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: March 31, 1999
Commission File number: 0-114244
WATCHOUT! INC.
(Exact name of registrant as specified in its charter)
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 March 31, 1999, there were 15,030,245 outstanding shares of common stock,
par value $.0001.
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<CAPTION>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WATCHOUT! INC.
Balance Sheet
(Unaudited)
ASSETS March 31, 1999 December 31, 1998
--------------------------- ----------------------------
<S> <C> <C>
Current Assets
Cash 0 580
Accounts Receivable 0 -
Less Allowance for Doubtful Accounts 0 -
--------------------------- ----------------------------
580
Inventory 0 -
Total Current Assets 0 580
Property, Plant and Equipment 0 -
Less Accumulated Depreciation 0 -
--------------------------- ----------------------------
Total Property and Equipment 0 -
Other Assets
Due from member 0 -
Organization Costs 15,250 15,250
Less Accumulated Amortization (3,812) (3,050)
--------------------------- ----------------------------
Total Other Assets 11,437 12,200
--------------------------- ----------------------------
TOTAL ASSETS 11,437 12,780
=========================== ============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accrued Expenses 537,213 537,213
Accounts Payable 475,989 475,989
Due to Stockholders 457,945 457,945
Due to Factor 0 -
Line of Credit 0 -
Notes Payable 450,000 450,000
--------------------------- ----------------------------
Total Current Liabilities 1,921,147 1921,147
Stockholders' Equity (Deficit)
Preferred Stock, no par value 10,000,000 shares authorized, no
shares issued or outstanding
0 -
Common Stock, $.001 par value, 50,000,000 shares authorized,
15,030,245 shares issued and outstanding
15,030 15,030
Additional Paid in Capital 989,502 989,502
Accumulated Deficit (2,914,241) (2,914,241)
--------------------------- ----------------------------
Total Stockholders' Deficit (1,909,709) (1,908,367)
--------------------------- ----------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
11,437 12,780
=========================== ============================
</TABLE>
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<TABLE>
<CAPTION>
WATCHOUT! INC.
Consolidated Statement of Income and Expense
(Unaudited)
For the three months ended March 31,
1999 1998
---------------------------- ------------------------------
<S> <C> <C>
OPERATING REVENUES
Revenues 0 $198,397
Cost of goods sold 0 22,972
---------------------------- ------------------------------
Gross profit 0 175,426
OPERATING EXPENSES
Royalties 0 -
Research & development 0 23,955
Selling expenses 0 27,479
Professional fees 0 20,561
General & Administrative 580 6,937
Marketing 0 1,250
Commitment/Loan Fees 0 -
---------------------------- ------------------------------
Total operating expense 580 80,182
---------------------------- ------------------------------
OPERATING PROFIT (LOSS) (580) 95,244
OTHER (REVENUES) & EXPENSES
Interest expense 13,500 4,268
Miscellaneous income 0 (1,691)
Loss on sale of receivables 0 138,528
---------------------------- ------------------------------
Total other revenues & expenses 13,500 141,105
NET INCOME (LOSS) (14,080) (45,861)
============================ ==============================
LOSS PER SHARE
Primary (0.00) (0.00)
Weighted number of shares outstanding 15,030,245 15,030,245
</TABLE>
The accompanying notes are an integral part of this financial statement
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<TABLE>
<CAPTION>
WATCHOUT! INC.
Consolidated Statement of Cash Flows
(Unaudited)
Quarter Ended
March 31
1999 1998
---------------------------- ----------------------------
<S> <C> <C>
Cash flows from Operating Activities
Net income (loss) (580) (45,861)
Depreciation & amortization
(Increase) decrease in Accounts Receivable 0 (40,503)
(Increase) decrease in Inventory 0 0
(Decrease) increase in Accrued Expenses 0 (157)
(Decrease) increase in Accounts Payable 0 11,588
(Decrease) increase in Interest Payable 13,500 (2,663)
Net cash flows used for Operating Activities (14,080) (77,596)
Cash flows from investing activities
(Purchase) sale of Fixed Assets 0 (12,954)
(Purchase) sale of Other Assets 0 50,889
---------------------------- ----------------------------
Total cash used for investing 0 37,935
Cash flows from financing activities
(Decrease) increase in Due to Stockholders 0 9,000
(Decrease) increase in Due to Member 0 (11,188)
(Decrease) increase in Line of Credit 0 (11,591)
(Decrease) increase in Notes Payable 0 0
Additional capital invested 0 0
---------------------------- ----------------------------
Total cash from financing activities 0 (13,779)
Increase (Decrease) in cash (580) (53,440)
---------------------------- ----------------------------
Cash and cash equivalents - beginning of period 580 59,147
---------------------------- ----------------------------
Cash and cash equivalents - end of period 0 5,707
============================ ============================
</TABLE>
The accompanying notes are an integral part of this financial statement
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WATCHOUT! 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 Company changed its name to WatchOut! Inc. on November 9,
1998.
The Company has ceased all business activities due to lack of operating capital.
2. General and Summary of Significant Accounting Policies
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.
Research and Development- Research and development costs are expensed when
incurred.
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 $457,945 in amounts due to stockholders. The amounts
are payable on demand at an interest rate of 5.81%.
4. Changes in Control
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. The Agreement
is in default and is in litigation.
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
<PAGE>
WATCHOUT! INC.
NOTES TO FINANCIAL STATEMENTS
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.
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.
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.
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WATCHOUT! INC.
NOTES TO FINANCIAL STATEMENTS
( 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.
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 March 31, 1999 current
liabilities exceed current assets by $1,921,147, and total liabilities exceed
total assets by $1,909,710.
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. Management
believes that actions presently being taken to revise the company's operating
and financial requirements provide the opportunity for the company to continue
as a going concern.
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations for the Quarter in 1999 Compared to Same Quarter in 1998
The Company had no revenue and no operations in the first quarter of
1999. On a consolidated basis, after the acquisition of Goldpoint and Watchout!
subsidiaries, the Company had revenues in the first quarter of 1998 of $198,397.
The cost of goods sold in the three month period was none in 1999 compared to
1998 which cost of goods was $22,572. The gross (loss) profit for the 1998
period was $0 compared to ($175,426) for the 1999 period.
The Company incurred operating expenses for the three month period of
$580 in 1999 compared to $80,182 in the same period in 19987. The Company
recorded a net operating loss of ($580) for the 1999 period as compared to a
$95,244 operating profit for the same period in fiscal year 1998. The net income
(loss) for the 3 month period in 1999 was ($14,080) compared to ($45,861) in
1998. 1999 quarter losses were attributable to interest accrual. The Company
losses will continue until a business is recommended. 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 1999 first quarter was nominal
compared to a nominal loss in the first quarter of 1998
Liquidity and Capital Resources
The Company had no 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. It had no accounts receivable or assets at quarter end. The Company has
significant current liabilities to lenders which exceed current assets by
approximately $1,921,147. The Company is in default on notes in the amounts of
$450,000, although no demand for payment has been issued.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in securities - None.
Item 3. Defaults upon senior securities - None.
Item 4. Submission of matters to a vote of security holders - None.
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 March 31, 1999. (incorporated by reference)
None.
<PAGE>
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: November 7, 1999
WATCHOUT! INC.
/s/ Kevin Waltzer
by:--------------------------------
President
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
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<ALLOWANCES> 0
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<CURRENT-ASSETS> 0
<PP&E> 0
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<TOTAL-ASSETS> 11437
<CURRENT-LIABILITIES> 1921147
<BONDS> 0
0
0
<COMMON> 15030
<OTHER-SE> (1924739)
<TOTAL-LIABILITY-AND-EQUITY> 11437
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<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13500
<INCOME-PRETAX> (14080)
<INCOME-TAX> 0
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<DISCONTINUED> (14080)
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<CHANGES> 0
<NET-INCOME> (14080)
<EPS-BASIC> (.00)
<EPS-DILUTED> (.00)
</TABLE>
