PRELIMINARY PROXY
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):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
Title of each class of securities to which transaction applies: Common
Aggregate number of securities to which transaction applies: ___________
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): $ per share*
Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] 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: NONE
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed: 6/20/00
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WCM CAPITAL, INC
76 Beaver Street
Suite 500
New York, New York 10005
Telephone 212-344-2828
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
JULY 31, 2000
To the Stockholders of WCM Capital, Inc.
The special meeting (the "Special Meeting") of the stockholders of WCM
Capital, Inc., a Delaware corporation (the "Company"), will be held on the 31st
day of July, 2000, at 10:00 a.m. eastern daylight time at the Holiday Inn, 304
Route 22 West, Springfield, New Jersey 07081 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., a New Jersey corporation
in exchange for 85% of the total issued and outstanding shares of
common stock of the Company;
2. To approve an amendment to the Certificate of Incorporation of the
Company to increase the authorized capital of the Company from
40,000,000 to 100,000,000; and
3. To transact any other business incidental to the Special Meeting as
may properly come before the Special Meeting or any adjournment or
postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on June 6, 2000 are entitled to notice of and to vote at the Special
Meeting or any adjournment or postponement thereof.
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All stockholders are cordially invited to attend the Special Meeting.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy as promptly as possible in the postage
prepaid envelope enclosed for that purpose. Before doing so, the Company advises
all stockholders to carefully read, review and consider the enclosed material.
Any stockholder attending the Special Meeting may vote in person even if he or
she has returned a proxy.
Sincerely,
/s/ Robert Waligunda
Robert Waligunda,
President
New York, New York
June 30, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE
AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. ANY STOCKHOLDER MAY REVOKE HIS PROXY AT ANY TIME BEFORE
THE SPECIAL MEETING BY WRITTEN NOTICE TO SUCH EFFECT, BY SUBMITTING A
SUBSEQUENTLY DATED PROXY OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN
PERSON. AS THESE MATTERS ARE IMPORTANT AND INVOLVE THE ISSUANCE OF MORE THAN 50%
OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE COMPANY, AND AS APPROVAL BY THE
STOCKHOLDERS OF THESE MATTERS WILL CONFER A CONTROLLING INTEREST IN THE COMPANY
TO MR. WILLIAM MARTUCCI AND/OR HIS NOMINEE(S), STOCKHOLDERS ARE ADVISED TO
CAREFULLY READ, REVIEW AND CONSIDER THE ENCLOSED MATERIAL.
THANK YOU FOR YOUR PROMPT ATTENTION TO THIS MATTER
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Table of Contents
Proxy Statement Summary
Introduction
The Acquisition
The Proposed Amendment to the
Certificate of Incorporation
The Special Meeting
Required Vote
The Parties to the Acquisition
Relationships between the Company and Martucci
Background of the Acquisition
Recommendation of the Board; Reasons for the Acquisition
Certain Effects of the Acquisition
Closing Date
Conditions to the Acquisition
Termination of the Stock Purchase Agreement
Absence of Regulatory Filings and Approvals
Federal Income Tax Consequences of the Acquisition
Market Price of the Company's Common Stock
Introduction
The Special Meeting
Purpose of the Special Meeting
Date, Time and Place of Special Meeting; Record Date
Required Vote
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Proposal 1. The Acquisition
General
The Acquisition
Background of Acquisition
Recommendation for the Company's Board of Directors;
Reasons for the Acquisition
Relationships between the Company and Martucci;
Potential Conflicts of Interest
Effect of the Acquisition
Resales of the Shares Under Rule 144
Absence of Regulatory Filings and Approvals
Federal Income Tax Consequences
The Stock Purchase Agreement
Terms of the Acquisition
Representations and Warranties
Conditions to Consummation of the Acquisition
Termination of the Stock Purchase Agreement
Registration Rights
Proposal 2 The Amendment
General
Recommendation of the Board of Directors;
Reasons for the Amendment
Information Regarding the Company
General
History and Development of the Company
Other Ventures
Water, Utilities and Refining Contracts
Properties
Colorado Mining Properties
Hayden/Kennec Leases
Location and Access
Ore Deposition in the Area
The Idaho Springs and Central Mining District
Geology of the Franklin Mines
Estimated Ore Reserves
Operations
Mill/Metallurgy
Offices of the Company
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Legal Proceedings
Convertible Debentures
Information Regarding USM
Management's Discussion and Analysis or Plan of Operations
Liquidity and Capital Resources
Plan of Operations
Results of Operations 1999 vs. 1998
Results of Operations 1998 vs. 1997
Market for Registration's Common Equity and Related Stockholder Matters
Sales of Restricted Securities
Security Ownership of Management
Independent Public Accountants
Where you can find Additional Information
APPENDICES
Appendix A Stock Purchase Agreement
Appendix B Amendment to Certificate of Incorporation
Appendix C Historical and Selected Financial Data
Appendix D Financial Statements of the Company
Appendix E Financial Statements of USM
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PROXY STATEMENT
SUMMARY
The following summary is qualified in its entirety by and reference is made
to the more detailed information appearing elsewhere in this Proxy Statement.
Capitalized terms used but not defined in this Summary shall have the meanings
ascribed to them elsewhere in this Proxy Statement. Stockholders are urged to
read this Proxy Statement and its appendices in their entirety before voting.
Introduction
The Acquisition.
This Proxy Statement relates, in part, to the solicitation of proxies by
the Board of Directors (the "Board") of WCM Capital, Inc., a Delaware
corporation (the "Company"), to approve the acquisition (the "Acquisition") by
the Company of all of the issued and outstanding stock of US Mining, Inc., a New
Jersey corporation ("USM"), in exchange for the forgiveness of certain
indebtedness of the Company to USM and an aggregate of 85% of the issued and
outstanding shares or approximately 9,305,839 shares of common stock of the
Company on the closing date (the "Acquisition"). The specific terms of the
Acquisition are set forth in a Stock Purchase Agreement, dated January 18, 2000,
among the Company, USM and Mr. William Martucci, the sole shareholder of USM
(the "Stock Purchase Agreement").
Pursuant to the terms of the Stock Purchase Agreement, the Company will
acquire 100% of the issued and outstanding shares of USM, in exchange for the
forgiveness of approximately $1,825,268.35 of indebtedness (the "Indebtedness)
and approximately 85% or 9,305,839 shares of the Company's common stock (the
"Shares"). The acquisition of USM will result in Martucci owning or controlling
over a majority (85%) of the outstanding shares of the Company.
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The Board, of which Martucci is a member, is of the view that,
notwithstanding the interests of Martucci in the acquisition of the stock of USM
which presents Martucci with actual or potential conflicts of interest, the
Acquisition of USM in exchange for the issuance of the Shares and forgiveness of
the Indebtedness are fair to its stockholders. No independent third party was
retained by the Board to evaluate the fairness of the Acquisition as to the
stockholders of the Company.
A copy of the Stock Purchase Agreement is attached as Appendix A to this
Proxy Statement.
The Proposed Amendment to the Certificate of Incorporation
The Board of Directors of the Company has approved, and recommends that the
stockholders adopt, an amendment of the Certificate of Incorporation of the
Company to increase the number of shares the Company is authorized to issue from
40,000,000 to 100,000,000 (the "Amendment"). The Amendment, if adopted, would
become effective upon the filing of the Certificate of Amendment to the
Certificate of Incorporation with the Secretary of State of Delaware, which
filing is expected to take place shortly after the stockholders approve the
same. A copy of Certificate of Amendment to the Certificate of Incorporation is
attached hereto as Appendix B.
The Special Meeting
At the Special Meeting of the Company's stockholders (the "Company's
Stockholders") and at any adjournment or postponement thereof (the "Special
Meeting"), the Company's Stockholders will be asked to approve the Acquisition
and the amendment of the Company's Certificate of Incorporation as proposed (the
"Amendment").
The Special Meeting is scheduled to be held at 10:00 a.m. Eastern Time, on
the 31st day of July, 2000 at the Holiday Inn, 304 Route 22 West, Springfield,
New Jersey 07081. The Board has fixed the close of business June 6, 2000 as the
record date (the "Record Date") for the determination of holders of the
Company's common stock, par value $.01 per share (the "Common Stock") entitled
to notice of and to vote at the Special Meeting. Each holder of record of Common
Stock at the close of business on the Record Date is entitled to one vote for
each share of Common Stock then held on each matter submitted to a vote of
stockholders. See "The Special Meeting."
The Board unanimously approved the Acquisition and recommends that the
Company's Stockholders vote "FOR" the each of the proposal to approve the
Acquisition. See "The Acquisition-Recommendation of the Board; Reasons for the
Acquisition."
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The Board unanimously approved the Amendment and recommends that the
Company's Stockholders vote "FOR" the proposal to approve the Amendment. See
"The Certificate of Incorporation Amendment-Recommendation of the Board, Reasons
for the Amendment."
Required Vote
Pursuant to Delaware law and the Company's By-Laws, the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock entitled to
vote at the Special Meeting is required to approve the Acquisition and adopt the
Amendment. Thus, a failure to vote or a vote to abstain will have the same legal
effect as a vote cast against approval or adoption, as the case may be. In
addition, brokers who hold shares of Common Stock as nominees will not have
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners. See "The Special Meeting-Vote Required; Quorum."
The holders of a majority of the outstanding shares of Common Stock
entitled to vote at the Special Meeting must be present in person or represented
by proxy to constitute a quorum for the transaction of business. As of the date
of this Proxy Statement, no stockholder of the Company has indicated to the
Board that he or she intends to vote in favor of any of the proposals before the
stockholders of the Company at the Special Meeting.
The Parties to the Transaction
WCM Capital, Inc.
The Company, 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"). The
Company's executive offices are located at 76 Beaver Street, New York, New York
10005, and its telephone number is 212-344-2828.
USM
US Mining, Inc. is a New Jersey corporation organized on October 20, 1997
("USM") which is an exploration stage company engaged in the business of holding
and investing in mining properties. USM is wholly owned by Martucci and the
Company is currently indebted to USM in the amount of $1,595,925.76 plus
interest in the amount of $229,342.59 as of March 31, 2000.
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Relationships between the Company and Martucci
In considering the recommendation of the Board with respect to the
Acquisition, the Company's stockholders should be aware that Martucci, a
director of the Company, has interests in USM which may present actual or
potential conflicts of interest. Currently, Martucci owns 100% of USM which
holds a secured promissory note in the principal amount of $1,825,268.35.
In view of the above summarized relationships among the Company and
Martucci, a director thereof, the terms of the Acquisition may be viewed as
having been negotiated on a non arms-length basis. See "Acquisition-Background
of the Acquisition", "Acquisition- Relationships between the Company and
Martucci; Potential Conflicts of Interest" and "Acquisition- Affects of the
Acquisition".
Background of the Acquisition
After several years of depressed mineral prices and unsuccessful efforts to
attract equity investment and/or traditional financing to commence operations at
the Franklin Mine and Mill, the Board has determined that the acquisition of USM
would allow the Company to eliminate the Indebtedness which would release the
security interest in substantially all of its properties, to exercise more
control over its mining properties, seek third party investment and make the
Company more attractive to third party financing. Therefore, the Board
determined that the Acquisition is in the best interest of the stockholders and
has approved and recommended the same to the stockholders. For a more compete
description, See "Acquisition-Background of the Acquisition.
Recommendation of the Board; Reasons for the Acquisition of USM
The Board has determined that the Stock Purchase Agreement, and the
transactions contemplated thereby, are advisable and in the best interests of
the Company and its stockholders and has unanimously approved and adopted the
Stock Purchase Agreement, and the transactions contemplated thereby. In reaching
its unanimous determination, the Board considered a number of factors, which
taken together support such determination, including, without limitation, the
Company's lack of success in attracting new investment or other financing to
address the Company's needs for additional capital to commence operations at the
Franklin Mine and to insure its viability as a going concern. For a more
complete discussion of the factors considered by the Board, See "Acquisition-
Recommendation of the Board of Directors".
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Certain Effects of the Acquisition
In the event that the stockholders approve the Acquisition, Martucci will
own or control over a majority of the common stock of the Company which will
give him significant influence over the policies and decisions affecting the
Company generally. Moreover, the issuance of the Shares to Martucci will result
in significant dilution to the stockholders of the Company.
Closing Date
The Acquisition is expected to be consummated on or before August 18, 2000,
assuming approval by the Company's stockholders of the Acquisition at the
Special Meeting, or on such earlier date which shall be the first business day
immediate following that day upon which the last of the conditions to closing of
the Acquisition (the "Closing") are satisfied or waived (the "Closing Date").
See "Closing Date," "Acquisition-The Stock Purchase Agreement; Conditions to
Consummation of the Acquisition."
Conditions to the Acquisition
The obligations of the parties to complete the Acquisition are subject to a
number of conditions. If these conditions are not satisfied or waived, the
Acquisition will not be completed. These conditions included, among others, that
the Acquisition shall have been approved by the Company's Stockholders. See
"Acquisition- The Stock Purchase Agreement; Conditions to the Consummation of
the Acquisition."
Termination of the Stock Purchase Agreement
The Stock Purchase Agreement may be terminated by Martucci or the Company
if there has been a material breach by the other party of such party's
representations, warranties, covenants or agreements which has not been waived
in writing. For a complete discussion of these termination provisions, see
"Acquisition-The Stock Purchase Agreement; Termination of the Stock Purchase
Agreement."
Absence of Regulatory Filings and Approvals
The consummation of the Acquisition is not subject to obtaining any
regulatory approvals or complying with any regulatory filing requirements. See
"Acquisition - Absence of Regulatory Filings and Approvals."
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Federal Income Tax Consequences of the Acquisition
The following discussion regarding certain federal income tax consequences
is based on current law. Stockholders should consult their own tax advisors as
to the federal, state, local and foreign tax effects of the contemplated
Acquisition in light of their individual circumstances.
It is anticipated that the contemplated Acquisition 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 Acquisition. See
"Acquisition-Federal Income Tax Consequences."
Market Price of the Company's Common Stock
On the Record Date, the closing price of the common Stock was $2.66 per
share. See "Price Ranges of the Company's Common Stock."
INTRODUCTION
This Proxy Statement is provided to the Company's stockholders in
connection with the Special Meeting. The Special Meeting will be held on the
date, at the time and in the location, and will be held to consider the matters
set forth under "The Special Meeting." The Board is soliciting proxies hereby
for the use at the Special Meeting. Information with respect to the execution
and revoking of proxies is provided under "The Special Meeting - Voting Rights."
This Proxy Statement and the enclosed form of proxy are first being mailed to
the Company's stockholders on or about June 30, 2000.
The costs of solicitation of the proxies from the Company's stockholders
will be borne by the Company. The Company will reimburse brokers, fiduciaries
and custodians and other nominees for reasonable out-of-pocket expenses incurred
in sending this Proxy Statement and other proxy materials to, and obtaining
instructions relating to such materials from, the beneficial owners of the
Common stock. Proxies may be solicited by directors or executive officers of the
Company, in person, by letter or by telephone or telefax.
THE SPECIAL MEETING
Purpose of Meeting
At the Special Meeting, the Company's stockholders eligible to vote thereat
will be asked to consider and vote upon: (1.) the acquisition (the
"Acquisition") by the Company of all of the
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issued and outstanding stock of US Mining, Inc., a New Jersey corporation ("USM)
in exchange for the forgiveness of certain indebtedness of the Company to USM
and approximately 85 % of the Company's Common Stock pursuant to the terms of a
Stock Purchase Agreement, dated January 18, 2000 (the "Stock Purchase
Agreement"), and (2) a proposal to amend the Company's Certificate of
Incorporation to increase the authorized capital of the Company from 40,000,000
to 100,000,000 .
The Board has unanimously approved the Acquisition and the Amendment and
recommends that the Company's stockholders vote "FOR" such proposals. See
"Acquisition - Recommendation of the Company's Board of Directors; Reasons for
the Acquisition," and "The Amendment-Recommendation of the Company's Board of
Directors; Reasons for the Amendment."
Date, Time and Place of Special Meeting; Record Date
The Special Meeting is scheduled to be held at 10:00 AM Eastern Time, on
the 31st day of July, 2000, at the Holiday Inn, 304 Route 22 West, Springfield,
New Jersey 07081. The Board has fixed the close of business on June 6, 2000, as
the record date (the "Record Date") for the determination of holders of Common
Stock entitled to notice of and to vote at the Special Meeting. On the Record
Date, there were 1,642,207 shares of Common Stock (held by approximately 2751
persons of record) outstanding and entitled to vote. Each share of Common Stock
is entitled to one vote. A majority of the shares of Common Stock issued and
outstanding and entitled to vote must be present at the Special Meeting in
person or by proxy in order to constitute a quorum for the Acquisition of
business.
Required Vote
The Board is submitting the Acquisition and the Amendment to the Company's
stockholders for approval in accordance with the requirements of its
organizational documents and applicable securities laws. The effect of such
submission under applicable Delaware law is that any Company stockholder voting
in favor of the Acquisition may be effectively precluded from asserting any
claim against the Board subsequent to the consummation of the Acquisition which
would allege, among other things, that the Board breached its fiduciary duty to
the Company's stockholders in approving the Stock Purchase Agreement, and the
Acquisition contemplated thereby, including the consummation of the Acquisition
and the Amendment.
The affirmative vote of the holders of a majority of all of the outstanding
shares of Common Stock is required to approve the Stock Purchase Agreement, and
the transactions contemplated thereby and the Amendment. As of the date of this
Proxy Statement, no stockholder of the Company has indicated to the Board of
Directors that he or she intends to vote in favor of either the Stock Purchase
Agreement and the transactions contemplated thereby or the Amendment.
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The Board is soliciting proxies so that each Company stockholder on the
Record Date has the opportunity to vote on the proposed Acquisition and
Amendment. When a proxy card is returned properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a Company Stockholder does not return a signed proxy card, his or
her shares will not be voted (unless such stockholder attends and votes at the
Special Meeting) and thus will have the effect of a vote against the Acquisition
and Amendment.
A broker who holds shares in street name will not be entitled to vote on
the proposed Acquisition and the Amendment without instructions from the
beneficial owner of such shares. This inability to vote is referred to as a
broker non-vote. Abstentions and broker non-votes will be counted for purposes
of determining the existence of a quorum at the Special Meeting. If a quorum has
been established for the purpose of conducting the Special Meeting, a quorum
shall be deemed to be present for the purpose of all votes being taken at such
meeting.
The Company's stockholders are urged to mark the box on their proxy card to
indicate how their shares will be voted. If a Company stockholder (other than a
broker which holds shares in street name for its customers) returns a signed
proxy card, but does not indicate how his or her shares are to be voted, the
shares represented by the proxy card will be voted "FOR" the proposed
Acquisition, "FOR" the proposed Amendment.
The proxy card also confers discretionary authority on the individuals
appointed by the Board and named on the proxy card to vote the shares
represented thereby on any other matter incidental to the Special Meeting that
is properly presented for action at the Special Meeting or any adjournment or
postponement thereof. At this time, the Company knows of no other matters that
may be presented for stockholder action at the Special Meeting. However, if any
matters, other than approval and adoption of the Stock Purchase Agreement, and
the transactions contemplated thereby, and the Amendment, should properly come
before the Special Meeting, it is the intention of the persons named in the
enclosed proxy card to vote such proxy in accordance with their best judgment.
The Board will not vote proxies solicited by this Proxy Statement in favor of
any proposal presented at the Special Meeting to adjourn or postpone the Special
Meeting to a later date.
All shares represented by properly executed and unrevoked proxies will be
voted at the Special Meeting. Any stockholder may revoke his proxy at any time
before the Special Meeting by written notice to such effect received by the
Company at its corporate offices 76 Beaver Street, Ste 500, New York, New York
10005, Attention: Corporate Secretary, by delivery of a subsequently dated
proxy, or by attending the Special Meeting and voting in person.
A list of the stockholders entitled to vote at the Special Meeting will be
available for examination by any stockholder at the Company's offices for a
period of 10 days prior to the Special Meeting and at the Special Meeting
itself.
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If the enclosed proxy card is duly executed and received in time for the
Special Meeting, and if no contrary instructions are included on the proxy card,
it is the intention of the persons manned as proxies to vote the shares of
Common Stock represented thereby in favor of the proposal to approve and adopt
the Stock Purchase Agreement, and the transactions contemplated thereby and the
Amendment, and in the discretion of the persons named as proxies, in connection
with any other business that may properly come before the Special Meeting or any
adjournment or postponement thereof.
In the event that there are not sufficient votes to approve and adopt the
Stock Purchase Agreement, and the transactions contemplated thereby and the
Amendment at the Special Meeting, it is expected that the Special Meeting will
be postponed or adjourned in order to permit further solicitation of proxies by
the Company.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that the information contained herein is correct after
the date hereof, June 30, 2000.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE
STOCK PURCHASE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE
AFFIRMATIVE VOTE OF HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON
STOCK IS REQUIRED TO APPROVE AND ADOPT THE STOCK PURCHASE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
TE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE
AMENDMENT. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF
COMMON STOCK IS REQUIRED TO APPROVE AND ADOPT THE AMENDMENT
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER ETHAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION WITH THE COMPANY'S SOLICITATION OF PROXIES AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.
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PROPOSAL 1. THE ACQUISITION
General
The following information, insofar as it relates to matters contained in
the Stock Purchase Agreement is qualified in its entirety by reference to the
Stock Purchase Agreement, and the amendments thereto, which is incorporated
herein by reference and attached hereto as Appendix A. Stockholders are urged to
read the Stock Purchase Agreement in its entirety.
All information contained in this Proxy Statement with respect to any party
other than the Company has been supplied by that party for inclusion herein and
has not been independently verified by the Company.
The Acquisition
Subject to the approval of the Company's stockholders, the Company will
acquire all of the issued and outstanding shares of stock of U.S. Mining, Inc.,
a New Jersey corporation ("USM"), all of which are currently held by William C.
Martucci, a director of the Company in exchange for 85% of the issued and
outstanding shares of Common Stock of the Company and the forgiveness of certain
indebtedness of the Company currently owed to USM.
Background of the Acquisition
The poor financial performance of the Company and the depressed prices of
gold and other metals over the past few years caused the Company's management
and Board to seek additional equity investments in the Company to finance
operations and to provide an adequate capital foundation for further growth.
Unfortunately, the Company had been unsuccessful in attracting equity
investments and looked for alternative financing through joint venture and
strategic partners. In 1997, the Company began its relationship with William C.
Martucci, the 100% owner of USM, who has agreed to and continues to finance the
Company. Due to the significant indebtedness of the Company to USM, the Company
continues to be unsuccessful in attracting financial investment in the Company
as USM currently has a security interest in substantially all of the assets of
the Company.
The sole business of the Company since its inception has been mining and
milling in the Idaho Springs, Colorado mining region. On January 5, 2000, the
Company submitted a letter to the DMG to clarify why, among other things, it has
not completed all of the recommended preventive measures at its mining site,
specifically with respect to its tailings ponds, to commence operations. The
Company explained its difficulty in obtaining needed financing to continue its
reclamation and remediation plans and to begin mining and milling operations at
the Franklin Mines due to its current fiscal condition. Moreover, the depressed
price of gold has made it increasingly difficult for the
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Company to attract additional strategic partners or additional funding. Thus,
the Company has concluded that it is economically unfeasible to mine and mill at
the properties at this time, however, the Company did not wish to abandon its
business plan or reclaim its mining properties but rather intends to maintain
the mine and mill site and to comply with all DMG regulations with hopes of
restarting the mine and mill as soon as the price of gold makes it profitable to
do so.
As a result of these problems, the Company has applied to have its mining
permit be placed in Temporary Cessation. Temporary Cessation is a limited period
of non-production, which results when an operator plans to temporarily cease
production for at least 180 days upon the filing of notice thereof with the DMG.
In the event that a Temporary Cessation is granted, no further reclamation work
or mining work would be required for the duration of the Temporary Cessation,
beyond basic maintenance and reclamation required to keep the site from further
deterioration. The Company expects that its request will be granted during the
third quarter 2000.
Relationship with Martucci
In early 1997, a former officer of the Company introduced a former joint
venture partner of the Company to William C. Martucci through which the Company
had established an independent relationship with Martucci and began discussions
with Martucci with respect to a possible business combination between certain
entities owned and controlled by him and the Company. As a result of these
discussions, On September 25, 1997, the Company entered into a letter of intent
with Martucci to acquire all of the outstanding shares of US Mining, Inc.
("USM") and POS Financial, Inc. ("POS") and in exchange for 85% of the
outstanding shares of stock of 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 April 6, 1998, Martucci terminated the Letter of intent but continued to
fund the Company (the "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 Advances made by USM to the Company during 1997 and
1998. The USM Note bears interest at a rate o 8% per annum and is secured by a
first priority lien on substantially all of the assets of the Company. As of
December 31, 1999, the Company owed USM $1,669,040 of which $1,470,295 is
attributable to principal and $198,745 to accrued unpaid interest on the USM
Note .
Additionally, on November 13, 1997, USM entered into an agreement with Mrs.
Dorothy Hayden to purchase her 50% interest (the "Hayden Interest") in the
mineral rights evidenced by the Hayden/Kennec Leases (the "Purchase Agreement").
The Hayden/Kennec Leases leased certain mineral rights located on the site of
the Franklin Mines to the Company. Currently, the Hayden/Kennec Leases have
expired and have not been renewed by the Company; however, the Purchase
Agreement requires the payment of royalties to Mrs. Hayden until such time as
the
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purchase of her interests is consummated. Mrs. Hayden has agreed to further
extend the Hayden/Kennec Leases with respect to the Hayden Interest through July
31, 2000. The Company has also been advised by USM that all royalty payments
have been paid and will continue to be paid until the sale is consummated or the
Purchase Agreement is terminated. with respect to the 50% interest currently
owned by Mrs. Kennec (the "Kennec Interest"), neither the Company nor USM has
reached agreement with Mrs. Kennec with respect to the Kennec Interest. However,
a failure by the Company to come to agreement with Mrs. Kennec regarding her
interest will not have an adverse impact on the Company's ability to exploit the
mineral rights evidenced by the Hayden/Kennec Leases, the Company has previously
been advised that Colorado Law would permit the exploitation of the mineral
rights so long as the non-participating owner (Mrs. Kennec) is paid whatever net
profits are owed to her upon commencement of operations.
If the Company acquires USM, it will then have control of the Hayden
Interest of the Hayden/Kennec Leases and will have the ability to extinguish the
indebtedness which, in effect has precluded the Company from acquiring financing
from third party investors or lenders. See "Acquisition-Recommendation of the
Board of Directors; Reasons for the Acquisition" and "Acquisition Relationship
between the Company and Martucci; Potential Conflicts of Interest.
Recommendation of the Company's Board of Directors; Reasons for the Acquisition
In reaching its unanimous determination that the Acquisition and the
transactions contemplated thereby are advisable and in the best interests of the
Company and its stockholders, the Company's Board of Directors considered a
number of factors, which factors, taken together, support such determination,
including without limitation, the following:
(1) The existing assets, financial conditions and lack of operations of
the Company, including, without limitation, concerns over the
Company's liquidity and capital resources, the inability of the
Company to obtain new financing, and the assessment of management that
the Company could not sustain its continuing operating losses on a
long term basis;
(2) The current and prospective environment in which the Company operates,
including, the depressed price of gold and other minerals which make
mining economically unfeasible at this time and the increasingly
difficult regulatory climate in Colorado with respect to mining
generally;
(3) The conclusion of the Board that the Acquisition is most favorable to
the Company in terms of long term revenue prospects and likelihood of
consummation, based on the advice of Company's management and that the
stockholders will realize greater value from a transaction such as
this since the Company will exercise complete control over its mining
properties and its
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indebtedness to USM will be extinguished;
(4) The failed efforts of the Company in obtaining a strategic partner and
or joint venture partner or effectuating a business combination, which
would be beneficial to the Company due to the improvement of its
assets by the USM security interests.
(5) The terms and conditions of the Stock Purchase Agreement, as reviewed
by the Board with its advisors, including the provisions relating to
the cancellation of the Company's debt to USM.
The foregoing discussion of the information and factors considered by the
Company's Board is not meant to be exhaustive but is believed to include the
material factors considered by the Board. The Board did not quantify or attach
any particular weight to the various facts that is considered in reaching its
determination that the Stock Purchase Agreement and the transactions
contemplated thereby are advisable and in the best interest of the Company's
Stockholders. In reaching its determination, the Board took the various factors
into account collectively and the Board did not perform a factor-by-factor
analysis, nor did the Board consider whether any individual factor was, on
balance, positive or negative. Further, the Board did not seek any independent
evaluation with respect to the fairness of the transactions as to the
stockholders. However, the Board believes that the terms of the Acquisition are
at least as fair to the Company and its stockholders as the Company could have
obtained from an independent non-affiliated third party.
Relationship Between the Company and Martucci; Potential Conflicts of Interest
In considering the recommendation of the Board with respect to the
Acquisition, the Company's Stockholders should be aware that Mr. Martucci, a
current director, has interests in connection with the Acquisition which may
present him with actual or potential conflicts of interest. For a discussion of
the relationship between the Company and Martucci, See "Background of the
Acquisition - Relationship with Martucci."
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 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 POS Agreement, Martucci agreed to sell to the Company 100% of
the outstanding shares of POS and 100% of the assets in exchange for
approximately 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.
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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 and Martucci of the Staff's inquiry and was thereafter
notified that both parties wished to terminate the agreements under the premise
that the Company could not secure stockholder approval of the Acquisition 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 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 $1.98, as adjusted per share. Therefore, the
conversion rate under the settlement Agreement would be one share of common
stock of the Company for each $1.00, as adjusted 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 309,252, as adjusted 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
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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.
On or about June 21, 1999, the Company entered into a letter of intent with
USM to purchase substantially all of its assets in exchange for shares of common
stock of the Company equal to 69% of the issued and outstanding shares of common
stock. The letter of intent further contemplated the forgiveness of the USM Note
and release of the security therefore upon the closing of the transaction. On or
about October 5, 1999 USM notified WCM Capital, Inc. that it was withdrawing its
letter of intent.
On January 18, 2000, the Company, Martucci and USM entered into an
agreement whereby the Company agreed to acquire USM in exchange for
approximately 85% of the Company's common stock which is the subject before this
Special Meeting. In view of the relationship between the Company and Martucci,
the terms of the Acquisition may be viewed as having been negotiated on a non
arms-length basis. See "The Acquisition - Relationships Between the Company and
Martucci; Potential Conflicts of Interest," "Certain Relationships and Related
Transactions."
Effect of the USM Acquisition
Upon the consummation of the Acquisition, Martucci will own approximately
85% of the issued and outstanding shares of Common Stock of the Company.
Stockholders will also experience significant dilution of their ownership
immediately following the issuance of the Shares to Martucci. Martucci will own
and/or control a majority of the Common Stock of the Company and will exert
influence with respect to management and other decisions of the Company.
Resales of the Shares Under Rule 144 By Martucci
The shares to be issued to Martucci in connection with the Acquisition will
be restricted and will not be available for resale absent an effective
registration statement or exemption from registration as provided for in the
Securities Act of 1933, as amended (the "Act"). Rule 144 under the Act permits
the resale of restricted securities without registration under certain
circumstances. Since Martucci will hold over a majority of the shares of Common
Stock of the Company and is a director of the Company, he is deemed an affiliate
for purposes of Rule 144 and will have significant restrictions placed upon him
with respect to holding periods, limitations on the amount of shares he can sell
in each quarter and his ability to transfer his stock generally. It should be
further noted that the Stock Purchase Agreement grants Martucci certain
Registration Rights which may, if exercised in the future, allow for the resale
of Martucci's shares pursuant to an effective Registration Statement. See "Stock
Purchase Agreement - Registration Rights".
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Absence of Regulatory Filings and Approvals
The Acquisition and the issuance of the Shares in connection therewith, is
not subject to obtaining any regulatory approvals or complying with any
regulatory filing requirements.
Federal Income Tax Consequences
The following discussion regarding material federal income tax consequences
is based on current law. Stockholders should consult their own tax advisors as
to the federal, state, local and foreign tax effects of the contemplated
Acquisition in light of their individual circumstances.
It is anticipated that the contemplated Acquisition 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.
THE STOCK PURCHASE AGREEMENT
The following is a summary of all material terms of the Stock Purchase
Agreement. This summary is qualified in its entirety by reference to the Stock
Purchase Agreement, which is attached to this Proxy Statement as Appendix A and
is incorporated herein by reference.
Terms of the Acquisition
Subject to the approval of the Company's stockholders, Martucci will sell
all of the issued and outstanding stock of USM to the Company pursuant to the
terms of the Stock Purchase Agreement and forgive certain indebtedness of the
Company to USM in exchange for 9,305,839 shares or 85% of the Company's Common
Stock.
Representations and Warranties
Each of the Company and USM have made various representations and
warranties to each other in the Stock Purchase Agreement relating to the
following matters (which representations and warranties are subject, in certain
cased, to specified exceptions: (i) corporate organization and qualification;
(ii) corporate power and authority, (iii) financial statements, (iv) Absence of
certain developments, (v) absence of undisclosed liabilities, (vi) taxes, (vii)
title to property, (viii) compliance with other agreements, (ix) litigation, (x)
employees, (xi) registration rights, (xii) governmental consents, (xiii)
compliance with laws, (xiv) permits, (xv) offerings, (xvi) brokers and finders
fees, (xvii) intellectual property (xviii) property and equipment, (xix)
Insurance, (xx) ERISA, (xxi) no misrepresentations or omissions and (xxii)
contracts. Additionally, Martucci has made representations and warranties to the
Company regarding (i) power and authority and (ii) investment intent. In
general, the representations and warranties of the parties survive the Closing
for three
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years; however, certain of them will survive the Closing indefinitely.
Conditions to Consummation of the Acquisition
Pursuant to the Stock Purchase Agreement, the obligations of the Company to
complete the Acquisition thereunder are subject to the fulfillment of the
following conditions (i) the representations and warranties made by the parties
are 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, (ii) all covenants, agreements and conditions contained in the
Stock Purchase Agreement to be performed by the parties 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 (iii) USM shall have delivered to the Company a certificate executed by
its President dated the Closing Date and Martucci shall have delivered a
certificate executed by Martucci certifying to the fulfillment of the conditions
specified in the Stock Purchase Agreement as they relate to USM and Martucci,
respectively, (iv) Martucci shall have delivered to the Company certificates
representing 100% of the Common Stock of USM, duly endorsed for transfer to the
Company, (v) the Company's Stockholders shall have approved the Stock Purchase
Agreement and the transactions contemplated thereby and (vi) the Company
received a certificate of the Secretary of USM certifying as to (A) the
Certificate of Incorporation any amendments to restatements thereof; (B) By-Laws
and any amendments to restatements thereof; (C) the good standing of USM in New
Jersey; (D) resolutions of the Board of Directors authorizing the execution of
the Stock Purchase Agreement and the other transactions contemplated herein; and
(E) incumbency of USM's signatories.
Pursuant to the Stock Purchase Agreement, the obligations of Martucci and
USM, to complete the Acquisition thereunder are subject to the fulfillment of
the following conditions (i) the representations and warranties made by the
Company are 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, (ii) all covenants, agreements and conditions contained in the
Stock Purchase Agreement to be performed by the Company at or prior to the
Closing Date shall have been performed or complied with, (iii) the Company
delivers to Martucci a certificate executed by the President of the Company
certifying to the fulfillment of the conditions specified in the Stock Purchase
Agreement as they relate to the Company, (iv) the Company shall issue or cause
to be issued to Martucci certificates representing 85% of the Company's Common
Stock, and (v) Martucci receive a certificate of the Secretary of the Company
certifying as to (A) the Certificate of Incorporation of the Company and any
amendments to restatements thereof; (B) By-Laws of the Company and any
amendments to restatements thereof; (C) the good standing of the Company in
Delaware; (D) resolutions of the Board of Directors authorizing the execution of
this Agreement and the other transactions contemplated herein; and (E)
incumbency of the Company's signatory.
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Termination of the Stock Purchase Agreement
This Stock Purchase Agreement may be terminated at any time prior to the
Closing, whether prior to or after approval by the stockholders of the Company
by mutual consent of the Company, Martucci and USM or by either the Company, 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 the Stock Purchase Agreement; (ii) any 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 the Stock Purchase 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 the Stock Purchase Agreement which prohibits
the consummation of the transactions contemplated thereby 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 transaction 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 by August 18, 2000.
In the event of termination of the Stock Purchase Agreement, all rights of
the parties will cease and terminate, except for any rights as any party may
otherwise have for breach of contract, including, without limitation, rights for
breach of any representations, warranties or covenants contained in the Stock
Purchase Agreement
Registration Rights
If during the two year period commencing upon the Closing Date, the Company
should file a registration statement with the Securities And Exchange Commission
to register any of its securities (other than pursuant to Form S-8, a
registration statement concerning a merger or acquisition or other comparable
form), a holder of the shares issued to Martucci (the "Martucci Shares")
pursuant to the Stock Purchase Agreement can request that his shares be included
in such registration statement (whether owned by Martucci or a transferee of
Martucci.)
Commencing six months after the Closing Date and continuing until the
second anniversary of the Closing Date, the Company, upon written notice from
the Holder(s) of in excess of 50% of the Martucci Shares, must file a
registration statement covering the sale of all of the remaining shares Martucci
Shares not later than 60 days after the date of the notice; provided, however,
that such period may be extended or delayed by the Company 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 the Company 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 the Company of the existence of
non-public material
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information, or to allow the Company to complete any pending audit of its
financial statements.
Notwithstanding, the Company is not required to include any Martucci Shares
in an underwritten offering of the Company's securities unless the holders
accept the terms of the underwriting as agreed upon between the Company and its
underwriters and the holders agree to execute any documents as may be required
by the Company or the managing underwriter in connection with such underwriting.
The Company has no plans to conduct any public offering of its securities
at this time or in the near future unless it shall be requested to do so in
accordance with the provisions of the Stock Purchase Agreement.
PROPOSAL 2. THE AMENDMENT
General
The Board of Directors of the Company has approved, and recommends that the
stockholders adopt an amendment to the Certificate of Incorporation of the
Company, in the form attached as Appendix B, to increase the number of shares
the Company can issue from 40,000,000 to 100,000,000. The Board believes that
additional shares of Common Stock of the Company should be available from time
to time for proper corporate purposes. The newly authorized shares of Common
stock will be issuable from time to time by action of the Board of Directors for
any proper corporate purpose, without stockholder approval unless required by
applicable law or the rules of the NASD and/or NASDAQ Small Cap Market. These
purposes could include, without limitation, financing, payment of stock
dividends, subdivisions of outstanding shares through stock splits, employee
stock operations and bonuses and corporate acquisitions. At the present time,
the Company has no immediate plans to issue the newly authorized shares other
than for corporate Acquisition in the ordinary course of business and to
consummate the Transactions set forth therein.
Description of the Common Stock
The Company currently has 40,000,000 shares of authorized common stock,
$.01 par value per share. As of The Record Date, there were 1,642,207 shares
issued and outstanding. Upon consummation of the Acquisition, there will be
approximately 10,948,146 shares issued and outstanding (assuming that no
additional shares will be issued by the Company prior to the consummation of the
Acquisition).
Holders of the common stock of the Company 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
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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 terms
of the Convertible Debentures. See "Legal Proceedings-Convertible Debentures."
In the event of a dissolution, liquidation, or winding up of the Company,
holders of 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 of the Company. The common stock
holders have no preemptive or other subscription rights and there is no
redemption or sinking fund provisions applicable to the common stock.
Recommendation of the Board of Directors; Reasons for the Amendment
In reaching its unanimous determination that the Amendment to the
Certificate of Incorporation is advisable and in the best interest of the
Company and its stockholders, the Company's Board of Directors considered a
number of factors, which factors, taken together, support such determination,
including, without limitation, that the Company would have ample shares of
common stock available for proper corporate purposes, such as financing, payment
of stock dividends, subdivisions of outstanding shares through stock splits,
employee stock option and bonuses and corporate Acquisition.
The foregoing discussion of the information and factors considered by the
Company's Board is not meant to be exhaustive but is believe tot include the
material factors considered by the Board. The Board did not quantify or attach
any particular weight to the various factors that it considered in reaching its
determination that the Amendment is advisable and in ht best interests of the
Company's stockholders. In reaching its determination, the Board took the
various factors into account collectively and the Board did not perform a
factor-by-factor analysis, nor did the Board consider whether any individual
factor was, on balance, positive or negative.
INFORMATION REGARDING THE COMPANY
CAUTIONARY STATEMENT ON FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, Management believes
that certain statements appearing in this Proxy Statement constitute "forward
looking statements" as defined in Section 21E of the Securities and Exchange Act
of 1934, as amended. Forward-looking statements can often be identified by
terminology such as may, will, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms or
other comparable terminology. Such forward-looking statements may involve known
or unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or
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developments in the Company's industry, to differ materially from the
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. The Company cautions readers that any such
forward-looking statements are based upon management's current expectations and
beliefs but are not guaranties of future performance. Actual results could
differ materially from those expressed or implied in forward-looking statements.
General
The Company 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 property is 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 a crushing and flotation mill which is located on the site of the Franklin
Mines (the "Franklin Mill"). While none of its properties were operational in
fiscal year 1999, the Company continues its rehabilitation of the property in
anticipation of the commencement of operations in the future.
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 that 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.
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Operations at the Company's Mining Properties
(1) The Franklin Mining Properties
During fiscal year 1998 and 1999, no mining or milling activities were
conducted at the Franklin Mine. However, the Company continued its
rehabilitation program and reclamation program 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 mining property. The Company has through fiscal year 1999, and will
continue, through fiscal year 2000, to take steps toward bringing the Franklin
Mine and Mill into operation.
Since its inception, the Company has spent significant monies constructing
the Franklin Mill, rehabilitating the Franklin and Freighters Friend shafts and
underground workings and constructing surface support facilities of the Franklin
Mines. In recent years, the Company has (a) instituted a plan for quarterly
ground water monitoring which includes surface water and ground water sampling
plans, (b) taken steps to correct run-off problems associated with the Tailings
Pond disposal areas currently located on the property, (c) reclaimed the lined
tailings ponds located adjacent to the Franklin Mill, (d) set forth preliminary
plans for the installation of a paste backfill system for tailings disposal and
(e) applied to the Colorado Division of Minerals and Geology, the state
governing authority for mining and milling (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. The Company believes that
upon the institution of a paste backfill system, it will have adequate capacity
for tailings disposal once operations commence. However, should additional
tailings disposal areas be required, the Company may make application to the DMG
to reopen the lined tailings ponds recently reclaimed. In addition, the Company
has instituted an environmental protection plan containing emergency response
plans for designated chemicals used on site and appropriate measures consistent
with local government agencies to prevent damage to area wildlife form
chemicals, toxic or acid forming materials and/or acid mine drainage. The
Company's plan has been approved by the DMG.
Throughout 1999, inspections of the Franklin Mining properties revealed
that certain reclamation issues still remained outstanding at the property.
Specifically, certain drainage problems and substandard linings at the tailings
disposal areas created potential hazards and required protection measures be
addressed. Tailings Pond No. 5 was of specific concern to the DMG. After several
extensions had been granted, the Company was unable to complete all of the
preventive work required by the DMG. Due to lack of funds, the Company has not
been able to institute its paste backfill program, which it believes would
alleviate the problems currently existing at its tailings disposal area.
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On January 5, 2000, the Company submitted a letter to the DMG to clarify
why, among other things, it has not completed all of the recommended preventive
measures at the site, specifically with respect to its tailings ponds, and
commenced operations. The Company explained its difficulty in obtaining needed
financing to continue its reclamation and remediation plans and to begin mining
and milling operations at the Franklin Mines due to the depressed price of gold.
Therefore, the Company concluded that it is economically unfeasible to mine and
mill at the properties at this time. The Company further stated, however, that
it did not wish to abandon its business plan or reclaim the property but rather
intends to maintain the mine and mill site and to comply with all DMG
regulations with hopes of restarting the mine and mill as soon as the price of
gold makes it profitable to do so.
On February 7, 2000, the DMG responded to the Company's correspondence with
a recommendation that the Company's mining permit be placed in Temporary
Cessation. Temporary Cessation is a limited period of non-production, which
results when an operator plans to temporarily cease production for at least 180
days upon the filing of notice thereof with the DMG. In the event that a
Temporary Cessation is granted, no further reclamation work or mining work would
be required for the duration of the Temporary Cessation, beyond basic
maintenance and reclamation required to keep the site from further
deterioration. The DMG further indicated that should the Company choose to apply
for Temporary Cessation, certain of the tailings pond area would be required to
be stabilized and the groundwater and the stability of the tailings ponds must
be protected from further deterioration. The DMG required that any notice of
Temporary Cessation submitted must specifically address an alternative interim
reclamation plan for Tailings Pond No. 5 as well as outlining the temporary
stabilization measures needed to comply with these requirements.
As recommended by the DMG, the Company requested for a change of status of
its permit to Temporary Cessation. Following a meeting of the DMG and
representatives of the Company held on February 10, 2000, the DMG set forth the
measures in a letter, dated March 9, 2000, which must be taken by the Company to
bring the site into compliance with groundwater regulations and to stabilize the
tailings pond and site during the Temporary Cessation. The Company has been
given until April 6, 2000 to submit a written commitment to complete all of the
required actions by May 30, 2000 for its Temporary Cessation request to be
granted. In addition, before coming out of Temporary Cessation, the Company must
commit to determining whether the current conditions of its tailings disposal
areas is adequate for further tailings disposal and in no event will the
Franklin Mill be permitted to operate without prior approval by DMG of a
comprehensive tailings disposal plan. The Company expects that its application
will be approved in the third quarter of 2000.
The Company has not conducted any significant commercial mining operations
and, as a result, had not generated any significant revenues through December
31, 1999 from operations at the Franklin Mine. Therefore, the Company remains in
the exploration stage. The Company, however, is hopeful that economically viable
commercial mining operations at the Idaho Springs
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mining facilities can be conducted in the future, however, given the current
economic climate, it is unlikely that the Company will commence operations in
the year 2000. It is the Company's intention, however, to prepare for full-scale
operations should the price of gold reach $350 per ounce or greater. The
Companies will continue to work closely with Colorado state mining regulatory
agencies in preparation and anticipation of full-scale operations at the
Franklin Mines and Franklin Mill.
(2) Newmineco and the Mogul Mine
On September 26, 1996, the Company acquired a 20% interest in Newmineco
from Gems & Minerals Corp., a former joint venture partner of the Company
("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 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. The Company continues to
maintain its interest in Newmineco but has been informed that the LLC has
abandoned its plan to participate in the exploration of the Mogul Mine and no
longer possesses the leasehold interest evidenced by the Rugg/Mogul Lease.
(3) The Gold Hill Mill
In 1996, the Company acquired the Gold Hill Mill in hopes of increasing its
milling capacity to mill ore extracted from the Franklin Mines and 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. These legal changes prohibited
the Company from using the Gold Hill Mill for processing ore from the Franklin
Mines.
Therefore, 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 a demand note in the aggregate principal amount of $350,000 which was
payable to Denver East by Com, Inc., an affiliate of Gems (the "Denver East
Note"). The Denver East Note is payable and accrues 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 nor does the Company expect to ever
collect on such note due to the Borrowers lack of funds.
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Other Ventures
On or about January 11, 1999, US Mining, Inc. ("USM"), a Company wholly
owned by Mr. William C. Martucci, a director of the Company executed a letter of
intent with agents for the Alamosa Mining and Leasing Company, Inc. and the
Renegade, LLC to enter into a joint venture arrangement for the exploitation of
the Shafter Mining Property located in Clear Creek County, Colorado. The letter
of intent was assigned to the Company on January 11, 1999.
After consultation with USM and completion of preliminary due diligence
with respect to the feasibility of commencing mining operations at the Shafter
Mining Property, the Company determined that it was not feasible to pursue this
arrangement and notified the parties of its intent in April 1999.
On January 18, 2000, the Company, Mr. William C. Martucci, a director of
the Company and USM entered into an agreement whereby the Company would acquire
USM in exchange for approximately 85% of the issued and outstanding shares of
the Company on the closing date. See Proposal 1 - The Acquisition.
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
The Company had no full-time employees. The Company's executive officers
serve as needed on a part-time basis for no compensation. However, on or about
June 1, 2000 the Company issued 169,750 shares of Common Stock to Richard
Brannon, a Vice President of the Company and 153,690 shares of Common Stock to
Joseph Laura, a consultant of the Company. The shares were issued to Laura as
compensation for services rendered and to Brannon for present and future
services rendered in connection with the Company's mining business. These shares
were registered by the Company on Form S-8 on or about June 6, 2000. 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 as needed. Management anticipates that as the Company's
business develops, additional technical administrative staff
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may be hired as well as qualified geological and technical consultants on an as
needed basis.
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.
Chalcopyrite A mineral containing copper, iron and sulphur.
Cyanidation and Pulp Recovery The process by which gold is extracted in the
milling process through the use of cyanide.
Exploration 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 sulphur.
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.
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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.
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 and 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.
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 sulphur.
Raise A tunnel driven upward from a level.
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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 sulphur.
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
sulphur.
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.
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Colorado Mining Properties
The property which constitutes the Franklin Mines consists of (i) leasehold
interests 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. The Franklin 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 was also required to pay taxes
and certain other expenses relating to the properties leased. Except with
respect to the property leased under the Hayden /Kennec Leases, 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
Under the original terms of the Hayden/Kennec Leases which expired in
November 1996, the Company was required to pay an aggregate minimum royalty
payment of $2000 or 5% of the net smelter royalties realized by the Company to
Mrs. Hayden and Mrs. Kennec. The Company was also required to pay all other
amounts with respect to the property including any tax liabilities. The
Hayden/Kennec Leases also contained an option to purchase the leased mineral
rights for a purchase price of $1,250,000 less all royalty payments made during
the term of the lease. As of the expiration date, the Company had paid $480,000
in royalties, which would have set the option price at $770,000.
In November 1996, the Company was granted a one-year extension of the
Hayden/Kennec Leases under the same terms and conditions. On November 13, 1997,
just prior to the expiration of the Hayden/Kennec leases, USM entered into an
Agreement with Mrs. Hayden to purchase her 50% interest (the "Hayden Interest")
in the mineral rights (the "Purchase Agreement"). Mrs. Hayden had previously
contracted to sell her interest to Gems & Minerals Corp., the Company: a former
joint venture partner, however, Gems was unable to consummate the purchase in
accordance with the terms of their Agreement.
Pursuant to the Purchase Agreement, Mrs. Hayden agreed to sell to USM the
Hayden Interest for $75,000, which would be evidenced by a note issued to Hayden
by USM at the consummation of the sale. The Purchase Agreement also contained a
provision which extended the Hayden/Kennec Leases with respect to the Hayden
Interest until March 13, 1998 and which required USM to continue to pay the
royalty payments required there under until the sale was consummated. As of the
date hereof, USM has not consummated the purchase of the Hayden Interests;
however, the terms of the Purchase Agreement remain in effect and Mrs. Hayden
has agreed to further extend the Hayden/Kennec Leases with respect to the Hayden
Interest through July 31, 2000. The Company has also been advised by USM that
all royalty payments have been paid and will continue to be paid until the sale
is consummated or the Purchase Agreement is terminated.
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With respect to the 50% interest currently owned by Mrs. Kennec (the
"Kennec Interest"), upon the expiration of the Hayden/Kennec Leases, the Company
entered into an extension Agreement with Mrs. Kennec to extend the Hayden/Kennec
Leases as they pertain to the Kennec Interest until March 12, 1998. No further
extensions have been granted and there can be no assurance that the Company will
reach any further Agreement with Mrs. Kennec regarding the Kennec Interest.
While there can be no guarantee that the Company's failure to come to Agreement
with Mrs. Kennec regarding her interest will not have an adverse impact on the
Company's ability to exploit the mineral rights evidenced by the Hayden/Kennec
Leases, the Company has previously been advised that Colorado Law would permit
the exploitation of the mineral rights so long as the non-participating owner
(Mrs. Kennec) is paid whatever net profits are owed to her upon commencement of
operations. Since USM is in a position to purchase the Hayden Interest and the
Company has continued to acquire USM, the Company is hopeful that its inability
to come to an Agreement with Mrs. Kennec with respect to the Kennec Interest
will not preclude the Company from commencing mining operations.
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.
The Idaho Springs and Central Mining District
Both the Idaho Springs and Central Mining Districts were discovered around
1860 and by 1900 were old mining districts. It has been estimated that these
areas combined to produce in excess of five million ounces of gold and
substantial amounts of silver, copper, lead and zinc
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during this period. Mining ceased in both districts around 1920. However, the
United States Geological Survey indicates that the base of the mineralization
has not been found in either of these mining districts. This means that the
mineralization in the veins found throughout this region may continue to great
depth and with modern mining techniques, stainless steel water pumps and better
mining engineering it is possible that may of the mines that helped produce the
five million ounces of gold in the last century can economically be opened and
ore mined to greater depths.
There are at least four other mining projects being pursued in the Idaho
Springs and Central City mining districts that may be available for purchase,
joint venture or lease. The Company has been advised that two of these projects
are located within three miles of the Franklin Mining properties. Currently,
however, there is only one active mining project in this area. The Company
believes there is tremendous development potential in the Idaho Springs and
Central City mining districts and the key to successful development is the
Franklin Mill. The Company is hopeful that nearby mining projects can be put
into production and, together with ore mined at the Franklin Mines, can be
processed at the Franklin Mill.
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(0) to 79(0).
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(0) to 79(0) 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
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 mineralized zones 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.
The mineral valuation of the Franklin Mining property is taken from a 1993
Summary of Reserves Report by Gifford A. Dieterle, Geologist, dated December 7,
and that year, the report states the proven and probable reserves as of 1987 are
as follows using a margin of error of plus or minus 15% assuming metallurgical
recovery of 90%.
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: 0.315 ounces per ton
Average Grade of Silver: 6.740 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
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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
Using the approximate value of gold in mid 1999 ($292/oz) and silver
($5/oz) the proven and probable reserves in Mr. Dieterle's report would
represent approximately 58,680 ounces of gold and 1,255,572 ounces of silver
having a gross value of approximately $ 23,412,418. It should be noted, however,
that this valuation only recognizes the gold and silver values that can actually
be sampled additional gold and silver that may be discovered by extending the
Franklin mine workings either laterally or downward. It should also be noted
that the current proven and probable gold and silver ore of the Franklin Mines
that have been taken from the 1993 report filed by Mr. Dieterle and that it is
possible that these reserves and any additional reserves discovered in the
future may not be sufficient to produce significant profitable mining given the
work and equipment necessary to extract and process the ore and the same and the
current price of gold and silver.
As of the date hereof, the Company has not received any information that
would require modification of the above table.
Operations
During the years 1998 and 1999, the Company continued its rehabilitation of
the properties in anticipation of the commencement of operations. Further, the
Company is continuing to seek strategic partners in this area to mill are mined
at other properties in the region. The Company's plan is to commence operations
by initially bringing to the surface 8000 tons of ore existing at the 5 level
tunnel via the Freighters Friend Shaft. 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 pledged to continue to provide financing to the
Company on an as needed basis through December 31, 2000: this financing is in
addition to the USM Advances made in 1998 and 1999. Other alternatives such as
private placements, loans, or public offerings may be considered for future
operating capital.
It is is important to be aware that mining is a regulated business and
compliance with regulatory requirements of the various agencies having
jurisdiction over the Company's activities can cause delays in the schedules set
by the Company for the installation of its facilities and performance of its
reclamation and remediation work. Moreover, regulatory requirements may require
capital outlays in excess of those anticipated; thus adversely affecting the
scope and timing of planned operations.
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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.
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. The Company
pays a monthly rental of $3,500 (on a month to month basis) 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 other suitable
facilities on a reasonable basis.
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Legal Proceedings
The Company, from time to time, may become involved in various legal
actions associated with the normal conduct of its business operations. No such
actions, other than those set forth below, involve known material gain or loss
contingencies not reflected in the Company's financial statements.
Convertible Debentures
On June 1, 1994, the Company advised the Transfer Agent/Trustee that the
Company was not in compliance with certain of the terms of the indenture (the
"Indenture") relating to the Company's 12 1/4% Convertible Debentures (the
"Debentures") in that it had not maintained current filings with the Securities
and Exchange Commission (the "Commission") as required. Accordingly, the
Transfer Agent/Trustee was instructed not to convert any of the Debentures into
Common Stock of the Company until such time as the Company notified the Transfer
Agent. The Company failed to make required sinking fund payments in 1994 and was
unable to pay the principal balance of the Debentures due on December 31, 1994
resulting in default under the terms of the Indenture.
In September, 1997, certain of the Company's 12 1/4% Convertible Debenture
holders, including the Hopis Trust (the "Plaintiff Debentureholders") instituted
an action in the Supreme Court of the State of New York against the Company for
payment on approximately $42,500 principal amount of Debentures plus accrued and
unpaid interest totaling approximately $13,000 and other costs and expenses
related thereto.
Thereafter, the Plaintiff Debentureholders moved for summary judgment
against the Company. The Company did not to oppose the motion and default was
entered against the Company in the amount of $42,500 plus interest, costs and
disbursements (the "Default"). Moreover, the issue of attorney's fees 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
Debentureholders agreeing to pay the Judgment plus certain additional costs in
the event that the Company fails to pay the Judgment and USM consummates the
Transaction with the Company. In the event that USM did not consummate the
Transaction by July 12, 1998, USM agreed to pay the Plaintiff Debentureholders
$5,100 for their Agreement not to enter the Judgment against the Company or
pursue the inquest. Plaintiff Debentureholders agreed not to enter the Judgment
against the Company until July 12, 1998 or until USM notifies them that it will
not pursue the Transaction.
On or about April 6, 1998, Martucci terminated his letter of intent to
consummate the Transaction with the Company. Despite such termination, Plaintiff
Debenture holders agreed to extend the terms of their Agreement with USM through
December 1998. As of date hereof, the Company is not aware of any further
extension nor, to its knowledge has the Judgment been entered. If the 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.
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The continued default in 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.,
Colorado counsel to the Company, Gems, Zeus and Newmineco ("BCCM") entered into
a contract with Golder Associates, "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 participation in the
Zeus joint venture, 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 this matter in September 1999 and the litigation was
discontinued, at no cost to the Company.
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Environmental Matters
As of the date hereof, the Company has no formal violations against it with
respect to the Franklin Mines and Franklin Mill. While there are no outstanding
violations against the Company at this time, there can be no assurance that the
Company will be able to adequately comply with the conditions set forth in its
permit approval or that future violations will not arise and that such
violations will not lead to interruptions in operations at the Franklin Mines or
Franklin Mill.
NASDAQ Delisting
In 1996, the Commission approved certain amendments to the requirements for
continued listing on the NASDAQ Small-Cap Market. On February 27, 1998, the
Company received a notification letter from NASDAQ informing the Company that
the Company's Common Stock was not in compliance with the new minimum bid price
requirement of $1.00, which became effective on February 23, 1998.
The Company was given until May 28, 1998 to come into compliance or it
would face delisting proceedings. On or about May 21, 1998, the Company
effectuated a 25 for 1 reverse stock split which, when consummated, caused it
stock price to rise above the $1.00 threshold. Therefore, the Company was not
subject to delisting proceedings and remained in compliance until November 1998.
On or about November 10, 1998, the Company received notification from
NASDAQ that it was not in compliance with the minimum bid price requirement and
had until February 10, 1999 to come into compliance. During the month of
January, the Company's stock price maintained a bid price above $1.00 for 10
consecutive days, thereby bringing it into compliance with NASDAQ rules.
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 whereby the panel required the Company to effectuate a
reverse stock split of three-for-one as a condition for continued listing. The
Company complied with the condition on or about December 17, 1999. 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.
While the Company is currently in compliance with the minimum bid price
requirement, there can be no assurance that in the future the company's common
stock will, in the future be able to maintain such compliance. In the event that
the Company cannot maintain compliance with the maximum bid price requirement
the Company, may, in the future, be subject to delisting causing the Company's
common stock to no longer be listed for trading on the NASDAQ Small Cap Market.
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However in such event, Management is hopeful that the Company's Common Stock
will qualify for trading on the Over-The-Counter/Bulletin Board ("OTC") market
and the Company will make every effort to include its Common Stock on the OTC in
the event of a delisting by NASDAQ.
In the event that the Company's Common Stock is traded on the OTC, it may
become subject to the "penny stock" trading rules. The penny stock trading rules
impose additional duties and a responsibility upon broker-dealers recommends the
purchase of a penny stock (by a purchaser that is not an accredited investor as
defined by Rule 501(a) promulgated by the Commission under the Securities Act)
or the sale of a penny stock. Among such duties and responsibilities, with
respect to a purchaser who has not previously had an established account with
the broker-dealer, the broker-dealer is required to (i) obtain information
concerning the purchaser's financial situation, investment experience, and
investment objectives, (ii) make a reasonable determination that transactions in
the penny stock are suitable for the purchaser and the purchaser (or his
independent adviser in such transactions) has sufficient knowledge and
experience in financial matters and may be reasonably capable of evaluating the
risks of such transactions, followed by receipt of a manually signed written
statement which sets forth the basis for such determination and which informs
the purchaser that it's unlawful to effectuate a transaction in the penny stock
without first obtaining a written agreement to the transaction. Furthermore,
until the purchaser becomes an established customer (i.e., having had an account
with the dealer for at least one year or, the dealer had effected three sales or
more of penny stocks on three or more different days involving three or more
different issuers), the broker-dealer must obtain from the purchaser a written
agreement to purchase the penny stock which sets forth the identity and number
of shares of units of the security to be purchased prior to confirmation of the
purchase. A dealer is obligated to provide certain information disclosures to
the purchaser of penny stock, including (i) a generic risk disclosure document
which is required to be delivered to the purchaser before the initial
transaction in a penny stock, (ii) a transaction-related disclosure prior to
effecting a transaction in the penny stock (i.e., confirmation of the
transaction) containing bid and asked information related to the penny stock and
the dealer's and salesperson's compensation (i.e., commissions, commission
equivalents, markups and markdowns) connection with the transaction, and (iii)
the purchaser-customer must be furnished account statements, generally on a
monthly basis, which include prescribed information relating to market and price
information concerning the penny stocks held in the customer's account. The
penny stock trading rules do not apply to those transactions in which the
broker-dealer or salesperson does not make any purchase or sale recommendation
to the purchaser or seller of the penny stock.
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Required compliance with the penny stock trading rules affect or will
affect the ability to resell the Common Stock by a holder principally because of
the additional duties and responsibilities imposed upon the broker-dealers and
salespersons recommending and effecting sale and purchase transactions in such
securities. In addition, many broker-dealers will not effect transactions in
penny stocks, except on an unsolicited basis, in order to avoid compliance with
the penny stock trading rules. The penny stock trading rules consequently may
materially limit or restrict the liquidity typically associated with other
publicly traded equity securities. In this connection, the holder of Common
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control the market in such securities and may set prices
that are not based on competitive forces. Furthermore, at times there may be a
lack of bid quotes which may mean that the market among dealers is not active,
in which case a holder of Common Stock may be unable to sell such securities.
Because market quotations in the over-the-counter market are often subjected to
negotiation among dealers and often differ from the price at which transactions
in securities are effected, the bid and asked quotations of the Common Stock may
not be reliable.
Redstone Litigation
On or about May 14, 1998, Redstone Securities Inc. ("Redstone") commenced
an action against the Company in the Supreme Court of the State of New York,
County of Nassau, Index No. 98-013668, claiming, among other things, breach of
contract, fraudulent inducement, and unjust enrichment in connection with an
Investment Banking Agreement dated August 28, 1996, between Redstone and the
Company. The complaint requests relief in the amounts of not less than $600,000
plus punitive damages, costs, interest and other expenses. On or about July 31,
1998, the Company answered the complaint and filed a cross complaint against
Redstone alleging, among other things, abuse of process, fraud, breach of
fiduciary duty, breach of contract and interference with prospective financial
advantage. In September 1999, the matter was settled whereby the Company agreed
to lift the stop transfer order on the shares held by Redstone to allow Redstone
the ability to sell those shares to an unaffiliated third party.
INFORMATION REGARDING USM
USM is a New Jersey corporation organized on October 20, 1997 and is
engaged in the business of holding and investing in mining properties. Martucci
holds 100% of the issued and outstanding shares of USM. For a more detailed
description of USM and its relationship to the Company, See "Background of USM
Acquisition" and "Relationships Between the Company and Martucci; Potential
Conflicts of Interest" in this Proxy Statement.
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
On March 16, 2000, the Company notified Lazar Levine & Felix ("LLF") that
it would no longer serve as its independent auditors. The decision to dismiss
LLF was approved by the Board of Directors of the Company.
During the two most recent fiscal years of the Company, none of the reports
of LLF on the financial statements of the Company contained an adverse opinion
or a disclaimer of opinion or was
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qualified or modified as to audit scope, or accounting principles; however, LLF
has qualified or modified its reports on the financial statements of the Company
as a going concern. During the two most recent fiscal years and any subsequent
interim period preceding the dismissal of LLF, there were no disagreements
between the Company and LLF concerning accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which would have
caused LLF to make a reference to the subject matter thereof in its report had
such disagreement not been resolved to the satisfaction of LLF.
The Company retained Ehrenkrantz Sterling & Co. LLC as its independent
auditors for fiscal year 1999.
Management's Discussion and Analysis or Plan of Operation
The Company is engaged in the business of investing and participating in
the development of commercial mining and milling operations primarily at leased
properties in or near Idaho Springs, Colorado.
During 1998 and 1999, remediation work was performed and completed at the
Franklin Mines and the Franklin Mill in preparation for the commencement of
mining operations at the Franklin Mines.
The Company has not commenced commercial operations at the Franklin Mine
since its inception. Therefore, the Company remains in the exploration stage and
has not generated significant revenues on a sustained basis since its inception.
The Company did not realize any revenues based on sales in 1999 and 1998. Since
the abandonment of its participation in Newmineco, the Company will no longer
recognize income or losses based on its proportionate equity interest in these
entities. The Company is entitled to receive 100% of the income generated from
the Franklin Mines, if any, once production is commenced less any royalty
payments due to Mrs. Kennec with respect to the mineral rights owned by her.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations principally
through equity and debt and monies provided through its relationship with USM
and its affiliates during 1998 and 1999. The Company has derived no income from
its mining and milling investments, which, as of December 31, 1999, were
comprised of investments in the assets and rights related to the Franklin Mines
and Mill. As of December 31, 1999, the Company had borrowed $1,470,295 from USM.
The Company had total current liabilities as of December 31, 1999 of
$2,553,200, including $1,470,295 constituting the principal balance of the USM
Note, convertible debentures with a principal amount of $145,000 and other notes
payable with a principal balance of $218,965. In addition to the payment of its
current liabilities, the Company incurred general, administrative and other
costs and expenditures related to any mining and milling operations, at the rate
of approximately $25,000 per month in 1999 and expect to incur additional
administrative expenses of approximately $20,000 per month plus interest in
2000.
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During 1999 and 1998, USM and its affiliates advanced approximately
$278,000 and $237,000, respectively, on behalf of the Company. These monies were
used to, among other things, pay for legal and accounting fees in connection
with public filings and necessary general and administrative expenses. USM has
continued to fund the Company directly or indirectly since 1997. USM and its
affiliates have verbally pledged to provide financing to the Company on an as
needed basis through December 31, 2000. The Company believes based on prior
performance and the acquisition Agreement entered into in January 2000 that USM
will fulfill its commitment to fund until December 31, 2000. It is anticipated
that the funds received from USM and its affiliates will cover the general,
administrative and other costs, which Management estimates will be approximately
$20,000 per month for the year 2000. Management cannot assure however, that USM
will provide $750,000 of funding which Management estimates will be needed to
ready the Franklin Mine and Milling properties for the commencement of
extraction and milling. Additional funding will be needed to ready the
properties for operations and to support operations once mining and milling
commence to finance operations as well as upgrade the processing facilities to
allow for an increase in ore processing capacity.
The Hayden/Kennec Leases cover mineral rights to 28 mining claims over 322
acres of the Franklin Mining properties. Currently, the Hayden/Kennec Leases are
expired; however, the terms of the Purchase Agreement between USM and Hayden
extend the terms of the Hayden/Kennec Leases as they relate to the Hayden
interests upon the same terms and conditions of the Hayden/Kennec Leases.
Therefore, USM has advanced, and is continuing to advance, $1,000 royalty
payment to Mrs. Hayden on a monthly basis as required by the Hayden/Kennec
Leases. As of the date hereof, the Company has not reached any Agreement with
Mrs. Kennec concerning her portion of the Leasehold.
Under the terms of the Hayden/Kennec Leases, the Company would have been
required to pay $777,000 to Mrs. Hayden and Mrs. Kennec in order to exercise the
purchase options set forth therein as of November, 1997 when the lease expired.
Presently, the Company is unable to make such payment; notwithstanding,
Management is optimistic that it will maintain its access to the leased mineral
rights represented by the Hayden/Kennec Leases given the Purchase Agreement
between Mrs. Hayden and USM. USM has advised the Company that it is current with
its payments to Mrs. Hayden and the Company, based upon the prior commitments
and past payment history of USM, believes that USM will continue to make the
necessary royalty payments to Mrs. Hayden until the purchase of Mrs. Hayden's
leasehold interest is consummated.
In the absence of liquid resources, cash flows from operations and any
other commitments for debt or equity financing, Management believes that the
ability of the Company to continue to maintain its permit and properties will be
dependent upon the provision of financing by USM and its affiliates; however, it
cannot assure that USM will continue to finance the Company through December
2000. Management believes that the Company will remain dependent on USM and its
affiliates as its primary source of financing for its operations until such
time, if any, as the Company can secure additional funding and can receive cash
flows from operations.
Management believes that it has obtained all of the necessary environmental
and regulatory recently applied for a Temporary Cessation of its permit until
such time as economically viable
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operations can be commenced at the Franklin Mining properties and the Company
can obtain commitments to adequately finance its operations. Management believes
that mining will be economically feasible if and when gold prices should rise to
$350 per ounce. There can be no assurance that the price of gold will rise to
this price level in the near future.
The Company had no active mining or milling operations during the first
quarter of 2000; however, the Company continued its efforts to bring the site
into compliance with groundwater regulations and to stabilize the tailings ponds
and site generally.
During the first quarter of 2000, the Company filed a notice with the
Division of Minerals and Geology (the "DMG") requesting that its permit be
placed into Temporary Cessation. A Temporary Cessation is a limited period of
non-production, which results when an operator plans to temporarily cease
production for at least 180 days upon filing of a notice of such intent with the
DMG. As a condition to granting the Company's request, the DMG required that the
Company address certain issues with respect to groundwater and tailings disposal
ponds by May 30, 2000. Thus, the Company's efforts have been focused on
addressing these issues.
While the Company intends to place its permit into Temporary Cessation, the
Company remains hopeful that economically viable commercial mining operations at
the Idaho Springs mining facilities can be conducted in the future. However,
given the current economic climate, it is unlikely that the Company will
commence operations in the year 2000.
Management estimates that the Company will incur general, administrative
and other costs and expenditures, exclusive of any costs and expenditures
related to any mining and milling operations and interest, at the rate of
approximately $20,000 per month for the remainder of 2000.
U.S. Mining Co. and its affiliates have verbally pledged to provide
financing to the Company on an as needed basis until on or about December 31,
2000. The Company cannot assure, however, that USM will fulfill its commitment
to fund the Company's operations through year-end 2000. The funds received from
USM and its affiliates will cover the general, administrative and other costs
approximated at $20,000 per month plus interest. Additional monies will be
needed to ready the Franklin Mine and Milling properties for the commencement of
extraction and milling and to support the extraction and milling processes once
underway as well as to upgrade the processing facilities to allow for an
increase in ore processing capacity.
There can be no assurance that the Company will have adequate funds
available to repay the funds advanced by USM and its affiliates or that USM will
fulfill its obligations to fund the Company through December 31, 2000. In the
event that the Company defaults on its obligations, USM may foreclose on the
assets secured by the USM note. Such foreclosure actions by USM would have a
material adverse effect on the future operations of the Company and the
Company's ability to explore the Franklin Mines.
Plan of Operations
For the remainder of fiscal 2000, the Company plans to (i) continue its
rehabilitation and remediation work to maintain its properties and permit (ii)
seek possible joint ventures with
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neighboring mines and (iii) work to secure additional funding for its
operations.
In the event that the Company should acquire additional working capital,
then the Company will initiate a reconfiguration program at the Franklin Mill to
expand mill capacity to processing 300 tons of ore per day and initiate core
drilling programs to substantiate additional proven ore reserves; however, there
can be no assurance that additional funding will be available or adequate to
take such action.
Results of Operations:
The Company had no active mining or milling operations during 2000.
The Company had a net loss of $180,147 for the three months ended March 31,
2000 as compared to a net loss of $81,196 during the same period in 1999. The
increase of $98,951 was attributable to:
(a) A decline in mine expenses and remediation costs from $14,677 (1999) to
$480 (2000) resulted from a decrease in mine site activities.
(b) Depreciation expense increased from $6,677 in 1999 to $13,447 in the first
quarter of 2000 due to Management's recording of depreciation expense on
idle equipment in 2000.
(c) General and administrative expenses increased from $25,642 in 1999 to
$126,768 in 2000 an increase of $101,126. This increase resulted
principally from an increase in legal, professional and other costs
associated with the filing of a proxy statement (approximately $61,000) and
the reversal of previously accrued costs during the quarter ended March 31,
1999 (approximately $38,000).
(d) Interest expense increased from $34,599 in 1999 to $40,137 in 2000 due to
additional interest on the USM note.
Three months ended March 31, 1999 and 1998
The Company had a net loss of $81,196 for the three months ended March 31,
1999 as compared to a net loss of $171,430 during the same period in 1998.
General and administrative expenses were $25,642 for the first quarter 1999
compared with $101,494 during the same period in 1998. This decrease was due to
a substantial decrease in legal and professional fees, as well as settlements
with venders resulting in a reduction of accounts payable of approximately
$38,000.
Interest expense was $34,599 during the 1999 quarter as compared to $27,095
in the 1998 quarter. This increase was due to interest incurred on the USM note.
Results of Operations 1999 vs. 1998.
The Company had no active mining or milling operations during 1999.
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The Company had a net loss of $501,926 for 1999 as compared to a net loss of
$1,531,317 during 1998. The decrease of $1,029,391 was attributable to:
(a) A decline in mine expenses and remediation costs from $62,560 (1998) to
$34,812 (1999) resulted from a decrease in mine site activities.
(b) Loss on sales and impairment losses on property and equipment in 1998 of
$465,000 which declined to $130,000 in 1999, a reduction of $335,000.
(c) Depreciation expense declining from $146,355 in 1998 to $60,746 in 1999 due
to a reduction in property and equipment from the recognition of impairment
losses and property disposals.
(d) General and administrative expenses decreasing from $642,592 in 1998 to
$233,829 in 1999, a cost savings of $408,763. This decrease resulted from a
decline in two costs, bad debt expense and legal fees. During 1998, a bad
debt expense of $350,000 was recognized attributable to the note receivable
from the sale of the Gold Hill Mill Properties. During 1999, no bad debt
expense was incurred. In addition, legal fees declined to approximately
$91,000 (1999) from approximately $149,000 (1998), a reduction of
approximately $58,000.
(e) Other expenses of $100,000 (1998) were attributable to an accrual for the
settlement of certain litigation. Such accrual was reversed in 1999 when
the litigation was settled.
Results of Operations 1998 vs. 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 $377,158 was attributable to an
increase in general and administrative expense in 1998 of $274,230 and interest
expense of $87,973, 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) and a decrease in 1998 mine expenses and environmental remediation costs
of $100,385.
General and administrative expenses were $642,592 for 1998 as compared with
$368,353 during 1997 due to increases in professional fees. In addition, the
Company incurred a bad debt expense of $350,000 in 1998 in connection with a
note receivable from the sale of the Gold Hill Mill. 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.
Market for Registrant's Common Equity and Related Stockholder Matters
The principal U.S. market on which shares of the Company Common Stock (all
of which are of one class, $.01 per share) are traded on the small cap market on
the National Association of Securities Dealers, Inc. Automated Quotation System
(Symbol "WCMC").
The following table sets forth the range of high and low bid quotes of the
Company's
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Common Stock per quarter since the beginning of fiscal year 1997 as reported by
the National Quotation Bureau (which reflects inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
Acquisition). The following stock prices have been adjusted to reflect a one for
twenty-five reverse stock split which occurred on May 26, 1998; but has not been
adjusted to reflect a one-for-three reverse stock split effected on December 13,
1999 except as noted.
High Low
Quarter Ended Bid Price Bid Price
------------- --------- ---------
March 31, 1997 $5.50 $4.00
June 30, 1997 $4.75 $4.00
September 30, 1997 $5.50 $4.00
December 31, 1997 $2.34375 $1.5625
March 31, 1998 $1.5625 $1.5625
June 30, 1998 $2.25 $1.5625
September 30, 1998 $1.50 $1.00
December 31, 1998 $0.875 $0.4375
March 31, 1999 $1.125 $1.06
June 30, 1999 $1.50 $0.4375
September 30, 1999 $1.00 $0.9375
December 31, 1999 $2.50 $1.00*
March 31, 2000 $5.50 $5.50
-------------
* Takes into account one for three reverse split effective December 20, 1999
As of the Record Date, the approximate number of recordholders of the
Company's Common Stock is 2,751 inclusive of those brokerage firms and/or
clearinghouses 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 1,642,207 as of the Record Date. 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, the Company is prohibited from paying dividends on its
Common Stock unless and until it is no longer in default under the debentures.
Sales of Restricted Securities
In consideration of the extension of the Kennec portion of the Hayden
Kennec Leases, the Company issued to Dorothy Kennec, 1,387 (as adjusted) shares
of the Company Common Stock in April 1997. The stock was valued at $9.375 per
share as adjusted having an aggregate value at the time of the extension
agreement of $13,000. The common stock issued to Mrs. Kennec was issued as
further consideration for the extension of the terms of the Hayden/Kennec Lease.
The Company issued the common stock in reliance upon the exemption contained in
Section 4(2) of the Act. Mrs. Kennec is the 50% owner of the certain of the
properties comprising the Franklin
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Mines that the Company has leased for over 20 years. No offering of common stock
was made to any persons other to Mrs. Kennec. As a result of her relationship to
the Company, Mrs. Kennec had access to all information regarding the Company,
including all documents, public records, books, and accounts of the Company and
was able to ask questions of and receive answers from representatives of the
Company regarding the same. Mrs. Kennec understood the risk inherent in an
investment in the Company, was acquiring the stock for her own account, not with
a view of distribution thereof, and thoroughly understood and was willing to
bear all the risks related to ownership of the Company's securities.
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. On February 10, 1997, the Company made its
election to convert the amounts owing on the Newmineco Note into Common Stock of
the Company at a conversion price of $5.85 per share (after giving effect to
adjustment to the price of the stock subsequently made as a result of reverse
stock split). The Company issued to such holders an aggregate of 102,564 (as
adjusted) shares of Common Stock of the Company in full satisfaction of the
Company's obligations under the Newmineco Note. The shares were issued in
accordance with an exemption from registration afforded by Section 4(2) under
the Act.
Security Ownership of Management
The following table sets forth the beneficial ownership of shares of the
Company's common stock as of March 15, 2000 (giving retroactive effect to the
three-for-one reverse stock split effected on or about December 20, 1999) for
each (a) director, (b) executive officer, and (c) person who is known to be the
beneficial owner of five percent or more of the outstanding shares of Common
Stock and all directors and executive officers as a group.
Name and Amount and Percentage
Address of Nature of of Class
Beneficial Beneficial
Owner(1) Ownership
Robert L. Waligunda(3) 856(4) .06
George E. Otten(2) -0- -0-
John R. Bruno(2)
Richard Brannon(3) -0- -0-
William C. Martucci(3) -0- -0-
William H. Wishinsky(3) -0- -0-
Ronald Ginsberg(2) -0- -0-
Robert W. Singer(2) -0- -0-
Casey Myhre(3) -0- -0-
------- -------
All Directors and Executive 856 .06%
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Officers as a Group
-------------
*Less than 1%
(1) Except as otherwise noted all shares are beneficially owned and the sole
voting and investment power is held by persons indicated.
(2) Former officer and/or director of the Company
(3) Executive officer and/or director of the Company
(4) Includes 400 shares pledged as collateral to a non-affiliate individual
INDEPENDENT PUBLIC ACCOUNTANTS
The Company does not expect representatives of either Ehrenkrantz Sterling
& Co. LLC, its independent auditors for fiscal year 1999, or Lazar Levine &
Felix, its independent auditors for 1998 to be present at the Special Meeting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by law, the Companies files reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information contain additional information about the Company. You can inspect
and copy these materials at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
Suite 1300, New York, New York 10048. For further information concerning the
Commission's public reference rooms, you may call the Commission at
1-800-SEC-0330. Some of this information may also be accessed on the World Wide
Web through the Commission's Internet address at "hppt://www.sec.gov."
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. THE
COMPANY HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
JUNE 30, 2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS PROXY
STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
OTHER BUSINESS
The company knows of no other matter to be presented at the Special
Meeting. However, if other matters should properly come before the Special
Meeting, it is the intention of the persons named in the enclosed proxy to vote
the proxy with respect to such matters in accordance with their best judgment.
By Order of the Board of Directors,
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YOUR VOTE IS IMPORTANT. PLEASE PROMPTLY COMPLETE AND SIGN THE ENCLOSED FORM OF
PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
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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 Monday, July 31, 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, 304 Route 22 West, Springfield, New
Jersey 07081 at 10:00 a.m., 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)
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Please date, sign and mail your
Proxy card back as soon as possible!
Special Meeting of Stockholders
WCM CAPITAL, INC.
July 31, 2000
Please detach and Mail in the Envelope Provided
-----------------------------------------------
----- Please mark your
| | Votes as in this
----- example
FOR AGAINST ABSTAIN
(1) To approve the Acquisition of 100% of the [ ] [ ] [ ]
issued and outstanding shares of Common Stock
of (i) U.S. Mining, Inc., a New Jersey
corporation (ii) Shoppers OnLine, Inc., a New
Jersey Corporation and (iii) Freebees
Incorporated, Inc., a New Jersey corporation,
in exchange for 85% of the total issued and
outstanding shares of Common Stock of the
Company;
(2) To approve an amendment to the Certificate of [ ] [ ] [ ]
Incorporation of the Company to increase the
authorized Capital of the Company from
40,000,000 to 100,000,000; and
(3) 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 June 6, 2000 are entitled to notice of, and to vote
at, the meeting or any adjournment thereof. June 6, 2000, the record date for
determination of stockholders entitled (a vote at the meeting or any
adjournments thereof, 1,642,207 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
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APPENDIX 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 Co., 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).
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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.
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
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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 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.
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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.
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.
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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 therefore.
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.
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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
that 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
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.
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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 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.
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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.
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.
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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.
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 government al 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 therefore.
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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.
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.
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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.
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.
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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 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.
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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
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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 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.
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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.
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.
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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.
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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 Co.
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
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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.
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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.
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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.
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Schedule 5.1
USM is qualified to do business in the following jurisdictions:
New Jersey
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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.
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Reference is made to that Stock Purchase Agreement, dated January 18, 2000,
by and among WCM Capital, a Delaware corporation, U.S. Mining, Inc., a New
Jersey corporation ("USM") and William C. Martucci, the sole stockholder of USM
(the "Stock Purchase Agreement"). All capitalized terms used herein shall have
the meanings ascribed to such terms in the Stock Purchase Agreement.
Section 10.1 of the Stock Purchase is hereby amended by deleting item (iv)
in its entirety and replacing it with the following: "or (vi) the Closing Date
shall not have occurred on or before August 18, 2000."
WCM CAPITAL, INC.
/s/ Robert Waligunda
------------------------------
President
US MINING, INC.
/s/ William C. Martucci
------------------------------
President
/s/ William C. Martucci
------------------------------
William C. Martucci
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APPENDIX B
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF WCM CAPITAL, INC.
Under Section 242 of the
Corporation Law of the State of Delaware
Robert Waligunda and Richard Brannon, respectively, the President and the
Secretary of WCM CAPITAL, INC. (the "Company"), a corporation organized and
existing under and by the virtue of the General Corporation law of the State of
Delaware, DO HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by written consent filed
with the minutes of the Board, adopted the following resolution proposing and
declaring advisable the following amendment to the Certificate of Incorporation
of said corporation:
"1. The Certificate of Incorporation is hereby amended to increase the number of
authorized shares of Common Stock from 40,000,000 shares to 100,000,000 shares."
SECOND: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of section 242 of the General Corporation law of the State
of Delaware by affirmative vote by the holders of the majority of the stock for
the Company entitled to vote at a special meeting of stockholders held on July
31, 2000.
IN WITNESS WHEREOF, we, the undersigned, have executed and subscribed this
certificate this ______ day of August, 2000.
--------------------------- -------------------------------
Robert Waligunda, President Richard Brannon, Secretary
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APPENDIX C
Summary Historical Financial Information
Certain historical and selected financial data are attached as Appendix C
to this Proxy Statement. Audited statements of each of the Company and USM, are
attached as Appendices D and E respectively.
The following pro-forma consolidation presents the effect of the
Acquisition on the Company's historical December 31, 1999 and March 31, 2000
Balance Sheet as if it had occurred on the balance sheets 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 Acquisition)
will be issued to Martucci for 100% of the issued and outstanding shares of
common stock of USM, Shoppers OnLine and Freebees. 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 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 financial statements and accompanying
footnotes of USM contained herein.
The contemplated transaction will be recorded under the purchase method of
accounting whereby the financial position as the results of operations of USM
and the Company could be considered commencing as of the contemplated date of
the transaction.
<PAGE>
APPENDIX C
SELECTED FINANCIAL DATA
WCM CAPITAL, INC.
<TABLE>
<CAPTION>
Three Months
Ended
March 31 Years Ended December 31
------------------- ---------------------------------------------------------
2000(C) 1999(C) 1999 1998 1997 1996 1995
------- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Loss from continuing operations 180,147 81,196 501,926 1,531,317 1,908,475 1,314,104 1,641,944
Loss from continuing operations per
common share 0.14 0.06 0.38 1.16 1.45 1.33 2.51
Total assets 4,742,087 4,936,904 4,754,850 4,943,182 5,901,694 6,962,547 4,011,290
Long-term obligations -- -- -- -- -- 719,639 320,270
Stockholders' equity per common share 1.53 1.99 1.67 2.05 3.22 4.91 4.49
Weighted average number of common
shares 1,318,767 1,318,767 1,318,767 1,318,390 1,313,333 990,458 653,805
</TABLE>
NOTES TO SELECTED FINANCIAL DATA:
(A) During the period covered by the above table, the Company had no sales or
operating revenues, no classes of capital stock other than common, and paid no
dividends.
(B) Weighted average number of shares and per share amounts have been restated
to give retroactive effect to the May 26, 1998 twenty-five for one reverse stock
split, and the December 20, 1999 three for one reverse stock split.
<PAGE>
<TABLE>
<CAPTION>
Historical Historical
WCM Capital, US Mining,
BALANCE SHEETS Inc. Inc. Consolidated
31-Mar-00 31-Mar-00 Adjustments Notes Pro-Forma(3)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ -- $ 11,663 $ 11,663
------------ ------------ ------------
Other assets
Mining, milling and other property &
equipment 4,604,386 -- 4,604,386
Mining reclamation bonds 137,701 -- 137,701
Note receivable-related party -- 1,825,268 $ (1,825,268) (1) $ --
------------ ------------ ------------ ------------
4,742,087 1,825,268 $ (1,825,268) 4,742,087
------------ ------------ ------------ ------------
$ 4,742,087 $ 1,836,931 $ (1,825,268) $ 4,753,750
============ ============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 699,289 $ 12,350 $ (3,864) (1) $ 707,776
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 1,627,438 -- (1,627,438) (1) --
------------ ------------ ------------ ------------
2,720,652 82,350 (1,631,302) 1,171,701
------------ ------------ ------------ ------------
Noncurrent liabilities
Loan payable to shareholder -- 1,998,263 (1,998,263) (2) --
------------ ------------ ------------ ------------
Stockholders' equity
Common stock
Authorized 40,000,000 shares, $.01 par
value 13,188 -- 74,709 (2) 87,893
Authorized 2,500 shares, no par
value -- 25 (25) --
Additional paid-in capital 18,390,360 -- 1,729,613 (2) 20,119,977
Deficit accumulated during development
stage (16,382,113) (243,707) (16,625,820)
------------ ------------ ------------ ------------
2,021,435 (243,682) 1,804,297 3,582,050
------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity $ 4,742,087 $ 1,836,931 $ (1,825,268) $ 4,753,751
============ ============ ============ ============
Common shares issued and outstanding 1,318,390 2,500 8,789,267
============ ============ ============
Stockholder's Equity per common share $ 1.53 $ (97.47) $ 0.41
============ ============ ============
</TABLE>
Notes:
(1) Intercompany balance eliminated in consolidation
(2) Consolidated column reflects contribution to equity of US Mining Inc.'s
loan payable to shareholder.
(3) 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.
<PAGE>
Pro Forma Statements of Operations
WCM & USM
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------- Three Months Ended(2)
Dec. 31, 1999 March 31, 2000 Pro Forma March 31, 2000
WCM USM Consolidated WCM
<S> <C> <C> <C> <C>
Revenues
Interest & other income $ 2,414 $112,334 $114,748 $ 685
Expenses 504,340 150,384 654,724 180,832
---------------------------------------------------- --------
Net Loss $501,926 $ 38,050 539,976 $180,147
==================================================== ========
Loss per share (1) $ 0.38 $ 0.41 $ 0.14
======== ======== ========
</TABLE>
(1) Weighted average number of shares and per share amounts have been restated
to give retroactive effect to the May 26, 1998 twenty-five for one reverse stock
split, and the December 20, 1999 three for one reverse stock split.
(2) June 30, 2000 three month information for USM is not available
<PAGE>
APPENDIX D
10KSB - 12/31/99
WCM CAPITAL, INC.
(An Exploration Stage Company)
- INDEX -
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Auditors F - 2
Financial Statements:
Balance Sheets, December 31, 1999 and 1998 F - 3
Statements of Operations, Years Ended December 31, 1999 and 1998 and
Cumulative Period From December 1, 1977 (inception) to December 31, 1999 F - 4
Statements of Stockholders' Equity, Years Ended December 31, 1999 and 1998 and
Cumulative Period From December 1, 1977 (inception) to December 31, 1999 F - 5
Statements of Cash Flows, Years Ended December 31, 1999 and 1998 and
Cumulative Period From December 1, 1977 (inception) to December 31, 1999 F - 6
Notes to Financial Statements
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
WCM Capital, Inc.
New York, New York
We have audited the balance sheet of WCM Capital, Inc. (formerly Franklin
Consolidated Mining Co., Inc.) as of December 31, 1999, and the related
statements of operations, changes in stockholders' equity, 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 December 31, 1998, which includes an accumulated
deficit as of December 31, 1998 of ($15,700,041). 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 financial statements of WCM Capital, Inc. as of December 31,
1998 were audited by other auditors whose report dated April 13, 1999 on those
statements included an explanatory paragraph that described the going concern
uncertainty discussed in Note 1 to the financial 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 a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of WCM Capital, Inc. as of December 31, 1999, and the
results of its operations and its cash flows for the year 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 an exploration stage enterprise whose
operations have generated recurring losses and cash flow deficiencies from
inception and, as of December 31, 1999, 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 wholly dependent on outside funding to
finance current operations. 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.
EHRENKRANTZ STERLING & CO., LLC
Certified Public Accountants
Livingston, New Jersey
March 28, 2000
F-2
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
- ASSETS -
DECEMBER 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ -- $ --
------------ ------------
TOTAL CURRENT ASSETS -- --
------------ ------------
OTHER ASSETS:
Mining, milling and other property and equipment, net of accumulated
depreciation and depletion of $2,166,261 and $2,105,515 4,617,834 4,808,580
Mining reclamation bonds 137,016 134,602
------------ ------------
$ 4,754,850 $ 4,943,182
============ ============
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 689,049 $ 654,164
Payroll and other taxes payable 29,960 29,960
Convertible debentures 145,000 145,000
Notes payable - related companies and others 218,965 218,965
Note payable - U.S. Mining, Inc. 1,470,295 1,191,586
------------ ------------
TOTAL CURRENT LIABILITIES 2,553,269 2,239,675
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 40,000,000 shares authorized;
1,318,767 shares issued and outstanding 13,188 329,598
Additional paid-in capital 18,390,360 18,073,950
Deficit accumulated during the exploration stage (16,201,967) (15,700,041)
------------ ------------
2,201,581 2,703,507
------------ ------------
$ 4,754,850 $ 4,943,182
============ ============
</TABLE>
See auditors' report and notes to financial statements.
F-3
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Cumulative
December 31 December 1, 1977
---------------------------- (inception) through
1999 1998 December 31, 1999
------------ ------------ ------------------
<S> <C> <C> <C>
REVENUES:
Sales $ -- $ -- $ 876,082
Interest income 2,414 3,920 551,109
Other income -- 4,397 79,397
------------ ------------ ------------
2,414 8,317 1,506,588
------------ ------------ ------------
EXPENSES:
Mine expenses and environmental remediation costs 34,812 62,560 3,621,110
Loss on sale/write-down of mining and milling and other property
and equipment 130,000 465,000 1,795,000
Depreciation and depletion 60,746 146,355 2,361,610
General and administrative expenses 233,829 642,592 6,482,206
Interest expense 144,953 123,127 1,286,432
Amortization of debt issuance expense -- -- 683,047
Equity in net (income) loss and settlement of claims of Joint Venture -- -- 1,059,971
Other (100,000) 100,000 419,179
------------ ------------ ------------
504,340 1,539,634 17,708,555
------------ ------------ ------------
NET LOSS $ (501,926) $ (1,531,317) $(16,201,967)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (.38) $ (1.16)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 1,318,767 1,318,390
============ ============
</TABLE>
See auditors' report and notes to financial statements.
F-4
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 1 of 5
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Exploration Treasury
Shares Stock Capital Stage Stock Total
-------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 8,268 $ 83 $ 43,017 $ -- $ -- $ 43,100
Non-cash:
Related parties 49,332 493 8,757 -- -- 9,250
In exchange for shares of Gold
Developers and Producers, Inc. 58,400 584 16,850 -- -- 17,434
Net loss -- -- -- (45,584) -- (45,584)
-------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1977 116,000 1,160 68,624 (45,584) -- 24,200
Issuance of common stock:
Pursuant to public offering, net of
underwriting expenses of $11,026 31,368 314 283,681 -- -- 283,995
Cash 12,000 120 242,757 -- -- 242,877
Non-cash 268 2 4,998 -- -- 5,000
Net loss -- -- -- (66,495) (66,495)
-------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1978 159,636 1,596 600,060 (112,079) -- 489,577
Issuance of common stock:
Cash 12,368 124 441,126 -- -- 441,250
Non-cash - related parties 2,132 21 59,979 -- -- 60,000
Non-cash - other 356 4 13,346 -- -- 13,350
Net loss -- -- -- (128,242) -- (128,242)
-------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1979 174,492 1,745 1,114,511 (240,321) -- 875,935
Issuance of common stock:
Cash 15,452 154 839,846 -- -- 840,000
Non-cash 3,176 32 118,968 -- -- 119,000
Net loss -- -- -- (219,021) -- (219,021)
-------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1980 193,120 1,931 2,073,325 (459,342) -- 1,615,914
Issuance of common stock:
Cash 3,500 35 262,465 -- -- 262,500
Issuance of common stock:
Cash 7,706 77 557,923 -- -- 558,000
Non-cash 1,387 14 103,986 -- -- 104,000
Commission on sale of common stock -- -- (57,300) -- -- (57,300)
Net loss -- -- -- (288,105) -- (288,105)
-------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1981 205,713 2,057 2,940,399 (747,447) -- 2,195,009
</TABLE>
See auditors' report and notes to financial statements.
F-5
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 2 of 5
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Exploration Treasury
Shares Stock Capital Stage Stock Total
--------- --------- ----------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 11,480 $ 115 $ 764,011 $ -- $ -- $ 764,126
Non-cash 2,160 22 161,978 -- -- 162,000
Commission on sale of common stock -- -- (56,075) -- -- (56,075)
Net loss -- -- -- (287,291) -- (287,291)
--------- --------- ----------- ----------- ------- -----------
Balance, December 31, 1982 219,353 2,194 3,810,313 (1,034,738) -- 2,777,769
Issuance of common stock:
Cash 16,975 170 1,189,380 -- -- 1,189,550
Non-cash 944 9 70,825 -- -- 70,834
Exercise of stock options by:
Related parties 3,567 35 267,465 -- -- 267,500
Others 52 1 3,999 -- -- 4,000
Commission on sale of common stock -- -- (124,830) -- -- (124,830)
Net loss -- -- -- (749,166) -- (749,166)
--------- --------- ----------- ----------- ------- -----------
Balance, December 31, 1983 240,891 2,409 5,217,152 (1,783,904) -- 3,435,657
Issuance of common stock:
Cash 16,023 160 1,151,540 -- -- 1,151,700
Non-cash 367 3 27,497 -- -- 27,500
Exercise of stock options by related parties 2,667 27 199,973 -- -- 200,000
Commission on sale of common stock -- -- (90,950) -- -- (90,950)
Net loss -- -- -- (301,894) -- (301,894)
--------- --------- ----------- ----------- ------- -----------
Balance, December 31, 1984 259,948 2,599 6,505,212 (2,085,798) -- 4,422,013
Issuance of common stock:
Cash 5,618 56 300,023 -- -- 300,079
Non-cash 133 2 7,498 -- -- 7,500
Exercise of stock options by:
Related parties 2,667 27 149,973 -- -- 150,000
Others 12 0 750 -- -- 750
Commission on sale of common stock -- -- (3,462) -- -- (3,462)
Net loss -- -- -- (133,929) -- (133,929)
--------- --------- ----------- ----------- ------- -----------
Balance, December 31, 1985 268,378 2,684 6,959,994 (2,219,727) -- 4,742,951
</TABLE>
See auditors' report and notes to financial statements.
F-6
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 3 of 5
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Exploration Treasury
Shares Stock Capital Stage Stock Total
--------- -------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 7,587 $ 76 $ 300,424 $ -- $ -- $ 300,500
Non-cash - related parties 2,133 21 79,979 -- -- 80,000
Non-cash - others 1,800 18 53,982 -- -- 54,000
Net loss -- -- -- (227,788) -- (227,788)
--------- -------- ----------- ----------- --------- -----------
Balance, December 31, 1986 279,898 2,799 7,394,379 (2,447,515) -- 4,949,663
Issuance of common stock:
Cash 34,725 347 1,286,954 -- -- 1,287,301
Non-cash - related parties 2,695 27 70,873 -- -- 70,900
Non-cash - other 500 5 37,245 -- -- 37,250
Commission on sale of common stock -- -- (110,243) -- -- (110,243)
Net loss -- -- -- (730,116) -- (730,116)
--------- -------- ----------- ----------- --------- -----------
Balance, December 31, 1987 317,818 3,178 8,679,208 (3,177,631) -- 5,504,755
Issuance of common stock - non-cash - related
parties 2,666 27 49,973 -- -- 50,000
Net loss -- -- -- (386,704) -- (386,704)
Purchase of 666 shares of treasury stock -
at cost -- -- -- -- (12,500) (12,500)
--------- -------- ----------- ----------- --------- -----------
Balance, at December 31, 1988 320,484 3,205 8,729,181 (3,564,335) (12,500) 5,155,551
Issuance of common stock:
Cash 9,040 90 110,410 -- -- 110,500
Non-cash - others 3,782 38 33,828 -- -- 33,866
Non-cash -related parties 2,800 28 31,472 -- -- 31,500
Private placement:
Cash 30,333 303 22,447 -- -- 22,750
Debt issuance expense -- -- 455,000 -- -- 455,000
Conversion of debentures 14,000 140 104,860 -- -- 105,000
Exercise of stock options 4,000 40 44,960 -- -- 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 384,439 3,844 9,569,658 (4,844,139) (12,500) 4,716,863
</TABLE>
See auditors' report and notes to financial statements.
F-7
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 4 of 5
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Exploration 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 4,467 45 45,180 -- -- 45,225
Non-cash - others 531 5 5,973 -- -- 5,978
Conversion of debentures 2,133 22 31,978 -- -- 32,000
Net loss -- -- -- (1,171,962) -- (1,171,962)
-------- ------- ------------ ------------ -------- ------------
Balance, December 31, 1990 391,570 3,916 9,652,889 (6,016,101) (12,500) 3,628,204
Issuance of common stock:
Cash - others 23,995 240 96,691 -- -- 96,931
Cash - related parties 24,000 240 89,760 -- -- 90,000
Non-cash - others 15,783 158 59,029 -- -- 59,187
Conversion of debentures 49,747 498 625,502 -- -- 626,000
Exercise of stock options 3,333 33 12,467 -- -- 12,500
Conversion of notes payable 3,333 33 14,967 -- -- 15,000
Net loss -- -- -- (764,926) -- (764,926)
-------- ------- ------------ ------------ -------- ------------
Balance, December 31, 1991 511,761 5,118 10,551,305 (6,781,027) (12,500) 3,762,896
Issuance of common stock:
Cash - others 26,959 269 169,339 -- -- 169,608
Cash - related parties 8,400 84 48,916 -- -- 49,000
Non-cash - others 23,062 231 365,827 -- -- 366,058
Non-cash - related parties 161 2 604 -- -- 606
Non-cash - exercise of options by related
parties 27,333 273 102,227 -- -- 102,500
Conversion of debentures 7,200 72 161,928 -- -- 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 604,876 6,049 11,393,023 (8,124,986) (12,500) 3,261,586
Issuance of common stock:
Cash - others 11,645 116 133,848 -- -- 133,964
Cash - related parties 10,360 104 77,596 -- -- 77,700
Non-cash - others 2,000 20 14,980 -- -- 15,000
Non-cash - settlement of litigation 13,333 133 99,867 -- -- 100,000
Non-cash - exercise of options by related
parties 2,667 27 9,973 -- -- 10,000
Conversion of debentures 1,867 19 34,981 -- -- 35,000
Conversion of loan 1,333 13 9,987 -- -- 10,000
Net loss -- -- -- (797,619) -- (797,619)
-------- ------- ------------ ------------ -------- ------------
Balance, December 31, 1993 648,081 6,481 11,774,255 (8,922,605) (12,500) 2,845,631
</TABLE>
See auditors' report and notes to financial statements.
F-8
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 5 of 5
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Exploration Treasury
Shares Stock Capital Stage Stock Total
--------- ------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Retirement of treasury stock (666) $ (7) $ (12,493) $ -- $ 12,500 $ --
Net loss -- -- -- (381,596) -- (381,596)
--------- ------- ----------- ------------ -------- ------------
Balance, December 31, 1994 647,415 6,474 11,761,762 (9,304,201) -- 2,464,035
Issuance of common stock:
Settlement of claims by joint venture partner 80,000 800 935,200 -- -- 936,000
Repayments of loan from joint venture partner 42,667 427 498,773 -- -- 499,200
Repayments of long-term loans from related
parties and accrued interest 115,730 1,157 675,868 -- -- 677,025
Exchange of shares for profit participation
interests 36,000 360 (360) -- -- --
Net loss -- -- -- (1,641,944) -- (1,641,944)
--------- ------- ----------- ------------ -------- ------------
Balance, December 31, 1995 921,812 9,218 13,871,243 (10,946,145) -- 2,934,316
Issuance of common stock for:
Cash 23,379 234 297,366 -- -- 297,600
Services and interest 49,547 495 561,942 -- -- 562,437
Conversion of convertible notes 57,263 573 557,747 -- -- 558,320
Repayments of loan from joint venture partner 30,880 309 361,566 -- -- 361,875
Repayments of long-term loans from related
party 124,892 1,249 1,462,332 -- -- 1,463,581
Net loss -- -- -- (1,314,104) -- (1,314,104)
--------- ------- ----------- ------------ -------- ------------
Balance, December 31, 1996 1,207,773 12,078 17,112,196 (12,260,249) -- 4,864,025
Issuance of common stock for:
Extension of lease rights 1,386 14 12,986 -- -- 13,000
Conversion of note payable 102,564 1,025 598,975 -- -- 600,000
Conversion of debt 6,667 67 50,433 -- -- 50,500
Acquisition of joint venture -- -- 615,774 -- -- 615,774
Net loss -- -- -- (1,908,475) -- (1,908,475)
--------- ------- ----------- ------------ -------- ------------
Balance, December 31, 1997 1,318,390 13,184 18,390,364 (14,168,724) -- 4,234,824
Net loss -- -- -- (1,531,317) -- (1,531,317)
--------- ------- ----------- ------------ -------- ------------
BALANCE, DECEMBER 31, 1998 1,318,390 13,184 18,390,364 (15,700,041) -- 2,703,507
Rounding of shares due to reverse split 377 4 (4) -- --
Net Loss -- -- -- (501,926) -- (501,926)
--------- ------- ----------- ------------ -------- ------------
BALANCE, DECEMBER 31, 1999 1,318,767 $13,188 $18,390,360 $(16,201,967) $ -- $ 2,201,581
========= ======= =========== ============ ======== ============
</TABLE>
See auditors' report and notes to financial statements.
F-9
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS Page 1 of 2
<TABLE>
<CAPTION>
Cumulative
December 1, 1977
Years Ended (inception)
December 31 Through
1999 1998 December 31, 1999
------------ ------------ -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (501,926) $ (1,531,317) $(16,201,967)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and depletion 60,746 146,355 2,361,610
Provision for bad debt -- 350,000 350,000
Write-down of mining and milling and other property and
Equipment 130,000 200,000 1,530,000
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 -- -- 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 -- -- 123,971
Other -- -- (7,123)
Changes in operating assets and liabilities:
Prepaid expenses -- -- --
Interest accrued on mining reclamation bonds (2,414) (3,921) (12,016)
Accounts payable and accrued expenses 34,885 285,010 1,151,265
------------ ------------ ------------
Net cash used in operating activities (278,709) (288,873) (6,560,919)
------------ ------------ ------------
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.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS Page 2 of 2
<TABLE>
<CAPTION>
Cumulative
December 1, 1977
Years Ended (inception)
December 31 Through
1999 1998 December 31, 1999
------------ ------------ -----------------
<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 -- -- (181,017)
Payments of debt issuance expenses -- -- (164,233)
Proceeds of other notes and loans payable 278,709 287,795 1,881,778
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 278,709 287,795 12,061,592
------------ ------------ ------------
INCREASE (DECREASE) IN CASH -- (1,078) --
CASH, BEGINNING OF PERIOD -- 1,078 --
------------ ------------ ------------
CASH, END OF PERIOD $ -- $ -- $ --
============ ============ ============
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.
See auditors' report and notes to financial statements.
F-11
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - 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, 1999 and 1998, the Company has a cash balance of $0, an accumulated
deficit of $16,201,967 and $15,700,041, respectively, current liabilities
of $2,553,269 and $2,239,675, respectively, and a working capital
deficiency of $2,553,269 and $2,239,675, respectively. The Company was in
default on the payment of the principal balance and accrued interest on
certain notes and debentures (see Notes 5, 6 and 7). 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 or environmental matters (see Note 8B), at the rate of
approximately $20,000 per month plus interest during 2000. Such matters
raise substantial doubt about the Company's ability to continue as a going
concern.
U.S. Mining Co. ("USM"), a related entity, and USM's affiliates have
pledged to provide financing to the Company on an as needed basis through
December 31, 2000. The funds received will cover general, administrative
and other costs. Additional funds will be needed to support the extraction
and milling processes once underway as well as to upgrade the processing
facilities to allow for an increase in ore processing capacity.
There can be no assurance that the Company will have adequate funds
available to repay the funds advanced by USM and its affiliates. In the
event that the Company defaults on its obligations, USM may foreclose on
the assets of the Company. Such foreclosure actions would have a material
adverse effect on the future operations of the Company.
Substantially all of the $4,617,834 of mineral properties and equipment
included in the accompanying balance sheet as of December 31, 1999, is
related to exploration properties. The ultimate realization of the
Company's investment in exploration properties and equipment is dependent
upon the success of future property sales, the existence of economically
recoverable reserves, the ability of the Company to obtain financing or
make other arrangements for development, and upon future profitable
production.
F-12
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Organization:
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 an
exploration stage enterprise because it did not generate any
significant revenues through December 31, 1999.
During October 1998, the Company's shareholders approved an amendment
to its certificate of incorporation changing the name of the Company
to WCM Capital, Inc.
(b) Accounting Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain
estimates and assumptions 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.
F-13
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) 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 1999 and 1998
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.
F-14
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(d) Impairment of Long-Lived Assets:
The Company has 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. 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. As of
December 31, 1998, (a) the $350,000 note was reduced to $0 and (b) a
$200,000 impairment loss was taken against the $725,000 of equipment
acquired. During 1999 an additional $130,000 impairment loss was taken
against the Company's mining, milling and other property and
equipment.
(e) 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.
(f) Environmental Remediation Costs:
Environmental remediation costs are accrued based on estimates of
known environmental remediation exposures. Ongoing environmental
compliance costs, including maintenance and monitoring costs are
expensed as incurred.
F-15
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(g) 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).
(h) Loss Per Common Share:
The Company has adopted SFAS 128 "Earnings Per Share" ("SFAS 128"),
which 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. Losses per share have been restated for prior periods
to give effect to the reverse stock splits during 1999 and 1998 (see
Note 10).
(i) Fair Value of Financial Investments:
The carrying amount of the Company's borrowings approximate fair
value.
(j) Statement of Comprehensive Income:
SFAS 130 "Reporting Comprehensive Income" 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 required.
F-16
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - ACQUISITIONS OF MINING AND MILLING PROPERTIES:
(a) Franklin Mines and Mill
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.
(b) Joint Venture
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 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-17
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - ACQUISITIONS OF MINING AND MILLING PROPERTIES (continued):
<TABLE>
<S> <C>
In conjunction with these transactions, the Company:
Acquired mine and mill improvements having a net book value of
(See Note 4) $ 780,787
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
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
Eliminated a $229,204 receivable from Gems (229,204)
Assumed notes payable - other of $87,000 and related accrued
interest on these notes of $16,858 (see Note 5) (103,858)
Assumed a liability of $408,482 payable to POS Financial, Inc.
(See Note 7) (408,482)
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>
(c) Gold Hill Mill
On July 3, 1996, the Company acquired the Gold Hill Mill from a
wholly-owned subsidiary of Gems, in exchange for an 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.
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. All the Gold Hill
assets were sold during 1998 (see Note 2).
(d) Mogul Mines
On September 26, 1996, the Company acquired a 20% interest in
Newmineco, an inactive company, by issuing a 9.5% note payable 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 of December 31, 1997.
F-18
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4 - MINING, MILLING AND OTHER PROPERTY AND EQUIPMENT:
Mining, milling and other property and equipment, consist of the
following at December 31:
1999 1998
---------- ----------
Machinery and equipment $1,617,220 $1,747,220
Mine and mill improvements (a) 5,071,065 5,071,065
Furniture and fixtures 11,714 11,714
Automotive equipment 84,096 84,096
---------- ----------
6,784,095 6,914,095
Less: accumulated depreciation and depletion 2,166,261 2,105,515
---------- ----------
$4,617,834 $4,808,580
========== ==========
(a) Includes mine and mill improvements of $780,787 in connection with the
termination of the Joint Venture (see Note 3).
During the years ended December 31, 1999 and 1998, the Company
expended $34,812 and $62,560, respectively on environmental
remediation costs and mine expenses.
F-19
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 5 - NOTES PAYABLE - RELATED PARTY AND OTHERS:
Notes payable related party and others consist of the following at
December 31, 1999 and 1998:
12% unsecured demand notes due to the Company's
former President and his affiliated entity $ 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 (8% at December 31, 1999).
(b) This principal amount represents four unsecured promissory notes. The
Company assumed these obligations on November 25, 1997, as part of the
acquisition from USM of the remaining interest in the Joint Venture
(see Note 3). These notes were in default when assumed by the Company,
and remain in default as of December 31, 1999. Interest is being
accrued at 8%.
Accrued interest on the above notes at December 31, 1999 and 1998
aggregated approximately $66,000 and $45,600 respectively.
F-20
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 6 - CONVERTIBLE DEBENTURES AND OTHER CONVERTIBLE DEBT:
The Company's convertible debt at December 31, 1999 and 1998 consists
of:
12.25% convertible debenture originally due 12/31/94 $145,000
As of December 31, 1999 and 1998, the Company was in default with
respect to the payment of the $145,000 principal balance of the
debenture and accrued interest of approximately $84,000 and $67,000,
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 102,564 shares of common
stock, as adjusted based on the conversion rate of $5.85, 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 3). 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 and 1999 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 are owned by a director of WCM
F-21
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - NOTE PAYABLE - RELATED PARTIES (continued):
and can exert significant influence over the Company. Additional
amounts were loaned to the Company by USM during 1998 and 1999. The
balance due on the note at December 31, 1999 aggregated $1,470,295
plus accrued interest of $198,745. The balance due on the note at
December 31, 1998 aggregated $1,191,586 plus accrued interest of
$91,950.
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 1,387 shares of the common stock of the Company valued
at $9.37 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 1,387 shares of common stock were issued on April 9, 1997.
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
F-22
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
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, 1999 USM had yet to receive clear title but
continued to make Purchase Agreement extension payments.
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.
The Company pays a monthly rental of $3,500 (on a month to month
basis) for the office space, secretarial and other services provided
to the Company pursuant to an oral agreement with a non-affiliate.
Rent expense was $41,000 and $33,450 in 1999 and 1998, respectively.
(b) Environmental Matters:
During 1999, inspections of the Franklin Mining properties revealed
that certain drainage problems and substandard linings at the tailings
disposal areas created potential hazards and that protection measures
are required.
F-23
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
The Company received a letter dated March 9, 2000 from the Colorado
Division of Minerals and Geology (the "DMG") which sets forth the
measures which must be taken by the Company to bring the site into
compliance with groundwater regulations and to stabilize the tailings
pond and site. In the event the Company completes all of the required
actions by May 30, 2000, a Temporary Cessation order will be granted
by DMG. In the event a Temporary Cessation is granted, no further
reclamation work or mining work would be required for the duration of
the Temporary Cessation, beyond basic maintenance and reclamation
required to keep the site from further deterioration.
(c) Litigation:
The Company is involved in various litigation as explained below:
(i) The Company and others were defendants in an action related to a
dispute over fees for engineering consulting services. The parties
settled this matter in September 1999 and the litigation was
discontinued.
During 1998, $100,000 of other expenses was accrued in connection with
this litigation. Such accrual was reversed in 1999 when the litigation
was settled.
(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
judgment 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.
F-24
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
(iii) On or about May 14, 1998, Redstone Securities Inc. ("Redstone")
commenced an action against the Company in connection with an
Investment Banking Agreement dated August 28, 1996, between Redstone
and the Company. On or about July 31, 1998, the Company answered the
complaint and filed a cross complaint against Redstone. In September
1999, the matter was settled whereby the Company agreed to lift the
stop transfer order on the shares held by Redstone to allow Redstone
the ability to sell those shares to an unaffiliated third party.
(d) NASDAQ Notification:
During 1998 and 1999, the Company received notification letters from
NASDAQ informing them that the Company's common stock was not in
compliance with the NASDAQ small-cap market price requirement of
$1.00, which became effective on February 23, 1998.
In order to mitigate the minimum bid price requirement the Company
effectuated reverse stock splits during 1998 and 1999 (see Note 10).
After each reverse split the Company's stock price remained above the
$1.00 minimum bid price requirement for the necessary ten-day period.
While the Company is currently in compliance with the minimum bid
price requirement, there can be no assurance in the future that it
will be able to maintain such compliance.
F-25
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - INCOME TAXES:
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $13,500,000 available to reduce future
federal taxable income, which, if not used, will expire at various
dates through December 31, 2019. 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.
<TABLE>
<CAPTION>
Deferred Tax Valuation
Asset Allowance
---------- ----------
<S> <C> <C>
Balance at January 1, 1998, attributable to federal
net operating loss carry forward $3,578,000 $3,578,000
Increase in federal net operating loss, year ended
December 31, 1998 861,000 861,000
Write down of equipment received as part of
Sale of Gold Hill 70,000 70,000
---------- ----------
Balance at December 31, 1998 4,509,000 4,4509,000
Increase in Federal net operating loss,
Year ended December 31, 1999 210,000 210,000
---------- ----------
Balance at December 31, 1999 $4,719,000 $4,719,000
========== ==========
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY:
(a) Reverse Stock Splits:
On May 26, 1998, the Company effectuated a twenty-five-for-one reverse
stock split. On December 20, 1999, the Company effectuated a
three-for-one reverse stock split. The accompanying financials give
retroactive effect to these reverse stock splits.
(b) Common Stock Reserved for Issuance:
At December 31, 1999 and 1998, there were 3,867 shares of common stock
reserved for issuance upon the exercise of the 12.25% $145,000
convertible debentures (See Note 6).
F-26
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - STOCKHOLDERS' EQUITY (Continued):
(c) Issuances of Common Stock
From December 1, 1977 (inception) through December 31, 1999, the
Company issued common stock for:
<TABLE>
<CAPTION>
Shares Amount
------------ ------------
<S> <C> <C>
Cash, including net proceeds of $283,995 from
Public offering 355,648 $ 8,758,256
Exercise of stock options 46,298 792,250
Commissions of sales of common stock -- (451,483)
Purchase and retirement of treasury stock (666) (12,500)
Non-cash, other than related parties:
Services and property 165,582 1,673,394
Conversion of debentures and notes payable 246,107 2,648,820
Stock options and stock warrants granted -- 39,100
Settlement of litigation and other 13,710 100,000
Non-cash, related parties:
Services and property 97,919 918,030
Settlement of claims by related parties 80,000 936,000
Repayment of related party loans 314,169 3,001,681
------------ ------------
1,318,767 $ 18,403,548
============ ============
</TABLE>
NOTE 11 - SUBSEQUENT EVENTS
On January 18, 2000, the Company, USM and USM's sole shareholder
("Martucci") entered into an agreement whereby the Company agreed
to acquire USM in exchange for 7,473,013 shares of the Common
Stock or approximately 85% of the Company's then issued and
outstanding common stock (the "Transaction"). The agreement may
be terminated by unanimous consent of the parties, in the event
of a breach of the terms of the contract by any of the parties,
in the event of an injunction preventing the closing or if the
closing has not occurred on or before July 16, 2000. As a
condition to closing, the Company must seek shareholder approval
of the Transaction. In addition, the Company has agreed to grant
Martucci piggyback and demand registration rights with respect to
the shares he is to
F-27
<PAGE>
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - SUBSEQUENT EVENTS (Continued):
receive in the Transaction. The Company has filed a proxy
statement with respect to the Transaction which is currently
subject to a review by the staff of the Securities and Exchange
Commission ("Commission"). Upon approval of the proxy statement
by the Commission the Company will submit the Transaction to its
shareholders for approval.
F-28
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(Unaudited)
APPENDIX D
10QSB - 3/31/2000
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
2000 1999
------------ ------------
<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
$2,179,709 and $2,166,261 4,604,386 4,617,834
Mining reclamation bonds 137,701 137,016
------------ ------------
$ 4,742,087 $ 4,754,850
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 699,289 $ 689,049
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 1,627,438 1,470,295
------------ ------------
TOTAL CURRENT LIABILITIES 2,720,652 2,553,269
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share;
40,000,000 shares authorized; 1,318,767 shares
issued and outstanding 13,188 13,188
Additional paid-in capital 18,390,360 18,390,360
Deficit accumulated during the development stage (16,382,113) (16,201,967)
------------ ------------
2,021,435 2,201,581
------------ ------------
$ 4,742,087 $ 4,754,850
============ ============
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
2000 1999 Inception
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales $ -- $ -- $ 876,082
Interest income 685 399 551,794
Other income -- -- 79,397
------------ ------------ ------------
685 399 1,507,273
------------ ------------ ------------
EXPENSES:
Mine expenses and environmental remediation costs 480 14,677 3,621,590
Write-down of mining and milling and other property
and equipment -- -- 1,795,000
Depreciation and depletion 13,447 6,677 2,375,057
General and administrative expenses 126,768 25,642 6,608,973
Interest expense 40,137 34,599 1,326,569
Amortization of debt issuance expense -- -- 683,047
Equity in net loss and settlement of claims of Joint Venture -- -- 1,059,971
Other -- -- 419,179
------------ ------------ ------------
180,832 81,595 17,889,386
------------ ------------ ------------
NET LOSS $ (180,147) $ (81,196) $(16,382,113)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (.14) $ (.06)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 1,318,767 1,318,767
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
2000 1999 Inception
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (180,147) $ (81,196) $(16,382,113)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and depletion 13,447 6,677 2,375,056
Provision for bad debt -- -- 350,000
Write-down of mining and milling and other
Property and equipment -- -- 1,530,000
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 (685) (399) (12,701)
Accounts payable and accrued expenses 10,240 (47,047) 961,505
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (157,145) (121,965) (6,718,064)
------------ ------------ ------------
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 157,145 121,965 2,038,923
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 157,145 121,965 12,218,737
------------ ------------ ------------
</TABLE>
(Continued)
4
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
from
2000 1999 Inception
------------ ------------ ------------
<S> <C> <C> <C>
DECREASE IN CASH $ -- $ -- $ --
CASH - beginning of period -- -- --
------------ ------------ ------------
CASH - end of period $ -- $ -- $ --
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ -- $ -- $ 299,868
============ ============ ============
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position of
WCM CAPITAL, INC. (the "Company") as of March 31, 2000, and its results of
operations and cash flows for the three months ended March 31, 2000 and
1999. Information included in the condensed balance sheet as of December
31, 1999 has been derived from the audited balance sheet in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999 (the
"10-KSB") filed with the Securities and Exchange Commission. Certain terms
used herein are defined in the 10-KSB. Accordingly, these unaudited
condensed financial statements should be read in conjunction with the
financial statements, notes to financial statements and the other
information in the 10-KSB.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results of operations for the full year
ending December 31, 2000.
NOTE 2 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. However, the Company has had
recurring losses and cash flow deficiencies since inception. As at March
31, 2000, the Company has an accumulated deficit of $16,382,114, current
liabilities of $2,720,652, and a working capital deficiency of $2,720,652.
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 2000. Such matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that may
result from the outcome of the above uncertainty.
U.S. Mining Co. and its affiliates have pledged to provide financing to the
Company on an as needed basis until on or about December 31, 2000. The
funds received from USM and its affiliates will cover the general,
administrative and other costs approximated at $20,000 per month plus
interest. Additional funds will be needed to ready the Franklin Mine and
Mill properties for the commencement of extraction and milling and to
support the extraction and milling processes once underway as well as to
upgrade the processing facilities to allow for an increase in ore
processing capacity.
There can be no assurance that the Company will have adequate funds
available to repay the funds advanced by USM and its affiliates. In the
event that the Company defaults on its obligations, USM may foreclose on
the assets secured by the USM note. Such foreclosure actions by USM would
have a material adverse effect on the future operations of the Company and
the Company's ability to explore the Franklin Mines.
Substantially all of the $4,604,386 of mineral properties and equipment
included in the accompanying balance sheet as of March 31, 2000, is related
to exploration properties. The ultimate realization of the Company's
investment in exploration properties and equipment is dependent upon the
success of future property sales, the existence of economically recoverable
reserves, the ability of the Company to obtain financing or make other
arrangements for development, and upon future profitable production.
6
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 3 - NOTES PAYABLE RELATED PARTY AND OTHERS
Notes payable related party and others consist of the following at March
31, 2000:
12% unsecured demand note due to an affiliate
of the former president of the Company $ 71,965
Secured promissory note (a) 60,000
Unsecured promissory notes (b) 87,000
--------
$218,965
========
(a) The outstanding principal balance of the note became payable on July
18, 1996 and the Company is in default. The note is guaranteed by
certain officers of Gems and is collateralized through a subordinated
security interest in the Company's mining reclamation bond. Interest
on the note is payable based on the rate of interest applicable to the
mining reclamation bond.
(b) This principal amount represents four unsecured promissory notes
comprised of one $36,000 note and three $17,000 notes payable. The
Company assumed these obligations on November 25, 1997, as part of the
acquisition from USM of the remaining interest in the Joint Venture.
These notes were in default when assumed by the Company, and remain in
default as of March 31, 2000. Interest is being accrued at rates
between 8% and 17% per annum.
Accrued interest on the above notes at March 31, 2000 aggregated
approximately $71,000.
NOTE 4 - CONVERTIBLE DEBENTURES
The Company's convertible debt at March 31, 2000 consist of:
12.25% convertible debenture originally due 12/31/94 $145,000
As of March 31, 2000, the Company was in default with respect to the
payment of the $145,000 principal balance of the debenture and accrued
interest of approximately $88,000. As a result of its default, the Company
is subject to and may be subject to further litigation by the Transfer
Agent/Trustee under the Indenture Agreement or from debenture holders
seeking immediate repayment of principal plus interest and other costs.
Management cannot assure that there will be funds available for the
required payments or what the effects will be of any actions brought by or
on behalf of the debenture holders.
NOTE 5 - NOTE PAYABLE - RELATED PARTY
The Company had outstanding a 8% promissory note balance of $1,627,438, at
March 31, 2000, which represents monies advanced to the Company by U.S.
Mining, Inc. ("USM") and obligations assumed in connection with the
contributions of Joint Venture interests in 1997. The note was payable on
May 4, 1998, and is secured by all the Company's mining claims and mining
properties, as well as its interests in the Hayden/Kennec Leases. The note
is subject to successive 30-day extensions throughout 1998 upon the mutual
agreement of the maker and lender for no additional consideration. On March
5, 1998, POS assigned this note to USM. Both POS and USM are considered
related parties because they can exert significant influence over the
Company. Accrued interest at March 31, 2000 was approximately $229,000.
7
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 6 - 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.
To further secure the ability of the Company and the Joint Venture to
utilize the leasehold covered by the Hayden/Kennec Leases, Gems
entered into an agreement with Mrs. Hayden to purchase her interest in
the Hayden/Kennec Leases (the "Hayden Interest".) Gems had advised the
Company that under Colorado Law, if an owner of 50% of mineral rights
desires to exploit those rights, then the remaining 50% owner could
not object to the exploitation of the rights, provided the
non-participating owner received 50% of the net profits generated from
such exploitation. Therefore, by acquiring the Hayden Interest, the
Company would be free to exploit the leasehold interests comprising
the Franklin mining properties irrespective of whether Mrs. Kennec
elected not to renew her portion of the Hayden/Kennec Leases or sell
her interest to the Company as per the terms of the Agreement.
However, on or about November 11, 1997, Gems defaulted on its
obligations under the terms of the purchase agreement and the
agreement terminated.
On November 13, 1997, Hayden entered into an agreement to sell the
Hayden interests to USM for a purchase price of $75,000 (the
"Hayden-USM Purchase Agreement"). The purchase price is evidenced by
note, due on February 2, 1998. Upon the execution of the Hayden-USM
Purchase Agreement, USM agreed to extend the Hayden/Kennec Leases upon
the same terms and conditions currently in effect through March 13th,
1998 (the "Extended Expiration Date"). As of the date hereof, USM has
not consummated the transaction contemplated by the Hayden-USM
Purchase Agreement; however, it is expected that the transactions will
close upon delivery by Hayden of clear title to the interests being
conveyed to USM. USM has continued to make royalty payments to Mrs.
Hayden as required by the Hayden-USM Purchase Agreement. As of the
date hereof, the Company has been advised by USM that the Hayden-USM
Purchase Agreement is in full force and effect.
On or about November 19, 1996, the Company entered into an agreement
with Mrs. Dorothy Kennec to extend her portion of the Hayden/Kennec
Leases through November 12, 1997. This agreement was further extended
through March 12, 1998; however, as of the date hereof, Mrs. Kennec
has granted no further extensions. There can be no assurance that the
Company and Mrs. Kennec will come to any agreement with respect to the
use of her leasehold interest or to purchase her interest in the
future.
8
<PAGE>
WCM CAPITAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
(b) Environmental Matters
During 1999, inspections of the Franklin Mining properties revealed
that certain drainage problems and substandard linings at the tailings
disposal areas created potential hazards and that protection measures
are required.
The Company received a letter dated March 9, 2000 from the Colorado
Division of Minerals and Geology (the "DMG") which sets forth the
measures which must be taken by the Company to bring the site into
compliance with groundwater regulations and to stabilize the tailings
pond and site. In the event the Company completes all of the required
actions by May 30, 2000, a Temporary Cessation order will be granted
by DMG. In the event a Temporary Cessation is granted, no further
reclamation work or mining work would be required for the duration of
the Temporary Cessation, beyond basic maintenance and reclamation
required to keep the site from further deterioration
(c) Litigation
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 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.
(d) NASDAQ Notification
During 1998 and 1999, the Company received notification letters from
NASDAQ informing them that the Company's common stock was not in
compliance with the NASDAQ small-cap market price requirement of
$1.00, which became effective on February 23, 1998.
In order to mitigate the minimum bid price requirement the Company
effectuated reverse stock splits during 1998 and 1999. After each
reverse split the Company's stock price remained above the $1.00
minimum bid price requirement for the necessary ten-day period.
While the Company is currently in compliance with the minimum bid
price requirement, there can be no assurance in the future that it
will be able to maintain such compliance.
9
<PAGE>
APPENDIX E
U.S. MINING, INC.
(An exploration stage company)
REPORT ON AUDIT OF FINANCIAL STATEMENTS
MARCH 31, 2000
<PAGE>
U.S. MINING, INC.
TABLE OF CONTENTS
Page
----
Independent Auditor's Report 1
Balance Sheet 2
Statements of Operations, Years Ended March 31, 2000 and 1999,
and the Cumulative Period From October 20, 1997 (Inception) to
March 31, 2000 3
Statements of Shareholder's Deficit, Years Ended March 31, 2000 and 1999, and
the Cumulative Period from October 20, 1997 (Inception) to March 31, 1998 4
Statements of Cash Flows, Years Ended March 31, 2000 and 1999, and the
Cumulative Period From October 20, 1997 (Inception) to March 31, 2000 5
Notes to Financial Statements 6
<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. (an
exploration stage company) as of March 31, 2000, and the related statements of
operations and shareholder's deficit and cash flows for the years ended March
31, 2000 and 1999. 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 ($152,447). 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 audits 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 audits provide reasonable basis for our opinion.
In our opinion, based on our audits 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, 2000 and the results
of its operations and its cash flows for the years ended March 31, 2000 and
1999, in conformity with generally accepted accounting principles.
Certified Public Accountants
May 23, 2000
1
<PAGE>
U.S. MINING, INC.
(An exploration stage company)
BALANCE SHEET
MARCH 31, 2000
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CURRENT ASSETS
--------------------------------------------------------------------------------
Cash $ 11,663
--------------------------------------------------------------------
--------------------------------------------------------------------------------
OTHER ASSETS
--------------------------------------------------------------------------------
Loan receivable from related company 1,825,268
--------------------------------------------------------------------
$ 1,836,931
--------------------------------------------------------------------============
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CURRENT LIABILITIES
--------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 12,350
--------------------------------------------------------------------------------
Note payable, Hayden 70,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 82,350
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LONG-TERM DEBT
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Loan payable to shareholder 1,998,263
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITMENTS --
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHAREHOLDER'S DEFICIT
--------------------------------------------------------------------------------
Common stock, no par value,
--------------------------------------------------------------------------------
2,500 shares authorized, issued and outstanding 25
--------------------------------------------------------------------------------
Deficit accumulated during the exploration stage (243,707)
--------------------------------------------------------------------------------
(243,682)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$ 1,836,931
--------------------------------------------------------------------============
--------------------------------------------------------------------------------
See notes to financial statements.
2
<PAGE>
U.S. MINING, INC.
(An exploration stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
October 20, 1997
(Inception)
Years Ended March 31, through
---------------------------------------------------------------------------------------------------------------------------------
2000 1999 March 31, 2000
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
---------------------------------------------------------------------------------------------------------------------------------
Interest $ 112,334 $ 90,352 $ 229,343
---------------------------------------------------------------------------------------------------------------------------------
EXPENSES
---------------------------------------------------------------------------------------------------------------------------------
Professional fees 11,321 28,617 115,885
---------------------------------------------------------------------------------------------------------------------------------
Hayden Purchase Agreement extension payments 12,000 12,000 24,000
---------------------------------------------------------------------------------------------------------------------------------
Interest 126,863 102,720 257,465
---------------------------------------------------------------------------------------------------------------------------------
150,184 143,337 397,350
---------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (37,850) (52,985) (168,007)
---------------------------------------------------------------------------------------------------------------------------------
INCOME TAXES 200 200 700
---------------------------------------------------------------------------------------------------------------------------------
NET LOSS, as previously reported (38,050) (53,185) (168,707)
---------------------------------------------------------------------------------------------------------------------------------
PRIOR PERIOD ADJUSTMENT -- -- (75,000)
---------------------------------------------------------------------------------------------------------------------------------
NET LOSS, as restated $ (38,050) $ (53,185) $(243,707)
-----------------------------------------------------------------------=========--------------=========--------------=========
</TABLE>
See notes to financial statements.
3
<PAGE>
U.S. MINING, INC.
(An exploration stage company)
STATEMENTS OF SHAREHOLDER'S DEFICIT
YEARS ENDED MARCH 31, 2000 AND 1999 AND
PERIOD OCTOBER 20, 1997 (INCEPTION) THROUGH
MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Exploration
Shares Stock Stage Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, October 20, 1997 -- $ -- $ -- $ --
Issuance of common stock, cash 2,500 25 -- 25
Net loss, as previously stated -- -- (77,472) (77,472)
Prior period adjustment -- -- (75,000) (75,000)
BALANCE, March 31, 1998, as restated 2,500 25 (152,472) (152,447)
Net loss -- -- (53,185) (53,185)
BALANCE, March 31, 1999, as restated 2,500 25 (205,657) (205,632)
Net loss -- -- (38,050) (38,050)
--------- --------- --------- ---------
BALANCE, March 31, 2000 2,500 $ 25 $(243,707) $(243,682)
========= ========= ========= =========
</TABLE>
See notes to financial statements.
4
<PAGE>
U.S. MINING, INC.
(An exploration stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
October 20, 1997
(Inception)
Years Ended March 31, through
2000 1999 March 31, 2000
----------- ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (38,050) $ (53,185) $ (243,707)
Adjustments to reconcile net loss to net cash
used in operating activities
Increase (decrease) in accounts payable and
accrued expenses (26,435) 34,635 12,350
Net cash used in operating activities (64,485) (18,550) (231,357)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in note receivable from related company (394,708) (434,787) (1,825,268)
Net cash used by investing activities (394,708) (434,787) (1,825,268)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in note payable, Hayden -- -- 70,000
Increase in loan payable, shareholder 470,829 453,364 1,998,263
Sale of stock -- -- 25
Net cash provided by financing activities 470,829 453,364 2,068,288
----------- ----------- -----------
NET INCREASE IN CASH 11,636 27 11,663
CASH, beginning of period 27 -- --
----------- ----------- -----------
CASH, end of period $ 11,663 $ 27 $ 11,663
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Interest paid $ -- $ -- $ --
Taxes paid 200 200 700
</TABLE>
See notes to financial statements.
5
<PAGE>
U.S. MINING, INC.
(an exploration 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.
EXPLORATION STAGE
In accordance with Statement of Financial Accounting Standards No. 7,
the Company is being treated as an exploration stage company since
inception, October 20, 1997, because 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 2001. The balance includes unpaid
interest of approximately $229,000.
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.
Unpaid interest of approximately $12,000 is included in accounts
payable and accrued expenses.
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 2001. The loan includes
unpaid interest totaling $245,115.
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, 2001.
6
<PAGE>
Note 5: RELATED PARTY TRANSACTIONS
See notes 2,4,7 and 8 for related party transactions.
Notes to Financial Statements
Note 6: FEDERAL AND STATE INCOME TAXES
The Company has available net operating loss carryforwards of
approximately $168,000 and $130,000 as of March 31, 2000 and 1999 for
Federal and State income taxes expiring 2020 and 2007, respectively,
to offset future taxable income.
A deferred tax asset of approximately $64,000 and $47,000, less an
allowance for the same amount, has been established as of March 31,
2000 and 1999 for carry forward 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,
2001. 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: LETTER OF INTENT
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 82% 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.
Note 9: PRIOR PERIOD ADJUSTMENT
The Company incorrectly capitalized an interest in a mineral rights
lease whereby under generally accepted accounting principles the cost
should have been expensed.
7
