-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PPfAcpL7QcweOgP7gCHd5KZJu8azRSzVIEGDxdCSBHLBpKwqIGXALBFmWcrjYAnL 1sg2S92wkVBytkb4XL/XTg== 0001046424-98-000057.txt : 19980612 0001046424-98-000057.hdr.sgml : 19980612 ACCESSION NUMBER: 0001046424-98-000057 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980611 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHITE CLOUD EXPLORATION INC CENTRAL INDEX KEY: 0000736314 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 840959153 STATE OF INCORPORATION: UT FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-11424 FILM NUMBER: 98646659 BUSINESS ADDRESS: STREET 1: 116 STANYAN CITY: SAN FRANCISCO STATE: CA ZIP: 94118 BUSINESS PHONE: 4153873135 MAIL ADDRESS: STREET 1: 116 STANYAN CITY: SAN FRANCISCO STATE: CA ZIP: 94118 10KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the transitional year ended: December 31, 1997 Commission File number: 0-114244 WHITE CLOUD EXPLORATION, INC. (Exact name of registrant as specified in its charter) Utah 84-0959153 State or Other Jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 116 Stanyan, San Francisco, California 94118 (Address of principal Executive Offices Zip Code) Registrant's telephone number, including area code: 415-387-3135 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value per Share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. State issuer's revenues for its most recent fiscal year. $826,446 Transitional Small Business Disclosure Format: __X___ Yes _______ No As of December 31, 1997, 15,030,245 shares of common stock were outstanding. The aggregate market value of the Stock held by nonaffiliates was none at December 31, 1997. Documents incorporated by reference: None Part I Item 1. Business. General - Organization and Reorganization Since its inception in July of 1983, White Cloud Exploration, Inc. ("White Cloud" or the Company") has been in the developmental stage, while it has attempted to identify suitable mergers, asset or acquisitions of operations. White Cloud, in March of 1991, entered into a Letter of Intent whereby White Cloud was to acquire 100% of the Stock of American Technology, Inc. ("ATI") in exchange for stock of White Cloud. The merger was cancelled due to accounting difficulties with American Technology, Inc. The Company has had no further activities since 1991, and has been inactive up until 1997. In April 1997, William C. Meier through his beneficial ownership of WCM Investments, Inc., a Texas corporation ("WCM Investments"), obtained control of Registrant by purchasing on April 17, 1997, 5,010,750 (pre-reverse stock split) shares of Registrant's Common Stock. On May 14, 1997, WCM Investments purchased from Registrant 7,500,000 (pre-reverse stock split) newly-issued shares of Registrant's Common Stock for $7,500 in cash. The 12,510,750 shares were automatically converted into 72,213 shares pursuant to a 173.25 to 1 reverse stock split of Registrant's Common Stock on June 29, 1997, and represented 72.2% of the shares of Common Stock of Registrant outstanding at such time. Acquisition of Assets. The Watchout! Agreement was entered into effective May 30, 1997, and the Watchout! Acquisition consummated pursuant thereto effective as of December 29, 1997. Pursuant to the Watchout! Agreement, the shareholders of Watchout! contributed to Registrant 251,354 shares of Watchout's common stock (100%) for an aggregate consideration of 11,296,300 shares of Registrant's common stock. The number of shares of Registrant's common stock issued pursuant to the Watchout! Agreement was determined by reference to the proportionate post-Acquisition equity ownership of Registrant negotiated by the pre-Acquisition Watchout! shareholders, Goldpoint members and Registrant shareholders. Prior to the closing of the Watchout! Acquisition, Watchout! was controlled by Robert Galoob and David Galoob. As a result of the Watchout! Acquisition, Registrant owns 100% of the issued and outstanding shares ofWatchout!. Watchout! designs, develops and intends to market worldwide watches and other consumer goods utilizing proprietary colored liquid crystal display technology. Pursuant to an LLC Interest and Asset Contribution Agreement (the "Goldpoint Agreement" and together with the Watchout! Agreement, the "Agreements"), the members (i.e., equity holders) of Goldpoint International, LLC, a Delaware limited liability company ("Goldpoint"), effective as of December 29, 1997, contemporaneously with the closing of the Watchout! Acquisition, received from Registrant 2,140,000 newly-issued shares of Registrant's common stock in exchange for 100% of the membership interests in Goldpoint (the "Goldpoint Acquisition".) The 2,140,000 shares represent approximately 14% of the outstanding shares of common stock of Registrant on a fully-diluted basis. Prior to the closing of the Goldpoint Acquisition, Goldpoint was controlled by Mr. Stephen J. Petre. It was agreed that after the required Section 14f Notice to Shareholders, Directors-Messrs. Signer and Mahanti resigned and the appointment of Messrs. Robert Galoob and David Galoob became effective. The Notice was effective on October 17, 1997. Effective as of December 29, 1997, pursuant to the Agreements, and contemporaneously with the consummation of the Acquisitions, Robert Galoob and David Galoob accepted appointments as directors of Registrant from the prior directors of Registrant, each of whom resigned as directors. The number of shares of Registrant's common stock issued pursuant to the Goldpoint Agreement was determined by reference to the proportionate post- Acquisition equity ownership of Registrant negotiated by the pre-Acquisition Watchout! shareholders, Goldpoint members and Registrant shareholders. As a result of the Goldpoint Acquisition, Registrant owns 100% of the outstanding membership interests in Goldpoint LLC. Goldpoint designs and markets fine writing instruments. Pursuant to the Agreements, in the event that: (i) Watchout! or Goldpoint did not provide the financial information necessary for Registrant to comply with its obligations to provide such information in connection with Registrant's filing obligations under the Securities Exchange Act of 1934, as amended, or (ii) the closing of the Private Placement (as defined below) does not occur, the holders of the majority of Registrant's common stock outstanding prior to the Acquisition, have the right but not the obligation to rescind the Watchout! Acquisition and/or the Goldpoint Acquisition, as the case may be. The descriptions contained herein of the Agreements and the Acquisitions are qualified in their entirety by reference to the Watchout! Agreement, dated as of May 30, 1997, by and among Registrant, Watchout! and the shareholders of Watchout!, and the Goldpoint Agreement, dated as of May 30, 1997, by and among Registrant, Goldpoint and the members of Goldpoint, filed as Exhibits 7.2 and 7.1, respectively, to Registrant's Form 8-K dated September 24, 1997. Concurrent with the closing of the Watchout! and Goldpoint acquisitions and funding of the loans, referred to hereinabove, the Company has adopted a new business plan. The company owns an exclusive worldwide license in perpetuity for watches, clocks jewelry and personal adornment items, with Boit, Inc. Boit Inc. is the developer and patent holder of a new technology/consumer product which is the basis for the WATCHOUT! product line. Based on the original patent application and now the issuance of the patent, the company has filed for protection in all the major European markets as well as Japan, Taiwan, South Korea, Hong Kong and China. The Product WATCHOUT! is the trade name for a product based on a proprietary, patented technology that transforms the plain blackon-gray liquid crystal displays found on all of today's digital watches into a programmable, moving array of colors, patterns and animated vignettes. Virtually any color combination and pattern can be created, doing for the watch what multimedia software did for the computer. While primarily aimed at the children's watch industry, the technology can also be applied to clocks and personal accessories, most notably, jewelry. Management believes that the jewelry market may be as large as the watch market. WATCHOUT! is an exclusive entry into the international watch market, estimated at $15 to $20 billion per year. Within this market, fashion watches are the fastest growing, most visible segment, accounting for an estimated 20% of total industry sales. Launched by Swatch in 1983, the category has revolutionized the way consumers think of watches and how they buy them. Character-licensed watches are created using the image, likeness or logos of popular characters from movies, television, cartoons, books, sports and well known consumers brands--and include the classic Mickey Mouse watch, still selling after 20 years on the market. Character-licensed watches constitute another sizable component of the industry and usually sell through toy outlets. At the heart of WATCHOUT! is a patented system combining a color changing LCD with a quartz analog movement--driven by an off-the-shelf programmable microprocessor. The patent application was filed in spring of 1995, and Boit, Inc. (predecessor to WATCHOUT!) received a U.S. patent in June 1997. Eighty to ninety percent of all watches in the fashion watch category are analog watches. Management believes that this patent, combining a color changing LCD with an analog movement, should enable the company to have a competitive edge for at least two years. This period will enable the company to firmly establish the brand in the marketplace. The technology is both inexpensive and easy to manufacture, comparable to that of standard analog watch movements. This ease-of-manufacturing will allow the company to market a cost competitive product, while facilitating continuity of the product lines and timely delivery. The fashion watch category is generally priced in the $40 to $150 range at retail. Management will price WATCHOUT! products in the midpoint of the category, from $60-$80. Character-licensed watches distributed through toy outlets will be priced less expensively at under $20. WATCHOUT! fashion, character-licensed, and advertising specialty watches will be price- competitive, while adding a graphical element never seen on a watch before. Placement Agreement On February 5, 1997, Watchout! and Sands Brothers & Co., Ltd. ("Sands Brothers") entered into a Selling Agreement pursuant to which Sands Brothers will act as placement agent in a private placement of $6,000,000 (at least $3,000,000 of which shall provide immediately available funds to the issuer at the closing of the private placement) of equity securities to be issued by an entity with shares registered under the Securities Exchange Act of 1934, as amended (the "Private Placement"). The Agreements were entered into and the Acquisitions consummated to facilitate the Private Placement. To date (June 10, 1998) the Placement has not been funded and there is no commitment to fund. Bridge Financing Pursuant to agreements between Sands Brothers and Watchout!, Sands Brothers agreed to arrange bridge financing for Watchout! to use as working capital during the period between execution of the Agreements and consummation of the Private Placement. Pursuant to such agreements, Sands Brothers arranged the loans described below. On September 3, 1997, Registrant issued Promissory Notes in the amounts of $50,000 to Raymond J. Larkin and $150,000 to Watchout!-Goldpoint Partners, L.P., an entity which is not otherwise an affiliate of Registrant, Watchout! or Goldpoint. The loaned funds were then made available to Watchout! and Goldpoint as working capital to fund their respective business operations until the Acquisitions and Private Placement are consummated. In connection with such loans, Mr. Larkin and Watchout!-Goldpoint Partners, L.P., Sands Brothers and Mark Hollo were issued Warrants to purchase 75,000, 225,000, 25,000 and 25,000 shares of Registrant's common stock, respectively, at $.01 per share. On September 19, 1997, Watchout! issued Promissory Notes in the amounts of $166,000 and $84,000 to John Bader and Wayne E. Williams, respectively. The loaned funds were then made available to Watchout! and Goldpoint to be used as working capital for their respective business operations. Robert Galoob and David Galoob have jointly and severally guaranteed $100,000 of the foregoing loans. Each of the foregoing Notes are secured by an Assignment of Contract Rights and related Security Agreement. Upon consummation of the Private Placement, Messrs. Bader and Williams are entitled to be issued Warrants to purchase 166,000 and 84,000 shares of Registrant's common stock, respectively, at $.10 per share. Employees and Consultants The Company at fiscal year end had no paid employees, and its President, Robert Galoob, Vice President Stephen Petre, and Secretary, David Galoob serve on an as needed basis. These officers intend to devote only such time as necessary to the business affairs of the Company. Presently, none of the officers receive salaries, however, they are reimbursed for their expenses incurred in their services as officers. There is no provision for any additional bonuses or benefits. The Company anticipates that in the near future it may enter into employment agreements with its officers. Although Directors do not receive compensation for their services they may be reimbursed for expenses incurred in attending Board meetings. Item 2. Properties. The Company maintains its corporate office at 116 Stanyan, San Francisco, California 94118 under an informal arrangement with the Company's President. This space is deemed adequate for the immediate future. Item 3. Legal Proceedings. The Company is not a party to any pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders within the year covered by this report, through solicitation of proxies or otherwise. A Notice pursuant to Section 14f was filed on October 6, 1997, and sent to shareholders within 3 days thereafter. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The outstanding registered securities of White Cloud Exploration, Inc. are not now presently traded on any exchange. Common Stock Common Stock 1997 Bid High Bid Low ____________________________________________________ 1st Quarter no quote no quote 2nd Quarter no quote no quote 3rd Quarter no quote no quote 4th Quarter no quote no quote Common Stock Common Stock 1996 and 1995 Bid High Bid Low ____________________________________________________ 1st Quarter no quote no quote 2nd Quarter no quote no quote 3rd Quarter no quote no quote 4th Quarter no quote no quote The Company anticipates its shares will trade over the counter by market makers who have not as yet quoted a specific bid or ask price. Quotations, if made, represent only prices between dealers and do not include retail markups, markdowns or commissions and accordingly, may not represent actual transactions. The Company estimates that as of December 31, 1997, there are approximately 219 record stockholders of the Company's shares. No dividends have been declared or paid by the Company and presently intends to retain all future earnings, if any, to finance the expansion and development of its business. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. Change in Accounting Year The Company acquired new assets and business operations of Goldpoint and Watchout! in the last half of 1997 and in order to match fiscal years with these operations the Registrant changed its year end to December 31, 1997, resulting in transitional accounting for a six month period ended December 31, 1997. All discussions hereinafter are based upon calendar year accounting for the combined operations. During fiscal year 1997, the Company continued to be a development stage entity. Its total revenues were $826,446 and it had $59,147 cash capital at year end. Financial Condition and Changes in Financial Condition All revenue producing business operations were conducted by the entities acquired in the year ended December 31, 1997. No revenues were generated in the fiscal year 1997 or 1996 directly by White Cloud Exploration, Inc., however, with the acquisition of the assets of Watchout! and Goldpoint and the operations thereof, the recast of the combined business entities reflects the combined financial conditions of the now acquired businesses of Watchout! and Goldpoint. The Company at year end December 31, 1997, had $59,147 in cash compared with $13,961 in cash at December 31, 1996. The Company at fiscal year end needed cash infusions from shareholders to provide capital, or loans from any sources, for advancement of its business ventures. Liquidity and Capital Assets. The Company's primary source of liquidity since inception has been from funds raised during its initial capitalization and from shareholder advances and loans. The company had $59,147 cash at 1997 year end, and $13,961 cash at previous year end and current assets of $305,276 at December 31, 1997 and $14,975 at December 31, 1996. Total liabilities for 1997 (which were all due) were $1,413,737 for a deficit of ($1,108,461) in the ratio of liabilities to current assets. The company is critically deficient in capital to market or produce products and needs an estimated $1,000,000 to even commence effective operations. No source of such funds has been identified and it would have to occur through debt or stock sales. Results of Operations for twelve month period ended December 31, 1997 Compared to 1996 In the year ended December 31, 1997, the Company had revenues of $826,446 and incurred operating expenses totaling $1,072,261. In calendar year 1996 the combined entities' revenues were $386,034. As of December 31, 1997, the Company had no material commitments for capital expenditures. In the year ended December 31, 1997, the Company incurred $201,328 in general and administrative expenses compared with $96,669 in 1996. In the fiscal year ended December 31, 1997, the Company incurred an operating loss of ($731,582) compared to a loss of ($766,217) in 1996. Net loss for 1997 was ($968,502) or ($.06) per share compared to a net loss for 1996 of ($895,058) or ($.08) on a fully diluted basis. Results of Operations - Prior Years The Company's combined operations when combined through December 31, 1995, did not generate revenues, although in 1995, $89,966 in start up expenses and research were incurred resulting in an operating loss of $89,966 in 1995. Registrant, prior to acquiring the Watchout! and Goldpoint businesses, had no revenues or operations since 1991. Reference is made to the 10-KSB filed for the period ended June 30, 1997. Item 7. Financial Statements and Supplemental Data. Attached hereto and filed as part of this Form 10-KSB are the financial statements required by Regulation SB. Please refer to pages F-1 through F-8. Item 8. Changes in and Disagreements on Accounting and Financial Disclosure. In connection with audits of two most recent fiscal years and any interim period preceding resignation, no disagreements exist with any former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of the former accountant would have caused him to make reference in connection with his report to the subject matter of the disagreement(s). The principal accountant's report on the financial statements for any of the past two years contained no adverse opinion or a disclaimer of opinion nor was qualified as to uncertainty, audit scope, or accounting principles except for the "going concern" qualification. For Fiscal Year 1992 and thereafter the Company engaged as its Auditor Michael B. Johnson & Co. There were no disagreements as to any matter of accounting practice or principles, financial statement disclosure or auditing scope or procedure, with any prior accountant. Part III Item 9. Directors and Executive Officers of the Registrant and Compliance with Section 16(a). Identification of Directors and Executive Officers of the Company The directors and executive officers of the Company, their age, positions held in the Company, and duration as such, were as follows as of end of the fiscal year: Name Age Position Since Robert Galoob 45 President/Director 12/97 David Galoob 48 Secretary/Treasurer/Director 12/97 Stephen Petre 42 Vice President 12/97 Business Experience The following is a brief account of the business experience during the past five years of the former officer/directors at the end of the period, indicting their principal occupation and employment during that period, and the name and principal business of the organization in which such occupation and employment were carried out. Robert Galoob obtained a B.S. from the University of California at Berkeley in 1975. He was President and Director of Robert Galoob, Inc. from 1989 to 1995. From 1995 to present he has been President and a Director of Galoob Enterprises, Inc. now known as Watchout!, Inc. David Galoob, attended college at City College of San Francisco, University of Oklahoma and University of Southern California. From 1970 to 1991 he was employed Lewis Galoob Toys, Inc. in various management positions including President, CEO, and Chairman of the Board. He retired in 1991. From 1991 to 1996, we was co-president and co-chairman of the board of the original San Francisco toymakers. Stephen J. Petre, Goldpoint founder, President and CEO since 1996. Mr. Petre has 19 years of business experience including extensive major account, international sales and marketing management, in addition to international sourcing. Under Mr. Petre's direct management, including product development and packaging innovation, Goldpoint carved out an important niche in the super store market, dominated by internationally known fine writing brand names. Mr. Petre will be the executive vice president, with responsibility for both WATCHOUT! and Goldpoint brands. Mr. Petre attended the University of Denver, and received a BSBA 1978. Directors of the Company hold office until the next annual meeting of the shareholders and until their successors have been elected and qualified. Officers of the Company are elected by the Board of Directors at the first meeting after each annual meeting of the Company shareholders and hold office until their death, or until they shall resign or have been removed from office. Section 16(a) Reporting Delinquencies Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of equity securities of the Company with the Securities and Exchange Commission. Officers, directors and greater-than 10% shareholders are required by the Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) filings. The following persons did not file reports under Section 16(a) during the most recent fiscal year: Name Number of late Known failures reports to file forms Robert Galoob 1 Annual Form 5 David Galoob 1 Annual Form 5 Stephen Petre 1 Annual Form 5 Item 10. Executive Compensation. The Company accrued a total of $39,250 compensation to the executive officers as a group for services contributed to the Company in all capacities during the period ended December 31, 1997. No one executive officer received, or has accrued for his benefit, in excess of $60,000 for the year. No cash bonuses were or are to be paid to such persons. The Company does not have any employee incentive stock option plans. There are no plans pursuant to which cash or non- cash compensation was paid or distributed during the last fiscal year, or is proposed to be paid or distributed in the future, to the executive officers of the Company. No other compensation not described above was paid or distributed during the last fiscal year to the executive officers of the Company. There are no compensatory plans or arrangements, with respect to any executive office of the Company, which result or will result from the resignation, retirement or any other termination of such individual's employment with the Company or from a change in control of the Company or a change in the individual's responsibilities following a change in control. SUMMARY COMPENSATION TABLE OF EXECUTIVES Name and Fiscal Salary Bonus Other Annual Restriced Securities Principal Year ($) ($) Compensation Stock Underlying Position ($) Awards Options/SARs ($) (#) Robert Galoob 1995 0 0 0 0 0 President 1996 0 0 0 0 0 1997 0* 0 0 0 0 David Galoob 1995 0 0 0 0 0 Secretary/ 1996 0 0 0 0 0 Treasurer 1997 0* 0 0 0 0 Stephen Petre, 1995 0 0 0 0 0 Vice President 1996 0 0 0 0 0 1997 0* 0 0 0 0 *accrued compensation of $39,250 total Option/SAR Grants Table (None) Aggregated Option/SAR Exercises in Last Fiscal Year an FY-End Option/SAR value (None) Long Term Incentive Plans - Awards in Last Fiscal Year (None) DIRECTOR COMPENSATION FOR LAST FISCAL YEAR NONE Item 11. Security Ownership of Management and Beneficial Owners. As of December 31, 1997, there were 15,030,245 common shares issued and outstanding. The following table sets forth information, as of Fiscal year end, with respect to the beneficial ownership of the Company's $.001 par value common stock by each person known by the Company to be the beneficial owner of more than five percent of the outstanding common stock, and by current officers and directors of the Company. Stock Title Name and Address Amount of Beneficial Percentage of Class Of Beneficial Owner Ownership of Class Common WCM Investments, Inc. 1,017,116 6.7% 2350 Airport Freeway #660 Bedford, TX 76022 Common Robert Galoob, 3,141,823 20.9% President & Director 116 Stanyan San Francisco, CA Common David Galoob 3,781,823 25.2% Secretary and Director 116 Stanyan San Francisco, CA Common Mark Hollo 1,820,000 12.1% c/o Sands Brothers 90 Park Avenue New York, NY 10016 Common Arch Angel Holding Company, LLC 1,580,000 10.5% 7 Park Avenue White Plains, NY 10603 Common Martin Sands 910,000 6% c/o Sands Brothers 90 Park Avenue New York, NY 10016 Common Steven Sands 910,000 6% c/o Sands Brothers 90 Park Avenue New York, NY 10016 All Officers and 8,503,646 56.6% Directors as a Group (3 Persons) (1) WCM Investments, Inc. is beneficially owned by William C. Meier. (2) Arch Angel Holding Co, LLC is beneficially owned by Stephen Petre, Vice President. Item 12. Certain Relationships and Related Transactions. There were no transactions or series of transactions for the fiscal year, to which the Company is a party, in which the amount exceeds $60,000, and in which, to the knowledge of the Company, any director, executive director, nominee, five percent stockholder or any member of the immediate family of any of the foregoing persons, have or will have a direct or indirect material interest, except as follows: 1. WCM Investments, Inc. beneficially owned by William C. Meier contributed $7,500 in cash and other consideration to the Company in May 1997 for issuance of 7,500,000 shares of common stock, pre-reverse split. By virtue of this transaction WCM became the owner of 72% of the then outstanding common stock of the registrant when combined with other holdings. 2. The Watchout! Agreement was entered into effective May 30, 1997, and the Watchout! Acquisition consummated pursuant thereto effective as of December 29, 1997. Pursuant to the Watchout! Agreement, the shareholders of Watchout! contributed to Registrant 100% of Watchout's common stock for an aggregate consideration of 11,296,300 shares of Registrant's common stock. Prior to the closing of the Watchout! Acquisition, Watchout! was controlled by Robert Galoob and David Galoob. Robert Galoob received 3,141,823 shares of common stock of registrant. David Galoob received 3,781,823 shares of common stock of registrant. 3. Pursuant to a LLC Interest and Asset Contribution Agreement (the "Goldpoint Agreement" and together with the Watchout! Agreement, the "Agreements"), the members (i.e., equity holders) of Goldpoint International, LLC, a Delaware limited liability company ("Goldpoint"), effective as of December 29, 1997, contemporaneously with the closing of the Watchout! Acquisition, received from Registrant 2,140,000 newly-issued shares of Registrant's common stock in exchange for 100% of the membership interests in Goldpoint (the "Goldpoint Acquisition", and together with the Watchout! Acquisition, the "Acquisitions"). The 2,140,000 shares represent approximately 14% of the outstanding shares of common stock of Registrant on a fully-diluted basis. Prior to the closing of the Goldpoint Acquisition, Goldpoint was controlled by Stephen J. Petre. Through Arch Angel Holding Company, LLC, Mr. Petre controls 1,580,000 shares of the Registrant. 4. On September 3, 1997, the Company entered into a loan arrangement with certain parties or loans totaling $200,000 to the Company. The Company advanced such monies to Watchout! in furtherance of its Agreement of May 30, 1997. The loans were funded by: (a) An 18% Senior note issued by the Company to Raymond Larkin in the amount of $50,000 due September 3, 1998, in full with interest. (b) An 18% Senior note issued by the Company to Watchout!-Goldpoint Partners for $150,000 due September 3, 1998, in full with interest. (c) In addition, the Company granted warrants to purchase common shares at $.01/share as an inducement to the lenders to make the loans. The options expire on September 3, 2002. The warrants are to Raymond J. Larkin for 75,000 shares and to Watchout! Goldpoint partners for 225,000 share (d) Further, the Company granted warrants to purchase 25,000 shares each to Mark Hollo and Sands Brothers & Co. The warrants are exercisable at $.01 per share on or before September 3, 2002. (e) The Company, in a separate transaction related to the Watchout! Agreement, agreed to issue warrants to purchase a total of 250,000 common shares of the Company @ $.10 per share exercisable two years from September 19, 1997. The warrants are to be issued to John Bader and Wayne E. Williams for 166,000 and 84,000, respectively. 5. In October 1997, 1,150,000 shares of common stock were issued to WCM Investments, Inc. in consideration of services in accomplishing the Watchout! and Goldpoint acquisitions. Part IV Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following exhibits and financial statement schedules are filed as exhibits to this Report: 1. Financial Statements of the Registrant are included under Item 8 hereof. 2. Financial Statement Schedules - None 3. Exhibits: Exhibit # Description Location 3.1 Articles of Incorporation Exhibit to Annual Report on Form 10K for Fiscal Year ended June 30, 1986 3.2 Bylaws of Registrant Exhibit to Annual Report on Form 10K for Fiscal Year ended June 30, 1986 27.1 Financial Data Schedule Attached (b) Reports on Form 8-K. September 24, 1997 Incorporated by reference. December 29, 1997 Incorporated by reference. (c) Notice to Shareholders under SEC 14(f) filed October 6, 1997. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant had duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of San Francisco, State of California on this 9th day of June, 1998. White Cloud Exploration, Inc. By: /s/Robert Galoob Robert Galoob, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/Robert Galoob President June 9, 1998 Robert Galoob Director /s/David Galoob Secretary June 9, 1998 David Galoob Director Michael B. Johnson & Co., P.C. (A Professional Corporation) Certified Public Accountants 9175 East Kenyon Avenue, Suite #100 Denver, Colorado 80237 Michael B. Johnson C.P.A. (303)796-0099 Member: A.I.C.P.A. Colorado Society of C.P.A.'s REPORT OF INDEPENDENT AUDITORS Board of Directors White Cloud Exploration We have audited the accompanying consolidated balance sheets of White Cloud Exploration, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. Because we were not engaged until after year end and did not observe the year end physical inventory and it was not practicable to extend our auditing procedures to enable us to express, and we do not express, an opinion on the inventory. Except for the item mentioned above, in our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of White Cloud Exploration, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Denver, CO April 30, 1998 F1 WHITE CLOUD EXPLORATION, INC. BALANCE SHEET DECEMBER 31 1997 1996 ASSETS Current Assets Cash $59,147 13,961 Accounts Receivable 137,454 20,260 Less Allowance for doubtful accounts (53,325) (19,246) 143,276 14,975 Inventory 162,000 - Total Current Assets 305,276 14,975 Property, plant and equipment 17,905 6,470 Less accumulated depreciation (5,653) (1,294) Total property, plant and equipment-net 12,252 5,176 Due from member 27,935 101,015 Other Assets 16,853 20,101 Total Assets $362,316 $141,267 LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Acccrued Expenses $200,157 231 Accounts Payable 319,983 253,101 Interest Payable 25,668 - Due to Stockholders 307,424 122,408 Due to Factor 55,537 72,439 Line of Credit 54,968 34,007 Notes Payable 450,000 - Total Liabilities 1,413,737 482,186 STOCKHOLDERS' EQUITY (DEFICIT) Preferred Stock, no par value 10,000,000 shares authorized, no shares issued or outstanding. - - Common Stock $.001 par value, 50,000,000 shares authorized, 15,030,245 & 227,000 shares issued and outstanding. 15,030 227 Additional Paid in Capital 989,502 746,305 Accumulated Deficit (2,055,953) (1,087,451) Total Stockholders' Deficit (1,051,421) (340,919) Total Liabilities & Stockholders' Deficit $362,316 $141,267 The accompanying notes are an integral part of this financial statement. F2 [CAPTION] WHITE CLOUD EXPLORATION, INC. STATEMENTS OF STOCKHOLDER'S EQUITY DECEMBER 31, 1997 TOTAL ADDITIONAL ACCUMULATED STOCKHOLDERS COMMON STOCK PAID-IN CAPTIAL DEFICIT EQUITY Shares Amount Balance at December 31, 1994 56,710 $57 $75,925 $(102,487) $(26,505) Issuance of common stock for cash 156,000 156 77,844 - 78,000 Net loss for year ended Dec. 31, 1995 - - - (89,906) (89,906) Balance at December 31, 1995 212,710 213 153,769 (192,393) (38,411) Issuance of common stock for cash 14,362 14 342,986 - 343,000 Capital contribution - - 250,000 - 250,000 Net loss for year ended Dec. 31, 1996 - - - (895,058) (895,508) Balance at December 31, 1996 227,072 227 746,305 (1,087,451) (340,919) Issuance of common stock for cash - - - - - Capital contribution - - 250,500 - 250,500 Issuance of common stock for services & repayment of debt to a relate party 43,290 43 7,457 - 7,500 Issuance of common stock in conjunction with merger 14,759,883 14,760 (14,760) - - Net loss for year ended Dec. 31, 1997 - - - (968,502) (968,502) Balance at December 31, 1997 15,030,245 $15,030 $989,502 $(2,055,953) $(1,051,421) The accompanying notes are an integral part of this financial statement. F3
[CAPTION] WHITE CLOUD EXPLORATION, INC. STATEMENT OF OPERATION YEARS ENDED DECEMBER 31 1997 1996 1995 OPERATING REVENUES Revenues $826,446 $386,034 $- Costs of goods sold 485,767 237,610 - Gross profit 340,679 148,424 - OPERATING EXPENSES Royalties 225,000 372,500 - Research & development 260,359 183,673 84,432 Selling expenses 23,117 52,312 - Professional fees 112,851 77,994 - Management fees 115,321 - - Consulting fees 31,930 77,419 4,000 General & administrative 201,328 96,669 1,534 Marketing 7,855 34,074 - Commitment/Loan fees 94,500 20,000 - Total operating expense 1,072,261 914,641 89,966 OPERATING PROFIT (LOSS) (731,582) (766,217) (89,966) OTHER REVENUES & EXPENSES Interest Expense (36,612) (923) - Miscellaneous income 37,946 (25) 60 Loss on sale of receivables (238,254) (127,893) - Total other revenues & expenses (236,920) (128,841) 60 NET INCOME (LOSS) $(968,502) $(895,058) $(89,906) LOSS PER SHARE Primary (0.06) (0.09) (0.01) Fully diluted (0.06) (0.08) (0.01) The accompanying notes are an integral part of this financial statement. F4
[CAPTION] WHITE CLOUD EXPLORATION, INC. STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31 1997 1996 1995 OPERATING ACTIVITIES Net loss $(968,502) $(895,058) $(89,906) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation & amoritization 7,607 4,344 - Common stock issued in exchange for services 43 - - Expenses paid by stockholder as capital contribution 88,500 - - Changes in operating assets and liabilities: Accounts receivable (83,115) (1,014) - Accounts payable and accrued expenses 266,808 226,277 - Interest payable 25,668 - - Net cash used in operating acitivities (662,991) (665,451) (89,906) INVESTING ACTIVITIES Purchase of equipment (11,435) (6,470) - Purchase of organizational costs - - (15,250) Purchase of trademarks - (7,901) - (Advances) payments to/from member 73,080 (101,015) - Net cash provided by investing activities 61,645 (115,386) (15,250) FINANCING ACTIVITIES Advances from stockholders 185,016 122,408 - Proceeds (payments) from/to factor (16,902) 72,439 - Proceeds from line of credit 20,961 34,007 - Proceeds from notes payable 450,000 - - Proceeds from issuance of stock 7,457 421,000 - Capital contributions - 142,000 108,000 Net cash provided by financing activities 646,532 791,854 108,000 Net increase (decrease) in cash and cash equivalents 45,186 11,017 2,844 Cash and cash equivalents at beginning of year 13,961 2,944 100 Cash and cash equivalents at end of year $59,147 $13,961 $2,944 SUPPLEMENTAL CASH FLOW Interest Paid $33,949 $923 $- Taxes Paid $1,050 $1,600 $- The accompanying notes are an integral part of this financial statement. F5
WHITE CLOUD EXPLORATION, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. Organization and Summary of Significant Accounting Policies: Organization- White Cloud Exploration, Inc. (the Company) was incorporated in the State of Utah on July 22, 1983, for the purpose of obtaining capital to seek potentially profitable business opportunities. Since inception, the Company has been engaged in organizational activities. The Company acquired two entities, Watchout, a California Corporation, and Goldpoint International, a limited liability company. White Cloud Exploration, Inc. changed its year-end from June 30 to December 31. The Watchout Agreement was entered into effective May 30, 1997, and the Watchout Acquisition consummated pursuant thereto effective as of December 29, 1997. Pursuant to the Watchout Agreement, the shareholders of Watchout contributed to the company all of Watchout's common stock for an aggregate consideration of 11,296,300 shares of the company common stock. The company owns 100% of the issued and outstanding shares of Watchout. Watchout designs, develops, and intends to market worldwide watches and other consumer goods utilizing proprietary colored liquid crystal display technology. The Goldpoint Agreement entered into contemporaneously with the Watchout Agreement and the Goldpoint Acquisition was considered contemporaneously with the consummation of the Watchout acquisition. Pursuant to the Goldpoint Agreement, the members of Goldpoint contributed to the company an aggregate of 100% of the equity interests in Goldpoint for an aggregate consideration of 2,140,000 shares of the company's common stock. As a result of the Goldpoint Acquisition, the company owns 100% of the outstanding membership interests in Goldpoint. Golpoint designs and markets fine writing instruments. 2. General and Summary of Significant Accounting Policies Organization-Watchout, a California corporation, is a development stage enterprise engaged in the development of fashion watches. Watchout plans to develop, manufacture and sell watches and personal accessories worldwide. Goldpoint International, LLC, A Delaware limited liability company, designs and markets fine writing instruments. Property and Equipment- Property and equipment are stated at cost. Depreciation is computed using the double-declining balance method over estimated useful lives of 5 years. Other Assets- Other assets consists of organizational costs and trademarks which have been capitalized and are being amortized over 5 and 40 years, respectively, using the straight-line method. Research and Development- Research and development costs are expensed when incurred. Income Taxes- No provision have been made for income taxes. As of December 31, 1997, the company had net operating loss (NOL) carryforwards for federal income tax purposes of approximately $2,055,900. These net- operating losses may be used to offset future taxable income. Unused carryforwards will expire in 2012. Uses of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported activities during the reporting period. Actual results may differ from those estimates. 3. Related Party Transactions Watchout has recorded unsecured, non-interest-bearing amounts due to stockholders for the reimbursement of expenses. There are no specific repayment terms; however, these amounts are expected to be repaid within 12 months of the balance sheet date. Watchout has also recorded $70,000 in amounts due to stockholders. The amounts are payable on demand at an interest rate of 5.81%. A shareholder has a consulting agreement in which 1,250,000 shares of White Cloud Exploration can be earned. F6 WHITE CLOUD EXPLORATION, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 4. Changes in Control Effective December 29, 1997 White Cloud Exploration acquired 100% of the outstanding common stock of Watchout and 100% of the limited liability interests in Goldpoint International, LLC in exchange for 11,296,300 and 2,140,000 shares of White Cloud Exploration restricted common stock. 5. Commitments and Contingencies License Agreement- On September 21, 1995 Watchout entered into a license agreement with an unrelated third party for the use of patents and technical knowledge. The agreement provides for minimum payments for the first four years through September 1999, totaling $915,000, which may be offset by the payment of royalties as a percentage of sales. The agreement may be canceled at any time, without cause, by Watchout, with 60 days notice and with no further liability. In addition to expense reimbursements of $20,000,minimum payments in the amount of $225,000 and $296,250 have been made for 1997 and 1996, respectively, and are reported as royalties in the accompanying Statement of Operations. Investment by Distribution- Watchout entered into an agreement with a distributor on July 21, 1996. The agreement provides that the distributor invest $500,000 - $250,000 as a cash payment to Watchout and $250,000 to be made available to Watchout for use in Hong Kong, oversees production, quality assurance/quality control and establish a $150,000 standby letter of credit. In exchange, Watchout will issue the distributor 4% of the common stock outstanding as of the date of the agreement, grant distribution rights in Southeast Asia (except Japan), pay 9% commission based on the factory store costs of the product, and grant the right to open Watchout retail stores in all of Southeast Asia. The agreement will remain in effect for a minimum of four years or until the distributor's investment of $500,000 is earned through commissions. Consulting Agreement- On November 15, 1996, Watchout entered into an agreement which requires payment of $150,00 in finder's fees to be made to an independent consultant, plus 2% of the amount accepted under a placement agreement but not to exceed $250,000. In addition, the consultant will earn compensation consisting of 1,250,000 shares of White Cloud Exploration at the close of the stock placement agreement. Placement Agreement- On February 5, 1997, Watchout entered into an agreement with a placement agent to secure additional capital or financing in the minimum amount of $6,000,000. The agreement requires Watchout to pay commissions to the placement agent equal to 10% of the additional capital or financing received and a nonaccountable expense allowance equal to 3% of the additional capital or financing. In addition, Watchout is partially responsible for certain expenses incurred by the placement agent upon closing. In 1996, commitment fees paid to the placement agent amounted to $20,000. No fees were paid in 1997 under this agreement. As a condition of the agreement, the placement agent reserved the right of first refusal to underwrite or place any future public or private sales of debt or equity securities of Watchout, including those involving any principal stockholders of the Watchout through November 19, 1999. Watchout has also agreed to pay the placement agent a 5% finder's fee in the event that they are party to any merger, acquisition or joint venture introduced directly or indirectly by the placement agent. In connection with the placement agreement, the Board of Directors passed a resolution to issue 69,868 shares of common stock to the placement agent for $500. The shares may be repurchased on a pro rata basis if $6,000,000 is not raised pursuant to the terms of the aforementioned agreement. F7 WHITE CLOUD EXPLORATION, INC. NOTES TO FINANCIAL STATEMETNS DECEMBER 31, 1997 Stock Warrants- In connection with the loan agreements dated September 19, 1997, Watchout agreed to pay finder's fees to a third party. The agreement requires payment of finder's fees in the form of $32,500 at the closing of the loans and 250,000 stock warrants with an exercise price of $.10 a share expiring on December 19, 2000. Payment of the finder's fees had not been made as of the balance sheet date, however, the $32,500 fee has been accrued at December 31, 1997. The warrants are to be issued when and if the private placement described previously under Placement Agreement is consummated. In connection with the loans arranged for by Sands Brothers & Co., Ltd. ("Sands Brothers"), White Cloud Exploration has agreed to issue stock warrants to Raymond J. Larkin, Watchout-Goldpoint Partners, L.P., Sands Brothers and Mark Hollo totaling 75,000, 225,000, 25,000 and 25,000 shares respectively, with an exercise price of $.01 a share, expiring on September 3, 2000. 6. Line of Credit A promissory note to Goldpoint International, LLC of $54,968 payable with interest 60 days from the date of each cash advance under a letter of credit issued by Opal Trade Corporation. Interest accrues at a rate of 4% over the prime rate designated by Chemical Bank. This note is collateralized by the assets of the company. 7. Loan Payable ( a ) Two 18% promissory notes of $150,000 and $50,000 due September 3, 1998. These notes are considered Senior and have priority in right of payment over all indebtedness of the company. ( b ) A 12% promissory note of $166,000 payable to John Bader in one payment of principal and interest due in demand or at the time of first funding of a private placement of stock in the amount of $6,000,000 by Watchout. All sums past due shall bear interest at 18% from their maturity date. Collateral security includes the first $1.32 per unit production proceeds upon the sale of certain products. ( c ) A 12% promissory note of $84,000 payable to Wayne Williams in one payment of principal and interest due on demand or at the time of first funding of a private placement of stock in the amount of $6,000,000 by Watchout. All sums past due shall bear interest at 18% from their maturity date. Collateral security includes priority assignment of contract rights to the next $0.68 per unit in production proceeds, second only to the $1.32 per unit assigned to John Bader from proceeds from certain products. 8. Going Concern The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the company as a going concern. However the company has sustained substantial operating losses in recent years. In addition, the company has used substantial amounts of working capital in its operations. Further, at December 31, 1997 current liabilities exceed current assets by $1,108,461, and total liabilities exceed total assets by $1,051,421. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the company, which in turn is dependent upon the company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to revise the company's operating and financial requirements provide the opportunity for the company to continue as a going concern. F8 EX-27 2
5 TRANSITIONAL PERIOD FINANCIAL STATEMENTS DATED April 30, 1998 for year ended 12/31/97 - of Michael B. Johnson & Co., P.C. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 59,147 0 137,454 (53,325) 162,000 305,276 17,905 (5,653) 362,316 1,413,737 0 0 0 15,030 (1,066,451) 362,316 826,446 0 485,767 485,767 1,072,261 0 0 (731,582) 0 (731,582) 0 (238,254) 0 (986,502) (.06) (.06)
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