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, 1996
Commission File No. 33-20432-FW
WHITESTONE INDUSTRIES, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 75-2228828
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
702 Marshall Street, Suite 500, Redwood, California 94063
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(Address of Principal Executive Offices) (Zip Code)
(415) 364-7030
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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: None
________________________________________________________________________________
(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 __ pages.
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
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within the past 60 days.
Common Stock, par value $.0001 per share ("Common Stock"), was the only
class of voting stock of the Registrant outstanding on April 1, 1996. Based
on the closing bid price of the Common Stock on the National Association of
Securities Dealers, Inc. OTC Bulletin Board as reported on May 31, 1997
($.10), the aggregate market value of the 2,984,320 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 $298,432. 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__
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.
5,924,320 shares of Common Stock, $.0001 par value, as of May 31, 1997.
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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 ("Golden Bear"), 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.
Proposed Transactions
As a result of the inability of the Company to implement its strategic
program for the development of its Golden Bear subsidiary, and the desire to
secure a possible operating base so that the Company's stockholders may receive
a satisfactory return on their investment, the Company and its President, Mr.
Donald Yu, entered into an Agreement on June 16, 1997 with Royal Capital, Inc.
("Royal") whereby Royal (i) acquired 100,000 shares of the Company's Preferred
Stock held by Mr. Yu; and (ii) acquired the voting proxy of 1,120,000 shares of
Common Stock. The consideration paid to Mr. Yu was $100,000. As a result, Royal
obtained a voting majority of the Company's capital stock.
On June 24, 1997, the Company, Royal and Proformix, Inc., a Delaware
company ("Proformix"), entered into a stock exchange agreement whereby the
Company will acquire all or substantially all of the outstanding shares of
capital stock of Proformix. In order to enter into the aforesaid agreement, the
Company's Board of Directors has authorized a 137:1 reverse split of its
outstanding shares of Common Stock (including shares of Common Stock underlying
the Company's outstanding Preferred Stock). The Company then intends to exchange
one share of its Common Stock for every 3.4676 shares Proformix common stock.
The aforesaid acquisition will not include Golden Bear. The Company's Board has
authorized a 5% stock dividend of the Common Stock of Golden Bear to the current
shareholders of the Company.
Proformix is a research based ergonomics company focusing on the
computerized workplace. Computer ergonomics optimized the design of technology
that allows persons to successfully interact with computers. The Company
believes that the acquisition of Proformix is in the best interests of the
Company's shareholders and should result in increased shareholder value.
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
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(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 to Mr. Myers in exchange for Mr. Myers' 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
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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.
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 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.
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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.
On December 7, 1995, the Company, WGL, Golden Bear, a newly organized
California corporation, and Mr. Donald 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.
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 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
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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.
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.
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, has developed various 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,
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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
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 was able to obtain significant purchase
orders from several major retailers, including Toys 'R Us. However, due to lack
of proper financing, the Company was not able to fulfill these orders and were
subsequently cancelled by the buyers.
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:
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.
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.
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
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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.
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.
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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.
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.
These licenses have since reverted back to the respective inventors due
to Company's inability to maintain the minimum royalty payment amounts.
Employees
The Company currently employs one full-time employee who is engaged in
both executive and administrative capacities. At present, none of the Company's
employees are receiving any salaries or benefits.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 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.
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The Company has temporarily moved its executive facilities to 702
Marshall Street, Suite 500, Redwood City, California 94063. These facilities
have been made available by Mr. George Eshoo, who is a Director and Secretary of
the Company, at no charge. The use of such facilities may be terminated on
notice by either Mr. Eshoo or the Company.
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. The Company has resolved this lawsuit through assignment to the
Plaintiff of certain indemnification rights received previously from Mr.
Saide[?].
The Company is a Plaintiff in a lawsuit filed in the U.S. District
Court for the Northern District of California, (Donald Yu and Whitestone
Industries, Inc. vs. Alex Vilnis, Baltic Trust Company et al; Case No.
C97-0484MHP) against Mr. Alex Vilnis, Vilnis Laurins, The Baltic Trust Company
and the International Exchange Co. Ltd. of Latvia. Both of these companies are
controlled by Mr. Alex Vilnis. The Company is alleging fraud and is also seeking
to obtain equitable relief involving the cancellation of 2,183,750 shares of its
Common Stock issued to International Exchange Co. Ltd. The Company had sought to
enter into a loan and stock sale financing agreement with Baltic Trust Co. and
subsequently ascertained that the transaction involved a scheme pursuant to
which the Company would not receive the negotiated consideration for the
issuance of its shares. As a result of the initiation of the lawsuit, the
Company has been successful in obtaining a temporary restraining order with
regard to any possible transfer of the shares at issue, and is in the process of
obtaining a default judgment against the above defendants. While the Company
anticipates that it will be difficult to obtain and enforce any damages awarded
to the Company, it believes that it would be in a position to successfully
preempt any effort by the Defendants to transfer or liquidate the shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
Not applicable.
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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
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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
June 30, 1996 2.50 1.75
September 30, 1996 .50 1.00
December 31, 1996 .50 1.00
March 31, 1997 .25 .50
May 31, 1997 .10 .25
- --------------
(1) No trading activities during these periods.
As of May 31, 1997, there were 1,062 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 May 30, 1997, was $0.10.
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.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
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.
General
The Company currently is in the business of developing a product line
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 January 1993 the Company was not engaged in significant
operations. From April 1993 to October 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. In October 1995 the Company
sold its oil and gas interests. From 1995 to the present, the Company, through
its wholly owned subsidiary Golden Bear, the Company has been developing
educational and innovative electronic games and toys. The Company has not
realized any sales revenues to date in such development.
Year ended December 31, 1996
compared to year ended December 31, 1995
No true comparison can be made between the years ended December 31,
1996 and December 31, 1996. The business in which the Company had been engaged
in the previous year was subsequently discontinued in 1995. The Company entered
into a new line of business commencing December 1995 and continues to be in the
development stage of operations. The Company did not realize any sales revenues
from its new activities in 1996. In 1996 the Company incurred expenses from both
the research and development of its current product line and through a failed
financing effort. 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 sales revenues as of December 31, 1996. At December 31, 1996,
the Company had net operating loss carryforwards of approximately $2.0 million
expiring in the years 2007 and 2009. At December 31, 1996, the Company's had a
deferred tax asset of approximately $806,000 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. The Company was required to pay
advance royalties aggregating $45,000 upon entering these agreements in 1995.
Such payments were initially recorded as prepaid royalties. However, they have
been written off in 1996 upon the
11
<PAGE>
Company's reevaluation of their future economic benefit.
Costs and Expenses
Costs and expenses related to research and development at December 31,
1996 were $252,820. This plus general and administrative expenses of $480,624,
mostly incurred in the Company's failed financing, comprised 70% of the
Company's total costs and expenses.
Liquidity and Capital Resources
As of December 31, 1996, the Company is in a development stage and has
a working capital deficit of approximately ($300,000). As a result of the
inability of the Company to implement its strategic program for the development
of its Golden Bear subsidiary, and the desire to secure a possible operating
base so that the Company's stockholders may receive a satisfactory return on
their investment, the Company and its President, Mr. Donald Yu, entered into an
Agreement on June 16, 1997 with Royal Capital, Inc. ("Royal") whereby Royal (i)
acquired 100,000 shares of the Company's Preferred Stock held by Mr. Yu; and
(ii) acquired the voting proxy of 1,120,000 shares of Common Stock. The
consideration paid to Mr. Yu was $100,000. As a result, Royal obtained a voting
majority of the Company's capital stock.
On June 24, 1997, the Company, Royal and Proformix, Inc., a Delaware
company ("Proformix"), entered into a stock exchange agreement whereby the
Company will acquire all or substantially all of the outstanding shares of
capital stock of Proformix. In order to enter into the aforesaid agreement, the
Company's Board of Directors has authorized a 137:1 reverse split of its
outstanding shares of Common Stock (including shares of Common Stock underlying
the Company's outstanding Preferred Stock). The Company then intends to exchange
one share of its Common Stock for every 3.4676 shares Proformix common stock.
The aforesaid acquisition will not include Golden Bear. The Company's Board has
authorized a 5% stock dividend of the Common Stock of Golden Bear to the current
shareholders of the Company.
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.
12
<PAGE>
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 59 President, Chief Executive
Officer, Chief Financial Officer, Director
George P. Eshoo 59 Director and Secretary
The officers are elected annually by the Board of Directors and serve
at the discretion of the Board of Directors.
DONALD YU has served as the President, CEO and a Director of the
Company since December 7, 1995. From August, 1995 to December, 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, 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.
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.
ITEM 10. EXECUTIVE COMPENSATION
Compensation
The Company did not compensate any of its officers and directors during
the year ended December 31, 1996.
13
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 9, 1997, the record and
beneficial ownership of Common Stock of the Company by each officer and
director, all officers and directors as a group, and each person known to the
Company to own beneficially or of record five percent or more of the outstanding
shares of the Company:
Shares
Officers, Directors and Beneficially Percent of Shares
Principal Stockholders Owned Beneficially Owned (1)
Donald R. Yu 4,800,000(2) 44.8%
George Eshoo 85,000(3) 1.4%
Marianne Rossi 20,000 **
International Exchange Ltd. 2,183,750(4) 36.9%
c/o Baltic Trust Co., Ltd.
Matisa Iela 65-4
LV-10009 Riga, Latvia
Jean Yu 1,120,000 18.9%
All directors, 4,905,000 45.7%
executive officers
as a group (3 persons)
** Less than 1%
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire within 60 days of June 9, 1997. For purposes of
computing the percentage of outstanding shares of Common Stock held by each
person or group of persons named above, any security which such person or
persons has or have the right to acquire within such date is deemed to be
outstanding but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated
in the footnotes to this table and pursuant to applicable community
property laws, the Company believes based on information supplied by such
persons, that the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock which they
beneficially own.
(2) Represents shares of Common Stock underlying 100,000 shares of the
Company's Series A Convertible Preferred Stock.
(3) Includes 50,000 shares beneficially owned by Eshoo Corp., of which Mr.
Eshoo is President.
14
<PAGE>
(4) These shares of Common Stock are currently in dispute as to ownership and
the transfer of these shares has been enjoined by the United States
District Court for the Northern District of California pending resolution.
The Company has challenged the record owner's entitlement to the shares in
question.
15
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, George P. Eshoo, a director of the Company, received
35,000 shares of Common Stock in consideration for legal services performed on
behalf of the Company. In addition, in August 1996, Mr. Eshoo received 50,000
shares of Common Stock of the Company for services as an officer and director of
the Company.
On December 26, 1995, Spiro Pappas, Trustee, received 200,000 shares of
Common Stock from the Company in consideration for $99,985. In August 1996, Mr.
Pappas received 200,000 shares in exchange for various consulting and strategic
planning services provided to the Company.
On December 7, 1995, the Company, WGL, Golden Bear, a newly organized
California corporation, 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.
On January 22, 19Mr. Yu converted 400,000 shares of the Series A
Preferred Stock into 1,920,000 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.
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 which became effective on February 2, 1996.
16
<PAGE>
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 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
The Company filed Form 8-K reports dated February 9, 1996 (Items 5 and
7).
17
<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 22nd day of July, 1997.
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.
SIGNATURES
Chairman of the Board,
President, Principal
/s/Donald Yu Executive, and Principal Financial
- ----------------------- and Accounting Officer July 22, 1997
Donald Yu
/s/George P. Eshoo Director July 22, 1997
- -----------------------
George P. Eshoo
18
<PAGE>
WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Page Number
-----------
Independent Auditors' Report F-2
Consolidated Balance Sheet at December 31, 1996 F-3
Consolidated Statements of Operations F-4
for the period cumulative December 7, 1995 (inception)
to December 31, 1996, and years ended December 31, 1996 and 1995
Consolidated Statement of Changes in Stockholders' Equity (Deficit) F-5
for the years ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows F-6
for the years ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements F-7-13
F-1
<PAGE>
[LETTERHEAD OF FELDMAN RADIN & CO., P.C.]
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, 1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the period cumulative December
7, 1995 (inception) to December 31, 1996, and two years ended December 31, 1996
and 1995. 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, 1996, and the
results of its operations and cash flows for the period cumulative December 7,
1995 (inception) to December 31, 1996, and two years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
/S/ Feldman Radin & Co., P.C.
Certified Public Accountants
July 8, 1997
New York, N.Y.
F-2
<PAGE>
WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
PATENTS $ 13,704
-----------
$ 13,704
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 84,145
Bank debt 103,254
Stockholder's loan 126,425
-----------
TOTAL CURRENT LIABILITIES 313,824
-----------
STOCKHOLDERS' EQUITY:
Preferred stock, $ .01 par value; 3,000,000 shares;
authorized, 100,000 shares issued and outstanding 100
Common stock, $ .0001 par value; 30,000,000 shares
authorized, 5,899,643 shares issued, 5,229,643
shares outstanding and 670,000 shares in treasury 590
Additional paid-in capital 2,242,926
Accumulated deficit (2,543,736)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (300,120)
-----------
$ 13,704
===========
See notes to consolidated financial statements
F-3
<PAGE>
WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
December 7,
1995
(Inception) to Year ended December 31,
December 31, --------------------------
1996 1996 1995
----------------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Sales $ -- $ -- $ --
Other 107,545 107,545 --
----------- ----------- -----------
Total revenues 107,545 107,545 --
COSTS AND EXPENSES:
General and administrative 480,624 419,391 61,233
Direct expenses 10,140 -- 10,140
Payroll 122,750 122,750 --
Research and development 252,820 151,117 101,703
Amortization of unearned consulting fees 162,500 162,500 --
----------- ----------- -----------
Total costs and expenses 1,028,835 855,759 173,076
LOSS FROM CONTINUING OPERATIONS (921,290) (748,214) (173,076)
LOSS FROM DISCONTINUED OPERATIONS -- -- (220,091)
----------- ----------- -----------
NET LOSS $ (921,290) $ (748,214) $ (393,167)
=========== =========== ===========
LOSS PER COMMON SHARE:
Continuing operations $ (0.23) $ (0.18) $ (0.14)
Discontinued operations -- -- (0.18)
----------- ----------- -----------
NET LOSS PER COMMON SHARE: $ (0.23) $ (0.18) $ (0.32)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,010,604 4,186,101 1,242,963
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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, 1994 -- $-- 1,173,443 $117 $ 862,141 $ (846,625) $ 15,633
Net loss -- -- -- -- -- (393,167) (393,167)
Proceeds from sale 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)
Net loss -- -- -- -- -- (748,214) (748,214)
Proceeds from sale of shares -- -- 325,000 33 187,452 -- 187,485
Shares subject of litigation -- -- 700,000 70 (70) -- --
Shares issued for services -- -- 1,080,000 108 333,592 -- 333,700
-------- ---- --------- --- --------- ----------- ---------
BALANCE - DECEMBER 31, 1996 100,000 $100 5,899,643 $590 $2,242,926 $(2,543,736) $(300,120)
======== ==== ========= ==== ========== =========== =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
WHITESTONE INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
December 7,
1995
(Inception) Year Ended December 31,
to December 31, -------------------------
1996 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Loss from continuing operations $(921,290) $(748,214 $ (173,076)
Amortization of unearned consulting fees 162,500 162,500 --
Common stock issued for services 171,200 171,200 --
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses -- 45,000 (45,000)
(Increase) in patents (13,704) (13,704) --
Increase (decrease) in accounts payable 84,145 (35,080) 119,225
-------- -------- --------
NET CASH (USED IN) CONTINUING OPERATIONS (517,149) (418,298) (98,851)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations -- -- (220,091)
Shares issued for services -- -- 160,900
Changes in assets and liabilities of
discontinued business -- -- 106,053
-------- -------- --------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- -- 46,862
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- -- (155,730)
Increase in organization costs -- -- (2,003)
-------- -------- --------
NET CASH (USED IN) INVESTING ACTIVITIES -- -- (157,733)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 287,470 187,485 178,735
Stockholder's loan 126,424 126,424 --
Bank debt 103,255 103,255 --
-------- -------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 517,149 417,164 178,735
-------- -------- --------
NET (DECREASE) IN CASH -- (1,134) (30,987)
CASH AT BEGINNING OF PERIOD -- 1,134 32,121
-------- -------- --------
CASH AT END OF PERIOD $ -- $ -- $ 1,134
======== ======== ========
</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, 1996
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.
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-based Compensation". 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. As permitted by the
statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", which does not
require
F-7
<PAGE>
compensation to be recorded if the consideration to be received
is at least equal to the fair value at the measurement date. The
adoption of SFAS No. 123 does not have a material impact on the
financial statements. The Company has not made the required
proforma disclosures in accordance with SFAS No. 123 because
there were no stock options or warrants outstanding at December
31, 1996 and 1995.
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 nondividend 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.
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.
f. Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual
F-8
<PAGE>
results could differ from those estimates.
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.
4. INCOME TAXES
At December 31, 1996, the Company had net operating loss
carryforwards of approximately $2.0 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, 1996, the Company has a deferred tax asset of
approximately $806,000 related to the net operating loss carryforwards.
The full amount of such asset has been reduced by a valuation
allowance.
The (provision) benefit for income taxes differs from amounts
computed using the statutory federal rate as follows:
December 31,
----------------------------
1996 1995
--------- ----------
Computed (provision) benefit $ 254,000 $ 134,000
Permanent differences (113,000) (68,000)
Tax benefit not recognized (141,000) (66,000)
--------- ----------
$ -- $ --
========= ==========
F-9
<PAGE>
5. BANK DEBT
In April 1996, the Company obtained a $50,000 overdraft credit
line from its commercial bank with an interest rate that is 5% above
the bank's prime rate (13.25% at December 31, 1996). In December 1996,
the Company obtained a $67,254 note from the same bank with an interest
rate that is 3% above the bank's prime rate (11.25% at December 31,
1996). This note has not been paid since its due date of January 21,
1997. The Company had aggregate outstanding borrowing of $103,254 from
the bank as of December 31, 1996.
6. EQUIPMENT
In March 1996, the Company had specialized tooling developed
to be used in its manufacturing process. The cost of this tooling was
$270,000, none of the cost of which was paid. During the quarter ended
September 30, 1996, the Company returned the tooling back to the
manufacturer after it decided not to commence manufacturing.
Consequently, the Company reduced its accounts payable by $270,000 and
reversed the recording of the equipment.
7. RESEARCH AND DEVELOPMENT EXPENSES
In December 1995, the Company contracted with several
sub-contract manufacturers in Hong Kong and Taiwan to assist in the
research and development activities of its product line of electronic
toys. Since then, the Company accrued most of the engineering efforts,
including the costs for design, graphics, software, and prototype
samples. In November 1996, when it was evident that the necessary
financing to begin production would not be received, the Company
renegotiated the amounts due to these vendors. Payables in the amount
of $107,545 were settled in exchange for the transfer of rights to the
products being developed as well as the assignment of some of the
Company's designs and software programs. Such transfer has been
recorded as other income.
8. 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
F-10
<PAGE>
total options at six month intervals expiring September 1995.
At December 31, 1996 and 1995, no options were outstanding.
9. 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.
10. 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 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
were initially recorded as prepaid royalties. However, they have been
written off in 1996 upon the Company's reevaluation of their future
economic benefit.
B. Financial Consulting Agreement - In December 1995, the
Company entered into a twelve month financial consulting agreement
which terminates in December 1996. As consideration for the services to
be provided under this agreement, the Company issued 650,000 shares of
common stock in February 1996. Such shares were valued at an aggregate
of $162,500, which amount was amortized to expense over the term of the
agreement.
11. 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.
In February 1996, the Company sold 200,000 shares of common
stock at $.50 per share. In March 1996, the Company sold 125,000 shares
at $.74 per share. Aggregate net proceeds from stock sales, after
expenses, were $187,485.
In May 1996, the Company issued 130,000 shares of common stock
to various individuals for consulting services. These shares have been
valued at $.74 per share, resulting in a non-cash expense of
approximately $96,000.
F-11
<PAGE>
In October 1996, the Company issued 700,000 shares of its
common stock under a subscription agreement for an aggregate sales
price of $500,000. The Company is currently suing to regain the shares
upon the non-payment of amounts due under the subscription agreement.
In November 1996, the Company issued 300,000 shares of common
stock to various individuals for consulting and legal services. These
shares have been valued at $.25 per share, resulting in a non-cash
expense of approximately $75,000.
12. LITIGATION
A. In October 1996, the Company entered into an agreement with
a Latvian company to obtain certain financing. The Latvian company
agreed to buy 700,000 shares of Company's common stock for $500,000 and
to additionally provide loan financing of $400,000, to be secured by
1,483,750 shares of stock owned by certain shareholders. Subsequent to
the issue and transfer of the 2,183,750 shares, the Company learned
that the agreed to funds were not provided.
In February 1997, the Company filed lawsuit as to ownership of
the 2,183,750 shares transferred. Since then, these shares have been
enjoined by the United States District Court for the Northern District
of California pending resolution. The Company has challenged the record
owner's entitlement to the shares in question.
B. In June 1997, the Company was named, among other parties,
in a lawsuit by a shareholder. The Company believes it has
jurisdictional defenses in this matter, and does not believe that any
loss would be material.
13. SUBSEQUENT EVENTS
On June 16, 1997, Royal Capital, Inc.("Royal") entered into an
agreement with the Company and its president, Donald R. Yu, whereby
Royal (i) acquired 100,000 shares of the Company's preferred stock held
by Mr. Yu; and (ii) acquired the voting proxy of 1,120,000 shares of
common stock. The consideration paid to Mr. Yu was $100,000. As a
result, Royal obtained a voting majority of the Company's capital
stock.
On June 24, 1997, the Company, Royal and Proformix, Inc., a
Delaware company ("Proformix") entered into an acquisition agreement
whereby the Company will acquire all or substantially all of the
outstanding shares of capital stock of Proformix, Inc. In order to
enter into the aforesaid agreement, the Company's Board of Directors
authorized a 137:1 reverse split of its outstanding shares of Common
Stock. The Company then intends to exchange one share of its Common
Stock with 3.4676 shares Proformix common stock. The aforesaid
acquisition will not include Golden Bear, the Company's wholly owned
F-12
<PAGE>
subsidiary. The Company's Board has authorized a 5% stock dividend
consisting of the Common Stock of Golden Bear to the current
shareholders of the Company.
F-13
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