Item 1. Business
(a) General Development of Business
W W Capital Corporation ("Company") was originally incorporated as Freedom Acquisition Fund, Inc., a Colorado corporation, on September 23, 1987, to merge with or engage in a merger with, or acquisition of, one or a small number of private firms.
On May 16, 1988, the Company completed a public offering of 15,000,000 Units at an offering price of $.03 per Unit, each Unit consisting of one share of common stock, one Class A Warrant to purchase one share of the Company's common stock and one Class B Warrant to purchase one additional share of the Company's common stock. The net proceeds of the offering to the Company were approximately $240,000. The exercise period of the Class A Warrants expired on September 1, 1989. 3,754,500 Class A Warrants, at a price of $0.035 per common share, were submitted to the Company's transfer agent for exercise, with proceeds of $131, 408 to the Company before the payment of offering expenses and commissions associated with the offering. The Class B Warrants expired unexercised in June, 1990.
On December 9, 1989, the Company's shareholders approved a proposal to re-incorporate W W Capital in the State of Nevada and to concurrently therewith, reverse split on a 1 for 100 basis the authorized shares of common stock from 500,000,000 shares par value $0.0001 per share to 5,000,000 shares of common stock, par value $0.01 per share and the 40,000,000 shares of authorized preferred stock, par value $0.10 per share to 400,000 shares of preferred stock, par value $10.00 per share. The re-incorporation and reverse stock split was effective December 15, 1989.
On November 16, 1990, the Company's shareholders approved a proposal to increase the number of authorized shares of common stock from 5,000,000 to 15,000,000 shares.
On August 16, 1988, the Company acquired 100% of the outstanding shares of W-W Manufacturing Co., Inc. ("W-W") one of the oldest and largest livestock equipment manufacturers in the United States, in exchange for 160,000,000 shares of the Company's common stock. W-W currently manufactures a full line of cattle and equine handling and confinement equipment for use by farmers, ranchers, rodeos, and universities throughout the United States.
W-W's principals began doing business in Texas City, Texas in 1945 designing and building their first cattle squeeze chute. Due to production and sales growth, the principals moved the operation to Dodge City, Kansas, where they established their first manufacturing facility in 1948. Operations continued to expand and develop, and on October 18, 1961, W-W was incorporated in the State of Kansas.
On October 12, 1990, the Company acquired certain real estate properties in Abilene, Texas from Western Fire and Marine Insurance Company. The real estate was acquired in exchange for 80,000 shares ($800,000 par value) of the Company's newly issued Series A Preferred Stock and $52,428 cash.
On October 25, 1990, the Company acquired certain undeveloped real estate located in Johnson County, Texas from Apex Realty Investments, Inc. The real estate was acquired in exchange for 40,000 shares ($400,000 par value) of the Company's newly issued Series B Preferred Stock.
On August 15, 1991, the Company entered into an exchange agreement ("Exchange Agreement") with Titan Industries, Inc., a Nebraska corporation ("Titan"), whereby the Company would issue to Titan common stock, in exchange for all the outstanding stock of Titan. The consummation of this Exchange Agreement was subject to approval by the stockholders of the Company. On December 13, 1991, the stockholders approved the acquisition. The actual closing and exchange of stock took place December 30, 1991. Under the terms of the agreement the stockholders of Titan received 1,600,000 shares of W W Capital Common Stock in exchange for all the outstanding common shares (7,500) of Titan Industries. The shares had an aggregate value of $3,600,000 at the date of closing. The purchase price was arrived at through an arms length negotiation.
On October 26, 1992, the Company entered into an exchange agreement ("Eagle Exchange Agreement") with Eagle Enterprises, Inc., a Tennessee corporation ("Eagle"), whereby the Company would issue to Eagle common stock, in exchange for all the outstanding stock of Eagle. The consummation of the Eagle Exchange Agreement was subject to approval by the Board of Directors of the Company. At a special meeting of the Board of Directors held October 20, 1992, the Board unanimously approved the acquisition. The actual closing and exchange of stock took place on October 26, 1992. Under the terms of the Eagle Exchange Agreement, the sole stockholder of Eagle (Jerry Bellar) received 325,000 shares of W W Capital Corporation common stock in exchange for all the outstanding common shares (1,539) of Eagle Enterprises. The shares had an aggregate value of $893,750 at the day of closing. The purchase price was arrived through an arms length negotiation. Eagle Enterprises was formed in August 1985 to manufacture livestock handling equipment. The company is presently located in a 40,000 square foot facility on 11.5 acres in Livingston, Tennessee. The Company's primary products are creep, bunk, mineral and round bale feeders for livestock. The company also manufactures livestock panels and gates along with two versions of headgates.
On February 19, 1993, the Company entered into an exchange agreement ("Real Estate Exchange Agreement") with Apex Realty Investments, Inc., a Colorado corporation ("Apex") a related party, whereby the Company exchanged assets (real property in Abilene, Texas) and common stock for real property owned by Apex. Under the terms of the Real Estate Exchange Agreement, Apex received real property the Company owned in Taylor County, Texas, a note receivable from two individuals, and 100,000 shares of the Company's restricted common stock in exchange for approximately 455 acres of real property, with water rights and a $60,000 timber contract located on the property in the mountains of Grand County, Colorado. In addition the Company assumed a $265,000 mortgage payable on the real estate. On December 15, 1994 this land was sold to an unrelated third party and received net cash of $374,606 after payoff of mortgage and other costs and the company is carrying back a note for $440,218 on the balance. This note was paid in-full in February 1996. Details of this transaction are more fully discussed in note 4 and 6 to the Financial Statements.
On October 15, 1993, the Company acquired various assets of Wholesale Pump and Supply, Inc. ("Wholesale") of Oklahoma City, Oklahoma by issuing 250,000 shares of common stock. The shares had an aggregate value of $145,000 at the day of closing. The purchase of assets was arrived through an arms length negotiation. Wholesale operates as a division of Titan Industries and is currently doing business in a 10,000 square foot rented warehouse. The company's primary functions are distributing water well supplies and environmental monitoring equipment for testing ground water.
(b) Financial Information About Industry Segments
The business of the Company is carried on within two segments by three operating units, each with its own organization. The management of each operating subsidiary unit has responsibility for product development, manufacturing, marketing and for achieving a return on investment in accordance with the standards and budgets established by W W Capital. Overall supervision, coordination and financial control are maintained by the executive staff from the corporate headquarters located at 11990 Grant Street, Metro North Building, Suite 400, Northglenn, Colorado. As of June 30, 1996, the Company and its segments had approximately 131 employees. The reader is referred to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and notes to the Company's Financial Statements for certain financial information regarding these segments.
(c) Narrative Description of Business
The registrant conducts its business through its two business segments: livestock handling equipment group, and the water and environmental products group. A discussion of these segments follows.
Livestock Handling Equipment Group
This division generated 51.9% of total corporate sales compared to 57.00% for fiscal 1995.
Principal Products, Markets and Distribution
The Livestock Handling group manufactures a broad line of cattle handling, equine (horse), rodeo equipment and containment systems. This equipment is used by farmers, ranchers, rodeos, county fairs, veterinarians and universities. Presently with its 50 year old history W-W Manufacturing, the primary subsidiary of this segment, is well recognized in the industry as the leader in production of livestock equipment. With the acquisition of Eagle Enterprises, October 1992, the Company has experienced growth with this segment reaching a record high sales of $11,369,826 for fiscal year June 30, 1994. Eagle had manufactured all types of livestock feeding equipment and various containment systems similar to that manufactured by W-W Manufacturing. The Eagle line of products is primarily distinguished from W-W Manufacturing's products by a purchase decision that is primarily motivated/driven by pricing considerations.
Eagle had eliminated some of its line of feeding equipment which had not been profitable in 1995. By elimination of these products, Eagle has the manufacturing capacity to produce the majority of W-W Manufacturing line of products, thus improving its delivery time to Dealer/Distributors in the east, and southeastern United States. The Eagle plant was realigned to complement the W-W Manufacturing line of products and all products will be sold under the W-W Manufacturing name. This is significant since the W-W Line has a long term (50 years) reputation as an industry leader and manufacturing of quality equipment. Now that the W-W Manufacturing line is manufactured at Eagle, Eagle has reintroduce a redesigned feeding line to meet customer needs and enabling Eagle to produce it profitably. This reintroduction should help Eagle reclaim sales levels that were lost when the feeding line was dropped as well as pick up new sales from customers previously handling the W-W Manufacturing line only. The redesigned feeding line is also being introduced into the midwest and west markets and is now being manufactured at W-W Manufacturing. Feed equipment has proven to be a lower margin product line but continues to sell during depressed market conditions and is used as a lead in product to gain new customers acceptance for the traditional higher margin W-W working equipment line.
The market for cattle handling equipment is segmented by herd size into economic classifications. Based upon an independent study done for the Company, it is believed that economic dissimilarities between large and small operators create important differences in buying behavior. Recognizing this, management of the Company has positioned the Company to meet the demands of the market place and to be able to service both the large and small operator through its sales and marketing targeted at expanding the Dealer/Distributor network throughout the entire United States.
The Company did not renew the sales and marketing agreement with Agri-Sales Associates (Agri-Sales) after the first term concluded in October of 1994. When utilizing the services of Agri-Sales, some new accounts were established, but the Company felt it lost some control over the sales functions and felt it necessary to have closer contact with its customers. After the conclusion of the Agri-Sales Agreement management assessed the conditions of its customers and market and realized that no all products were selling and customers inventory levels were to high. With over sold market area's the Company had to develop a plan to systemically help customers understand and sell through its inventory. The Company has established sales areas and hired salespeople to cover the entire United States. With an aggressive sales and marketing plan in place the Company has hired an experienced sales manager and seven salesmen to continue to expand our Dealer/Distributor network. During the transition from Agri-Sales to our own in-house sales staff and the expansion into new market area, sales expenses have been higher than expected as salesmen gain knowledge of the customers and market. As our Dealer/Distributor network is expanded, management feels there will be an overall reduction in sales expenses and this savings will be realized to the bottom line. A substantial majority of this segment's sales will continue to be in cattle handling equipment. It is expected that 80% of these sales will be generated through the expanded Dealer/Distributor network. At present the Company works with approximately 80 different distributors representing 5,000 Sub-Dealers throughout the United States and Mexico.
The Company will continue to generate sales by offering special assistance in design and installation of product. This service has proven to be a valuable asset in the sale of equipment to large fairs, expo centers, rodeos and universities.
Over the years, W-W Manufacturing products have become favored for durability and ease of use by ranch hands who must work large volumes of cattle. W-W Manufacturing's presence at rodeos underscores the Company's position in the marketplace as a producer of equipment for the "working cowboy." W-W Manufacturing has been responsible for many innovations in rodeo equipment and has developed a well-respected line for that market. Since 1979, all of the chutes and rodeo equipment for the Professional Rodeo Cowboys National Finals Rodeo (NFR) have been supplied by W-W Manufacturing. The NFR is the largest rodeo championship event in the world. In addition, W-W Manufacturing has provided all the equipment for the International Rodeo Association Finals since 1978 and for many other top Rodeos across the country.
In the past, the Company has produced both heavy duty and portable horse stalls. These products have been primarily used by commercial users and exposition centers. Based on the success of the commercial horse stalls, the Company has introduced stalls designed for the equine hobbyist and horse show enthusiast. Aesthetics, ease of use and durability are considered by management to be the main selling points of this kind of equipment. The new horse stalls have been marketed through the distributor network already established by the Company.
Cost of distribution of products has and will continue to be a problem for the customers and the Company. To help lower this cost the Company need's to continue to find ways to fill trucks with a variety of products. With the introduction of the feed equipment, the new stock tank line, dog kennel line and other horse related products, the Company anticipates these products will help reduce its distribution cost and provides its customer the opportunity to carry more items with less depth of inventory.
Management believes these developments are key to the success of the Company's future expansion, and intends to continue to increase its Dealer/Distributor network vigorously. Demonstration, Seminars and special design will continue to be offered and special discounts given to principal Distributors for volume purchases.
Raw Materials and Facilities
The manufacture of livestock handling equipment requires various sizes of steel, tubing and other related steel products. The products necessary for fabrication of equipment are purchased from numerous steel companies, and the Company has experienced no difficulties in obtaining adequate supplies. The subsidiaries of this segment are located as follows: W-W Manufacturing, the largest by sales volume of the two subsidiaries, is located at 2400 East Trail Street, Dodge City, Kansas. Eagle Enterprises, is located at 175 Windle Community Road, Livingston, Tennessee.
Competition
The Company encounters competition in varying degrees in both cattle handling and equine product lines. Competitors are primarily domestic producers of similar products. These companies compete in price, delivery schedules, quality, product performance and other conditions of sales. During 1996 and 1995, management invested in new equipment, did extensive training, scheduled many live demonstrations, improved plant efficiencies, introduced new product improvements and new products, in order to maintain its competitive edge.
Strategy for Growth
Growth is anticipated in two areas. First, the Company will continue to expand the distributor/dealer network and expand into the upper midwest and west. However, this area for growth will be constrained by availability of capital resources.
Diversification into related product areas now served by the Company could afford a second area for growth. Management believes W-W Manufacturing's 50 year old reputation for quality, as well as for introducing new innovations into existing products, has positioned the Company ideally as a marketer for new products of its own as well as other companies' products. Over the past couple of years the Company introduced two of these products, the hydraulic squeeze chute and the large animal hospital bed as previously discussed. As discussed earlier the Company reintroduced a new feeding line as well as many product improvements over the year.
Water and Environment Products Group
The water and environmental products group consists of Titan Industries of Paxton, Nebraska with distribution locations in Dodge City, Kansas and its division, of Wholesale Pump and Supply in Oklahoma City, Oklahoma. This group accounts for 48.1% of total corporate sales for the fiscal year 1996. This compared with 43.00% in fiscal year 1995.
Titan's functions are broken down primarily into two divisions. The distribution of water well supplies and related products, and manufacturing of environmental products for the water industry.
Principal Products, Markets and Distribution
The Company distributes (wholesale) a wide variety of water well and related products. These products include submersible pumps, high pressure tanks, pipe, pipe fittings and various other accessories for water well drillers, plumbers and various other applications of water uses. The Company sells these products by direct sales through the sales force, by dealers and independent representatives. These products are primarily sold in a close proximity to the present three distribution points in Paxton, Nebraska, Dodge City, Kansas, and Oklahoma City, Oklahoma. The Company has taken steps to widen its water well supplies distribution by offering new lines not carried by local competitors. Titan has also improved its delivery schedules to meet the demands of these customers thereby making service the top priority in expanding this segment of the business.
The Company is also involved in manufacturing water well monitoring equipment which adds an environmental aspect to the business. Titan manufactures several unique products like flush threaded PVC pipe which allows strong joints without glue. Flush threaded pipe allows for seamless joints both inside and out. This is significant as monitor wells are tested for impurities, in the parts per million category, where joint solvents and glues can actually be measured as part of the contamination. By packaging products together as monitoring well units, the Company is able to sell these units for greater total profit margins than the individual components command as separate (commodity type) items. Another unique product produced by Titan is flush mounted PVC screens which offer a lower cost and longer life since standard steel screens are subject to corrosion. The Company has added significant growth in the environmental sales with other products such as well protectors, manhole covers, drainage pipe and various other related products.
The environmental products are marketed through distributors which have been set up throughout the United States. Management plans to continue its efforts to market aggressively to government agencies as the guidelines for ground water testing become more stringent.
Raw Materials and Facilities
The Company redistributes various manufactured products through its water well supply division. Also, the Company uses various sizes of PVC pipe for production of its well screen and flush jointed products. The Company has not experienced any difficulties in obtaining the raw material needed for production of its water well products.
The subsidiary of this segment owns its new headquarters and manufacturing facilities which consists of 25,000 square feet located in Paxton, Nebraska, which was completed in December 1994. The Company also has two other distribution points located in Dodge City, Kansas and Oklahoma City, Oklahoma (Wholesale Pump and Supply).
Competition
The water well supply division of Titan experiences a high degree of competition and only sells within a close proximity to its three distribution points. The environmental products consisting of well screen flush jointed pipe, and new horizontal drilling products have achieved a unique position in their various markets. These products encounter some degree of competition, but due to their unique design and availability of production Titan, maintains a market dominance in this area, throughout the United States. During 1994, the Company invested in new equipment, and constructed a new plant which was completed in December, 1994, to enhance production and improve delivery time. Since the completion of the facility the Company has enjoyed new customer growth across the country.
Strategy for Growth
Growth is anticipated in several areas. First, distributor demand of the Company's existing product line has continued to remain strong as more and more distributors around the Country became aware of Titan's quality and reliability of delivery. The Company has improved significantly sales of larger diameter pipe with the manufacturing equipment added during 1994. Since gross profit margins increase in direct proportion to pipe diameter size, this new equipment should enhance profitability. With the addition of Wholesale Pump and Supply in Oklahoma City, Oklahoma, growth to the south, southeast and southwest has been greatly improved. The Company anticipates significant additional increases in these areas with the environmental well products due to the ease and speed of delivery. Second, the Company continues to increase marketing its products to governmental agencies as they expand the environmental protection agency guidelines for testing of ground water. Third, the Company has been investigating and developing new slotting techniques using high density polyethylene pipe for use in the horizontal drilling industry. This product is being used extensively by land fills and in other waste treatment applications. The Company has also expanded its market in custom fabrication of pipe through round hole perforations, Titan Ver-ta slot and other applications as requested by customers. Recent developments in the mining industry show that their is a significant market for Titans products and is presently looking for ways to distribute its line of products.
Other Information Relative to the Business
Patents and Trademarks
The Company holds no patents or registered trademarks or service marks.
Seasonality
The Company experiences seasonality in sales in both of its segments. The livestock handling equipment product segment has increased sales in the fall and through the spring and lower sales in summer. The water and environment product segment has increased sales in the spring, summer and into the fall and lower sales in the winter. With this diversity in sales, the seasonality allows the Company as a whole to experience overall level sales throughout the year.
Practice Relating to Working Capital
The information relating to this Item is included under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
Dependence Upon a Single Customer
Not Applicable
Dollar Amount of Backlog Orders
Backlog in the livestock handling equipment group was $226,475. This decrease from 1995 is due to a large special order of $512,000 that was not shipped until September of 1995. The general decline in orders is due to depressed beef prices.
The water and environmental products showed a backlog increase from $173,420 in 1995 to $205,000 as of June 30, 1996. Substantially all the backlog is expected to be realized as sales during the first quarter of the 1996 fiscal year.
Business Subject to Renegotiation at Election of Government
Not Applicable
Research and Development Expenditures
Due to the nature of manufacturing operations of the Company and the types of products produced by its two segments, expenditures for research and development are not material to the overall operating cost.
Compliance with Environmental Controls
The Company has determined that a significant amount of paint located at its Tennessee facility, must be disposed of to comply with environmental regulations. The Company has estimated a range of $10,000 to $45,000 as the cost to dispose of this paint based upon managements estimate and the actual cost incurred subsequent to June 30, 1996, to dispose of the most contaminated barrels of paint. The Company has accrued $10,000 of this charge as a liability in the accompanying financial statements.
To the best of its knowledge, the Company believes that it is presently in substantial compliance with all existing environmental laws and does not anticipate that such compliance will have a material effect on its future capital expenditures, earnings or competitive position with respect to any of its business segments other than Tennessee situation discussed above.
Item 2.
Item 2. Properties
The Company's corporate headquarters is located at 11990 Grant Street, Metro North Building, Suite 400, in Northglenn, Colorado, and is leased from an unrelated third party.
The livestock handling equipment division is located at 2400 East Trail Street, Dodge City, Kansas. This facility is leased from Murle F. and Sara R. Webster, shareholders of the Company, for $5,000 per month, on a month to month basis. This facility is comprised of approximately 40,000 square feet in three buildings.
Eagle Enterprises is located at 175 Windle Community Road, Livingston, Tennessee. This facility is owned by the Company and has approximately 40,000 square feet located on 11.5 acres of land.
The water and environmental products group conducts its primary operations at Highway 30, Paxton, Nebraska, in a facility which consists of general offices, manufacturing facilities and open storage areas. This facility is approximately 25,000 square feet on 10.1 acres of land. The Company also has a distribution facility at 1904 West Wyatt Earp, Dodge City, Kansas. Both of the aforementioned locations are owned by the Company. Titan leases a third distribution facility for its division, Wholesale Pump and Supply located at 1821 N.W. 4th Drive, Oklahoma City, Oklahoma. Which consists of approximately 10,000 square feet of space.
The Company owned certain undeveloped real estate in Grand County, Colorado. The property is approximately 455 acres located in the Never Summer Range of the mountains north of the Winter Park ski area which was sold in December 1994.
The Company also owns an undeveloped 95 acre tract located southeast of Fort Worth, Texas. The Company has listed this property for sale for $400,000, and investigating the possibility of a joint venture development.
Item 3.
Item 3. Legal Proceedings
In April, 1994, W-W Manufacturing and Eagle sent written notice to Agri-Sales that the Companies will not renew their sales and marketing agency agreement with Agri-Sales when the two year initial contract term expired on October 26, 1994. Agri-Sales informed the Company that under the contract, W-W Manufacturing and Eagle can not terminate the sales and marketing agreement until May 26, 1995. On October 5, 1994, the Company filed a lawsuit in the Sixteenth Judicial District, Ford County, Kansas, asking the Court for declaratory judgement and a preliminary injunction against Agri-Sales to resolve the issue. On October 10, 1994, Agri-Sales filed an answer and made application for a temporary injunction against the Company. On October 20, 1994, the District Judge denied Agri-Sales application for a temporary injunction against the Company. Additionally, Agri-Sales has filed a counter claim for relief estimating damages of $500,000 to $600,000 for the commissions Agri-Sales would have earned for the period October 26, 1994 to April 26, 1995, (the date Agri-Sales contends that the contract will expire) and actual damages of $475,206. Management is confident the court will decide that the contracts did expire on October 26, 1994 and the actual amounts due Agri-Sales based upon the Company's calculation, which had been recorded in the accompanying financial statements, are substantially less than the amounts claimed. This case is in discovery and the Company's legal counsel is unable to express an opinion on the outcome of this case. The Company has been negotiating with Agri-Sales to settle this law suit. The Company has offered to pay $180,000, with $30,000 due upon final judgment of the March Group, Inc. law suit discussed below, with the remaining balance payable in semi annual payment of $25,000 until paid in-full, with zero interest.
On December 22, 1992, The March Group, Inc. (The March Group) filed a lawsuit against Eagle and its former shareholders, Jerry R. Bellar (Bellar) and James Buford (Buford). The March Group alleges that Eagle, Bellar and Buford breached a listing contract to sell Eagle and has requested damages of $169,596 (Count I). The March Group has also sued the Company for breach of a separate agreement which the Company had made with The March Group promising to direct all inquiries it had regarding the purchase of Eagle through The March Group and is seeking damages of $169,596 (Count II). Additionally, The March Group is requesting damages against Eagle, Bellar and the Company under a specific Tennessee statute which would allow The March Group three times its proven actual damages of $508,788 (Count III).
On May 6, 1994, the Chancery Court, for the State of Tennessee, entered an order requiring Eagle to pay the March Group $169,596 under Count I and ruled in favor of defendants on Counts II and III. On June 7, 1995 the court of appeals reversed the decision that Eagle had to pay $169,596. The case (Count I) has been remanded back to trial court for trial. The court of appeals affirmed the decision of the trail court on Count II and III in favor of the Company. After the Court of Appeals decision, Eagle filed an application for review to the Tennessee Supreme Court asking it to reconsider the Court of Appeals decision rejecting Eagle's claim that plaintiff violated the Tennessee Real Estate Broker Licensing Act, thus forfeiting any fee under the listing contract. Trial of the remanded case to the trial court will not begin until such time as the Tennessee Supreme Court has decided whether to grant Eagle's application for review. To date, the Tennessee Supreme Court has not issued its decision.
At the closing of the sale of Eagle, the Company agreed to pay $50,000 of the projected fee due the March Group under its listing agreement, which is recorded in the financial statements. Under the terms of the Eagle sale agreement, Bellar agreed to indemnify the Company for undisclosed liabilities after applying a $10,000 deductible. Bellar has acknowledged that his indemnification obligations require him to pay Eagle for all damages in excess of $50,000 awarded to the March Group under Count I. The remaining amount due the March Group ($119,596) and the receivable from Bellar have not been recorded on the financial statements.
At the time Eagle was purchased, Eagle was a defendant in a lawsuit filed by Liberty Metal Fabrications, Limited (Liberty Metals) in the State of Kentucky. The claims against Eagle relate prior to the acquisition of Eagle (October 26, 1992) by the Company. Liberty Metals was claiming approximately $91,000 from Eagle. The Company settled the claim by paying $18,000 and returning certain equipment to Liberty Metals.
Additionally, it is Management's opinion that any amounts paid to Liberty Metals, by Eagle, should be indemnified by Bellar. It was indicated during the purchase of Eagle that Eagle's exposure in the Liberty Metals case was "at worst a wash-out". Bellar denies that Liberty Metals is covered under the indemnification agreement.
Daniel R. Beaton and Rocky Mountain Realty, Inc ("Beaton") has filed a law suit in the District Court, County of Adams, State of Colorado against W W Capital Corporation. Beaton is asserting a claim against the Company for a claimed real estate commission in the amount of $87,218 plus interest and attorney fees due from the Company's sale of certain real property located in Grand County Colorado, pursuant to a listing agreement. The Company's position is that the listing agreement was intended to exclude any buyer that was referred to the Company through several listed individuals. The Company settled this lawsuit by paying Beaton $3,500.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders of the Company during the fourth quarter of the fiscal year ended June 30, 1996.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matter
The Company's Common Stock was listed for trading purposes on the Boston Stock Exchange on May 15, 1991, and trades under the symbol "WWC.B". The Company's Common Stock is also listed on the over-the-counter market and trades under the symbol"WWCA".
Holders
As of October 21, 1996 the Company had approximately 600 record holders of its common stock, not including some individuals holding shares in street name.
Dividends
The Company did not pay dividends during 1996 or 1995 and does not intend to pay cash dividends in the foreseeable future. The management of the Company intends, for the present, to retain all available funds for the development of its business. Additionally, certain of the Companies' loan covenants prohibit the paying of dividends.
Item 6.
Item 6. Selected Financial Data Year Ended June 30,
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto under Item 8.
Item 8. Financial Statements and Supplementary Data.
W W CAPITAL CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Financial Statements:
Independent Auditors' Report . . . . . . . . . . . .
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995 . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended June 30, 1996, 1995 and 1994 . . . . . . . . . .
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996, 1995 and 1994 . . . . . .
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . .
Financial Statement Schedules:
Independent Auditors' Report . . . . . . . . . . . . . S-1
I - Condensed Financial Information of Registrant . . . . S-2
All other schedules are omitted because they are applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
Not Applicable
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Officers of the Company are elected at the Board of Directors' annual organizational Meeting immediately following the Annual Stockholders' Meeting. Such Officers hold office until their successors are elected and qualify. The following information indicates the position and age of the directors and officers as of October 21, 1996, and their business experience during the prior five years.
DAVID L. PATTON, age 65, was elected to the Board of Directors of the Company in December 1991, and Chairman of the Board in December 1993. Mr. Patton is a partner with the law firm of Patton, Kerbs & Hess in Dodge City, Kansas. Mr. Patton was a founder of Titan Industries, Inc.,which is currently operated as a wholly-owned subsidiary of the Company.
STEVE D. ZAMZOW, age 48, joined the Company in 1991 and was elected as the Company's Chief Financial Officer in June 1992, President and Chief Executive Officer in December 1993 and elected as a Director in December 1993 by the shareholders. From 1976 to 1991, Mr. Zamzow owned numerous companies and was a financial consultant for various companies. Mr. Zamzow has been Vice President for a steel company and has worked extensively in business workouts. From 1971 to 1974, Mr. Zamzow was employed by Peat, Marwick, Mitchell & Co. as an auditor. Mr. Zamzow received his accounting degree from the University of Nebraska.
MILLARD T. WEBSTER, age 48, became a director of the Company in 1988 and has been employed by the Company's subsidiary, W-W Manufacturing Co., Inc. since 1962. Mr. Webster has occupied the positions of piecework production foreman, production manager, and Vice President and President of the Company's subsidiary, W-W Manufacturing Co., Inc. Mr. Webster is currently a Vice President for the Company's subsidiary, W-W Manufacturing Co., Inc. Mr. Webster graduated from Evangel College, Springfield, Missouri in 1970 with a bachelor's degree in business administration. Mr. Webster is the brother of Mickey J. Winfrey, Executive Vice President-Administration, Secretary and Treasurer of the Company.
THOMAS W. HEMPHILL, age 64, became a director of the Company in December 1991 and served until his resignation July 31, 1996. Since 1986, Mr. Hemphill has assisted the management of the Company in corporate planning and training. Mr. Hemphill has been an independent business consultant since leaving the employment of Security Pacific Corporation in 1975 as Senior Management Advisor. Mr. Hemphill was a pioneer in the introduction of private mortgage insurance in the early 1960's and served as President of Excel Investment Company from 1966 to 1975.
EDWARD J. WADE, age 42, became a director of the Company in 1993 and served until his resignation August 23, 1996. Mr. Wade is a practicing Anesthesiologist of Pain Anesthesia and Control Care Services, P.A. in Wichita, Kansas. Mr. Wade received his M.D. from the University of Kansas School of Medicine in 1980 and his residency and internship through the University of Utah, School of Medicine, Salt Lake City, Utah in 1992. Mr. Wade then received his Chief Resident of Anesthesiology with the University of Utah of Salt Lake City, Utah in 1986.
JAMES H. ALEXANDER, age 58, has been nominated to become a Director of the Company. Since 1992, Mr. Alexander has been a member of the Board of Directors of Zykronix, Inc. and presently is the
Item 10. Directors and Executive Officers of the Registrant, Continued
Chief Operating Officer. Mr. Alexander is also an independent real estate broker for TDI Property Brokers. From April 1992, to November 1992, Mr. Alexander was a member of a management team of a venture capital firm which funded a satellite communications company. Mr. Alexander is the founder of T.D.I., Inc., a corporation engaged in consulting, fund raising, acquisitions and mergers of hi-tech firms. Mr. Alexander has taken courses leading toward Bachelor of Science Degree in Business Administration from Rollins College.
MICKEY J. WINFREY, age 41, became Vice President-Administration, Secretary and Treasurer of the Company in 1988. Ms. Winfrey had been employed by the Company's subsidiary, W-W Manufacturing Co., Inc., from 1973 to 1990, where she has held positions as secretary/receptionist, payroll clerk, head of personnel and office manager. Ms. Winfrey is the sister of Millard T. Webster, a director of the Company.
ROBERT W. CLAAR, age 43, joined the Company in June 1994 and was elected as the Company's Chief Financial Officer and Vice President. Mr. Claar graduated from the University of Nebraska and has spent sixteen years in public accounting and was an audit partner for eight of those years. Mr. Claar has had extensive SEC reporting experience, as well as experience in serving manufacturing and distribution clients. Prior to entering public accounting, Mr. Claar owned and operated his own business in Central Nebraska.
Item 11.
Item 11. Executive Compensation
The following table sets forth the cash compensation paid or accrued during the fiscal years ended June 30, 1996, 1995 and 1994, to the Company's Chief Executive Officer, No other executive officer received cash in excess of $100,000.
Option Grants in Fiscal Year 1996
During the fiscal year ended June 30, 1996, the Company did not grant stock options to the executive officers.
Aggregated Option Exercises in Fiscal Year 1995
The following table sets forth for the executive officer named in the Summary Compensation Table, information concerning each exercise of stock options during the fiscal year ended June 30, 1996 and the value of the unexercised stock options at June 30, 1996.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of October 21, 1996, the ownership of the Company's common stock by each director of the Company, by each person who is known by the Company to be the beneficial owner of more than 5% of the Company's common stock, and by the officers and directors of the Company as a group:
Item 13.
Item 13. Certain Relationships and Related Transactions
On June 30, 1989, W-W Land & Cattle, a partnership owned by Millard T. Webster, a director of the Company, Mickey J. Winfrey, an officer of the Company and Terry L. Webster, a brother of Mr. Millard T. Webster and Ms. Winfrey, executed a promissory note for the amount of $96,424 in favor of the Company's subsidiary, W-W Manufacturing Co., Inc. Interest was payable annually at 9% per annum and the principal was due on demand. On June 30, 1993, Ms. Winfrey satisfied her obligations under this note by paying to the Company the amount of $11,361. As of June 30, 1995, $23,028 remained payable under this note by Millard T. Webster and Terry L. Webster.
The Company currently leases its manufacturing facility in Dodge City, Kansas from Murle F. Webster, father of Millard T. Webster and Mickey J. Winfrey. This lease requires a monthly rental payment of $5,000. This lease expired on December 31, 1994, however, it has continued on a month to month basis. During the fiscal year ended June 30, 1995, $60,000 was paid by the Company under the lease.
Millard T. Webster, a director of the Company, Mickey J. Winfrey, an officer of the Company, and Terry L. Webster, have each executed a promissory note in favor of the Company for the amount of $58,333. Each note bears interest at 9% per annum, are payable in monthly installments of $767 and are due to be paid in full by September 30, 1997. Murle F. Webster, lessor of the Company's manufacturing facility, has executed an assignment of monthly rent back to the Company under each of these notes.
On October 26, 1992, the Company, through its wholly-owned subsidiaries, W-W Manufacturing Co., Inc. ("W-W Manufacturing"), and Eagle Enterprises, Inc. ("Eagle"), entered into an exclusive two year initial term sales and marketing agreement with Agri-Sales Associates, Inc. ("Agri-Sales") to market the Company's products throughout the United States. Jerry R. Bellar, a 4.1% stockholder of the Company, is President and a majority stockholder of Agri-Sales. In conjunction with the cancellation of the agreements, the Companies owed Agri-Sales approximately $164,863 which was increased to $180,000 under a proposed settlement of a lawsuit between the Company and Agri-Sales (see "Legal Proceeding" for additional information).
On October 26, 1993, the Company acquired all of the outstanding stock of Eagle in exchange for 325,000 shares of its common stock. Eagle was owned by Jerry R. Bellar, who is now a 4.1% stockholder of the Company. As a result of the acquisition of Eagle, the Company acquired a note payable to Mr. Bellar. On January 24, 1994, Eagle agreed to become a co-borrower with Mr. Bellar. Said note was used to refinance Eagle's note payable to him in the amount of $119,847. This note was paid in-full in January 1996.
At June 30, 1996, the Company has a receivable form Agri-Sales and/or Jerry Bellar in the amount of $132,221. This balance represents accounts due to the Company relating to the March Group, Inc. law suit and Liberty Metal Fabrication, Limited lawsuit (see "Legal Proceeding" for additional information).
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) List of Financial Statements Filed as a Part of This Report
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995.
Consolidated Statement of Operations for the years ended June 30, 1996, 1995 and 1994.
Consolidated Statement of Stockholders' Equity for the years ended June 30, 1996, 1995 and 1994.
Consolidated Statement of Cash Flows for the years ended June 30, 1996, 1995 and 1994.
(a) (2) List of Financial Statement Schedules Filed as a Part of This Report
Schedule I - Condensed Financial Information of Registrant
(a) (3) Exhibits
Exhibit Number Document
2.1 Exchange Agreement dated August 15, 1991 between W W Capital Corporation and Titan Industries, Inc. (filed as Exhibit 3.3 to Form 10-K for the fiscal year ended June 30, 1991 and is hereby incorporated by reference).
2.2 Exchange Agreement dated October 26, 1992 between W W Capital Corporation and Eagle Enterprises, Inc. (filed as an exhibit to the Company's Form 8-K dated November 3, 1993 and is hereby incorporated by reference).
3.1 Articles of Incorporation dated December 13, 1989 of W W Capital Corporation, a Nevada corporation (filed as Exhibit 3.2 to the Company's Form 10-K for the year ended June 30, 1990 and is hereby incorporated by reference).
3.1.1 Certificate and Amendment to Articles of Incorporation filed December 21, 1990 with the Nevada Secretary of State (filed as Exhibit 3.01 to the Company's Form 10-Q for the quarter ended December 31, 1990 and is hereby incorporated by reference).
3.2 Bylaws of W W Capital Corporation (filed as Exhibit 3.2 to the Company's Form 10-K for the year ended June 30, 1991 and is hereby incorporated by reference).
10.1 Real Estate Lease Agreement and Amendment between Murle F. and Sara R. Webster and W W Capital Corporation (filed as an exhibit to the Company's Post-Effective Amendment No. 1 to Form S-18 and is hereby incorporated by reference).
10.1.1 Amendment to Real Estate Lease between Murle F. and Sara R. Webster and W W Capital Corporation dated March 24, 1993 (filed herewith).
10.2 Assignment of Rental Income from Murle F. and Sara R. Webster to W W Capital Corporation (filed as an exhibit to the Company's Post-Effective Amendment No. 1 to Form S-18 and is hereby incorporated by reference).
10.3 1990 Incentive Stock Option Plan (filed as Exhibit 10.16 to the Company's Form 10-K for the year ended June 30, 1990 and is hereby incorporated by reference).
10.4 Promissory Note dated June 30, 1990 from Millard T. Webster in favor of W W Capital Corporation for the amount of $2,716 (filed as Exhibit 10.8 to Form 10-K for the fiscal year ended June 30, 1991 and is hereby incorporated by reference).
10.5 Promissory Note dated April 30, 1990 from Millard T. Webster and Mickey J. Winfrey in favor of W W Capital Corporation for the amount of $43,000 (filed as Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1991 and is hereby incorporated by reference).
10.6 Loan Agreement dated June 29, 1992 between W-W Manufacturing Co., Inc. (wholly owned subsidiary of the Company) and Bank IV Kansas, N.A. (Garden City Kansas) (filed as Exhibit 10.12 for the fiscal year ended June 30, 1992 and is hereby incorporated by reference).
10.7 Loan Agreement dated June 29, 1992 between Titan Industries, Inc. (wholly owned subsidiary of the Company) and Bank IV Kansas, N.A. (Garden City Kansas) (filed as Exhibit 10.13 for the fiscal year ended June 30, 1992 and is hereby incorporated by reference).
10.8 1990 Non-Qualified Stock Option Plan (filed as Exhibit 10.14 of Form 10-K for the fiscal year ended June 30, 1992 and is hereby incorporated by reference).
10.9 Employee Stock Benefit Plan (filed as Exhibit 10.15 of Form 10-K for the fiscal year ended June 30, 1992 and is hereby incorporated by reference).
10.10 Loan Agreement dated December 15, 1992 between Eagle Enterprises, Inc. (wholly owned subsidiary of the Company) and Bank IV Kansas, N.A. (Garden City, Kansas) (filed as Exhibit 10.10 of Form 10-K for the fiscal year June 30, 1993 and is hereby incorporated by reference).
10.11 Exchange Agreement between W W Capital Corporation and Apex Realty Investments, Inc. dated February 19, 1993 (filed as an exhibit to the Company's Form 8-K dated March 5, 1993 and is hereby incorporated by reference).
10.11.1 Addendum to Exchange Agreement between W W Capital Corporation and Apex Realty Investments, Inc. dated August 23, 1993 (filed as Exhibit 10.11.1 of Form 10-K for the fiscal year June 30, 1993 and is hereby incorporated by reference).
10.12 Loan Agreement dated April 8, 1993 between Eagle Enterprises, Inc. (wholly owned subsidiary of the Company) and First American National Bank, N.A. (Cookeville, Tennessee) (filed as Exhibit 10.12 of Form 10-K for the fiscal year June 30, 1993 and is hereby incorporated by reference).
10.13 1992 Non-Qualified Stock Option Plan (filed as Exhibit 10.13 of Form 10-K for the fiscal year June 30, 1993 and is hereby incorporated by reference).
10.14 Loan Agreement dated October 20, 1992 between W W Capital Corporation, Eagle Enterprises, Inc. and Jerry R. and Jacqueline A. Bellar (former owners of Eagle Enterprises, Inc.) (filed as Exhibit 10.14 of Form 10-K for the fiscal year June 30, 1993 and is hereby incorporated by reference).
10.15 Asset Sale and Purchase Agreement between W W Capital Corporation and Wholesale Pump and Supply, Inc. date October 14, 1993 (filed as Exhibit 10.15 of Form 10-K for fiscal year June 30, 1994 and is hereby incorporated by reference).
10.16 Real Estate Contract between W W Capital Corporation and Daniel L. Hahn, Donna R. Hahn and Helene D. Linder, Promissory Note, date December 15, 1994 between W W Capital Corporation and Daniel L. Hahn, Donna R. Hahn and Helene D. Linder (filed as an exhibit to the Company's Form 8-K dated December 15, 1994 and is hereby incorporated by reference).
10.17 Loan Agreement dated March 3, 1995 between Titan Industries, Inc. (wholly owned subsidiary of the Company and Keith County Economic Development Corporation (incorporated by reference June 30, 1995 10-K).
10.18 Loan Agreement dated March 3, 1995 between Titan Industries, Inc. (wholly owned subsidiary of the Company and First National Bank in Ogallala (incorporated by reference June 30, 1995 10-K).
10.19 Letter Agreement dated September 17, 1996, between W W Capital Corporation and Bank IV Garden City (filed herewith).
21.0 Subsidiaries of the Registrant (filed herewith).
27.0 Financial Data Schedule.
Item 14 (b)
No reports on Form 8-K were filed during the fourth quarter of the fiscal year covered by this report.
Exhibit 10.19
September 17, 1996
Bank IV
Mr. Steve Zamzow, President Mr. Robert W. Claar, CFO WW Capital Corporation 11990 Grant Street Suite 400
Northglenn, CO 80233
Gentlemen:
Thank you for your letter dated September 4, 1996 advising us of the resignations of Directors Hemphill and Wade. Please keep us informed on their replacements.
Your letter confirmed that you are in violation of your loan covenant due to the fact that year to date losses have reduced your consolidated net worth below the required $2,850M. Your traditional cash flow is not expected to meet the goal of 1.20/1 debt service coverage. The bank is willing to grant a waiver of the net worth requirement under the following conditions:
1. WWC will provide the bank with a detailed breakeven analysis on both Eagle Enterprises, Inc. and WW Manufacturing, Inc. This analysis should break out revenue volumes required for the companies to breakeven given various combinations of product mixes.
2. WWC currently guarantees the loans to the respective subsidiaries. Our counsel has requested that each subsidiary guarantee the loans of its affiliates in addition to the holding company's guaranty.
3. All revolving equipment lines are immediately frozen at current levels and repayment schedules with no new advances. These notes will be rewritten into standard term notes at renewal with terms and conditions to be determined at the time we review the operating lines for renewal.
4. A twelve month proforma consolidated Profit & Loss Statement shall be provided the bank which breaks out and details monthly holding company expenses separately from other expenses.
If you find these conditions acceptable, please sign the acknowledgement below and return a copy to me as soon as possible. Upon the bank's satisfactory receipt of items #1, #2,and #4 our waiver of the net worth covenant will be in effect.
Should you have questions regarding this correspondence, please contact me.
Sincerely.
Douglas Laubach Sr. Vice President
Agreed to and acknowledged by the undersigned acting under resolution and the express authority of the respective Boards of Directors of the companies set forth below:
Authorized Signer Title
W W Capital Corporation by: /s/: Mr. Steven Zamzow Pres.
Eagle Enterprises, Inc. by: /s/: Mr. Steven Zamzow Pres.
W W Manufacturing, Inc. by: /s/: Mr. Steven Zamzow Pres.
Titan Industries, Inc. by: /s/: Mr. Steven Zamzow Pres.
Exhibit 21.0
Subsidiaries of the Registrant
W-W Manufacturing Co., Inc. Incorporated in the state of Kansas
Titan Industries, Inc. Incorporated in the state of Nebraska
Eagle Industries, Inc. Incorporated in the state of Tennessee
SIGNATURES
Pursuant to the requirements of Section 13, or 15(b) 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.
W W CAPITAL CORPORATION
By /s/ Steve D. Zamzow
Steve D. Zamzow, President
Date: November 08, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons of the Registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ Steve D. Zamzow President, and 11/08/96 Steve D. Zamzow Director
/s/ Robert W. Claar Chief Financial Officer 11/08/96 Robert W. Claar
/s/ David L. Patton Chairman of the Board 11/08/96 David L. Patton
/s/ Millard T. Webster Director 11/07/96 Millard T. Webster
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders W W Capital Corporation
We have audited the accompanying consolidated balance sheets of W W Capital Corporation as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 consolidated financial statements referred to above present fairly, in all material respects, the financial position of W W Capital Corporation as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit of $916,259 and has little remaining credit on two of the subsidiary's lines of credit. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that result from the outcome of this uncertainty.
MILLER AND McCOLLOM Certified Public Accountants Denver, Colorado October 15, 1996
W W CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
W W CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS, CONTINUED
The accompanying notes are an integral part of the consolidated financial statements.
W W CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
W W CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1996, 1995 and 1994
The accompanying notes are an integral part of the consolidated financial statements.
W W CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued on Next Page)
W W CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
The accompanying notes are an integral part of the consolidated financial statements.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(1) Summary of Significant Accounting Policies
(a) Organization and Operations W-W Capital Corporation (the Company), was originally incorporated in the State of Colorado on September 23, 1987 and reincorporated in Nevada on December 15, 1989, for the purpose of acquiring or completing a merger with another company. Effective August 16, 1988, the Company entered into a common stock exchange agreement with W-W Manufacturing Co., Inc. (W-W) whereby the Company transferred 100% of its net assets to W-W and issued 160,000,000 shares of its common stock to the existing stockholders of W-W in exchange for 100% of the outstanding common stock of W-W. As a result, the Company became the parent of W-W. W-W was incorporated in the State of Kansas on October 18, 1961 and is engaged in the manufacture, distribution and sale of a wide range of livestock confinement and handling equipment at its Dodge City, Kansas, plant.
In December, 1991, the Company acquired Titan Industries, Inc. (Titan), a Nebraska corporation, in a business combination accounted for as a pooling of interests. Titan is engaged in the processing, purchasing and distribution of water well supplies. Titan became a wholly- owned subsidiary of the Company through the exchange of 1,600,000 shares of the Company's common stock for all of the outstanding stock of Titan.
On October 26, 1992, the Company acquired Eagle Enterprises, Inc. (Eagle), a Tennessee Corporation, effective September 1, 1992. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at their fair values as of the date of the acquisition, and the results of operations of Eagle are included in the accompanying consolidated financial statements since the date of acquisition. The merger agreement provided that the Company issue 325,000 shares of its common stock in exchange for all of the outstanding stock of Eagle. At its Livingston, Tennessee plant, Eagle produces livestock handling equipment and confinement equipment.
On October 15, 1993, the Company acquired various assets of Wholesale Pump and Supply, Inc. (Wholesale) of Oklahoma City, Oklahoma by issuing 250,000 shares of common stock. The acquisition was accounted for as purchase and accordingly, assets were recorded at their fair values as of the date of acquisition and the results of Wholesale are included in the accompanying consolidated financial statements since the date of acquisition. Wholesale operates as a division of Titan.
(b) Policy of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, W-W, Titan and Eagle.
(c) Inventories Inventories of raw materials, work-in-process and finished goods are stated at the lower of cost (first-in, first-out (FIFO) method) or market value. For manufactured finished goods and work in process, production costs have been included in the value.
(d) Property and equipment Property and equipment are recorded at cost. Depreciation is computed using various depreciation methods based on the estimated useful lives of the respective assets. Maintenance and repairs are charged to expense as incurred; renewals and betterments are capitalized. Upon sale or disposition of properties, the asset account is relieved of the cost of the property and the accumulated depreciation account is charged with depreciation taken prior to the sale. Any resultant gain or loss is credited or charged to operations.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(1) Summary of Significant Accounting Policies, Continued
(e) Real Estate Held for Sale Real estate held for sale is stated at the lower of cost or net realizable value. The Company capitalizes the carrying cost as part of it's value in real estate held for sale.
(f) Loan Acquisition Costs Loan acquisition costs represent costs incurred to obtain certain of the Company's long-term debt (Note 7). Such costs have been capitalized and are being amortized over the terms of the related notes payable.
(g) Income Taxes Income tax expense is based upon operations as reported for financial statement purposes. Such amount differs from the amount as reflected on the Company's income tax returns because certain items are reported for income tax purposes in periods different from those in which they are reported in the financial statements. If applicable, the tax effects of these timing differences are reflected as deferred income taxes (Note 10).
Tax credits are accounted for on the flow-through method as a reduction of the provision for Federal income taxes in the year the credits are realized.
(h) Primary Net Earnings per Share Primary net earnings per share have been computed using the weighted average number of shares of common stock outstanding, plus exercisable stock options during the applicable years. Primary earnings per share for 1996, 1995 and 1994 excluded stock options because the effect of such inclusion would be antidilutive.
(i) Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments, purchased with an original maturity of three months or less, to be cash equivalents.
(j) Construction Period Interest Interest expense incurred during the construction of fixed assets has been capitalized as part of the cost of those assets. During the years ended June 30, 1995, the Company capitalized $12,616 in conjunction with the building of the new facility in Paxton, Nebraska.
(k) Impairment of a Loan The Company uses the allowance method of accounting for bad debts. Individual notes are evaluated for potential impairment when payments are in arrears. Loans identified as impaired are then valued based upon the present value of estimated future cash flows, valuation of collateral, or management's judgement based upon general market conditions, historical trends or individual circumstances. The resulting value is then compared to the carrying amount. An allowance is established for any resulting deficiency in the loan value compared to the carrying amount.
The Company recognizes the entire change in this valuation allowance as bad-debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad-debt expense that otherwise would have been reported. Interest accrued on impaired loans is recognized as interest income. Payments received are applied first to accrued interest receivable and then to principle.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(1) Summary of Significant Accounting Policies, Continued
(l) Advertising The Company expenses the cost of advertising the first time the advertising takes place, except for sales videos and show materials, which were capitalized and amortized over its expected period of future benefits of 60 and 36 months respectively.
At June 30,1996, $20,106 of advertising was reported as assets. Advertising expense for each of the three years ended June 30, 1996 was $173,782, $112,006 and $112,432 respectively.
(m) Accounting for Stock-Based Compensation The Company will adopt Statement of Financial Standards No. 123, Accounting for Stock-Based Compensation during the year ended June 30, 1997. The Company does not anticipate this statement to have a material effect on the financial statements. It is the Company's intent to disclose and show pro forma effects on the financial statements.
(n) Impairment of Long-Lived Assets
The Company determined that the marketing rights for the animal hospital bed, in its livestock equipment handling segment, was impaired after estimating the present value of expected gross profit from future sales as compared to the net book value. The Company wrote down the intangible asset by $38,557 through a charge to cost of goods sold.
(o) 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
(p) Going Concern
The Company has suffered recurring operating losses, has a accumulated deficit of $916,259 at June 30, 1996 and has little remaining credit available on two of the three subsidiary's lines of credit. In addition, as described in Note 7, the Company is in default on some of its long term debt. The bank has indicated a willingness to grant a waiver of the net worth requirements if the Company meets certain conditions. These factors indicate that the Company may be unable to continue as a going concern.
Management has and is taking the following steps to insure it can meet its obligations as they come due. The livestock segment traditionally has shown an overall profit as a segment. With past years decline in beef prices, drought conditions in three of the largest market areas of the segment, and record high grain prices the market for traditional cattle equipment was non- existent. The Company has taken steps to broaden its line with products that will sell in down market conditions. The Company felt to stay competitive in the short- and long-term markets the product mix had to be changed allowing for faster turnover of lower priced products.
The Company is reviewing ways to reduce cost at all levels of the Company. With successfully centralizing accounting to the Corporate headquarters and realizing that not all the present office space will be needed, the Company is looking at relocation to less space at a lower cost. All other overhead cost are being reviewed and the Board will be taking steps to reduce costs where applicable and necessary.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(1) Summary of Significant Accounting Policies, Continued
(p) Going Concern
The Company has found a new supplier of steel which will reduce steel cost by approximately 10%. Benefit from this will not be realized until the second half of fiscal 1997. Labor efficiencies are being reviewed and new ways of production are being looked at to reduce cost. A new wash and paint system has been put in place allowing for less overall paint cost and an improved finished product. With market conditions improving, sales on the upturn and lower material costs, the Company feels the livestock segment will return to overall profitability in fiscal 1997.
Eagle Enterprises, located in the eastern market is presently being reviewed to determine the best use of this facility. The Company's cost and break-even has been reduced, but with the downturn in the market and sales the Company has not been able to feel the effect of this improvement. It is anticipated that with the introduction of new product sales and market conditions improving that Eagle should at least break-even and even have a chance to be profitable.
The Company has been negotiating on development of its 95 acres in Texas. There is presently two developers interested in joint venturing with the Company in development of this land. Management feels that agreements can be reached with one of these developers and the project can be started after the holiday season. It is anticipated from preliminary studies that the Company will generate significant cash flow and profits from this project. The cash received from this project will be used to fund operations and mostly reduce debt obligations.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(2) Related Party Transactions As of June 30, 1996 and 1995, the Company had various notes receivable due from stockholders and certain affiliated entities. The outstanding balances of such receivables at June 30, 1996 and 1995 and interest income recorded for each of the years in the three-year period ended June 30, 1996 are described in Note 4.
The Company has entered into month to month lease agreement with Mr. Webster in connection with the Company's leasing of land, and buildings used in its operations (Note 12). During the years ended June 30, 1996, 1995 and 1994, rental expense incurred for leasing of the aforementioned property amounted to $60,000, for each year (see Note 4).
Effective February 1, 1994, certain of the former stockholders of Titan agreed to accept 38,055 shares of the Company's common stock as payment of notes payable and accrued interest due them totaling $38,055.
On January 24, 1994 Eagle agreed to become a co-borrower with its former stockholder's to refinance a note which the former stockholder prior borrowings had been loaned to Eagle. The new note was equal to the amount Eagle owed the former stockholder under an interest bearing note.
As discussed in Note 7, the Company has notes payable to various stockholders of the Company.
On October 26, 1992, as discussed in Note 12, W-W and Eagle entered into exclusive sales and marketing agency agreements with Agri-Sales Associates (Agri-Sales) whose major stockholder was (Jerry R. Bellar) the former majority stockholder of Eagle and a current stockholder of the Company. On April 18, 1994, W-W and Eagle sent written notice to Agri-Sales, notifying them, pursuant to the provisions of the agreements, W-W and Eagle were going to cancel the agreements at the end of the initial two year term. The Company paid or accrued approximately $14,673, $234,586, and $1,085,646 in commissions to Agri-Sales during the years ended June 30, 1996, 1995 and 1994, respectively. At June 30, 1996 and 1995, the Company owed Agri-Sales approximately $180,000 and $165,327 in accrued commissions, while Agri-Sales and/or Bellar owed the Company approximately $132,221 and $110,114 at June 30, 1996 and 1995, including amounts due under the indemnification agreement relating to the March Group as discussed in Note 16. Jerry Bellar is obligated to indemnify the Company for undisclosed liabilities after applying a $10,000 deductible.
In accordance with its Articles of Incorporation and Bylaws, the Company is required to indemnify its officers and directors for amounts paid for defense of certain legal proceedings. During the years ended June 30, 1994, the Company incurred $57,566 in legal expenses pursuant to such indemnification provision for current and former officers and directors of the Company. These legal expenses were related to the Securities and Exchange Commission private investigation which was concluded in 1994.
The Company has entered into the transactions with related parties as disclosed above during the three- year period ended June 30, 1996. The Company has not attempted to determine whether any or all of such transactions have been consummated on terms equivalent to those that would have prevailed in arm's length transactions.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) Notes Receivable A summary of the notes receivable at June 30, 1996 and 1995 is as follows.
(a) Notes Receivable - Stockholders At June 30, 1996 and 1995, notes receivable due from stockholders consisted of the following:
Effective June 30, 1988, Millard T. Webster and Mickey J. Winfrey, stockholders and officers of the Company, and Terry L. Webster, stockholder of the Company, executed three individual notes totaling $175,000 payable to the Company in monthly installments of $2,300, including interest at 9% per annum with final payment in November, 1997. The Company had entered into a lease agreement (Note 12) with Murle F. Webster for the Company's Dodge City, Kansas, manufacturing plant at a monthly rent of $5,000. Murle F. Webster, as lessor, has executed an assignment of $2,300 of the $5,000 monthly rent back to the Company. The $2,300 monthly assignment is being applied by the Company to the debt owed by the three aforementioned individuals. The Company recorded interest income applicable to the above note amounting to $4,290, $6,326, and $8,271 during the years ended June 30, 1996, 1995 and 1994, respectively.
(b) Notes Receivable - Other Affiliated Entity At June 30, 1996 and 1995, notes receivable due from other affiliated entity consisted of the following:
*The above notes are classified as non-current due to uncertainty as to the timing of collection.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(4) Notes Receivable, Continued During the years ended June 30, 1996, 1995 and 1994, the Company recorded interest income other affiliated entity of $2,072, $2,152 and $2,182 respectively, Land & Cattle has not paid accrued interest in three years.
(c) Notes Receivable - Other At June 30, 1996 and 1995, other notes receivable consisted of the following:
* The above note is classified as non-current due to uncertainty as to the timing of collection.
The Haggard Drilling, Inc. note receivable and trade accounts receivable was converted into a new note due from R.S.B.P., Inc.
(d) Loan Impairment At June 30, 1996 and 1995, the Company identified $42,781 and $48,220 respectively as impaired loans. At June 30, 1996, an allowance for credit loss was computed in the amount of $17,923, applicable to impaired loans of $42,781. At June 30, 1995, no allowance for credit loss was provided. During the year ended June 30, 1996, the Company accrued interest income of $3,500 on identified impaired loans. During the year ended June 30, 1996, the Company received interest of $111 on these impaired loans
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(4) Notes Receivable, Continued The following is the change in the allowance for losses for notes receivable, other affiliated entities and former employee for the year ended June 30, 1996.
Balance, Beginning of Year $ -
Additions 17,923 Direct write-downs - ________
Balance, End of Year $17,923 =======
(5) Property Plant and Equipment At June 30, 1996 and 1995, property plant and equipment consisted of the following:
(6) Investment in Real Estate On December 15, 1994, the Company sold its Grand County real estate for an adjusted price of $1,090,216 and recognized a loss of $195,598 on this transaction. The Grand County property was acquired under an asset exchange agreement with Apex Realty Investments, Inc. (Apex), a company wholly-owned by Nicholas L. Scheidt, a stockholder and former member of the Board of Directors of the Company. The Company received net cash of $374,606 after closing costs and paying off a mortgage in the amount of $241,170 against the property. Additionally, the buyers entered into a five year mortgage payable to the Company for the remaining balance of $440,218. This note was paid in full in February 1996.
On October 25, 1990, the Company acquired 95 acres of undeveloped real estate located in Johnson County, Texas, from Apex in exchange for 40,000 shares of the Company's newly issued Series B, $10.00 par value preferred stock and cash. An independent MAI appraisal dated July 1, 1991, estimated the fair market value of the property to be $215,000 without regard to the value of minerals or sand contained on the site. In May, 1988, an engineering report was prepared based upon a subsurface investigation of the 95-acre tract which estimated the total quantity of soils classified as sand to be 1,499,000 cubic yards. The Company had estimated the fair value of the sand at approximately $390,000.
On August 11, 1995, the Company listed the 95 acres for sale for $400,000. At June 30, 1995, the Company wrote down the value of this real estate to its estimated net realizable value of $373,960, recognizing an unrealized loss of $75,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996 (7) Notes Payable (a) Revolving Credit Facilities
At June 30, 1996 and 1995, revolving credit facilities consisted of the following:
(1) Determined by multiplying days outstanding by principal and dividing by total days outstanding in the fiscal year.
(2) Determined by dividing interest expense by average amount outstanding during the year.
All of the above notes are secured by deeds of trust on real estate, property and equipment, vehicles, inventory, accounts receivable, and contract rights. The revolving credit agreements provide that outstanding indebtedness cannot exceed the sum of 80% of the eligible receivables, plus 50% of raw materials and finished goods.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(7) Notes Payable, Continued
(b) Notes Payable - Financial Institutions and Other Entities As of June 30, 1996 and 1995, notes payable to financial institutions and other entities consisted of the following:
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(7) Notes Payable, Continued
(b) Notes Payable - Financial Institutions and Other Entities, Continued
Certain loan agreements prohibit the Company from paying cash dividends. In addition subsidiaries of the Company are required to meet certain restrictive loan covenants. As a result of these covenants approximately $1,890,000 of the Company's consolidated net assets at June 30, 1996, are considered to be restricted net assets of consolidated subsidiaries.
*Secured by all receivables, contract rights, inventory, real estate, and machinery and equipment. **At June 30, 1996, the Company is in violation of certain loan covenants with both First American National Bank and Bank IV Kansas. The Banks have not declared the Company in default and have allowed the Company to remain in violation of these agreements. Subsequent to year end, Bank IV Kansas indicated that the Bank would grant a waiver of the net worth requirements, if the Company, among other things, would have each subsidiary guarantee the loans of its affiliates in addition to W W Capital Corporate guaranty and all revolving equipment lines are immediately frozen at current levels and repayment schedules with no new advances, with these notes rewritten into standard term notes at renewal with terms and conditions to be determined at that time. The Company has agreed to Bank IV's request.
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(7) Notes Payable, Continued
(b) Notes Payable - Financial Institutions and Other Entities, Continued
***This loan requires the Company to retain/create 17 full time new jobs within an 18 month period with 60% held by those with low incomes, as defined.
(c) Notes Payable to Related Parties At June 30, 1996 and 1995, notes payable to related parties consisted of the following:
June 30, ________________________________ 1996 1995
Notes payable, former stockholders of Titan, interest at 10.00%, unsecured, due on demand $32,465 $35,125
During the years ended June 30, 1996, 1995 and 1994, the Company incurred interest expense of $3,299 $2,679 and $11,268, respectively, on the above notes payable.
(d) Aggregate Maturities The aggregate maturities of the notes payable to financial institutions, other entities and related parties for each of the years ending June 30, are as follows:
June 30, -------- 1997 $ 316,298 1998 1,113,479 1999 74,579 2000 58,683 2001 55,491 Later 352,986 Total $1,971,516
(8) Capital Lease Obligation The Company is the lessee of certain equipment under capital leases expiring at various dates through 1998. The assets and liabilities under the capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over the lower of its lease term or its estimated productive life. At June 30, 1996, the equipment has original cost of $67,253 with accumulated amortization of $26,003.
Minimum future lease payments under the capital leases at June 30, 1996, for each of the next five years and in the aggregate are as follows:
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(9) Covenants Not to Compete On October 15, 1993, the Company acquired certain assets of Wholesale Pump & Supply. In connection with this purchase, Company entered into a covenant not to compete with the majority stockholder of Wholesale. The agreement provided that Company pay $50,000 upon closing and $1,000 per month over the next 36 months. The liability was $3,934 and $14,229, respectively, at June 30, 1996 and 1995.
(10) Income Taxes Effective July 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method (see Note 18).
A reconciliation of income tax at the statutory rate to the Company's effective rate is as follows:
Deferred tax assets and liabilities consist of the following:
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(10) Income Taxes, Continued At June 30, 1996, the Company has approximately $1,012,725 of net operating loss available for carry forward to offset future year's taxable revenue. The loss carry forward expires at various times through the year 2011, if not utilized earlier.
At June 30, 1996, the Company has capital loss carryforwards in the amount of $283,582 which no benefit has been recognized due to uncertainty as to realization.
(11) Employee Benefit Plans 401(k) Plan Effective February 1, 1993, the Company established a 401(k) Saving Plan, whereby eligible employees, who have one-half year of entry service and are age 21 or older, may contribute up to 20% of their salary up to a maximum as allowed by the Internal Revenue Code. The Company may make discretionary matching contributions on the first 4% of employee contributions. Employee contributions are 100% vested, with the Company's matching contributions vesting at 25% per year after three years of service. During the year ended June 30, 1996, 1995 and 1994, the Company made $10,295, $12,350 and $9,213 in discretionary contributions to the Plan.
Stock Options
The Company adopted an Incentive Stock Option Plan (Incentive Plan) at its annual meeting on November 16, 1990. Under this Plan, the Board of Directors or its designated committee is authorized to grant officers and key employees options to purchase up to 950,000 shares of the Company's common stock. These options have a three-year vesting period.
On June 8, 1990, and May 1, 1992, the Board of Directors adopted a non-qualified stock option plan for the outside directors of the Company. Under this plan, the incentive stock option plan committee is authorized to grant outside directors options to purchase up to 400,000 shares of the Company's common stock. The Company granted options to purchase up to 122,668 shares at option prices ranging from $0.5625 to $2.50 per share which are outstanding as of June 30, 1996. On July 1, 1996, the Company granted to certain directors options to purchase 30,000 shares at $0.063 per share.
These options will expire five or ten years after issuance.
As of June 30, 1996, the following outstanding stock options are exercisable:
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(12) Commitments and Contingencies
Operating Leases
The Company leases its manufacturing facility in Dodge City, Kansas, from Murle F. Webster, a stockholder (Note 2). The manufacturing facility lease required a monthly rental of $5,000 which expired in December, 1994, and has continued on a month to month basis (Note 4). The provisions of the building leases require the Company to pay insurance, property taxes and maintenance costs. The Company also leases certain office equipment under noncancelable operating lease agreements.
On April 14, 1994, the Company entered into a 60-month office space lease. The lease provides for monthly rental payments of $3,489 escalating to $4,123 for the period beginning June 1, 1994 through May 31, 1999.
Future minimum rental payments under operating leases as of June 30, 1996 are as follows:
Rental expense under operating leases for the years ended June 30, 1996, 1995 and 1994 amounted to $137,066, $130,989, and $116,325, respectively.
Sales and Marketing Agency Agreement
On October 26, 1992, W-W and Eagle entered into sales and marketing agency agreements with Agri- Sales Associates, Inc. (Agri-Sales), a related party. The agreements had an initial two-year term and may renew for a like term with the provision that either party may cancel upon 180 days written notice. On April 18, 1994, the Company notified Agri-Sales, that W-W and Eagle would not renew their Sales and Marketing Agency Agreements. The agreements provide the following commission structure by the Company which was in effect during the period October 26, 1993 through October 25, 1994:
W-W Eagle ___________________________________________________ 12 Month 12 Month Aggregate Aggregate Cumulative Sales Commission Cumulative Sales Commission Excluding Specials Rate Excluding Specials Rate
Less than Less than $5,500,000 10% $4,700,000 7.50%
$5,500,000 to $4,700,000 to $6,000,000 11% $5,200,000 8.50%
Greater than Greater than $6,000,000 12% $5,200,000 9.50%
Additionally, Agri-Sales received a commission of 5.00% on special orders initiated for W-W products (see Note 2).
W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(12) Commitments and Contingencies, Continued
Long Distance Service
The Company entered into an agreement for long distance telephone service which requires a monthly minimum of $5,000 through February 1999.
Employment Contract
On May 1, 1996, the Company entered into 2 year employment with its territory sales manager which provides for an annual salary of $55,000 plus a bonus equal to .0075% of the sales increase over annual budgeted sales.
Environmental Remediation Liability
The Company has determined that a significant amount of paint located at its Tennessee facility, must be disposed of to comply with environmental regulations. The Company has estimated a range of $10,000 to $45,000 as the cost to dispose of this paint based upon managements estimate and the actual cost incurred subsequent to June 30, 1996, to dispose of the most contaminated barrels of paint. The Company has accrued $10,000 of this charge as a liability in the accompanying financial statements.
(13) Stockholders' Equity On November 16, 1990, the Board of Directors amended the articles of incorporation to allow the Company to issue 400,000 shares of $10.00 par value preferred stock in one or more series. The Board of Directors have the right to: fix the number of shares in any such series, alter or determine the rights, preferences, privileges, limitations and restrictions granted to any wholly unissued series of preferred stock. All then outstanding preferred stock was converted into common stock in October 1992.
(14) Segmented Information and Reconciliation The Company's operations are classified into principal industry segments; W-W and Eagle which manufacture and distribute livestock handling equipment, and Titan which processes and distributes water well and environmental supplies. Following is a summary of segmented information for each of three years in the period ended June 30, 1996:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(14) Segmented Information and Reconciliation, Continued
(15) Major Customer and Sales Agency Agreement
Agri-sales sold approximately 17% and 90% of the Company's net sales under the Sales and Marketing Agency Agreement described in Note 12 during the years ended June 30, 1995 and 1994 respectively. These sales are attributable to the livestock handling equipment segment of the Company. No customer accounted for more than 10% of total net sales during each of the three years in the period ended June 30, 1996.
(16) Litigation
In April, 1994, W-W Manufacturing and Eagle sent written notice to Agri-Sales that the Companies would not renew their sales and marketing agency agreement with Agri-Sales when the two year initial contract term expired on October 26, 1994. Agri-Sales informed the Company that under the contract, W-W Manufacturing and Eagle can not terminate the sales and marketing agreement until May 26, 1995. On October 5, 1994, the Company filed a lawsuit in the Sixteenth Judicial District, Ford County, Kansas, asking the Court for declaratory judgement and a preliminary injunction against Agri-Sales to resolve the issue. On October 10, 1994, Agri-Sales filed an answer and made application for a temporary injunction against the Company. On October 20, 1994, the District Judge denied Agri-Sales application for a temporary injunction against the Company. Additionally, Agri-Sales has filed a counter claim for relief estimating damages of $500,000 to $600,000 for the commissions Agri- Sales would have earned for the period October 26, 1994 to April 26, 1995, (the date Agri-Sales contends that the contract will expire) and actual damages of $475,206. Management is confident the court will decide that the contracts did expire on October 26, 1994 and the actual amounts due Agri- Sales based upon the Company's calculation, which had been recorded in the accompanying financial statements, are substantially less than the amounts claimed. This case is in discovery and the Company's legal counsel is unable to express and opinion on the outcome of this case. The Company has been negotiating with Agri-Sales to settle this lawsuit. The Company has offered to pay $180,000, with $30,000 due upon final settlement of The March Group, Inc. law suit discussed below with the remaining balance payable in semi-annual payments of $25,000 until paid in-full, with zero interest.
On December 22, 1992, The March Group, Inc. (The March Group) filed a lawsuit against Eagle and its former shareholders, Jerry R. Bellar (Bellar) and James Buford (Buford). The March Group alleges that Eagle, Bellar and Buford breached a listing contract to sell Eagle and has requested damages of $169,596 (Count I). The March Group has also sued the Company for breach of a separate agreement which the Company had made with The March Group promising to direct all inquiries it had regarding the purchase of Eagle through The March Group and is seeking damages of $169,596 (Count II). Additionally, The March Group is requesting damages against Eagle, Bellar and the Company under a specific Tennessee statute which would allow The March Group three times its proven actual W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(16) Litigation, Continued
damages of $508,788 (Count III).
On May 6, 1994, the Chancery Court, for the State of Tennessee, entered an order requiring Eagle to pay the March Group $169,596 under Count I and ruled in favor of defendants on Counts II and III. On June 7, 1995 the court of appeals reversed the decision that Eagle had to pay $169,596. The case (Count I) has been remanded back to trial court for trial. The court of appeals affirmed the decision of the trial court on Count II and III in favor or the Company. After the Court of Appeals decision, Eagle filed an application for review to the Tennessee Supreme Court asking it to reconsider the Court of Appeals decision rejecting Eagle's claim that plaintiff violated the Tennessee Real Estate Broker Licensing Act, thus forfeiting any fee under the listing contract. Trial of the remanded case to the trial court will not begin until such time as the Tennessee Supreme Court has decided whether to grant Eagle's application for review. To date, the Tennessee Supreme Court has not issued its decision.
At the closing of the sale of Eagle, the Company agreed to pay $50,000 of the projected fee due the March Group under its listing agreement, which is recorded in the financial statements. Under the terms of the Eagle sale agreement, Bellar agreed to indemnify the Company for undisclosed liabilities after applying a $10,000 deductible. Bellar has acknowledged that his indemnification obligations require him to pay Eagle for all damages in excess of $50,000 awarded to the March Group under Count I. The remaining amount due the March Group ($119,596) and the receivable from Bellar have not been recorded on the financial statements.
Eagle was a defendant in a lawsuit filed by Liberty Metal Fabrications, Limited (Liberty Metals) in the State of Kentucky. The claims against Eagle relate prior to the acquisition of Eagle (October 26, 1992) by the Company. Liberty Metals was claiming approximately $91,000 from Eagle. The Company settled the claim by paying $18,000 and returning certain equipment to Liberty Metals.
Additionally, it is Management's opinion that any amounts paid to Liberty Metals, against Eagle, that Eagle would be indemnified by Bellar. It was indicated during the purchase of Eagle that Eagle's exposure in the Liberty Metals case was "at worst a wash-out". Bellar denies that the Liberty Metal case is covered under the indemnification agreement.
Daniel R. Beaton and Rocky Mountain Realty, Inc ("Beaton") has filed a law suit in the District Court, County of Adams, State of Colorado against W W Capital Corporation. Beaton is asserting a claim against the Company for a claimed real estate commission in the amount of $87,218 plus interest and attorney fees due from the Company's sale of certain real property located in Grand County Colorado, pursuant to a listing agreement. The Company settled this lawsuit by paying Beaton $3,500.
(17) Significant Group Concentrations of Credit Risk
The Company's business activity is in two industry segments, livestock handling equipment and water well and environmental supplies. W-W and Eagle's livestock handling equipment customers are principally resalers and are primarily located in the midwest, Tennessee and Georgia, while Titan's water well supply customers are principally located in the states of Nebraska Oklahoma and Kansas. At June 30, 1996, W-W and Eagle's accounts receivable totalled $678,216 and Titan's totalled $1,328,406.
The Company and its subsidiaries maintain cash balances at several financial institutions located in the states of Colorado, Kansas, Nebraska and Tennessee. Accounts at each institution are insured by the Federal Deposit Insurance Corporation for up to $100,000. A June 30, 1996, bank balances exceeded the $100,000 insured limit by $39,218.
(18) Change in Accounting Principle
The Company adopted, effective July 1, 1993, Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes", issued in February 1992. Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference W W CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
(18) Change in Accounting Principle, Continued
between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rules which will be the effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are accumulated deprecation and business combinations accounted for by the purchase method. A deferred tax asset is recorded for net operating losses being carried forward for tax purposes.
The change from the deferred method to the liability method of accounts for income taxes decreased the Company's 1994 loss by $63,604, $.01 per share, before the cumulative effect of the change in accounting. Also, net losses for 1994 were decreased by $33,265, $.006 per share, by the cumulative effect of the change in accounting related to years prior to 1994 which were not restated.
(19) Fair Value of Financial Instruments
Effective June 30, 1996, the Company adopted SFAS No. 107, which requires disclosing fair value to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider tax consequences of realization. The following table summarizes financial instruments by individual balance sheet accounts.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
a) Cash and cash equivalents: the carrying amount reported in the balance sheet for cash and cash equivalents approximated its fair value.
b) Notes receivable: The carrying amount reported in the balance sheet for notes receivable approximated its fair value.
c) Revolving credit notes: The carrying amount of revolving credit notes approximated fair value.
d) Long-term debt: The fair value was estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders W W Capital Corporation
We have audited the accompanying consolidated balance sheets of W W Capital Corporation as of June 30, 1996 and 1995 and for each of the three years in the period ended June 30, 1996 and have issued our report thereon dated October 15, 1996. Our audits also included the financial statement schedules of W W Capital Corporation, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
MILLER AND McCOLLOM Certified Public Accountants
Denver, Colorado October 15, 1996
W W CAPITAL CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
W W CAPITAL CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
STATEMENTS OF OPERATIONS
W W CAPITAL CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
CONSOLIDATED STATEMENTS OF CASH FLOWS
W W CAPITAL CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
NOTES TO CONDENSED FINANCIAL INFORMATION
June 30, 1996
(1) Long-term Debt
Notes payable to financial institutions were as follows:
Future matures of notes payable are as follow at June 30, 1996:
(2) Related Party Transactions
At June 30, 1996, and 1995, Jerry R. Bellar, the former majority shareholder of Eagle and a current stockholder of the Company, owed $132,221 and $100,114 respectively under on indemnification agreement related to the Company's acquisition of Eagle.
The following amounts related to wholly owned subsidiaries of the Company were eliminated in the consolidated financial statements of the Company but are reflected in this condensed financial statement of registrant:
Amounts receivable (payable) at June 30:
W W CAPITAL CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
NOTES TO CONDENSED FINANCIAL INFORMATION, CONTINUED
June 30, 1996
(2) Related Party Transactions, Continued Management fee income for:
Equity in subsidiary operations for: