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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000 Commission File Number 000-18389
WORLD WIDE STONE CORPORATION
NEVADA 33-0297934
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5236 S. 40th Street, Phoenix, AZ 85040
(Address of Principal Executive Offices) (Zip Code)
602-438-1001
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or, for such 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 [ ]
As of September 30, 2000 there were 32,803,768 shares of common stock
outstanding.
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WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 ............................3
Consolidated Statements of Operations
Three months ended September 30, 2000 and 1999 ......................4
Consolidated Statements of Operations
Nine months ended September 30, 2000 and 1999 .......................5
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 .......................6
Notes to Consolidated Financial Statements ............................7
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations .........................9
PART II. OTHER INFORMATION....................................................12
Signature ....................................................................13
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WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
----------- -----------
CURRENT ASSETS:
Cash $ 360,003 $ 151,147
Accounts receivable 1,113,684 805,052
Inventory 1,659,998 1,519,767
Prepaid expenses and other 465,777 72,585
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Total current assets 3,599,462 2,548,551
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $2,028,726
and $1,622,870, respectively 4,898,286 5,159,297
COST IN EXCESS OF NET ASSETS ACQUIRED, net of
accumulated amortization of $132,235 and
$118,555, respectively 141,354 155,034
OTHER ASSETS:
Other receivables 140,349 299,308
Deferred loan fees, net 37,975 47,505
Prepaid taxes 10,083 10,748
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Total assets $ 8,827,509 $ 8,220,443
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 169,174 $ 228,286
Accrued liabilities 233,866 319,353
Income taxes payable 435,155 94,093
Current portion of long-term debt 366,771 297,830
Other (Banca Serfin S.A. debt) 900,000 900,000
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Total current liabilities 2,104,966 1,839,562
DEFERRED TAX LIABILITY 83,388 18,000
LONG-TERM DEBT, net of current portion 695,786 1,037,408
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Total liabilities 2,884,140 2,894,970
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value,
100,000,000 shares authorized,
34,803,768 shares issued,
32,803,768 shares outstanding 34,804 34,804
Additional paid-in capital 8,039,436 8,039,436
Accumulated deficit (2,016,248) (2,643,707)
Cumulative remeasurement adjustment 5,377 14,940
Treasury stock, at cost, 2,000,000 shares (120,000) (120,000)
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Total stockholders' equity 5,943,369 5,325,473
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Total liabilities and stockholders' equity $ 8,827,509 $ 8,220,443
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The accompanying notes are an integral part of these
consolidated balance sheets.
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WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
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2000 1999
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REVENUE $ 2,740,867 $ 1,860,990
COST OF GOODS SOLD 1,475,236 898,382
SLAB REFINISHING 139,412 --
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Gross profit 1,126,219 962,518
COST AND EXPENSES:
Selling, general and administrative 456,191 465,315
Depreciation and amortization 19,812 7,510
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Income from operations 650,216 489,693
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OTHER INCOME (EXPENSE):
Interest expense (29,007) (36,974)
Loss on currency remeasurement (25,274) (44,878)
Other income 5,196 33,624
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Total other expense (49,085) (48,228)
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Income before provision for income taxes 601,131 441,465
PROVISION FOR INCOME TAXES 358,486 178,000
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Net income 242,645 263,465
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency remeasurement adjustment 48,088 3,226
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Comprehensive income $ 290,733 $ 266,691
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EARNINGS PER SHARE
Basic and diluted:
Net income per share $ .01 $ .01
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Weighted average number of common
shares outstanding 32,803,768 32,703,768
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The accompanying notes are an integral part of these
consolidated financial statements.
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WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
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2000 1999
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REVENUE $ 7,372,000 $ 4,567,585
COST OF GOODS SOLD 3,810,250 2,316,805
SLAB REFINISHING 640,032 --
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Gross profit 2,921,718 2,250,780
COST AND EXPENSES:
Selling, general and administrative 1,469,712 1,183,142
Depreciation and amortization 52,924 29,558
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Income from operations 1,399,082 1,038,080
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OTHER INCOME (EXPENSE):
Interest expense (95,454) (69,407)
(Loss) on currency remeasurement (39,384) (10,118)
Other income 12,001 40,827
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Total other expense (122,837) (38,698)
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Income before provision for income taxes 1,276,245 999,382
PROVISION FOR INCOME TAXES 648,786 379,000
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Net income 627,459 620,382
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency remeasurement adjustment (9,563) 24,014
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Comprehensive income $ 617,896 $ 644,396
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EARNINGS PER SHARE
Basic and diluted:
Net income per share $ .02 $ .02
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Weighted average number of common
shares outstanding 32,803,768 32,703,768
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The accompanying notes are an integral part of these
consolidated financial statements.
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WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
--------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 627,459 $ 620,382
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 419,536 304,140
Amortization of deferred loan fees 9,530 --
Loss on foreign currency remeasurement 39,384 10,118
Changes in certain assets and liabilities:
Increase in accounts receivable (308,632) (336,599)
Increase in inventory (140,231) (435,016)
Increase in prepaid expenses and other (392,527) (7,343)
Decrease (increase) in other receivables 110,012 (12,532)
Increase in deferred taxes 65,388 300,000
(Decrease) increase in accounts payable (59,112) 33,327
(Decrease) increase in accrued liabilities (85,487) 86,156
Increase in income taxes payable 341,062 --
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Net cash provided by operating activities 626,382 562,633
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment, net (144,845) (1,384,907)
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Net cash used in investing activities (144,845) (1,384,907)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments on) proceeds from long-term debt (22,861) 889,813
Net payments on the line of credit (250,000) --
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Net cash (used in) provided
by financing activities (272,681) 889,813
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NET INCREASE IN CASH 208,856 67,539
CASH, beginning of period 151,147 279,167
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CASH, end of period $ 360,003 $ 346,706
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SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 75,567 $ 30,732
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Cash paid for income taxes $ 242,336 $ --
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The accompanying notes are an integral part of these
consolidated financial statements.
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WORLD WIDE STONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(1) INTERIM FINANCIAL REPORTING:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-QSB.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for the periods
presented have been made. The results of operations for the three-month and
nine-month periods ended September 30, 2000 are not necessarily indicative of
the operating results that may be expected for the entire year ending December
31, 2000. These financial statements should be read in conjunction with the
Company's Form 10-KSB for the year ended December 31, 1999.
(2) INVENTORY:
Inventory is stated at the lower of cost or market. Inventory and cost of goods
sold include all normal operating costs incurred at the Company's three
factories in Mexico as well as freight charges from Mexico to the United States.
Included in these operating costs was depreciation of property, plant and
equipment of $124,328 and $99,584 for the three months ended September 30, 2000
and 1999, respectively, and $327,612 and $269,142 for the nine months ended
September 30, 2000 and 1999, respectively. Additional costs incurred for initial
production quality issues and inefficiencies, including $39,000 of depreciation
related to the Company's third factory, were excluded from inventory and
included in slab refinishing expense during the nine months ended September 30,
2000. As of September 30, 2000, inventory was located at a plant in Durango,
Mexico, at a showroom-warehouse in Phoenix, Arizona, and at a warehouse in El
Paso, Texas. Inventory at September 30, 2000, consists of finished goods and raw
materials of $1,383,276 and $276,722, respectively.
(3) ADOPTION OF STAFF ACCOUNTING BULLETIN (SAB) NO. 101
In December 1999, the Securities and Exchange Commission issued SAB No. 101 that
provides guidance on revenue recognition. SAB No. 101 is effective for fiscal
years beginning after December 15, 1999. The Company is currently evaluating the
impact of adopting SAB No. 101, which is required during the fourth quarter of
2000, and does not expect a material adjustment as a result of its adoption.
Accordingly, the Company believes that their revenue recognition policy complies
with SAB No. 101.
(4) EARNINGS PER SHARE:
The Company utilizes Statement of Financial Accounting Standards (SFAS) No. 128,
EARNINGS PER SHARE, to compute basic and diluted earnings per share. 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. In
March 2000,
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the Company's Board of Directors approved a 1-for-30 reverse stock split of the
Company's common stock. If approved by the shareholders, each 30 shares of the
Company's common stock outstanding prior to the reverse stock spilt will
represent one share of common stock following the reverse stock spilt. If
approved, the Company's net income per share would be restated as $.22 and $.24
for the three months ended September 30, 2000 and 1999, respectively, and $.57
and $.57 for the nine months ended September 30, 2000 and 1999, respectively.
The Company has not yet scheduled a date for stockholder approval of the reverse
stock split.
(5) 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 in accordance with SFAS No. 52, FOREIGN
CURRENCY TRANSLATION.
The remeasurement method of foreign currency 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 and losses resulting from
transactions that are short-term in nature are reported in the Company's
consolidated statements of operations as foreign currency remeasurement
adjustments. Remeasurement gains or losses resulting from intercompany
transactions that are long-term in nature are reported as a separate component
of stockholders' equity as a cumulative remeasurement adjustment.
(6) RELATED PARTY TRANSACTIONS:
In January 1999, an officer of the Company acquired the building that the
Company leases for its corporate offices in Phoenix, Arizona. In March 2000, the
building was transferred to a director of the Company as part of a divorce
settlement. Because the Company entered into the lease with a third party prior
to the officer's acquisition of the building and the subsequent transfer to the
director, the Company believes that the terms of the lease are no less favorable
to the Company than could be obtained from non-affiliated parties. The lease for
this building expires in November 2000. The Company is negotiating an extension
to the lease and anticipates that the extension will be on terms substantially
similar to the terms and conditions of the existing lease.
(7) SUBSEQUENT EVENT:
Subsequent to September 30, 2000, the Company settled its $900,000 debt with
Banca Serfin S.A.. As a result of the Company's insistence that the debt owed to
Banca Serfin S.A. was much less than what the bank had claimed and the Company's
ability to engage legal counsel and litigate the matter over the past several
years, the debt was settled on October 6, 2000 for approximately $127,000. Legal
fees incurred to settle the debt obligation are estimated to be approximately
$150,000. Legal fees were negotiated as a percentage of the difference between
the original contingency and the final settlement with the bank. Other direct
costs associated with the settlement of this matter are likely to be immaterial.
The Company paid the settlement out of operating cash flow and accrued the
amounts due to legal counsel in October 2000. The Company will account for the
net gain on this transaction as an extraordinary item in the fourth quarter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Report on Form 10-QSB 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 our 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 2000 and thereafter; future products
or product development efforts; spending for acquisitions of additional
equipment or expansion of production facilities; and liquidity and anticipated
cash needs and availability. All forward-looking statements included in this
Report are based on information available to us as of the filing date of this
Report, and we assume no obligation to update any such forward-looking
statements. It is important to note that our actual results could differ
materially from those in such forward-looking statements as a result of a
variety of factors, including those identified in our Form 10-KSB for the year
ended December 31, 1999, as filed with the Securities and Exchange Commission.
INTRODUCTION
We quarry, manufacture, and market a wide variety of dimensional stone products.
We extract marble limestone and travertine blocks from quarries located in
Mexico. We then transport the blocks to factories operated by our wholly-owned
Mexican subsidiaries in Durango, Durango, Mexico, where the blocks are cut,
honed, polished or tumbled, dimensioned and packaged. We market our dimensional
stone products primarily in the United States through distributors, dealers, and
designers. In addition, we sell nominal quantities of our products in Europe and
Canada.
RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUE. Revenue for the three months ended September 30, 2000 was $2,740,867, a
47.3% increase over revenue of $1,860,990 for the three months ended June 30,
1999. Revenue for the nine months ended September 30, 2000 was $7,372,000, a
61.4% increase over revenue of $4,567,585 for the nine months ended September
30, 1999. We attribute the increase in revenue to increased production and
continued market acceptance and demand for our products. Production from our
honed tile product factory for the three and nine-month periods ended September
30, 2000 was 23.9% and 18.3% higher than the same periods in 1999. Production
from our ancient tile product factory for the three and nine-month periods ended
September 30, 2000 was 70.2% and 63.8% higher than the same periods in 1999.
COST OF GOODS SOLD; SLAB REFINISHING; GROSS PROFIT. Cost of goods sold was
$1,475,236 and $ 898,382 for the three months ended September 30, 2000 and 1999,
respectively. Cost of goods sold was $3,810,250 and $2,316,805 for the nine
months ended September 30, 2000 and 1999, respectively. Gross profit as a
percentage of revenue, including slab refinishing expense, was 41.1% and 51.7%
for the three months ended September 30, 2000 and 1999, respectively, and was
39.6% and 49.3% for the nine months ended September 30, 2000 and 1999,
respectively.
Slab refinishing expense was $139,412 and $0 for the three months ended
September 30, 2000 and 1999, respectively, and was $640,032 and $0 for the nine
months ended September 30, 2000 and 1999, respectively. Slab refinishing expense
represents all fixed costs incurred for our third factory in excess of amounts
required for normal production activity and for costs incurred to resolve
initial production
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quality issues. Slab refinishing expense decreased during the three months ended
September 30, 2000, as fewer slabs had to be refinished compared with the first
two quarters of fiscal 2000.
Gross profit as a percentage of revenue, excluding slab refinishing expense, was
46.2% and 51.7% for the three months ended September 30, 2000 and 1999,
respectively, and was 48.3% and 49.3% for the nine months ended September 30,
2000 and 1999, respectively. The decrease in gross profit as a percentage of
revenue, excluding slab refinishing expense, for the three and nine months ended
September 30, 2000, results from increased production and sales from our ancient
tile product factory, representing our highest margin items and increasing our
gross margin, offset by a 25% increase in the average cost per cubic meter for
block and a poorer quality of block quarried and consumed over this quarter,
which decreased our gross margin. This increase in cost is the result of
quarrying through a geological fracture in our primary quarry. When our
quarriers encounter a geological fracture, they expend significantly more time
and effort cutting and removing useable block for delivery to our factories.
Even so, much of the block delivered to our factories is very porous and breaks
apart during final production. Over the three months ended September 30, 2000,
we increased our production by approximately 20% over the previous quarter to
meet increased market demand for our products. In order to achieve this increase
in production, it was necessary to cut approximately 40% more block than in the
previous quarter, given the poorer quality of much of the block consumed. By
consuming more block, at a higher cost per cubic meter, our gross profit for the
three months ended September 30, 2000, decreased instead of improving due to
increased production and sales of ancient tile.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense remained relatively consistent at $456,191 and $465,315
for the three months ended September 30, 2000 and 1999, respectively. Selling,
general, and administrative expense was $1,469,712 and $1,183,142 for the nine
months ended September 30, 2000 and 1999, respectively. The increase in selling,
general, and administrative expense for the nine months ended September 30, 2000
is due to increases in personnel and increased spending on advertising and
promotion. Selling, general, and administrative expense continues to decrease as
a percentage of revenue as we increase our revenue while maintaining relatively
the same sales and administrative cost structure.
PROVISION FOR INCOME TAXES. We accounted for the utilization of our net
operating loss carryforwards during the nine months ended September 30, 1999 by
reducing our deferred tax asset by $379,000 and recording a related provision
for income taxes of $113,000, $88,000, and $178,000 for the three months ended
March 31, 1999, June 30, 1999, and September 30, 1999, respectively. We have
recorded a provision for income taxes of $84,720, $205,580, and $358,486 for the
three months ended March 31, 2000, June 30, 2000, and September 30, 2000
respectively, using an effective rate of 43% in the first and second quarters
and 60% in the third quarter. The provision for income taxes for the nine months
ended September 30, 2000 is comprised of a current amount of $583,398 and a
deferred amount of $65,388.
SEASONALITY
Historically, we have 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 remodeling. We may also be subject to periodic
declines experienced by the building industry in general.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position increased to $1,494,496 at September 30, 2000 from
$708,989 at December 31, 1999. The increase was attributable to increases in
cash and accounts receivable and
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decreases in accounts payable and accrued liabilities. The improvement in our
working capital position can be attributed to improved cash flows resulting from
increased monthly sales levels.
Our net cash provided by operating activities was $626,382 for the nine months
ended September 30, 2000, compared to net cash provided by operating activities
of $562,633 for the nine months ended September 30, 1999. The change was
primarily attributable to increases in net income and income taxes payable
during the nine months ended September 30, 2000.
We have a $500,000 revolving line of credit with Bank One, Arizona NA. Interest
on amounts borrowed on the line of credit is payable at the bank's prime rate
plus 1.5%, or a total of 10.75% at September 30, 2000. The line of credit
formally expired on August 13, 2000, but has temporarily been extended through
November 15, 2000. The line of credit is secured by our inventory, accounts
receivable, and intangible assets. Franklin E. Cunningham, our Chairman of the
Board, President, and Chief Executive Officer, also has personally guaranteed
our obligations under the line of credit. We had outstanding borrowings of $0
and $250,000 at September 30, 2000 and December 31, 1999, respectively. We had
$500,000 and $250,000 available to us under the line of credit at September 30,
2000 and December 31, 1999, respectively.
In January 2000, we entered into a capital lease agreement with Banc One Leasing
Corporation in order to refinance the balance outstanding on the line of credit
at December 31, 1999. The lease has a five-year term and bears interest at a
rate of 9.29% per annum. We have the option to purchase the equipment for a
nominal amount at the end of the lease term.
In October 2000, we settled our $900,000 debt with Banca Serfin S.A. Because of
our insistence that the debt owed to Banca Serfin S.A. was much less than what
the bank had claimed and our ability to engage legal counsel and litigate the
matter over the past several years, the debt was settled for approximately
$127,000. We were able to make this payment with cash from operations. Legal
fees incurred to settle the debt obligation are estimated to be approximately
$150,000. Legal fees were negotiated as a percentage of the difference betwen
the original contingency and the final settlement with the bank. We will account
for the gain on this transaction, net of direct costs associated with settling
the debt, as an extraordinary item in the fourth quarter.
We anticipate that our current cash resources, expected cash flow from
operations, and equipment financing will be sufficient to fund our capital needs
during the next 12 months at our current level of operations. We may be required
to obtain additional capital to fund our planned growth during the next 12
months and beyond, particularly for expansion of our facilities and operations
in Mexico. Potential sources of any such capital may include the proceeds from
bank financing, strategic alliances, and offerings of our 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 affect on our business.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 3.2A: First Amended and Restated Bylaws of the Registrant as
adopted March 15, 2000
Exhibit 27.1: Financial Data Schedule
(b) REPORTS ON FORM 8-K
Not Applicable
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
Date: November 14, 2000 World Wide Stone Corporation
By: /s/ Aaron T. Macneil
------------------------------------
Aaron T. Macneil,
Chief Financial Officer
