SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transitional year ended: December 31, 1998
Commission File number: 0-114244
WATCHOUT! INC.
(Exact name of registrant as specified in its charter)
WHITE CLOUD EXPLORATION, INC.
(Former Name)
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value per Share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes ( ) No (X)
State issuer's revenues for its most recent fiscal year. $0
<PAGE>
Transitional Small Business Disclosure Format:
______ Yes ___X___ No
As of December 31, 1998, 15,030,245 shares of common stock were outstanding. The
aggregate market value of the Stock held by nonaffiliates was $588,325 at
December 31, 1998 based on bid price of $.125 per share.
Documents incorporated by reference: None
<PAGE>
Part I
Item 1. Business.
General - Organization and Reorganization
Since its inception in July of 1983 as White Cloud Exploration, Inc. ("the
Company"), the Company has been in the developmental stage, while it has
attempted to identify suitable mergers, asset or acquisitions of operations.
The Company changed its name to WatchOut! Inc. in November, 1998.
White Cloud, in March of 1991, entered into a Letter of Intent whereby
White Cloud was to acquire 100% of the Stock of American Technology, Inc.
("ATI") in exchange for stock of White Cloud. The merger was cancelled due to
accounting difficulties with American Technology, Inc.
The Company had no further activities since 1991, and was inactive up until
1997.
In April 1997, William C. Meier through his beneficial ownership of WCM
Investments, Inc., a Texas corporation ("WCM Investments"), obtained control of
Registrant by purchasing on April 17, 1997, 5,010,750 (pre-reverse stock split)
shares of Registrant's Common Stock. On May 14, 1997, WCM Investments purchased
from Registrant 7,500,000 (pre-reverse stock split) newly-issued shares of
Registrant's Common Stock for $7,500 in cash. The 12,510,750 shares were
automatically converted into 72,213 shares pursuant to a 173.25 to 1 reverse
stock split of Registrant's Common Stock on June 29, 1997, and represented 72.2%
of the shares of Common Stock of Registrant outstanding at such time.
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 Registrant 251,354 shares of Watchout's common stock (100%) for
an aggregate consideration of 11,296,300 shares of Registrant's common stock.
The number of shares of Registrant's common stock issued pursuant to the
Watchout! Agreement was determined by reference to the proportionate
post-Acquisition equity ownership of Registrant negotiated by the
pre-Acquisition Watchout! shareholders, Goldpoint members and Registrant
shareholders. Prior to the closing of the Watchout! Acquisition, Watchout! was
controlled by Robert Galoob and David Galoob.
As a result of the Watchout! Acquisition, Registrant owned 100% of the
issued and outstanding shares of Watchout!. Watchout! intended to market
worldwide watches and other consumer goods utilizing proprietary colored liquid
crystal display technology.
Pursuant to an LLC Interest and Asset Contribution Agreement (the
"Goldpoint Agreement" and together with the Watchout! Agreement, the
"Agreements"), the members (i.e., equity holders) of Goldpoint International,
LLC, a Delaware limited liability company ("Goldpoint"),
<PAGE>
effective as of December 29, 1997, contemporaneously with the closing of the
Watchout! Acquisition, received from Registrant 2,140,000 newly-issued shares of
Registrant's common stock in exchange for 100% of the membership interests in
Goldpoint (the "Goldpoint Acquisition".) The 2,140,000 shares represent
approximately 14% of the outstanding shares of common stock of Registrant on a
fully-diluted basis. Prior to the closing of the Goldpoint Acquisition,
Goldpoint was controlled by Mr. Stephen J. Petre.
Effective as of December 29, 1997, pursuant to the Agreements, and
contemporaneously with the consummation of the Acquisitions, Robert Galoob and
David Galoob accepted appointments as directors of Registrant from the prior
directors of Registrant, each of whom resigned as directors.
As a result of the Goldpoint Acquisition, Registrant owns 100% of the
outstanding membership interests in Goldpoint LLC. Goldpoint intended to market
fine writing instruments.
Neither WatchOut! Inc. nor Goldpoint was successful in raising capital or
carrying out the business plan adopted. As a result all attempts at operations
were suspended in September 1998, and no further business was attempted in 1998.
The Company, subseqent to year end determined to seek investment or other
business acquisition.
<PAGE>
Employees and Consultants
The Company at fiscal year end had no paid employees, and its President,
Robert Galoob, Vice President Stephen Petre, and Secretary, David Galoob serve
on an as needed basis. These officers intend to devote only such time as
necessary to the business affairs of the Company.
Presently, none of the officers receive salaries, however, they are
reimbursed for their expenses incurred in their services as officers. There is
no provision for any additional bonuses or benefits. The Company anticipates
that in the near future it may enter into employment agreements with its
officers. Although Directors do not receive compensation for their services they
may be reimbursed for expenses incurred in attending Board meetings.
Item 2. Properties.
The Company maintains its corporate office at 116 Stanyan, San Francisco,
California 94118 under an informal arrangement with the Company's President.
This space is deemed adequate for the immediate future.
Item 3. Legal Proceedings.
The Company was a party to pending legal proceedings with Boit, Inc., the
licensor of the watch technology as of year end. The suit seeks to terminate the
license due to certain defaults. The Company could lose the action, but it would
not have a material effect since the Company has abandoned the business plan
which would have used the watch technology.
Item 4. Submission of Matters to a Vote of Security Holders.
One matters was submitted to a vote of security holders within the year
covered by this report by an information statement solely for the purpose of
changing the name of the corporation to WatchOut! Inc. The date of the action
was November 9, 1998.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The outstanding registered securities of the Company were quoted on the
OTCBB during the year.
Common Stock Common Stock
1998 Bid High Bid Low
____________________________________________________
1st Quarter no quote no quote
2nd Quarter no quote no quote
3rd Quarter no quote no quote
4th Quarter .125 .125
<PAGE>
Common Stock Common Stock
1997 and 1996 Bid High Bid Low
____________________________________________________
1st Quarter no quote no quote
2nd Quarter no quote no quote
3rd Quarter no quote no quote
4th Quarter no quote no quote
The Company anticipates its shares will trade over the counter by market
makers who have not as yet quoted a specific bid or ask price. Quotations, if
made, represent only prices between dealers and do not include retail markups,
markdowns or commissions and accordingly, may not represent actual transactions.
As of December 31, 1998, there are approximately 219 record stockholders of the
Company's shares, not including shareholders represented by "street name"
holders.
No dividends have been declared or paid by the Company and presently
intends to retain all future earnings, if any, to finance the expansion and
development of its business.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Financial Condition and Changes in Financial Condition
No revenue producing business operations were conducted by the company in
1998. No revenues were generated in the fiscal year 1997 directly by White Cloud
Exploration, Inc., however, with the acquisition of the assets of Watchout! and
Goldpoint and the operations thereof, the recast of the combined business
entities reflected the combined financial conditions of the acquired businesses
of Watchout! and Goldpoint in 1997 which generated $340,679 in gross profit on
total revenues of $826,446. The Company at year end December 31, 1998, had $580
cash compared with $59,147 in cash at December 31, 1997. The Company at fiscal
year end needed cash infusions from shareholders to provide capital, or loans
from any sources, for advancement of its business ventures. The Company had no
business at year end.
<PAGE>
Liquidity and Capital Assets.
The Company's primary source of liquidity since inception has been from
funds raised during its initial capitalization and from shareholder advances and
loans. The company had $580 cash at 1998 year end, and $59,147 cash at 1997 year
end and current assets of $12,780 at December 31, 1998 and $362,316 at December
31, 1997.
Total liabilities for 1998 (which were all due) were $1,921,147 for a
deficit of ($1,908,367) in the ratio of liabilities to current assets.
The company was critically deficient in capital and needs an estimated
$1,000,000 to even commence effective operations. No source of such funds had
been identified at year end, and it would have to occur through debt or stock
sales.
Results of Operations for twelve month period ended December 31, 1998 Compared
to 1997
In the year ended December 31, 1998, the Company had no revenues and
incurred operating expenses totaling $602,833. In calendar year 1997 the
combined entities' net revenues were $340,679. As of December 31, 1998, the
Company had no material commitments for capital expenditures.
In the year ended December 31, 1998, the Company incurred $98,746 in
general and administrative expenses compared with $201,328 in 1997. In the
fiscal year ended December 31, 1998, the Company incurred an operating loss of
($602,833) compared to a loss of ($731,582) in 1997. Net loss for 1998 was
($856,901) or ($.06) per share compared to a net loss for 1997 of ($968,502) or
($.06) on a fully diluted basis.
The Company had a loss on sale of inventory and receivables of ($162,000)
in 1998 and ($238,254) in 1997. Interest expense (accrued) was $92,063 in 1998
compared to $36,612 in 1997.
Item 7. Financial Statements and Supplemental Data.
Attached hereto and filed as part of this Form 10-KSB are the financial
statements required by Regulation SB. Please refer to pages F-1 through F-8.
Item 8. Changes in and Disagreements on Accounting and Financial Disclosure.
In connection with audits of two most recent fiscal years and any interim
period preceding resignation, no disagreements exist with any former accountant
on any matter of accounting principles or practices, financial
<PAGE>
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of the former accountant would have caused him to
make reference in connection with his report to the subject matter of the
disagreement(s).
The principal accountant's report on the financial statements for any of
the past two years contained no adverse opinion or a disclaimer of opinion nor
was qualified as to uncertainty, audit scope, or accounting principles except
for the "going concern" qualification.
For Fiscal Year 1992 and thereafter the Company engaged as its Auditor
Michael B. Johnson & Co. There were no disagreements as to any matter of
accounting practice or principles, financial statement disclosure or auditing
scope or procedure, with any prior accountant.
Part III
Item 9. Directors and Executive Officers of the Registrant and Compliance with
Section 16(a).
Identification of Directors and Executive Officers of the Company
The directors and executive officers of the Company, their age, positions
held in the Company, and duration as such, were as follows as of end of the
fiscal year:
Name Age Position Since
Robert Galoob 48 President/Director 12/97
David Galoob 49 Secretary/Treasurer/Director 12/97
Stephen Petre 45 Vice President 12/97
Business Experience
The following is a brief account of the business experience during the past
five years of the former officer/directors at the end of the period, indicting
their principal occupation and employment during that period, and the name and
principal business of the organization in which such occupation and employment
were carried out.
Robert Galoob obtained a B.S. from the University of California at Berkeley
in 1975. He was President and Director of Robert Galoob, Inc. from 1989 to 1995.
From 1995 to present he was President and a Director of Galoob Enterprises, Inc.
now known as Watchout! Inc.
David Galoob, attended college at City College of San Francisco, University
of Oklahoma and University of Southern California. From 1970 to 1991 he was
employed by Lewis Galoob Toys, Inc. in various management positions including
President, CEO, and Chairman of the Board. He retired in 1991. From 1991 to
1996, we was co-president and co-chairman of the board of The Original San
Francisco Toymakers.
<PAGE>
Stephen J. Petre is Vice President. He was founder, President and CEO of
Goldpoint, LLC since 1996. Mr. Petre has 19 years of business experience
including extensive major account, international sales and marketing management,
in addition to international sourcing. Mr. Petre was the vice presidentof
WATCHOUT!. Mr. Petre attended the University of Denver and received a BSBA in
1978.
Directors of the Company hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified.
Officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company shareholders and hold office
until their death, or until they shall resign or have been removed from office.
Section 16(a) Reporting Delinquencies
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership of equity securities of the
Company with the Securities and Exchange Commission. Officers, directors and
greater-than 10% shareholders are required by the Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
filings.
Item 10. Executive Compensation.
The Company accrued a total of no compensation to the executive officers as
a group for services contributed to the Company in all capacities during the
period ended December 31, 1998. No one executive officer received, or has
accrued for his benefit, in excess of $60,000 for the year. No cash bonuses were
or are to be paid to such persons.
<PAGE>
The Company does not have any employee incentive stock option plans.
There are no plans pursuant to which cash or non- cash compensation was
paid or distributed during the last fiscal year, or is proposed to be paid or
distributed in the future, to the executive officers of the Company. No other
compensation not described above was paid or distributed during the last fiscal
year to the executive officers of the Company. There are no compensatory plans
or arrangements, with respect to any executive office of the Company, which
result or will result from the resignation, retirement or any other termination
of such individual's employment with the Company or from a change in control of
the Company or a change in the individual's responsibilities following a change
in control.
SUMMARY COMPENSATION TABLE OF EXECUTIVES
Name and Fiscal Salary Bonus Other Annual Restriced Securities
Principal Year ($) ($) Compensation Stock Underlying
Position ($) Awards Options/SARs
($) (#)
Robert Galoob 1995 0 0 0 0 0
President 1996 0 0 0 0 0
1997 0* 0 0 0 0
1998 0 0 0 0 0
David Galoob 1995 0 0 0 0 0
Secretary/ 1996 0 0 0 0 0
Treasurer 1997 0* 0 0 0 0
1998 0 0 0 0 0
Stephen Petre, 1998 0 0 0 0 0
Vice President 1996 0 0 0 0 0
1997 0* 0 0 0 0
1998 0 0 0 0 0
*accrued compensation of $39,250 total
Option/SAR Grants Table (None)
Aggregated Option/SAR Exercises in Last Fiscal Year an FY-End Option/SAR
value (None)
Long Term Incentive Plans - Awards in Last Fiscal Year (None)
<PAGE>
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
(Except for compensation of officers who are also Directors which compensation
is listed in Summary Compensation Table of Executives)
<TABLE>
<CAPTION>
Name Annual Meeting Consulting Number of Number of
Retainer Fees ($) Fees/Other Shares (#) Securities
Fees ($) Fees (R) Underlying
Options/SAR
(#)
<S> <C> <C> <C> <C> <C>
Robert Galoob, 0 0 0 0 0
Director
David Galoob, 0 0 0 0 0
Director
</TABLE>
Item 11. Security Ownership of Management and Beneficial Owners.
As of December 31, 1998, there were 15,030,245 common shares issued and
outstanding. The following table sets forth information, as of Fiscal year end,
with respect to the beneficial ownership of the Company's $.001 par value common
stock by each person known by the Company to be the beneficial owner of more
than five percent of the outstanding common stock, and by current officers and
directors of the Company.
Stock Title Name and Address Amount of Beneficial Percentage
of Class Of Beneficial Owner Ownership of Class
Common WCM Investments, Inc.(1) 1,017,116 6.7%
2350 Airport Freeway #660
Bedford, TX 76022
Common Robert Galoob, 3,141,823 20.9%
President & Director
116 Stanyan
San Francisco, CA
Common David Galoob 3,781,823 25.2%
Secretary and Director
116 Stanyan
San Francisco, CA
<PAGE>
Common Mark Hollo 1,820,000 12.1%
c/o Sands Brothers
90 Park Avenue
New York, NY 10016
Common Archangel(2)
Holding Company, LLC 1,580,000 10.5%
7 Park Avenue
White Plains, NY 10603
Common Martin Sands 910,000 6%
c/o Sands Brothers
90 Park Avenue
New York, NY 10016
Common Steven Sands 910,000 6%
c/o Sands Brothers
90 Park Avenue
New York, NY 10016
All Officers and 8,503,646 56.6%
Directors as a Group
(3 Persons)
(1) WCM Investments, Inc. is beneficially owned by William C. Meier.
(2) Archangel Holding Co, LLC is beneficially owned by Stephen Petre, Vice
President.
Item 12. Certain Relationships and Related Transactions.
There were no transactions or series of transactions for the fiscal year,
to which the Company is a party, in which the amount exceeds $60,000, and in
which, to the knowledge of the Company, any director, executive director,
nominee, five percent stockholder or any member of the immediate family of any
of the foregoing persons, have or will have a direct or indirect material
interest, except as follows:
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
<PAGE>
Watchout! Agreement, the shareholders of Watchout! contributed to Registrant
100% of Watchout's common stock for an aggregate consideration of 11,296,300
shares of Registrant's common stock. Prior to the closing of the Watchout!
Acquisition, Watchout! was controlled by Robert Galoob and David Galoob. Robert
Galoob received 3,141,823 shares of common stock of registrant. David Galoob
received 3,781,823 shares of common stock of registrant.
Pursuant to a LLC Interest and Asset Contribution Agreement (the "Goldpoint
Agreement" and together with the Watchout! Agreement, the "Agreements"), the
members (i.e., equity holders) of Goldpoint International, LLC, a Delaware
limited liability company ("Goldpoint"), effective as of December 29, 1997,
contemporaneously with the closing of the Watchout! Acquisition, received from
Registrant 2,140,000 newly-issued shares of Registrant's common stock in
exchange for 100% of the membership interests in Goldpoint (the "Goldpoint
Acquisition", and together with the Watchout! Acquisition, the "Acquisitions").
The 2,140,000 shares represent approximately 14% of the outstanding shares of
common stock of Registrant on a fully-diluted basis. Prior to the closing of the
Goldpoint Acquisition, Goldpoint was controlled by Stephen J. Petre. Through
Arch Angel Holding Company, LLC, Mr. Petre controls 1,580,000 shares of the
Registrant.
On September 3, 1997, the Company entered into a loan arrangement with certain
parties or loans totaling $450,000 to the Company. The Company advanced such
monies to Watchout! in furtherance of its Agreement of May 30, 1997. The loans
were funded by:
(a) An 18% Senior note issued by
the Company to Raymond Larkin in the
amount of $50,000 due September 3,
1998, in full with interest.
(b) An 18% Senior note issued by
the Company to Watchout!-Goldpoint
Partners for $150,000 due September 3,
1998, in full with interest.
(c) In addition, the Company granted
warrants to purchase common shares at
$.01/share as an inducement to the
lenders to make the loans. The options
expire on September 3, 2002. The
warrants are to Raymond J. Larkin
for 75,000 shares and to Watchout!
Goldpoint partners for 225,000
share
(d) Further, the Company granted
warrants to purchase 25,000 shares
each to Mark Hollo and Sands
Brothers & Co. The warrants are
exercisable at $.01 per share on or
before September 3, 2002.
(e) The Company, in a separate
transaction related to the Watchout!
Agreement, borrowed $250,000 from Wayne
Williams and John Bader at interest of
18% per annum and agreed to issue warrants
to purchase a total of 250,000
common shares of the Company @ $.10
per share exercisable two years from
September 19, 1997. The warrants are
to be issued to John Bader and Wayne E.
Williams for 166,000 and 84,000,
respectively.
<PAGE>
Part IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following exhibits and financial statement schedules are filed as
exhibits to this Report:
1. Financial Statements of the Registrant are included under Item 8 hereof.
2. Financial Statement Schedules - None
3. Exhibits:
Exhibit # Description Location
3.1 Articles of Incorporation Exhibit to Annual Report
on Form 10K for Fiscal
Year ended June 30, 1986
3.2 Bylaws of Registrant Exhibit to Annual Report
on Form 10K for Fiscal
Year ended June 30, 1986
3.3 Amendment to Articles of Exhibit to Form 8-K filed
Incorporation December 14, 1998
27.1 Financial Data Schedule Attached
(b) Reports on Form 8-K.
Incorporated by reference.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant had duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized, in the city of San
Francisco, State of California on this 1st day of November, 1999.
WatchOut! Inc.
/s/ Kevin Waltzer
By: ________________________________
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Robert Galoob November 10, 1999
- ---------------------- Director --------------------
Robert Galoob
/s/ David Galoob Secretary November 10, 1999
- ---------------------- Director --------------------
David Galoob
/s/ John J. Russell November 1, 1999
- ---------------------- Director --------------------
John J. Russell
<PAGE>
Michael B. Johnson & Co., P.C. (A
Professional Corporation)
Certified Public Accountants
9175 East Kenyon Avenue, Suite
#100 Denver, Colorado 80237
Michael B. Johnson C.P.A. (303)796-0099
Member: A.I.C.P.A.
Colorado Society of C.P.A.'s
REPORT OF INDEPENDENT AUDITORS
Board of Directors
White Cloud Exploration
We have audited the accompanying balance sheets of White Cloud Exploration, Inc.
as of December 31, 1998, and the related statements of operations and cash flows
for the years then ended. These financial statements are based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
As shown in the financial statements, the Company incurred a net loss of
$856,896 and had incurred substantial losses in the prior years. At December 31,
1998, current liabilities exceed current assets by $1,920,567. These factors
indicate that the Company has substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
the Company cannot continue in existence.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of White Cloud Exploration, Inc.
as of December 31, 1998 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Michael Johnson & Co., LLC.
Denver, CO
October 20, 1999
F1
<PAGE>
WATCHOUT! INC.
BALANCE SHEET
DECEMBER 31, 1998 AND 1997
1998 1997
ASSETS
Current Assets
Cash $ 580 $ 59,147
Accounts Receivable - 137,454
Less Allowance for doubtful accounts - (53,325)
------------ --------------
580 143,276
Inventory - 162,000
Total Current Assets 580 305,276
Property, plant and equipment - 17,905
Less accumulated depreciation - (5,653)
------------ --------------
Total property and equipment - 12,252
Other Assets
Due from Member - 27,935
Organization Costs 15,250 16,853
Less Accumulated Amortization (3,050) -
------------ -------------
Total Other Assets 12,200 44,788
------------ -------------
TOTAL ASSETS 12,780 362,316
============ =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accrued Expenses 537,213 200,157
Accounts Payable 475,989 319,983
Due to Stockholders 457,945 307,424
Due to Factor - 55,537
Line of Credit - 54,968
Notes Payable 450,000 450,000
------- --------
Total Current Liabilities 1,921,147 1,413,737
Stockholders' Equity (Deficit)
Preferred Stock, no par value 10,000,000 shares
authorized, no shares issued or outstanding - -
Common Stock, $.001 par value, 50,000,000 shares
authorized, 15,030,245 shares issued & outstanding 15,030 15,030
Additional paid in capital 989,502 989,502
Accumulated Deficit (2,911,849) (2,055,953)
------------ -----------
Total Stockholders' Deficit (1,908,317) (1,051,421)
------------ -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 12,780 $ 362,316
============ ===========
The accompanying notes are an integral part of this financial statement.
F2
<PAGE>
WATCHOUT! INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998
1998 1997
---- ----
OPERATING REVENUES
Revenues $ - $ 826,446
Cost of Goods Sold - (485,767)
------------- -------------
GROSS PROFIT - 340,679
OPERATING EXPENSES
Royalties 56,250 225,000
Research Development 48,048 260,359
Selling Expenses - 23,117
Professional Fees 122,051 112,851
Management Fees - 115,321
Consluting Fees 94,792 31,930
General & Administrative 98,746 201,328
Marketing 1,251 7,855
Commitment/Loan Fees 181,695 94,500
------------- ------------
TOTAL EXPENSES 602,833 1,072,261
-------------- -------------
OPERATING PROFIT (LOSS) (602,833) (731,582)
-------------- -------------
OTHER REVENUES & EXPENSES
Interest Expense 92,063 (36,612)
Miscellaneous Income - 37,946
Loss on Sale of Receivables/Inventory (162,000) (238,254)
-------------- -------------
TOTAL OTHER REVENUES & EXPENSES 254,063 (236,920)
-------------- -------------
NET INCOME (LOSS) (856,896) (968,502)
============== =============
Weighted Average Common Shares 15,030,245 15,030,245
Loss Per Share $ (0.06) $ (0.06)
============== =============
The accompanying notes are an integral part of this financial statement.
F3
<PAGE>
<TABLE>
<CAPTION>
WATCHOUT! INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
1998 1997
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(856,896) $(968,502)
Adjustment to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation & Amortization - 7,607
Common Stock Issued in Exchange for Services - 43
Expenses Paid by stockholder as Capital Contribution - 88,500
Changes in Operating Assets and Liabilities:
Inventory 162,000 -
Accounts Receivable 84,129 (83,115)
Accounts Payable and Accrued Expenses 457,216 266,808
Interest Payable - 25,668
------------- ----------
Net Cash Used in Operating Activities (153,551) (662,991)
INVESTING ACTIVITIES
Purchase of Equipment - (11,435)
(Advances) Payments to/from Member - 73,080
------------- ----------
Net Cash Provided by Investing Activities - 61,645
FINANCING ACTIVITIES
Advances from Stockholders 150,521 185,016
Proceeds (Payments) from/to Factor (55,537) (16,902)
Proceeds from Line of Credit - 20,961
Proceeds from Notes Payable - 450,000
Proceeds from Issuance of Stock - 7,457
------------- ----------
Net Cash Provided by Financing Activities 94,984 646,532
------------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (58,567) 45,186
Cash and Cash Equivalents at Beginning of Year 59,147 13,961
------------- ----------
Cash and Cash Equivalents at End of Year $ 580 $ 59,147
============= ==========
SUPPLEMENTAL CASH FLOW
Interest Paid $ 11,063 $ 10,924
Taxes Paid $ - $ 1,050
</TABLE>
The accompanying notes are an integral part of this financial statement.
F4
<PAGE>
<TABLE>
<CAPTION>
WATCHOUT! INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998
Additional Accum. Total
Common Stock Paid-in Excess/ Stockholders'
Shares Amount Capital (Deficit Equity
---------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance 12/31/96 22,072 227 746,755 (1,087,451) (340,469)
Capital Contribution - - 250,000 - 250,000
Issue Stock for Services/Debt 43,290 43 7,457 - 7,500
Issue of Stock for Merger 14,759,883 14,760 (14,760) - -
Net Loss for 12/1/97 - - - (968,502) (968,502)
------------ ------ ------- --------- -----------
Balance 12/31/97 15,030,245 15,030 989,452 (2,055,953) (1,051,471)
Net Loss 12/31/98 - - - (856,896) (856,896)
------------ ------ ------- --------- -----------
Balance 12/31/98 15,030,245 15,030 989,452 (2,912,849) (1,908,367)
============ ======= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F5
<PAGE>
WATCHOUT! INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------
The following is a summary of WatchOut! Inc.'s (Company) significant accounting
policies:
Organization
- ------------
The Company was incorporated July 22, 1983 under the laws of Utah for the
purpose of obtaining capital to seek potentially profitable business
opportunities. Since inception, the Company has been engaged in organizational
activities. In 1997, the Company acquired two entities: WatchOut!, a California
Corporation and Goldpoint International, a limited liability company. In
November of 1998, the corporation changed it's name to WatchOut! Inc.
Cash and Cash Equivalents:
- -------------------------
For purposes of the statement of cash flows, cash and cash equivalents include
cash in banks and money market accounts.
Research & Development
- ----------------------
Research and development costs are expense when incurred.
Use of Estimates in the preparation of Financial Statements:
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amount 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.
Income Taxes
- ------------
No provisions have been made for income taxes. As of December 31, 1998, the
Company had net operating loss (NOL) carryforwards for federal income tax
purposes of approximately $2,912,849. These net operating laosses may be used to
offset future taxable income. Unusued carryforwards will expire in 2013.
F6
<PAGE>
WATCHOUT! INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CON'T:
- ----------------------------------------------------------
Income Taxes:
- -------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards Number 109 ("SFAS 109"), "Accounting for Income
Taxes," which requires a change from the deferred method to the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted stautory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $2,912,849 for federal income tax purposes. These carryforwards,
if not utilized to offset taxable income will expire at the end of the indicated
years:
2009 $ 102,487
2010 89,906
2011 895,058
2012 968,502
2013 856,896
----------
$2,912,849
==========
There was no provision or benefit for income taxes in fiscal 1998.
NOTE 2 - NOTES PAYABLE
- ----------------------
Following is a summary of notes payable at December 31,
1998
----
8% Unsecured notes payable to
Shareholders, due on various dates $457,945
Unsecured notes payable, due in 1998
at an interest rate of 12% 450,000
--------
$907,945
========
F7
<PAGE>
WATCHOUT! INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 - GOING CONCERN:
- ----------------------
The Company incurred a net loss of $856,896 for 1998 and $968,502 for 1997 and
has incurred substantial net losses in the prior years. At December 31, 1998,
current liabilities exceeded current assets by $1,920,567 and at December 31,
1997 by $1,270,461. These factors indicate that the Company has substantial
doubt about its ability to continue in existence. The financial statements do
not inclue any adjustments relating to the receoverability and classification of
recorded assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.
NOTE 4 - RELATED PARTY TRANSACTION:
- ----------------------------------
Watchout! Inc. has recorded unsecured, non-interest-bearing amounts due to
stockholders for the reimbursement of expenses. There are no specific repayment
terms. Officers, directors and shareholders have loaned the Company large sums
of funds in order to keep the Company afloat.
NOTE 5 - SUBSEQUENT EVENTS:
a) Gill & Associates, a collection agency for Office Depot has threatened
a collection suit for approximately $17,000.
b) Boit, Inc. filed suit to resolve the technology license for the
Company's watch products. The Company settled the suit and relinquished
the license in the summer of 1999.
c) Len Dorfman has filed suit for fees owed totaling $96,000.
d) In October 1999, the major shareholders of the Company agreed to sell
control of the Company by selling over 8 million shares, including
options, to Innovative Cybersystems Corp. which intends to engage in a
new business. The Agreement requires settlement of certain debts and
renegotiations of all other debt as a condition of the Agreement.
e) The Company is negotiating to cancel the Sands Brothers selling
Agreement to settle any claims by Sands Brothers for a Mutual Release.
f) Bader-Williams Loan: The Company is renegotiating the loan which is in
default to provide a fixed amount and new payment terms.
g) Watchout/Goldpoint Loan: The Company is renegotiating the loan which is
in default, to provide a fixed amount and new payment terms.
F8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 580
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 580
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,780
<CURRENT-LIABILITIES> 1,921,147
<BONDS> 0
0
0
<COMMON> 15,030
<OTHER-SE> (1,922,347)
<TOTAL-LIABILITY-AND-EQUITY> 12,780
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 602,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,063
<INCOME-PRETAX> (602,833)
<INCOME-TAX> 0
<INCOME-CONTINUING> (602,833)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (856,896)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
