WHITESTONE INDUSTRIES INC, 10KSB, 1996-05-16

WHITESTONE INDUSTRIES INC
10KSB, 1996-05-16
CRUDE PETROLEUM & NATURAL GAS

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U.S. 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 Year Ended December 31, 1995

Commission File No. 32-20432-FW

WHITESTONE INDUSTRIES, INC.
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(Name of Small Business Issuer in Its Charter)

DELAWARE 75-2228828
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

19200 VON KARMAN AVENUE, SUITE 550, IRVINE, CALIFORNIA 92715
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(Address of Principal Executive Offices) (Zip Code)

(714) 622-5566
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(Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: NONE

Name of Each Exchange
Title of Each Class on Which Registered

- --------------------------------------- -------------------------------------

Securities registered under Section 12(g) of the Exchange Act:
------------------

- --------------------------------------------------------------------------------
(Title of Class)

Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports, and (2)
has been subject to such filing requirements for the past 90 days.

Yes [ ] No [X]

This report contains a total of 37 pages.

<PAGE>

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer'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. [X]

State issuer's revenues for its most recent fiscal year: $ -0-

State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. $4,026,585.

Common Stock, par value $.0001 per share ("Common Stock"), was the only
class of voting stock of the Registrant outstanding on April 1, 1996.
Based on the closing bid price of the Common Stock on the National
Association of Securities Dealers, Inc. OTC Bulletin Board as reported
on March 31, 1996 ($2.37), the aggregate market value of the 1,698,981
shares of the Common Stock held by persons other than officers,
directors and persons known to the Registrant to be the beneficial
owner (as that term is defined under the rules of the Securities and
Exchange Commission) of more than five percent of the Common Stock on
that date was approximately $4,026,585. By the foregoing statements,
the Registrant does not intend to imply that any of these officers,
directors or beneficial owners are affiliates of the Registrant or that
the aggregate market value, as computed pursuant to rules of the
Securities and Exchange Commission, is in any way indicative of the
amount which could be obtained for such shares of Common Stock.

ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS

Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.

Yes [ ] No [X]

<PAGE>

APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.

4,673,981 shares of Common Stock, $.0001 par value, as of
March 31, 1996.

<PAGE>

PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

Whitestone Industries, Inc. (the "Company" or "Whitestone") was
incorporated as a Delaware corporation on April 19, 1988 under the name
"Fortunistics Inc." as a "blind pool" or "blank check" company to seek
acquisition possibilities, make acquisitions or enter into other business
endeavors. Currently, the Company, through its wholly-owned subsidiary, Golden
Bear Entertainment Corporation, is engaged in developing and marketing
electronic, interactive, pre-school children's games and educational products.
In particular, the Company has developed prototypes of its products and is
negotiating marketing outlets, primarily with large, national toy store chains.
Accordingly, the Company is considered to be a development stage company for
accounting purposes.

BACKGROUND

Effective October 11, 1988, the Company issued a stock dividend or
"spun-off" to its then stockholders, 2,500,000 shares of its common stock,
$.0001 par value ("Common Stock") (83,333 shares after giving effect to a
one-for thirty (1:30) reverse stock split effective January 18, 1993 of its then
outstanding Common Stock (the "Reverse Stock Split") described below in
"Acquisition by The Whitestone Group, Ltd."), together with an equal amount of
the Company's Class A and Class B Common Stock Purchase Warrants. The
distribution of these securities was made pursuant to a Registration Statement
on Form S-18 filed with the Securities and Exchange Commission, which became
effective October 11, 1988. None of the Company's Class A or Class B Warrants
were exercised.

Following completion of the Company's initial public offering of
certain of its securities and stock dividend, the Company's activities were
limited to managing its limited resources and investigating potential business
opportunities. On November 15, 1988, Mr. Bill Myers ("Myers") acquired
13,000,000 shares of Common Stock (4,333,333 shares post Reverse Stock Split) of
the Company from Halter Venture Corporation, the former principal stockholder of
the Company. Subsequently, on May 1, 1989, in exchange for shares of its Common
Stock, the Company received a commitment or option to acquire up to 10,000,000
shares of common stock of Videoactive Company, a media production and marketing
company with limited operations. Thereafter, on December 31, 1991, Mr. Bill
Myers, also the principal shareholder of Videoactive Company in addition to
being a principal shareholder of the Company, received 10,000,000 additional
shares of Common Stock (3,333,334 post Reverse Stock Split. Additionally,
1,000,000 shares of Common Stock (33,334 post Reverse Stock Split) of the
Company were issued

<PAGE>

to Mr. Myers in exchange for Mr. Myer's agreeing to assume various ongoing
expenses and other liabilities of the Company during the period in which the
Company was seeking an acquisition candidate or developing prospective business
operations.

On January 18, 1993, the Company, its principal stockholder, Mr. Bill
Myers, and The Whitestone Group, Ltd., a British Virgin Islands limited
partnership ("WGL"), entered into a Stock Purchase Agreement pursuant to which
(i) WGL agreed to purchase 297,143,860 shares of the Common Stock (9,904,762
shares post Reverse Stock Split) in consideration of $10,000; (ii) the Company
agreed to undertake a one-for-thirty (1:30) Reverse Stock Split; (iii) the
Company agreed to file a Certificate of Amendment to its Certificate of
Incorporation to (A) change its name from "Fortunistics, Inc." to "Whitestone
Industries, Inc.," (B) reduce its authorized capitalization to 20,000,000 shares
of Common Stock ($.0001 per share) and 1,000,000 shares of preferred stock ($.01
per share), (C) provide for certain management matters including indemnification
of officers, directors and agents, limitation of liability for breach of
fiduciary duty by a director, and (D) eliminate the application of Section 203
of the General Corporation Law of the State of Delaware (which prohibits
transactions between stockholders and a corporation); (iv) Myers agreed to grant
to Inmobiliaria Nueva York S.A., an affiliate of WGL, an option to purchase
23,139,990 shares of Common Stock (771,333 shares post Reverse Stock Split) of
Myers' 24,000,000 shares of Common Stock (800,000 shares) exercisable for an
aggregate purchase price of $2,500 at any time or prior to January 19, 1995; and
(v) all officers and directors of the Company resigned, and Mr. Hernan Saide, a
principal of WGL, and an affiliate of Inmobiliaria Nueva York, S.A., was elected
as the Company's sole Director, President, Chief Executive Officer, Secretary
and Treasurer and served in these capacities until December 7, 1995. Upon
closing, WGL owned 9,904,762 shares of the total of 10,971,429 shares of Common
Stock of the Company outstanding or approximately 90.3% of the outstanding
shares, giving effect to the Reverse Stock Split.

OPERATIONS.

From April 30, 1993, to October 16, 1995 (but effective July 1, 1995),
the Company was engaged in the acquisition and development of oil and gas
properties, interests and production and the sale and disposition of such
properties. During that time, the Company's management focused on prospective
operations on the purchase and development of existing oil and gas production
properties at a time when major oil and gas companies were divesting themselves
of their continental oil production. In management's judgment, activities of
major oil and gas companies generated an abundance of purchase opportunities
following a decline in the price of petroleum production.

<PAGE>

In connection with (i) the issuance of 9,904,762 shares of Common Stock
to WGL pursuant to the Agreement previously described above, and (ii) the
assumption of WGL's related bank debt, the Company acquired WGL's 75% ownership
in an oil and gas limited liability company (the "LLC") whose primary asset is
oil and gas properties located predominantly in Oklahoma and Texas. The
management company who owned 25% of the LLC later merged with Magnum Petroleum
(see discussion below). The oil and gas properties acquired by the Company were
recorded at WGL's historical cost (approximately $1,112,000 before adjustments
for receipt of pre-acquisition net revenues). For financial reporting purposes,
the operation of the oil and gas properties are included in the accompanying
consolidated financial statement effective on May 1, 1993. Pursuant to the LLC's
operating agreement, 75% of the net revenue of the LLC, after all monthly
operating expenses have been paid, may be distributed to the Company provided
the assets of the LLC exceed all liabilities of the LLC.

Between July 13 and July 18, 1994, the Company acquired all of the
capital stock of Entertainment & Gaming International, Inc. ("EGI") and MegaPot,
Inc. ("MegaPot"), pursuant to an Agreement and Plan of Reorganization, and
acquired a 55% majority interest in HICO, N.V. ("HICO"), pursuant to a Stock
Purchase Agreement. At that time, EGI, a Florida corporation, conducted its
operations under the name "Sport Shop Television," and was a shopping network
that markets, through television, sports-related goods, memorabilia, garments,
collectibles and equipment; MegaPot, a Nevada corporation, designed and
manufactured software and hardware for video slot machines utilized in casinos;
and HICO, a Curacao corporation, owned and operated the Las Palmas Hotel and
Casino in Curacao.

The Company then briefly changed its name from "Whitestone Industries,
Inc." to "Entertainment & Gaming International, Inc." However, as a result of
the failure of consideration by EGI, the acquisitions of Entertainment & Gaming
International, Inc. and HICO, Inc. have been rescinded and annulled and, in the
case of MegaPot, Inc., the principals of the respective parties, determined that
it would be in the interest of the respective parties that the transaction be
rescinded, and that all parties return the shares of capital stock received. All
other preliminary agreements and letters of intent relative to the acquisition
of additional companies as previously described in the Company's press releases
have been terminated, due to misrepresentations on the part of EGI, MegaPot, and
HICO. In light of the cancellation of all of these transactions, the Company
filed an amendment to its Certificate of Incorporation to change the name of the
Company back to Whitestone Industries, Inc. (effective January 25, 1995).

On March 31, 1995, the Company entered into a licensing agreement with
DieHard Marketing Group, Inc. ("DieHard"). In

<PAGE>

consideration for the issuance of 1,250,000 of its shares of Common Shares and
$50,000, the Company received an exclusive worldwide license (the "DieHard
License") in and to certain products and proprietary rights with respect to
video software to be used in video games and computer systems. The license has
an initial period of ten years, subject to automatic renewal for additional ten
year periods, unless the agreement is terminated for cause, as defined in the
agreement.

On June 1, 1995, Whitestone Games, Inc. ("Whitestone Games") was
incorporated in the State of Florida and became a wholly owned subsidiary of the
Company on June 7, 1995. On June 7, 1995, the Company assigned all rights in and
to the DieHard License to Whitestone Games.

In October 1995 (but effective July 1, 1995), the Company sold its oil
and gas business (including all related assets and liabilities) to Magnum
Petroleum, Inc. ("Magnum") in exchange for (i) $300,000 in cash, (ii) 85,131
shares of Magnum common stock. and (iii) options to purchase 50,000 shares of
Magnum common stock at prices from $4.00 to $4.50. Substantially all of this
consideration was subsequently transferred to Whitestone Group, Ltd., a British
Virgin Islands corporation ("WGL"), whose sole stockholder is the Company's
former president and majority stockholder, Hernan Saide, in settlement of
amounts owed to WGL by the Company and for WGL's assumption of all remaining
liabilities of the Company outstanding as of July 1, 1995. Accordingly, the
results of the oil and gas properties are shown on the Company's accompanying
financial statements separately as "discontinued operations." Additionally, the
Company's 1994 financial information has been reclassified to conform with its
1995 presentation.

In October 1995, the Company also spun off Whitestone Games to the then
stockholders of the Company, in proportion to each stockholder's pro-rata
interest in the Company as of the record date (September 6, 1995), which is
accounted for as a dividend. The shares of Whitestone Games stock is currently
being held in escrow for the benefit of the stockholders until such time a
registration statement to be filed with the Securities and Exchange Commission
to register the Whitestone Games stock is effective. The registration statement
will be prepared by Hernan Saide, the Company's former President, and Amy Habie,
a consultant to Whitestone Games.

<PAGE>

Agreement, WGL contributed back to the Company its right and interest in and to
6,700,000 shares of its 8,700,000 shares of the Company's Common Stock in
exchange for the Company's interest in certain securities (85,131 shares of
Magnum Petroleum Common Stock and options). Prior to December 7, 1995, WGL owned
approximately 64.2% of the outstanding capital stock interest of the Company.
Upon consummation of the transaction, WGL owned approximately 5.9% of the
outstanding capital stock interest of the Company.

Pursuant to the Agreement, the Company acquired all of the capital
stock of Golden Bear in exchange for the distribution to Mr. Yu of (i) 3,200,000
shares of restricted Common Stock of the Company and (ii) 500,000 shares of
newly issued shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") convertible into an 24,000,000 shares of Common Stock (subject
to certain anti-dilution provisions). The Common Stock and the series A
Preferred Stock issued to Mr. Yu represents approximately 79.89% of the
outstanding capital stock interest of the Company. A Statement of Designation
was filed with the State of Delaware on December 7, 1995, setting forth the
designations, preferences, rights and limitations of the Series A Preferred
Stock.

Effective December 7, 1995, Mr. Donald Yu was appointed the Company's
Chief Executive Officer, President, Chief Executive Officer and Chairman, and
Mr. George P. Eshoo and Mr.James Koo (who later resigned) were appointed as
Directors of the Company and the former officers and directors resigned from
their respective offices.

Effective December 7, 1995, Golden Bear became a wholly-owned
subsidiary of the Company. Golden Bear was organized by Donald Yu, an
experienced toy and electronic executive, to develop, market, distribute and
sell educational and innovative toys incorporating high technology electronics
that provide color recognition, voice and "surround-sound." Golden Bear is the
licensee for certain technology in connection with two of the products being
developed and marketed by the Company as described below.

On January 22, 1996, Mr. Yu converted 400,000 shares of the Series A
Preferred Stock into 19,200,000 shares of Common Stock. On January 29, 1996, the
Company amended its Certificate of Designation to provide that the Series A
Preferred Stock are not subject to adjustment in the event of a reverse stock
split of the Company's Common Stock.

<PAGE>

3,000,000 shares and changed the par value of the Company's preferred stock from
$.01 to $.0001. Furthermore, the Company effectuated a one for ten (1:10)
reverse stock split of the Company's common stock. Pursuant to the NASD, the
reverse stock split became effective on February 2, 1996.

THE TOY INDUSTRY

There are hundreds of millions of children in the world between the
ages of two and twelve years old. In the United States alone, there are over 40
million children in this age group. Retail sales in the United States in 1993 of
non-video game toys was estimated at $17.5 billion by the Toy Manufacturers
Association, an industry trade group. According to this trade group, the largest
toy markets by size are: United States, Japan and Western Europe. The industry
is dominated by large American toy manufacturers such as Mattel, Hasbro, Tyco,
Fisher-Price and Playskool. These large companies primarily sell their products
using in house sales personnel. Other smaller companies typically sell their
products through independent manufacturers' representatives.

BUSINESS STRATEGY

Management believes that currently, there has been minimal integration
of electronics into toys, but the success of Nintendo and SEGA indicates that
the toy market is prime for other entries to this market. Because the toy
industry is highly fragmented, Management believes, but there can be no
assurances, that it will be able to grow rapidly with only a limited number of
products.

The Company, through Golden Bear, is currently engaged in the
development and marketing of electronic, interactive, pre-school children's
games and educational products (For purposes of this section which describes the
Company's business, the term "Company" refers to Golden Bear). The Company's
activities to date have consisted of developing prototypes of its products and
negotiating marketing outlets, primarily with large, national toy store chains.
Accordingly, the financial statement presentation is that of a development stage
enterprise. Upon reaching a full operating stage, the Company envisions
contracting out the manufacture of its products to third parties.

PRODUCTS

Beginning in October, 1995, Donald Yu, the Company's President, Chief
Executive Officer, Chief Financial Officer, and Chairman (as of December 7,
1995), Joseph Whitaker, the Company's Executive Vice President (as of February
5, 1996), Marketing, and Lawrence Aledort, the Company's Senior Vice President,
Sales met with major toy buyers (including Toys R Us, Kaybee, J.C. Penney) to

<PAGE>

preview the Company's initial product line to determine the viability of each
product described below and buyer's responses to each of these products.
Subsequently, in mid-January 1996, the initial product line described below was
displayed at the Hong Kong Toy Fair, primarily to the major domestic import
buyers and the international trade. The Company also presented its initial
product line to major buyers representing a large cross section of U.S. outlets
including Toys R Us, KayBee, Target, Hills, Bradlees, JC Penney, FAO Schwarz, at
the Official 93rd American International Toy Fair in New York. As a result of
these initial responses, the Company anticipates, but there can be no assurances
that it will be able to obtain significant broad U.S. distribution during its
1996 fiscal year (December 31, 1996).

Additionally, the Company has met with representatives many of the
significant international countries which represent large distribution world
wide including Canada, France, Italy, Germany and the United Kingdom. The
Company plans to secure exclusive distributorships in these and other countries
for early 1997 to rapidly expand its world wide position. See "Marketing and
Sales."

The Company's product line currently consists of the following:

1. CATCH THE BEAT is a stylized FM Radio/Cassette Tape Player with a
built-in antenna and full stereo ear phones. On the game-playing
surface consists of a 16 raised and lighted (in different colors)
buttons (similar to raised telephone numbers on a touch-tone telephone)
that light up when music is played through the Tape Cassette Play. By
incorporating certain proprietary technology, each button is randomly
assigned a note or tone. The object of the game is to listen to the
beat, hit which flashing buttons a player believes appears to be
assigned the various notes or tones and to score points. The faster the
beat of the music, the harder the game is.

2. SMART FUN - SOUNDS SO REAL STORY TELLER is a moving picture story
system with "Wrap-Around" sound that incorporates a proprietary
3-dimensional stereo sound system. Each Story Teller consists of 16
full-color story frames that advance automatically, a built-in
backlight for nighttime reading, and color effects with exclusive story
cartridges that are easy to load. The sound track incorporates
technology using "Surround Sound," giving an impression that certain of
these sounds may be coming from overhead, behind, nearby, or far away
or are traveling.

3. SMART FUN - MUSICAL COLOR DISK PLAYER is a small, hand held machine
that turns colors into music through proprietary technology. For
example, red may be associated wit the note

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"C", blue with "F", green with "G", etc. The user will turn a crank to
spin the turntable and hear the color disk. The machine senses each
color and turns it into music. In addition to pre-colored disks, blank
disks will be included so that users can color their own songs.

4. SMART FUN - TALKING SHOW 'N KNOW is an interactive light-up
learning game that enhances a child's pre-reading skills. In response
to questions posed by a realistic electronic voice that also
incorporates sound effects, a child will identify the sounds with
certain visual pictures. If the response is correct, the child is
praised and if the response is incorrect, the child is encouraged to
try again or, after several attempts, a new question is asked so that a
child is not become frustrated.

MANUFACTURING

The Company's strategy is to manufacture the majority of its products
through unaffiliated contract manufacturers with facilities in Hong Kong, the
People's Republic of China and other developing countries in the Pacific Rim
region which offers labor cost advantages. Management has significant experience
and contacts in the subcontracting of toy manufacturing and particularly, in
this region of the world. See "Management." Over the years, Management has
established close relationships with several subcontractors and has developed
product and manufacturing standards, production planning and quality assurance
functions with the ability to monitor costs, quality assurance and oversight of
manufacturing processes. Some of the Company's products or components may be
manufactured in the United States, depending on cost and related matters.

MARKETING AND SALES

To conduct domestic sales and follow up on sales leads generated at the
toy fairs, the Company will use an established network of experienced toy
industry sales representative organizations which have been used previously or
are known and well-respected by Management. The Company believes that use of
outside sales representatives will allow the Company to maintain a low overhead
in its sales operations while, at the same time, to take advantage of
professional sales persons with considerable influence in the toy industry.
Sales commissions paid to these representative groups will be consistent with
industry standard practices, which is typically 5% of net sales. Certain key
retailers will be closely monitored by headquarters sales management in Irvine,
California, and consideration given to converting such retailers to "House
Account" status as that becomes economically viable.

<PAGE>

The Company will sell its products in this manner to major North
American retailers of toys, toy-related and consumer electronic products.
Accounts that the management has previously sold to or will make efforts to be
part of its customer base include:

Toys R Us Sears Walmart
Kay Bee Toys K-Mart Service Merchandise
Price Club Costco Hudson Bay
Target Best Buy Venture
Caldor Ames Bradlee's
Best Products BJ's Wholesale AAFES

At the international level, the Company anticipates that it will set up
exclusive distribution agreements in the major international markets. The
Company's strategy is to manufacture products for international distributors
once the Company has received a firm order accompanied by a letter of credit
issued by the distributor in favor of the Company. The Company believes, but
there can be no assurances, that this approach will help to substantially
eliminate most of the capital commitment that may be required of the Company
prior to the manufacture of products. The Company does not intend to carry any
inventory for the international market, thus eliminating all associated costs
including storage, overhead, insurance, and inventory related expenses.
International distributors will be managed from the Company's headquarters in
Irvine, California. The Company believes that it is important that its
distributors be local to each country, based upon the Company's belief that the
propensity to buy local and this inclination will also help the Company to
obtain local input regarding packaging, product positioning, pricing and new
product ideas which would appeal to a specific country. The Company's local
distributor will be responsible for all of the marketing and selling expenses
for each of their respective markets.

COMPETITION

The toy industry is highly competitive. Competitors include toy
companies, divisions of large diversified companies, publishing companies,
manufacturers of video and voice communication products and consumer electronic
companies. The products envisioned by the Company will compete in a number of
different markets with a number of different competitors. The Company's main
competitors include Mattel, Hasbro, Tyco, Fisher-Price, Playskool and Video
Technology Industries who are considerably larger than the Company and have
substantial financial and creative resources. Nonetheless, the Company believes
that it will be able to compete favorably with other toy companies by product
innovation incorporating advanced technology and through focused marketing and
promotion in targeted niche markets.

<PAGE>

LICENSE AGREEMENTS

On December 5, 1995, Golden Bear entered into a license agreement with
James Wickstead Design Associates, which grants Golden Bear the exclusive,
worldwide right and license to use the proprietary technology during the lives
of the proprietary rights in connection with the Smart Fun - Musical Color Disc
Player and related products to be developed, in exchange for royalty payments
ranging from 3% to 6% of net sales. Other forms of consideration received by the
Company in connection with the license are shared equally with the licensor.

On December 5, 1995, Golden Bear also entered into a license agreement
with Diece-Lisa Industries, Inc. which grants Golden Bear the exclusive,
worldwide right and license to the proprietary rights relating to the game
"Catch the Beat," all merchandising rights), and all related rights to
manufacture, use and sell the "Catch the Beat" and related products, in exchange
for royalty payments ranging from 4% to 6% of net sales. The initial term of
this license is one year, and is automatically renewed if certain minimum
royalty amounts ($15,000 per year) are paid. Additionally, the Company and
Diece-Lisa Industries, Inc. will share equally in the gross revenues from
sublicenses granted to third parties.

All royalty payments are payable on a quarterly basis (January 1, April
1, June 1 and September 1).

EMPLOYEES

The Company currently employs 3 persons on a full-time basis of which 2
are in executive positions and one is engaged in administrative capacities. At
present, none of the Company's employees are receiving any salaries, although
the employees are receiving health insurance benefits.

ITEM 2. DESCRIPTION OF PROPERTY

Prior to December 7, 1995 the Company's executive offices were located
at 2255 Glades Road, Suite 324A, Boca Raton, FL 33431. These premises which
consisted of approximately 200 square feet of space, were subject to a lease
agreement with HQ of Boca Raton, Inc. The term of the lease was six months,
beginning February 1, 1995, at a base rental of $500 per month, and was renewed
on August 1, 1995 for an additional six-month period. As of December 7, 1995,
Hernan Saide, the Company's former Chairman, President, and Chief Executive
Officer, assumed the remaining obligations under the terms of the lease
agreement.

After December 7, 1995 the Company's executive offices were located at
702 Marshall Street, Suite 500, Redwood City, California 94063. These offices
were provided to the Company by George P.

<PAGE>

Eshoo, a Director of the Company at no charge until February 29, 1996.

Subsequently, on March 1, 1996, the Company moved its executive offices
to 19200 Von Karman Avenue, Suite 500, Irvine, CA 92715. These premises, which
consists of approximately 350 square feet of space, and is subject to a lease
agreement with DBS, Inc. The lease is on a six month basis, beginning March 1,
1996, at a base rental of $1450 per month. The Company considers these
facilities to be temporary.

ITEM 3. LEGAL PROCEEDINGS

The Company is not engaged in a material legal proceeding. The Company
is aware of a lawsuit filed by AJ Robbins, P.C. on November 15, 1995, but the
Company has not yet been served on the Company. The lawsuit is based on
accountants' fees allegedly due by the Company. The former management of the
Company, and specifically Hernan Saide, has indemnified the present management
and the Company against any actions that occurred or accrued period to December
7, 1995.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS

Not applicable.

<PAGE>

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS

The Company's Common Stock commenced trading on the OTC Bulletin Board
on January 6, 1994 under the symbol "WHST." Subsequently, on February 2, 1996,
the NASD advised the Company that its trading symbol had been changed to "WHSN."
The following table sets forth the high and low bid quotations for the Common
Stock for the periods indicated. These quotations reflect prices between
dealers, do not include retail mark-ups, mark-downs or commission and may not
necessarily represent actual transactions.

HIGH LOW
---- ---
March 31, 1994 (1) (1)
June 30, 1994 (1) (1)
September 30, 1994 (1) (1)
December 31, 1994 (1) (1)
March 31, 1995 (1) (1)
June 30, 1995 .685 .625
September 30, 1995 .875 .640
December 31, 1995 .250 .250
March 31, 1996 5.00 2.37
April 1, 1996 - May 14, 1996 2.50 1.75
- --------------
(1) No trading activities during these periods.

As of March 31, 1996, there were 4,673,981 holders of record of the Company's
common stock. The closing bid price quoted on the pink sheets for the Company's
Common Stock at March 31, 1996 was $2.37.

The Company has never declared or paid, and has no present intention to
pay, cash dividends on its Common Stock. Any future dividends will necessarily
depend upon the Company's future earnings, capital requirements, financial
condition and other factors.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS [NEEDS TO BE REVIEWED]

The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the Notes thereto appearing
elsewhere on this Report.

<PAGE>

GENERAL

The Corporation is in the business of developing lines of toys focused
on incorporating the latest advances in electronic technology into new, as well
as previously accepted styles of toys.

RESULTS OF OPERATIONS

Prior to the series of transactions undertaken on January 18, 1993
culminating in the stock purchase by Whitestone, The Company was not engaged in
significant operations. From inception of the Company on April 19, 1988 through
the fiscal year ended December 31, 1992, Management's primary focus was on
organizing the Company and investigating prospective business opportunities in
which to participate. The costs attributable to these activities and general and
administrative expenses constitute substantially all of the expenses of the
Company from inception through December 31, 1992. Most of these expenses were
one time costs and are not of a continuing nature.

YEAR ENDED DECEMBER 31, 1995 ("1995") COMPARED TO YEAR ENDED DECEMBER 31, 1994
("1994")

No true comparison can be made between year ended December 31, 1995 and
year ended December 31, 1994. The Company currently is in the development stage
and as of December 31, 1995 most of the Company's expenses resulted from its
research and development. This resulted in net operating losses to the Company.

REVENUES.

As discussed above, the Company is a development stage company and has
not produced any revenues as of December 31, 1995. At December 31, 1995, the
Company had net operating losses of approximately $1.6 million expiring in the
years 2007 through 2009. On December 7, 1995, the Company experienced a greater
than 50% change in ownership. Section 382 of the Internal Revenue Code limits
the availability of pre-ownership change losses in such situations.
Approximately $1.4 million of such losses are limited to approximately $250,000
of annual utilization in any one year. At December 31, 1995, the Company has a
deferred tax asset of approximately $640,000 related to the net operating loss
carryforwards. The Company has provided a valuation allowance for the full
amount of this deferred tax asset.

The Company is committed under two perpetual license agreement
connected to the development of its products. These agreements call for royalty
payments of from 4-6% of all such product sales.

<PAGE>

COSTS AND EXPENSES.

Costs and expenses related to research and development at December 31,
1995 were $101,703. This plus general and administrative expenses of $61,233
comprised 95% of the Company's total costs and expenses.

LIQUIDITY AND CAPITAL RESOURCES.

As of December 31, 1995, the Company is in a development stage and has
a working capital deficit of approximately ($73,000). The Company is actively
seeking financing to develop its operations. As the Company grows and expands
into new areas, it must add to its working capital in order to develop and
market new products. During 1995, the Company's growth was funded by loans made
to the Company by the former CEO, President and Chairman of the Company, and a
consultant to the Company, and by a limited number of sales of the Company's
Common Stock (resulting in proceeds to the Company of $99,985 through sale of
2,000,000 shares of Common Stock (200,000 shares after giving effect to the
February 1996 one for ten (1:10) reverse stock split).

CAPITAL EXPENDITURES.

During the year ended 1995, the Company's total capital expenditures
(including assets acquired with stock and assumed liabilities) were
approximately $155,730. These expenditures were attributable to Whitestone
Games, Inc., prior to the December 7, 1995 transaction between the Company,
Whitestone Group, Ltd. and Golden Bear Entertainment, Inc.

<PAGE>

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

The financial statements are included under Item 13(a) of this Report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE UNDER SECTION 16 (A) OF THE EXCHANGE ACT

The following table sets forth the names, ages and positions with the
Company of the executive officers and directors of the Company. Directors will
be elected at the Company's annual meeting of stockholders and serve for one
year or until their successors are elected and qualify. Officers are elected by
the Board and their terms of office are, except to the extent governed by
employment contract, at the discretion of the Board.

NAME AGE POSITION
---- --- --------
Donald Yu 58 President, Chief Executive
Officer, Chief Financial Officer, Director

Hernan Saide 37 President, Chief Executive
Officer, Director

George P. Eshoo 56 Director

Joseph Whitaker 55 Executive Vice President,
Marketing

Lawrence Aledort 61 Senior Vice President, Sales
- ----------

The officers are elected annually by the Board of Directors and serve
at the discretion of the Board of Directors. Messrs. Yu, Whitaker, and Aledort
devote their full time to the business of the Company.

DONALD YU has served as the President, CEO and a Director of the
Company since December 7, 1995. From August, 1995 to December,

<PAGE>

1995, Mr. Yu was an independent consultant, developing what are now the
Company's current products. Since its inception in December 1995, Mr Yu also has
served as the sole officer and director of Golden Bear Entertainment Corp., now
a wholly owned subsidiary of the Company. From October, 1994 to August, 1995,
Mr. Yu was President and Chief Executive Officer of Q-Sound Electronics, Inc.
(QSL), a Newport Beach, California based company specializing in the design,
manufacture and market consumer products utilizing proprietary three-dimensional
audio, "surround sound" technology. From October, 1993, to October, 1994, Mr. Yu
had served as President and CEO of Dynamic Life Products of Newport Beach,
California, a manufacturer and distribute of bath safety products. From
September, 1990 to July, 1992, Mr. Yu was President of Catalina Toys, Inc., a
manufacturer of high tech toys.

HERNAN SAIDE has served as a Director and Executive officer of the
Company from January 18, 1993 through December 7, 1995 when the majority of the
Company's stock was acquired by Mr. Donald Yu. Between June 1990 and to the
present, Mr. Saide has been engaged in managing various real estate investments
through his proprietary company, Sitco, Incorporated, of Boca Raton, Florida.
Mr. Saide received a B.A. in Economics in 1984 from the University of Florida
and received an executive post-graduate degree in Business Administration in
1987 from the Universidad Adolfo Ibaneo, Santiago, Chile.

GEORGE P. ESHOO has been senior partner of the law firm of George P.
Eshoo, P.A. since 1966. Mr Eshoo attended the University of California at
Berkeley, where he received a Bachelor of Science degree in 1961, and received
his J.D. in 1966 from the University of California at San Francisco, Hastings
College of Law and received his Juris Doctor.

SIGNIFICANT EMPLOYEES

JOSEPH S. WHITAKER has served as the Company's Executive Vice-
President, Marketing since February 5, 1996. Prior to that time, since December
7, 1995, Mr. Whitaker has worked for the Company as a consultant since August of
1995. From February, 1995, to August, 1995, Mr. Whitaker served as Senior
Vice-President, Marketing of companies such as Q-Sound Electronics, Inc. From
July, 1993 to the present, he has served as an independent consultant to a
number members of toy and electronic industries including SEGA of America and
Intex Corp. In 1990 and until July of 1992, Mr. Whitaker founded Catalina Toys,
and served as its Senior Vice President, Sales and Marketing. Prior to that, Mr.
Whitaker was in senior management with Mattel, Inc., Lorimar/Telepictures, Inc.
and Columbia Pictures.

LAWRENCE ALEDORT has served as the Company's Senior Vice-President,
Sales, since February 5, 1996. Since 1978, Mr. Aledort

<PAGE>

has been President of Lawrence Aledort Associates, Inc., a manufacturer's
representative of toy and software product lines, as well as marketing and sales
consulting. From 1993 to the present, he has also been a principal in Blue Moon
Products, an inventing and toy development enterprise.

ITEM 10. EXECUTIVE COMPENSATION

CASH COMPENSATION

Total cash compensation paid to all executive officers as a group for
services provided to the Company in all capacities during the year ended
December 31, 1995 aggregated to $17,432.44. Set forth below is summary
compensation table in the tabular format specified in the applicable rules of
the Securities and Exchange Commission. As indicated, no officer of the Company
or any of its subsidiaries received total salary and bonus which exceeded
$100,000 during the periods reflected.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

OTHER ALL
NAME AND ANNUAL RESTRICTED OTHER
PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION PERIOD SALARY BONUS SATION* AWARD(S) SARS(#) PAYOUTS SATION
- --------- ------ ------ ----- ------- --------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hernan Saide, 1995$ -0- $ -0- $17,432.44(1) - -0- - $ -0-
Chairman,CEO 1994$ -0- $ -0- $23,111.88(2) - -0- - $ -0-
President 1993$ -0- $ -0 $12,709.92(3) - -0- - $ -0-
<FN>
(1) $12,815.33 for automobile allowance, $1,458.80 for dependent health
insurance and $3,158.31 for cellular telephone.

(2) $12,482.01 for automobile allowance; $2279.00 for dependent health
insurance, and $8,350.87 for cellular telephone.

(3) $4,000 for consulting services; $6,275.58 for automobile allowance; $669
for dependent health insurance; $1,765.34 for cellular telephone.
</FN>
</TABLE>

Donald Yu, 1995 $ -0- $ -0- $ -0- - _____ - $ -0-
Chairman,CEO 1994 $ -0- $ -0- $ -0- - _____ - $ -0-
President 1993 $ -0- $ -0- $ -0- - _____ - $ -0-

EMPLOYMENT AGREEMENTS

Through March 31, 1996, none of the executive officers or directors
received any compensation. As of April 1, 1996, Mr. Yu commenced receiving
health insurance benefits.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<PAGE>

(INDIVIDUAL GRANTS)
- --------------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS/
SECURITIES SARS GRANTED
UNDERLYING TO EMPLOYEES EXERCISE OR
OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#) YEAR ($/SH) DATE
- --------------------------------------------------------------------------------
Hernan Saide -0- -0- -0- ---
Donald Yu -0- -0- -0- ---

OPTION EXERCISES AND VALUES AT YEAR END

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTION/SARS OPTION/SARS
AT FY-END (#) AT FY-END
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE

Hernan Saide -0- -0- -0- -0-
Donald Yu -0- -0- -0- -0-

OPTION GRANTS

There are no outstanding options granted as of the date hereof.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
Company's Common Stock beneficially owned on March 31, 1996, (i) by each person
who is known by the Company to own beneficially or exercise voting or
dispositive control over 5% or more of the Company's Common Stock, (ii) by each
of the Company's directors, and (iii) by all executive officers and directors as
a group. At March 31, 1996, there were 4,673,981 shares of Common Stock
outstanding, and 100,000 shares of Series A Convertible Preferred Stock
outstanding (All figures give effect to a one for ten (1:10) reverse stock split
effective February 2, 1996). This information as to beneficial ownership was
furnished to the Company by or on behalf of the persons named. In general, a
person is deemed to be a "beneficial owner" of a security if that person has or
shares the power to vote or direct the voting of such security, or the power to
dispose or to direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities of which the person has the right to
acquire beneficial ownership within

<PAGE>

(60) days. Information with respect to the percent of class is based on
4,673,981 shares of the Company's Common Stock issued and outstanding as of
March 31, 1996. Unless otherwise indicated, the business address of each person
listed is 19200 Von Karman Avenue, Suite 550, Irvine, California 92715.

SHARES PERCENT
NAME BENEFICIALLY OWNED(1) OF CLASS
---- --------------------- --------
Donald Yu(2)(3) 1,120,000 23.96%

George P. Eshoo(4) 35,000 less than 1%

All Officers and
Directors as a Group
(2 persons) 1,155,000 24.71%

Jean King(5) 1,120,000 23.96%

Hayden Financial Corporation(6) 400,000 8.56%

Spiro Pappas, Trustee(7) 300,000 6.41%
- -----------------
(1)Except as otherwise indicated in the footnotes below, each stockholder has
sole power to vote and dispose of all the shares of Common Stock listed opposite
his name.

(2)Mr. Yu is President, CEO and Chairman of the Company. Does not include
100,000 shares of Series A Preferred Stock that are convertible into 4,800,000
shares of Common Stock. See "Certain Relationships and Related Transactions."

(3)Mr. Yu is the former husband of Ms. King.

(4)Mr. Eshoo is a director of the Company.

(5)Ms. King is the former wife of Mr. Yu. Her address is 10176 Chamberley Court,
Cupertino, California 95017. See "Certain Relationships and Related
Transactions."

(6)The address for Hayden Financial Corporation is 21560 Toledo Road, Boca
Raton, Florida 33433. Hayden Financial Corporation and its principal, Robert
Gartzman, initially received a total of 6,500,000 shares of Common Stock
(650,000 post reverse split as of February 2, 1996) in connection with financial
consulting agreements entered into in December 1995.

(7)The address is 301 W. Oakland Blvd., Fort Lauderdale, Florida 33311.

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In February 1996, pursuant to a December 1995 consulting agreement with
Hayden Financial Corporation, in consideration for certain services performed
and to be performed on behalf of the Company, Hayden Financial Corporation
received 6,500,000 shares of Common Stock (650,000 post reverse split as of
February 2, 1996). On February 5, 1996, the Company filed a registration
statement on Form S-8 with the Securities and Exchange Commission to register
250,000 shares of Common Stock for resale received by Hayden Financial
Corporation in connection with the consulting agreement.

In January 1996, George P. Eshoo, a director of the Company, received
350,000 shares of Common Stock (35,000 post reverse split as of February 2,
1996) in consideration for legal services performed on behalf of the Company.

On December 26, 1995, Spiro Pappas, Trustee, received 2,000,000 shares
of Common Stock (200,000 share post reverse split as of February 2, 1996) from
the Company in consideration for $99,985.

On December 7, 1995, the Company, WGL, Golden Bear Entertainment
Corporation, a newly organized California corporation ("Golden Bear"), and Mr.
Donald Yu, ("Yu"), the sole shareholder of Golden Bear and the Company's current
President, CEO, CFO and Chairman, entered into a Stock Purchase and Exchange
Agreement (the "Agreement") which was effective as of that date. Pursuant to the
Agreement, WGL contributed back to the Company its right and interest in and to
6,700,000 shares of its 8,700,000 shares of the Company's Common Stock in
exchange for the Company's interest in certain securities (85,131 shares of
Magnum Petroleum Common Stock and options). Prior to December 7, 1995, WGL owned
approximately 64.2% of the outstanding capital stock interest of the Company.
Upon consummation of the transaction, WGL owned approximately 5.9% of the
outstanding capital stock interest of the Company (See discussion below).

Pursuant to the Agreement, the Company acquired all of the capital
stock of Golden Bear in exchange for the distribution to Mr. Yu of 3,200,000
shares of restricted Common Stock of the Company and (ii) 500,000 shares of
newly issued shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") convertible into an 24,000,000 shares of Common Stock (subject
to certain anti-dilution provisions). The Common Stock and the series A
Preferred Stock issued to Mr. Yu represents approximately 79.89% of the
outstanding capital stock interest of the Company. A Statement of Designation
was filed with the State of Delaware on December 7, 1995, setting forth the
designations, preferences, rights and limitations of the Series A Preferred
Stock.

<PAGE>

On January 22, 1996, Mr. Yu converted 400,000 shares of the Series A
Preferred Stock into 19,200,000 shares of Common Stock (1,920,00 post Reverse
Split). On January 29, 1996, the Company amended its Certificate of Designation
to provide that the Series A Preferred Stock are not subject to adjustment in
the event of a reverse stock split of the Company's Common Stock.

Subsequently, on January 31, 1996, the Company filed a Certificate of
Amendment to its Certificate of Incorporation whereby the Company increased the
number of its authorized shares of Common Stock, par value $.0001 from
20,000,000 shares to 30,000,000 shares. The Company also increased the number of
authorized shares of preferred stock from 1,000,000 shares to 3,000,000 shares
and changed the par value of the Company's preferred stock from $.01 to $.0001.
Furthermore, the Company effectuated a one for ten (1:10) reverse stock split of
the Company's common stock. Pursuant to the NASD, the reverse stock split became
effective on February 2, 1996.

In October 1995 (but effective July 1, 1995), the Company sold its oil
and gas business (including all related assets and liabilities) to Magnum
Petroleum, Inc. ("Magnum") in exchange for (i) $300,000 in cash, (ii) 85,131
shares of Magnum common stock. and (iii) options to purchase 50,000 shares of
Magnum common stock at prices from $4.00 to $4.50. Substantially all of this
consideration was subsequently transferred to Whitestone Group, Ltd., a British
Virgin Islands corporation ("WGL"), whose sole stockholder is the Company's
former president and majority stockholder, Hernan Saide, in settlement of
amounts owed to WGL by the Company and for WGL's assumption of all remaining
liabilities of the Company outstanding as of July 1, 1995. As discussed above,
in exchange for 6,700,000 shares of is 8,700,000 shares of the Company's Common
Stock, WGL received 85,131 shares of Magnum Petroleum Common Stock and options.

Pursuant to an agreement with Ms. Jean King, the former wife of Mr.
Donald Yu, the Company's President, CEO, CFO, and Chairman, Ms. King, also an
employee of the Company, is entitled to one-half of Mr. Yu's (i) capital stock
of the Company and (ii) earnings. As a result, Mr. Yu transferred 1.12 million
shares of Common Stock to Ms. King. Additionally, Ms. King will be assigned all
rights to one-half of any compensation received or accrued by or on behalf of
Mr. Yu in the future.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(A) The financial statements listed on the index to financial
statements on page F-1 are filed as part of this Form 10-KSB.

(B) REPORTS ON FORM 8-K

<PAGE>

The Company filed Form 8-K reports dated May 23, 1995 (Item 8),
December 19, 1995 (Item 1, 2, 7), February 9, 1996 (Items 5 and 7), and April 4,
1996 (Item 5).

<PAGE>

WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995

Page Number
-----------

Independent Auditors' Report F-2

Consolidated Balance Sheet at December 31, 1995 F-3

Consolidated Statements of Operations for the years ended December F-4
31, 1995 and 1994

Consolidated Statement of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1995 and 1994 F-5

Consolidated Statements of Cash Flows for the years ended December F-6
31, 1995 and 1994

Notes to Consolidated Financial Statements F-7-11

F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
and Stockholders
Whitestone Industries, Inc. and Subsidiary
Boca Raton, Florida

We have audited the accompanying consolidated balance sheet of
Whitestone Industries, Inc. and Subsidiary (A Development Stage Enterprise) as
of December 31, 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the two years ended December 31, 1995
and 1994. 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 audit.

We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Whitestone
Industries Inc. and Subsidiary (A Development Stage Enterprise) as of December
31, 1995, and the results of its operations and cash flows for the years ended
December 31, 1995 and 1994, in conformity with generally accepted accounting
principles.

Feldman Radin & Co., P.C.

March 20, 1996
New York, N.Y.

F-2

<PAGE>

WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1995

ASSETS

CURRENT ASSETS:
Cash $ 1,134
Prepaid royalties 45,000
----------

$ 46,134
==========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Accounts payable $ 119,225
----------

STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $ .001 par value ; 3,000,000 shares
authorized, 100,000 shares issued and outstanding 100
Common stock, $. 0001 par value; 30,000,000 shares
authorized, 3,794,643 shares issued of which
670,000 are held in treasury 379
Additional paid-in capital 1,721,952
Accumulated deficit (1,795,522)
----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (73,091)
----------

$ 46,134
==========

See notes to consolidated financial statements

F-3

<PAGE>

WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
----------------------------
1995 1994
---------- ---------
REVENUE $ - $ -

COSTS AND EXPENSES:
General and administrative 61,233 -
Direct expenses 10,140 -
Research and development 101,703 -
---------- ---------

LOSS FROM CONTINUING OPERATIONS (173,076) -

LOSS FROM DISCONTINUED OPERATIONS (220,091) (680,235)
---------- ---------

NET LOSS $ (393,167) $(680,235)
========== =========
LOSS PER COMMON SHARE:
Continuing operations $ (0.14) $ -
Discontinued operations (0.18) (0.60)
---------- ---------

NET LOSS PER COMMON SHARE: $ (0.32) $ (0.60)
========== =========

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,242,963 1,135,943
========== =========

See notes to consolidated financial statements

F-4

<PAGE>

<TABLE>
<CAPTION>
WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

PREFERRED STOCK COMMON STOCK
------------------------ ------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
------------ ---------- --------- ------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1993 - - 1,098,443 $110 $ 640,648 $ (166,390) $ 474,368

Net loss - - - - - (680,235) (680,235)
Shares issued in exchange for
services - 75,000 7 187,493 - 187,500
Committed to issue shares in
connection with borrowings - - - - 34,000 - 34,000
-------- ----- --------- ---- ---------- ----------- ----------

BALANCE - DECEMBER 31, 1994 - $ - 1,173,443 $117 $ 862,141 $ (846,625) $ 15,633

Net loss - - - - - (393,167) (393,167)
Proceeds from sales of shares - - 30,000 3 78,747 - 78,750
Shares issued for services
and debt - - 26,200 3 160,897 - 160,900
Shares issued for Diehard
license - - 125,000 12 399,988 - 400,000
Distribution of Whitestone
Games as dividend - - - - - (555,730) (555,730)
Capital contribution - - - - 120,538 - 120,538
Proceeds from sale of shares - - 200,000 20 99,965 - 99,985
Common shares issued for
Golden Bear stock - - 320,000 32 (32) - -
Preferred shares issued for
Golden Bear stock 500,000 500 - - (500) - -
Conversion of preferred
to common (400,000) (400) 1,920,000 192 208 - -
-------- ----- --------- ---- ---------- ----------- ----------

BALANCE - DECEMBER 31, 1995 100,000 $ 100 3,794,643 $379 $1,721,952 $(1,795,522) $ (73,091)
======== ===== ========= ==== ========== =========== ==========
</TABLE>

See notes to consolidated financial statements

F-5

<PAGE>

<TABLE>
<CAPTION>
WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------
1995 1994
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
CASH FLOWS FROM CONTINUING OPERATIONS
Loss from continuing operations $ (173,076) $ -

Changes in assets and liabilities:
(Increase) in prepaid expenses (45,000) -
Increase in accounts payable 119,225 -
---------- ---------

NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATIONS (98,851) -
---------- ---------

CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations (220,091) (680,235)
Shares issued for services 160,900 187,500
Changes in assets and liabilities of
discontinued business 106,053 154,301
---------- ---------

NET CASH PROVIDED BY (USED IN) DISCONTINUED
OPERATIONS 46,862 (338,434)
---------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (155,730) (66,393)
Increase in organization costs (2,003) -
---------- ---------

NET CASH USED IN INVESTING ACTIVITIES (157,733) (66,393)
---------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due from related party
and stockholder - 357,114
Proceeds from long-term debt - 12,345
Commitment to issue shares in connection
with borrowings - 34,000
Sale of common stock 178,735 -
---------- ---------

CASH PROVIDED BY FINANCING ACTIVITIES 178,735 403,459
---------- ---------

NET INCREASE IN CASH (30,987) (1,368)

CASH AT BEGINNING OF YEAR 32,121 33,489
---------- ---------

CASH AT END OF YEAR $ 1,134 $ 32,121
========== =========

</TABLE>

NON-CASH FINANCING AND INVESTING ACTIVITIES:
(1) During 1995, net debt and payables totalling $120,538 were assumed by a
former major stockholder.
This has been accounted for as a contribution to capital.
(2) During 1995, assets with a net value of $555,730 were distributed as a
dividend in connection with the spin-off of Whitestone Games, Inc.

See notes to consolidated financial statements

F-6

<PAGE>

WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995

1. BUSINESS

Whitestone Industries, Inc. (the "Company"), through its
wholly-owned subsidiary, Golden Bear Entertainment Corporation ("Golden
Bear"), is currently engaged in the development and marketing of
electronic, interactive, pre-school children's games and educational
products.

The Company's activities to date have consisted of developing
prototypes of the products and negotiating marketing outlets, primarily
with large, national toy store chains. Accordingly, the financial
statement presentation is that of a development stage enterprise. Upon
reaching a full operating stage, the Company envisages contracting out
the manufacture of its products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. BASIS OF PRESENTATION - The consolidated financial statements
include the accounts of the Company and its subsidiary. All
material intercompany transactions and balances have been
eliminated.

b. SECURITIES ISSUED FOR SERVICES - The Company accounts for
stock and options issued for services by reference to the fair
market value of the Company's stock on the date of stock
issuance or option grant. Compensation expense is recorded for
the fair market value of the stock issued, or in the case of
options, for the difference between the stock's fair market
value on the date of grant and the option exercise price.

In 1995 the Financial Accounting Standards Board issued
Statement No. 123, Accounting for Stock-based Compensation.
Statement No. 123 establishes financial accounting and
reporting standards for stock-based compensation plans such as
stock options and warrants. The statement generally suggests,
but does not require, employee stock-based compensation
transactions be accounted for based on the fair value of the
consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. An
enterprise may

F-7

<PAGE>

continue to follow the requirements of Accounting Principles
Board (APB) opinion No. 25, for employee based transactions,
which does not require compensation to be recorded if the
consideration to be received is at least equal to the fair
value at the measurement date. If an enterprise elects to
follow APB Opinion No. 25, it must disclose the pro-forma
effects on net income as if compensation were measured in
accordance with the suggestions of Statement No. 123. All
stock based transactions with new employees must be accounted
for at the fair value of the instrument. The Company has
determined that it will continue to follow APB Opinion No. 25,
for employee based transactions, therefore, adoption of this
pronouncement in 1996 is not expected to have a material
impact on the financial statements.

c. LOSS PER SHARE - Loss per share is based on the weighted
average number of common shares and dilutive securities
outstanding during the periods, after giving retroactive
effect to the recapitalization.

d. REORGANIZATION - On December 7, 1995, the Company, Whitestone
Group, Ltd., a British Virgin Islands limited partnership
organized under the laws of British Virgin Islands ("WGL"),
Golden Bear, a newly formed California corporation and Donald
Yu entered into a Stock Purchase and Exchange Agreement (the
"Agreement"), which was effective on December 7, 1995.
Pursuant to the Agreement, WGL contributed back to the Company
its rights and interest in 670,000 shares of its 870,000
shares of the Company's common stock. Prior to December 7,
1995, WGL owned approximately 64.2% of the outstanding capital
stock interest of the Company. Upon consummation of the
transaction, WGL owned approximately 5.9% of the outstanding
capital stock interest of the Company.

Pursuant to the Agreement, the Company acquired all of the
capital stock of GBEC in exchange for the distribution to Mr.
Yu, the sole stockholder of GBEC, of (i) 320,000 shares of
restricted common stock of the Company and (ii) 500,000 shares
of newly issued shares of Series A Convertible Preferred Stock
(the "Series A Preferred Stock") that were convertible into
24,000,000 shares of common stock of the Company. In January
1996, Mr. Yu converted 400,000 of his preferred shares into
19,200,000 common shares (subsequently reduced to 1,920,000
shares in the February 1996 reverse stock split). This
conversion is presented as if it had occurred at December 31,
1995. The remaining 100,000 shares of preferred stock are
non-dividend paying, have a liquidation preference of the
greater of $.01 per share or 48 times the liquidation payment
of the common stock and remain convertible into an aggregate
of 4,800,000 shares of common stock.

F-8

<PAGE>

e. STOCK SPLIT - In February 1996, the Company effected a one for
ten reverse stock split. All common share data in these
financial statements is retroactively restated to reflect this
transaction.

3. DISCONTINUED OPERATIONS

In October 1995 (effective July 1, 1995), the Company sold its
oil and gas business (including all related assets and liabilities) to
Magnum Petroleum, Inc. ("Magnum") in exchange for $300,000 in cash,
85,131 shares of Magnum common stock and 50,000 options to purchase
Magnum common stock at prices from $4.00 to $4.50. Accordingly, the
results of the oil and gas properties are shown separately as
"discontinued operations." The Company's 1994 financial information has
been reclassified to conform with the 1995 presentation. The Magnum
securities were valued at $300,000. Substantially all of this
consideration was subsequently transferred to WGL in settlement of
amounts owed to the Company's then president and majority stockholder
and for his assumption of all remaining liabilities of the Company
outstanding as of that date. The excess of the liabilities assumed or
settled over the assets distributed, which amount to $120,538, is
recorded as a contribution to capital.

Revenues of the discontinued business were $422,002 for 1995
and $690,506 for 1994.

4. INCOME TAXES

At December 31, 1995, the Company had net operating losses of
approximately $1.6 million expiring in the years 2007 through 2009. On
December 7, 1995, the Company experienced a greater than 50% change in
ownership. Section 382 of the Internal Revenue Code limits the
availability of pre-ownership change losses in such situations.
Approximately $1.4 million of such losses are limited to approximately
$250,000 of annual utilization in any one year.

At December 31, 1995, the Company has a deferred tax asset of
approximately $640,000 related to the net operating loss carryforwards.
The full amount of such asset has been reduced by a valuation
allowance.

F-9

<PAGE>

The (provision) benefit for income taxes differs from amounts
computed using the statutory federal rate as follows:

DECEMBER 31,
-------------------------------
1995 1994
--------- ----------
Computed (provision) benefit $134,000 $ 231,000

Permanent differences (68,000) -

Tax benefit not recognized (66,000) (231,000)
-------- ---------
$ - $ -
======== =========

5. STOCK OPTION PLANS

During 1993, the Company adopted a nonqualifying stock option
plan for its Board of Directors. Each board member received an option
to purchase 2,500 shares of the Company's common stock at $0.05. The
options are exercisable over a two year period, exercisable 25% of the
total options at six month intervals expiring September 1995. During
1995, the Company issued options to acquire 11,000 shares at $0.25 per
share, all of which were exercised during 1995.

During 1993, the Company issued a nonqualifying stock option
plan to one of its noteholders and stockholders to purchase 1,000
shares of the Company's common stock at $0.05 per share. The options
are exercisable over a two year period, exercisable 25% of the total
options at six month intervals expiring September 1995.

At December 31, 1995, no options were outstanding.

6. SPIN-OFF OF SUBSIDIARY

During 1995, the Company spun-off its wholly-owned subsidiary,
Whitestone Games, Inc. to its shareholders. This transaction is
accounted for as a dividend. The total amount recorded was $555,730.
This consists of net tangible assets totaling $155,730 and a $400,000
intangible asset related to a license to certain video games, which the
Company acquired in June 1995 in exchange for 125,000 shares of Company
common stock.

7. COMMITMENTS

A. License Agreements - The Company is committed under the two
perpetual license agreements connected to the development of its
products. The agreements call for royalty payments of from 4-6% of all
such product sales. The agreements are

F-10

<PAGE>

automatically renewable, subject to meeting annual minimum royalty
payments, which aggregate $60,000. The Company was required to pay
advance royalties aggregating $45,000 upon entering into these
agreements in December 1995. Such payments are recorded as prepaid
royalties, and will be expensed as the related product sales are made.

B. Financial Consulting Agreement - In December 1995, the
Company entered into an agreement with a financial consulting company
to provide investment banking services. The agreement is for a duration
of twelve months and calls for a fee of 650,000 shares of the Company's
common stock. Such shares were issued in February 1996.

8. STOCKHOLDERS' EQUITY

In January 1996, the Company amended its Certificate of
Incorporation to increase the number of authorized common shares from
20,000,000 to 30,000,000, and to increase the number of authorized
preferred shares from 1,000,000 to 3,000,000. This amendment also
changed the par value of the preferred stock from $.01 to $.001. These
changes are reflected in the December 31, 1995 financial statements.

Subsequent to the December 7, 1995 change in control of the
Company, the Company raised net proceeds of $99,985 through the sale of
200,000 shares of common stock.

F-11

<PAGE>

SIGNATURE

In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on this 15th day of May, 1996.

WHITESTONE INDUSTRIES, INC.

By: /s/ DONALD YU
------------------------------
Donald Yu
Chairman of the Board
and Chief Executive Officer

In accordance with the Exchange, this Report has been signed below by the
following person on behalf of the Registrant, and in the capacities and on the
date indicated.

SIGNATURE
Chairman of the Board,
President and Principal
/s/ DONALD YU Executive, Financial MAY 15, 1996
- --------------------- and Accounting Officer
Donald Yu

/s/ GEORGE P. ESHOO Director MAY 15, 1996
- ---------------------
George P. Eshoo

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM (A) FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,134
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,134
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,134
<CURRENT-LIABILITIES> 119,225
<BONDS> 0
0
100
<COMMON> 379
<OTHER-SE> (73,570)
<TOTAL-LIABILITY-AND-EQUITY> 46,134
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 10,140
<OTHER-EXPENSES> 162,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (173,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> (173,076)
<DISCONTINUED> (220,091)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (393,167)
<EPS-PRIMARY> (0.32)
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</TABLE>