SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For fiscal year ended December 31, 1998
Commission file number 0-18389
WORLD WIDE STONE CORPORATION
----------------------------------------------------
(Exact Name of Small Business Issuer in Its Charter)
NEVADA 33-0297934
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5236 SOUTH 40TH STREET, PHOENIX, ARIZONA 85040 (602) 438-1001
------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code,
of issuer's executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
Preferred Stock, par value $.001 per share
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenue for its most recent fiscal year: $4,267,938.
As of March 26, 1999, there were outstanding 32,703,768 shares of the issuer's
Common Stock, par value $.001 per share (the "Common Stock"). There are no
shares of the issuer's preferred stock outstanding. The aggregate market value
of Common Stock held by nonaffiliates of the issuer (9,452,323 shares) based on
the closing price of the registrant's Common Stock as reported in the National
Quotation Bureau's "Pink Sheets" on March 26, 1999, was $378,093. For purposes
of this computation, all executive officers, directors, and 10% beneficial
owners of the registrant are deemed to be affiliates. Such determination should
not be deemed an admission that such officers, directors, or 10% beneficial
owners are, in fact, affiliates of the registrant.
Documents incorporated by reference: None.
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WORLD WIDE STONE CORPORATION
ANNUAL REPORT ON FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS..................................... 1
ITEM 2. DESCRIPTION OF PROPERTY..................................... 15
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 16
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS.................................................. 17
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT................................................ 22
ITEM 10. EXECUTIVE COMPENSATION...................................... 23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 25
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................ 26
SIGNATURES................................................................. 27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
-----------------------------------
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-KSB THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S "EXPECTATIONS,"
"ANTICIPATION," "INTENTIONS," "BELIEFS," OR "STRATEGIES" REGARDING THE FUTURE.
FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING REVENUE, MARGINS,
EXPENSES, AND EARNINGS ANALYSIS FOR FISCAL 1999 AND THEREAFTER; FUTURE PRODUCTS
OR PRODUCT DEVELOPMENT EFFORTS; SPENDING FOR ACQUISITIONS OF ADDITIONAL
EQUIPMENT OR EXPANSION OF PRODUCTION FACILITIES; MARKETS FOR THE COMPANY'S
PRODUCTS AND THE DIMENSIONAL STONE INDUSTRY IN GENERAL; AND LIQUIDITY AND
ANTICIPATED CASH NEEDS AND AVAILABILITY. ALL FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE
FILING DATE OF THIS REPORT, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FACTORS DISCUSSED IN ITEM 1, "SPECIAL CONSIDERATIONS."
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
The Company quarries, manufactures, and markets a wide variety of
dimensional stone products. Dimensional stone products consist of natural stone
that is cut to standard sizes or to sizes specified in architectural designs.
The Company's products are used for both interior and exterior applications in
residential and commercial buildings, primarily as
+ floor, wall, and patio tiles;
+ decorative trim and architectural accents;
+ countertops and tabletops; and
+ panels.
The Company markets and distributes its products throughout the United States
primarily on a wholesale basis through approximately 25 authorized stocking
distributors and more than 250 wholesale distributors, as well as through
architects, residential and commercial developers, installation contractors, and
designers.
The Company was originally incorporated in the state of Delaware in
1989 under the name "Tacitus Ventures, Inc." for the purpose of acquiring and
operating businesses. In November 1989, Tacitus Ventures, Inc. acquired World
Wide Stone Corporation, a privately-held Nevada corporation, and changed its
name to World Wide Stone Corporation. On November 30, 1989, the Company effected
a change of domicile to the state of Nevada by forming a new Nevada corporation
and dissolving the Delaware corporation. The Company's stone quarrying and
manufacturing operations are conducted through its wholly owned subsidiaries
Cantera Stone, Inc., a Nevada corporation; Marmoles Muguiro, S.A. de C.V., a
Mexican corporation; and Sociedad Piedra Sierra, S.A. de C.V., a Mexican
corporation. As used herein, the term "Company" refers to World Wide Stone
Corporation and its subsidiaries, predecessors, and operating divisions.
INDUSTRY
Stone has been used as a primary and decorative building material for
thousands of years. According to published reports, world production of stone
materials reached approximately 94.0 million tons in 1996. From January through
September 1998, approximately 42,493 tons of travertine were imported into the
United States, with a value of approximately $25.6 million. In addition,
approximately 138,015 tons of marble were imported into the United States from
January through September 1998, with a value of approximately $131.9 million.
Published reports also indicate that consumption of stone and marble is expected
to increase to 680.0 million square meters in 2000 and to almost 4.0 billion
square meters in 2025.
Published reports indicate that Italy produces the vast majority of
finished dimensional stone each year. A large proportion of current dimensional
stone industry production involves quarrying large blocks of stone and shipping
them to processing centers in Italy, Germany, Japan, Brazil, the United States,
and other countries. After processing, the finished stones are then shipped to a
final destination for installation. As a result, shipping costs and the time
factors associated with ocean transport become increasingly important factors
due to shorter building schedules and lack of advance planning by consumers. The
development of sophisticated, high-capacity computer-controlled stone processing
machinery in recent years has enabled dimensional stone product manufacturers,
including the Company, to increase output and control costs in spite of higher
costs for transportation and skilled workers.
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PRODUCTS
The Company currently markets a wide variety of dimensional stone
products under the "Durango Stone(TM)" brand name. The Company markets several
lines of dimensional stone products that are produced in a variety of colors and
finishes, as follows:
+ HONED AND POLISHED. The Company uses traditional stone finishing
techniques to provide a highly polished surface to stone tiles,
panels, and countertops. The Company offers honed and polished
dimensional stone products in a wide variety of standard and
irregular shapes and sizes, all of which provide a highly elegant
and luxurious appearance.
+ DURANGO ANCIENT(TM). Instead of honing and polishing the finished
surface, the Company tumbles unfinished stones in large drums in
a process that wears the surface to replicate hundreds of years
of wear and weathering. This process yields finished stones with
an aged appearance that is highly attractive in interior and
exterior applications where a highly weathered look is desired.
+ DURANGO ANTIQUE(TM). The Company utilizes a multi-step process
that includes sandblasting and acid washing to yield a highly
textured surface with more traction than a honed finish. This
product is popular in wet areas such as patios, walkways, and
pool or spa decks. Durango Antique(TM) provides extra traction
and a cooler surface, even in hot weather, similar to but much
cooler than "cool deck" products often used around swimming
pools.
+ DURANGO ACCENTS(TM). The Company offers an increasing variety of
strips, tiles, and panels that are designed to enhance and
compliment its lines of Durango Stone. Architects and designers
can select from various sizes and shapes of Durango Accents(TM)
for use as borders, back splashes, and highlights and to create
unique decorative mosaics of pattern and color.
The Company manufactures and markets Durango Stone(TM) products in a
wide variety of standard sizes ranging from 1" x 1" to 24" x 24" tiles for
floors and walls. In addition, the Company cuts stone slabs to standard or
custom sizes for countertops, vanity tops, panels, furniture, and other
applications. The wide range of colors, finishes, and sizes enables architects,
designers, and end users to create unique and distinctive applications. Samples
of certain of the Company's stone products have been tested for hardness,
abrasion resistance (durability), water absorption, and coefficient of friction.
The Company's marble limestone products feature base colors that
include ivory, beige-taupe, peach, ivory-beige, brown, or gold. The base colors
are accented by black or white flecks and "flowerings" ranging from sandy beige
to pewter-gray. The Company's travertine products range in color from ivory to
beige to a combination of taupe and ivory, with occasional black or gray flecks
or flowering.
SALES, MARKETING, AND DISTRIBUTION
The Company markets its dimensional stone products primarily in the
United States. The Company employs an in-house sales force that markets its
products primarily to approximately 25 authorized stocking distributors and to
more than 250 wholesale distributors of dimensional stone products, as well as
to architects, residential and commercial developers, installation contractors,
and designers. Representatives of the Company also attend several domestic and
international building industry trade shows each year. In addition, the Company
advertises its dimensional stone products and has been featured in recent
articles in major industry publications such as DIMENSIONAL STONE MAGAZINE,
STONE WORLD MAGAZINE, and CONTEMPORARY STONE DESIGN. The Company maintains a
showroom at its headquarters in Phoenix, Arizona, where the Company's sales
staff assists wholesale buyers, installation contractors, architects, and
designers to become familiar with the Company's products and their features and
uses.
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The Company utilizes the services of independent freight forwarders in
El Paso, Texas to manage the importation and storage of the Company's products
at the United States border with Mexico. These freight forwarders transload the
products at the border, manage the customs process, and either store the
products in a bonded warehouse or ship the products to the Company's warehouse
in Phoenix, Arizona or directly to the customer.
QUARRYING AND MANUFACTURING
QUARRYING
The Company currently extracts marble limestone and travertine from two
quarry sites in Coahuila, Mexico. The Company pays the owners of the land on
which its developed quarry sites are located a royalty based upon the quantity
of stone extracted by the Company. In December 1998, the Company rescinded a
previous transaction and no longer has rights to extract stone from a quarry
site in Chihuahua, Mexico.
The Company has engaged two independent contractors that employ
approximately 15 to 30 workers to extract the stone from the Company's quarry
sites. The Company owns a portion of the equipment, tools, and supplies used by
the contractors to extract stone from the quarries. During 1998, the Company
extracted approximately 330 cubic meters (approximately 11,660 cubic feet) of
stone per month from its primary quarry site. The Company has increased the
quantity of stone it extracts per month during 1999 in anticipation of the
quantities of stone that will be required to supply its new slab factory
beginning in the fourth quarter.
The quarry workers drill pilot holes to define the large quarry blocks
or monoliths to be extracted. These blocks are the height of the quarry face,
which generally is 30 to 40 feet high. After drilling the pilot holes, the
quarry workers utilize diamond wire saws to free the monoliths from the quarry
face. The monoliths are then cut into three to five blocks of approximately five
feet by six feet by eight feet and weighing about 20,000 pounds each. The quarry
workers then use a front-end loader to load the blocks onto trucks for transport
to the Company's facilities in Durango, Durango, Mexico.
MANUFACTURING AND FINISH PROCESSING
After the large stone blocks arrive at the Company's manufacturing
facilities, the Company's skilled workers utilize a variety of large machines
that split and cut the blocks into progressively smaller units. To produce honed
and polished stone products, the workers first utilize computer operated diamond
saws and wire saws to cut the blocks into "billets" measuring approximately 1.5
inches by 16 inches by 8 feet in length. The billets are then split length-wise
into two strips and processed through a calibrating machine that grinds them to
a thickness of approximately 10 millimeters. Workers then fill holes and voids
with a cement-like material. After the filling material has dried, the strips
are honed, polished, and cut to finished sizes. Workers then bevel the edges of
the tiles, and the tiles are dried to reveal the natural color of the stone. The
Company's workers then carefully examine and sort the tiles for color and
character as well as production defects. Tiles with defects are either repaired
or rejected and cut into smaller tiles that can be sold by the Company. Tiles
without defects are packaged according to their respective color categories and
shipped to the Company's warehouse in Phoenix, Arizona, to a warehouse in El
Paso, Texas, or directly to the Company's customers for installation at the end
users' homes or businesses. The Company currently produces approximately 3,300
square feet of honed and polished stone products per day and ships approximately
72,600 square feet of honed and polished products per month to the United
States.
To produce Durango Ancient(TM) stone products, the workers place blocks
of stone into large tumblers (drums) and vibratories where the stones are
tumbled and vibrated together with abrasive materials of various sizes. This
process produces the appearance of several hundred years of wear and weathering
in as little as one hour. After tumbling, the workers split and cut the blocks
into finished dimensions, sort according to color and character, and package for
shipping. The Company currently produces approximately 2,700 square feet of
Durango Ancient(TM) stone products per day and ships approximately 59,000 square
feet of Durango Ancient(TM) products per month to the United States.
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The Company produces Durango Antique(TM) stone products through a
process that includes sandblasting and acid washing. This process produces a
highly textured surface with a variety of unique appearances. The Company
currently produces approximately 350 square feet of Durango Antique(TM) stone
products per day and ships approximately 8,000 square feet of Durango
Antique(TM) products per month to the United States.
During 1997 and 1998, the Company increased its emphasis on improving
the quality as well as the quantity of dimensional stone products that it
produces. The Company believes that it will be able to compete effectively with
dimensional stone products imported from Italy and other countries so long as it
can deliver stone products of comparable quality while taking advantage of the
lower shipping costs and faster delivery schedules from its facilities in
Mexico. The Company strives to increase product quality through increased
training, improvements to production systems, and incentive programs that
include bonuses paid to employees who meet goals relating to production and
quality standards.
EQUIPMENT AND MACHINERY
Since 1993, the Company has invested approximately $2.6 million in
equipment and machinery utilized in its stone quarrying and finishing
operations. The equipment utilized for dimensioning and surfacing the finished
stone products are highly complex and therefore the most capital intensive.
Recent advances in quarrying technologies have resulted in increased costs for
quarry equipment. The following is a partial listing of the equipment currently
utilized by the Company in its operations.
<TABLE>
<CAPTION>
QUARRY EQUIPMENT
<S> <C>
1 - Marini diamond wire saw 3 - 22-wheel tractor trailers for block hauling
3 - Mexican-made diamond wire saw 1 - 350 cfm Ingersoll-Rand compressor
2 - Caterpillar electric power plants 1 - 450 cfm Case compressor
3 - Front end loaders 1 - 650 cfm compressor
1 - Caterpillar on tracks 6 - rock hammer drills
1 - 20-ton water truck 1 - Marini down hole driller
2 - Mexican-made down hole drillers
MANUFACTURING AND FINISH PPRROCESSING EQUIPMENT
1 - 63-inch Zonato blockcutter 1 - 530-gallon Mekanica tumbler
1 - Mexican-made 47.2-inch blockcutter 1 - 1,320-gallon Mekanica tumbler
1 - Levi Tunisi 6-head splitting machine 1 - Ultra Matic vibratory
2 - Levi Tunisi 4-head splitting machines 1 - Ultra Matic "Big Bertha" vibratory
1 - Zambon four-head splitting machine 1 - Small round vibratory
3 - Zambon head cut-off saws 1 - Automated finishing vibrator
2 - 12-head Zonato 25 3/4-inch 1 - Sandblasting rig with 350 cfm DeVilbiss
calibrating and polishing machines compressor
1 - 10-head Terzago 17 3/4-inch 2 - Design Force beveling machines
calibrating and polishing machine 2 - Design Force ovens
2 - Levi Tunisi cut-off saws 1 - Zonato drying and buffing oven
1 - Zonato cut-off saw 5 - Pick-up trucks
1 - VIC saw 1 - 10-wheel truck
8 - Target tub saws 1 - Nissan forklift
3 - Mordenti jib saws 1 - 20-ton gantry crane
1 - U.S.-made gangsaws 2 - Bridge cranes
1 - Officine BM diamond gangsaw 1 - Galvanized flat wire belt conveyor and roller
</TABLE>
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BACKLOG
The Company strives to ship its products as quickly as possible after
receipt of purchase orders from its customers. The Company does not maintain a
material backlog of orders.
TRADEMARKS AND PATENT RIGHTS
Although the Company's business historically has not depended on
trademark or patent protection, the Company recognizes the increasing value of
its various trade names and marks. The Company is taking steps designed to
protect, maintain, and increase the value of its trade names and marks. There
can be no assurance, however, that the Company will be able to obtain legal or
other protection for its trade names and marks or that any protections that the
Company obtains will be adequate to maintain or enhance the value of its trade
names or marks.
COMPETITION
The dimensional stone industry is highly fragmented and extremely
competitive. The Company competes with many domestic and international
companies, some of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. The Company believes that its primary competitors are
dimensional stone product manufacturers that obtain their stone from quarries in
Italy and Turkey, which yield stone products that compete with the Company's
products in terms of appearance, quality, and price. The Company also competes
indirectly with manufacturers of other products, such as ceramic tile, carpet,
or wood flooring products and plastic laminate or Corian(TM) countertops, which
are sold for use as flooring, countertops, and other installations in which
dimensional stone products may be used. The Company competes principally on the
basis of
+ the increasing popularity of dimensional stone products;
+ the color, quality, and appeal of its products;
+ product design;
+ the prices and availability of its products; and
+ its ability to deliver products to market on shorter notice than
overseas manufacturers of competing products.
The Company believes that the geographical proximity of its Mexican processing
facilities to its markets in the United States provides a competitive advantage
by enabling the Company to fill orders on much shorter lead times than its
overseas competitors. There can be no assurance that the Company will continue
to compete successfully in the future. See Item 1, "Special Considerations - The
Company Faces Intense Competition."
SEASONALITY
The Company historically has experienced lower sales in the fourth
calendar quarter as a result of production declines during the holiday season as
well as seasonal declines in homebuilding and remodelling. The Company increased
sales and marketing efforts during fiscal 1998 in an effort to improve sales
during the fourth quarter. The Company also may be subject to periodic declines
experienced by the building industry in general. See Item 1, "Special
Considerations - A Variety of Factors Could Adversely Affect the Company's
Operating Results."
NATURE OF THE COMPANY'S MARKETS
The Company designs and markets dimensional stone products primarily in
those styles and colors that historically have not been subject to frequent
fluctuations in demand. The markets for the Company's products, however, may be
subject to changing customer tastes, a high level of competition, and a constant
need to create
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and market new products. Demand for dimensional stone products is influenced by
the popularity of certain types of stone as well as architectural styles,
cultural and demographic trends in society, marketing and advertising
expenditures, and general economic conditions. Because these factors can change,
customer demand also can shift. Certain of the Company's dimensional stone
products may be successfully marketed for only a limited time. The Company may
not always be able to respond to changes in customer demand because of the
amount of time and financial resources that may be needed to bring new products
to market. The inability to respond to market changes would have an adverse
impact on the Company. See Item 1, "Description of Business - Products,"
"Description of Business - Sales and Marketing," and "Description of Business -
Competition."
SOURCES AND AVAILABILITY OF RAW MATERIALS AND SUPPLIES
The Company currently obtains most of its marble limestone and
travertine from two quarry sites in Coahuila, Mexico. Based upon the exposed
quarry face as well as the length, depth, and spacing of various quarry holes
drilled in the course of its quarry operations, the Company currently estimates
that its primary quarry contains at least 2.0 million cubic meters of marble
limestone and travertine. During 1998, the Company consumed approximately 4,000
cubic meters of stone. The Company plans to extract at least 6,000 cubic meters
of stone during 1999 in anticipation of the quantities of stone that will be
required to supply its existing factories as well as its new slab factory, which
is scheduled to begin operations in the fourth quarter of 1999. The Company
believes that this quarry will be sufficient to meet the Company's requirements
for this stone for an indefinite period at the Company's currently anticipated
levels of production. Although the Company has a long-term lease for its primary
quarry, the inability to obtain stone from this site for even a short period of
time could have a material adverse effect on the Company. See Item 1, " Special
Considerations - The Company Obtains Stone From a Limited Number of Desirable
Quarry Sites" and "Special Considerations - The Company Depends upon Third
Parties to Operate Its Quarries." In December 1998, the Company rescinded a
previous transaction and no longer has rights to mine a large deposit of
homogenous green quartzite in the state of Chihuahua, Mexico. See Item 12,
"Certain Relationships and Related Transactions." During 1998, the Company also
purchased small quantities of stone from other quarry sites in southern Mexico.
The Company utilizes a variety of supplies for its dimensional stone
quarrying and finishing operations. These supplies include industrial diamond
segments for saw blades, diamond wires, diamond tooling, and various abrasives.
The Company believes that all of the supplies necessary to produce its
dimensional stone products are readily available from multiple sources.
GOVERNMENT REGULATION; ENVIRONMENTAL MATTERS
The Company is subject to various federal and state governmental laws
and regulations of the United States and Mexico related to occupational safety
and health, labor, and wage practices as well as federal, state, and local
governmental regulations relating to the use, storage, discharge, handling,
emission, generation, manufacture, and disposal of toxic, volatile, or other
hazardous substances used to produce the Company's products. The processing of
dimensional stone products utilizes significant amounts of fresh water and
produces certain inert materials, primarily calcium carbonate, as by-products.
The Company believes that these by-products are harmless to the environment. In
addition, the Company has installed a water purification system at its stone
processing facility in Mexico. This system reclaims approximately 90% of the
water used in the Company's stone processing operations. The waste created by
the stone processing operations is transported off-site on a regular basis by a
third-party waste hauler. The Company currently is constructing a
state-of-the-art water treatment system for its entire Mexican stone processing
facility. This system will recycle all of the waste water from the stone
production processes and will create a more advantageous method of compacting
and recycling the calcium carbonate and other production by-products.
Failure to comply with current or future laws and governmental
regulations could result in the imposition of substantial fines on the Company,
suspension of production, alteration of its production processes, cessation of
operations, or other actions that could materially and adversely affect the
Company's business, financial condition, and results of operations. The Company
believes that it currently is in material compliance with environmental and
other laws applicable to its quarrying and dimensional stone manufacturing
operations.
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INSURANCE
The Company maintains a $2.0 million liability insurance policy with an
additional $1.0 million in commercial umbrella liability coverage. The Company
maintains insurance on its vehicles in Mexico. Otherwise, the Company is
self-insured for losses incurred in connection with its Mexican operations and
facilities. The Company believes its insurance coverage is adequate.
EMPLOYEES
As of March 26, 1999, the Company employed 141 persons, all of whom
were employed full-time. Of the total number employed by the Company, 130 were
engaged in factory operations, four in sales and marketing, two in warehouse
functions, and five in administrative functions, including the Company's
executive officers. All of the Company's factory employees are located in
Mexico. The Company has experienced no work stoppages and is not a party to a
collective bargaining agreement. The Company believes that it maintains good
relations with its employees.
SPECIAL CONSIDERATIONS
THE FOLLOWING FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
REPORT, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS.
A VARIETY OF FACTORS COULD ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS
A wide variety of factors could adversely impact the Company's net
sales and operating results. These factors, many of which are beyond the control
of the Company, include the following:
+ the Company's ability to identify trends in markets that the
Company targets and to introduce products that take advantage of
those trends;
+ the Company's ability to locate and obtain the rights to quarry
new sources of stone;
+ the Company's ability to build or acquire additional facilities
and equipment necessary to quarry and produce finished stone
products at competitive prices;
+ the Company's ability to design and arrange for timely production
and delivery of its products;
+ market acceptance of the Company's products;
+ the level and timing of orders placed by customers;
+ seasonality;
+ the popularity and life cycles of the Company's products;
+ customer satisfaction with products designed and marketed by the
Company;
+ the timing of expenditures in anticipation of orders;
+ the cyclical nature of the markets served by the Company; and
+ competition and competitive pressures on prices.
The Company's ability to increase its sales and marketing efforts to
increase the visibility of its products in order to stimulate customer demand
and its ability to monitor and control manufacturing processes in order to
maintain satisfactory delivery schedules are important factors in its long-term
prospects. A slowdown in demand for the Company's products as a result of
changing consumer tastes and spending patterns, economic conditions, or other
broad-based factors could adversely affect the Company's operating results.
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THE COMPANY MAY NEED ADDITIONAL CAPITAL TO EXPAND ITS BUSINESS
The Company believes that its existing capital resources, cash flow
from operations, and financing commitments will be sufficient to satisfy the
Company's capital requirements during the next 12-month period. The Company,
however, may require additional equity or debt financing to
+ finance future acquisitions of quarry rights;
+ construct or acquire facilities or equipment;
+ develop new product lines; or
+ provide funds to take advantage of other business opportunities.
The Company cannot predict the timing or amount of any such capital requirements
at this time. Although the Company has been able to obtain adequate financing on
acceptable terms in the past, there can be no assurance that such financing will
continue to be available on acceptable terms. In particular, in the past
potential lenders have encountered difficulties or uncertainties associated with
utilizing the Company's equipment and facilities located in Mexico as security
for loans. These difficulties or uncertainties may make it more difficult or
costly for the Company to obtain purchase or lease financing in the future. If
additional financing is not available on satisfactory terms, the Company may not
be able to expand its business at the rate desired and its operating results may
be adversely affected. Debt financing increases expenses and must be repaid
regardless of operating results. Equity financing could result in additional
dilution to existing shareholders.
THE COMPANY FACES RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS, INTERNATIONAL
TRADE, AND CURRENCY EXCHANGE
The Company currently obtains all of its dimensional stone products
from Mexico and its dimensional stone processing facilities are located in
Mexico. The Company has capital investments in facilities, tools, and equipment
in Mexico that amounted to more than $5.0 million as of December 31, 1998. The
Company believes that final production of its dimensional stone products at
factories in Mexico enables the Company to obtain these items on a cost basis
that allows the Company to market its products profitably. The Company's
dependence on foreign personnel and the Company's maintenance of equipment and
inventories abroad expose it to certain economic and political risks, including
the following:
+ risks associated with establishing and maintaining satisfactory
internal controls at its Mexican operations;
+ political and economic conditions abroad;
+ the possibility of expropriation, supply disruption, currency
controls, and exchange fluctuations; and
+ changes in tax laws, tariffs, currency exchange rates, and
freight rates.
Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export or import
compliance laws, or other trade policies, could adversely affect the Company's
ability to manufacture its products outside the United States or the price at
which the Company can obtain those products. The Company has not experienced any
significant interruptions in obtaining its dimensional stone products to date.
All of the Company's purchases from its Mexican subsidiaries are
denominated in U.S. dollars. Because it maintains operations in Mexico, the
Company may be subject to risks associated with fluctuations in the value of the
Mexican peso in the future. These risks include the potential for inflationary
pressures and the disruptive effects on the employees of the Company's Mexican
subsidiaries that may occur as a result of any devaluations of the peso that may
occur in the future. The devaluation of the peso in December 1994 resulted in a
short-term decrease in the Company's costs to produce dimensional stone products
in Mexico. The Company, however,
8
<PAGE>
increased wages paid to employees of its Mexican subsidiaries in order to reduce
the negative impact that the currency devaluation had on the workers' standards
of living. Because of the factors described above, any devaluations of the
Mexican peso in the future could have an adverse effect on the Company's
operating results.
To date, the Company has made limited sales of its dimensional stone
products in Canada and other foreign countries. Sales in foreign countries
currently do not represent a material portion of the Company's revenue. All
sales outside the United States are denominated in United States dollars. As a
result, the Company does not bear any risks that may be associated with exchange
rate fluctuations in connection with such sales.
THE COMPANY OBTAINS STONE FROM A LIMITED NUMBER OF DESIRABLE QUARRY SITES
Although the Company possesses rights to two quarry sites, the Company
currently obtains substantially all of its stone blocks from one quarry site in
Coahuila, Mexico. The Company located this quarry site after extensive
geological searches by the Company's management. The Company believes that the
stone extracted from this site possesses distinctive characteristics in terms of
color and quality that make this particular type of marble limestone unique and
attractive. The Company extracts stone from this quarry pursuant to existing
contractual arrangements with the owners of the land. The inability to continue
to extract sufficient quantities of stone from this site for even a short period
of time may have a material adverse effect on the Company's financial condition
and results of operations. The Company may not be able to locate an alternative
source of stone with desirable characteristics on a timely basis in the event
that it is unable to obtain stone from its primary quarry site.
THE COMPANY DEPENDS UPON THIRD PARTIES TO OPERATE ITS QUARRIES
The Company depends upon third-party contractors to extract stone
blocks from the Company's quarry sites in Mexico. Although the Company owns some
of the tools, equipment, and supplies utilized in the quarrying process, the
Company has limited control over the quarrying processes themselves. As a
result, any difficulties encountered by the third-party contractors that result
in production delays or the inability to fulfill orders on a timely basis could
have a material adverse effect on the Company. The Company does not have
long-term contracts with its third-party contractors. The Company has
experienced short-term interruptions in services from its third-party
contractors in the past and was able to take temporary measures to avoid
prolonged disruption to its quarrying operations. Although the Company believes
it would be able to secure other third-party contractors that could conduct
quarrying operations for the Company, the Company's operations could be
adversely affected if it lost its relationship with any of its current
contractors. The Company generally does not maintain an inventory of sufficient
size that would provide protection for an interruption of supply in excess of 90
days.
THE COMPANY RELIES UPON INDEPENDENT DISTRIBUTORS AND OTHERS TO SELL ITS PRODUCTS
The Company markets and distributes its products throughout the United
States primarily through a network of authorized stocking distributors and
wholesale buyers as well as architects, developers, installation contractors,
and designers. Stocking distributors generally stock inventories only in
quantities that they consider sufficient to fill anticipated short-term orders.
As a result, they may cancel orders and change or delay volume levels on short
notice to the Company. The Company may not be able to replace cancelled,
delayed, or reduced orders in a timely manner. The Company depends upon its
network of independent distributors, wholesalers, and others to sell its
products to end users, to perform installation services, and to perform other
services after the sale. Most of these distributors, wholesalers, and other
purchasers of stone products carry products that compete directly with the
Company's products and other dimensional stone manufacturers compete intensely
for their attention. The Company may not be able to maintain favorable
relationships with the distributors, wholesalers, and others that currently
carry or sell the Company's product lines in order to encourage them to promote
and sell its products instead of those of its competitors. The Company also
cannot provide assurance that it will be able to develop similar relationships
with additional distributors, wholesalers, and others in the future. See Item 1,
"Description of Business - Sales, Marketing, and Distribution."
9
<PAGE>
THE COMPANY MAY HAVE WEAK INTERNAL CONTROLS
The Company's independent public accountants reported to the Company
that, in the course of the audit of the Company's financial statements for the
year ended December 31, 1998, they discovered certain conditions that they
believe constitute material weaknesses in the internal control structure of the
Company. These weaknesses, however, did not cause the Company's auditors to
modify their reports on the Company's financial statements for fiscal 1998. The
Company has determined to take such steps as may be necessary to address and
correct weaknesses in its internal controls. In this regard, in November 1998
the Company employed a Chief Accounting Officer and began development and
implementation of policies and procedures designed to ensure accurate
classification and timely recording of significant transactions. In addition,
the Company is developing and implementing a management reporting system
designed to facilitate management oversight of business operations and financial
reporting.
THE COMPANY MUST RESPOND TO RAPID MARKET CHANGES
The Company designs and markets dimensional stone products primarily in
those styles and colors that historically have not been subject to frequent
fluctuations in demand. The markets for the Company's products may be subject to
rapidly changing customer tastes, a high level of competition, and a constant
need to create and market new products. Demand for dimensional stone products is
influenced by a wide variety of factors, including the following:
+ the popularity of certain types of stone;
+ architectural styles;
+ cultural and demographic trends;
+ marketing and advertising expenditures; and
+ general economic conditions.
Because these factors can change, customer demand also can shift. Certain of the
Company's new dimensional stone products may be successfully marketed for only a
limited time. The Company may not always be able to respond to changes in
customer taste and demand because of the amount of time and financial resources
that may be required to bring new products to market. The inability to respond
to market changes could have an adverse impact on the Company's operations. See
Item 1, "Description of Business - Products."
THE COMPANY DEPENDS ON NEW PRODUCTS
The Company historically has focused on producing dimensional stone
products in traditional colors, styles, and finishes. The Company's operating
results will depend to a significant extent on its ability to continue to
develop and introduce new dimensional stone products on a timely basis. Those
products must compete effectively on the basis of price and must address
customer requirements. The success of new product introductions depends on
various factors, including the following:
+ proper new product selection;
+ successful sales and marketing efforts;
+ timely production and delivery of new products; and
+ consumer acceptance of new products.
New products may not receive or maintain substantial market acceptance. The
Company's future operating results could be adversely affected if the Company is
unable to design, develop, and introduce competitive products on a timely basis.
See Item 1, "Description of Business - Products."
10
<PAGE>
THE COMPANY FACES INTENSE COMPETITION
The dimensional stone products markets are highly fragmented and
extremely competitive. The Company competes with many domestic and international
companies, some of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses.
The Company believes that its relationships with many of the leading
dimensional stone processing equipment manufacturers, importers, and
distributors represent a significant advantage over its competitors in the
dimensional stone products industry. Accordingly, the Company strives to develop
and strengthen these relationships. The Company's ability to compete
successfully depends on a number of factors both within and outside its control.
These factors include the following:
+ the quality, appearance, uniqueness, pricing, and diversity of
its products;
+ the continued popularity of its available stone products;
+ the quality of its customer services;
+ its ability to recognize industry trends and anticipate shifts in
consumer demands;
+ its success in designing and marketing new products;
+ the availability of adequate sources of manufacturing capacity
and the Company's ability to meet delivery schedules;
+ its efficiency in filling customer orders;
+ its ability to develop and maintain effective marketing programs
that enable it to sell its products;
+ product introductions by the Company's competitors;
+ the number, nature, and success of its competitors in a given
market; and
+ general market and economic conditions, including trends in the
residential and commercial building industries in the United
States and other countries.
The Company currently competes principally on the basis of
+ the increasing popularity of dimensional stone products;
+ the color, quality, and appeal of its products;
+ product design;
+ the prices and availability of its products; and
+ its ability to deliver products to market sooner than overseas
manufacturers of competing products.
The Company cannot provide assurance that it will continue to be able to compete
successfully in the future.
THE CYCLICAL NATURE OF THE UNITED STATES CONSTRUCTION INDUSTRY MAY ADVERSELY
IMPACT THE COMPANY'S BUSINESS
The Company's dimensional stone products are installed primarily in new
and remodeled luxury residences, upscale commercial buildings, and hotels
throughout the United States. The level of construction activity in the United
States has remained at a relatively high level in recent years, which has
contributed significantly to the demand for the Company's products and growth of
the Company's business since 1995. The U.S. construction industry, however, is
extremely cyclical. A variety of factors influence the construction
11
<PAGE>
industry and therefore indirectly influence demand for the Company's products.
These factors, all of which are outside the Company's control, include the
following:
+ housing demand and commercial real estate and hotel vacancy and
absorption rates;
+ affordability of housing and commercial real estate;
+ availability of financing;
+ interest rates; and
+ general economic conditions, including
-- growth in gross domestic product;
-- regional and local economic trends and outlook;
-- shifting demographic trends;
-- levels of unemployment; and
-- consumer confidence.
Construction activity may fluctuate or decline significantly from time to time
in the future as a result of these factors. A decrease in demand for the
Company's products as a result of downturns in construction activity could have
a material adverse effect on the Company's financial condition and results of
operations.
THE COMPANY EXPERIENCES SEASONAL FLUCTUATIONS IN SALES
The second and third calendar quarters of each year generally are
characterized by higher sales of dimensional stone products because of the
increased level of residential construction activities during those months.
Seasonal fluctuations in quarterly sales may require the Company to take
temporary measures, including increased personnel, borrowings, and other
operational changes, and could result in unfavorable quarterly earnings
comparisons. The Company also may be subject to periodic declines experienced by
the building industry in general. See Item 1, "Special Considerations - The
Cyclical Nature of the United States Construction Industry May Adversely Impact
the Company's Business."
THE COMPANY MUST EFFECTIVELY MANAGE ITS GROWTH
Since 1993, the Company's business operations have undergone
significant changes and growth, including the following:
+ locating, obtaining the rights to develop, and developing its
sources of stone;
+ emphasis on and expansion of its dimensional stone product lines;
and
+ significant investments in facilities, equipment, and tooling.
The Company's ability to effectively manage any significant future growth will
require it to
+ further enhance its operational, financial, management, and
internal control systems;
+ expand its facilities and equipment;
+ produce and receive products on a timely basis; and
+ successfully hire, train, and motivate additional employees.
The failure of the Company to manage its growth on an effective basis could have
a material adverse effect on the Company's operations. The Company may be
required to increase staffing and incur other expenses as well as to make
expenditures on capital equipment and manufacturing facilities in order to meet
the anticipated demand of its customers. Changing consumer tastes can
significantly affect sales of the Company's dimensional stone products, and
customers for the Company's products generally do not commit to firm orders for
more than a short time in
12
<PAGE>
advance. The Company's profitability would be adversely affected if the Company
increases its expenditures in anticipation of future orders that do not
materialize. Certain customers also may increase orders for the Company's
products on short notice, which could place an excessive short-term burden on
the Company's resources.
THE COMPANY DEPENDS ON KEY PERSONNEL
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management, including Franklin Cunningham, the Company's
Chairman of the Board, President, and Chief Executive Officer. The loss of
services of one or more of its key employees, particularly Mr. Cunningham, could
have a material adverse effect on the Company. The Company does not maintain key
person life insurance on the life of Mr. Cunningham or any of its other
officers.
MANAGEMENT OWNS A MAJORITY OF THE COMPANY'S COMMON STOCK
The directors and executive officers of the Company and the officers of
the Company's Mexican subsidiaries currently own approximately 71.1% of the
Company's outstanding Common Stock. Accordingly, such shareholders collectively
have the power to elect all of the members of the Company's Board of Directors
and thereby to control the business and policies of the Company.
THE COMPANY FACES RISKS ASSOCIATED WITH "YEAR 2000" COMPLIANCE
Many currently installed computer systems and software products may not
function property when processing transactions that include dates on and after
January 1, 2000. The Company currently is upgrading its internal computer
network to improve its management information systems in general, as well as to
ensure that its systems will not malfunction as a result of "Year 2000" issues.
Any failure to achieve Year 2000 compliance by the Company or third parties that
the Company's business relies upon could have a material adverse effect on the
Company's business, financial condition, or results of operations. See Item 6,
"Selected Financial Data; Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Compliance."
THE COMPANY'S STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY
The Company's Common Stock currently is quoted in the National
Quotation Bureau's "Pink Sheets." The trading volume of the Company's Common
Stock historically has been limited, and there can be no assurance that an
active public market for the Company's Common Stock will be developed or
sustained. The trading price of the Company's Common Stock in the past has been,
and in the future could be, subject to wide fluctuations. See Item 5, "Market
for Common Equity and Related Stockholder Matters." These fluctuations may be
caused by a variety of factors, including the following:
+ quarterly variations in the Company's operating results;
+ actual or anticipated announcements of new products by the
Company or its competitors;
+ changes in analysts' estimates of the Company's financial
performance;
+ general conditions in the markets in which the Company competes;
and
+ worldwide economic and financial conditions.
The stock market in general also has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many rapidly
expanding companies and often have been unrelated to the operating performance
of such companies. These broad market fluctuations and other factors may
adversely affect the market price of the Company's Common Stock.
13
<PAGE>
PENNY STOCK RULES MAY MAKE BUYING OR SELLING THE COMPANY'S COMMON STOCK
DIFFICULT
The Company's Common Stock in the past has been, and from time to time
in the future may be, subject to the "penny stock" rules as promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In the
event that no exclusion from the definition of a "penny stock" under the
Exchange Act is available, then any broker engaging in a transaction in the
Company's Common Stock will be required to provide each customer with a risk
disclosure document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market values of the Company's securities
held in the customer's accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the customer's confirmation. Certain brokers are less willing to
engage in transactions involving "penny stocks" as a result of the additional
disclosure requirements described above, which may make it more difficult for
holders of the Company's Common Stock to dispose of their shares.
SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF THE
COMPANY'S COMMON STOCK
Sales of substantial amounts of Common Stock by shareholders of the
Company, or even the potential for such sales, are likely to have a depressive
effect on the market price of the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities. Of the
32,703,768 shares of Common Stock outstanding as of March 26, 1999,
approximately 3,600,000 shares are eligible for resale in the public market
without restriction unless held by an "affiliate" of the Company, as that term
is defined under applicable securities laws. The approximately 29,104,000
remaining shares of Common Stock currently outstanding are "restricted
securities," as that term is defined in Rule 144 under the securities laws, and
may be sold only in compliance with Rule 144, pursuant to registration under the
securities laws, or pursuant to an exemption therefrom. Affiliates also are
subject to certain of the resale limitations of Rule 144. Generally, under Rule
144, each person who beneficially owns restricted securities with respect to
which at least one year has elapsed since the later of the date the shares were
acquired from the Company or an affiliate of the Company may, every three
months, sell in ordinary brokerage transactions or to market makers an amount of
shares equal to the greater of 1% of the Company's then-outstanding Common Stock
or, if the shares are quoted on a stock exchange or Nasdaq, the average weekly
trading volume for the four weeks prior to the proposed sale of such shares.
Sales under Rule 144 also are subject to certain manner-of-sale provisions and
notice requirements and to the availability of current public information about
the Company. A person who is not an affiliate, who has not been an affiliate
within three months prior to sale, and who beneficially owns restricted
securities with respect to which at least two years have elapsed since the later
of the date the shares were acquired from the Company or from an affiliate of
the Company is entitled to sell such shares under Rule 144(k) without regard to
any of the volume limitations or other requirements described above. An
aggregate of 23,081,445 shares held by the Company's officers and directors
currently are available for sale under Rule 144.
THE COMPANY DOES NOT PLAN TO PAY CASH DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and
does not currently anticipate that it will pay dividends in the foreseeable
future. Instead, the Company intends to apply earnings to the expansion and
development of its business.
CHANGE IN CONTROL PROVISIONS MAY ADVERSELY AFFECT EXISTING STOCKHOLDERS
The Company's Articles of Incorporation and Nevada law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when those attempts
may be in the best interests of shareholders. The Articles of Incorporation also
authorize the Board of Directors, without shareholder approval, to issue one or
more series of preferred stock, which could have voting, liquidation, dividend,
conversion, or other rights that adversely affect or dilute the voting power of
the holders of Common Stock.
14
<PAGE>
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS IN THIS REPORT
Certain statements and information contained in this Report concerning
future, proposed, and anticipated activities of the Company; certain trends with
respect to the Company's revenue, operating results, capital resources, and
liquidity or with respect to the markets in which the Company competes or the
dimensional stone industry in general; and other statements contained in this
Report regarding matters that are not historical facts are forward-looking
statements, as such term is defined in the securities laws. Forward-looking
statements, by their very nature, include risks and uncertainties, many of which
are beyond the Company's control. Accordingly, actual results may differ,
perhaps materially, from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
such forward-looking statements include those discussed under this Item 1,
"Special Considerations" and elsewhere in this Report.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a facility in Phoenix, Arizona, containing
approximately 10,000 square feet. The lease term expires in December 2002, with
two five-year renewal options. The Company uses approximately 3,000 square feet
of the facility for its corporate offices and showroom and approximately 7,000
square feet for warehouse space. Franklin E. Cunningham, the Company's Chairman
of the Board, President, and Chief Executive Officer, acquired this building in
January 1999. See Item 13, "Certain Relationships and Related Transactions."
The Company owns approximately 5.4 acres of land in Durango, Durango,
Mexico where its dimensional stone processing facilities are located. The
Company owns four buildings, containing an aggregate of approximately 65,000
square feet, located on this property. The Company utilizes these facilities for
its stone processing, finishing, selection, and warehousing operations and for
offices.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, the Company, through one of its Mexican
subsidiaries, initiated litigation with Multibanco Comermex S.A. and Banca
Serfin S.A. ("Banca Serfin") for the release of the lien against certain trust
assets. The lawsuit alleges that the debt owed by the Company to Banca Serfin is
much less than the bank has claimed. The bank claims that the Company owes
approximately $900,000. The Company is vigorously litigating its position that
it has repaid all borrowings owed to Banca Serfin. The Company established a
reserve of approximately $900,000 in 1997 to cover any damages resulting from
the lawsuit and is no longer accruing interest related to the balance on its
financial statements. Although the Company believes that the expected outcome of
this matter will not have a material adverse effect on the results of operations
or the financial condition of the Company, there can be no assurance that the
Company will achieve a favorable outcome in this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently is quoted in the National
Quotation Bureau's "Pink Sheets" under the symbol "WWST." The Company has no
shares of preferred stock outstanding. The following table sets forth the
quarterly high and low closing sale prices of the Company's Common Stock for the
calendar periods indicated.
COMMON STOCK
------------------
HIGH LOW
---- ---
1996:
First Quarter.................................. $ 0.50 $0.25
Second Quarter................................. 0.25 0.25
Third Quarter.................................. 0.88 0.50
Fourth Quarter................................. 0.63 0.03
1997:
First Quarter.................................. $ 0.34 $0.06
Second Quarter................................. 0.34 0.06
Third Quarter.................................. 0.50 0.03
Fourth Quarter................................. 0.50 0.03
1998:
First Quarter.................................. $ 0.22 $0.03
Second Quarter................................. 0.63 0.03
Third Quarter.................................. 0.21 0.03
Fourth Quarter................................. 0.06 0.03
1999:
First Quarter (through March 26, 1999)......... $ 0.10 $0.02
As of March 26, 1999, there were approximately 500 holders of record of
the Company's Common Stock. On March 26, 1999, the closing sales price of the
Company's Common Stock on the National Quotation Bureau's "Pink Sheets" was
$0.02 per share.
The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividends in the
foreseeable future. The payment of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition, and such other factors as the
Board of Directors may consider.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes certain selected consolidated financial
data of the Company and is qualified in its entirety by the more detailed
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Report. The data for fiscal 1998 and 1997 has been derived
from the financial statements of the Company audited by Arthur Andersen LLP,
independent public accountants. The data for fiscal 1996 has been derived from
the financial statements of the Company audited by Mark Shelley, CPA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS:
<S> <C> <C> <C>
Net sales............................................ $ 4,267,938 $ 3,111,918 $ 1,928,733
Cost and expenses:
Cost of sales.................................... 2,042,064 1,679,015 1,042,384
Selling, general and administrative.............. 1,290,600 1,015,835 675,716
Depreciation and amortization.................... 42,276 21,385 11,299
----------- ----------- -----------
Operating income .................................... 892,998 395,683 199,334
Interest income (expense) and other, net............. (62,379) 63,980 (5,656)
----------- ----------- -----------
Income before benefit from (provision for)
income taxes....................................... 830,619 459,663 193,678
Benefit from (provision for) income taxes............ -- 300,000 (50)
----------- ----------- -----------
Net income .......................................... $ 830,619 $ 759,663 $ 193,628
=========== =========== ===========
Basic and diluted earnings per common share and
common share equivalent (1)...................... $ 0.02 $ 0.02 $ 0.01
=========== =========== ===========
Basic and diluted weighted average number of
common shares and common share equivalents
outstanding (1).................................. 34,687,330 35,073,683 34,727,786
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Cash................................................. $ 279,167 $ 221,660 $ 43,756
Working capital(2)................................... 283,376 (294,750) 342,040
Total assets......................................... 5,818,209 5,086,418 3,980,588
Notes payable to banks and long-term debt............ 204,459 305,889 169,334
Total stockholders' equity........................... 4,399,742 3,571,384 2,811,721
</TABLE>
- ----------
(1) Because the Company has no outstanding convertible securities or other
common stock equivalents, the amounts reported for basic and diluted
earnings per share are the same and the amounts reported for basic and
diluted weighted average common shares are the same.
(2) The decrease in working capital in fiscal 1997 was primarily attributable
to a reclassification of debt on the Company's financial statements from
long-term to current liabilities as a result of the Company's dispute with
Banca Serfin over the amounts owed. See Item 3, "Legal Proceedings."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company quarries, manufactures, and markets a wide variety of
dimensional stone products. The Company extracts marble limestone and travertine
blocks from quarries located in Mexico. The Company then transports the blocks
to plants operated by its wholly owned Mexican subsidiaries in Durango, Durango,
Mexico, where the blocks are cut, honed, polished or tumbled, then dimensioned
and packaged. The Company markets its dimensional stone products primarily in
the United States and Canada through distributors, dealers, and designers. The
Company also sells a small quantity of its products in Europe.
The Company began producing and marketing its current line of Durango
Stone(TM) products in 1994. The Company has concentrated on expanding its
facilities, upgrading its equipment, and training its employees to produce
larger quantities of high-quality dimensional stone products at reduced costs
per square foot. The Company introduced its "Truly Tumbled" Durango Stone(TM)
products in November 1996. The Company initiated marketing efforts for this new
product during 1997 and has achieved successful levels of sales to date. The
Company believes that production of this product will continue to be profitable
due to economies of scale and further utilization of existing machinery.
During 1997, the Company focused on increasing sales, reducing
production costs, and expanding production capacity. The Company expanded its
Mexican facilities from approximately 30,000 square feet to approximately 40,000
square feet in order to house additional machinery purchased during 1997 and to
provide expanded warehouse space. During 1997, the Company also doubled quarry
production by adding new diamond wire saws and drillers. The Company financed
all of its 1997 improvements, construction, and equipment purchases through cash
flows from operations. The Company's employees reworked and installed new and
used machinery and the entire project was completed with a relatively small
investment.
During 1998, the Company upgraded some of the equipment at its existing
factories as production at those facilities approached capacity. The Company
also placed orders for several new pieces of equipment and began construction of
a third production facility adjacent to its two existing factories. The new
facility will produce large marble limestone slabs. The Company plans to market
these slabs to wholesale distributors, contractors, and other end-users as
partially finished slabs, which can be cut to finished size prior to
installation, and as fully finished slabs cut to standard or custom dimensions
and shipped as ready-to-install panels. The new factory also will produce slabs
that the Company will use for processing into tiles in its existing factories.
The Company anticipates that the cost to build and equip this facility will be
approximately $2.0 million. As of the date of this Report, the Company has
funded approximately $500,000 of the costs of the facility from operations and
has received a commitment for an additional $1,050,000. See "Liquidity and
Capital Resources," below. The Company intends to use cash flows from operations
to finance the balance of the costs to build and equip the new facility. The
Company currently expects that it will complete the new facility and begin
production of slabs in the fourth quarter of 1999. The Company believes that
there is significant demand for the type of products that the new facility will
produce and that sales of these products will contribute significantly to the
Company's revenue and profitability in future periods. These expectations for
sales and profitability may not be met, however, for a variety of reasons. See
Item 1, "Special Considerations."
RESULTS OF OPERATIONS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
REVENUE. The Company's revenue for the year ended December 31, 1998
totaled $4,267,938, which represents a 37% increase over revenue of $3,111,918
for the year ended December 31, 1997. The Company attributes the increase in
revenue to (a) greater market acceptance and demand for its products as a result
of expanded sales and marketing efforts and the increase in its customer base of
authorized stocking distributors and wholesale distributors; and (b) increased
productivity and production volume due to improved utilization of factory
capacity through expanded work shifts, upgrades and enhancements to existing
machinery, and the installation of new machinery.
18
<PAGE>
COST OF GOODS SOLD; GROSS PROFIT. Cost of goods sold increased to
$2,042,064 during the year ended December 31, 1998 from $1,679,015 during the
year ended December 31, 1997. This increase is attributed to the corresponding
increase in sales during the same period. Gross profit increased to $2,225,874,
or 52% of revenue, in fiscal 1998 from $1,432,903, or 46% of revenue, in fiscal
1997. The increase in gross profits as a percentage of revenue reflects the
Company's ability to increase productivity and production volume while
controlling production costs even as sales increased.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense increased 27% to $1,290,600 in the year ended December
31, 1998 from $1,015,835 in the year ended December 31, 1997. The increase is
attributable primarily to (a) increased salaries and additional sales and
administrative personnel; (b) increased expenditures for advertising, attendance
at trade shows, travel, and development of the Company's web-site; and (c)
increased legal and accounting expenses. The increased salaries, travel,
advertising, and trade show expenditures contributed to the Company's increased
revenue during fiscal 1998. Included in selling, general, and administrative
expenses for fiscal 1997 are charges taken in the fourth quarter for (1)
approximately $95,000 of additional accruals to create a reserve for the maximum
potential loss related to the contested Mexican bank loan; (2) approximately
$105,000 in additional accruals related to various Mexican taxes and other
administrative expenses; and (3) a charge of approximately $100,000 taken to
write off various loans and receivables deemed uncollectible by the Company.
Excluding the one-time charges taken in the fourth quarter of fiscal 1997,
selling, general, and administrative expense increased to approximately 30% of
revenue during fiscal 1998 from approximately 23% of revenue in fiscal 1997 as a
result of the increased expenditures described above.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization for
the years ended December 31, 1998 and 1997 was $331,534 and $273,895,
respectively. Depreciation expense included in cost of goods sold as indirect
overhead for the years ended December 31, 1998 and 1997 amounted to $289,258 and
$252,510, respectively. Depreciation and amortization of $42,276 in 1998 and
$21,385 in 1997 was allocated and directly related to other costs and expenses
for those fiscal years. The Company anticipates depreciation expense will
continue to increase as it expands its operations by purchasing additional
property, plant, and equipment during 1999 and subsequent years.
OTHER INCOME (EXPENSE), NET. Other expense in fiscal 1998 was $62,379,
as compared with other income of $63,980 in fiscal 1997. In fiscal 1998,
interest expense increased approximately $23,000 due to debt finance charges on
an equipment note established in December 1997. The Company experienced a loss
on currency remeasurement of $38,399 due to the devaluation of the Mexican peso
during 1998. Interest expense for the year ended December 31, 1997, was
approximately $9,000, which is net of a fourth quarter reversal of approximately
$52,000 of interest expense previously accrued during the first six months of
1997 for the disputed Mexican bank debt. The reversal relates to the Company's
policy to no longer accrue interest on the disputed balance of Mexican bank
debt. See Item 3, "Legal Proceedings."
NET INCOME BEFORE INCOME TAXES. Net income before income taxes for
fiscal 1998 increased 81% to $830,619 over net income before income taxes of
$459,663 in fiscal 1997. This increase is primarily the result of an increase in
revenue and margins on that revenue.
(PROVISION FOR) BENEFIT FROM INCOME TAXES. The Company utilized a
portion of its net operating loss carryforwards in 1998, and therefore recorded
no provision for income taxes in 1998. Because the Company determined that it is
more likely than not that it will utilize a portion of the remaining net
operating loss carryforwards in 1999, there was no change in the Company's
deferred tax asset of $300,000 originally recorded in fiscal 1997. As of
December 31, 1998, the Company had a net operating loss carryforward balance of
approximately $800,000 from losses incurred in the early 1990's.
NET INCOME. Net income for fiscal 1998 increased to $830,619 over net
income of $759,663 in fiscal 1997 as a result of the factors described above.
Net income for fiscal 1998 did not include any income tax benefit, while net
income for fiscal 1997 included the $300,000 benefit from income taxes described
above.
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<PAGE>
SEASONALITY
The Company historically has experienced lower sales in the fourth
calendar quarter as a result of production declines during the holiday season as
well as seasonal declines in homebuilding and remodelling. The Company increased
sales and marketing efforts during fiscal 1998 to improve sales during the
fourth quarter. The Company also may be subject to periodic declines experienced
by the building industry in general.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to a positive position of
$283,376 at December 31, 1998 from a deficit position of $294,750 at December
31, 1997. Current assets increased to $1,598,945 at December 31, 1998 from
$1,007,411 at December 31, 1997. These increases were due primarily to increased
sales, which resulted in increases in cash, accounts receivable, and a build-up
of inventory.
The Company's operating activities provided net cash of $739,429 during
the year ended December 31, 1998. The major element contributing to net
operating cash flow was earnings from operations.
The Company invested $580,492 during fiscal 1998 to enhance its
factories and to purchase equipment and machinery, primarily in Mexico. The
Company intends to acquire additional property, plant, and equipment during 1999
and in future years in order to continue its current sales volume increases and
to accommodate anticipated increases in demand for its products. As of December
31, 1998, the Company had commitments to purchase approximately $1.4 million of
equipment for its new slab factory being constructed in Mexico. During March
1999, the Company obtained a commitment for lease financing of up to $1,050,000
for equipment to be installed in the new slab factory. The commitment includes a
five-year lease term with an option to purchase the equipment for $1.00 at the
end of the term. The Company currently anticipates that the lease financing will
be completed during the second quarter of 1999. The Company intends to use cash
flows from operations to finance the balance of the costs to build and equip the
new facility.
In December 1997, the Company obtained $190,000 in long-term debt to
fund equipment purchases for its operations in Mexico. The bank financing
consists of a promissory note that bears interest at the rate of the bank's
prime rate plus 2.0%. The note matures on December 8, 2000. The balance on the
note was approximately $132,000 at December 31, 1998. The Company's net payments
for long-term debt and capital leases in 1998 totaled approximately $94,000.
The Company anticipates that its current cash resources, expected cash
flow from operations, and the equipment financing described above will be
sufficient to fund the Company's capital needs during the next 12 months at its
current level of operations, apart from capital needs resulting from
construction of new facilities (other than the new slab production facility) or
acquisitions of additional equipment or additional business operations. However,
the Company may be required to obtain additional capital to fund its planned
growth during the next 12 months and beyond, particularly for expansion of the
Company's facilities and operations in Mexico. Potential sources of any such
capital may include the proceeds from bank financing, strategic alliances, and
offerings of the Company's equity or debt securities. There can be no assurance
that such capital will be available from these or other potential sources, and
the lack of such capital could have a material adverse effect on the Company's
business.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries to represent years in the date code
field. Computer systems and products that do not accept four-digit year entries
will need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years. The Company has upgraded its
internal computer network at its headquarters in Phoenix, Arizona, in order to
integrate its management information systems, as well as to ensure that its
computer systems and other process control equipment located at its Arizona
facility will be able to deal appropriately and without malfunctions caused by
"Year 2000" issues.
20
<PAGE>
The Company currently has one internal information technology systems
employee and one external computer engineer planning upgrades to the computer
network and computer-operated equipment located at the Company's factories and
quarries in Mexico. The Company currently plans to test its computer systems and
computer-operated equipment in Mexico during April 1999. The Company intends to
complete upgrades to its computer systems and equipment located in Mexico during
1999 to ensure that they will properly process dates beginning on and after
January 1, 2000, as well as to improve the content, quality, and flow of
information throughout the Company.
The Company has corresponded with third party vendors, suppliers,
banks, government agencies, and others with respect to the Year 2000 issue. All
third parties that have responded to the Company as of the filing date of this
Report have indicated that they have addressed the Year 2000 issue and are
working towards solving problems related to the Year 2000 issue. There can be no
assurance, however, that computer systems operated by third parties, including
customers, vendors, credit card transaction processors, and financial
institutions, with which the Company's systems interface will continue to
properly interface with the Company's systems and will otherwise be compliant on
a timely basis with Year 2000 requirements.
The Company's costs to modify software and hire Year 2000 solution
providers are included as part of the management information system enhancements
described above. The Company currently estimates that its costs to address the
Year 2000 issue to date have been approximately $25,000 for internal and
external computer network services. The Company currently anticipates that it
will incur additional costs of approximately $30,000 during 1999 to complete
upgrades and enhancements to its computer systems.
The Company's business depends entirely upon its ability to extract and
process stone in Mexico and ship its dimensional stone products to the United
States for sales and distribution. The Company may be at risk with respect to
suppliers of necessary resources, particularly suppliers of power, water, and
telecommunications within Mexico, if those suppliers are not Year 2000
compliant. Extended power brownouts or blackouts or loss of the water supply at
the Company's factories in Mexico would seriously disrupt the Company's source
of dimensional stone products. Telephone communication system failures within
Mexico or between the United States and Mexico, Canada, and Europe as a result
of Year 2000 issues would severely hinder the Company's sales and shipping
functions. In addition, disruption to local and international banking, credit
card processing, and other financial services as a result of Year 2000 issues
would have a material adverse effect on the Company's cash management systems
and financial resources. Potential revenue losses and/or liabilities to third
parties as a result of Year 2000 problems could adversely impact the Company's
ability to continue as a going concern. Because of these factors, the Company is
unable to fully assess the impact of the Year 2000 issue as of the filing date
of this Report. As of the filing date of this Report, the Company has not
formulated a contingency plan with respect to the Year 2000 issues described
above.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements, the notes
thereto, and the reports thereon commencing at page F-1 of this Report, which
financial statements, notes, and reports are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective February 18, 1998, the Company dismissed Mark Shelley, CPA
("Shelley") and engaged Arthur Andersen LLP ("Arthur Andersen") as its
independent public accountants. The change in independent public accountants was
approved by the Board of Directors of the Company. Shelley's report on the
financial statements of the Company for the year ended December 31, 1996, did
not contain an adverse opinion or a disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope, or accounting principles. During the
term of Shelley's engagement, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of Shelly, would
have caused him to make reference to the subject matter of the disagreement in
connection with
21
<PAGE>
his report. Prior to retaining Arthur Andersen, the Company had not consulted
with Arthur Andersen regarding the application of accounting principles or the
type of opinion that might be rendered on the Company's financial statements.
The Company has authorized Shelley to respond fully to inquiries from Arthur
Andersen.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
Company's directors and executive officers.
NAME AGE POSITION HELD
---- --- -------------
Franklin E. Cunningham 47 Chairman of the Board, President, and
Chief Executive Officer
Spencer W. Cunningham 50 Executive Vice President, Chief Financial
Officer, Treasurer, and Director
Lee M. Cunningham 48 Vice President and Director
Timothy H. Ligget 39 Chief Accounting Officer and Director
Michael D. Nafziger 44 Director of National Sales, Secretary,
and Director
L. Ernest Whitesel 62 Director
FRANKLIN E. CUNNINGHAM founded the Company and has served as its
President and Chief Executive Officer since August 1989 and as Chairman of the
Board since November 1991. Mr. Cunningham served as the Company's Treasurer from
August 1989 to March 1998. From 1983 to 1989, Mr. Cunningham served as a
consultant and agent to various architectural stone and ceramic tile materials
and equipment suppliers, manufacturers, manufacturer representatives,
distributors, architects, and designers in the United States, Italy, Germany,
Taiwan, Spain, Portugal, India, Turkey, and Indonesia. Mr. Cunningham has been
involved in various aspects of the architectural stone and ceramic tile industry
since 1973. Mr. Cunningham is the husband of Lee M. Cunningham and the brother
of Spencer W. Cunningham.
SPENCER W. CUNNINGHAM has served as Executive Vice President and as a
director of the Company since August 1994, as Treasurer of the Company since
March 1998, and as Chief Financial Officer of the Company since November 1998.
Mr. Cunningham also served as Vice President of the Company from August 1989
until May 1991. From January 1985 to November 1991, Mr. Cunningham operated a
real estate construction company and served as an independent business
development consultant in Ohio and Arizona. Mr. Cunningham was employed as an
association group insurance administrator and broker from 1980 through 1984. Mr.
Cunningham is the brother of Franklin E. Cunningham and the brother-in-law of
Lee M. Cunningham.
LEE M. CUNNINGHAM has served as a director of the Company since
September 1990. Mrs. Cunningham served as Secretary of the Company from
September 1990 to November 1998 and has served as Vice President since November
1998. Mrs. Cunningham also served as Secretary of the Company from October 1989
to March 1990. Mrs. Cunningham is a licensed general contractor in the State of
Arizona and has been engaged in various aspects of the interior design and
furnishings, building products and building construction, and importing
industries since 1973. Mrs. Cunningham also is active as a consultant in human
resources and leadership, and facilitates seminars for professional growth. Mrs.
Cunningham is the wife of Franklin E. Cunningham and the sister-in-law of
Spencer W. Cunningham.
22
<PAGE>
TIMOTHY H. LIGGET has served as Chief Accounting Officer and as a
director of the Company since November 2, 1998. Mr. Ligget has served in several
management positions in public accounting firms and in private industry since
1981. He is a Certified Public Accountant in the state of Arizona.
MICHAEL D. NAFZIGER has served as the Company's Director of National
Sales as a director of the Company since August 1996, and as Secretary of the
Company since November 1998. Mr. Nafziger served as the Company's Director of
Operations from November 1995 to August 1996. Prior to joining the Company, Mr.
Nafziger served as Vice President - Marketing for Genesis Technology Group from
1981 to 1983 and as President of Ultraset/Profinish from 1983 to 1991. Mr.
Nafziger was self-employed as a consultant from 1991 until November 1995.
L. ERNEST WHITESEL has served as a director of the Company since
November 1992. Mr. Whitesel has engaged in business investing activities as
President of Hallmark Enterprises, Inc. since March 1991. Mr. Whitesel served as
the principal partner in a general insurance agency from 1981 to 1990.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
officers, and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "SEC"). SEC
regulations require directors, officers, and greater than 10% stockholders to
furnish the Company with copies of all Section 16(a) forms that they file. Based
solely upon the Company's review of the copies of such forms for the year ended
December 31, 1998 received by it and written representations that no other
reports were required, the Company believes that each person who was a director,
officer, or beneficial owner of more than 10% of the Company's Common Stock
complied with all Section 16(a) filing requirements during such fiscal year,
except that Timothy H. Ligget filed a late report on Form 3 disclosing his
beneficial ownership of the Company's securities as of the date he became an
officer and director of the Company.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The following table sets forth certain information concerning the
compensation earned by the Company's Chief Executive Officer for the fiscal
years ended December 31, 1996, 1997 and 1998. No other officer of the Company
received compensation of $100,000 or more during fiscal 1998.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL OTHER
------------------- COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS($) ($)(2)
- --------------------------- ---- ------------- -------- ------------
Franklin E. Cunningham 1998 $ 83,333 $ 0 $ 962
Chairman of the Board, and 1997 72,000 0 962
President and Chief Executive 1996 72,000 0 --
Officer
- ----------
(1) Mr. Cunningham also received certain perquisites, the value of which did
not exceed 10% of his salary and bonus during fiscal 1998.
(2) Amounts shown for fiscal 1998 represent premium payments for term life
insurance.
The Company offers its employees, including directors who also are
employees of the Company, medical, dental, and life insurance benefits. The
Company currently has no stock option plan or other incentive or long-term
compensation plans for or agreements with directors, officers, or other key
employees.
23
<PAGE>
DIRECTORS' COMPENSATION
Directors of the Company historically did not receive compensation for
serving as members of the Company's Board of Directors and were not reimbursed
for their expenses in attending meetings of the Board of Directors. In November
1998, the Board of Directors approved a program under which directors will
receive $200 for each meeting attended in person or by telephone. In addition,
the Company will reimburse directors for expenses related to out-of-town travel
to attend Board of Directors meetings.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND AGENTS
The Company's Articles of Incorporation provide that no director or
officer of the Company shall be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty by such
person as a director or officer, except that a director or officer shall be
liable, to the extent provided by applicable law, (i) for acts or omissions
which involve intentional misconduct, fraud or a knowing violation of law, or
(ii) for the payment of dividends in violation of restrictions imposed by Nevada
laws. The effect of this provision in the Articles of Incorporation is to
eliminate the rights of the Company and its stockholders, either directly or
through stockholders' derivative suits brought on behalf of the Company, to
recover monetary damages from a director or officer for breach of the fiduciary
duty of care as a director or officer except in those instances provided under
Nevada law.
The Company's Bylaws require the Company to indemnify any person who
incurs liability or expense by reason of such person acting as a director or
officer of the Company, to the fullest extent allowed by Nevada law, except that
indemnification is not permitted in relation to any matter in which such person
is found to be liable for negligence or misconduct. In the event that an action,
suit, or proceeding is settled, the Company may indemnify such person only in
connection with such matters covered by the settlement as to which the Company
is advised by counsel that the person to be indemnified did not commit such a
breach of duty. The Bylaws define "expenses" to include, but not to be limited
to, amounts of judgments, penalties or fines and interest thereon, costs,
attorneys' fees, expert witness fees, and amounts paid in settlement, provided
that such settlement is approved by the Company's Board of Directors before the
Company indemnifies a person determined to be entitled to such indemnification.
Section 78.751 of the Nevada General Corporation Law (the "Nevada GCL")
provides that a corporation may indemnify its directors and officers against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the director or officer in
connection with an action, suit or proceeding in which the director or officer
has been made or is threatened to be made a party, if the director or officer
acted in good faith and in a manner that the director or officer reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal proceeding, had no reason to believe that his or
her conduct was unlawful. Any such indemnification may be made by the
corporation only as ordered by a court or as authorized by the Company's
stockholders or Board of Directors in a specific case upon a determination made
in accordance with the Nevada GCL that such indemnification is proper in the
circumstances. Under the Nevada GCL, indemnification may not be made for any
claim, issue or matter as to which the director or officer has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals, to be liable
to the corporation or for amounts paid in settlement by the corporation, unless
and only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines that in view of all the
circumstances of the case, the director or officer is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. Under the
Nevada GCL, to the extent that a director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding or in defense of any claim, issue or matter therein, the director or
officer must be indemnified by the corporation against expenses, including
attorneys' fees, actually and reasonably incurred by the director or officer in
connection with the defense.
24
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares
of the Company's Common Stock beneficially owned as of March 26, 1999 (i) by
each of the Company's directors and executive officers; (ii) by all directors
and executive officers of the Company as a group; and (iii) by each person who
is known by the Company to own beneficially or exercise voting or dispositive
control over more than 5% of the Company's Common Stock.
SHARES BENEFICIALLY
OWNED(2)
-----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT
- --------------------------------------- ------ -------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Franklin E. Cunningham 18,119,695(3) 52.2%
Spencer W. Cunningham 6,138,000(4) 17.7%
Lee M. Cunningham 18,119,695(3) 52.2%
Timothy H. Ligget 170,000 *
Michael D. Nafziger 0 *
L. Ernest Whitesel 23,750 *
Jaime Muguiro Munos(5) 2,280,000 7.0%
Alejandro Muguiro Munos(6) 1,520,000 4.4%
All directors and executive officers
as a group (eight persons) 23,251,445 71.1%
- ----------
*Less than 1% of outstanding shares of Common Stock.
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all Common Stock beneficially
owned by him or her, subject to applicable community property law. Except
as otherwise indicated, each of such persons may be reached through the
Company at 5236 South 40th Street, Phoenix, Arizona 85040.
(2) The numbers and percentages shown include the shares of Common Stock
actually owned as of March 26, 1999 and the shares of Common Stock that the
person or group had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of Common Stock that
the identified person had the right to acquire within 60 days of March 26,
1999 are deemed to be held by such person for the purpose of computing the
percentage of the shares of Common Stock owned by such person.
(3) The shares indicated are held jointly by Mr. and Mrs. Cunningham as husband
and wife. Includes up to 5,000,000 shares that Spencer W. Cunningham has
the right to acquire from Mr. and Mrs. Cunningham. See footnote 4.
(4) Represents 1,138,000 shares of Common Stock held by Mr. Cunningham and up
to 5,000,000 shares that Mr. Cunningham has the right to acquire from
Franklin and Lee Cunningham. See footnote 3.
(5) Mr. Munos is an officer and director of the Company's wholly owned
subsidiary, Marmoles Muguiro, S.A. de C.V. Mr. Munos' address is c/o
Marmoles Muguiro, S.A. de C.V., Boulevard Francisco Villa, Km 2 CD.
Industrial, Durango, Durango, Mexico.
(6) Mr. Munos is an officer and director of the Company's wholly owned
subsidiary, Marmoles Muguiro, S.A. de C.V. Mr. Munos' address is c/o
Marmoles Muguiro, S.A. de C.V., Boulevard Francisco Villa, Km 2 CD.
Industrial, Durango, Durango, Mexico.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1995, the Company issued 2,000,000 shares of Common Stock
to Jaime Muguiro Munos in exchange for the rights to extract stone from a quarry
site in Chihuahua, Mexico. In December 1998, the Company and Mr. Munos rescinded
that transaction. Accordingly, the Company transferred the quarry rights back to
Mr. Munos and Mr. Munos surrendered the 2,000,000 shares of Common Stock to the
Company. The Company now holds the shares as treasury stock.
25
<PAGE>
In January 1999, Franklin E. Cunningham, the Company's Chairman of the
Board, President, and Chief Executive Officer acquired the building in Phoenix,
Arizona, that the Company leases for its corporate offices, showroom, and
warehouse space. The Company's lease for this building expires in December 2002,
with two five-year renewal options. Rental payments to Mr. Cunningham under the
lease will total approximately $57,000 during calendar 1999. Because the Company
entered into this lease with a third party prior to Mr. Cunningham's acquisition
of the building, the Company believes that the terms of the lease are no less
favorable to the Company than it could obtain from non-affiliated parties.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 Articles of Incorporation of the Registrant(1)
3.2 Bylaws of Registrant, as amended to date(1)
4.1 Form of Certificate of Common Stock(1)
16 Letter Re: Change in Accountants(2)
27.1 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended December 31, 1997, as filed with the Securities and Exchange
Commission on November 19, 1998.
(2) Incorporated by reference to the Registrant's Form 8-K as filed with the
Securities and Exchange Commission on March 27, 1998.
(b) REPORTS ON FORM 8-K.
None
26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WORLD WIDE STONE CORPORATION
Date: April 9, 1999 /s/ Franklin E. Cunningham
----------------------------------------------
Franklin E. Cunningham, Chairman of the Board,
President, and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ Franklin E. Cunningham Chairman of the Board, April 9, 1999
- ----------------------------- President, and Chief
Franklin E. Cunningham Executive Officer
(Principal Executive Officer)
/s/ Lee M. Cunningham Vice President and Director April 9, 1999
- -----------------------------
Lee M. Cunningham
/s/ Spencer W. Cunningham Executive Vice President, April 9, 1999
- ----------------------------- Chief Financial Officer,
Spencer W. Cunningham Treasurer, and Director
(Principal Financial Officer)
/s/ Michael D. Nafziger Director of National Sales, April 9, 1999
- ----------------------------- Secretary, and Director
Michael D. Nafziger
/s/ Timothy H. Ligget Chief Accounting Officer and April 9, 1999
- ----------------------------- Director (Principal Accounting
Timothy H. Ligget Officer)
/s/ L. Ernest Whitesel Director April 9, 1999
- -----------------------------
L. Ernest Whitesel
27
<PAGE>
WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheet as of December 31, 1998........................ F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1998 and 1997...................................... F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998 and 1997...................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997...................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To World Wide Stone Corporation:
We have audited the accompanying consolidated balance sheet of WORLD WIDE STONE
CORPORATION (a Nevada corporation) and subsidiaries as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of World Wide Stone Corporation
and subsidiaries as of December 31, 1998 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
April 9, 1999.
F-2
<PAGE>
WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 279,167
Accounts receivable 265,585
Inventories (Note 2) 885,478
Prepaid expenses and other 168,715
-----------
Total current assets 1,598,945
PROPERTY, PLANT AND EQUIPMENT, net (Notes 2, 4, 5 and 6) 3,559,788
COST IN EXCESS OF NET ASSETS ACQUIRED, net of
accumulated amortization of $100,316 (Note 2) 173,273
OTHER ASSETS:
Other receivables (Note 8) 172,338
Prepaid taxes 13,865
Deferred taxes (Note 7) 300,000
-----------
Total assets $ 5,818,209
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 124,294
Accrued liabilities 189,714
Current portion of long-term debt (Note 4) 101,561
Other (Note 6) 900,000
-----------
Total current liabilities 1,315,569
LONG-TERM DEBT, net of current portion (Note 4) 102,898
-----------
Total liabilities 1,418,467
-----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 100,000,000
shares authorized, 34,703,768 issued, 32,703,768
outstanding at December 31, 1998 34,704
Additional paid-in capital 8,024,536
Accumulated deficit (3,537,237)
Cumulative remeasurement adjustment (2,261)
Treasury stock, at cost, 2,000,000 shares (120,000)
-----------
Total stockholders' equity 4,399,742
-----------
Total liabilities and stockholders' equity $ 5,818,209
===========
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
REVENUE $ 4,267,938 $ 3,111,918
COST OF GOODS SOLD 2,042,064 1,679,015
----------- -----------
Gross profit 2,225,874 1,432,903
COST AND EXPENSES:
Selling, general and administrative 1,290,600 1,015,835
Depreciation and amortization 42,276 21,385
----------- -----------
Income from operations 892,998 395,683
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 7,645 5,627
Interest expense (31,625) (9,213)
Gain (loss) on foreign currency
remeasurement (Note 2) (38,399) 67,566
----------- -----------
(62,379) 63,980
----------- -----------
INCOME BEFORE INCOME TAXES 830,619 459,663
BENEFIT FOR INCOME TAXES -- 300,000
----------- -----------
Net income 830,619 759,663
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency remeasurement adjustment
(Note 2) (2,261) --
----------- -----------
Comprehensive income $ 828,358 $ 759,663
=========== ===========
EARNINGS PER SHARE
Basic and diluted:
Net income per share (Note 2) $ .02 $ .02
=========== ===========
Weighted average number of common
shares outstanding 34,687,330 35,073,683
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Cumulative
Shares Paid-in Accumulated Remeasurement Treasury
Issued Amount Capital Deficit Adjustment Stock Total
------ ------ ------- ------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 35,425,868 $ 35,426 $7,903,814 $(5,127,519) $ -- $ -- $ 2,811,721
Return of stock from
financial consultant
(Note 9) (722,100) (722) 722 -- -- -- --
Net income -- -- -- 759,663 -- -- 759,663
---------- -------- ---------- ----------- ------- --------- -----------
BALANCE, December 31, 1997 34,703,768 34,704 7,904,536 (4,367,856) -- -- 3,571,384
Acquisition of treasury
stock (Note 3) -- -- 120,000 -- -- (120,000) --
Cumulative remeasurement
loss (Note 2) -- -- -- -- (2,261) -- (2,261)
Net income -- -- -- 830,619 -- -- 830,619
---------- -------- ---------- ----------- ------- --------- -----------
BALANCE, December 31, 1998 34,703,768 $ 34,704 $8,024,536 $(3,537,237) $(2,261) $(120,000) $ 4,399,742
========== ======== ========== =========== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 830,619 $ 759,663
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 331,534 273,895
(Gain) loss on foreign currency remeasurement 38,399 (67,566)
Reserve for Mexican bank debt (Note 6) -- 94,834
Deferred tax benefit -- (300,000)
Changes in certain assets and liabilities:
Increase in accounts receivable (128,164) (109,860)
Increase in inventories (259,377) (35,766)
Increase in prepaid expenses and other (146,486) (14,093)
Decrease in prepaid taxes 5,048 49,662
(Increase) decrease in other receivables 62,993 (133,227)
Increase (decrease) in accounts payable 31,720 (20,922)
Increase (decrease) in accrued liabilities (26,857) 169,483
--------- ---------
Net cash provided by operating activities 739,429 666,103
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment, net (580,492) (624,754)
--------- ---------
Net cash used in investing activities (580,492) (624,754)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt 101,450 180,004
Payment on short-term notes payable -- (43,449)
--------- ---------
Net cash (used in) provided by financing
activities 101,450 136,555
--------- ---------
NET INCREASE IN CASH 57,507 177,904
CASH, beginning of year 221,660 43,756
--------- ---------
CASH, end of year $ 279,167 $ 221,660
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 31,625 $ 9,213
========= =========
Cash paid for income taxes $ -- $ --
========= =========
Noncash financing activities:
Acquisition of treasury stock through additional
paid-in capital $ 120,000 $ --
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) NATURE OF OPERATIONS:
World Wide Stone Corporation, a Nevada corporation, and its subsidiaries
(collectively, the Company) quarries, manufactures and markets a wide variety of
dimensional stone products. Stone is cut, finished and packaged at its two
factories which operate in Durango, Mexico. The Company quarries, manufactures,
and markets a wide variety of dimensional stone products. Dimensional stone
products consist of natural stone that is cut to standard sizes or to sizes
specified in architectural designs. The Company's products are used for both
interior and exterior applications in residential and commercial buildings,
primarily as floor, wall, and patio tiles, decorative trim and architectural
accents, countertops and tabletops, and panels. The Company markets and
distributes its products throughout the United States, Canada and Europe,
primarily on a wholesale basis through approximately 25 authorized stocking
distributors and more than 250 wholesale distributors, as well as architects,
residential and commercial developers, installation contractors, and designers.
MANAGEMENT PLANS AND SPECIAL CONSIDERATIONS
The Company has experienced rapid growth over the last five years. Management
believes that two major equipment purchases during 1997 and purchases of
additional machinery in 1998 allowed the Company to significantly increase
production in its tumbled finish plant located in Durango, Mexico. The Company
believes that this will lead to continued growth in revenue in 1999.
The Company is currently constructing its third factory, which is anticipated to
double existing production. The new factory will produce large marble limestone
slabs. The Company plans to market these slabs to wholesale distributors,
contractors, and other end-users as partially finished slabs, which can be cut
to finished size prior to installation, and as fully finished slabs cut to
standard or custom dimensions and shipped as ready-to-install panels. The
Company anticipates that the total cost to build and equip this factory will be
approximately $2.0 million. The Company believes that there is significant
demand for the type of products that the new factory will produce and that sales
of these products will contribute significantly to the Company's revenue and
profitability in future periods. Continued growth is expected to be directly
proportional to the amount of capital available to enable the Company to develop
its quarries, acquire machinery, construct buildings, and process finished stone
products (see Note 10).
F-7
<PAGE>
The Company currently obtains substantially all of its stone blocks from two
quarry sites in Coahuila, Mexico. The Company believes that the stone extracted
from these sites possesses distinctive characteristics in terms of color and
quality that make this particular type of marble limestone unique. The Company
extracts stone from these quarries pursuant to existing lease arrangements with
the owners of the land. Under the lease agreements, the Company pays a royalty
based upon the number of cubic meters of stone extracted from the site. The
Company believes that these quarry sites will be sufficient to meet the
Company's requirements for this type of marble limestone for an indefinite
period of time at management's anticipated levels of production. Although the
Company currently has secured long-term leases for its primary quarry sites, the
inability to continue to extract sufficient quantities of stone from these sites
for even a short period of time would have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company would be able to locate an alternative source of
stone with desirable characteristics on a timely basis in the event that it is
unable to obtain stone from its primary quarry sites.
The Company depends upon third-party contractors to extract stone blocks from
the Company's leased quarry sites in Mexico. Although the Company owns some of
the tools, equipment, and supplies utilized in the quarrying process, the
Company has limited control over the quarrying process. As a result, any
difficulties encountered by the third-party contractors that result in
production delays or the inability to fulfill orders on a timely basis could
have a material adverse effect on the Company. The Company does not have
long-term contracts with its third-party contractors. The Company has
experienced short-term interruptions in services from its third-party
contractors in the past and was able to take temporary measures to avoid
prolonged disruption to its operations. Although the Company believes it would
be able to secure other third-party contractors that could conduct quarrying
operations for the Company, the Company's operations could be adversely affected
if it lost its relationship with any of its current contractors. The Company
does not maintain an inventory of sufficient amounts to provide protection for
any significant period against an interruption of supply, particularly if it
were required to utilize an alternative source of supply.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of World Wide Stone
Corporation and its wholly owned subsidiaries, Cantera Stone, Inc. (a Nevada
corporation), Marmoles Muguiro, S.A. de C.V., (a Mexican corporation) and
Sociedad Piedra Sierra, S.A. de C.V (a Mexican corporation). All material
intercompany transactions, accounts, and balances have been eliminated.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. SFAS No. 131 superseded SFAS No. 14, FINANCIAL REPORTING
FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 establishes standards for
reporting information about operating segments, products and
F-8
<PAGE>
services, geographic areas, and major customers. The adoption of SFAS No. 131
did not affect the Company's results of operations or financial position, and
does not affect the reporting requirements of the Company as it operates in one
reportable segment under the criteria outlined in SFAS No. 131.
INVENTORIES
Inventories are stated at the lower of cost or market with cost being determined
under the specific identification method. Market is the lower of replacement
cost or net realizable value. Inventories and cost of goods sold include all
operating expenses incurred at the two plants in Mexico. Inventories as of
December 31, 1998 were located at the plants in Durango, Mexico, at a warehouse
in Phoenix, Arizona, and at a bonded warehouse in El Paso, Texas.
Inventories at December 31, 1998 consist of the following:
Finished goods $ 868,416
Work in process 9,860
Raw materials 7,202
---------
$ 885,478
=========
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
The cost in excess of net assets acquired is being amortized on a straight-line
basis over 15 years. Amortization expense for the years ended December 31, 1998
and 1997 amounted to $18,239 for each period.
PROPERTY, PLANT AND EQUIPMENT
Major renewals or betterments are capitalized while maintenance costs and
repairs are expensed in the period incurred. Upon retirement or disposal of
depreciable assets, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is reflected in operations.
Depreciation expense included in cost of goods sold as indirect overhead for the
years ended December 31, 1998 and 1997 amounted to $289,258 and $252,510,
respectively.
LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under SFAS No. 121, long-lived
assets and certain identifiable intangible assets to be held and used in
operations are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be fully recoverable. An impairment
loss is recognized if the sum of the expected long-term undiscounted cash flows
is less than the carrying amount of the long-lived assets being evaluated.
F-9
<PAGE>
REVENUE RECOGNITION
Revenue is recognized upon product shipment to the customer from the warehouses
in Arizona or Texas, or the factory in Durango, Mexico.
USE OF 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange.
The carrying amounts of cash, receivables and accounts payable approximate fair
values since they are short-term in nature. The carrying amounts of the
Company's borrowings under the long-term debt instruments approximate fair
value. The fair value of the Company's long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
EARNINGS PER SHARE
The Company utilizes SFAS No. 128, EARNINGS PER SHARE, to compute basic and
diluted earnings per share. Pursuant to SFAS No. 128, basic earnings per common
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per common
share is determined assuming that options and/or warrants were exercised at the
beginning of each year or at the time of issuance. Because the Company has no
outstanding convertible securities or other common stock equivalents, there is
no difference between amounts reported for weighted average common shares and
earnings per share for basic and diluted amounts.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATION OF CREDIT RISK, consist primarily of receivables. Concentration of
credit risk with respect to trade receivables is limited due to the large number
of customers spread over a large geographic area. The Company's trade
receivables are not secured.
F-10
<PAGE>
FOREIGN CURRENCY TRANSLATION
The Company's wholly-owned Mexican subsidiaries maintain their books and records
in Mexican pesos. Their functional currency, however, is the U.S. dollar.
Therefore, these subsidiaries utilize the remeasurement method of foreign
currency translation when consolidated.
The remeasurement method of foreign currency translation converts all monetary
assets and liabilities from Mexican pesos to U.S. dollars at the current rate of
exchange at the balance sheet date. All nonmonetary assets and liabilities are
converted at the historical rates that were present when the particular
transaction took place. Revenue and expenses from the statements of operations
are converted from Mexican pesos to U.S. dollars at a weighted average
conversion rate. Depreciation, amortization, and similar historical-cost-based
expenses use a historical-based rate. Remeasurement gains or losses resulting
from transactions that are short-term in nature are reported in the Company's
consolidated statements of operations. Remeasurement gains or losses resulting
from intercompany transactions that are long-term in nature are reported as a
separate component of stockholders' equity.
(3) RELATED PARTY TRANSACTIONS:
On December 3, 1995, the Company acquired the rights to mine a deposit of green
quartzite in the state of Chihuahua, Mexico. The Company exchanged 2,000,000
shares of its restricted common stock for these rights. Because the stock was
issued to an officer of one of the Company's subsidiaries, the purchase of the
lease rights was expensed in 1995. The entire transaction was rescinded in
December 1998 and the shares of stock issued to the officer were returned to the
Company and placed in treasury stock. The returned shares were valued using the
closing price of the Company's stock as quoted in the National Quotation
Bureau's "Pink Sheets" at the date of recission.
In January 1999, the Company began leasing its corporate offices in Phoenix,
Arizona from an officer of the Company.
(4) LONG-TERM DEBT:
Long-term debt at December 31, 1998, consists of the following:
Loan from bank, interest at prime (7.75% at December 31,
1998) plus 2% per annum, principal and interest payments
of $6,175 due monthly through December 2000, secured
by equipment $ 131,722
Various loans, interest ranging from 10.9% to 12.0% per
annum, principal and interest payments ranging from
$432 to $597 due monthly through September 2001, secured
by vehicles 72,737
---------
204,459
Less - current portion 101,561
---------
Total long-term portion $ 102,898
=========
F-11
<PAGE>
Future maturities are as follows:
Years Ending
December 31,
------------
1999 $ 101,561
2000 96,968
2001 5,930
---------
$ 204,459
=========
(5) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is being provided
by use of the straight-line method over the estimated useful lives of the
assets.
Property and equipment at December 31, 1998 is comprised of the following:
Useful
Lives Amount
----- ------
Land located in Mexico N/A $ 780,000
Property, plant and specialty manufacturing
systems located in Mexico 40 years 795,252
Machinery, equipment and various vehicles
located in Mexico 5-12 years 3,032,874
Machinery, equipment and vehicles located
in the U.S. 5 years 198,861
-----------
4,806,987
Accumulated depreciation (1,247,199)
-----------
Net property, plant and equipment $ 3,559,788
===========
All land, property, plant and specialty manufacturing systems located in Mexico
are held in a Mexican land trust in Durango, Mexico. The trust is administered
by Multibanco Comerex, S.A. for the benefit of Cantera Stone, Inc. The trust was
established in 1991 in accordance with Mexican laws and regulations governing
transactions involving Mexican real property purchased by foreign investors.
Under the trust agreement, the Company is granted full rights of ownership
(rights to construct, lease, sell, etc.) and, therefore, these amounts are
reflected in the consolidated financial statements as assets owned by the
Company.
(6) COMMITMENTS AND CONTINGENCIES:
LITIGATION
In September 1998, Marmoles Muguiro S.A. de C.V. filed a lawsuit against Banca
Serfin S.A. in Durango, Mexico. The lawsuit alleges that monies owed on the
Company's line of credit are significantly less than the bank alleges. The bank
has claimed the Company owes U.S. $900,000 (plus penalties and interest, which
the bank has offered to waive) but the Company contends that the actual amount
owed is substantially less. The debt is secured by property and land that are
held in the Mexican trust (see Note 5). Under that agreement, assets held in
trust secure the debt up to 1,400,000 pesos (approximately U.S. $140,000 at
December 31, 1998).
F-12
<PAGE>
Under the advisement of legal counsel, the Company recorded a liability
(reflected in other current liabilities in the accompanying consolidated balance
sheet) to cover the maximum potential loss resulting from the Bank's claim. The
Company is no longer accruing interest related to the balance alleged by the
bank. It is the opinion of management and its legal counsel that the expected
outcome of this matter will not have a material adverse effect on the results of
operations or on the financial condition of the Company. There can be no
assurance, however, that the Company will obtain a favorable result to this
lawsuit.
OPERATING LEASES
The Company leases its corporate offices (see Note 3), vehicles and other
properties under operating leases. Rent expense under these arrangements was
approximately $65,000 and $45,000 for the years ended December 31, 1998 and
1997, respectively. Total future commitments under these noncancellable
agreements for the years ending December 31, are as follows:
1999 $ 71,000
2000 71,000
2001 7,000
---------
$ 149,000
=========
ROYALTIES
The Company pays a royalty to a third party on its leased quarry of 90 pesos
(approximately U.S. $9.00 and U.S. $11.00 at December 31, 1998 and 1997,
respectively) per cubic meter of stone extracted. This amounted to approximately
U.S. $31,000 and U.S. $24,000 for the years ended December 31, 1998 and 1997,
respectively. These payments are included in cost of goods sold and inventory in
the accompanying statements of operations and balance sheet as applicable. The
royalty agreements expire in 2023, with the Company retaining the right to
extend the agreements an additional thirty years at current terms (with minor
adjustments for inflation).
(7) INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires the use of an asset and
liability approach in accounting for income taxes. Deferred tax assets and
liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities at the tax rates in effect
when these differences are expected to reverse.
The benefit for income taxes for the years ended December 31, 1998 and 1997
consisted of the following:
1998 1997
------ --------
Current $ -- $ --
Deferred -- 300,000
------ --------
Total $ -- $300,000
====== ========
F-13
<PAGE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended December 31 are as follows:
1998 1997
---- ----
Statutory federal rate 34% 34%
State taxes, net of federal benefit 6 6
Net operating loss carryforward utilized (40) (40)
(Increase) in deferred tax asset -- (65)
--- ---
Total --% (65)%
=== ===
The components of the Company's deferred taxes at December 31, 1998, consisted
of net operating loss carryforwards of $320,000 and a valuation allowance of
$20,000.
The Company records a valuation allowance to reserve its gross deferred tax
assets in situations when it is not "more likely than not" that the asset will
be realized. At December 31, 1998, its management determined that it is more
likely than not that the Company will utilize available net operating loss
carryforwards in the future.
During 1998, the Company utilized approximately $830,000 of its net operating
loss carryforwards. As of December 31, 1998, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $800,000, which
expire in the years 2006 through 2011.
(8) IVA TAXES RECEIVABLE:
Under Mexican law, a value-added tax (IVA tax) is levied on the value added to
goods and services by each business entity at each level in the production and
distribution chain. Under normal business conditions, each business in the
process collects tax on its sales, takes a credit for the tax it has paid on
purchases, and remits or receives the net amount to/from the government. Only
the final consumer is not entitled to a refund for the tax paid. Because the
Company is an exporter of its products out of Mexico, no IVA tax is collected by
the Company from the end purchaser. However, the Company pays substantial
amounts of IVA tax for raw materials and services related to its Mexican
operations. As of December 31, 1998, the Company was entitled to an IVA tax
refund amounting to approximately U.S. $172,000. Management believes, based upon
written confirmation received from the Mexican government, that all of the IVA
taxes due back to the Company will be collected in the fourth quarter of 1999.
(9) STOCK CONSULTING AGREEMENT:
Under the terms of a Consulting Agreement (Agreement) effective August 12, 1996
between the Company and an independent financial consulting corporation
(Consultant), the Company contracted for financial and public relations
services. The Consultant was to be compensated for its duties and services via
warrants issued by the Company for a total of up to 5,000,000 shares of the
Company's common stock. The warrants could be earned by the Consultant in
performance increments.
F-14
<PAGE>
Upon agreement and registration of the warrants, the first increment of warrants
were issued to the Consultant and immediately exercised for 1,000,000 shares of
common stock in August 1996. In October 1996 the Company learned that the
Consultant had been charged with alleged criminal wrong-doings related to the
promotion of various other companies. Upon further inquiry and verification by
management, the Company found that the Consultant's principal was subject to
investigation by federal authorities in the matter. The Company and the
Consultant agreed that, whether or not its principal became formally charged
with any alleged wrong-doing in the matter, the Consultant had been rendered
ineffective and ineffectual with respect to the terms and purposes of the
Agreement. Therefore, on October 12, 1996, under the terms and conditions
thereof, the Company suspended the Agreement and instructed the Consultant to
make an immediate and complete accounting to the Company of all warrants and
shares remaining directly and indirectly in the Consultant's possession.
As of April 9, 1999, the Company has not yet received a full accounting from the
Consultant. However, the Company has received a partial accounting, the return
of approximately 722,000 shares of common stock, and payments for warrants in
the total amount of $41,805, which are reflected in the consolidated financial
statements.
(10) SUBSEQUENT EVENT:
On March 17, 1999, the Company obtained a commitment for lease financing of up
to $1,050,000 for equipment to be installed in a new slab factory being
constructed in Mexico. The commitment includes a five-year lease term with an
option to purchase the equipment for $1.00 at the end of the term. This lease
will be accounted for as a capital lease and, accordingly, the Company will
record a long-term obligation.
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF WORLD WIDE STONE CORPORATION FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF
SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES
EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS,
NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT
BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY
REFERENCE.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 279,167
<SECURITIES> 0
<RECEIVABLES> 265,585
<ALLOWANCES> 0
<INVENTORY> 885,478
<CURRENT-ASSETS> 1,598,945
<PP&E> 4,806,987
<DEPRECIATION> 1,247,199
<TOTAL-ASSETS> 5,818,209
<CURRENT-LIABILITIES> 1,315,569
<BONDS> 102,898
0
0
<COMMON> 34,704
<OTHER-SE> 4,365,038
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</TABLE>
