 Investments, a
California general partnership (the "Joint Venture"). The Company had
a 17.5% interest in the Joint Venture, and Island had the remaining
82.5% interest. The Joint Venture was formed to develop the Franklin
Mines and related assets of the Company. In May 1993, Island assigned
its interest in the Joint Ventures to Gems and Minerals Corp.,
("Gems") a wholly owned subsidiary of Island. On July 15, 1996, Gems
transferred 31.5% of its 82.5% interest in the Joint Venture to Nuco
Ventures, Inc., a Delaware Company, and wholly-owned subsidiary of
Gems ("Nuco").
During 1997, in a step transaction, Gem's and Nuco's aggregate 82.5%
interest in the Joint Venture was acquired by U.S. Mining, Inc., a New
Jersey corporation ("USM"). USM assigned the acquired interest to the
Company in exchange for the assumption by the Company of certain
liabilities. Upon the acquisition of the 82.5% interest of the Joint
Venture by the Company, the relationship with Gems was terminated and
the Joint Venture was effectively dissolved.
F-12
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued):
<TABLE>
<CAPTION>
In conjunction with these transactions, the Company:
<S> <C>
o Acquired mine and mill improvements having a net book value of
(see Note 4) $ 780,787
o Eliminated the Joint Venture deficit of $123,971, after giving
effect to equity in net income of Joint Venture of $9,249 for
1997 123,971
o Eliminated a $458,567 liability which represented the remainder
of a note and related accrued interest payable to a subsidiary of
Gems in conjunction with the acquisition of the Gold Hill Mill 458,567
o Eliminated a $229,204 receivable from Gems (229,204)
o Assumed notes payable - other of $87,000 and related accrued
interest on these notes of $16,858 (see Note 5) (103,858)
o Assumed a liability of $408,482 payable to POS Financial, Inc.
(see Note 7) (408,482)
o Assumed a liability of $20,255 associated with the Joint Venture
less other items of $14,248 (6,007)
----------
The net amount of $615,774 was credited to additional paid-in capital. $ 615,774
==========
</TABLE>
Basis of Presentation/Going Concern Uncertainty:
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
December 31, 1998 and 1997, the Company has a cash balance of $0 and
$1,078, respectively an accumulated deficit of $15,700,041 and
$14,168,724, respectively current liabilities of $2,239,675 and
$1,666,870, and a working capital deficiency of $ 2,239,675 and
$1,665,792. In addition, its operations used $288,873 and $583,557 of
cash for the year ended December 31, 1998 and 1997, respectively.
Also, the Company was in default on the payment of the principal
balance and accrued interest on certain notes and debentures (see
Notes 5 and 6). Certain accounts payable were also 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 $15,000 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.
F-13
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued):
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 $15,000 per
month plus interest. 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 once needed.
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 POS 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 exploit the
Franklin Mines.
Substantially all of the $4,808,580 of mineral properties and
equipment included in the accompanying balance sheet as of December
31, 1998, 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with generally
accepted accounting principles. Outlined below are those policies that
are considered particularly significant.
(1) Use of Estimates:
To prepare financial statements in accordance with generally accepted
accounting principles, management makes certain estimates and
assumptions, where applicable, that affect the reported amounts of
assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the
reporting period. While actual results could differ from those
estimates, management does not expect such variances, if any, to have
a material effect on the financial statements.
(2) Cash Equivalents:
The Company defines cash equivalents as all short-term, highly liquid
investments with original maturity dates less than 90 days.
F-14
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(3) Mining, Milling and Other Property and Equipment:
Mining, milling and other property and equipment are recorded at cost.
Costs incurred to acquire, explore, improve, and develop mining and
milling properties are capitalized and amortized in relation to the
production of estimated reserves. Mine development expenditures
incurred substantially in advance of production are deferred on an
individual property basis until the viability of a property is
determined. When a property is placed in commercial production, such
deferred costs are depleted using the units-of-production method.
General exploration costs and costs to maintain the mineral rights and
leases are expensed as incurred. Management of the Company
periodically reviews the recoverability of the capitalized mineral
properties and mining equipment. Management takes into consideration
various information including, but not limited to, historical
production records taken from previous mine operations, results of
exploration activities conducted to date, estimated future prices and
reports and opinions of outside geologists, mine engineers, and
consultants. When it is determined that a project or property will be
abandoned or its carrying value has been impaired, a provision is made
for any expected loss on the project or property.
Post-closure reclamation and site restoration costs are estimated
based upon environmental and regulatory requirements and accrued over
the life of the mine using the units-of-production method. Current
expenditures relating to ongoing environmental and reclamation
programs are expensed as incurred.
Depletion of mining and milling improvements and mine development
expenditures is computed using the units of production method based on
probable reserves (there was no charge for depletion in 1998 and 1997
because the Company's mining and milling operations were not in
operation during these years). Depreciation of equipment is computed
using the straight-line method over the estimated useful lives of the
related assets.
(4) Impairment of Long-Lived Assets:
As of January 1, 1996, the Company adopted the provisions of FASB
Statement of Financial Accounting Standards No. 121, "Accounting of
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (SFAS 121). Under SFAS 121, impairment losses on
long-lived assets are recognized when events or changes in
circumstances indicate that the undiscounted cash flows estimated to
be generated by such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses then are measured by comparing the fair
value of assets to their carrying amounts. It was the Company's
determination that due to certain restrictions associated with milling
operations in Boulder County, Colorado, the Gold Hill Mill properties
would not be placed into operation. The Company planned to sell the
land and structural building and move and utilize the equipment to the
Franklin
F-15
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
properties and in fact on June 5, 1998 the Company sold its Gold Hill
Mill Properties in exchange for property and equipment having a market
value of $725,000 and a 14% note receivable of $350,000. The note is
payable on demand. The Company recognized a loss of $265,000 as a
result of this transaction. As of December 31, 1998, (a) the $350,000
note was written down to $0 and (b) a $200,000 writedown was taken
against the $725,000 of equipment acquired, based upon an evaluation
of impairment.
As a result of its intentions, at December 31, 1997 the Company
reduced by $1,200,000 the carrying value of certain assets relating to
its Gold Hill milling operations to $1,340,000, which approximated
management's estimate of fair value at that time. As stated above,
this property was sold in June of 1998.
(5) Joint Venture:
The Company accounted for its investment in the Joint Venture under
the equity method. As a general partner in the Joint Venture (until
the Joint Venture's dissolution in November 1997 - see Note 1), the
Company would be liable to creditors and certain other parties for any
obligations the Joint Venture might ultimately be unable to satisfy.
Accordingly, through November 25, 1997, the Company recorded its
equity in the net losses of the Joint Venture even though they
exceeded the Company's total investment.
(6) Revenue Recognition:
Revenues, if any, from the possible sales of mineral concentrates will
be recognized by the Company only upon receipt of final settlement
funds from the smelter.
(7) Environmental Remediation Costs:
Environmental remediation costs are accrued based on estimates of
known environmental remediation exposures. Such accruals are recorded
even if significant uncertainties exist over the ultimate cost of the
remediation. Ongoing environmental compliance costs, including
maintenance and monitoring costs are expensed as incurred.
F-16
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(8) Income Taxes:
Deferred income taxes are to be provided on transactions, which are
reported in the financial statements in different periods than for
income tax purposes. The Company utilizes Financial Accounting Board
Statement No. 109, "Accounting for Income Taxes," ("SFAS 109"). SFAS
109 requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which
the difference is expected to reverse. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized (see Note 9).
(9) Loss Per Common Share:
The Company had adopted SFAS 128 "Earnings Per Share" ("SFAS 128"),
which has changed the method of calculating earnings per share. SFAS
128 requires the presentation of "basic" and "diluted" earnings per
share on the face of the income statement. Loss per common share is
computed by dividing the net loss by the weighted average number of
common shares outstanding during each period. Common stock equivalents
have been excluded from the computations since the results would be
anti-dilutive. Earnings per share has been restated for prior periods
to give effect to the twenty-five for one reverse stock split (see
Note 10).
(10) Reclassifications:
Prior years financial statements have been reclassified to conform
with the current year presentation.
(11) Fair Value of Financial Investments:
The carrying amount of the Company's borrowings approximate fair
value.
(12) Statement of Comprehensive Income:
SFAS 130 "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997. This statement prescribes standards
for reporting comprehensive income and its components. Since the
Company currently does not have any items of comprehensive income, a
statement of comprehensive income is not yet required.
F-17
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - ACQUISITIONS OF MINING AND MILLING PROPERTIES:
On December 26, 1976, the Company acquired Gold Developers and
Producers Incorporated, a Colorado corporation which, prior to the
acquisition, leased 28 patented mining claims from Audrey and David
Hayden and Dorothy Kennec pursuant to a mining lease and option to
purchase, dated November 12, 1976 (hereinafter collectively referred
to as the "Hayden/Kennec Leases"). In 1981, the Company commenced a
rehabilitation program to extend and rehabilitate the shafts and
tunnels in place at the Franklin Mines, install the Franklin Mill, and
search for and delineate a commercial ore body. In 1983, the Company
completed the Franklin Mill.
On July 3, 1996, the Company acquired the Gold Hill Mill from a
wholly-owned subsidiary of Gems (see Note 1), in exchange for a 8%
mortgage note with an initial principal balance of $2,500,000. The
Gold Hill Mill is a fully permitted milling facility located in
Boulder, Colorado. The Company is responsible for developing and
operating the Gold Hill Mill.
At December 31, 1997, the Company reduced by $1,200,000 the carrying
value of certain of the Gold Hill Mill assets to $1,340,000 which
approximates management's estimate of fair value . Land aggregating
$345,000, of the remaining $1,340,000 in assets, is classified on the
1997 balance sheet as land-held for resale with the balance classified
as mining, milling and other property and equipment. All the Gold Hill
assets were sold during 1998 (see Note 2d).
On September 26, 1996, the Company acquired a 20% interest in
Newmineco, an inactive company, by issuing a 9.5% note payable to Gems
with a principal balance of $600,000. Newmineco represented that it
held the exclusive mining rights related to the Mogul Mines in the
Spencer Mountains of Colorado. Because of certain permitting and other
problems in the Mogul Mines, the purchase price to the Company was
reduced to $150,000 in 1996, and the investment was written down to
zero as at December 31, 1997 (see Note 6).
NOTE 4 - MINING, MILLING AND OTHER PROPERTY AND EQUIPMENT:
Mining, milling and other property and equipment, at the Franklin
Mines and the Franklin Mill and the Gold Hill Mill consist of the
following at December 31:
1998 1997
---------- ----------
Machinery and equipment $1,747,220 $2,217,220
Mine and mill improvements (a) 5,071,065 5,071,065
Furniture and fixtures 11,714 11,714
Automotive equipment 84,096 84,096
---------- ----------
6,914,095 7,384,095
Less: accumulated depreciation and depletion 2,105,515 1,959,160
---------- ----------
$4,808,580 $5,424,935
(a) Includes mine and mill improvements of $780,787 in connection with the
termination of the Joint Venture (see Note 1).
F-18
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 4 - MINING, MILLING AND OTHER PROPERTY AND EQUIPMENT (Continued):
During the years ended December 31, 1998 and 1997, the Company
expended $62,560 and $162,945, respectively on mine expenses and
environmental remediation costs.
NOTE 5 - NOTES PAYABLE - RELATED PARTY AND OTHERS:
Notes payable related party and others consist of the following at
December 31:
1998 1997
---- ----
12% unsecured demand notes due to the Company's
former President and his affiliated entity $ 71,965 $ 20,000
Secured promissory note (a) 60,000 60,000
Unsecured promissory notes (b) 87,000 87,000
-------- --------
$218,965 $167,000
======== ========
(1) 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.
(2) This principal amount represents four unsecured promissory notes
comprised of one $36,000 note and three $17,000 notes payable. These
obligations were assumed by the Company on November 25, 1997, as part
of the acquisition from USM of the remaining interest in the Joint
Venture (see Note 1). These notes were in default when assumed by the
Company, and remain in default as of December 31, 1998. Interest is
being accrued at rates between 8% and 17% per annum.
Accrued interest on the above notes at December 31, 1998 and 1997
aggregated approximately $45,600 and $21,000.
F-19
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 - CONVERTIBLE DEBENTURES AND OTHER CONVERTIBLE DEBT:
The Company's convertible debt at December 31, 1998 and 1997 consists
of:
12.25% convertible debenture originally due 12/31/94 $145,000
As of December 31, 1998 and 1997, the Company was in default with
respect to the payment of the $145,000 principal balance of the
debenture and accrued interest of approximately $67,000 and $49,000,
respectively. As a result of its default, the Company may be subject
to legal proceedings by the Transfer Agent/Trustee under the Indenture
Agreement or from debentureholders 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
debentureholders (see Note 8c).
In September 1996, the Company acquired its 20% interest in Newmineco
by issuing a 9.5% note payable to Gems with a principal balance of
$600,000. This note could be converted to common stock at the
Company's option on or after January 1, 1997. On February 10, 1997,
the Company notified the assignees that it had elected to convert the
principal balance of the 9.5% note into 307,693 shares of common
stock, as adjusted based on the conversion rate of $1.95, per share as
adjusted. As a result of problems concerning permitting and various
other issues related to the Mogul Mines, the purchase price was
reduced to $150,000 on December 31, 1996 and to $-0- on December 31,
1997 (see Note 3). The $450,000 (1996) and $150,000 (1997) reductions
in the purchase price were effectuated through an equivalent reduction
in the principal balance of an 8% mortgage note that was payable to an
affiliate of Gems by the Company.
NOTE 7 - NOTE PAYABLE - RELATED PARTY:
The Company had outstanding an 8% promissory note balance of $955,756,
at December 31, 1997, which represents monies advanced to the Company
by, an affiliated entity, POS Financial, Inc. ("POS"), a New Jersey
corporation and obligations assumed in connection with the
contributions of Joint Venture interests (see Note 1). 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.
Additional amounts were loaned to the Company by USM during 1998. The
balance on the note at December 31, 1998 aggregated $1,191,586 plus
accrued interest of $91,950.
F-20
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
(a) 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.
On November 19, 1996, the Company entered into an amendment to the
Hayden/Kennec Leases with Dorothy Kennec (the "Kennec Amendment").
Pursuant to the terms of the Kennec Amendment, Kennec agreed to extend
the term as it relates to her portion of the leasehold rights through
November 12, 1997. In consideration for such extension, the Company
agreed to increase the royalty payment due to Kennec under the
original Hayden/Kennec Leases from $1,000 to $2,000 per month and to
issue to Kennec 4,160 shares of the common stock of the Company valued
at $3.125 per share as adjusted, having an aggregate value of $13,000.
All of the payments made under the Kennec Amendment plus the value of
the shares issued thereunder are to be further applied against the
buy-out price of the property under the original Hayden/Kennec Leases.
The 4,160 shares of common stock were issued on April 9, 1997 (see
Note 10).
To further secure the Company and the Joint Venture, Gems entered into
an agreement on December 21, 1995 to purchase Hayden's interest
thereto (the "Hayden Interests") for a purchase price of $75,000. Gems
made an initial payment of $5,000 to Hayden and the remainder of the
purchase price was to be paid on or prior to the expiration date of
the Hayden/Kennec Leases. Gems advised the Company that under Colorado
law, if an owner of 50% of mineral rights desired 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, Gems informed the Company that it believed that with the
acquisition of the Hayden interest, together with the portion of the
Hayden/Kennec Leases owned by Kennec, the Company and the Joint
Venture would have adequate access to the minerals during the
remainder of the term of the Hayden/Kennec Leases on a continuing
basis.
On November 12, 1997, Gems had failed to comply with the terms of the
Hayden/Kennec-Gems Purchase Agreement. 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 a note, due on February 2, 1998.
Payment on the note has been extended until USM receives a report of
clear title. 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 13, 1998 (the "Extended
Expiration Date"). As of December 31, 1998 USM had yet to receive
clear title but continued to make lease payments.
F-21
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
(a) Lease Agreements (continued):
While the Company has extended the term of the Hayden/Kennec Leases,
as amended through March 13, 1998, in the event that it shall expire
or otherwise terminate, any improvements made on the property become
the property of the lessor without any further compensation to the
Company and the lessor would have to reclaim the property in
accordance with the State of Colorado Division of Minerals and Geology
(the "DMG") requirements in effect at the time of such expiration or
termination. Thus, the likelihood that the Company would recover
fixtures and other equipment on the property may be minimal.
(b) Environmental Matters:
On January 31, 1997, the Company received approval from the DMG of its
March 6, 1996 amended application to its permit by obtaining the
$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 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. As a result, management
believes that substantially all of the necessary environmental and
regulatory approvals have been obtained from DMG.
The amended permit required among other things the submission of a
final design for tailings disposal facilities, the installation of a
Surface Water Control Plan previously approved by the DMG, the filing
of an Environmental Protection Plan, and the completion of certain
closure plans.
As of December 31, 1998 and 1997, the Company believes that there are
no formal violations against it 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.
(c) Litigation:
The Company is involved in various litigation as explained below:
(1) The Company and others are defendants in an 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 defendants plan to vigorously defend
their position asserting that the work was never completed. An
accrued liability of $135,000, an increase of $100,000 from the
December 31, 1997 financial statements, has been recorded. This
is the amount the Company estimates to be its portion of the
total claim and the $100,000 additional expense has been recorded
in the accompanying financial statements and is included in other
F-22
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
(c) Litigation (continued):
(i) expenses. The Company and the other defendants are in settlement
negotiations with the plaintiff. The Company believes that its'
$135,000 accrual is enough to satisfy its' portion of a future
settlement. There can be no assurance that final settlement
agreements will be executed or that the Company would be
successful if the matter does proceed to arbitration.
(ii) 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. A default judgement 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.
(iii) The Company is in litigation with Redstone Securities, Inc.
("Redstone") a company which in the past had provided financial
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. More specifically, Redstone contends that it
should be able to sell its stock under Rule 144. 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 being 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.
F-23
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
(d) 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, the Company received a
notification letter from NASDAQ informing them 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 was 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.
NOTE 9 - INCOME TAXES:
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $12,950,000 available to reduce future
federal taxable income which, if not used, will expire at various
dates through December 31, 2018. Changes in the ownership of the
Company may subject these loss carryforwards to substantial
limitations.
The Company has offset the deferred tax asset attributable to the
potential benefits from such net operating loss carryforwards and the
reduction in carrying value by an equivalent valuation allowance due
to the uncertainties related to the extent and timing of its future
taxable income. There are no other material temporary differences.
Deferred Tax Valuation
Asset Allowance
Balance at January 1, 1998, attributable to federal ------------ ---------
net operating loss carryforward $3,578,000 $3,578,000
Increase in federal net operating loss, year ended
December 31, 1998 861,000 861,000
Writedown of equipment received as part of
Sale of Gold Hill 70,000 70,000
---------- ----------
Balance at December 31, 1998 $4,509,000 $4,509,000
========== ==========
F-24
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - STOCKHOLDERS' EQUITY:
(A) Reverse Stock Split:
On May 26, 1998, the Company effectuated a twenty-five for one reverse
stock split. The accompanying financials give retroactive effect to
this reverse stock split.
(b) Issuances of Common Stock:
The following three 1997 common stock issuances reflect security
values that were established at the time the parties entered into
arm's-length agreements in 1996, and represent the respective value of
the security at those dates. The securities were issued pursuant to an
exemption provided by Section 4(2) of the Securities Act of 1933, and
are restricted securities.
On February 10, 1997, the Company issued 307,692 common shares upon
conversion of the $600,000 9.5% note at a conversion price of $1.95
per share, as adjusted (see Note 6).
On April 9, 1997, the Company issued 4,160 common shares to Dorothy
Kennec in exchange for extension of lease terms (see Note 8a) at an
aggregate value of $13,000 or $3.125 per share, as adjusted.
On June 19, 1997, the Company issued 20,000 common shares to Redstone
Securities as payment for approximately $50,000 in debt obligations.
(c) Common Stock Reserved for Issuance:
At December 31, 1998 and 1997, there were 11,600 shares of common
stock reserved for issuance upon the exercise of the 12.25% $145,000
convertible debentures (see Note 6).
NOTE 11 - RESTATEMENT:
At the time the Company initially issued its financial statements for
the years ended December 31, 1996 and 1995, management believed that
the market values of certain shares of common stock issued to pay for
services and settle outstanding claims by and repay obligations to its
joint venture partner, were substantially in excess of the fair values
at the respective dates of issuance because the shares issued were
restricted and the trading volume for the Company's shares was
limited. However, the Company did not have the resources to engage an
investment banker to appraise the per share value at the date of each
issuance; instead, management estimated the fair value by discounting
the quoted market value by 50%. After discussions with the staff of
the Securities and Exchange Commission (the "SEC") as to the basis of
the valuation of certain shares issued, management has determined that
it would still not be cost effective to obtain appraisals of the fair
value of the shares, and market value at time of issuance would be the
most reliable measure of
F-25
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - RESTATEMENT (Continued):
fair value for these transactions. As a result, the accompanying
financial statements reflect increases in various accounts such as
interest expense, legal costs, consulting fees and other items.
Accordingly, the resulting net loss (and the related net loss per
share), additional paid-in capital and accumulated deficit for 1996
and 1995 have been restated.
The following table summarizes the increase in the Company's net loss
and net loss per share for the years ended December 31, 1996 and 1995
arising from the changes in the prices used to value the issuance of
common shares for services rendered:
<TABLE>
<CAPTION>
Number Estimate Market
of Value Value
Shares Per Share Per Share Increase
----------- ----------- ----------- --------
(as adjusted) (as adjusted) (as adjusted)
<S> <C> <C> <C> <C>
1996:
General and administrative expenses:
Consulting fees 40,000 $ 1.25 $ 6.25 $200,000
Professional fees 2,240 3.125 6.25 7,000
--------
Total 207,000
Interest expense - shares issued upon
conversion of debt at conversion price
based on 75% of market value 171,791 2.4375 3.25 139,580
--------
Increase in net loss $346,580
========
Increase in net loss per common share $ .01
========
1995:
Interest expense - excess of market value over principal of
shares issued upon conversion of loans from joint
venture partner 128,000 1.9531 3.9063 $249,600
Loss on settlement of claims by joint
venture partner 240,000 1.9531 3.9063 468,000
--------
Increase in net loss $717,600
========
Increase in net loss per common share $ .01
========
</TABLE>
F-26
<PAGE>
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - RESTATEMENT (Continued):
The effect of the preceding changes on the 1997 financial statements
were as follows:
1997 1997
(As Originally Presented) (As restated)
------------------------- -------------
Additional paid-in capital $16,350,575 $17,414,755
Deficit accumulated during the
development stage (13,104,544) (14,168,724)
F-27
<PAGE>
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.
F-28
<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
F-29
<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)
F-30
<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.
F-31
<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.
F-32
<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.
F-33
<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
F-34
<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
F-35
<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.
F-36
<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.
F-37
<PAGE>
U.S. MINING, INC.
(a development stage company)
REPORT ON AUDIT OF FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE>
U.S. MINING, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report 1
Balance Sheet 2
Statements of Operations and Deficit Year Ended March 31, 1999, the
Period October 20, 1997 (inception) to March 31, 1998 and
Cumulative Period From October 20, 1997 (Inception) to March 31, 1999 3
Statements of Shareholder's Deficit, Year Ended March 31, 1999, and the Period
from October 20, 1997 (Inception) to March 31, 1998 4
Statements of Cash Flows Year Ended March 31, 1999, the
Period October 20, 1997 (inception) to March 31, 1998 and
Cumulative Period From October 20, 1997 (Inception) to March 31, 1999 5
Notes to Financial Statements 6
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Shareholders
U.S. Mining, Inc.
Springfield, New Jersey
We have audited the accompanying balance sheet of U.S. Mining, Inc. (a
development stage company) as of March 31, 1999, and the related statements of
operations and shareholder's deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We did not audit the accumulated amounts from inception through
March 31, 1998, which includes an accumulated deficit as of March 31, 1998 of
($77,472). Those amounts were audited by other auditors whose report has been
furnished to us and our opinion insofar as it relates to those accumulated
amounts is based solely on the report of the other auditors. The statements of
operations and cash flows of U.S. Mining, Inc. for the period October 20, 1997
(inception) through March 31, 1998 were audited by other auditors whose report
dated July 9, 1998 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of U.S. Mining, Inc. as of March 31, 1999 and the results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
- ------------------------------
Ehrenkrantz Sterling & Co. LLC
Certified Public Accountants
January 6, 2000
<PAGE>
U.S. MINING, INC.
(a development stage company)
BALANCE SHEET
MARCH 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 27
-----------
OTHER ASSETS
Loan receivable from related company 1,430,560
Interest in mineral rights lease 75,000
-----------
1,505,560
-----------
$ 1,505,587
===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 38,785
Note payable, Hayden 70,000
-----------
TOTAL CURRENT LIABILITIES 108,785
-----------
LONG-TERM DEBT
Loan payable to shareholder 1,527,434
-----------
COMMITMENTS --
SHAREHOLDER'S DEFICIT
Common stock, no par value,
2,500 shares authorized, issued and outstanding 25
Deficit accumulated during the development stage (130,657)
-----------
(130,632)
-----------
$ 1,505,587
============
See notes to financial statements.
<PAGE>
U.S. MINING, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
October 20, 1997
(Inception) Cumulative
Year Ended through From
March 31, 1999 March 31, 1998 Inception
<S> <C> <C> <C>
REVENUES
Interest $ 90,352 $ 26,657 $ 117,009
--------- --------- ---------
EXPENSES
Professional fees 28,617 75,947 104,564
Hayden Purchase Agreement extension payments 12,000 -- 12,000
Interest 102,720 27,882 130,602
--------- --------- ---------
143,337 103,829 (247,166)
--------- --------- ---------
LOSS BEFORE INCOME TAXES (52,985) (77,172) (130,157)
INCOME TAXES 200 300 500
--------- --------- ---------
NET LOSS $ (53,185) $ (77,472) $(130,657)
========= ========= =========
</TABLE>
See notes to financial statements.
3
<PAGE>
U.S. MINING, INC.
(a development stage company)
STATEMENTS OF SHAREHOLDER'S DEFICIT
YEAR ENDED MARCH 31, 1999
PERIOD OCTOBER 20, 1997 (INCEPTION) THROUGH
MARCH 31, 1998
<TABLE>
<CAPTION>
Accumulated
Deficit
During
Common Development
Shares Stock Stage Total
<S> <C> <C> <C> <C>
BALANCE, October 20, 1997 -- $ -- $ -- $ --
Issuance of common stock, cash 2,500 25 -- 25
Net loss -- -- (77,472) (77,472)
----- --------- --------- ---------
BALANCE, March 31, 1998 2,500 25 (77,472) (77,447)
Net loss -- -- (53,185) (53,185)
----- --------- --------- ---------
Balance March 31, 1999 2,500 $ 25 $(130,657) $(130,632)
===== ========= ========= =========
</TABLE>
See notes to financial statements.
4
<PAGE>
U.S. MINING, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period
October 20, 1997
(Inception) Cumulative
Year Ended through From
March 31, 1999 March 31, 1998 Inception
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (53,185) $ (77,472) $ (130,657)
Adjustments to reconcile net loss to net cash
used in operating activities
Increase in accounts payable and accrued expenses 34,635 4,150 38,785
----------- ----------- -----------
Net cash used in operating activities (18,550) (73,322) (91,872)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in note receivable from related company (434,787) (995,773) (1,430,560)
Purchase of mineral rights lease -- (75,000) (75,000)
----------- ----------- -----------
Net cash used by investing activities (434,787) (1,070,773) (1,505,560)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in note payable, Hayden -- 70,000 70,000
Increase in loan payable, shareholder 453,364 1,074,070 1,527,434
Sale of stock -- 25 25
----------- ----------- -----------
Net cash provided by financing activities 453,364 1,144,095 1,597,459
----------- ----------- -----------
NET INCREASE IN CASH 27 -- 27
CASH, beginning of period -- -- --
----------- ----------- -----------
CASH, end of period $ 27 $ -- $ 27
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Interest paid $ -- $ -- $ --
Taxes paid 200 300 500
</TABLE>
See notes to financial statements.
5
<PAGE>
U.S. MINING, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company was formed on October 20, 1997 as a New Jersey
corporation. The Company entered into a Purchase Agreement to acquire
an interest in a mineral rights lease (Hayden) located in the county
of Clear Creek, Colorado and provides financial assistance to WCM
Capital, Inc. (WCM), a related company.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
DEVELOPMENT STAGE
In accordance with Statement of Financial Accounting Standards No. 7,
the Company is being treated as a development state company since
inception, October 20, 1997, since it did not generate any significant
revenues to date.
Note 2: LOAN RECEIVABLE
A loan receivable arising from monies advanced to WCM bears interest
at 8%. It is secured by all of WCM's mining claims and mining
properties and its interest in certain mineral right leases. The loan
has been classified as a long term receivable. The loan is not
expected to be repaid before April, 2000. The balance includes unpaid
interest of approximately $117,000.
Note 3: NOTE PAYABLE, HAYDEN
A note payable to Audrey Hayden for the purchase of an interest in a
mineral rights lease bears interest at 7% and was due in January 1998.
Note 4: LOAN PAYABLE TO SHAREHOLDER
The Company has an obligation to the shareholder which bears interest
at 8% relating to open account advances to the Company. The obligation
is not expected to be repaid before April 2000. The loan includes
unpaid interest totaling $124,427.
Subsequent to March 1999, two related companies assigned their loans
receivable plus unpaid interest from the Company totaling to
$1,118,756 and $22,140 respectively, to the Company's shareholder. The
accompanying financial statements have been adjusted to reflect the
obligation to its shareholder. Demand for repayment of these amounts
is not expected to occur before April, 2000.
6
<PAGE>
Note 5: RELATED PARTY TRANSACTIONS
The shareholder owns and controls other related companies. The
operating results and financial position of the Company could be
significantly different than if the other companies were autonomous.
See notes 2,4,7 and 8 for other related transactions.
Note 6: FEDERAL AND STATE INCOME TAXES
The Company has available net operating loss carryforwards of
approximately $130,000 for Federal and State income taxes expiring
2112 and 2005, respectively, to offset future taxable income.
A deferred tax asset results from the benefit of utilizing operating
loss carryforwards in future years less an allowance totaling
approximately $47,000, for carryforward losses not anticipated to be
used by their expiration dates.
Note 7: COMMITMENTS
The Company, its related companies, and its shareholder have pledged
to provide financing to WCM on an as needed basis through December
2000. These funds will cover the general, administrative and other
costs of WCM estimated at $20,000 per month plus interest. Additional
monies may be required to help finance the estimated $750,000 needed
to fund the reactivation of the Franklin Mine and Milling properties
owned by WCM for the commencement of extraction and milling.
Additional funds may be required to support the extraction and milling
processes once underway as well as to upgrade the processing
facilities.
Note 8: SUBSEQUENT EVENTS
In December 1999, the Company signed a letter of intent whereby 100%
of the Company's issued and outstanding shares of common stock would
be exchanged by the Company's shareholder for such number of shares of
WCM `s common stock, which will approximate 85% of the issued and
outstanding shares of WCM immediately following the acquisition.
Upon the occurrence of the above-mentioned stock exchange, the
Company's shareholder loan payable would be contributed as additional
paid in capital.
The finalization of these negotiations and ultimate execution of the
transactions described herein are subject to shareholder and
regulatory approval and other uncertainties. Accordingly, no assurance
can be provided that such transactions will occur.
7
<PAGE>
U.S. MINING, INC.
(a development stage company)
FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 31, 1998 AND 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder
U.S. Mining, Inc.
Springfield, NJ 07081
We have audited the accompanying balance sheet of U.S. Mining, Inc. (a
development stage company) as of March 31, 1998 and the related statements of
operations; stockholder's equity (deficit) and cash flows for the period from
inception November 4, 1997 through March 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Mining, Inc. as of March
31, 1998 and the results of its operations and its cash flows for the period
from inception November 4, 1997 through March 31, 1999 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 4 to the financial
statements, the Company has incurred a net loss and an accumulated deficit from
inception. In addition, the Company's major asset is a note receivable from an
affiliate and the ability of the affiliate to continue as a going concern is in
question. This situation raises substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments to the recorded asset amounts and to the recorded
liability amounts that might be necessary should the Company be unable to
continue as a going concern.
---------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
July 9, 1998
<PAGE>
U.S. MINING, INC.
(a development stage company)
BALANCE SHEETS
(Unaudited)
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
ASSETS
1998 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 991 $ 715
----------- -----------
OTHER ASSETS
Note receivable from related company 1,283,536 1,668,770
Interest in mineral rights lease 75,000 75,000
----------- -----------
1,358,536 1,743,770
----------- -----------
$ 1,359,527 $ 1,744,485
----------- -----------
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable $ 43,382 28,303
Note payable, Hayden 70,000 70,000
----------- -----------
TOTAL CURRENT LIABILITIES 113,382 98,303
----------- -----------
LONG-TERM DEBT
Loan payable to shareholder 1,363,610 1,804,297
----------- -----------
SHAREHOLDER'S DEFICIT
Common stock, no par value, 25 25
2,500 shares authorized, issued and outstanding (117,490) (158,140)
----------- -----------
Deficit accumulated during the development stage (117,465) (158,115)
----------- -----------
$ 1,359,527 $ 1,744,485
----------- -----------
</TABLE>
See notes to financial statements.
(1)
<PAGE>
U.S. MINING, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended November 4, 1997
December 31 (inception)
---------------------- through
1998 1999 December 31, 1999
--------- --------- -----------------
<S> <C> <C> <C>
REVENUES
Interest $ 65,293 $ 81,466 $ 198,475
--------- --------- ---------
EXPENSES
Professional fees and other 22,777 7,396 111,960
Hayden Purchase Agreement extension payment 9,000 9,000 21,000
Interest 73,494 92,353 222,955
--------- --------- ---------
105,271 108,749 355,915
--------- --------- ---------
LOSS BEFORE INCOME TAXES (39,978) (27,283) (157,440)
INCOME TAXES 40 200 700
--------- --------- ---------
NET LOSS $ (40,108) $ (27,483) $(158,140)
========= ========= =========
</TABLE>
See notes to financial statements.
(2)
<PAGE>
U.S. MINING, INC.
(a development stage company)
STATEMENTS OF SHAREHOLDER'S DEFICIT
(Unaudited)
NINE MONTHS ENDED DECEMBER 31, 1998 and 1999
Accumulated
Deficit
During
Common Development
Shares Stock Stage Total
--------- --------- --------- ---------
Balance, April 1, 1998 2,500 $ 25 $ (77,472) $ (77,447)
Net loss -- -- (40,018) (40,018)
--------- --------- --------- ---------
Balance, December 31, 1998 2,500 $ 25 $(117,490) $(117,465)
========= ========= ========= =========
Balance, April 1, 1999 2,500 $ 25 $(130,657) $(130,632)
Net loss -- -- (27,483) (27,483)
--------- --------- --------- ---------
Balance, December 31, 1999 2,500 $ 25 $(158,140) $(158,115)
========= ========= ========= =========
See accompanying notes to financial statements.
(3)
<PAGE>
U.S. MINING, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended November 4, 1997
December 31 (inception)
--------------------------------- through
1998 1999 December 31, 1999
----------- ----------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (40,018) $ (27,483) $ (158,140)
Adjustments to reconcile net loss to net cash
used in operating activities
(Decrease) increase in accounts payable 40,457 (10,482) 28,303
----------- ----------- -----------
Net cash used in operating activities 439 (37,965) (129,837)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in note receivable from related company (261,106) (238,210) (1,668,770)
Purchase of mineral rights lease -- -- (75,000)
----------- ----------- -----------
Net cash used in investing activities (261,106) (238,210) (1,743,770)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTVITIES
Increase in note payable, Hayden -- -- 70,000
Increase in loan payable, shareholder 261,658 276,863 1,804,297
Sale of stock -- -- 25
----------- ----------- -----------
Net cash provided by financing activities 261,658 276,863 1,874,322
----------- ----------- -----------
NET INCREASE IN CASH 991 688 715
CASH, beginning of period -- 27 --
----------- ----------- -----------
CASH, end of period $ 991 $ 715 $ 715
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Interest paid $ 9,000 $ 9,000
Taxes paid 40 200
</TABLE>
See notes to financial statements.
(4)
<PAGE>
U.S. MINING, INC.
(a development stage company)
Notes to Financial Statements
1. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly (a) the financial position as of
December 31, 1998 and 1999, (b) the results of operations for the nine
months ended December 31, 1998 and 1999 and (c) changes in cash flows for
the nine months ended December 31, 1998 and 1999.
2. Refer to the audited financial statements for the fiscal year ended March
31, 1999 for details of accounting policies and accounts, none of which
have changed significantly in composition since that date.
3. Financial results for the interim periods ended December 31, 1998 and 1999
may not be indicative of the financial results for the fiscal years ending
March 31, 1999 and 2000, respectively.
5
<PAGE>
EXHIBIT A
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is dated this 18th day of
January, 2000 and is by and between WCM Capital Inc., a Delaware Corporation
("WCM"), William C. Martucci, an individual ("Martucci") and U. S. Mining, a New
Jersey corporation ("USM").
RECITALS
WHEREAS, Martucci is the owner of 100% of the outstanding shares of Common
Stock, par value $.01 per share of USM (the "USM Common Stock"); and
WHEREAS, WCM desires to acquire the USM Common Stock in exchange for such
number of shares of Common Stock, par value $.01 per share, of WCM (the "WCM
Common Stock") that equals 85% of the issued and outstanding shares of WCM
Common Stock immediately following consummation of the acquisition upon the
terms and subject to the conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual agreements and covenants
hereinafter set forth, and for other good and valuable consideration, the
parties hereto agree as follows:
ARTICLE 1
1.1 Terms of the Exchange:
(a) Martucci shall sell, assign, assign, transfer and convey at the Closing
Date (as hereinafter defined in Section 2.1) the USM Common Stock to WCM.
(b) In consideration for the USM Common Stock, WCM hereby agrees to issue
to Martucci, or his nominee, such number of shares of WCM Common Stock that
equals 85% of the issued and outstanding shares of WCM Common Stock immediately
following consummation of the acquisition contemplated in this Agreement.
Assuming that the number of issued and outstanding shares of WCM Common Stock
will be the same on the Closing Date as it is on the date hereof, Martucci would
receive 7,473,013 shares of WCM Common Stock. On the Closing Date, WCM shall
cause its transfer agent to issue and deliver to Martucci, a certificate or
certificates representing 7,473,013 shares of WCM Common Stock (or such other
number of shares that equals 85% of the issued and outstanding shares of WCM
Common Stock immediately following consummation of the acquisition).
1.2 Taking of Necessary Action: Further Action: Each of WCM and Martucci
shall take all reasonable and lawful action as may be necessary or appropriate
in order to effectuate the transactions contemplated by this Agreement. In case
at any time after the Closing Date any further action shall be necessary or
desirable to carry out the intentions of this Agreement, the officers and
directors of each of the parties hereto shall take all such lawful and necessary
action.
<PAGE>
ARTICLE 2
Closing
2.1 Closing: The closing of the transactions contemplated by this Agreement
will be held at the offices of USM at 3 Dundar Road, Springfield, N.J. 07081, at
10:00 a.m., local time on or about the fifth business day after the date upon
which all conditions contained in Articles 6 and 7 hereof have been satisfied or
waived or such other time and place as the parties may agree upon (the "Closing
Date").
2.2 Delivery of Certificates; On the Closing Date (a) WCM shall issue to
Martucci the WCM Common Stock and (b) Martucci shall deliver to WCM the USM
Common Stock duly endorsed for transfer to WCM.
ARTICLE 3
Representations and Warrantees of Martucci
Martucci hereby represents and warrants to WCM as follows:
3.1 Power and Authorization. Martucci has the power and authority to
execute and deliver this Agreement and to perform his obligations under the
terms of this Agreement. All action on the part of Martucci necessary for the
execution, delivery and performance by Martucci of this Agreement has been taken
or will be taken prior to the Closing Date. This Agreement, when executed and
delivered by Martucci shall constitute the valid and binding obligations of
Martucci enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy insolvency or other laws relating to or
affecting creditor's rights generally or by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
3.2 Investment. Martucci is acquiring the WCM Common Stock for investment
for his own account, not as a nominee or agent and not with a view to, or for
resale in connection with any distribution of any part thereof, and he has no
present intention of selling, granting any participation in or otherwise
distributing the same. Martucci understands that the WCM Common Stock has not
been registered under the Securities Act of 1933, as amended (the "Act") or
applicable state and other Securities laws and is being issued to Martucci by
reason of a specific exemption from the registration provisions of the Act and
applicable state and other Securities laws, the availability of which depends
upon, among other things, the bona fide nature of the investment intent and the
accuracy of Martucci's representations expressed herein.
3.4 Restricted Common Stock. Martucci has no need of liquidity in this
investment and acknowledges and understands that he must bear the economic risk
of this investment for an indefinite period of time because the WCM Common Stock
must be held indefinitely unless subsequently registered under the Act and
applicable state and other Securities laws or unless an exemption from such
registration is available. Martucci understands that any transfer agent of WCM
will be issued a stop-transfer
2
<PAGE>
instructions with respect to such shares unless such transfer is subsequently
registered under the Act and applicable state and other Securities laws or
unless an exemption from such registration is available, and that each
certificate representing the WCM Common Stock will bear a restrictive legend to
such effect.
ARTICLE 4
Representations and Warranties of WCM
WCM hereby represents and warrants to Martucci and USM as follows:
4.1 Organization and Good Standing; Articles of Incorporation and By-Laws:
WCM is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware. WCM has the requisite corporate power
and authority to own and operate its properties and assets and to carry on its
business as currently conducted. WCM is qualified to do business in those
jurisdictions listed on Schedule 4.1 hereto. WCM is not qualified to do business
as a foreign corporation in any other jurisdiction and such qualification is not
now required, except to the extent that the failure to so qualify would not have
a material adverse effect on WCM's business as currently conducted.
4.2 Corporate Power and Authorization. WCM has the corporate power and
authority to execute and deliver this Agreement, to issue the Common Stock
hereunder and to perform its obligations under the terms of this Agreement. All
corporate action on the part of WCM, its directors and stockholders necessary
for the authorization, execution, delivery and performance by WCM of this
Agreement and the authorization, sale, issuance and delivery of WCM Common Stock
has been taken or will be taken prior to the Closing Date. This Agreement, when
executed and delivered by WCM, shall constitute valid and binding obligations of
WCM, enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency or other laws relating to or
affecting creditors' rights generally or by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). Upon the Closing Date, the WCM Common Stock will be duly
authorized and, when issued in compliance with the provisions of this Agreement,
will be validly issued, fully paid, nonassessable, and free and clear of any
liens, pledges, claims, security interests or other encumbrances created hereby;
provided, however, that the WCM Common Stock is subject to restrictions on
transfer under state or federal Securities laws as set forth herein.
4.3 Capitalization. The authorized capital stock of WCM consists of
40,000,000 shares of Common Stock, $0.01 par value, of which 1,318,390 shares
are issued and outstanding. All of the outstanding shares of Common Stock have
been duly authorized and validly issued and are fully paid and nonassessable.
Except as set forth on Schedule 4.3 , there are no options, warrants or other
rights outstanding to purchase or acquire, or any Common Stock convertible into,
nor has WCM agreed to issue or reissue, other than pursuant to this Agreement,
any of WCM's authorized and unissued capital stock. There are no agreements or
understandings that affect or relate to the voting or giving of written consent
with respect to any of WCM's outstanding Common Stock. There are no preemptive
rights with respect to the issuance or sale of WCM's capital stock.
3
<PAGE>
4.4 Financial Statements. WCM has provided the Stockholder with (i) WCM's
Annual Report on Form 10-KSB for the year ended December 31, 1999, which
contains the audited financial statements of WCM as of and for the years ended
December 31, 1997 and 1998 (the "Audited Financial Statements"), and (ii) WCM's
Quarterly Report on Form 10-QSB for the Quarter ended September 30, 1999, which
included unaudited financial statements of WCM as of and for the nine months
ended September 30, 1999 (the "Interim Financial Statements" and together with
the Audited Financial Statements, the "Financial Statements"). The Financial
Statements are complete and correct in all material respects and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the period indicated. The Financial Statements
fairly present the financial condition and operating results of WCM as of the
dates and for the periods indicated, subject, with respect to the Interim
Financial Statements, to normal year-end audit adjustments. The above-mentioned
Annual Report and Quarterly Report are collectively referred to as the "Exchange
Act Reports."
4.5 Absence of Certain Developments. Except as described on Schedule 4.5
and in the Exchange Act Reports since December 31, 1998, there has been no
change in the assets, liabilities, condition (financial or otherwise), operating
results, business or prospects of WCM from that reflected in the Audited
Financial Statements, except: (a) changes in the ordinary course of business
that have not been, individually or in the aggregate, materially adverse to the
assets, properties, condition (financial or otherwise), operating results,
business or prospects of WCM; or (b) changes reflected in the Interim Financial
Statements. Without limiting the foregoing, except as described on Schedule 4.5,
WCM has not, since December 31, 1998, (i) directly or indirectly declared or
paid any dividend or ordered or made any other distribution on account of any
shares of any class of the capital stock of WCM, (ii) directly or indirectly
redeemed, purchased or otherwise acquired any such shares or agreed to do so or
set aside any sum or property for any such purpose, (iii) made any capital
expenditures exceeding $100,000, (iv) incurred any indebtedness exceeding
$100,000, (v) sold or encumbered any material assets, property, rights licenses
or permits used in WCM's business, (v) suffered any extraordinary loss, damage
or casualty loss, (vi) received notification of termination or significant
decrease from any material customer or supplier, or (vii) committed to any of
the foregoing.
4.6 Absence of Undisclosed Liabilities. Except as disclosed on Schedule 4.6
and the Exchange Act Reports, WCM does not have any liability or obligation,
absolute or contingent, that is not reflected in the Financial Statements, other
than obligations and liabilities which taken individually or in the aggregate
would not have a material adverse effect on WCM's assets, liabilities, condition
(financial or otherwise), operating results, business or prospect.
4.7 Taxes. WCM has filed all tax returns and reports required by law to be
filed, and has paid all taxes, assessments and other government al charges that
are due and payable, except for those matters reasonably being contested by WCM
and those matters which, individually and in the aggregate, would not have a
material adverse effect on WCM's assets, liabilities, condition (financial or
otherwise), operating results, business or prospects. The charges, accruals and
reserves on the books of WCM in respect of taxes are considered adequate by WCM,
and WCM knows of no assessment for additional taxes or any basis therefor.
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4.8 Title to Properties: Except as set forth on Schedule 4.8 and the
Exchange Act Reports, WCM has good title to all of its properties and assets,
both real and personal, tangible and intangible, reflected on the balance sheet
included in the Audited Financial Statements or acquired after the date thereof
(except inventory or other personal property disposed of in the ordinary course
of business subsequent to the date thereof), and such properties and assets are
not subject to any mortgage, pledge, lien, security interest encumbrance or
charge other than (o) liens for current taxes not yet due and payable, (ii)
liens and encumbrances that do not materially detract from the value of the
property subject thereto or materially impair the operations of WCM or (iii)
liens securing obligations reflected in the Financial Statements. With respect
to properties or assets it leases, except as set forth on Schedule 4.8 and the
Exchange Act Reports, WCM is in compliance with such leases (except for such
defaults or breaches that would not, individually or in the aggregate, have a
material adverse affect on assets, liabilities, condition (financial or
otherwise), operating results, business or prospects) and holds valid leasehold
interests free of any liens, claims or encumbrances except for those described
in subsections (i) through (iii) hereof.
4.9 Compliance with Other instruments. WCM is not in violation or default
of any provision of its Certificate of Incorporation or By-Laws, or, except as
described in the Exchange Act Reports in default of any material mortgage,
indebtedness, indenture, contract, agreement, instrument, judgment or decree to
which WCM is a party or by which it is bound. The execution, delivery and
performance by WCM of this Agreement, and the consummation of transactions
contemplated hereby and thereby, will not, except as described in the Exchange
Act Reports result in any violation of or conflict with the WCM's Certificate of
Incorporation or By-Laws, and, will not result in any violation of or conflict
with, or constitute a default under, any material mortgage, indebtedness,
indenture, contract, agreement, instrument, judgment or decree to which WCM is a
party or by which it is bound or in the creation of any material mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of WCM.
4.10 Litigation, etc. Except as described in the Exchange Act Reports,
there are no actions, suits, proceedings (arbitration, regulatory or otherwise)
or investigations pending or, to WCM's best knowledge, threatened, against WCM
or against any if its officers or directors in their capacity as such or which
otherwise involves WCM's business or operations. WCM has not commenced or had
commenced against it any case under applicable bankruptcy laws. WCM is not
engaged in any legal action to recover moneys due it or for damages sustained by
it in connection with WCM's business.
4.11 Employees. WCM does not have any employees employed at will or
pursuant to an employment agreement with WCM.
4.12 Registration Rights. Except as described in Article 11 of this
Agreement, WCM is not under any contractual obligation to register under the
Act, any of its currently outstanding Common Stock or any of its Common Stock
which may hereafter be issued.
4.13 Governmental Consent. No consent, approval or authorization of or
registration, qualification, designation, declaration or filing with any
governmental authority on the part of WCM is required in connection with the
valid execution, delivery and performance of this Agreement, the offer, sale or
issuance of the WCM Common Stock, or the consummation of any other transactions
<PAGE>
contemplated hereby or thereby, except for filings that may be required to
comply with applicable federal and state Securities laws.
4.14 Compliance with Law. WCM is conducting its business and operations in
compliance in all material respects with all governmental rules and regulations
applicable thereto, including without limitation those relating to occupational
safety, environmental, health and employment practices, and, except as is
disclosed in the Exchange Act Reports, is not in violation or default in any
material respects under any statute, law, ordinance, rule, regulation, judgment,
order, decree, concession, grant, franchise, license or other governmental
authorization or approval applicable to it or any of its properties.
4.15 Permits. WCM has all permits, licenses, orders and approvals of any
federal, state, local or foreign governmental or regulatory body that are
material to or necessary in the conduct of its business as now conducted
(collectively, the "Permits"); all such Permits are in full force and effect; no
violations have been recorded in respect of any such Permits; and not proceeding
is pending or, to the knowledge of WCM, threatened to revoke or limit any such
Permits.
4.16 Offering. Subject to the accuracy of the Martucci's representations in
Article 3, hereof, the offer, sale and issuance of the Common Stock as
contemplated by this Agreement will constitute transactions exempt from the
registration requirements of Section 5 of the Act.
4.17 Brokers or Finders. WCM has not retained any broker or finder in
connection with the transactions contemplated by this Agreement, and there are
no brokerage commissions, finder's fees or similar items of compensation payable
in connection therewith based on any arrangement or agreement made by or on
behalf of WCM.
4.18 Intellectual Property. WCM does not have any patents, patent
applications, trademarks and trademark applications or other registrations of
intellectual property rights registered in its name or licensed to WCM.
4.19 Property, Equipment, etc. To the best of WCM's knowledge, the property
and equipment owned or leased by WCM, taken as a whole, are in good operating
condition (except for ordinary wear and tear which do not adversely affect WCM's
businesses) and are generally suitable for the uses for which they are currently
used.
4.20 Insurance. The physical properties and assets used in connection with
WCM's businesses are covered by insurance with reputable companies against
casualty and other losses customarily obtained to cover comparable properties
and assets by similar businesses in the region in which such properties and
assets of WCM are located, in amounts and coverage which are reasonable in light
of existing conditions. WCM has not failed to give any notice or present any
claim under any insurance policy in a due and timely fashion except for such
failures that would not have a material adverse effect on WCM's assets,
liabilities, condition (financial or otherwise), operating results, business or
prospects.
4.21 No Misrepresentations or Omissions. To WCM's best knowledge, all
information provided in connection herewith and all representations and
warranties hereunder, including the
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disclosures in the Financial Statements, this Agreement or the Schedules hereto,
are complete and correct in all material respects and do not contain any
misleading statement or omit any material information.
4.22 ERISA. WCM does not maintain any "Plan" subject to the Employment
Retirement Income Security Act of 1974, as amended ("ERISA").
4.23 Common Stock Filings. WCM has made all filings with the Securities and
Exchange Commission (the "SEC") that it has been required to make under the Act
and the rules and regulations promulgated thereunder and under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder. WCM has provided Martucci with complete and
correct copies of all of WCM's filings made with the SEC (including all exhibits
to such filings) during the past two fiscal years and during the current fiscal
year through the date hereof (all such documents which have been filed with the
SEC, as amended, the "SEC Documents"), including, without limitation all Annual
Reports on Form 10-KSB, all Quarterly Reports on Form 10-QSB, all Current
Reports on Form 8-K, all registration statements and all proxy statements and
annual reports to shareholders. To the best knowledge of WCM, the SEC Documents
comply in all material respects with the requirements of the Act or the Exchange
Act, as the case may be, and to the best knowledge of WCM, none of the SEC
Documents contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.24 Contracts. The Exchange Act Reports disclose all material written
contracts, agreements, mortgages, notes, instruments, leases, licenses,
franchises, arrangements or understandings with respect to WCM (the "WCM
Contracts"). Except as set forth in the Exchange Act Reports, all of WCM
Contracts are valid and in full force and effect and there are no existing
defaults, or events which with the passage of time or the giving of notice, or
both, would constitute defaults by WCM, or to the knowledge of WCM, by any other
party to any WCM Contract.
ARTICLE 5
Representations and Warranties of USM
USM hereby represents and warrants to WCM as follows:
5.1 Organization and Good Standing; Articles of Incorporation and By-Laws:
USM is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of New Jersey. USM has the requisite corporate power
and authority to own and operate its properties and assets and to carry on its
business as currently conducted. USM is qualified to do business in those
jurisdictions listed on Schedule 5.1 hereto. USM is not qualified to do business
as a foreign corporation in any other jurisdiction and such qualification is not
now required, except to the extent that the failure to so qualify would not have
a material adverse effect on USM's business as currently conducted.
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5.2 Corporate Power and Authorization. USM has the corporate power and
authority to execute and deliver this Agreement, and to perform its obligations
under the terms of this Agreement. All corporate action on the part of USM, its
directors and stockholders necessary for the authorization, execution, delivery
and performance by USM of this Agreement has been taken or will be taken prior
to the Closing Date. This Agreement, when executed and delivered by USM, shall
constitute valid and binding obligations of USM, enforceable in accordance with
its terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency or other laws relating to or affecting creditors' rights generally or
by general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
5.3 Capitalization. The authorized capital stock of USM consists of 2,500
shares of Common Stock, without par value, of which 2,500 shares are issued and
outstanding. All of the outstanding shares of common stock have been duly
authorized and validly issued and are fully paid and nonassessable. There are no
options, warrants or other rights outstanding to purchase or acquire, or any
Common Stock convertible into, nor has USM agreed to issue or reissue, other
than pursuant to this Agreement, any of USM's authorized and unissued capital
stock. There are no agreements or understandings that affect or relate to the
voting or giving of written consent with respect to any of USM's outstanding
Common Stock. There are no preemptive rights with respect to the issuance or
sale of USM's capital stock.
5.4 Financial Statements. USM has provided WCM with (i) audited financial
statements of USM as of and for the year ended March 31, 1999 (the "USM Audited
Financial Statements"), and (ii) unaudited financial statements of USM as of and
for the nine months ended December 31, 1999 (the "USM Interim Statements" and
together with the USM Audited Financial Statements, the "USM Financial
Statements"). The USM Financial Statements are complete and correct in all
material respects and have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the period
indicated. The USM Financial Statements fairly present the financial condition
and operating results of USM as of the dates and for the periods indicated,
subject, with respect to the USM Interim Financial Statements, to normal
year-end audit.
5.5 Absence of Certain Developments. Since March 31, 1999, there has been
no change in the assets, liabilities, condition (financial or otherwise),
operating results, business or prospects of USM from that reflected in the USM
Audited Financial Statements, except: (a) changes in the ordinary course of
business that have not been, individually or in the aggregate, materially
adverse to the assets, properties, condition (financial or otherwise), operating
results, business or prospects of USM; or (b) changes reflected in the USM
Interim Financial Statements. Without limiting the foregoing, except as
described on Schedule 5.5, USM has not, since March 31, 1999, (i) directly or
indirectly declared or paid any dividend or ordered or made any other
distribution on account of any shares of any class of the capital stock of USM,
(ii) directly or indirectly redeemed, purchased or otherwise acquired any such
shares or agreed to do so or set aside any sum or property for any such purpose,
(iii) made any capital expenditures exceeding $100,000, (iv) incurred any
indebtedness exceeding $100,000, (v) sold or encumbered any material assets,
property, rights licenses or permits used in USM's business, (v) suffered any
extraordinary loss, damage or casualty loss, (vi) received notification of
termination or significant decrease from any material customer or supplier, or
(vii) committed to any of the foregoing.
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5.6 Absence of Undisclosed Liabilities. USM does not have any liability or
obligation, absolute or contingent, that is not reflected in the USM Financial
Statements, other than obligations and liabilities which taken individually or
in the aggregate would not have a material adverse effect on USM's assets,
liabilities, condition (financial or otherwise), operating results, business or
prospect.
5.7 Taxes. USM has filed all tax returns and reports required by law to be
filed, and has paid all taxes, assessments and other governmental charges that
are due and payable, except for those matters reasonably being contested by USM
and those matters which, individually and in the aggregate, would not have a
material adverse effect on USM's assets, liabilities, condition (financial or
otherwise), operating results, business or prospects. The charges, accruals and
reserves on the books of USM in respect of taxes are considered adequate by USM,
and USM knows of no assessment for additional taxes or any basis therefor.
5.8 Title to Properties: USM has good title to all of its properties and
assets, both real and personal, tangible and intangible, reflected on the
balance sheet included in the Audited Financial Statements or acquired after the
date thereof (except inventory or other personal property disposed of in the
ordinary course of business subsequent to the date thereof), and such properties
and assets are not subject to any mortgage, pledge, lien, security interest
encumbrance or charge other than (o) liens for current taxes not yet due and
payable, (ii) liens and encumbrances that do not materially detract from the
value of the property subject thereto or materially impair the operations of USM
or (iii) liens securing obligations reflected in the USM Financial Statements.
With respect to properties or assets it leases, USM is in compliance with such
leases (except for such defaults or breaches that would not, individually or in
the aggregate, have a material adverse affect on assets, liabilities, condition
(financial or otherwise), operating results, business or prospects) and holds
valid leasehold interests free of any liens, claims or encumbrances except for
those described in subsections (i) through (iii) hereof.
5.9 Compliance with Other instruments. USM is not in violation or default
of any provision of its Certificate of Incorporation or By-Laws, or, in default
of any material mortgage, indebtedness, indenture, contract, agreement,
instrument, judgment or decree to which USM is a party or by which it is bound.
The execution, delivery and performance by USM of this Agreement, and the
consummation of the transactions contemplated hereby and thereby, will not,
result in any violation of or conflict with the USM's Certificate of
Incorporation or By-Laws, and, will not result in any violation of or conflict
with, or constitute a default under, any material mortgage, indebtedness,
indenture, contract, agreement, instrument, judgment or decree to which USM is a
party or by which it is bound or in the creation of any material mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of USM.
5.10 Litigation, etc. There are no actions, suits, proceedings
(arbitration, regulatory or otherwise) or investigations pending or, to USM's
best knowledge, threatened, against USM or against any if its officers or
directors in their capacity as such or which otherwise involve USM's business or
operations. USM has not commenced or had commenced against it any case under
applicable bankruptcy laws. USM is not engaged in any legal action to recover
moneys due it or for damages sustained by it in connection with USM's business.
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<PAGE>
5.11 Employees. USM does not have any employees employed at will or
pursuant to an employment agreement with USM.
5.12 Registration Rights. USM is not under any contractual obligation to
register under the Act, any of its currently outstanding Common Stock or any of
its Common Stock which may hereafter be issued.
5.13 Governmental Consent. No consent, approval or authorization of or
registration, qualification, designation, declaration or filing with any
governmental authority on the part of USM is required in connection with the
valid execution, delivery and performance of this Agreement, or the consummation
of any other transactions contemplated hereby or thereby.
5.14 Compliance with Law. USM is conducting its business and operations in
compliance in all material respects with all governmental rules and regulations
applicable thereto, including without limitation those relating to occupational
safety, environmental, health and employment practices, and is not in violation
or default in any material respects under any statute, law, ordinance, rule,
regulation, judgment, order, decree, concession, grant, franchise, license or
other governmental authorization or approval applicable to it or any of its
properties.
5.15 Permits. USM does not have any permits, licenses, orders or approvals
of any federal, state, local or foreign governmental or regulatory body that are
material to or necessary in the conduct of its business as now conducted.
5.16 Brokers or Finders. USM has not retained any broker or finder in
connection with the transactions contemplated by this Agreement, and there are
no brokerage commissions, finder's fees or similar items of compensation payable
in connection therewith based on any arrangement or agreement made by or on
behalf of USM.
5.17 Intellectual Property. USM does not have any patents, patent
applications, trademarks and trademark applications or other registrations of
intellectual property rights registered in its name or licensed to USM.
5.18 Property, Equipment, etc. To the best of USM's knowledge, the property
and equipment owned or leased by USM, taken as a whole, are in good operating
condition (except for ordinary wear and tear which do not adversely affect USM's
businesses) and are generally suitable for the uses for which they are currently
used.
5.19 Insurance. The physical properties and assets used in connection with
USM's businesses are covered by insurance with reputable companies against
casualty and other losses customarily obtained to cover comparable properties
and assets by similar businesses in the region in which such properties and
assets of USM are located, in amounts and coverage which are reasonable in light
of existing conditions. USM has not failed to give any notice or present any
claim under any insurance policy in a due and timely fashion except for such
failures that would not have a material adverse effect on USM's assets,
liabilities, condition (financial or otherwise), operating results, business or
prospects.
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5.20 No Misrepresentations or Omissions. To USM's best knowledge, all
information provided in connection herewith and all representations and
warranties hereunder, including the disclosures in the Financial Statements,
this Agreement or the Schedules hereto, are complete and correct in all material
respects and do not contain any misleading statement or omit any material
information.
5.21 ERISA. USM does not maintain any "Plan" subject to ERISA.
5.22 Contracts. Schedule 5.22 sets forth a list of all written contracts,
agreements, mortgages, notes, instruments, leases, licenses, franchises,
arrangements or understandings with respect to USM (the "USM Contracts"). Except
as set forth on Schedule 5.22, all of the USM Contracts are valid and in full
force and effect and there are no existing defaults, or events which with the
passage of time or the giving of notice, or both, would constitute defaults by
USM, or to the knowledge of USM, by any other party to any USM Contract.
ARTICLE 6
The obligations of WCM to issue the Common Stock on the Closing Date are subject
to the fulfillment as of the Closing Date of the following conditions:
6.1 Representations and Warranties Correct. The representations and
warranties made by Martucci and USM in Article 3 and 5 hereof be true and
correct at and as of the Closing Date, with the same effect as though such
representations and warranties had been made at and as of the Closing Date.
6.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by Martucci and USM at or prior to the Closing Date
shall have been performed or complied with, including the obtaining of all
consents necessary for the consummation of the transaction by Martucci and USM.
6.3 Compliance Certificate of each of USM and Martucci. USM shall have
delivered to WCM a certificate executed by the President of USM dated the
Closing Date and Martucci shall have delivered a certificate executed by
Martucci certifying to the fulfillment of the conditions specified in Sections
6.1 and 6.2 of this Agreement as they relate to USM and Martucci, respectively.
6.4 USM Common Stock Martucci shall have delivered to WCM Certificates
representing USM Common Stock, duly endorsed for transfer to WCM.
6.5 Stockholder Approval WCM stockholders shall have approved the Agreement
and the transactions contemplated herein.
6.6 Compliance Certificate. WCM shall have received a certificate of the
Secretary of USM certifying as to (a) the Certificate of Incorporation of USM
and any amendments to restatements thereof; (b) By-Laws of USM and any
amendments to restatements thereof; (c) the good standing of
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USM in New Jersey; (d) resolutions of the Board of Directors authorizing the
execution of this Agreement and the other transactions contemplated herein; and
(e) incumbency of USM's signatory.
ARTICLE 7
Conditions to Closing of Martucci and USM
Martucci's obligation to sell the USM Common Stock at the Closing Date is
subject to the fulfillment as of the Closing Date of the following conditions:
7.1 Representations and Warranties Correct. The representations and
warranties made by WCM in Article 4 hereof shall be true and correct at and as
of the Closing Date, with the same effect as though such representations and
warranties had been made at and as of the Closing Date.
7.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by WCM at or prior to the Closing shall have been
complied with.
7.3 Compliance Certificate. WCM shall have delivered to Martucci a
certificate executed by the President of WCM dated the Closing Date, and
certifying to the fulfillment of the conditions specified in Sections 7.1 and
7.2 of this Agreement.
7.4 Stock Certificates. WCM shall have issued or cause to be issued to
Martucci a certificate or certificates representing the WCM Common Stock.
7.5 Compliance Certificate. USM and Martucci shall have received a
certificate of the Secretary of WCM certifying as to (a) the Certificate of
Incorporation of WCM and any amendments to restatements thereof; (b) By-Laws of
WCM and any amendments to restatements thereof; (c) the good standing of WCM in
Delaware and the jurisdictions listed on Schedule 4.1 hereto; (d) resolutions of
the WCM's Board of Directors authorizing the execution of this Agreement and the
other transactions contemplated hereby; (e) resolutions of WCM's stockholders or
minutes of a special meeting of stockholders approving the execution and
delivery of this Agreement and the consummation of the transactions contemplated
herein; and (f) incumbency of WCM signatory.
ARTICLE 8
Stockholder Approvals, Board of Directors' Recommendations; Filings:
8.1 Stockholder Approvals; Board of Directors' Recommendations. A meeting
of the stockholders of WCM shall be held in accordance with the General
Corporation Law of the State of Delaware ("GCL"), as promptly as possible, after
at least 20 days' prior written notice thereof to the stockholders of WCM, to
consider and vote upon, among other things, the adoption and approval of this
Agreement and such other transactions as contemplated hereby (collectively, the
"Proxy Proposals"). Subject to its fiduciary duty to stockholders, the Board of
Directors of WCM shall recommend to its stockholders that the Agreement and the
other Proxy Proposals be adopted and approved.
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8.2 Filings. WCM undertakes to promptly prepare and submit to Martucci's
counsel, for review and approval, any and all documentation and/or filings
required by the GCL or the Act or the Exchange Act to be submitted and/or filed
including, but not limited to a proxy statement prepared and filed pursuant to
the Exchange Act proxy rules. Upon the approval of such documentation and/or
filings by Martucci's counsel, WCM shall undertake to file same with the SEC.
ARTICLE 9
Indemnification
9.1 Indemnification by Martucci and USM. Martucci agrees to indemnify,
defend and hold WCM harmless, and its officers, directors, stockholders, agents,
employees, attorneys, affiliates, successors and assigns, from and against, and
pay or reimburse each of them for, any and all claims, losses, damages,
judgments, amounts paid in settlement, costs and legal, accounting or other
expenses (collectively, "Losses") that any of them may sustain or incur as a
result of any misrepresentation, any inaccuracy in, or any breach of, any
warranty or representation or any non-performance of any covenant or other
obligation on the part of Martucci and USM contained in this Agreement, or any
document delivered hereunder; provided that Martucci and USM shall not be
required to indemnify WCM for Losses unless such Losses exceed $50,000 in the
aggregate, in which event Martucci and USM shall be obligated to indemnify WCM
for the amount of such Losses in excess of $50,000.
9.2 Indemnification by WCM. WCM agrees to indemnify, defend and hold
harmless Martucci and , USM's officers, directors, stockholders, agents,
employees, attorneys, affiliates, successors and assigns and each of them, from
and against, and pay or reimburse each of them for, any and all Losses that any
of them may sustain or incur as a result of any misrepresentation, breach of
warranties or representations or non-performance of any covenants or other
obligations on the part of WCM contained in this Agreement or any document
delivered hereunder; provided that WCM shall not be required to indemnify
Martucci and USM for losses unless such Losses exceed $50,000 in the aggregate,
in which event USM shall indemnify such indemnified party for the amount of such
Losses in excess of $50,000.
9.3 Indemnification Procedures.
(a) Promptly after receipt by a party entitled to indemnification hereunder
(an "Indemnified Party") of notice of any claim or of the commencement of any
action, investigations, suit or proceeding ("Proceeding") with respect to which
such party may make a claim for Indemnification hereunder, the Indemnified Party
will notify the party against whom indemnification is sought (the "Indemnifying
Party") in writing of such claim or Proceeding, and the Indemnifying Party may
in his or its discretion assume the defense of such claim or Proceeding, in
which case he or it shall employ counsel reasonably satisfactory to the
Indemnified Party and shall pay the fees and expenses of such counsel.
Notwithstanding the preceding sentence, an Indemnified Party will be entitled to
employ counsel separate from counsel for the Indemnifying Party and to
participate in the defense of such claim or Proceeding at the Indemnified
Party's expense. No settlement or compromise of any claim or Proceeding shall
give rise to liability of the Indemnifying Party unless such party shall have
been notified of any proposed settlement or compromise and shall have consented
thereto; provided that the
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Indemnifying Party shall obtain the written consent of the Indemnified Party,
which consent shall not be unreasonably withheld, prior to ceasing to defend,
settling or otherwise disposing of any such claim or proceeding, if as a result
of the failure of the Indemnified Party to do so would cause it or him to become
subject to injunctive or other equitable relief, or the business of the
Indemnified Party (or that of its subsidiary) would be materially adversely
affected in any manner.
(b) Other Losses. In the event that any Indemnified Party suffers a Loss or
otherwise becomes entitled to indemnification hereunder from an Indemnifying
Party in a situation that does not involve a Proceeding being instituted by a
third party, the Indemnified Party shall send notice as it would pursuant to
Section 9.3(a) in order to provide reasonable notice to the Indemnifying Party
as to the nature and extent of the Loss.
(c) Effect. Any notice of a claim or Proceeding or a claim for indemnity
provided for herein shall be in writing and shall specify, to the extent known
by the Indemnified Party, the nature and extent of the claim or Proceeding and
the amount being asserted as damages or Losses, as the case may be.
Notwithstanding the foregoing, the failure to so provide notice on a timely and
adequate basis (except to the extent that such notice is given after the
survival period contained in Section 9.2) shall not relieve the Indemnifying
Party of its obligations to indemnify hereunder except to the extent that such
Indemnifying Party can establish prejudice to it by the lack of timely or
adequate notice.
ARTICLE 10
Termination
10.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing, whether prior to
or after approval by the stockholders of WCM by consent of all of the parties
hereto, or by either WCM, on the one hand, or MARTUCCI on the other, if; (i) the
other party shall, when made, have breached in any material respect any of its
representations or warranties contained in this Agreement; (ii) any such
representation or warranty shall not be correct or accurate in all material
respects at and as of the Closing Date with the same effect as if made at such
time (with such exceptions as are permitted hereunder); (iii) the other party
shall have failed to comply in all material respects with any of its convents or
agreements contained in this Agreement to be complied with or performed by it at
or prior to the Closing Date; (iv) if a permanent injunction is entered,
enforced or deemed applicable to this Agreement which prohibits the consummation
of the transactions contemplated hereby and all appeals of such injunction shall
have been taken and shall have been unsuccessful; (v) if any governmental
entity, the consent of which is a condition to the obligation of such party to
consummate the transactions contemplated hereby, shall have determined not to
grant its consent and all appeals of such determination shall have been taken
and shall have been unsuccessful; or (vi) the Closing Date shall not have
occurred within 180 days of the date hereof.
10.2 Effect of Termination. In the event of termination of this Agreement
pursuant to Section 10.1 hereof, all rights of all parties hereto shall cease
and terminate, except for such rights as any party may otherwise have for breach
of contract, including, without limitation, rights for breach of any
representations, warranties or covenants contained herein.
14
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ARTICLE 11
Registration Rights
11.1 Piggyback Registration. If during the two year period commencing upon
the Closing Date, WCM proposes to register any of its securities under the Act
(other than pursuant to Form S-8, a registration statement concerning a merger
or acquisition or other comparable form), WCM shall include the WCM Common Stock
(the "Registrable Securities") acquired by Martucci herein (whether owned by
Martucci or a transferee of Martucci) (the "Holder") in such registration
statement. WCM shall at such time give prompt written notice to the Holder of
its intention to file such registration statement and of such Holder's rights
under such proposed registration, and upon the request of the Holder delivered
to WCM within fifteen (15) days after giving of such notice (which request shall
specify the Registrable Securities intended to be disposed of by the Holder and
the intended method of disposition thereof), WCM shall include such Registrable
Securities held by the Holder requested to be included in such registration.
11.2. Mandatory Registration. Commencing six months after the Closing Date
and continuing until the second anniversary of the Closing Date, in the event
the Holder has not sold all of his Registrable Securities in connection with a
registration statement pursuant to Sections 11.1 hereof or otherwise, WCM, upon
written notice from the Holder(s) of in excess of 50% of the Registrable
Securities, shall file a registration statement covering the sale of all
remaining Registrable Securities as soon as practicable, but not later than 60
days after the date of such notice; provided, however, that such period may be
extended or delayed by WCM for one period of up to 45 days if, upon the advice
of counsel at the time such registration is required to be filed, or at the time
WCM is required to exercise its best efforts to cause such registration
statement to become effective, such delay is advisable and in the best interests
of WCM because of the existence of non-public material information, or to allow
WCM to complete any pending audit of its financial statements.
11.3. Limitation on Piggyback and Mandatory Registration Rights.
Notwithstanding anything contained in section 11.1 or 11.2 of this Agreement,
WCM shall not be required to include any of the Holders' Registrable Securities
in an underwritten offering of WCM's securities unless the Holders accept the
terms of the underwriting as agreed upon between WCM and the underwriters
selected by it (provided such terms are usual and customary for selling
stockholders) and the Holder(s) agree to execute and/or deliver such documents
in connection with such registration as WCM or the managing underwriter may
reasonably request.
15
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ARTICLE 12
Miscellaneous
12.1 Governing Law. This agreement shall be governed by an construed under
the laws of the State of New York without regard to the conflicts of law
principles thereof.
12.2 Survival. The representations and warranties made herein shall survive
the Closing Date of the transactions contemplated hereby for a period of three
(3) years from the Closing Date.
12.3 Successors and Assigns. Except as otherwise provided herein, this
Agreement shall insure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors and administrators of the parties hereto. WCM may not
assign its rights under this Agreement without the express written consent of
USM and Martucci.
12.4 Entire Agreement: Amendment. This Agreement, its attachments, and the
other documents and agreements delivered pursuant hereto at the Closing Date
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof. Except as expressly provided
herein, neither this Agreement no any term hereof may be amended, waived,
discharged or terminated other than by a written agreement of USM and Martucci,
and WCM.
12.5 Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by registered or certified
mail, postage prepaid, or otherwise delivered by hand or by messenger, including
Federal Express or similar courier services, addressed (a) if to WCM, 76 Beaver
Street, Room 500, New York, New York 10005 or at such other address as WCM shall
have furnished to the other parties hereto in writing or (b) if to Martucci or
USM to 3 Dundar Road, Springfield, N.J. 07081, or such other address as Martucci
or USM shall have furnished to the other parties hereto in writing. Each such
notice or other communication shall for all purposes of this Agreement be
treated as effective or having been given when delivered if delivered
personally, or, if sent by mail or courier, at the earlier of its receipt or 48
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
12.6 Delays or Omissions. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing to any party to this
Agreement, shall impair any such right, power or remedy of such party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character of any breach or default under this
Agreement, or any waiver of any provisions or conditions of this Agreement, must
be in writing and shall be effective only to the extent specifically set forth
in such writing. All remedies either under this Agreement or by law or otherwise
afforded to any party to this Agreement, shall be cumulative and not
alternative.
16
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12.7 Expenses. Martucci agrees to pay the expenses and legal fees incurred
on its behalf and on behalf of the other parties to this Agreement with respect
to this Agreement and the transactions contemplated hereby.
12.8 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be an original, and all of which together shall constitute
one instrument.
12.9 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision. Furthermore, in lieu of such illegal, unenforceable or
void provision, there shall be added automatically as part of this Agreement a
provision as similar in terms to such illegal, unenforceable or void provision
as may be possible and be legal, enforceable and valid.
12.10 Effect of Headings. The section headings used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.
12.11 Announcements. Each party shall give to the other parties hereto
reasonable prior notice and shall consult with the other parties hereto on the
timing, contents and manner of making all announcements or press releases,
written or otherwise, relating to the transactions contemplated hereby, whether
to employees, stockholders or the public, by or on behalf of any of the parties
hereto, except to the extent required by law.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
effective as of the date first set forth above.
WCM Capital, Inc.
By: s/Robert Waligunda
---------------------------------
Robert Waligunda, President
U.S. Mining, Inc.
By: s/William C. Martucci
---------------------------------
William C. Martucci, President
By: s/William C. Martucci
---------------------------------
William C. Martucci, Individually
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Schedule 4.1
WCM is qualified to do business in the following jurisdictions:
Colorado
18
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Schedule 4.5
The following is a list and description of material events that have occurred
subsequent to the events described in the Financial Statements:
Reverse Split: Effective as of 12:01 a.m. Eastern Standard Time on December 20,
1999, WCM reverse split its issued and outstanding shares of Common Stock on a
one-for-three basis and the number of authorized shares of WCM's Common Stock
was reduced from 100,000,000 shares to 40,000,000 shares. As a result, each
three shares of Common Stock outstanding prior to the reverse split became one
share after the reverse split. Fractional shares were rounded up to the next
whole number. There was no change in the par value of WCM's shares of Common
Stock.
NASDAQ: NASDAQ notified WCM that it would delist WCM's Common Stock from the
NASDAQ SmallCap Market on September 17, 1999. WCM appealed this decision before
a NASDAQ Listing Qualifications Panel. The oral hearing was held on October 28,
1999 and WCM is waiting for its decision. However, at the hearing, the hearing
Panel suggested that WCM 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 reverse split was effected on December 20, 1999 (see
"Reverse Split" above).
USM Funding: Martucci and USM are familiar with USM's agreement to fund WCM's
operations and the transactions contemplated by this Agreement.
19
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Schedule 4.6
There are no undisclosed WCM liabilities, except:
The current balance on the loan from USM to WCM and USM and Martucci are
familiar with this balance.
20
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Schedule 4.8
The following is an update on issued related to WCM's title in, and or leases on
relevant properties:
None, other than the extension that USM received from Hayden. USM and Martucci
are familiar with this.
21
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Schedule 5.1
USM is qualified to do business in the following jurisdictions:
New Jersey
22
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Schedule 5.5
The following is a list and description of material events that have occurred
with regard to USM subsequent to the events described in the USM Financial
Statements
USM Funding of WCM: WCM is familiar with USM's agreement to fund WCM's
operations and the transactions contemplated by this Agreement.
23
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Schedule 5.22
The following is a complete and accurate list of all USM Contracts not disclosed
in the Exchange Act Reports:
Hayden has extended the Agreement pursuant to which USM can acquire her
interest. WCM is familiar with this.
<PAGE>
EXHIBIT B
ITEMS 1 AND 2 OF PART I TO THE COMPANY'S ANNUAL REPORT
ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998
PART I
Item 1. Description of Business
General
The Company, originally incorporated on December 1, 1976 under the laws of the
State of Delaware, is engaged in the exploration, development and mining of
precious and nonferrous metals, including gold, silver, lead, copper and zinc.
The Company owns or has an interest in a number of precious and nonferrous metal
properties. The Company's principal mining properties are (i) the Franklin
Mines, located near Idaho Springs in Clear Creek County, Colorado, for which the
Company acquired the exclusive right to explore, develop, mine and extract all
minerals located in approximately 51 owned and/or patented mining claims (the
"Franklin Mines") and, (ii) the Franklin mill, a crushing and flotation mill
which is located on the site of the Franklin Mines (the "Franklin Mill"). For
information regarding the Gold Hill Mill and the Mogul Mine, see Item 1.
Operations at the Company's Mining Properties. (2) Newmineco and the Mogul Mine
and (3) The Gold Hill Mill (until its sale in June 1998). While none of its
properties were operational in fiscal year 1998, the Company continued its
rehabilitation of the Franklin Mines and Franklin Mill in anticipation of the
commencement of operations.
History and Development of the Company
The claims that comprise the Franklin Mines are located on a site upon which
placer gold was discovered above the ground at Idaho Springs, Colorado in 1859.
The Franklin Mines vein system was discovered in 1865. Thereafter, mining
commenced on the site in 1865 and continued on an almost uninterrupted basis
through 1915 until the outbreak of World War I caused curtailment of mining
operations in the area. The principal minerals extracted during this period were
gold, silver, lead, copper, and zinc. The Franklin Mines have not operated on a
continuous or consistent commercial basis since 1915.
On December 26, 1976, the Company acquired Gold Developers and Producers
Incorporated, a Colorado corporation which, prior to the acquisition, leased 28
patented mining claims from Audrey and David Hayden and Dorothy Kennec pursuant
to a mining lease and option to purchase, dated November 12, 1976 (hereinafter
collectively referred to as the "Hayden/Kennec Leases"). In 1981, the Company
commenced a rehabilitation program to extend and rehabilitate the shafts and
tunnels in place at the Franklin Mines, install the Franklin Mill and search for
and delineate a commercial ore body. The Company completed the Franklin Mill,
which is capable of crushing, processing and concentrating approximately 150
tons of ore per 24-hour period, in 1983.
Joint Ventures and Strategic Partners
In February, 1993, the Company and Island Investment Corp., a Nevada corporation
("Island"), formed Zeus No. 1 Investments, a California general partnership
(hereinafter referred to as "Zeus", the "Joint Venture" or the "Zeus Joint
Venture") to develop the Franklin Mines and related assets of the Company.
Island later assigned its interest in the Zeus Joint Venture to Gems and
Minerals Corp., a wholly owned subsidiary of Island ("Gems"). On July 15, 1996,
Gems transferred 31.5% of its 82.5% interest in the Zeus Joint Venture to Nuco
Ventures, Inc., a Delaware company and wholly owned subsidiary of Gems ("Nuco").
The Joint Venture was formed to provide the Company with the financial and
technical support necessary to develop the Franklin Mining properties. While the
Zeus Joint Venture was granted the exclusive right to use the Franklin Mining
properties, at no time did the Company transfer its leasehold interests or
ownership interest in its mining permits to the Joint Venture or to Gems. The
Company did, however, relinquish its interest in 82.5% of the profits from
operations at the
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Franklin Mine and Franklin Mill as Gems was to contribute necessary capital and
other technical support to bring the Franklin Mines into operation. Each of Gems
and the Company were free to pursue other business interests outside the Joint
Venture exclusive of the other.
Since the inception of the Joint Venture, Gems maintained responsibility for
supplying technology, engineers and personnel, as well as additional equipment
and financing to bring the Franklin Mines and Franklin Mill into operation. The
Company retained responsibility for keeping its permits in full force and
effect. However, since the Company had limited financial resources, it was
dependent on Gems for its primary funding.
In early 1997, an officer of the Company introduced Gems to William C. Martucci
("Martucci"). Martucci began negotiations with Gems to enter into a possible
business combination between Martucci's businesses, on the one hand, and
businesses owned and/or operated by or affiliated with Gems (the "Gems
Businesses"), on the other hand. The Gems Businesses included the 82.5% interest
in the Zeus Joint Venture.
By mid to late 1997, it became apparent to the Company that Gems did not possess
the technical and financial resources required to bring the Franklin Mines into
operation as contemplated by the Joint Venture. Also, during this period, the
Company had established a relationship with Martucci independent of Gems. On
September 25, 1997, the Company entered into a letter of intent, (the "Martucci
Letter of Intent"), with Martucci to acquire (the "Transaction") all of the
outstanding shares of POS Financial Corp., a New Jersey corporation ("POS") and
certain other entities owned by him including U.S. Mining, Inc., a New Jersey
corporation ("USM"), in exchange for newly issued shares of Common Stock of the
Company. USM is in the business of investing in mining properties and POS owns
and operates free standing ATM Kiosks.
Pursuant to the Martucci Letter of Intent, Martucci would receive 85% of the
outstanding shares of the Company, upon the closing of the completion of
customary due diligence, the execution of definitive agreements and the approval
of Franklin stockholders. Additionally, Mr. Martucci agreed to cover expenses
incurred with respect to the Transaction in the form of loans to the Company.
Management believed that the financial support to be supplied by Mr. Martucci
pursuant to the Martucci Letter of Intent would be sufficient to fund the
Company prior to the consummation of the Transaction.
On November 25, 1997 in a step transaction, USM acquired an aggregate of 82.5%
interest in the Zeus Joint Venture from Gems and Nuco in exchange for the
assumption of approximately $100,000 in liabilities of Gems (the "Gems
Liabilities"). USM thereafter simultaneously assigned the acquired interest to
the Company in exchange for the assumption of the Gem's liabilities. Upon the
acquisition of the 82.5% interest of the Zeus Joint Venture by the Company, the
Zeus Joint Venture relationship with Gems was terminated and the Joint Venture
was effectively dissolved. The result of the termination of the Zeus Joint
Venture is that the Company has reacquired the right to received 100% of the
profits generated from the Franklin Mines and Franklin Mill once these
properties come into operation which will further enhance the Company's future
profitability.
On April 6, 1998, Martucci terminated the Martucci Letter of Intent. During
1997, USM and/or affiliates advanced to Franklin approximately $955,756 of funds
including approximately $410,000 advanced to the Company by POS through advances
made to Gems for the Company (the "POS Advances"). On March 9, 1998, the Company
executed a Loan Agreement and Promissory Note (the "USM Note") evidencing the
terms upon which the Company would repay the USM Advances and upon which USM
would advance additional funds to the Company on an "as needed" basis. The USM
Note; in the principal amount of $955,756, bore interest at a rate of 8% per
annum and was due and payable on May 4, 1998, but could be extended on a month
to month basis. The USM Note is secured by a first priority lien on
substantially all of the assets of the Company. POS thereafter assigned the POS
Note to USM on March 9th, 1998. As of December 31, 1998, the Company owed USM
$1,283,536 of which $1,191,586 is attributable to principal and $91,950 to
accrue and unpaid interest on the USM Note. The Company has not, as of March 31,
1999, made any payments on principal and/or interest accrued on the USM Note.
On or about August 3, 1998, the Company entered into agreements with each of USM
(the "USM Agreement") and Martucci (the "POS Agreement"). Pursuant to the USM
Agreement, USM agreed to forgive the indebtedness of the Company evidenced by
the USM Note; release the security interests in the collateral of the Company
securing the USM
2
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Note and assign its rights to the Hayden-USM Purchase Agreement in exchange for
42.5% of the issued and outstanding shares of the Company.
Under the terms of the USM Agreement, Martucci agreed to sell to the Company
100% of the outstanding shares of USM in exchange for 42.5% of the issued and
outstanding shares of the Company. The Company intended to seek stockholders'
approval of these transactions at its Annual Meeting of Stockholders held in
October 1998.
In August 1998, the Company filed a preliminary proxy statement with the
Securities and Exchange Commission (the "Commission") for its annual meeting of
stockholders, which included proposals to approve each of the USM Agreement and
the POS Agreement. Shortly after the filing of the preliminary proxy materials,
the Commission informed the Company that the staff of the Commission (the
"Staff") would be conducting a review of the proxy materials and the proposals.
The Company informed USM of the Staff's inquiry and was thereafter notified that
USM wished to terminate the agreements under the premise that the Company could
not secure stockholder approval of the transactions in a timely manner. See Item
4. Submission of Matters to a Vote of Security Holders for further information
about the Annual Meeting of Shareholders of the Company held October 12, 1998.
On September 21, 1998, the Company received a letter from USM concerning the
monies loaned to the Company by USM, which included the monies owed to USM by
the Company pursuant to the terms of the POS Note and an additional $144,280
loaned to the Company subsequent to the date of the POS Note. At a meeting of
the Board of Directors of the Company on October 8, 1998, a negotiated
settlement agreement was approved by the Board, whereby USM agreed to convert
the Company's indebtedness to USM into shares of common stock of the Company at
a conversion price equal to 50% of the closing bid price as of the close of
business October 7, 1998. The price of the Company's common stock at the close
of business on October 7, 1998 was $.66 per share. Therefore, the conversion
rate under the settlement agreement would be one share of common stock of the
Company for each $.33 of indebtedness of the Company to USM.
It was further agreed that the settlement plan would be implemented in a two
step transaction. Approximately $306,160 of loans would be paid by converting
that portion into 927,757 shares of common stock of the Company resulting in USM
holding approximately 19% of the total issued and outstanding shares of common
stock of the Company. The conversion of the remaining indebtedness would be
predicated upon either (i) stockholder approval of the issuance of more than 20%
of the Company's common stock in the aggregate to USM at a discount to market
price as required by the rules of corporate governance promulgated by the NASDAQ
Small Cap Market ("NASDAQ"), or (ii) the issuance of a waiver by the NASDAQ
excepting the Company for compliance with this rule. USM also agreed that it
would continue to provide the Company with financing going forward as further
inducement to consummate the settlement agreement set forth above.
Due to the fact that the Company had already expended significant monies to
conduct a proxy solicitation for its annual meeting scheduled on October 12,
1998, the Company made application to NASDAQ for a waiver of the meeting
requirement described above.
On October 19, 1998, the Company made a formal application to NASDAQ in
accordance with Rule 4310(C)(25)(H)(ii) of the NASDAQ Stock Market for a waiver
of the requirement that the Company call a meeting of its stockholders to
approve the issuance of over 20% in the aggregate of its stock to USM at a price
below market price. The rule allows for a waiver of this requirement when, among
other things, a delay in securing stockholder approval would seriously
jeopardize the financial viability of the Company. On or about October 24, 1998,
the NASDAQ Stock Market contacted the Company and indicated that it was inclined
to deny the Company's application unless additional information was submitted
for review. The Company thereafter withdrew its application and re-opened
negotiations with USM. Although the Board of Directors of the Company has
approved the issuance of 927,757 shares of common stock of the Company, such
shares have not been issued. The Company however, continues to be in default of
the USM Note and has not, as of the date hereof, repaid any of the amounts owed
to USM. The Company and USM are continuing negotiations with respect to the
outstanding monies owed to USM and USM is still funding the Company.
Notwithstanding, the termination of the Martucci Letter of Intent, the Company
and Martucci have continued negotiations regarding a possible business
combination between the Company and the Martucci Companies on an informal basis.
However, there can be no assurance that any definitive agreement will be reached
between the parties regarding future acquisitions. Moreover, since USM and
affiliates have been the primary source of funding to the Company as of late,
there
3
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can be no assurance that the Company will have adequate funds available to repay
the USM Note. In the event that the Company should default on its obligations to
repay the USM advances, USM may foreclose on the assets securing the USM Note.
Such foreclosure actions by USM would have a material adverse effect on the
future operations of the Company and on the Company's ability to explore the
Franklin Mines.
Operations at the Company's Mining Properties
(1) Compliance with DMG regulations at the Franklin Mines and Franklin Mill.
During fiscal year 1997, the majority of the remedial work and the technical
revisions to the Franklin Permit consisted of work relating to correcting
violations cited against the Company in 1996. Specifically, the Company (a)
instituted a plan for quarterly groundwater monitoring which included surface
water and groundwater sampling plans, (b) took steps to correct the run-off
problem associated with the Tailings Pond disposal area (the "Disposal Area"),
(c) reclaimed the Lined Tailings Ponds located adjacent to the Franklin Mill
(the "Lined Tailings Pond"), (d) commenced preliminary plans for the
installation of a paste backfill system for tailings disposal and (e) made
application to the DMG for expansion of the permitted area at the Franklin Mines
and Franklin Mill to allow for performance of certain of the remediation work
outlined above. Upon completion of paste backfill work, it is anticipated that
the Company will possess substantial tailings disposal capacity consistent with
its production plans. However, should additional disposal areas be required, the
Company may make application to the DMG to reopen the other tailings ponds which
it has recently reclaimed. Since the reclamation work relating to the Lined
Tailings Ponds has been completed, the Company may also make application to the
DMG to reduce the $252,000 reclamation bond currently posted with the DMG.
In addition to the work performed in connection with the Franklin Permits, the
Company submitted to the DMG an environmental protection plan (the
"Environmental Protection Plan") which complies with the provisions of the
Mineral Rules and Regulations of the MLRB of Hard Rock, Metal and Designated
Mining Operations. The Environmental Protection Plan includes an emergency
response plan for designated chemicals used on site and appropriate measures
consistent with the recommendations by the Colorado Division of Wildlife for the
Protection of Wildlife to prevent damage to area wildlife from designated
chemicals, toxic or acid forming materials and acid mine drainage. The
Environmental Protection Plan was accepted by the DMG.
On January 31, 1997, the Company received approval from the DMG of its March 6,
1996 amendment application to the Franklin Permit. The notification of approval,
received by the Company on February 28, 1997, increased the total permitted
area, revised the mining plan to include the processing of ore from the Mogul
Mines, alters the milling process, propose tailings paste disposal, and modifies
the surface water control plan. All of the terms of the amendment approved by
the DMG were incorporated into the Franklin Permit and made a part thereof.
However, the DMG set forth certain conditions to its approval which required (i)
the submission of a final design for tailings disposal facilities in the form of
a technical revision to the DMG for the Surface Water Control Plan not later
than April 15, 1997 and (ii) the completion of closure plans for the Lined
Tailings Pond by spring runoff and in any event no later than April 15. Finally,
the schedule for the completion of the closure plan for Tailings Pond 5 will be
determined by the DMG during fiscal year 1997 and will be dependent on the
Company's tailings disposal plan which is to be submitted to the DMG in 1997.
In the spring of 1997, the region in which the Franklin mining properties are
located was subject to severe weather patterns, which caused flood conditions in
the area. As a result, the Company was unable to complete its work at the
Franklin Mines within the prescribed time frame. Given the oral agreement with
the DMG to grant the Company latitude with respect to the completion of its
projects, the Company failed to make any formal application to the DMG for an
extension of time to complete the Surface Water Control Plan and closure plans
for the tailings ponds. As a result of this oversight, the Company received a
formal Notice of Violation and Cease and Desist Order from the DMG for failure
to fully complete these projects as prescribed by the DMG in its January 31,
1997 approval.
Thereafter, installation of the Surface Water Control Plan, and the closure and
reclamation of the tailings ponds were completed and the Cease and Desist was
automatically lifted without further action by the Company or administrative
proceedings by the DMG. As of the date hereof, the Company is in compliance with
all applicable regulations and no violations exist against the Company or its
properties.
4
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During fiscal year 1998, the Company continued its remedial rehabilitation work
at the Franklin Mines and Mill in anticipation of commencing operations.
Specifically, the Company continued with its water monitoring programs and
commissioned additional reports and research into claims located on the Franklin
Mining properties. The Company has through fiscal year 1998, and will continue,
through fiscal year 1999, to take all steps necessary to bring the Franklin Mine
and Mill into operations.
(2) Newmineco and the Mogul Mine.
On September 26, 1996, the Company acquired a 20% interest in Newmineco from
Gems for a purchase price of $600,000 evidenced by an interest only note bearing
interest at 9.5% per annum (the "Newmineco Note"). Newmineco was formed for the
purpose of exploiting certain rights to a mining property known as the Mogul
Mine evidenced by a Lease dated March 18, 1996, entered into between Island, as
lessee, and the Ruggs (McCollum being the lessor/optionor as to the Muscat Lode
claim only) as lessor (the "Rugg/Mogul Lease"). The Rugg/Mogul Lease was
contributed to Newmineco prior to the acquisition by the Company of 20% of the
LLC.
On February 7, 1997, Gems notified the Company that it had assigned its interest
in the Newmineco Note to certain third parties, including John Miner, a
consultant to the Zeus Joint Venture. Thereafter, on February 10, 1997, the
Company notified Mr. Miner, as special agent to the assignees that it had
elected to convert the principal due on the Newmineco Note into Common Stock of
the Company in accordance with the terms therein. An aggregate of 307,692 as
adjusted shares were issued to the assignees in full satisfaction of the
Newmineco Note.
The Company continues to maintain a 20% interest in Newmineco, but has decided
to abandon its plans to participate in the exploitation of the Mogul Mine. For
more information regarding the disputes related to Newmineco and the Mogul Mine,
See Item 3 Litigation-Durango Litigation.
(3) The Gold Hill Mill
The Gold Hill Mill is located within close proximity to the Franklin Mines and
Mill and it was hoped that the acquisition of the facility would afford the
Company the opportunity to expand its geographic reach into the Gold Hill Mining
region. In July, 1996, the Company acquired the Gold Hill Mill in hopes of
increasing its capacity to mill ore mined from the Franklin Mines and possibly
other mining properties in the region.
However, in 1997, it became clear that the regulatory climate made it
economically unfeasible to bring the Gold Hill Mill into operation. Recent
changes in the laws governing milling and mining in Boulder County restrict the
use of milling facilities located in Boulder County to processing ore recovered
within the county only. Therefore, the laws preclude the Company from using the
Gold Hill Mill for processing ore from the Franklin Mines. Management does not
believe that any mines located in Boulder County are operating at this time.
Therefore, the Company decided to divest itself of this property during fiscal
year 1998.
On or about June 5, 1998, the Company sold the Gold Hill Mill to Denver East
Machinery Company ("Denver East") for an aggregate purchase price of $1,075,000.
Payment of the purchase price was made by transferring certain property and
equipment owned by Denver East having a fair market value of $725,000 and the
issuance of a demand note in the aggregate principal amount of $350,000 (the
"Denver East Note"). The Denver East Note is payable on demand by Com, Inc. and
will accrue interest at a rate of 14% per annum. As of the date hereof, the
Company has not made demand for payment under the terms of the Denver East Note.
Other Matters
On or about June 12, 1997, the Company filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form SB-2 (the
"Registration Statement") on behalf of certain shareholders of the Company for
the purpose of registering an aggregate of 638,076 as adjusted shares. The
Company was obligated to file the Registration Statement on behalf of these
shareholders pursuant to certain contractual agreements granting such persons
demand and/or piggyback registration rights.
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After receiving comments from the Commission on or about July 18, 1997, the
Company received requests from the majority of the Selling Shareholders to
withdraw their shares from the Registration Statement because, assuming all
other provisions of Rule 144 were complied with, the shares may be sold pursuant
to Rule 144.
The Commission consented to the withdrawal of the Company's Registration
Statement on May 5, 1998. For further information regarding the Registration
Statement, See Items. Legal Proceedings-Securities and Exchange Commission.
The Company has not conducted any significant commercial mining operations and,
as a result, had not generated any significant revenues through December 31,
1998 from operations at the Franklin Mine. Therefore, the Company remains in the
development stage. The Company, however, is hopeful that economically viable
commercial mining operations at the Idaho Springs mining facilities can be
conducted in the future. Moreover, the Company continues to work closely with
Colorado state mining regulatory agencies in preparation and anticipation of
full-scale operations at the Franklin Mines and Franklin Mill.
Water, Utilities and Refining Contracts
The Company has historically purchased power from Public Service Company of
Colorado at its published rates. Moreover, the Company's management believes
that sufficient water for present and future operations may be obtained from the
City of Idaho Springs at its normal rates or from other nearby sources at
reasonable rates. The Company's management does not anticipate any difficulty in
obtaining sufficient water and power sources for its future mining and milling
operations.
In the past, the Company has entered into refining agreements with Zinc
Corporation of America and ASARCO Incorporated for the sale and refining of
lead, zinc and copper concentrates produced from the Franklin Mine in Colorado.
The Company's management expects that at such time as it recommences active
mining and milling operations, the Company will not have difficulties in
renewing or renegotiating contracts with either ASARCO or Zinc Corporation of
America or entering into new contracts with their competitors.
Employees and Technical Consultants
As of December 31, 1998, the Company had no full-time employees. The Company's
executive officers serve as needed on a part-time basis for no compensation.
With respect to operations at the Franklin Mines and Franklin Mill, technical
personnel and other qualified consultants and experts are retained on a contract
or consulting basis. Management anticipates that as the Company's business
develops, additional technical administrative staff may be hired as well as
qualified geological and technical consultants on an as needed basis.
Item 2. Properties
Glossary of Terms
Assay A chemical evaluation of metal content
conducted after mining ore.
Backfill Mine waste which is disposed of
underground in a formerly mined area.
Chacopyrite A mineral containing copper, iron and
sulfur.
Cyanidation and Pulp Recovery The process by which gold is extracted
in the milling process through the use
of cyanide.
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Development Stage Company Companies engaged in the preparation of
an established commercially mineable
deposit or reserve for its extract which
are not in the production stage.
Dip An angle measured in degrees from the
horizon.
Fault A fracture in the earth through which
mineralizing solutions may rise and form
a vein.
Fault System A large regional fracture.
Footwall That portion of the vein which is
located below.
Galena A mineral containing both lead and
sulfur.
Gravity Concentration Minerals concentrated by application of
devices employing the force of gravity.
Hanging wall That portion of the vein which is
overhead.
J.L. Emerson Fault A large fracture in the earth' s crust
located in the Franklin Mine area.
Laramide Period A period in history dating back
approximately 70 to 90 million years
ago.
Main Trunk A highly mineralized portion of the J.L.
Emerson fault located on the properties
constituting the Franklin Mines.
Massive Sulfides High quality ore.
Microcline gneiss A type of rock found at the Franklin
Mine.
Mill The plant facility where the metals
constituting the ore are removed from
mined rock.
Mine Workings The areas where ore is being mined.
Mineral Concentrate A mill product where the rock particles
have been removed from the metallic
minerals.
Mineralized Rock Rock which contains the minerals to be
mined.
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Monzonite Intrusive rock types containing large
amounts of quartz and often the
progenitor of metallic, mineralizing
solutions.
Ore A metallic or non-metallic mineral that
can be mined from the earth and sold at
a profit.
Ore Conduit An opening through which mineralizing
solutions can rise.
Ore Reserves Minerals located in the ground whose
existence is governed by varying degrees
of probability.
Ore Shoot A body of ore.
Orogeny An event causing a major upheaval or
reshapement of the earth's crust, such
as volcanism, mountain building or ore
formation.
Paste Backfill Procedure in which backfill is treated
with certain chemicals to solidify the
same to prevent seepage
Pegatites A type of rock found in the Franklin
Mine.
Pillars Unmined sections of ore in a stope.
Pre-Cambrian age A time period in history dating back
approximately 600 million years ago.
Probable (Indicated) Reserves Reserves for which quantity and grade
and/or quality are computed from
information similar to that used for
proven reserves, but the site for
inspection, sampling and measurement are
farther apart or are otherwise less
adequately spaced. The degree of
assurance, although lower than that for
proven reserves, is high enough to
assume continuity between point of
observation.
Production Shaft The device through which ore is hoisted
from the mine and the area through which
materials are lowered into the mine and
miners enter and exit the mine.
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Proven (Measured) Reserves Reserves for which (a) quantity is
computed from dimensions revealed in
outcrops, trenches, workings or drill
holes; grade quality are computed from
the results of detailed sampling and (b)
the sites for inspection, sampling and
measurement are spaced so closely and
the geologic character is so well
defined that size, shape, depth and
mineral content of reserves are well
established.
Pyrite A mineral containing both zinc and
sulfur.
Raise A tunnel driven upward from a level.
Refractory A difficulty in separating value metals
or minerals from the host rock.
Reserves That part of a mineral deposit which
could be economically and legally
extracted or produced at the time of the
reserve determination.
Schist, granite gneiss A type of rock found in the Franklin
Mine.
Selective Flotation Minerals concentrated in a selected
mineral group in the mill.
Shaft A vertical tube-like opening whereby
miners enter the mine.
Slurry A mixture of ground rock or minerals in
water.
Slimes Exceedingly fine particles mixed with
water.
Sphalerite A mineral containing both zinc and
sulfur.
Strike In a horizontal direction.
Stope The area of the mine where miners
extract mineral deposits from the mine.
Tailings Waste which is produced by the Mill.
Tailings Pond The location where mill wastes are
deposited.
Telluride A mineral containing tellurium often
found with quantities of gold and/or
silver and sulfur.
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Tennentite A complex mineral containing copper,
antimony or arsenic, often containing
large amounts of silver.
Tertiary Period A time period in history dating back
approximately 40 to 70 million years
ago.
Vein A fracture in the earth's crust where
minerals have been deposited.
Winze A tunnel driven downward from a level.
Colorado Mining Properties
The property which constitutes the Franklin Mines consists of (i) 100% leasehold
interest in the mineral rights to 28 claims comprising approximately 322 acres
evidenced by the Hayden/Kennec Leases and (ii) an additional 23 claims leased
and/or purchased by the Company covering less than 100% of the mineral rights
comprising approximately 20 additional acres, for a total of 51 claims over 340
acres. Such properties include all improvements made by the Company thereon,
including the Franklin Mill capable of supporting up to a 150 ton per day
operation in its present state. The Company does not intend to exploit any
claims for which it holds less than a 100% interest. Management believes that it
currently maintains adequate insurance for all of its mining properties.
Hayden/Kennec Leases
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 was 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 expiration date, the Company 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.
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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.
Location and Access
The Franklin Mines and Franklin Mill are located in Clear Creek County, Colorado
approximately 2.7 miles north of the town of Idaho Springs, which is accessible
from Interstate 70 approximately 33 miles west of Denver. From Idaho Springs, a
county maintained gravel road connecting Idaho Springs with Central City in
Gilpin County passes within 1/4 of a mile of the Franklin Mine facilities and
offices. A minor roadway, also maintained by the County, allows access to the
Franklin Mine within 1/8 of a mile. The mine location is accessible year round,
except in the case of a major snowstorm in winter months.
Ore Deposition in the Area
Most of the ore deposition in the area where the Franklin Mine is located has
been credited to the period of the Laramide Orogeny. Ore extracted from the
region included gold, silver, copper, lead, zinc, and uranium. By far the
largest single metal values were in gold, with silver being a distant second.
Though many of the smaller veins located in the area pinched out at moderate
depth, some have shown strong mineralization at greater depths.
The ore deposits are of four types: (I) pyritic gold ores; (ii)
galena-sphalerite ores; (iii) composite (pyrite-galena-sphalerite) ores and (iv)
telluride ores. Pyritic gold ores are chiefly associated with pyrite,
chalcopyrite, and tennentite. The "composite ores" are believed to be the result
of two or more periods of mineralization, with pyritic minerals first and
galena-sphalerite second; mineral content varies widely with the relative
percentage of the different types of ore present. Telluride ores are present
mostly in the Northeast corner of the district, but some telluride ores have
been noted elsewhere.
Geology of the Franklin Mines
The rocks most commonly seen in the Franklin Mines are Pre-Cambrian age granite
and microcline gneiss. Tertiary Period, monzonite, the most common of which is
quartz monzonite, can be seen on the ninth level and are reported from lower
levels in the Gem vein or Gem workings of the Franklin Mines. The general strike
of the system is N75 degrees W with dips varying from 45(degree) to 79(degree).
The structure of the mines is controlled by the J.L. Emerson Fault system that
runs in a west-northwest direction across the whole property and beyond.
Secondary to the J.L. Emerson Fault are multitudes of small fissure veins that
are parasitic to the main break. Some of these veins contribute to considerable
mineralization where they intersect the J.L. Emerson Fault structure. These
mineral bodies are observable in several locations in the Franklin 73 mine and
the Gem mine, one measuring 22 feet wide and 60 feet in length. It has been
reliably reported that some of the large stopes mined in the Gems workings
measured up to 105 feet in width.
Estimated Ore Reserves
The mineral lodes of the Franklin Mines consist of these associated with the
Gem, the Freighter and the Franklin mines and those minerals generally
associated with the "Main Trunk" of the J.L. Emerson Fault. No reference is
being made regarding the mineral potential of structures situated adjacent to,
or off the "Main Trunk".
Sampling by the channel sample method was conducted during the period of 1975
through 1993 with assaying provided by the Franklin and other accredited assay
laboratories. Assays were also obtained from the old Gem Mining Co. mine assay
map, dated 1921 (the "Gems Assay Map"). The sampling process was carried out at
right angles to the strike of the veins. Blocks were sampled on three or four
sides and at times within by raise or winze. Those blocks, which were
extensively mined, were entered where possible through open stopes with both
pillars and "backfill" being sampled.
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The Franklin mineral structure is generally a tabular structure in shape and
consisting of several parallel to sub-parallel veins, striking in a westerly
direction and dipping at 45(degree) - 79(degree) north. Its depth is unknown.
The J.L. Emerson Fault is a large regional structure, striking east to west and
having an irregular plain that dips to the north at 45 to 79 degrees. The J.L.
Emerson Fault is associated throughout with a series of parallel to sub-parallel
sigmoidal shaped fractures that may focus east or west on the principal fault
plain. These fracture patterns are found on nearly all levels and represent
important centers of mineral concentration. The J.L. Emerson Fault consists of
two main parallel to sub-parallel mineralized fault fractures, the so called
"footwall" and "hanging wall" veins. Each of the principal veins has
historically contributed to ore production in the Gem vein. A second set of true
fissure veins of a later date and striking northeast and southwest interdict the
J.L. Emerson Fault at several points, but does not cross. These veins are of
unknown economic potential.
The mineral structures in the Franklin Mines are often large, but poorly
defined. It was suggested that a core-drilling program be conducted at promising
locations to determine potential mineral reserves therein. It was believed by
management and Gems, its joint venture partner, that much unexplored mineral
potential exists in the Franklin Mine.
There is no assurance that additional reserves exist in other mineralized
structures in the Franklin Mines until a systematic core-drilling program
extends the mineralized zone(s) and a comprehensive economic evaluation based
upon that work concludes economic feasibility.
As filed with Securities & Exchange Commission; Summary of Reserves Report by
Gifford A. Dieterle, Geologist, dated December 7, 1993.
In place 173,486.60 Tons
Broken ore (in stopes or on surface) 4,700.00 Tons
Ore Mined or Milled since 1987 8,100.00 Tons
186,286.60 Tons
Average Grade of Gold: .315 ounces per ton
Average Grade of Silver: .740 ounces per ton
The metallurgical recovery of gold from ore is estimated at 90%, distributed as
follows:
56% in lead concentrate
31% in pyrite concentrate
3% in zinc concentrate
The metallurgical recovery of silver from ore is estimated at 90%, distributed
as follows:
70% in lead concentrate
15% in zinc concentrate
5% in pyrite concentrate
As of the date hereof, the Company has not received any information that would
require modification of the above table.
Operations.
The successful conclusion of the paste back fill testing program will provide
the Company with adequate tailings disposal and will bring the Company close to
the commencement of operations. The Company is hopeful that it will commence
rehabilitation before the end of the second quarter of 1999 by initially
bringing to the surface 8000 tons of ore existing at the 5 level tunnel via the
Freighters Friend Shaft. The Company has been approached by and is pursuing
ventures with two local mining operators to mill ore mined from other mining
properties located in the region at the Franklin Mill.
12
<PAGE>
The Company retained Walsh Environmental Scientists and Engineers, Inc., of
Boulder, Colorado in 1998 to oversee all environmental, compliance and
regulatory matters relative to the Franklin Mines and Franklin Mill and has
purchased the necessary equipment to conduct paste back fill testing with regard
to tailings disposal on the property. In mid 1998, the Company determined that
the remaining work to be conducted on the Franklin Mining properties could be
handled more economically by retaining a qualified consultant to oversee such
activities. Therefore, the Company no longer engaged Walsh for such purposes.
The Company's consultant continues to oversee activities at the mining site and
to conduct all water monitoring and other procedures required to keep the
Company's permits in full force and effect.
Since the acquisition of Gem's 82 1/2% of the Joint Venture in 1997, the Company
is now entitled to receive 100% of the profits from mining operations and will
assume full responsibility for management of the Franklin Mining Properties.
Management believes that an initial capital requirement of approximately
$750,000 will be required to bring the mill into operations and possibly reach
through to the discovery program of the multiple levels of the Franklin Mine.
USM and its affiliates have verbally pledged to continue to provide financing to
the Company on an as needed basis through December 31, 1999: this financing is
in addition to the USM Advances made in 1997 and 1998. Other alternatives such
as private placements, loans, or public offerings may be considered for future
operating capital.
Mill/Metallurgy
The Franklin Mill, was designed to recover and concentrate metallic minerals by
two historic methods; selective flotation and gravity by table and jig. Both
systems were operated in a continuous circuit. After a series of upgrades in
1982, the Franklin Mill currently has a daily processing capacity (operating for
a 24 hour period) of approximately 150 tons of ore. In the past, the Franklin
Mill operated on an eight-hour schedule and processed approximately 30 tons of
ore during that time interval.
The Franklin ore is refractory and therefore difficult to separate. Pyrite (iron
sulfide) constitutes approximately 23% of the weight of the ore. Approximately
35% of the gold content of the ore remains locked in the pyrite as refractory
gold and is not recoverable by ordinary means. In 1993, a new metallurgical
process was introduced to attempt to extract gold from the pyrite concentrates.
This process attempted to break down the pyrite minerals by oxidation and
thereby free the contained refractory gold. The procedure involved the use of
standard banks of flotation cells (48"), pyrite slurry (30%), air, and
agitation. At a later stage pre-processing of the pyrite by further milling
occurred. Processed pyrite was subjected to cyanidation and carbon-pulp recovery
of gold. The process was initially reported to be successful by the then joint
venture operator with recovery of 85% of gold. However, later testing indicated
that little or no gold could be recovered through this process.
Standard milling procedures are intended for newly mined ore with selective
flotation of; a) lead, silver, gold and b) zinc and c) gravity concentration of
gold bearing pyrite. Gold bearing pyrite concentrates will be taken off site to
a copper smelter where gold and silver will be extracted. Average recovery of
gold in lead concentrate is estimated at approximately 60%; pyrite concentrate
35%; slimes 5% (lost).
In the past, the Franklin Mill operated on a limited schedule while exploration
and development was taking place. While the Franklin Mill has not operated with
respect to ore milling, limited crushing activities took place in early 1996 for
the purpose of crushing bulk test ore samples prior to assay. Thus, prior
milling and the crushing recently done at the Franklin Mill can be characterized
as "exploratory" in nature.
Completed in 1992, the Gold Hill Mill is a fully permitted modern milling
facility. With the exception of test milling approximately 4,000 tons of ore by
the previous owner, the Gold Hill Mill has not been operated since its
completion in any commercial operations. On June 2, 1998 the Company sold its
interest in the Gold Hill mine to the Denver East Company.
Offices of the Company
The Company maintains its executive offices, consisting of approximately 500
square feet, at 76 Beaver Street, Suite 500, New York, New York. In 1998, the
Company re-negotiated its oral agreement and now pays a monthly rental of $3,500
13
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for the office space, secretarial and other services provided to the Company
pursuant to an oral agreement with a non-affiliate. The Company also maintains
an office on site at the Franklin mine in Idaho Springs.
The Company's management anticipates this space will service the Company's needs
for the foreseeable future and that, in the event such space should become
unavailable in the future, the Company will be able to lease these or other
suitable facilities on a reasonable basis.
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PROXY
WCM CAPITAL, INC.
76 Beaver Street - Suite 500
New York, New York 10005-3402
Phone (212) 344-2828
NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
To Be Held Tues., February 22, 2000
The undersigned hereby appoints Robert L. Waligunda as Proxy, with the
power to appoint his substitute, and hereby authorizes him to
represent and to vote as designated on the reverse side, all the
shares of common shares, $0.01 par value per share (the "Common
Shares"), of WCM Capital, Inc., a Delaware corporation (the
"Company"), at a Special Meeting of Shareholders (the "Meeting") to be
held at the Holiday Inn, on Tues., Feb. 22, 2000 at 10 AM, or any
postponement or adjournment thereof, for the following purposes.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED FOR
ALL PROPOSALS.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
Please date, sign and mail your
Proxy card back as soon as possible!
SpecialMeeting of Stockholders
WCM CAPITAL, INC.
Feb. 22, 2000
Please detach and Mail in the Envelope Provided
[_] Please mark your
Votes as in this
Example
(1) To approve the acquisition of 100% of the issued And outstanding shares of
common stock of U.S. Mining, Inc. in exchange for such number of shares of
the Company's common stock that equals 85% of the issued and outstanding
shares of the Company's common stock immediately following consummation of
the acquisition; and
FOR AGAINST ABSTAIN
[_] [_] [_]
(2) To transact such other business as may properly come before the meeting or
any adjournments thereof.
FOR AGAINST ABSTAIN
[_] [_] [_]
Only holders of the Company's common stock, par value $0.01 per share (the
"Common Stock") of record on January 17, 2000 are entitled to notice of, and to
vote at, the meeting or any adjournment thereof. January 17, 2000, the record
date for determination of stockholders entitled (a vote at the meeting or any
adjournments thereof, 3,955,169 shares of Common Stock were issued and
outstanding.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL
OUT, SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE.
PROXIES FORWARDED BY OR FOR BROKERS OR FIDUCIARIES SHOULD BE RETURNED AS
REQUESTED BY THEM. THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE INVOLVED
IN FURTHER COMMUNICATION.
Signature _____________________________ Signature_____________________________
Date___________________
NOTE: Please sign exactly as the name appears above. When shares are held by
joint tenants, both should sign
2
