SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: September 30, 1998
Commission File number: 0-114244
WATCHOUT! INC.
(Exact name of registrant as specified in its charter)
formerly WHITE CLOUD EXPLORATION, INC.
Utah 84-0959153
- --------------------------------- -----------------
State or Other Jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
Number)
116 Stanyan, San Francisco, California 94118
- --------------------------------------- ---------
(Address of principal Executive Offices Zip Code)
Registrant's telephone number, including area code: 415-387-3135
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No ____
As of September 30, 1998, there were 15,030,245 outstanding shares of common
stock, par value $.0001.
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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WHITE CLOUD EXPLORATION, INC.
BALANCE SHEET
AS OF SEPTEMBER 30,
(UNAUDITED)
<S> <C> <C>
1998 1997
ASSETS
Current Assets
Cash 1,891 176,700
Accounts Receivable 29,144 422,743
Escrow - Boit 56,250
Less Allow for Doubtful Accts
Inventory 162,000 176,186
Total Current Assets 249,285 775,630
Fixed Assets
Property, Plant & Equipment 40,859 33,156
Less accumulated Depreciation 11,753 9,901
Total Fixed Assets 29,106 23,255
Total Assets 278,391 798,885
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accrued Expenses 448,714 280,310
Accounts Payable 379,318 317,110
Interest Payable 23,005
Due to Stockholders 512,196 319,146
Due to Member 15,000
Line of Credit
Notes Payable 450,000 532,273
Total Current Liabilities 1,813,232 1,463,838
Stockholders' Equity (Deficit)
Preferred Stock, no par value 10,000,000 shares authorized
no shares issued or outstanding.
Common Stock, $0.001 par value, 50,000,000 shares
authorized
15,030,245 & 227,000 shares issued and outstand 15,030 15,030
Additional Paid in Capital 989,502 989,002
Accumulated Deficit (2,539,373) (1,668,985)
Total Stockholders' Deficit (1,534,841) (664,953)
Total Liabilities & Stockholders' Deficit 278,391 798,885
</TABLE>
<PAGE>
WHITE CLOUD EXPLORATION, INC.
STATEMENT OF OPERATIONS
For the nine months ended September 30,
(UNAUDITED)
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<CAPTION>
1998 1997
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OPERATING REVENUES
Revenues 132,959 434,593
Cost of goods sold 141,929 259,391
Gross profit (8,970) 175,202
OPERATING EXPENSES
Royalties 56,250 168,750
Research & Development 48,048 172,893
Selling Expenses 1,250 30,173
Professional Fees 51,797 98,822
General & Administrative 198,950 228,606
Bad Debt Expense 125,399
Total operating expenses 481,695 699,244
OPERATING PROFIT (LOSS) (490,665) (524,042)
OTHER (REVENUES) &
EXPENSES
Interest expense 5,899 57,492
Miscellaneous income (16)
Loss on sale of receivables (13,129)
Total other revenues & expenses (7,245) 57,492
NET INCOME (LOSS) (483,420) (581,534)
LOSS PER SHARE
Primary (0.03) (0.04)
Weighted number of shares outstanding 15,030,245 15,030,245
</TABLE>
<PAGE>
WHITE CLOUD EXPLORATION, INC.
STATEMENT OF CASH FLOWS
Three months ended September 30,
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
OPERATING ACTIVITIES
Net Income (Loss) (372,856) (495,179)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation & Amortization (198) 5,557
Common stock issued in exchange for services
Changes in operating assets and liabilities
(Increase) Decrease in Accounts Receivable 29,884 (75,473)
(Increase) Decrease in Inventory (142,913)
Increase (Decrease) in Accounts Payable 280,710 25,284
Increase (Decrease) in Interest Payable
Net cash used in operating activities 310,396 (187,545)
INVESTING ACTIVITIES
(Purchase)Sale of Equipment 197 (10,920)
Net cash provided by investing activities 197 (10,920)
FINANCING ACTIVITIES
Advances (payments) from/to Stockholder 138,947 127,355
Proceeds (payments) from/to factor
Proceeds (payments) from/to line of credit (8,850)
Proceeds (payments) from/to notes payable 432,273
Proceeds (payments) from/to Member (67,159) 15,000
Proceeds from issuance of stock
Capital contributions 250,000
Net cash provided by financing activities 62,938 824,628
Net increase (decrease) in cash and cash
equivalents 675 130,984
Cash and cash equivalents at beginning of period 1,216 45,716
Cash and cash equivalents at end of period 1,891 176,700
</TABLE>
<PAGE>
WHITE CLOUD EXPLORATION, INC.
STATEMENT OF OPERATIONS
For the three months ended September 30,
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
OPERATING REVENUES
Revenues (40,189) 2,151
Cost of goods sold 53,898 184,797
Gross profit (94,087) (182,646)
OPERATING EXPENSES
Royalties - 168,750
Research & Development 48,048 137,989
Selling Expenses (2,024) (54,761)
Professional Fees 47,110 75,352
General & Administrative 101,830 213,614
Bad Debt Expense 125,399
Total operating expenses 320,363 540,944
OPERATING PROFIT (LOSS) (414,450) (723,590)
OTHER (REVENUES) &
EXPENSES
Interest expense 4,281 12,278
Miscellaneous income (16)
Loss on sale of receivables
Total other revenues & expenses 4,265 12,278
NET INCOME (LOSS) (418,715) (735,868)
LOSS PER SHARE
Primary (0.03) (0.05)
Weighted number of shares outstanding 15,030,245 15,030,245
</TABLE>
<PAGE>
WHITE CLOUD EXPLORATION, INC.
STATEMENT OF OPERATIONS
For the nine months ended September 30,
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
OPERATING REVENUES
Revenues 132,959 434,593
Cost of goods sold 141,929 259,391
Gross profit (8,970) 175,202
OPERATING EXPENSES
Royalties 56,250 168,750
Research & Development 48,048 172,893
Selling Expenses 1,250 30,173
Professional Fees 51,797 98,822
General & Administrative 198,950 228,606
Bad Debt Expense 125,399
Total operating expenses 481,695 699,244
OPERATING PROFIT (LOSS) (490,665) (524,042)
OTHER (REVENUES) &
EXPENSES
Interest expense 5,899 57,492
Miscellaneous income (16)
Loss on sale of receivables (13,129)
Total other revenues & expenses (7,245) 57,492
NET INCOME (LOSS) (483,420) (581,534)
LOSS PER SHARE
Primary (0.03) (0.04)
Weighted number of shares outstanding 15,030,245 15,030,245
</TABLE>
<PAGE>
WHITE CLOUD EXPLORATION, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
SEPTEMBER 30, 1998
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<CAPTION>
(UNAUDITED)
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
PAID-IN CAPITAL DEFICIT STOCKHOLDER'S
<S> <C> <C> <C> <C> <C> <C>
EQUITY
Shares Amount Amount Amount Amount
Balance at December 31, 1994 56,710 57 75,975 (102,487) (26,455)
Issuance of common stock for 156,000 156 77,844 78,000)
Net loss for year ended Dec 31, 1995 (89,906) (89,906)
Balance at December 31, 1995 212,710 213 153,819 (192,393) (38,361)
Issuance of common stock for 14,362 14 342,986 343,000
Capital contribution 250,000 250,000
Net loss for year ended Dec 31, 1996 (895,058) (895,058)
Balance at December 31, 1996 227,072 227 746,805 (1,087,451) (340,419)
Issuance of common stock for cash
Capital contribution 250,000 250,000
Issuance of common stock for services
& repayment of debt to relate 43,290 43 7,457 7,500
Issuance of common stock
in conjunction with merger 14,759,883 14,760 (14,760)
Net loss for year ended dec 31, 1997 (968,502) (968,502)
Balance at December 31, 1997 15,030,245 15,030 989,502 (2,055,953) (1,051,421)
Net loss for nine months ended (483,420) (483,420)
September 30, 1998
Balance at September 30, 1998 (2,539,373) (1,534,841)
</TABLE>
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WHITE CLOUD EXPLORATION, INC.
WHITE CLOUD EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies:
Organization- White Cloud Exploration, Inc. (the Company) was incorporated in
the State of Utah on July 22, 1983, for the purpose of obtaining capital to seek
potentially profitable business opportunities. Since inception, the Company has
been engaged in organizational activities. The Company acquired two entities,
WatchOut, a California Corporation, and Goldpoint International, a limited
liability company. White Cloud Exploration, Inc. changed its year-end from June
30 to December 31.
The Watchout Agreement was entered into effective May 30, 1997, and the Watchout
Acquisition consummated pursuant thereto effective as of December 29, 1997.
Pursuant to the Watchout Agreement, the shareholders of Watchout contributed to
the company all of Watchout's common stock for an aggregate consideration of
11,296,300 shares of the company common stock. The company owns 100% of the
issued and outstanding shares of Watchout. Watchout designs, develops, and
intends to market worldwide watches and other consumer goods utilizing
proprietary colored liquid crystal display technology.
The Goldpoint Agreement entered into contemporaneously with the Watchout
Agreement and the Goldpoint Acquisition was completed contemporaneously with the
consummation of the Watchout acquisition. Pursuant to the Goldpoint Agreement,
the members of Goldpoint contributed to the company an aggregate of 100% of the
equity interests in Goldpoint for an aggregate consideration of 2,140,000 shares
of the company's common stock. As a result of the Goldpoint Acquisition, the
company owns 100% of the outstanding membership interests in Goldpoint.
Goldpoint designs and markets fine writing instruments.
2. General and Summary of Significant Accounting Policies
Organization-Watchout, a California corporation, is a development stage
enterprise engaged in the development of fashion watches. Watchout plans to
develop, manufacture and sell watches and personal accessories worldwide.
Goldpoint International, LLC, A Delaware limited liability company, designs and
markets fine writing instruments.
Property and Equipment- Property and equipment are stated at cost. Depreciation
is computed using the double-declining balance method over estimated useful
lives of 5 years.
Other Assets- Other assets consists of organizational costs and trademarks which
have been capitalized and are being amortized over 5 and 40 years, respectively,
using the straight-line method.
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WHITE CLOUD EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
Research and Development- Research and development costs are expenses when
incurred.
Income Taxes- No provision have been made for income taxes. As of December 31,
1997, the company had net operating loss (NOL) carryforwards for federal income
tax purposes of approximately $2,055,900. These net-operating losses may be used
to offset future taxable income. Unused carryforwards will expire in 2012.
Uses 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 activities during the reporting period. Actual
results may differ from those estimates.
3. Related Party Transactions
Watchout has recorded unsecured, non-interest-bearing amounts due to
stockholders for the reimbursement of expenses. There are no specific repayment
terms; however, these amounts are expected to be repaid within 12 months of the
balance sheet date.
Watchout has also recorded $70,000 in amounts due to stockholders. The amounts
are payable on demand at an interest rate of 5.81%. A shareholder, WCM
Investments, Inc., had a consulting agreement in which 1,150,000 shares of White
Cloud Exploration were issued in 1997.
4. Changes in Control
Effective December 29, 1997 White Cloud Exploration acquired 100% of the
outstanding common stock of Watchout and 100% of the limited liability interests
in Goldpoint International, LLC in exchange for 11,296,300 and 2,140,000 shares
of White Cloud Exploration restricted common stock.
5. Commitments and Contingencies
License Agreement- On September 21, 1995 Watchout entered into a license
agreement with an unrelated third party for the use of patents and technical
knowledge. The agreement provides for minimum payments for the first four years
through September 1999, totaling $915,000, which may be offset by the payment of
royalties as a percentage of sales. The agreement may be canceled at any time,
without cause, by Watchout, with 60 days notice and with no further liability.
In addition to expense reimbursements of $20,000,minimum payments in the amount
of $225,000 and $296,250 have been made for 1997 and 1996, respectively, and are
reported as royalties in the accompanying Statement of Operations.
WHITE CLOUD EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
<PAGE>
Investment by Distribution- Watchout entered into an agreement with a
distributor on July 21, 1996. The agreement provides that the distributor invest
$500,000 - $250,000 as a cash payment to Watchout and $250,000 to be made
available to Watchout for use in Hong Kong, oversees production, quality
assurance/quality control and establish a $150,000 standby letter of credit. In
exchange, Watchout will issue the distributor 4% of the common stock outstanding
as of the date of the agreement, grant distribution rights in Southeast Asia
(except Japan), pay 9% commission based on the factory store costs of the
product, and grant the right to open Watchout retail stores in all of Southeast
Asia. The agreement will remain in effect for a minimum of four years or until
the distributor's investment of $500,000 is earned through commissions.
Consulting Agreement- On November 15, 1996, Watchout entered into an agreement
which requires payment of $150,00 in finder's fees to be made to an independent
consultant, plus 2% of the amount accepted under a placement agreement but not
to exceed $250,000. In addition, the consultant earned compensation consisting
of 1,150,000 shares of White Cloud Exploration, Inc.
Placement Agreement- On February 5, 1997, Watchout entered into an agreement
with a placement agent to secure additional capital or financing in the minimum
amount of $6,000,000. The agreement requires Watchout to pay commissions to the
placement agent equal to 10% of the additional capital or financing received and
a non-accountable expense allowance equal to 3% of the additional capital or
financing. In addition, Watchout is partially responsible for certain expenses
incurred by the placement agent upon closing. In 1996, commitment fees paid to
the placement agent amounted to $20,000. No fees were paid in 1997 under this
agreement.
As a condition of the agreement, the placement agent reserved the right of first
refusal to underwrite or place any future public or private sales of debt or
equity securities of Watchout, including those involving any principal
stockholders of the Watchout through November 19, 1999.
Watchout has also agreed to pay the placement agent a 5% finder's fee in the
event that they are party to any merger, acquisition or joint venture introduced
directly or indirectly by the placement agent.
In connection with the placement agreement, the Board of Directors issued
3,639,925 shares of common stock to the placement agent for $500. The shares may
be repurchased on a pro rata basis if $6,000,000 is not raised pursuant to the
terms of the aforementioned agreement.
<PAGE>
WHITE CLOUD EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
Stock Warrants- In connection with the loan agreements dated September 19, 1997,
Watchout agreed to pay finder's fees to a third party. The agreement requires
payment of finder's fees in the form of $32,500 at the closing of the loans and
250,000 stock warrants with an exercise price of $.10 a share expiring on
December 19, 2000. Payment of the finder's fees had not been made as of the
balance sheet date, however, the $32,500 fee has been accrued at December 31,
1997. The warrants are to be issued when and if the private placement described
previously under Placement Agreement is consummated.
In connection with the loans arranged for by Sands Brothers & Co., Ltd. ("Sands
Brothers"), White Cloud Exploration has agreed to issue stock warrants to
Raymond J. Larkin, Watchout-Goldpoint Partners, L.P., Sands Brothers and Mark
Hollo totaling 75,000, 225,000, 25,000 and 25,000 shares respectively, with an
exercise price of $.01 a share, expiring on September 3, 2000.
6. Line of Credit
A promissory note to Goldpoint International, LLC of $54,968 payable with
interest 60 days from the date of each cash advance under a letter of credit
issued by Opal Trade Corporation. Interest accrues at a rate of 4% over the
prime rate designated by Chemical Bank. This note is collateralized by the
assets of the company.
7. Loan Payable
( a ) Two 18% promissory notes of $150,000 and $50,000 due September 3, 1998.
These notes are considered Senior and have priority in right of payment over all
indebtedness of the company.
( b ) A 12% promissory note of $166,000 payable to John Bader in one payment of
principal and interest due on demand or at the time of first funding of a
private placement of stock in the amount of $6,000,000 by Watchout. All sums
past due shall bear interest at 18% from their maturity date. Collateral
security includes the first $1.32 per unit production proceeds upon the sale of
certain products.
( c ) A 12% promissory note of $84,000 payable to Wayne Williams in one payment
of principal and interest due on demand or at the time of first funding of a
private placement of stock in the amount of $6,000,000 by Watchout. All sums
past due shall bear interest at 18% from their maturity date. Collateral
security includes priority assignment of contract rights to the next $0.68 per
unit in production proceeds, second only to the $1.32 per unit assigned to John
Bader from proceeds from certain products.
<PAGE>
WHITE CLOUD EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
8. Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
company as a going concern. However the company has sustained substantial
operating losses in recent years. In addition, the company has used substantial
amounts of working capital in its operations. Further, at September 30, 1998
current liabilities exceed current assets by $1,534,841.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
company, which in turn is dependent upon the company's ability to meet its
financing requirements, and the success of its future operations.
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations for the three month period ended September 30, 1998
compared to the same period in 1997.
On a consolidated basis, after the acquisition of Goldpoint and Watchout!
subsidiaries, the Company had revenues in the third quarter of 1998 of ($40,189)
as compared to the same period in 1997 of $2,151. The cost of goods sold in the
three month period in 1998 was $53,898 and for the same period in 1997 was
$184,797. The gross profit (loss) for the 1998 third quarter period was
($94,087) compared to ($182,646) for the 1997 period.
The Company incurred operating expenses for the three month period of
$320,363 in 1998 compared to $940,944 in the same period in 1997. The Company
recorded a net operating loss of ($414,450) for the 1998 period as compared to a
($723,590) operating loss for the same period in fiscal year 1997. The net
income (loss) for the 3 month period in 1998 was ($418,715) compared to
($735,686) in 1997. The losses were due to expenses and costs for the production
and marketing of Watchout! and Goldpoint products. The Company losses will
continue until more revenue from sales can be achieved and until profitable
operations are achieved. While the Company is seeking capital sources for
investment, there is no assurance that capital sources can be found. The loss
per share for the 1998 third quarter was ($.05) compared to ($.03) in the third
quarter of 1997.
Results of Operations for the nine month period ended June 30, 1998 compared to
the same period in 1997.
On a consolidated basis, after the acquisition of Goldpoint and Watchout!
subsidiaries, the Company had revenues in the first nine months of 1998 of
$132,959 as compared to the same period in 1997 of $434,593. The cost of goods
sold in the period in 1998 was $141,929 and for the same period in 1997 was
$259,391. The gross profit for the 1998 period after a "returns and allowances
deduction" of $195,294 was ($8,970) compared to $175,202 for the 1997 period.
The Company incurred operating expenses for the nine month period of
$481,695 in 1998 compared to $699,244 in the same period in 1997. The Company
recorded a net operating loss of ($490,665) for the 1998 nine month period as
compared to a ($524,042) operating loss for the same period in fiscal year 1997.
The net income (loss) for the period in 1998 was ($483,420) compared to
($581,534) in 1997. The losses were due to start up expenses and research and
development and marketing costs for the production of Watchout! and Goldpoint
products. The Company losses will continue until more revenue from sales can be
achieved and until profitable operations are achieved. While the Company is
seeking capital sources for investment, there is no assurance that capital
sources can be found. The loss per share for the 1998 nine month period was
($.03) compared to ($.04) in the same period of 1997.
Liquidity and Capital Resources
The Company had nominal cash capital at the end of the period. The Company
will be forced to make private placements of stock in order to fund operations
continuance. No assurance exists as to the ability to make private placements of
stock. At September 30, 1998, it had accounts receivable (net) of about $29,144
and inventory of $162,000 and escrows of $56,250 which total $278,391 as its
assets. The Company has significant current liabilities of $1,813,232 which
exceed current assets by approximately $1,534,841. The Company is in default on
certain outstanding notes totalling $450,000, although no demand for payment has
been issued.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings -
In July 1998, Boit Incorporation, the LCD technology licensor,
filed suit in San Diego, California Superior Court, about
registrants relationship with its agent in Hong Kong, Camke
Development Ltd. The allegation was that Camke was in reality
a third party licensee and not actually a manufacturing agent
and distributor for South East Asia. Boit also claimed that
Registrant breached the license contract by not yet having
products in the marketplace and seeks cancellation of the
contract.
A response was filed that the allegations are totally without
merit and that in accordance with the contract with Boit, all
disputes have a specific method of being resolved - mediation
and binding arbitration precedent to litigation. The Court has
referred the matter to arbitration.
If the technology license agreement were to be canceled, it
would materially affect the Company by eliminating its primary
product lines in the watch business. No prediction of an
outcome can be made.
Item 2. Changes in securities - None.
Item 3. Defaults upon senior securities - None.
<PAGE>
Item 4. Submission of matters to a vote of security holders
None in the period ended September 30, 1998.
Item 5. Other information - None.
Item 6. Exhibits and reports on Form 8-K
(a) The following are filed as Exhibits to this
Quarterly Report. The numbers refer to the
Exhibit Table of Item 601 of Regulation S-K:
None.
(b) Reports on Form 8-K filed during the three months
ended September 30, 1998. (incorporated by
reference)
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Dated: _______________
WHITE CLOUD EXPLORATION, INC.
by: /s/ Robert Galoob
-----------------------------------
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,891
<SECURITIES> 0
<RECEIVABLES> 29,144
<ALLOWANCES> 0
<INVENTORY> 162,000
<CURRENT-ASSETS> 249,285
<PP&E> 40,859
<DEPRECIATION> (11,753)
<TOTAL-ASSETS> 278,391
<CURRENT-LIABILITIES> 1,813,232
<BONDS> 0
0
0
<COMMON> 15,030
<OTHER-SE> (2,539,373)
<TOTAL-LIABILITY-AND-EQUITY> (1,534,841)
<SALES> (40,189)
<TOTAL-REVENUES> (40,189)
<CGS> 53,898
<TOTAL-COSTS> 320,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,281
<INCOME-PRETAX> (418,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (418,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (418,715)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
