U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSBA
Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 2001 Commission File No. 0-9416
WCM CAPITAL, INC.
(FORMERLY FRANKLIN CONSOLIDATED MINING CO., INC.)
(Exact name of registrant as specified in its charter)
Delaware #13-2879202
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 344, Millburn, New Jersey 07041
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area code (212) 344-2828
The Number of Shares Outstanding of Common Stock
$.01 Par Value, at March 31, 2001 1,318,767(1)
(1) Includes 169,750 shares and 153,690 shares issued to Richard Brannon and
Joseph Laura in May, 2000 and thereafter rescinded in December, 2000.
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 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 [_]
ACCOUNTANT'S REVIEW REPORT
To the Board of Directors
WCM CAPITAL, INC.
New York, New York
We have reviewed the accompanying Balance Sheet of WCM Capital, Inc. as of
March 31, 2001 and the related Statements of Operation and Cash Flows for the
three months then ended in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. We did not audit the accumulated amounts from inception
through December 31, 1999, which included an accumulated deficit of
($16,201,967) as of December 31, 1999. Those amounts were audited by other
auditors whose report has been furnished to us and our opinion insofar as it
relates to those accumulated amounts is based solely on the report of the other
auditors. The financial statements of WCM Capital, Inc. as of December 31, 1999
were audited by other auditors whose report on those statements dated March 28,
2000 included an explanatory paragraph that described the going concern
uncertainty discussed in Note 2 to the financial statements. All information
included in these financial statements is the representation of the management
of WCM Capital Inc.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the reports of other auditors, we are not aware of
any material modifications that should be made to the March 31, 2001 financial
statements in order for them to be in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is an exploration stage enterprise whose
operations have generated recurring losses and cash flow deficiencies from
inception, and as of March 31, 2001, has a substantial working capital
deficiency. As a result, it was in default with respect to payments on several
notes and convertible debentures and is wholly dependent on outside funding to
finance current operations. Such matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
The financial statements for WCM Capital, Inc. for the period ended March
31, 2000 were reviewed by other accountants. Therefore, we do not make any
representation or assurance about them.
POLAKOFF WEISMANN LEEN LLC
May 1, 2001
F-1
WCM CAPITAL INC.
(An Exploration Stage Company)
BALANCE SHEETS
ASSETS
March 31,
----------------------
2001 2000
---------- ---------
Property and equipment - at cost $6,310,550 6,784,095
Less: Accumulated depreciation and amortization 2,156,738 2,179,709
---------- ---------
Net property and equipment 4,153,812 4,604,386
---------- ---------
Other assets -
Mining reclamation Bonds 140,455 137,701
---------- ---------
Total $4,294,267 4,742,087
========== =========
See auditors' report and notes to financial statements
F-2
WCM CAPITAL, INC.
(An Exploration Stage Company)
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
---------------------------
2001 2000
------------ -----------
Current liabilities:
Accounts payable and accrued expenses $ 1,849,213 699,289
Payroll and other taxes -- 29,960
Convertible debentures 145,000 145,000
Notes payable: --
Related companies and others 297,028 218,965
U.S. Mining Inc. - related company -- 1,627,438
------------ -----------
Total current liabilities 2,291,241 2,720,652
------------ -----------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 40,000,000 shares
authorized; 1,318,767 shares issued and outstanding 13,188 13,188
Additional paid-in capital 20,191,090 18,390,360
Deficit accumulated during the exploration stage (18,201,252) (16,382,113)
------------ -----------
Total stockholders' equity 2,003,026 2,021,435
------------ -----------
Total $ 4,294,267 4,742,087
============ ===========
See auditors' report and notes to financial statements.
F-3
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
Cumulative
December 1,
1977
(Inception)
Three Months Ended through
March 31, March 31,
2001 2000 2001
----------- ---------- -----------
Revenues:
Sales $ -- -- 876,082
Interest income 699 685 554,548
Other income -- -- 79,397
----------- ---------- -----------
Total 699 685 1,510,027
----------- ---------- -----------
Expenses:
Mine expenses and environmental remediation costs -- 480 3,668,159
Loss on sale/write down of mining and milling and --
other property and equipment -- -- 2,224,983
Depreciation and depletion -- 13,447 2,395,649
General and administrative 40,911 126,768 7,718,265
Interest 15,918 40,137 1,542,026
Amortization of debt issuance -- -- 683,047
Equity in net loss and settlement of claims
of Joint Venture -- -- 1,059,971
Other -- -- 419,179
----------- ---------- -----------
Total 56,829 180,832 19,711,279
----------- ---------- -----------
Net loss $ (56,130) (180,147) (18,201,252)
=========== ========== ===========
Loss per common share (0.05) (0.14)
=========== ==========
Weighted average shares outstanding 1,318,767 1,318,767
=========== ==========
See auditors' report and notes to financial statements.
F-4
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
December 1,
1977
(Inception)
Three Months Ended through
March 31, March 31,
2001 2000 2001
-------- -------- -----------
Cash flows from operating activities:
Net loss $(56,130) (180,147) (18,145,122)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and depletion -- 13,447 2,395,649
Depreciation impairment loss -- -- (43,562)
Provision for uncollectible account -- -- 350,000
Write down of mining and milling and the other
property and equipment -- -- 2,003,545
Amortization of debt issuance expense -- -- 683,047
Loss on sale of equipment -- -- 265,000
Value of common stock issued for:
Services and interest -- -- 1,934,894
Settlement of:
Litigation -- -- 100,000
Claims by joint venture partner -- -- 936,000
Compensation resulting from stock options granted -- -- 311,900
Value of stock options granted for services -- -- 112,500
Equity in net (income) loss of joint venture -- -- 123,971
Other -- -- (7,123)
Changes in operating assets and liabilities:
Interest accrued on mining reclamation bonds (699) (685) (14,756)
Accounts payable and accrued expenses 24,928 10,240 2,086,501
Payroll and other taxes -- -- (29,960)
-------- -------- -----------
Net cash used in operating activities (31,901) (157,145) (6,937,516)
-------- -------- -----------
Cash flows from investing activities:
Purchases and additions to mining, milling and other
property and equipment -- -- (5,120,354)
Purchases of mining reclamation bonds, net -- -- (125,000)
Deferred mine development costs and other expenses -- -- (255,319)
-------- -------- -----------
Net cash used in investing activities -- -- (5,500,673)
-------- -------- -----------
See auditors' report and notes to financial statements.
F-5
WCM CAPITAL, INC.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
December 1,
1977
(inception)
Three Months Ended through
March 31, March 31,
2001 2000 2001
------ ------- -----------
Cash flows from financing activities:
Issuance of:
Common stock -- -- 8,758,257
Underwriter's stock warrants -- -- 100
Commissions on sales of common stock -- -- (381,860)
Purchases of treasury stock -- -- (12,500)
Payments:
Deferred underwriting costs -- -- (63,814)
Debt issuance expenses -- -- (164,233)
Repayments:
Other notes and loan payables -- -- (120,000)
Loans from affiliate -- -- (48,661)
Proceeds:
Exercise of stock options -- -- 306,300
Advances from joint venture partner -- -- 526,288
Other notes and loans payable -- 157,145 489,546
Donated loan -- -- 1,768,829
Loans from affiliate 31,901 -- 55,954
Issuance of convertible debentures and notes -- -- 1,505,000
Advances to joint venture partner -- -- (181,017)
------ ------- -----------
Net cash provided by financing activities 31,901 157,145 12,438,189
------ ------- -----------
Increase (decrease) in cash -- -- --
Cash Beginning -- -- --
Cash Ending -- -- --
====== ======= ===========
Supplemental disclosure of cash flow data -
Interest paid -- -- 299,868
====== ======= ===========
See auditors' report and notes to financial statements.
F-6
WCM CAPITAL INC.
(An EXPLORATION STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE A - BASIS OF PRESENTATION/GOING CONCERN UNCERTAINTY:
The accompanying financial statements have been prepared assuming WCM
Capital Inc. (The "Company") will continue as a going concern. However, the
Company has had recurring losses and cash flow deficiencies since
inception. As of March 31, 2001 and 2000, the Company did not have any cash
balances, an accumulated deficit of $18,201,000 and $16,382,000,
respectively, and current liabilities of $2,291,000 and $2,721,000,
respectively, and a working capital deficiency of $2,291,000 and
$2,721,000, respectively. The Company was in default on the payment of the
principal balances and accrued interest on certain notes and debentures
(Notes E, F and G). In addition to the payable of its current liabilities,
management estimates that the Company will incur general, administrative,
and other costs and expenditures, exclusive of any costs and expenditures
related to any mining and milling operations or environmental matters (Note
Hb), at a rate of approximately $25,000 per month during the year 2001 as
based upon the year 2000 actual costs. Such matters raise substantial doubt
as to the Company's ability to continue as a going concern.
U.S. Mining Co. (USM), has verbally pledged to provide financing to the
Company on an as needed basis through March 31, 2001. The funds will cover
general, administrative and other costs. Additional funds will be needed to
support the extraction and milling processes once underway as well as to
upgrade the processing facilities to allow for an increase in ore
processing capacity.
There is no assurance that the Company will have adequate funds available
to repay the funds advanced by USM. In the event that the Company defaults
on its obligations, USM may file suit for recovery of advances. Such
actions would have a material adverse effect on the future operations of
the Company.
Substantially all of the $4,153,800 of plant and equipment included in the
accompanying balance sheet as of March 31, 2001, is related to exploration
properties. The ultimate realization of the Company's investment in such
properties and equipment is dependent upon the success of future property
sales, the existence of economically recoverable reserves, the ability of
the Company to obtain financing or make other arrangements for development
and future profitable production.
F-7
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
The Company (formerly Franklin Consolidated Mining Co., Inc.), incorporated
on December 1, 1976 under the laws of the State of Delaware, was formed to
engage in the exploration, development and mining of precious and
non-ferrous metals, including gold, silver, lead, copper and zinc. The
Company owns or has an interest in a number of precious and non-ferrous
metal properties. The Company's principal mining properties are (i) the
Franklin Mines, located near Idaho Springs in Clear Creek County, Colorado,
for which the Company acquired the exclusive right to explore, develop,
mine, and extract all minerals located in approximately 51 mining claims of
which 28 are patented (Franklin Mines) and (ii) the Franklin Mill, a
crushing and flotation mill which is located on the site of the Franklin
Mines (Franklin Mill). The Company is an exploration stage enterprise, as
it did not generate any significant revenues through March 31, 2001.
Accounting Estimates:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
While actual results could differ from those estimates, management does not
expect such variances, if any, to have a material effect on the financial
statements.
Mining, Milling and Other Property and Equipment:
Recorded at costs incurred to acquire, improve and develop mining and
milling properties capitalized and amortized in relation to the production
of estimated reserves. Exploration costs and costs to maintain the mineral
rights and leases are expensed as incurred. Management periodically reviews
the recoverability of the capitalized mineral properties and mining
equipment and takes into consideration various information including, but
not limited to, historical production records taken from previous mine
operations, results of exploration activities conducted to date, estimated
future prices and reports and opinions of outside geologists, mine
engineers, and consultants. When it is determined that a project or
property will be abandoned or its carrying value has been impaired, a
provision is made for any expected loss on the project or property.
F-8
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
Post-closure reclamation and site restoration costs are estimated based
upon environmental and regulatory requirements and are accrued over the
life of the mine using the units-of-production method. Current expenditures
relating to ongoing environmental and reclamation programs are expenses as
incurred.
Depreciation of equipment is computed using the straight-line method over
the estimated useful lives of the related assets.
Impairment of Long-Lived Assets:
The company has adopted the provisions of FASB Statement of Financial
Accounting Standards No. 121, "Accounting of the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). Under SFAS
121, impairment losses on long-lived assets are recognized when events or
changes in circumstances indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their carrying value
and, accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses then are measured by comparing the fair
value of assets to their carrying amounts. The Company, due to certain
restrictions associated with milling operations, sold the Gold Hill Mill
Properties on June 5, 1998 in exchange for property and equipment with a
market value of $725,000 and a 14% note receivable of $350,000. As of
December 31, 1998 this note was voided and a $200,000 impairment loss was
taken against the $725,000 of equipment acquired. Additional impairment
losses of $430,000 and $130,000 in 2000 and 1999 respectively were taken
against the Company's mining, milling and other property and equipment.
Revenue Recognition:
Revenues, if any, from the possible sales of mineral concentrates will be
recognized by the Company only upon receipt of final settlement funds from
the smelter.
Environmental Remediation Costs:
Accrued based on estimates of known environmental remediation exposures.
Ongoing environmental compliance costs, including maintenance and
monitoring costs are expensed as incurred.
F-9
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
Income Taxes:
Deferred income taxes are to be provided on transactions, which are
reported in the financial statements in different periods than for income
tax purposes. The Company utilized Financial Accounting Board Statement No.
109, "Accounting for Income Taxes," ("SFAS 109"). SFAS 109 requires
recognition of deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the
year in which the difference is expected to reverse. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized (Note I).
Loss Per Common Share:
The Company has adopted SFAS 128 "Earnings Per Share" ("SFAS 128"), which
requires the presentation of "basic" and "diluted" earnings per share on
the face of the income statement. Loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding during each period. Common stock equivalents have been excluded
from the computations since the results would be anti-dilutive. Loses per
share have been restated for prior periods to give effect to the reverse
stock splits during 1999 (Note J).
Fair Value of Financial Investments:
The carrying amount of the Company's borrowings approximate fair value.
Statement of Comprehensive Income:
SFAS 130 "Reporting Comprehensive Income" prescribes standards for
reporting comprehensive income and its components. Since the Company
currently does not have any items of comprehensive income, a statement is
not required.
F-10
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE D - ACQUISITIONS OF MINING AND MILLING PROPERTIES:
Joint Venture
On December 26, 1976, the Company acquired Gold Developers and Producers
Incorporated, a Colorado corporation which, prior to the acquisition,
leased 28 patented mining claims from Audrey and David Hayden and Dorothy
Kennec pursuant to a mining lease and option to purchase, dated November
12, 1976 (hereinafter referred to as "Hayden" and "Kennec"). In 1981, the
Company commenced a rehabilitation program to extend and rehabilitate the
shafts and tunnels in place at the Franklin Mines, install the Franklin
Mill, and search for and delineate a commercial ore body. In 1983, the
Company completed the Franklin Mill.
Gold Hill Mill:
On July 3, 1996, the Company acquired the Gold Hill Mill from a wholly
subsidiary of Gems, in exchange for an 8% mortgage note with an initial
principal balance of $2,500,000. The Gold Hill Mill is a fully permitted
milling facility located in Boulder, Colorado.
At December 31, 1997, the Company reduced by $1,200,000 the carrying value
of certain of the Gold Hill Mill assets to $1,340,000, which approximates
management's estimate of fair value. All the Gold Hill assets were sold
during 1998 (see Note B).
NOTE D - MINING, MILLING AND OTHER PROPERTY AND EQUIPMENT:
Consist of the following: March 31,
------------------------
2001 2000
---------- ---------
Machinery and equipment $1,240,675 1,617,220
Mine and mill improvements (a) 4,974,065 5,071,065
Furniture and fixtures 11,714 11,714
Automotive equipment 84,096 84,096
---------- ---------
6,310,550 6,784,095
Less: accumulated depreciation
and depletion 2,156,738 2,166,261
---------- ---------
$4,153,812 4,617,834
========== =========
F-11
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE D - MINING, MILLING AND OTHER PROPERTY AND EQUIPMENT (continued):
(a) The improvements and equipment were written down $430,000 and $130,000
in 2000 and 1999 respectively (Note B) based upon the independent
appraisal of a qualified equipment appraiser.
During the three months ended March 31, 2001 and 2000, the Company
expended zero and $480, respectively, on environmental remediation
costs and mine expense.
NOTE E - NOTES PAYABLE - RELATED PARTY AND OTHERS:
Due to related party and others consisting of the following at March 31,
2001 and 2000:
12% unsecured demand notes due to the
Company's former President and his affiliated
entity $142,718
Secured promissory note (a) 60,000
Unsecured promissory notes (b) 94,310
--------
$297,028
========
(a) The outstanding principal balance of the note, payable on July 18,
1996 was defaulted. Collateralized by a subordinated security interest
in the Company's mining reclamation bond. Interest is payable based on
the rate of interest applicable to the mining reclamation bond (8% at
March 31, 2001).
(b) This principal amount represents four unsecured promissory notes. The
Company assumed these obligations on Novembers 25, 1997, as part of
the acquisition from USM. These notes were in default when assumed by
the Company, and remain in default as of March 31, 2001, interest
accrued at 17%.
Accrued interest on the above notes at March 31, 2001 and 2000 aggregated
approximately $91,000 and $71,000, respectively.
F-12
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE F - CONVERTIBLE DEBENTURES AND OTHER CONVERTIBLE DEBT:
At March 31, 2001 and 1999 consists of a $145,000 12.25% convertible
debenture maturing December 31, 1994.
As of March 31, 2001 and 1999, the Company was in default with respect to
the principal balance of the debenture and accrued interest of
approximately $107,000 and $88,000, respectively. As a result, the Company
may be subject to legal proceedings by the Transfer Agent/Trustee under the
Indenture Agreement or from debenture holders seeking immediate repayment
of principal plus interest and other costs. Management cannot assure that
funds will be available for the required payments or the effect will be of
any actions brought by or on behalf of the debenture holders (Note Ic).
In September 1996, the Company acquired a 20% interest in Newmineco by
issuing a 9.5% note payable of $600,000 to Gems, convertible to common
stock at the Company's option on or after January 1, 1997. On February 10,
1997, the Company notified the assignees that it elected to convert the
principal balance into 102,564 shares of common stock, as adjusted based on
the conversation rate of $5.85, per share as adjusted. As a result of
problems concerning permitting and various other issued related to the
Mogul Mines, the purchase price was reduced to $150,000 on December 31,
1996 and to zero on December 31, 1997 (Note B). The $450,000 and $150,000
reductions in the purchase price in 1996 and 1997 respectively were
effectuated through an equivalent reduction in the principal balance of an
8% mortgage notes payable to an affiliate of Gems by the Company.
NOTE G - NOTE PAYABLE - RELATED PARTY:
The Company had an 8% promissory note outstanding with a balance of
$955,756, at December 31, 1997, representing advances to the Company by an
affiliated entity, POS Financial, Inc. (POS), a New Jersey corporation and
obligations assumed in connection with the contributions of Joint Venture
interest (Note B). The note was payable on May 4, 1998, and is secured by
all the Company's mining claims and mining properties. The note is subject
to successive 30-day extensions throughout 1998 and 1999 upon the mutual
agreement of the maker and lender for no additional consideration. On March
5, 1998, POS assigned this note to USM. Both POS and USM are considered
related parties as they are owned by a director of WCM and can exert
significant influence over the Company. Additional amounts were loaned to
the Company by USM during 1999 and 2000. The balance due on the note at
March 31, 2001 aggregated $1,764,829 plus accrued interest of $328,040. The
balance due on the note at December 31, 1999 aggregated $1,470,295 plus
accrued interest of $198,745.
F-13
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE G - NOTE PAYABLE - RELATED PARTY (continued):
This note was donated to the Company as of December 31, 2000 and is
included as additional paid in capital. The accrued interest remains a
liability of the Company. Additional amounts were loaned to the Company
through March 31, 2001 and also donated as additional paid in capital.
All royalty payments made under the Hayden/Kennec Leases were expensed as
incurred and included in mine expenses and environmental remediation costs
in the accompanying Statements of Operations.
NOTE H - COMMITMENTS AND CONTINGENCIES:
(a) Lease Agreement:
On November 13, 1997, Hayden entered into an agreement to sell the Hayden
interests to USM for a purchase price of $75,000 (the "Hayden-USM Purchase
Agreement"). The purchase price was evidenced by a promissory note, due
February 2, 1998. Payment on the note has been waived until USM receives a
report of clear title.
Upon the execution of the Hayden-USM Purchase Agreement, USM agreed to give
Hayden mineral rights to some land parcels and will receive royalties which
will be expenses as incurred. As of March 31, 2001, USM had not received
clear title but continued to make Purchase Agreement extension payments.
Kennec receives a 50% share on land and mineral rights on certain parcels
of acreage.
All royalty payments made under the Hayden and Kennec agreements were
expensed as incurred as mine expenses and environmental remediation costs
in the accompanying Statement of Operations.
The Company pays a monthly rental of $3,500 (on a month to month basis) for
the office space, secretarial and other services provided to the Company
pursuant to an oral agreement with a non-affiliate. As of February 28,
2001, the Company ceased its tenancy.
F-14
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE H - COMMITMENTS AND CONTINGENCIES (continued):
(b) Environmental Matters:
During 1999, inspections of the Franklin Mining properties revealed that
certain drainage problems and substandard linings at the tailings disposal
areas created potential hazards and that protection measures are required.
The Company received a letter dated March 9, 2000 from the Colorado
Division of Minerals and Geology (the "DMG") which set forth measures that
must be taken to bring the site into compliance with groundwater
regulations and to stabilize the tailings pond and site. In the event the
Company completes all of the required actions by May 30, 2001, a Temporary
Cessation order will be granted by DMG. In the event a Temporary Cessation
is granted, no further reclamation work or mining work would be required
for the duration of the Temporary Cessation, beyond basic maintenance and
reclamation required to keep the site from further deterioration.
(c) Litigation:
The Company is involved in various litigation:
(i) The Company and others were defendants in an action related to a
dispute over fees for engineering consulting services. The parties
settled this matter in September 1999 and litigation was discontinued.
(ii) In September 1997, certain of the Company's 12.25% Convertible
Debenture holders (see Note B) instituted an action against the
Company for payment of approximately $42,500 principal amount of its
12.25% Convertible Debentures plus accrued and unpaid interest
totaling approximately $13,000 and other costs and expenses related
thereto. The Company answered the aforesaid complaint. A default
judgment was entered against the Company in the amount of $42,500 plus
interest, costs and disbursements. The Company and USM have been
negotiating with the debenture holders without arriving at a
settlement. The continued default could result in the Company being
subject to additional legal proceedings. In addition, there is no
assurance that funds will be available to cure the default or reach a
settlement.
F-15
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE I - COMMITMENTS AND CONTINGENCIES (continued):
(iii) On or about May 14, 1998, Redstone Securities Inc. ("Redstone")
commenced an action against the Company in connection with an
Investment Banking Agreement dated August 28, 1996, between Redstone
and the Company. On or about July 31, 1998, the Company answered the
complaint and filed a cross complaint against Redstone. In September
1999, the matter was settled whereby the Company agreed to lift the
stop transfer order on the shares held by Redstone allowing them the
ability to sell those shares to an unqualified third party.
(d) NASDAQ Notification:
During 1998 and 1999, the Company received notification letters from NASDAQ
informing them that the Company's common stock was not in compliance with
the NASDAQ small-cap market price requirement of $1.00, which became
effective on February 23, 1998.
In order to mitigate the minimum bid price requirement the Company
effectuated reverse stock splits during 1998 and 1999 (Note J). After each
reverse split the Company's stock price remained above the $1.00 minimum
bid price requirement for the necessary ten-day period.
While the Company is currently in compliance with the minimum bid price
requirement, there can be no assurance in the future that it will be able
to maintain such compliance.
NOTE I - INCOME TAXES:
As of March 31, 2001, the Company had federal net operating loss
carryforwards of approximately $11,876,000 available to reduce future
federal taxable income, which, if not used, will expire at various dates
through December 31, 2020. Changes in the ownership of the Company may
subject these loss carryforwards to substantial limitations.
The Company has offset the deferred tax attributable to the potential
benefits from such net operating loss carryforwards and the reduction in
carrying value by an equivalent valuation allowance due to the
uncertainties related to the extent and timing of its future taxable
income. There are no other material temporary differences.
F-16
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE I - INCOME TAXES (continued):
Deferred Valuation
Tax Asset Allowance
---------- ---------
Balance at December 31, 1998 $4,509,000 4,509,000
Increase in Federal deferred tax asset, year ended December 31, 1999 210,000 210,000
---------- ---------
Balance at December 31, 1999 4,719,000 4,719,000
Increase in Federal deferred tax asset, year ended March 31, 2001 470,000 470,000
Balance at March 31, 2001 5,189,000 5,189,000
Increase in Federal deferred tax asset, three months ended March 31, 2001 11,700 11,700
---------- ---------
Balance at March 31, 2001 $5,200,700 5,200,700
========== =========
NOTE J - STOCKHOLDERS' EQUITY:
(a) Reverse Stock Splits:
On May 26, 1998, the Company effectuated a twenty-five-for-one reverse
stock split, and on December 20, 1999, a three-for-one reverse stock
split. The accompanying financials give retroactive effect to these
reverse stock splits.
(b) Common Stock Reserved for Issuance:
At March 31, 2001 and 1999, there were 3,867 shares of common stock
reserved for issuance upon the exercise of the 12.25% $145,000
convertible debentures (see Note F).
F-17
WCM CAPITAL, INC.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NOTE J - STOCKHOLDERS' EQUITY (continued):
(c) Issuance of Common Stock
From December 1, 1997 (inception) through March 31, 2001, the Company
issued common stock for:
Shares Amount
------------ ------------
Cash, including net proceeds of $283,995 from Public offering 355,648 $ 8,758,256
Exercise of stock options 46,298 792,250
Commissions of sales of common stock -- (451,483)
Purchase and retirement of 666 shares treasury stock (12,500)
Non-cash, other than related parties:
Services and property 165,582 1,673,394
Conversion of debentures and notes payable 246,107 2,648,820
Stock options and stock warrants granted -- 39,100
Settlement of litigation and other 13,710 100,000
Non-cash, related parties:
Services and property 97,919 918,030
Settlement of claims by related parties 80,000 936,000
Donated related party loans payable -- 1,768,829
Repayment of related party loans 314,169 3,001,681
------------ ------------
1,318,767 $ 20,172,377
============ ============
F-18
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAUTIONARY STATEMENT ON FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, Management believes that
certain of the matters discussed in this Quarterly Report for the period ended
March 31, 2001 are "forward looking risks and uncertainties which cause actual
results to differ materially from those discussed herein including, but not
limited, risks relating to changing economic conditions, change in price as
disclosed in this Quarterly Report. The Company cautions readers that any such
forward-looking statements are based upon management's current expectations and
beliefs but are not guaranties of future performance. Actual results could
differ materially from those expressed or implied in forward-looking statements.
Liquidity and Capital Resources
The Company had no active mining or milling operations during the first quarter
ended March 31, 2001; however, the Company continued its efforts to bring the
site into compliance with groundwater regulations and to stabilize the tailings
ponds and site generally in anticipation of obtaining a grant of Temporary
Cessation from the Division of Minerals and Geology of the State of Colorado
("DMG").
During the first quarter of 2000, we filed a notice with the DMG requesting that
our permit be placed into Temporary Cessation. A Temporary Cessation is a
limited period of non-production, which results when an operator plans to
temporarily cease production for at least 180 days upon filing of a notice of
such intent with the DMG. As a condition to granting the request, the Company
must address certain issues with respect to groundwater and tailings disposal
ponds. Thus, the Company's efforts have been focused on addressing these issues.
We believe that we have adequately addressed the concerns of the DMG and expect
that it will grant our application for Temporary Cessation in the second or
third quarter of this year.
While we have actively sought to place our permit into Temporary Cessation, we
remain hopeful that economically viable commercial mining operations at the
Idaho Springs mining facilities can be conducted in the future. Given the
current economic climate and our efforts concerning the Temporary Cessation
order, it is highly unlikely that we the Company will begin operating in fiscal
year 2001.
Management estimates that we will incur general, administrative and other costs
and expenditures, exclusive of any costs and expenditures related to any mining
and milling operations and interest, at the rate of approximately $25,000 per
month for the remainder of 2001.
U.S. Mining Co. and its sole shareholder, William C. Martucci, has verbally
pledged to provide financing to the Company on an as needed basis for purposes
of meeting our general administrative and other costs until on or about December
31, 2001. The Company cannot assure, however, that USM will fulfill its
commitment to fund the Company's operations through year-end 2001. The funds
received from USM will cover the general, administrative and other costs
approximated at $25,000 per month. Additional monies will be needed to ready the
Franklin Mine and Milling properties for the commencement of extraction and
milling and to support the extraction and milling processes once underway as
well as to upgrade the processing facilities to allow for an increase in ore
processing capacity should we decide to reactivate our permit.
There can be no assurance that the Company will have adequate funds available to
repay the funds advanced by USM or that USM will fulfill its obligations to fund
the Company through December 31, 2001. In the event that the Company defaults on
its obligations, USM may foreclose on it security interest in the Company's
assets. Such foreclosure actions by USM would have a material adverse effect on
the future operations of the Company and the Company's ability to explore the
Franklin Mines.
3
Results of Operations:
Three months ended March 31, 2001 Compared to Three Months Ended March 31, 2000
We had a net loss of $61,130 for the three months ended March 31 2001 as
compared to a net loss of $180,147 during the same period in 2000.
Environmental remediation costs and mine expenses were $ Zero for the three
months ended March 31, 2001 compared to $480 during the same period in 2000.
This decrease was due to inactivity.
General and administrative expenses were $45,911 for the three months ended
March 31, 2001 compared with $126,768 during the same period in 2000. This
decrease resulted principally from decrease in legal and professional fees.
Interest expense was $15,918 during the three months ended March 31, 2001 as
compared to $40,137 during the same period in 2000. This decrease was due to an
apparent over accrual for 2000.
Three Months ended March 31, 2000 Compared to Three Months Ended March 31, 1999
The Company had a net loss of $180,147 for the three months ended March 31,
2000, as compared to a net loss of $81,196 during the same period in 1999.
Depreciation expenses increased from $6,677 in the three months ended March 31,
1999 to $13,467 for the three months ended March 31, 2000 as a result of
recording of depreciation expense on idle equipment in the first quarter 2000.
Environmental remediation costs and mine expenses were $480 for the three months
ended March 31, 2000 as compared to $14,677 during the same period in 1999. This
decrease was due to lower levels of activities in the first quarter 2000.
General and administrative expenses were $126,768 for the three months ended
March 31, 2000, compared with $25,642 during the same period in 1999. This
increase resulted from an increase in legal and professional fees and other
costs associated with the filing of our proxy statement and the reversal of
accrued costs during the quarter ended March 31, 1998 of approximately $38,000.
Interest expense was $40,137 during the three months ended March 31, 2000, as
compared to $34,599 during the same period in 1999. This increase was due to
interest incurred on the US Mining Note.
4
PART II
Item 1. Legal Proceedings
Convertible Debentures
On June 1, 1994, the Company advised the Transfer Agent/Trustee that the Company
was not in compliance with certain of the terms of the indenture (the
"Indenture") relating to the Company's 12 1/4% Convertible Debentures (the
"Debentures") in that it had not maintained current filings with the Securities
and Exchange Commission (the "Commission") as required. Accordingly, the
Transfer Agent/Trustee was instructed not to convert any of the Debentures into
Common Stock of the Company until such time as the Company notified the Transfer
Agent. The Company failed to make required sinking fund payments in 1994 and was
unable to pay the principal balance of the Debentures due on December 31, 1994
resulting in default under the terms of the Indenture.
In September, 1997, certain of the Company's 12 1/4% Convertible Debenture
holders, including the Hopis Trust (the "Plaintiff Debentureholders") instituted
an action in the Supreme Court of the State of New York against the Company for
payment on approximately $42,500 principal amount of Debentures plus accrued and
unpaid interest totaling approximately $13,000 and other costs and expenses
related thereto.
Thereafter, the Plaintiff Debenture holders moved for summary judgment against
the Company. The Company did not to oppose the motion and default was entered
against the Company in the amount of $42,500 plus interest, costs and
disbursements (the "Default"). Moreover, the issue of attorney's fees was
severed from the case and all to be set down for an inquest.
In February 1998, USM entered into an Agreement with the Plaintiff Debenture
holders agreeing to pay the Judgment plus certain additional costs in the event
that the Company fails to pay the Judgment and USM consummates the Transaction
with the Company. In the event that USM did not consummate the Transaction by
July 12, 1998, USM agreed to pay the Plaintiff Debenture holders $5,100 for
their Agreement not to enter the Judgment against the Company or pursue the
inquest. Plaintiff Debenture holders agreed not to enter the Judgment against
the Company until July 12, 1998 or until USM notifies them that it will not
pursue the Transaction.
On or about April 6, 1998, Martucci terminated his letter of intent to
consummate the Transaction with the Company. Despite such termination, Plaintiff
Debenture holders agreed to extend the terms of their Agreement with USM through
December 1998. As of date hereof, the Company is not aware of any further
extension nor, to its knowledge has the Judgment been entered. If the proposed
settlement is not consummated, there can be no assurance that the Judgment will
not be entered and the Company will be required to pay the amount of the
Judgment, including any costs, interest and penalties related thereto.
The continued default in the Debentures by the Company may result in Company
being subject to additional legal proceedings by the Transfer Agent/Trustee
under the Indenture or from other holders seeking immediate payment of the
$102,500 plus related interest and penalties. While the Company hopes to cure
the default or, in the alternative, reach an acceptable settlement arrangement
with the holders, there can be no assurance that the funds will be available in
the future to meet all of the Company's obligations.
On November 2, 2000 American Stock Transfer and Trust Company served the Company
with a summons, as Trustee under the Indenture dated January 2, 1990 to receive
damages on behalf of the holders of the Company's 12-1/4% Convertible Debenture
Holders in the amount of $142,000.00 plus interest and other fees. This action
is as a result of the default on the Debentures described above and are separate
and apart from the September 1997 action, which involves specific debenture
holders. As of the date of this report, there have been no further developments
with either proceeding.
5
Environmental Matters:
As of the date hereof, the Company has no violations against it with respect to
the Franklin Mines and Franklin Mill. While there are no outstanding violations
against the Company at this time, there can be no assurance that the Company
will be able to adequately comply with any future conditions set forth by the
DMG regarding its permit or that violations will not arise in the future.
There can be no assurance, however, that the Company will adequately address the
groundwater and tailings issues relating to its notification to place its permit
into Temporary Cessation, which may result in violations cited by the DMG.
NASDAQ Listing
On or about March 30, 2001, the Staff of the NASDAQ stock market notified the
Company that our common stock failed to maintain a minimum bid price of $1.00
over the prior 30 trading days as required by Rule 4310(C)(4) of the NASDAQ
SmallCap Marketplace Rules. On May 4, 2001, the Staff notified the Company of
its determination that the our common stock had maintained a minimum bid price
of $1.00 for at lease 10 consecutive trading days and is now in compliance with
the Marketplace Rules. Accordingly, the Staff has closed the matter.
Although the Company is currently in compliance with the requirements for
continued listing on the NASDAQ Small Cap Market, there can be no assurance that
in the future the Company will maintain such compliance. Should this occur, our
stock might be subject to delisting from the NASDAQ Small Cap Market. In such
event, Management is hopeful that the Company's Common Stock will qualify for
trading on the Over-The-Counter/Bulletin Board ("OTC") market and the Company
will make every effort to include its Common Stock on the OTC in the event of a
delisting by NASDAQ.
In the event that the Company's Common Stock is traded on the OTC, it may become
subject to the "penny stock" trading rules. The penny stock trading rules impose
additional duties and a responsibility upon broker-dealers recommends the
purchase of a penny stock (by a purchaser that is not an accredited investor as
defined by Rule 501(a) promulgated by the Commission under the Securities Act)
or the sale of a penny stock. Among such duties and responsibilities, with
respect to a purchaser who has not previously had an established account with
the broker-dealer, the broker-dealer is required to (i) obtain information
concerning the purchaser's financial situation, investment experience, and
investment objectives, (ii) make a reasonable determination that transactions in
the penny stock are suitable for the purchaser and the purchaser (or his
independent adviser in such transactions) has sufficient knowledge and
experience in financial matters and may be reasonably capable of evaluating the
risks of such transactions, followed by receipt of a manually signed written
statement which sets forth the basis for such determination and which informs
the purchaser that it's unlawful to effectuate a transaction in the penny stock
without first obtaining a written agreement to the transaction. Furthermore,
until the purchaser becomes an established customer (i.e., having had an account
with the dealer for at least one year or, the dealer had effected three sales or
more of penny stocks on three or more different days involving three or more
different issuers), the broker-dealer must obtain from the purchaser a written
agreement to purchase the penny stock which sets forth the identity and number
of shares of units of the security to be purchased prior to confirmation of the
purchase. A dealer is obligated to provide certain information disclosures to
the purchaser of penny stock, including (i) a generic risk disclosure document
which is required to be delivered to the purchaser before the initial
transaction in a penny stock, (ii) a transaction-related disclosure prior to
effecting a transaction in the penny stock (i.e., confirmation of the
transaction) containing bid and asked information related to the penny stock and
the dealer's and salesperson's compensation (i.e., commissions, commission
equivalents, markups and markdowns) connection with the transaction, and (iii)
the purchaser-customer must be furnished account statements, generally on a
monthly basis, which include prescribed information relating to market and price
information concerning the penny stocks held in the customer's account. The
penny stock trading rules do not apply to those transactions in which the
broker-dealer or salesperson does not make any purchase or sale recommendation
to the purchaser or seller of the penny stock.
6
Required compliance with the penny stock trading rules affect or will affect the
ability to resell the Common Stock by a holder principally because of the
additional duties and responsibilities imposed upon the broker-dealers and
salespersons recommending and effecting sale and purchase transactions in such
securities. In addition, many broker-dealers will not effect transactions in
penny stocks, except on an unsolicited basis, in order to avoid compliance with
the penny stock trading rules. The penny stock trading rules consequently may
materially limit or restrict the liquidity typically associated with other
publicly traded equity securities. In this connection, the holder of Common
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control the market in such securities and may set prices
that are not based on competitive forces.
Furthermore, at times there may be a lack of bid quotes which may mean that the
market among dealers is not active, in which case a holder of Common Stock may
be unable to sell such securities. Because market quotations in the
over-the-counter market are often subjected to negotiation among dealers and
often differ from the price at which transactions in securities are effected,
the bid and asked quotations of the Common Stock may not be reliable.
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Default on Senior Securities
See Item 1. Legal Proceedings - Convertible Debenture
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Temporary Cessation Notification
Throughout 1999, inspections of the Franklin Mining properties revealed that
certain reclamation issues still remained outstanding at the property. Drainage
problems and substandard linings at the tailings disposal areas created
potential hazards and required protection measures are addressed. Tailings Pond
No. 5 was of specific concern to the DMG. After several extensions had been
granted, the Company was unable to complete all of the preventive work required
by the DMG. Due to lack of funds, the Company has not been able to institute its
paste backfill program, which it believes would alleviate the problems currently
existing at its tailings disposal area.
On January 5, 2000, the Company submitted a letter to the DMG to clarify why,
among other things, it has not completed all of the recommended preventive
measures at the site, specifically with respect to its tailings ponds. The
Company explained its difficulty in obtaining needed financing to continue its
reclamation and remediation plans and to begin mining and milling operations at
the Franklin Mines due to the depressed price of gold. Therefore, the Company
concluded that it is economically unfeasible to mine and mill at the properties
at this time. Notwithstanding, the Company does not wish to abandon its business
plan or reclaim the property but rather intends to maintain the mine and mill
site and to comply with all DMG regulations with hopes of restarting the mine
and mill as soon as the price of gold makes it profitable to do so.
On February 7, 2000, the DMG responded to the Company's correspondence with a
recommendation that the Company's mining permit be placed in Temporary
Cessation. Temporary Cessation is a limited period of non-production, which
results when an operator plans to temporarily cease production for at least 180
days upon the filing of notice thereof with the DMG. In the event that a
Temporary Cessation is granted, no further reclamation work or mining work would
be required for the duration of the Temporary Cessation, beyond basic
maintenance and reclamation required to keep the site from further
deterioration. The DMG further indicated that should the Company choose to apply
for Temporary Cessation, certain of the tailings pond area would be required to
be stabilized and the groundwater and the stability of the tailings ponds must
be protected from further deterioration. The DMG required that any notice of
Temporary Cessation submitted must specifically address an alternative
7
interim reclamation plan for Tailings Pond No. 5 as well as outlining the
temporary stabilization measures needed to comply with these requirements.
As recommended by the DMG, the Company requested for a change of status of its
permit to Temporary Cessation. Following a meeting of the DMG and
representatives of the Company held on February 10, 2000, the DMG set forth the
measures in a letter, dated March 9, 2000, which must be taken by the Company to
bring the site into compliance with groundwater regulations and to stabilize the
tailings pond and site during the Temporary Cessation.
The Company's application for Temporary Cessation of its permit is still pending
before the DMG and we expect our application to be granted in the second or
third quarter of fiscal year 2001. While the Company continues its water
monitoring activities and to work the DMG to obtain Temporary Cessation, there
can be no assurance that our request will be granted. In the event that our
application is denied, we will have to comply with more stringent requirements
to keep our permit active. It is likely that we will be unable to continue
rehabilitation and reclaimation work as required by the DMG due to our lack of
funding. Failure to comply with any rules, regulations or orders of the DMG can
result in citations, which, if remained uncorrected, will result in the loss of
our mining permit and will have a material adverse effect on the Company as a
whole.
Item 6. Exhibits and Reports on Form 8-K (all filed in original filing)
A. Exhibits
NONE
B. Reports on Form 8-K
NONE
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WCM CAPITAL, INC.
Date: May 11, 2001 /s/ Robert Waligunda
---------------------------
Robert Waligunda, President
8