-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uxj/0dEIz12CHe4QnDwuFTPw56M0II1idgL6V55R0+AFxzuvQE2TLA8T7Fgg008w WE/L9sj+R12L28jtXVHTsQ== 0000950147-98-000964.txt : 19981120 0000950147-98-000964.hdr.sgml : 19981120 ACCESSION NUMBER: 0000950147-98-000964 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLPOWER CORP CENTRAL INDEX KEY: 0001068618 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 870384678 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-29780 FILM NUMBER: 98755091 BUSINESS ADDRESS: STREET 1: 7309 EAST STETSON DRIVE STREET 2: STE 102 CITY: SCOTTSDALE STATE: AZ ZIP: 85251 BUSINESS PHONE: 6029476366 MAIL ADDRESS: STREET 1: 7309 EAST STETSON DR STREET 2: STE 102 CITY: SCOTTSDALE STATE: AZ ZIP: 85251 10-K 1 FORM 10-K OF WORLD WIDE STONE F.T.Y.E 12/31/97 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, 1997 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[ ] No[X] 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: $3,111,918. As of September 30, 1998, there were outstanding 34,703,768 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 September 30, 1998, was $1,984,988. For purposes of this computation, all 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. EXPLANATORY NOTE: The issuer has voluntarily filed reports for prior reporting periods on Forms 10-K and Forms 10-Q, although it qualified as a "small business issuer," as defined in Item 10(a) of Regulation S-B, during all prior reporting periods. Accordingly, the issuer has elected to file this Annual Report on Form 10-KSB. WORLD WIDE STONE CORPORATION ANNUAL REPORT ON FORM 10-KSB FISCAL YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PAGE ---- PART I....................................................................... 1 ITEM 1. DESCRIPTION OF BUSINESS....................................... 1 ITEM 2. DESCRIPTION OF PROPERTY.......................................12 ITEM 3. LEGAL PROCEEDINGS.............................................12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........13 PART II......................................................................14 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......14 ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS....................................................15 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................19 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................19 PART III.....................................................................20 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT....20 ITEM 10. EXECUTIVE COMPENSATION........................................22 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................24 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................24 PART IV......................................................................25 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..............................25 SIGNATURES...................................................................26 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1 i 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 20 authorized stocking distributors and more than 100 wholesale distributors, as well as 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. Approximately 500.0 million square meters of fabricated stones were sold at a value of approximately $20.0 billion in 1996, an increase of 9.7% over 1995 consumption. 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. 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 20 authorized stocking distributors and to more than 100 wholesale distributors of dimensional stone products, as well as 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. The Company utilizes the services of independent freight forwarders in El Paso and Laredo, 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. 2 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 September 1998, the Company agreed to rescind its rights to extract stone from a third quarry site in Chihuahua, Mexico. The Company has engaged an independent contractor that employs approximately 10 to 20 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 contractor to extract stone from the quarries. The Company currently extracts approximately 300 cubic meters (approximately 10,600 cubic feet) of stone per month from its primary quarry site. 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 slabs into progressively smaller blocks. 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 an exact 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 warehouses in Laredo and El Paso, Texas, or directly to the Company's customers for installation at the end users' home or business. The Company currently produces approximately 3,000 square feet of honed and polished stone products per day and ships approximately 66,000 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 stones 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 2,150 square feet of Durango Ancient(TM) stone products per day and ships approximately 48,000 square feet of Durango Ancient(TM) products per month to the United States. 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, 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 3 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 $2.0 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 list of the equipment currently utilized by the Company in its operations. QUARRY EQUIPMENT 1 - Marini diamond wire saw 3 - 22-wheel tractor trailers for 3 - Mexican-made diamond wire saw block hauling 2 - Caterpillar electric power plants 1 - 350 cfm Ingersoll-Rand compressor 1 - Front end loader 1 - 450 cfm Case 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 PROCESSING EQUIPMENT 1 - 63-inch Zonato blockcutter 1 - Ultra Matic vibratory 1 - Mexican-made 47.2-inch blockcutter 1 - Ultra Matic "Big Bertha" vibratory 1 - Zambon four-head splitting machine 1 - Small round vibratory 3 - Zambon head cut-off saws 1 - Sandblasting rig with 350 cfm 1 - 12-head Zonato 25 3/4-inch DeVilbiss compressor calibrating and polishing machine 5 - Pick-up trucks 1 - 10-head Terzago 17 3/4-inch 1 - 10-wheel truck calibrating and polishing machine 1 - Nissan forklift 1 - Levi Tunisi 4-head splitting machine 1 - 20-ton gantry crane 1 - Zonato cut-off saw 1 - Design Force beveling machine 8 - Target tub saws 1 - Zonato drying and buffing oven 1 - 530-gallon Mekanica tumbler 3 - Mordenti jib saws 1 - 1,320-gallon Mekanica tumbler 2 - U.S.-made gangsaws 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. 4 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 sooner 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, "Description of Business - Special Considerations - 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 took a number of steps during fiscal 1997 to increase sales during the fourth quarter. The Company also may be subject to periodic declines experienced by the building industry in general. See Item 1, "Description of Business - Special Considerations - Certain Factors That Could Adversely Affect 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 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 all 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. The Company currently consumes approximately 4,000 cubic meters of stone per year. Accordingly, 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 affect on the Company. See Item 1, "Description of Business - Special Considerations - Limited Availability of Desirable Quarry Sites; Dependence on Third Parties for Quarry Operations." In September 1998, the Company agreed to rescind its rights to mine a large deposit of homogenous green quartzite in the state of Chihuahua, Mexico. 5 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 that are necessary for the production of 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. Failure to comply with current or future governmental laws and 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. 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 September 30, 1998, the Company employed 132 persons, all of whom were employed full-time. Of the total number employed by the Company, 118 were engaged in factory operations, 5 in sales and marketing, 4 in warehouse functions, and 5 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. The Company strives to foster continuous quality improvement at its factory operations in Mexico and corporate headquarters in Phoenix, Arizona, through a program based on "Control Systems Theory." The Company believes that Control Systems Theory forms the basis for an appropriate multi-cultural approach to a multi-national company. This theory maintains that all people are internally motivated and will not produce quality products or services unless their needs for belonging, accomplishment, freedom, and fun are met. What people choose in order to meet these needs will vary from person to person and from culture to culture. Control Systems Theory as adopted by the Company involves active interest by management in the needs of the Company's employees; a non-threatening, participatory environment; more effective training; more empowerment for decision making; and increased emphasis on personal responsibility. The Company stresses cooperation rather than coercion. In implementing Control Systems Theory, the Company de-emphasized final product inspections in favor of training its workers to inspect their own work. The Company also emphasizes a quality environment in its factory as an essential element for quality production. The Company believes that the application of Control Systems Theory has proven to be beneficial in increasing the satisfaction and cooperation of its employees and the quality of its finished products. The Company has made a commitment to continuing education of its employees and the application of Control Systems Theory principles in its operations. 6 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. CERTAIN FACTORS THAT COULD ADVERSELY AFFECT OPERATING RESULTS The Company's operating results are affected by a wide variety of factors that could adversely impact its net sales and operating results. These factors, many of which are beyond the control of the Company, include the Company's ability to identify trends in markets that the Company targets and to introduce products that take advantage of those trends; the ability to locate and obtain the rights to quarry new sources of stone; the ability to build or acquire additional facilities and equipment necessary to quarry and produce finished stone products at competitive prices; its 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 and 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. POSSIBLE NEED FOR ADDITIONAL CAPITAL The Company believes that its existing capital resources and cash flow from operations will be sufficient to satisfy the Company's capital requirements during the next 12-month period. The Company, however, may be required to seek additional equity or debt financing to finance future acquisitions of quarry rights, to construct or acquire facilities or equipment, to develop new product lines, or to 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, the Company believes that difficulties or uncertainties encountered by lenders that wish to utilize the Company's equipment and facilities located in Mexico as security may make it more difficult or costly for the Company to obtain purchase or lease financing in the future. If such financing is not available on satisfactory terms, the Company may be unable 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. INTERNATIONAL TRADE, EXCHANGE, AND FINANCING 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, 1997. 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 enables 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 risks associated with establishing and maintaining satisfactory internal controls at its Mexican operations; political and economic conditions abroad; and the possibility of expropriation, supply disruption, currency controls, and exchange fluctuations as well as changes in tax laws, tariffs, 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 7 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 United States dollars. As a result, the Company, through its Mexican subsidiaries, 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, 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. LIMITED AVAILABILITY OF DESIRABLE QUARRY SITES; DEPENDENCE ON THIRD PARTIES FOR QUARRYING OPERATIONS Although the Company has 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 possess 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. 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 site. 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 60 days. RELIANCE ON INDEPENDENT DISTRIBUTION CHANNELS 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 deemed sufficient to fill anticipated short-term orders. As a result, orders generally can be cancelled and volume levels changed or delayed 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 8 directly with the Company's products and other dimensional stone manufacturers compete intensely for their attention. There can be no assurance that the Company will 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. There also can be no assurance that the Company 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." WEAKNESSES IN 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, 1997, 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 1997. The Company has determined to take such steps as may be necessary to address and correct weaknesses in its internal controls. In this regard, the Company recently employed a Chief Accounting Officer and has begun development and implementation of policies and procedures designed to ensure accurate classification and timely recording of significant transactions as well as development and implementation of a management reporting system designed to facilitate management oversight of business operations and financial reporting. 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 the popularity of certain types of stone as well as 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." DEPENDENCE 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 that compete effectively on the basis of price and that address customer requirements. The success of new product introductions depends on various factors, including proper new product selection, successful sales and marketing efforts, timely production and delivery of new products, and consumer acceptance of new products. There can be no assurance that any new products will 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." 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. 9 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, including 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 its 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. There can be no assurance that the Company will continue to be able to compete successfully in the future. 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, "Description of Business - Special Considerations - Certain Factors That Could Adversely Affect Operating Results." MANAGEMENT OF GROWTH Since 1993, the Company's business operations have undergone significant changes and growth, including 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 manage effectively any significant future growth, however, will require it to further enhance its operational, financial, management, and internal control systems; to expand its facilities and equipment; to produce and receive products on a timely basis; and to 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 other expenses as well as to make expenditures on capital equipment and manufacturing facilities in order to meet the anticipated demand of its customers. Sales of the Company's dimensional stone products are subject to changing consumer tastes, and customers for the Company's products generally do not commit to firm orders for more than a short time in 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 would place an excessive short-term burden on the Company's resources. DEPENDENCE 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 affect on the Company. The Company does not maintain key person life insurance on the life of Mr. Cunningham or any of its other officers. 10 CONTROL BY MANAGEMENT The directors and executive officers of the Company and the officers of the Company's Mexican subsidiaries currently own approximately 72.8% 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. THIN TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; PENNY STOCK RULES 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 in response to quarterly variations in operating results of the Company, 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, worldwide economic and financial conditions, and other events or factors. 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. See Item 5, "Market for Common Equity and Related Stockholder Matters." 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 any 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. SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL DEPRESSIVE EFFECT ON STOCK PRICE Of the 34,703,768 shares of Common Stock outstanding as of September 30, 1998, 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 the Securities Act of 1933, as amended (the "Securities Act"). The approximately 31,100,000 remaining shares of Common Stock currently outstanding are "restricted securities," as that term is defined in Rule 144, and may be sold only in compliance with Rule 144, pursuant to registration under the Securities Act, or pursuant to an exemption therefrom. Affiliates also are subject to certain of the resale limitations of Rule 144 as promulgated under the Securities Act. 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 25,081,445 shares held by the Company's officers and directors 11 currently are available for sale under Rule 144. 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. LACK OF 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 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. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements and information contained in this Report under the headings "Description of Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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 Act. 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 elsewhere under this Item 1, "Description of Business Special Considerations." 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. 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 40,000 square feet, located on this property. The Company utilizes these facilities for its stone processing, finishing, selection, and warehousing operations. ITEM 3. LEGAL PROCEEDINGS On February 7, 1997, the Company filed a lawsuit against Mario Ruiz and Progressive Transfer Company, the Company's transfer agent. The Company sought to recover certificates representing 4,310,000 shares of Common Stock and 1,666,667 shares of preferred stock from Mr. Ruiz for failure to contribute certain assets as consideration for such shares. The Company authorized Progressive Transfer Company, the Company's transfer agent, to cancel such shares on the Company's stock records. The Company named Progressive Transfer Company as a party to the lawsuit as a formality to prevent the inadvertent transfer of the certificates held by Mr. Ruiz. On June 19, 1998, the Company and Mr. Ruiz settled this lawsuit. Pursuant to the settlement, Mr. Ruiz 12 has relinquished his rights with respect to the shares of Common Stock and preferred stock that were the subject of the lawsuit. 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 1996 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. 13 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 ---- --- 1995: First Quarter......................... $ 1.00 $1.00 Second Quarter........................ 1.00 1.00 Third Quarter......................... 1.00 1.00 Fourth Quarter........................ 1.00 1.00 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 As of September 30, 1998, there were approximately 500 holders of record of the Company's Common Stock. On September 30, 1998, the closing sales price of the Company's Common Stock on the National Quotation Bureau's "Pink Sheets" was $.21 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. On February 14, 1997, the Company issued an aggregate of 40,000 shares of Common Stock to Peter K. Kloepfer. The Company issued the shares without registration under the Securities Act in reliance on Section 4(2) of the Securities Act. 14 ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 1995 and 1996 has been derived from the financial statements of the Company audited by Mark Shelley, CPA. The data for fiscal 1997 has been derived from the financial statements of the Company audited by Arthur Andersen LLP, independent public accountants.
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS: Net sales .................................. $ 1,077,479 $ 1,928,733 $ 3,111,918 Cost and expenses: Cost of sales ............................ 764,358 1,042,384 1,679,015 Selling, general and administrative ...... 1,583,190 675,716 1,015,835 Depreciation and amortization ............ 10,232 11,299 21,385 ----------- ----------- ----------- Operating income (loss) .................... (1,280,301) 199,334 395,683 Interest income (expense) and other, net ... 47,116 (5,656) 63,980 ----------- ----------- ----------- Income (loss) before (provision for) benefit from income taxes ................. (1,233,185) 193,678 459,663 (Provision for) benefit from income taxes .. (50) (50) 300,000 ----------- ----------- ----------- Net income (loss) .......................... $(1,233,235) $ 193,628 $ 759,663 =========== =========== =========== Basic and diluted earnings per common share and common share equivalent (1) ........... $ (0.04) $ 0.01 $ 0.02 =========== =========== =========== Basic and diluted weighted average number of common shares and common share equivalents outstanding (1) ........................... 31,359,840 34,727,786 35,073,683 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Cash ....................................... $ 23,570 $ 43,756 $ 221,660 Working capital(2) ......................... 285,371 342,040 (294,750) Total assets ............................... 3,550,440 3,980,588 5,086,418 Notes payable to banks and long-term debt .. 166,540 169,334 305,889 Total stockholders' equity ................. 2,566,288 2,811,721 3,571,384
- ---------- (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." 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 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 1998 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 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, "Description of Business - Special Considerations." 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. In addition, the Company recently began making sales of its products in Europe. In 1993, the Company obtained a commitment for debt financing from Banca Serfin S.A. and received the initial installments on this financing in July 1993. The Company used these funds to begin rebuilding the machinery it uses to produce marble limestone and travertine dimensional stone products as well as to prospect for new quarry deposits. As a direct result of those prospecting efforts, during 1993 the Company successfully acquired a lease for its current source of marble limestone block. In 1993, the Company also ordered new equipment from Italy in order to increase production to profitable levels. The Company received this machinery in August 1994 and had it installed and operational in September 1994. This new equipment enabled the Company to approximately triple production volume without an appreciable increase in costs other than interest expense related to the purchase financing for this equipment. As a result, the Company significantly reduced the per square foot cost to produce stone tiles or slabs, which has enabled the Company to significantly increase profitability. Although the Company finished fiscal 1994 with a net loss of approximately $264,000, this represented a substantial improvement over prior years. Fiscal 1995 was a year of revenue growth and stabilization of operations. The Company's Arizona showroom and warehouse operation enabled the Company to penetrate the Arizona market and increase its profit margins. Fiscal 1996 represented a year of substantial growth, with a 79% increase in revenue over fiscal 1995 and net income of $193,628. The Company shipped its first truckload of "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 sales growth, net profits, and increased 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. The Company also expanded water treatment facilities and constructed new administrative offices as well as a new employee dining room and bathrooms. 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 16 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. This was also due in part by further utilizing the capacity of some of the machinery of the original plant. RESULTS OF OPERATIONS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 REVENUE. The Company's revenue for the year ended December 31, 1997 was $3,111,918, which represents a 61% increase over revenue of $1,928,733 for the year ended December 31, 1996. The Company attributes the increase in revenue to increased production volume and increased market acceptance and demand for its products. COST OF GOODS SOLD; GROSS PROFIT. Cost of goods sold increased from $1,042,384 during the year ended December 31, 1996 to $1,679,015 during the year ended December 31, 1997. This increase is attributed to the corresponding increase in sales during the same period. Cost of goods sold represented approximately 54% of revenue in each of fiscal 1996 and 1997. Gross profit increased to $1,432,903 in fiscal 1997 from $888,349 in fiscal 1996. As a percentage of revenue, gross profit remained constant at approximately 46% in each year. This consistency reflects the Company's ability to properly control costs in proportion to increased revenue. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and administrative expense increased from $675,716 in the year ended December 31, 1996 to $1,015,835 in the year ended December 31, 1997. The increase is attributable to the corresponding increase in sales during the same period. Selling, general, and administrative expense represented approximately 35% and 33% of revenue during the years ended December 31, 1996 and 1997, respectively. Included in selling, general, and administrative expenses for fiscal 1997 are charges taken in the fourth quarter for (i) approximately $95,000 of additional accruals to create a reserve for the maximum potential loss related to the contested Mexican bank loan; (ii) approximately $105,000 in additional accruals related to various Mexican taxes and other administrative expenses; and (iii) a charge of approximately $100,000 taken to write off various loans and receivables deemed uncollectible by the Company. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $11,299 during the year ended December 31, 1996 to $21,385 during the year ended December 31, 1997. The Company anticipates that this trend will continue as the Company expands its operations by purchasing additional property, plant, and equipment during 1998 and subsequent years. OTHER INCOME (EXPENSE) AND OTHER, NET. Other income (expense) and other, net, changed to $63,980 in fiscal 1997 from ($5,656) in fiscal 1996. The change was primarily attributable to an increase in currency remeasurement gain due to the strength of the United States dollar against the Mexican peso during 1997. 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." (PROVISION FOR) BENEFIT FROM INCOME TAXES. The Company recorded a $300,000 benefit from income taxes in fiscal 1997 as a result of recognizing the tax benefits of its net operating losses against continuing earnings. The Company has a net operating loss carryforward balance of approximately $2.0 million from losses incurred in the early 1990's. The Company reduced the previously established valuation allowance because management has determined that it is more likely than not that the Company will utilize that portion of available net operating loss carryforwards in fiscal 1998. NET INCOME. Net income for fiscal 1997 increased by 292% to $759,663 over net income of $193,628 in fiscal 1996 as a result of increased revenue and containment of costs as a percentage of revenue from fiscal 1996 to fiscal 1997, as well as the $300,000 benefit from income taxes described above. 17 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 took a number of steps during fiscal 1997 to increase 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 position decreased to a deficit of ($294,750) at December 31, 1997 from $342,040 at December 31, 1996. The decrease of $636,790 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." Current assets increased from $669,788 at December 31, 1996 to $1,007,411 in 1997. This increase was due primarily to increased sales revenue, which resulted in increases in cash, accounts receivable, and a build-up of inventory to service its order backlog at December 31, 1997. The Company's operating activities provided net cash of $666,103 during the year ended December 31, 1997. The major element contributing to net operating cash flow was earnings from operations. The Company invested $624,754 during fiscal 1997 to enhance its factories and to purchase equipment and machinery, primarily in Mexico. This was an increase of $334,557 from 1996 to 1997. The Company intends to acquire additional property, plant, and equipment during 1998 and in future years in order to continue its current sales volumes and to accommodate anticipated increases in demand for its products. During fiscal 1997, the Company obtained $190,000 in long-term debt by obtaining bank equipment financing in December 1997. 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 Company's current cash resources and expected cash flow from operations are expected to 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 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 affect 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 currently is upgrading its internal computer network in order to integrate its management information systems throughout its organizational structure, as well as to ensure that its process control equipment will be able to deal appropriately and without malfunctions caused by "Year 2000" issues. The Company currently has two internal information technology systems employees and an external computer engineer working on upgrades to its computer network. The Company anticipates that the network system, which is intended to improve the content, quality, and flow of information within the Company, will be operational during calendar 1999. 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 18 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 will be approximately $25,000 for internal and external computer network services. The Company is unable to fully assess the impact of the Year 2000 issue as of the filing date of this Report. Because the Company's business depends significantly upon telephone communications within the continental United States and between the United States and Mexico, Canada, and Europe, the Company believes that telephone communication system failures 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. 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 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. 19 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 49 Executive Vice President, Chief Financial Officer, Treasurer, and Director Lee M. Cunningham 47 Vice President and Director Timothy H. Ligget 39 Chief Accounting Officer and Director Michael D. Nafziger 43 Director of National Sales, Secretary, and Director L. Ernest Whitesel 61 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. 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 20 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 "Commission"). During 1998, the directors, officers, and 10% stockholders of the Company became aware that certain transactions that are required to be disclosed under Section 16(a) had not previously been reported. Therefore, the following persons recently made late filings on Form 5 to disclose the following holdings and/or transactions: Franklin E. Cunningham reported a total of five transactions between 1992 and 1997 that were required to be previously reported on Form 4; Spencer W. Cunningham reported his beneficial ownership of Common Stock that was required to be previously reported on Form 3 and a total of two transactions in 1994 and 1997 that were required to be previously reported on Form 4; Lee M. Cunningham reported a total of five transactions between 1992 and 1997 that were required to be previously reported on Form 4; Michael D. Nafziger reported his beneficial ownership of Common Stock that was required to be previously reported on Form 3; L. Ernest Whitesel reported his beneficial ownership of Common Stock that was required to be previously reported on Form 3 and one transaction in 1994 that was required to be previously reported on Form 4; Jaime M. Munos reported his beneficial ownership of Common Stock that was required to be previously reported on Form 3 and a total of two transactions in 1995 that were required to be previously reported on Form 4; and Alejandro M. Munos reported his beneficial ownership of Common Stock that was required to be previously reported on Form 3 and one transaction in 1995 that was required to be previously reported on Form 4. The Company has implemented a program that is intended to ensure that directors, officers, and 10% stockholders comply with their Section 16(a) filing requirements on a timely basis in the future. 21 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, 1995, 1996, and 1997. No other officer of the Company received compensation of $100,000 or more during fiscal 1997. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION ALL OTHER ---------------------- COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS($) ($)(2) - --------------------------- ---- ------------- -------- ------------- Franklin E. Cunningham 1997 $72,000 $0 $962 Chairman of the Board, and 1996 72,000 0 -- President and Chief Executive 1995 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 1997. (2) Amounts shown for fiscal 1997 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 or agreements, key employees of the Company. 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, 22 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. 23 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 September 30, 1998 (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 NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) - --------------------------------------- --------------------- 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(5) 4,280,000 12.3% Alejandro Muguiro(6) 1,520,000 4.4% All directors and executive officers as a group (eight persons) 25,251,455 72.8% - ---------- * 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 September 30, 1998 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 September 30, 1998 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. Muguiro is an officer and director of the Company's wholly owned subsidiary, Marmoles Muguiro, S.A. de C.V. Mr. Muguiro's address is c/o Marmoles Muguiro, S.A. de C.V., Boulevard Francisco Villa, Km 2 CD. Industrial, Durango, Durango, Mexico. (6) Mr. Muguiro is an officer and director of the Company's wholly owned subsidiary, Marmoles Muguiro, S.A. de C.V. Mr. Muguiro's 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. Not applicable. 24 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Number Exhibit ------ ------- 3.1 Articles of Incorporation of the Registrant 3.2 Bylaws of Registrant, as amended to date 4.1 Form of Certificate of Common Stock 16 Letter Re: Change in Accountants(1) 27.1 Financial Data Schedule - ---------- (1) 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 25 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: November 3, 1998 /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, President, November 3, 1998 - ---------------------------- and Chief Executive Officer Franklin E. Cunningham (Principal Executive Officer) /s/ Lee M. Cunningham Vice President and Director November 3, 1998 - ---------------------------- Lee M. Cunningham /s/ Spencer W. Cunningham Executive Vice President, Chief November 3, 1998 - ---------------------------- Financial Officer, Treasurer, Spencer W. Cunningham and Director (Principal Financial Officer) /s/ Michael D. Nafziger Director of National Sales, November 3, 1998 - ---------------------------- Secretary, and Director Michael D. Nafziger /s/ Timothy H. Ligget Chief Accounting Officer and November 3, 1998 - ---------------------------- Director (Principal Accounting Timothy H. Ligget Officer) /s/ L. Ernest Whitesel Director November 3, 1998 - ---------------------------- L. Ernest Whitesel
26 WORLD WIDE STONE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Reports of Independent Public Accountants............................... F-2 Consolidated Balance Sheet as of December 31, 1997...................... F-4 Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996...................................... F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997 and 1996...................................... F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996...................................... F-7 Notes to Consolidated Financial Statements.............................. F-8 F-1 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, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, 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, 1997 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Phoenix, Arizona, October 19, 1998. F-2 MARK SHELLEY, CPA 110 S. Mesa Dr. # 1 Mesa, Arizona 85210 (602) 833-4054 INDEPENDENT AUDITOR'S REPORT To the Board of Directors World Wide Stone Corporation I have audited the consolidated balance sheet of World Wide Stone Corporation as of December 31, 1996 and the accompanying related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I have conducted my audit in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of World Wide Stone Corporation as of December 31, 1996 and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Mark Shelley, CPA by: /s/ Mark Shelley -------------------- August 19, 1998 F-3 WORLD WIDE STONE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 ASSETS CURRENT ASSETS: Cash $ 221,660 Accounts receivable 137,421 Inventories (Note 2) 626,101 Prepaid expenses and other 22,229 ----------- Total current assets 1,007,411 PROPERTY, PLANT AND EQUIPMENT, net (Notes 4, 5 and 6) 3,292,591 COST IN EXCESS OF NET ASSETS ACQUIRED, net of accumulated amortization of $82,077 (Note 2) 191,512 OTHER ASSETS: Other receivables (Note 8) 275,991 Prepaid taxes 18,913 Deferred taxes (Note 7) 300,000 ----------- Total assets $ 5,086,418 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 92,574 Accrued liabilities 216,571 Current portion of long-term debt (Note 4) 93,016 Other (Note 6) 900,000 ----------- Total current liabilities 1,302,161 LONG-TERM DEBT, net of current portion (Note 4) 212,873 ----------- Total liabilities 1,515,034 ----------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY: Common stock, $0.001 par value, 100,000,000 shares authorized, 34,703,768 issued and outstanding 34,704 Additional paid-in capital 7,904,536 Accumulated deficit (4,367,856) ----------- Total stockholders' equity 3,571,384 ----------- Total liabilities and stockholders' equity $ 5,086,418 =========== The accompanying notes are an integral part of this consolidated balance sheet. F-4 WORLD WIDE STONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- REVENUE $ 3,111,918 $ 1,928,733 COST OF GOODS SOLD 1,679,015 1,042,384 ------------ ------------ Gross profit 1,432,903 886,349 COST AND EXPENSES: Selling, general and administrative 1,015,835 675,716 Depreciation and amortization 21,385 11,299 ------------ ------------ Income from operations 395,683 199,334 ------------ ------------ OTHER INCOME (EXPENSE): Interest income 5,627 -- Interest expense (9,213) (5,275) Gain (loss) on currency remeasurement 67,566 (381) ------------ ------------ 63,980 (5,656) ------------ ------------ INCOME BEFORE INCOME TAXES 459,663 193,678 BENEFIT (PROVISION) FOR INCOME TAXES 300,000 (50) ------------ ------------ Net income $ 759,663 $ 193,628 ============ ============ EARNINGS PER SHARE Basic and diluted: Net income per share (Note 2) $ .02 $ .01 ============ ============ Weighted average number of common shares outstanding 35,073,683 34,727,786 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-5 WORLD WIDE STONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Common Stock Additional --------------------- Paid-in Accumulated Shares Amount Capital Deficit Total ------ ------ ------- ------- ----- BALANCE, December 31, 1995 34,385,868 $ 34,386 $7,853,049 $(5,321,147) $2,566,288 Exercise of stock warrants (Note 9) 1,000,000 1,000 40,805 -- 41,805 Sales of common stock 40,000 40 9,960 -- 10,000 Net income -- -- -- 193,628 193,628 ----------- -------- ---------- ----------- ---------- 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 =========== ======== ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 WORLD WIDE STONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 759,663 $ 193,628 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 273,895 223,782 (Gain) loss on currency remeasurement (67,566) 381 Reserve for Mexican bank debt (Note 6) 94,834 48,666 Deferred tax benefit (300,000) -- Changes in certain assets and liabilities: (Increase) decrease in accounts receivable (109,860) 81,555 Increase in inventories (35,766) (293,840) Increase in prepaid expenses and other (14,093) (8,136) (Increase) decrease in prepaid taxes 49,662 (66,580) Increase in other receivable (133,227) (56,927) Increase (decrease) in accounts payable (20,922) 75,011 Increase in accrued liabilities 169,483 58,244 --------- --------- Net cash provided by operating activities 666,103 255,784 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant, and equipment, net (624,754) (290,197) --------- --------- Net cash used in investing activities (624,754) (290,197) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from long-term debt 180,004 11,861 Payment on short-term notes payable (43,449) (9,067) Issuance of common stock -- 51,805 --------- --------- Net cash provided by financing activities 136,555 54,599 --------- --------- NET INCREASE IN CASH 177,904 20,186 CASH, beginning of year 43,756 23,570 --------- --------- CASH, end of year $ 221,660 $ 43,756 ========= ========= SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 9,213 $ 5,275 ========= ========= Cash paid for income taxes $ -- $ -- ========= ========= The accompanying notes are an integral part of these consolidated financial statements. F-7 WORLD WIDE STONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) NATURE OF OPERATIONS: NATURE OF OPERATIONS World Wide Stone Corporation, a Nevada corporation, and its subsidiaries (collectively, the Company) are in the dimensional stone production, quarrying and sales business. 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 primarily on a wholesale basis through approximately 20 authorized stocking distributors and more than 100 wholesale distributors, as well as architects, residential and commercial developers, installation contractors, and designers. MANAGEMENT PLANS The Company has experienced rapid growth over the last four years. Management believes that two major equipment purchases during 1997 and planned purchases of additional machinery in 1998 will allow the Company to significantly increase production in its tumbled finish plant, Sociedad Piedra Sierra de C.V. located in Durango, Mexico. The Company believes that this will lead to continued growth in revenue in 1998 and 1999. The Company is also planning its third factory, which is anticipated to double existing production. The new plant will be built in phases similar to the Company's other production facilities. The Company estimates the first phase will cost approximately $1.0 million, which is expected to be raised in 1999 through additional equity financing and/or bank debt, supplier credit, and earnings. Future growth is expected to be directly proportional to the amount of capital available to enable the Company to acquire machinery, construct buildings, and develop its quarries. F-8 (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. 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, 1997 were located at the plants in Durango, Mexico, at the warehouse in Tempe, Arizona, and at bonded warehouses in El Paso and Laredo, Texas. Inventories at December 31, 1997 consist of the following: Finished goods $592,644 Work in process 7,061 Raw materials 26,396 -------- $626,101 ======== COST OF GOODS SOLD Depreciation expense included in cost of goods sold as indirect overhead for the year ended at December 31, 1997 and 1996 amounted to $252,510 and $212,483, respectively. 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 12 months ended December 31, 1997 and 1996 amounted to $18,239 for each period. The Company's policy is to evaluate the cost in excess of net assets acquired based on an evaluation of such factors as the occurrence of a significant adverse event or change in the environment in which the business operates. If the expected future net cash flows (undiscounted and without interest) are less than the carrying value of the asset upon the occurrence of such an event, an impairment loss would be recorded in the period such determination is made. No impairment losses have been recognized in any of the periods presented. F-9 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. Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. In management's opinion, no such events or changes in circumstances have occurred. 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 borrowing 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 During 1997, the Company adopted SFAS No. 128, 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. SFAS No. 128 is effective for financial statements for both interim and annual periods presented after December 15, 1997 and F-10 as a result, all prior period earnings per share (EPS) data presented has been restated. 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. LIMITED AVAILABILITY OF QUARRY SITES Although the Company has lease rights to three quarry sites, 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. DEPENDENCE ON THIRD PARTIES FOR QUARRYING OPERATIONS 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 F-11 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. 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. Any resulting remeasurement gain or loss is reported in the Company's consolidated statements of operations. RECENTLY ISSUED ACCOUNTING STATEMENTS The Financial Accounting Standards Board (FASB) issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, in June 1997. The Company is required to adopt these Statements with its fiscal year ending December 31, 1998. The adoption of these new standards is not expected to have a material impact on the Company's financial statements. (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. The Company also agreed to pay a royalty of 700 pesos per month (approximately 91 U.S. dollars) until the deposit is operational and then 30 pesos (approximately 4 U.S. dollars) per cubic meter of stone quarried. The 30 pesos will be adjusted for inflation. 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 (see Note 10). F-12 (4) LONG-TERM DEBT: Long-term debt at December 31, 1997, consists of the following: Loan from bank, interest at prime (8.5% at December 31, 1997) plus 2% per annum, principal and interest payments of $6,175 due monthly through December 2000, secured by equipment $ 190,000 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 115,889 --------- 305,889 Less: current portion (93,016) --------- Total long-term portion $ 212,873 ========= Future maturities are as follows: Years Ending December 31, ------------ 1998 $ 93,016 1999 101,561 2000 105,382 2001 5,930 -------- $305,889 ======== (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, 1997 is comprised of the following: Useful Lives Amount ----- ------ Property, plant and specialty manufacturing systems located in Mexico 10-40 years $1,750,000 Machinery, equipment and various vehicles located in Mexico 5-12 years 2,295,040 Machinery, equipment and vehicles located in the U.S. 5 years 181,455 ---------- 4,226,495 Accumulated depreciation (933,904) ---------- Net property, plant and equipment $3,292,591 ========== F-13 All 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 that 900,000 U.S. dollars is owed 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. Under that agreement, assets held in trust secure the debt up to 1,400,000 new pesos (approximately 175,000 U.S. dollars at December 31, 1997). 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 accrued approximately $95,000 in fiscal 1997 and $49,000 in 1996 related to this 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. The Company filed a lawsuit against one of the original incorporators of the Company and the Company's stock transfer agent on February 7, 1997. The purpose of the lawsuit was to recover certificates representing 4,310,000 shares of common stock and 1,666,666 shares of convertible preferred stock that the individual did not return after failing to contribute any of the agreed assets required as consideration for the shares issued. On June 3, 1998, the individual signed a settlement agreement with the Company relinquishing all rights, title and interest to the aforementioned shares. The shares were previously returned to authorized shares on the Company's books in 1990. Accordingly, no adjustment is reflected in the Company's 1997 financial statements for the settlement. F-14 OPERATING LEASES The Company leases its corporate offices and other properties under operating leases. Rent expense under these arrangements was approximately $45,000, and $33,000 for the years ended December 31, 1997 and 1996, respectively. Total future commitments under these noncancellable agreements for the years ending December 31, are as follows: 1998 $ 49,000 1999 57,000 2000 58,000 -------- $164,000 ======== ROYALTIES The Company pays a royalty to a third party on its leased quarry of 90 pesos (approximately 11.00 U.S. dollars) per cubic meter of stone extracted. This amounted to approximately 24,484 and 20,374 U.S. dollars for the years ended December 31, 1997 and 1996, 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 (provision) for income taxes at December 31, 1997 and 1996 consisted of the following: 1997 1996 ---- ---- Current $ -- $ (50) Deferred 300,000 -- -------- -------- Total $300,000 $ (50) ======== ======== F-15 A reconciliation of the federal statutory rate to the Company's effective tax rate for the years ended December 31 are as follows: 1997 1996 ---- ---- Statutory federal rate 34% 34% State taxes, net of federal benefit 6 6 Net operating loss carryforward utilized (40) (40) Reduction of valuation allowance (65) -- ---- ---- Total (65%) --% ==== ==== The components of the Company's deferred taxes at December 31, 1997 are as follows: Deferred tax assets (liabilities): Net operating loss carryforward $ 805,000 Valuation allowance (505,000) --------- Net deferred tax asset $ 300,000 ========= 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. During 1997, the Company recorded $300,000 of income tax benefit by reducing the valuation allowance established previously because management has determined it is more likely than not it will utilize that portion of available net operating loss carryforwards in fiscal 1998. As of December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $2,012,000 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, 1997, the Company was entitled to an IVA tax refund amounting to approximately 276,000 U.S. dollars. 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 1998. F-16 (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. 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 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 immediate and complete accounting to the Company all warrants and shares remaining directly and indirectly in the Consultant's possession. As of October 19, 1998, the Company has not yet received a full accounting from the Consultant. However, the Company has received a partial accounting, the return of some 722,100 shares of common stock, and payments for warrants in the total amount of $41,805, which are reflected in the consolidated financial statements. F-17 EX-3.1 2 ARTICLES OF INCORPORATION FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA NOV 30, 1989 /s/ Frankie Sue Del Papa, Secretary of State No. 10061-89 ARTICLES OF INCORPORATION OF WORLD WIDE STONE CORPORATION The undersigned, for the purpose of forming a corporation, pursuant to and by virtue of Chapter 78 of the Nevada Revised Statutes, hereby certifies and adopts the following Articles of Incorporation. ARTICLE I NAME The name of the corporation shall be: WORLD WIDE STONE CORPORATION ARTICLE II PRINCIPAL OFFICE The location of the principal office of the corporation in the State of Nevada is 2929 South Maryland Parkway, Suite A, Las Vegas, Nevada 89109. The corporation may also maintain an office or offices at such other place or places, either within or without the State of Nevada, as may be determined, from time to time, by the Board of Directors. ARTICLE III PURPOSES The purpose for which this corporation is organized to engage in any business or activity not forbidden by the law or by these Articles of Incorporation. ARTICLE IV CAPITAL STOCK Section 1. Authorized Shares. The aggregate number of shares which the corporation shall have authority to issue shall be two classes of stock designated as follows: (a) One Hundred Million (100,000,000) shares of common capital stock, of one mil ($.001) par value; and (b) Twenty-five Million (25,000,000) shares of preferred stock, of one mil ($.001) par value. The Board of Directors shall be vested with the authority to fix and determine the designations, rights, preferences, or other variations of each of the above classes (or series within each class), as proscribed by N.R.S. 79.165. Section 2. Consideration for Shares. The stock authorized by Section 1 of this Article shall be issued for such consideration as shall be fixed, from time to time, by the Board of Directors. ARTICLE V DIRECTORS The members of the governing board of the corporation shall be styled Directors. The number of directors shall be at least Three (3); provided, however, that at such time when the common stock is owned by less than three shareholders, the Board of Directors may consist of less than three directors. There shall be more than one initial stockholder, and accordingly, the initial Board of Directors shall consist of three members. The name and post office address of the directors constituting the first Board of Directors shall be: Frank Cunningham 2929 South Maryland Parkway Suite A Las Vegas, Nevada 89109 Gordon L. Hall 2929 South Maryland Parkway Suite A Las Vegas, Nevada 89109 2 Mario Ruiz 2929 South Maryland Parkway Suite A Las Vegas, Nevada 89109 The number of directors may be changed from time to time in such manner as shall be provided in the By-Laws of the corporation. ARTICLE VI ASSESSMENT OF STOCK The capital stock of this Corporation, after the amount of the subscription price has been fully paid in, shall not be assessable for any purpose, and no stock issued as fully paid up shall ever be assessable or assessed. The holders of such stock shall not be individually responsible for the debts, contracts, or liabilities of the corporation and shall not be liable for assessment to restore impairments in the capital of the corporation. ARTICLE VII INCORPORATORS The name and post office address of the incorporator signing these Articles of Incorporation is as follows: Gordon L. Hall 2929 South Maryland Parkway Suite A Las Vegas, Nevada 89109 ARTICLE VIII DIRECTOR/OFFICER PERSONAL LIABILITY No director or officer of the corporation shall be personally liable to the corporation or any of its stockholders for damages for a breach of a fiduciary duty as a director or officer involving any act or omission of any such director or officer occurring on or after the date of their taking office; provided, however, that the foregoing provision shall not eliminate or limit the liability of a director or officer of the corporation for: 3 (a) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law; or (b) the payment of dividends in violation of Nevada Laws. ARTICLE IX INDEMNIFICATION The corporation may provide in its By-Laws or by agreement, to the extent permitted by the laws of the State of Nevada, for the indemnification of and the advancement of expenses for the corporation's directors, officers, employees or agents and any person serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise in the defense of their acts or omissions while serving in such capacity. ARTICLE X PROSPECTIVE EFFECT Any repeal or modification of this Article approved by the stockholders of the corporation shall be prospective only. In the event of any conflict between this Article and any other Article of the corporation's Articles of Incorporation, the terms and provisions of this Article shall control. ARTICLE XI TERM The Corporation shall have perpetual existence. IN WITNESS WHEREOF, I have executed these Articles of Incorporation on this 14th day of November, 1989. /s/ Gordon L. Hall ------------------------------ Gordon L. Hall 4 STATE OF NEVADA ) ) SS: COUNTY OF CLARK ) On this 29th day of November, 1989, before me, the undersigned Notary Public, personally appeared Gordon L. Hall, known to me to be the person described in and who executed the foregoing instrument and who acknowledged that he executed the same for the purposes stated therein. /s/ Jeffrey Alan Tiller ------------------------------ NOTARY PUBLIC in and for said County and State 5 EX-3.2 3 BYLAWS ================================================================================ BYLAWS OF WORLD WIDE STONE CORPORATION (AS AMENDED THROUGH NOVEMBER 2, 1998) ================================================================================ TABLE OF CONTENTS PART ONE STOCK, STOCK CERTIFICATES AND SHAREHOLDERS.......................... 1 1.1 Stock Certificates................................................ 1 1.2 Stock Records..................................................... 1 1.3 Transfer.......................................................... 1 1.4 Stock Rules and Regulations....................................... 1 PART TWO SHAREHOLDERS MEETINGS............................................... 1 2.1 Regular and Special Meetings...................................... 1 2.2 Annual Meeting.................................................... 1 2.3 Special Meetings.................................................. 2 2.4 Quorum............................................................ 2 2.5 Notice............................................................ 2 2.6 Proxies........................................................... 2 2.7 Business to be Transacted......................................... 2 2.8 Election of Directors............................................. 2 2.9 Voting............................................................ 2 2.10 Removal of Director............................................... 2 2.11 Informal Action by Shareholders................................... 3 2.12 Fixing Stockholder of Record Date................................. 3 2.13 Chairman of Stockholders' Meetings................................ 3 2.14 Number of Shares to be Voted ..................................... 3 2.15 Rescinded or Cancelled Shares..................................... 3 2.16. Holders of Record and Number of Shares Owned...................... 3 PART THREE BOARD OF DIRECTORS................................................ 3 3.1 Number and Eligibility............................................ 3 3.2 Annual Meeting and Election of Chairman of the Board.............. 3 3.3 Election of Officers.............................................. 4 3.4 Special Meetings.................................................. 4 3.5 Quorum and Waiver of Notice....................................... 4 3.6 Voting............................................................ 4 3.7 Filling Vacancies................................................. 4 -i- TABLE OF CONTENTS (continued) 3.8 Tenure............................................................ 4 3.9 Compensation...................................................... 4 3.10 Powers............................................................ 5 3.11 Dividends......................................................... 5 3.12 Consent Action.................................................... 5 PART FOUR OFFICERS, POWERS AND DUTIES........................................ 5 4.1 Officers........................................................... 5 4.2 Tenure............................................................. 5 4.3 Bonds and Other Requirements....................................... 5 4.4 Removal of Officers................................................ 5 4.5 President.......................................................... 5 4.6 Vice President..................................................... 6 4.7 Secretary.......................................................... 6 4.8 Treasurer.......................................................... 6 4.9 Other Officers..................................................... 6 4.10 Salaries........................................................... 6 4.11 Vacancies.......................................................... 7 PART FIVE FISCAL AND LEGAL................................................... 7 5.1 General............................................................. 7 5.2 Contracts........................................................... 7 5.3 Checks, Drafts, Etc................................................. 7 5.4 Deposits............................................................ 7 5.5 Gifts............................................................... 7 5.6 Fiscal Year......................................................... 7 5.7 Principal Offices................................................... 7 PART SIX AMENDMENTS......................................................... 8 6.1 Vote Required....................................................... 8 6.2 Meetings for Adoption............................................... 8 PART SEVEN MISCELLANEOUS..................................................... 8 7.1 Election of Chairman Pro Tem........................................ 8 -ii- TABLE OF CONTENTS (continued) 7.2 Parliamentary Law................................................... 8 7.3 Loans to Corporation................................................ 8 7.4 Dealings by Directors............................................... 8 7.5 Non-Liability of Shareholder, Officers and Directors................ 9 7.6 Indemnification of Officers......................................... 9 7.7 Authority to Sell Corporate Assets.................................. 9 7.8 Corporate Seal...................................................... 9 -iii- BYLAWS OF WORLD WIDE STONE CORPORATION (AS AMENDED THROUGH NOVEMBER 21, 1991) PART ONE STOCK, STOCK CERTIFICATES AND SHAREHOLDERS 1.1 STOCK CERTIFICATES. The certificates for shares of the capital stock of the corporation shall be in such form not inconsistent with the Articles of Incorporation, but shall be prepared or be approved by the Board of Directors. The certificates shall be signed by the President or Vice President and Secretary. 1.2 STOCK RECORDS. A stock register shall be kept by the Transfer Agent, who shall accurately record the issuance of each certificate of stock, the date of issuance thereof, the name and post office address of the person, firm or corporation to whom issued. 1.3 TRANSFER. Shares of the capital stock of the corporation shall be transferable only upon the books of the corporation and of the Transfer Agent, and the corporation shall not be bound to recognize any rights of any transferee until such transfer is so made upon the books of the corporation and the Transfer Agent. 1.4 STOCK RULES AND REGULATIONS. The board of directors may make such rules and regulations as it may deem expedient not inconsistent with the Bylaws or with the Articles of Incorporation concerning the issue, transfer and registration of certificates for shares of the corporation. PART TWO SHAREHOLDERS MEETINGS 2.1 REGULAR AND SPECIAL MEETINGS. Place of Meetings. The annual meetings shall be the only regular meetings of the shareholders. Special meetings of the shareholders may be held when called as hereinafter provided. Any shareholders meetings may be held within or without the State, but shall always be held at the time and place fixed in the call for such meeting or in any resolution adjourning the same. 2.2 ANNUAL MEETING. The annual meeting of the shareholders for the election of directors shall be held on a date in the month, following the end of the corporation's fiscal year. If, for any reason, such meeting shall not be held or a board of directors shall not be elected at such meeting or at an adjournment thereof, a board of directors may be elected at a special meeting to be called by the board of directors then in office or upon their order. 2.3 SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes other than the election of directors as hereinabove provided, may be held at the call of the chairman of the board, or the president of the corporation, or the board of directors, and shall be called by the president at the request of the holders of one-tenth of all the outstanding shares of the corporation entitled to vote at the meeting. 2.4 QUORUM. Except as otherwise provided by law, a majority of the outstanding shares of stock entitled to vote at any meeting shall constitute a quorum of such meeting. 2.5 NOTICE. Notice of all shareholders meetings shall be in writing, signed by the president or secretary. A copy of such notice shall be sent by mail not less than ten days not more than 50 days prior to the date of the meeting, to each shareholder of record entitled to notice of such meeting, at the registered post office address of such shareholder as it appears upon the records of the corporation. Such notice shall state the time and place of the meeting and the purpose for which it is called, so far as is known at the date of the notice, and if the call be for an annual meeting, the notice shall so state. Such notice shall be sufficient for such meeting and any adjournment thereof. 2.6 PROXIES. Any shareholder of the corporation entitled to vote at any meeting may be represented and vote at such meeting by a proxy appointed by an instrument in writing signed by him or by his duly authorized agent or attorney-in-fact. 2.7 BUSINESS TO BE TRANSACTED. Any question may be considered and acted upon at an annual meeting, but no question not stated in the call for a special meeting shall be acted upon thereat except by the consent of the holders of a majority of the shares as reflected in the records of the corporation. 2.8 ELECTION OF DIRECTORS. The directors shall be elected by a majority of the shares at the annual shareholders meeting. Prior to each annual election of directors, the shareholders shall pass a resolution designating the number that shall constitute the board of directors for the ensuing year, and such number shall not be increased or diminished during any year except by the vote of the holders of a majority of the outstanding stock of the corporation at a meeting legally held. The number of Directors shall be no less than three. 2.9 VOTING. The holders of common stock of the corporation shall be entitled to one vote for each share of common stock held at any shareholder's meeting. For purposes of this provision, the "holder" is to be determined by the name appearing on the corporation's books, except that shares standing in the name of a deceased person may be voted by his legal representative, and a receiver may vote shares not standing in his name if he has the authority to do so by an appropriate order of the court which appointed him. 2.10 REMOVAL OF DIRECTOR. The shareholders of the corporation may, at any meeting called for that purpose, remove any director from office, with or without cause, by a vote of a majority of the outstanding shares of the class of stock which elected the director or directors to be removed, provided, however, that no director shall be removed in case the votes of a sufficient number of shares are cast against his removal, which if cumulatively voted at an election of the entire board of directors, would be sufficient to elect him. 2 2.11 INFORMAL ACTION BY SHAREHOLDERS. Any action which may be taken by the shareholders at a meeting may be taken without a meeting, if a consent in writing setting forth the action so taken shall be signed by all the shareholders entitled to vote with respect to the subject matter of that action. 2.12 FIXING STOCKHOLDER OF RECORD DATE. The directors may prescribe a period not exceeding sixty days before the holding of any stockholders' meeting as the day of which stockholders entitled to notice of and to vote at such meetings must be determined. Only stockholders of record on that day are entitled to notice or to vote at such meeting. 2.13 CHAIRMAN OF STOCKHOLDERS' MEETINGS. The President of the Corporation shall serve as chairman of all stockholders' meetings unless the Directors prescribe an alternate Chairman for any meeting. 2.14 NUMBER OF SHARES TO BE VOTED. Shareholders of record on the date fixed by the Directors as the record date under paragraph 2.12 may vote the number of shares owned by said shareholder on the record date if voting by proxy; if voting in person, shareholder may elect to vote the actual number of shares owned as of the meeting date, if this number is larger. 2.15 RESCINDED OR CANCELLED SHARES. Stockholders of record listed in the records of the Corporation's transfer agent, as of the date fixed by the Directors pursuant to paragraph 2.12, herein will not be deemed stockholders of record in the Corporate books for purposes of being entitled to vote with respect to any shares of stock which have been cancelled, rescinded, or otherwise redeemed by the Directors prior to the holding of any such stockholders' meeting. 2.16 HOLDERS OF RECORD AND NUMBER OF SHARES OWNED. If the Corporation recognizes a shareholder of record and accepts shares as issued and transferred, such action shall be effective as of the date and time the Directors accept such action, even if the stockholder or the shares of stock have not yet been submitted to or accepted by the Corporation's transfer agent. The Corporation's main office records shall control in event of a conflict between the records of the Corporation at its main office and those of the transfer agent. PART THREE BOARD OF DIRECTORS 3.1 NUMBER AND ELIGIBILITY. The Board of Directors shall consist of such number of directors, not fewer than one nor more than nine, as may be determined from time to time by resolution of the Board of Directors. All directors of the Corporation shall be of lawful age and may or may not be shareholders of the Corporation. 3.2 ANNUAL MEETING AND ELECTION OF CHAIRMAN OF THE BOARD. Immediately after the adjournment of the annual shareholders meeting, the board of directors elected thereat shall convene in annual meeting and shall elect a chairman from among its number, who shall hold office for a period of one year or until his successor has been duly elected and qualified. It shall be the duty of the chairman to preside at all meetings of the shareholders and board of directors, and to insure compliance with the rules and regulations as herein set forth, and to perform such duties as may be delegated to him and prescribed by the board of directors. 3 3.3 ELECTION OF OFFICERS. At the annual meeting of the board of directors, the board shall elect the officers of the corporation as follows: a president, a vice president, a secretary, a treasurer and such other officers with such titles and with such powers and duties as may be deemed necessary by the board of directors. 3.4 SPECIAL MEETINGS. Special meetings of the board of directors may be held from time to time upon call issued by the chairman, the president, a majority of the directors or the holders of a majority of the outstanding stock of the corporation. Such meetings may be held either within or without the incorporating state, and may be held by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meetings. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting. Notice of special meetings of the board shall be signed by the person or persons calling the same as aforesaid. Such notice shall state the time and place of the meeting and the purposes for which it is called. 3.5 QUORUM AND WAIVER OF NOTICE. A majority of the members of the board at the time holding office shall constitute a quorum for the transaction of business. No special meeting of the board shall be valid unless notice of the meeting has been mailed to each member of the board as provided in paragraph 3.4 above, or the giving of such notice shall have been waived in writing. 3.6 VOTING. Each director present shall be entitled to one vote at each directors meeting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. 3.7 FILLING VACANCIES. Any vacancy in the Board of Directors or in the officers of the Corporation caused by the death, resignation, removal or other disqualification of a director or an officer, or a vacancy resulting from an increase in the number of directors, may be filled by a majority vote of the shareholders or of the remaining directors. If the directors remaining in office constitute fewer than a quorum of the Board, they may fill the vacancy by the affirmative vote of a majority of all of the directors remaining in office. A vacancy that will occur at a specific later date by reason of a resignation effective at such later date may be filled before the vacancy occurs, provided that the new director may not take office until the vacancy occurs. If at any time by reason of death or resignation or other cause, the Corporation has no directors remaining in office, any officer or any shareholder of the Corporation may call a special meeting of shareholders. 3.8 TENURE. The directors shall hold office from the time of their election until the next annual election of directors, as provided by these Bylaws, or until their successors are duly elected and qualified. 3.9 COMPENSATION. By resolution of the board, the directors may be paid their expenses, if any, of attending board meetings or any committee meetings. Directors may be paid 4 a fixed sum for each meeting they attend, or may be paid a stated salary as a director or committee member. These payments will not preclude any director from serving the company in any other capacity and receiving compensation for that service. 3.10 POWERS. The business of this corporation shall be conducted by the board of directors, and the board shall have the right to fix the compensation of all officers and directors for services rendered and, except as prescribed in these Bylaws to the contrary, prescribe their duties and powers. 3.11 DIVIDENDS. The board of directors may declare dividends on the stock of the corporation as provided for by the laws of the incorporating state. 3.12 CONSENT ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all the members of the Board of Directors or of any such committee. PART FOUR OFFICERS, POWERS AND DUTIES 4.1 OFFICERS. The officers of this corporation shall consist of a president, a vice president, a secretary, a treasurer and such other officers with such titles, powers and duties as may be prescribed by the board of directors. 4.2 TENURE. All officers shall hold office from the time of their election until the next annual election of officers or until their respective successors are elected and qualified, provided, however, any officer may be removed from office by a majority vote of the directors at any legally held meeting of the board. 4.3 BONDS AND OTHER REQUIREMENTS. The board of directors may require any officer to give bond to the corporation (with sufficient surety and conditioned for the faithful performance of the duties of his office) and to comply with such other conditions as may from time to time be required of him by the board. 4.4 REMOVAL OF OFFICERS. If the majority of the board concurs, the board of directors may at any time, with our without cause, remove any officer or agent of the corporation and declare his office or offices vacant, or, in the case of the absence or disability of any officer or for any other reason considered sufficient, the board may temporarily delegate his powers and duties to any other officer or to any director. 4.5 PRESIDENT. In the absence of the chairman, the president shall preside at all meetings of the shareholders and board of directors. The president, along with other authorized officers, shall sign for and on behalf of the corporation, or in its name, all certificates of stock, deeds, mortgages, contracts and other instruments in writing, except that contracts may be signed with like effect by any other officer or employee of the corporation specified in these Bylaws or designated by the board of directors. While actively engaged in conducting the business of the corporation, he shall be charged with all the duties and have all the authority customarily 5 performed and exercised by the chief executive of a corporation organized under the laws of the state, and shall perform such other duties as may be prescribed by the board. 4.6 VICE PRESIDENT. The vice president shall have and may exercise such powers and shall perform such duties as may be delegated to him by the board of directors or the president of the corporation. The vice president shall, in the event of the death, absence, or other disability of the president, perform all the duties and exercise all the authority of the president. 4.7 SECRETARY. It shall be the duty of the secretary to record and keep the minutes of all meetings of the shareholders, the board of directors and the executive committee of the board of directors. He shall fill in and countersign all certificates of stock and keep the stock records of the corporation so as to show the aggregate number of shares outstanding and the date, the number of shares, the name of the holders and all other necessary information relating to each outstanding stock certificate. He shall keep the seal of the corporation and affix and attest the same upon any instrument executed by the corporation requiring a seal, except as otherwise ordered by the board of directors. At the expiration of his term, from whatever cause, he shall surrender all books, monies, papers and property of the corporation to his successor. 4.8 TREASURER. The treasurer or assistant treasurer shall be the custodian of all monies belonging to the corporation and shall hold all funds of the corporation subject to the order of the board of directors or persons thereunto authorized by the board of directors. He shall deposit the funds of the corporation with such bank or banks as the board of directors may approve and designate. At each annual meeting of the shareholders, and at each annual meeting of the directors, and whenever called upon at any other directors meeting, he shall make a complete and correct report of his accounts and disclose the true financial condition of the corporation. He shall submit his books and accounts for audit when so requested by the board of directors. At the discretion of the board, he shall give bond, made by a duly authorized surety company, in such sum as may be required of him by the board, conditioned for the proper accounting of all monies and property coming into his hands by virtue of his office. The premium on such bond shall be paid by the corporation. At the expiration of his term of office, from whatever cause, he shall deliver up all books, papers and monies of the corporation to his successor. 4.9 OTHER OFFICERS. If an assistant secretary be elected by the board of directors, he shall have and may exercise the same powers and perform the same duties as the secretary, and if an assistant treasurer be elected by the board, he shall have and may exercise the same powers and perform the same duties as the treasurer. Such assistant secretary, assistant treasurer, and any and all other officers elected by the board shall have and may exercise such powers and perform such duties as may be assigned to them by the board. 4.10 SALARIES. Officers' salaries may from time to time be fixed by the board of directors or be left up to the discretion of the president (except as to his own). No officer will be prevented from receiving a salary by reason of the fact that he is also a director of the corporation. 6 4.11 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. PART FIVE FISCAL AND LEGAL 5.1 GENERAL. All monies of every kind belonging to the corporation shall be deposited to its credit in a bank or banks designated by the board of directors, and no monies shall be withdrawn therefrom unless the checks or other orders evidencing such withdrawals are signed by such officers or employees of the corporation as may be designated by resolution of the board of directors duly adopted. 5.2 CONTRACTS. The board of directors may authorize any officer or officers, agent or agents of the corporation, in addition to the officers so authorized by the Bylaws, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. All contracts binding the corporation shall be signed by the President or his officer designee. 5.3 CHECKS, DRAFTS, ETC. All checks, drafts, orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors. In the absence of such determination by the board of directors, such instruments shall be signed by the treasurer or an assistant treasurer and countersigned by the president or a vice president of the corporation. 5.4 DEPOSITS. All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the board of directors may select. 5.5 GIFTS. The board of directors may accept on behalf of the corporation any contribution, gift, bequest or devise for the general purposes or for any special purpose of the corporation. 5.6 FISCAL YEAR. The fiscal year of this corporation shall be that set forth on the caption page of these Bylaws. 5.7 PRINCIPAL OFFICES. The principal office of the Corporation shall be located in the City of Chandler, County of Maricopa, State of Arizona and shall be changed to such other place or places as the Board of Directors shall from time to time designate. 7 PART SIX AMENDMENTS 6.1 VOTE REQUIRED. These Bylaws may be enlarged, amended or repealed by a majority vote of the outstanding stock of the corporation at any regular meeting of the shareholders or at any special meeting of the shareholders called for that purpose, or by a two-thirds vote of the board of directors at any meeting of the board of directors called for that purpose. 6.2 MEETINGS FOR ADOPTION. Such amendment, enlargement or repeal may be adopted at any annual meeting of the shareholders without previous notice; but if contemplated at a special shareholders meeting, notice thereof shall be given in the call for the meeting. PART SEVEN MISCELLANEOUS 7.1 ELECTION OF CHAIRMAN PRO TEM. In the absence of the chairman, the president and any vice president at any shareholders or directors meeting, the shareholders or directors present shall elect a chairman pro tem, who shall preside at the meeting and exercise the same powers as the chairman, the president or the vice president could if present. 7.2 PARLIAMENTARY LAW. When not in conflict with these Bylaws, Robert's Rules of Order, Revised, 75th Anniversary Edition, shall establish the rule of procedure at all shareholders and directors meetings, and the provisions of that publication are incorporated by reference herein as the ruling law for this corporation. 7.3 LOANS TO CORPORATION. Should any of the shareholders be asked to lend money to the corporation in the form of either promissory notes or bonds, these loans should be executed in writing in the usual form for promissory notes or bonds, and shall bear the maximum rate of interest which the law permits a corporation to pay for money that the corporation may borrow. This provision applies to all monies or assets which a shareholder may transfer to the corporation with the intent that such monies or assets be treated as loans. 7.4 DEALINGS BY DIRECTORS. No contract or other transaction between this corporation and any other corporation, whether or not a majority of the shares of the capital stock of such other corporation is owned by this corporation, and no act of this corporation shall in any way be affected or invalidated by the fact that any of the directors of this corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation. Any director individually, or any firm of which that director may be a member, may be a party to or may be pecuniarily or otherwise interested in any contract or transaction of this corporation, provided that the fact that he or his firm have an interest in the transaction shall be disclosed to a majority of the board of directors of this corporation. Any director of this corporation who is also a director or officer of another corporation dealing with this corporation, or who has any personal interest in a matter before the board of this corporation, may be counted in determining the existence of a quorum at any meeting of the board of directors of this corporation which shall 8 authorize any action that may affect that director or that other corporation. That director may vote at such a meeting as if he were not a director or officer of the other corporation or was not personally interested. 7.5 NON-LIABILITY OF SHAREHOLDER, OFFICERS AND DIRECTORS. The shareholders, officers and directors of this corporation shall not be individually liable for the corporation debts or other liabilities, and private property of such individual shall be exempt from corporation debts or liabilities. 7.6 INDEMNIFICATION OF OFFICERS. The corporation shall indemnify every person, his heirs, executors and administrators against all expenses reasonably incurred by such person in connection with any action, suit or proceeding to which such person may be made a party by reason of that person being or having been a director or officer of this corporation, or by reason of that person being or having been a director or officer of any other corporation of which this corporation is a shareholder or creditor, and from which other corporation such person is not entitled to be indemnified, or by reason of such officer or director or former officer or former director becoming a party to any such action, suit or proceeding at the request of or at the direction of this corporation or any successor hereto; provided, however, there shall be no indemnification in relation to any matter as to which such person shall be finally adjudged in such action, suit or proceeding to be liable for negligence or misconduct. In the event of a settlement of such action, suit or proceeding, indemnification of such person shall be provided only in connection with such matters covered by such settlement as to which the corporation is advised by counsel that such person to be indemnified did not commit such a breach of duty. This right of indemnification shall be exclusive of other rights to which such person may be entitled. As used in this Bylaw, expenses shall include, but shall not be limited to, amounts of judgments, penalties or fines and interest thereon for reasonable periods of time, rendered, levied or adjudged against such persons, costs of the action, suit or proceeding, attorneys' fees, expert witness fees and amounts paid in settlement by such persons, provided that such settlement shall have been or is thereafter approved by the board of directors of this corporation. This Bylaw is made a part of these Bylaws to comply with and to take full advantage of state laws governing such indemnification. 7.7 AUTHORITY TO SELL CORPORATE ASSETS. With the consent or ratification in writing or pursuant to the vote of the holders of a majority in interest of the capital stock issued and outstanding, the board of directors will have the powers and authority to lease, sell, assign, transfer, convey or otherwise dispose of the entire property of the corporation, irrespective of the effects thereof upon the continuance of the business of the corporation and the exercise of its franchise; but the corporation may not be dissolved except as provided by the laws of the incorporating state. 7.8 CORPORATE SEAL. The Board of Directors shall provide a Corporate Seal which shall be in the form of a circle and shall bear the full name of the corporation, the year of its incorporation and the words "Corporate Seal, Nevada". The facsimile of such Corporate Seal shall be affixed hereto. 9 EX-4.1 4 FORM OF CERTIFICATE OF COMMON STOCK NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA NUMBER SHARES CUSIP NO. 981544 10 9 World Wide Stone ---------------- AUTHORIZED STOCK: 100,000,000 SHARES PAR VALUE $.001 PER SHARE THIS CERTIFIES THAT IS THE RECORD HOLDER OF WORLD WIDE STONE CORPORATION transferable on the books of the Corporation in person or by duly authorized upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: WORLD WIDE STONE CORPORATION CORPORATE SEAL /s/ Lee M. Cunningham /s/ Frank Cunningham NEVADA --------------------- -------------------- Secretary President Countersigned & Registered: PROGRESSIVE TRANSFER COMPANY 3230 Flamingo Rd., Suite 156 Las Vegas, Nevada 89121 By /s/ ----------------------------------- Transfer Agent - Authorized signature NOTICE: Signature must be guaranteed by a firm which is a member of a registered national stock exchange, or by a bank (other than a saving bank), or a trust company. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT -......Custodian....... TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right or under Uniform Gifts to Minors survivorship and not as tenants Act.......................... in common (State) Additional abbreviations may also be used though not in the above list. For Value Received,______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated______________________ _____________________________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF WORLD WIDE STONE CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1997 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. U.S DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 221,660 0 137,421 0 626,101 1,007,411 4,226,495 933,904 5,086,418 1,302,161 212,873 0 0 34,704 3,536,680 5,086,418 3,111,918 3,111,918 1,679,015 1,679,015 1,037,220 0 9,213 459,633 (300,000) 759,663 0 0 0 759,663 .02 .02
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