<PAGE> 1
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
NEXLAND, INC. AND SUBSIDIARY
DELAWARE EIN 371356503
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1101 BRICKELL AVENUE, NORTH TOWER, SUITE 200, MIAMI, FLORIDA 33131
------------------------------------------------------------------
Address of principal executive offices (Zip code)
(305) 358-7771
--------------------------------------------------
Registrant's telephone number, including area code
--------------------------------------------------------------------------------
(1) Registrant 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 1. X Yes
___No 2. [X] Yes [ ] No
As of October 31, 2000, there were 35,871,024 shares outstanding of issuer's
common stock.
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TABLE OF CONTENTS
PART I.....................................................................3
Financial Statements
Consolidated Balance Sheets ......................................3
Consolidated Statements of Operations.............................4
Consolidated Statements of Cash Flows.............................5
Notes to The Consolidated Financial Statements....................6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................9
Forward-looking Statements And Associated Risks...................9
Going Concern ....................................................9
Significant Plant or Equipment Purchases.........................10
Changes in The Number of Employees...............................10
Management's Discussion And Analysis.............................10
Sales............................................................10
Cost of Sales ...................................................10
Selling, General And Administrative..............................10
Interest Expense ................................................12
Liquidity And Capital Resources..................................12
Inflation........................................................12
PART II...................................................................13
ITEM 1. Legal Proceedings........................................13
ITEM 2. Changes In Securities and Use of Proceeds ...............13
ITEM 3. Defaults Upon Senior Securities .........................13
ITEM 4. Submission of Matters to a Vote of Security Holders......13
ITEM 5. Other Information........................................14
ITEM 6. Exhibits ................................................14
SIGNATURES................................................................16
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FINANCIAL STATEMENTS
NEXLAND, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 88,485 $ 4,231
Accounts receivable 157,589 78,597
Inventory 155,767 56,467
----------- -----------
TOTAL CURRENT ASSETS 401,841 139,295
EQUIPMENT, NET 27,536 4,775
DEPOSITS AND OTHER ASSETS 48,180 3,180
----------- -----------
TOTAL ASSETS $ 477,557 $ 147,250
=========== ===========
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES
Accounts payable $ 654,930 $ 196,061
Accrued expenses 78,951 53,939
Notes payable 19,553 19,553
TOTAL CURRENT LIABILITIES 753,434 269,553
NOTES PAYABLE - RELATED PARTIES 201,917 201,917
----------- -----------
955,351 471,470
CAPITAL DEFICIT
PREFERRED STOCK, 10,000,000 SHARES AUTHORIZED,
$0.0001 PAR VALUE; NO SHARES OUTSTANDING -- --
COMMON STOCK, 50,000,000 SHARES AUTHORIZED,
$0.0001 PAR VALUE; 35,174,977 and 34,094,703 ISSUED
AND OUTSTANDING 3,517 3,410
ADDITIONAL PAID-IN CAPITAL 2,308,666 --
UNEARNED COMPENSATION (395,835) --
ACCUMULATED DEFICIT (2,394,142) (327,630)
TOTAL CAPITAL DEFICIT (477,794) (324,220)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDER EQUITY $ 477,557 $ 147,250
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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NEXLAND, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 30, 30, 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
SALES $ 319,574 $ 47,876 $ 760,454 $ 82,778
COST OF SALES 144,909 54,944 322,104 82,285
------------ ------------ ------------ ------------
GROSS PROFIT 174,665 (7,068) 438,350 493
OPERATING EXPENSES:
EMPLOYEE COMPENSATION/SEVERANCE
PAID IN COMMON STOCK 62,499 -- 1,229,165 --
SELLING, GENERAL AND ADMINISTRATIVE 386,740 64,287 1,255,611 81,688
DEPRECIATION 1,500 -- 3,614 --
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 450,739 64,287 2,488,390 81,688
INTEREST EXPENSE 5,400 -- 16,472 --
------------ ------------ ------------ ------------
NET (LOSS) $ (281,474) $ (71,355) $ (2,066,512) $ (81,195)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 35,079,382 29,500,000 34,558,126 29,500,000
NET (LOSS) PER COMMON SHARE $ (.01) $ -- $ (.06) $ --
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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NEXLAND, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
NET LOSS $(2,066,512) $ (81,195)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH (USED IN) OPERATING ACTIVITIES:
COMPENSATION CHARGES IN CONNECTION WITH
EMPLOYMENT AGREEMENT 104,165 --
COMPENSATION CHARGE IN CONNECTION
WITH SEVERANCE 1,125,000 --
EXPENSES PAID BY ISSUANCE OF COMMON STOCK 378,929 --
DEPRECIATION 3,614 --
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) IN ACCOUNTS RECEIVABLE (78,992) --
(INCREASE) IN INVENTORY (99,300) (39,572)
(INCREASE) IN DEPOSITS AND OTHER ASSETS (45,000) --
INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 483,881 111,842
----------- -----------
TOTAL ADJUSTMENTS 1,872,297 72,270
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (194,215) (8,925)
INVESTING ACTIVITIES:
PURCHASE OF EQUIPMENT (26,375) (2,251)
----------- -----------
FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF WARRANTS 45,491 --
PROCEEDS FROM ISSUANCE OF COMMON STOCK 99,353 --
PROCEEDS FROM EXERCISE OF OPTIONS 160,000 --
ADVANCES FROM STOCKHOLDER -- 15,365
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 304,844 15,365
NET INCREASE IN CASH AND CASH EQUIVALENTS 84,254 4,189
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,231 23
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 88,485 $ 4,212
=========== ===========
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR TAXES $ -- $ --
CASH PAID FOR INTEREST $ -- $ --
ISSUANCE OF COMMON STOCK FOR COMPENSATION $ 500,000 $ --
ISSUANCE OF COMMON STOCK FOR SEVERANCE $ 1,125,000 $ --
ISSUANCE OF COMMON STOCK FOR CONSULTING SERVICES AND
LATE FILING FEES FOR THE COMPANY'S S-1 $ 378,929 $ --
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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NEXLAND, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-Q and include all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair presentation of the results for the
periods presented. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted. It is suggested that
these consolidated financial statements be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. The
results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
2. FORMATION OF A NEW SUBSIDIARY
In September 2000 the Company formed a new wholly-owned subsidiary,
Nexland Canada, located in Victoria, B.C. The subsidiary was formed to offer the
Company's products to Canadian customers and to expand operations beyond the USA
market. During the three months ended September 30, 2000, the operations of the
subsidiary were not significant.
3. EARNINGS PER SHARE
Net loss per share of common stock is based on the weighted average
number of common shares outstanding during each period. Diluted loss per share
of common stock is computed on the basis of the weighted average number of
common shares and dilutive options and warrants outstanding. All options and
warrants have an anti-dilutive effect and are excluded from the calculation.
4. CAPITAL DEFICIT
During the nine months ended September 30, 2000, the Company issued
30,000 shares of common stock to a consultant for services rendered and recorded
a charge to consulting fees with a corresponding credit to additional paid-in
capital in the amount of $138,750.
During the nine months ended September 30, 2000, the Company issued
39,213 shares of
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common stock in connection with the late filing of the Company's Form S-1 and
recorded a charge to expense with a corresponding credit to additional paid-in
capital in the amount of $240,179.
On April 25, 2000, pursuant to an employment contract between the
Company and Enrique Dillon (the Chief Executive Officer at that time), the
Company issued 1,170,000 shares of common stock to Enrique Dillon. On May 1,
2000, pursuant to an employment contract between the Company and Martin Dell'Oca
(Chief Financial Officer) the Company issued 200,000 shares of common stock to
Martin Dell'Oca. The shares under both employment contracts, are subject to
forfeiture in the event the employees resign or are terminated for cause prior
to the initial two-year terms of their respective employment agreements. Pending
the forfeiture periods, the shares are held in escrow.
In connection with these employment agreements, the Company recorded the
unearned compensation as a charge to stockholders' equity in the amount of
$500,000 representing the market value of the common stock at the date of grant
which is amortized over the period of the employment agreements. Amortization of
$104,165 was recorded during the nine month period ended September 30, 2000.
On June 30, 2000, Mr. Dillon resigned from his position in the Company for
personal reasons. In connection with his resignation, the 1,170,000 shares of
common stock issued in connection with his employment agreement were forfeited.
The Company in consideration of the termination of the employment agreement
issued 500,000 shares of common stock to the former executive. In connection
with this, the Company recorded a charge to operations in the amount of
$1,125,000.
In August 2000, in connection with a private placement, the Company issued
101,470 shares of common stock at $0.98 per share for cash of $99,353.
In September 2000, private investors exercised warrants to purchase 49,491
shares of the Company's common stock at $.92 per share.
On September 6, 2000, the Company adopted a Stock Incentive Plan (the "Stock
Incentive Plan") under which 6,000,000 shares of common stock are reserved for
issuance upon exercise of stock based awards including, non-statutory stock
options and incentive stock options. The Plan will be administered by a plan
administrator who is a member of the Board of Directors.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for the plan. Under APB Opinion 25,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
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On September 6, 2000, the Company granted the following options under the 2000
Stock Incentive Plan:
o To Greg Levine, Chief Executive Officer of the Company, options to purchase
up to 300,000 shares of the common stock at an exercise price of $0.843 per
share. These options vest 50% immediately and 50% in 4 years. These options
may be exercised within ten years of the date of grant.
o To Daniel Sultan, Director and major stockholder of the Company, options to
purchase up to 300,000 shares of common stock at an exercise price of
$0.927 per share. These options vest one-fourth on each of the first,
second, third and fourth anniversaries of the grant date. These options may
be exercised within five years of the date of grant.
o To Martin Dell'Oca, Chief Financial Officer, of the Company, options to
purchase up to 150,000 shares of the common stock at an exercise price of
$0.843 per share. These options vest one-fourth on each of the first,
second, third and fourth anniversaries of the grant date. These options may
be exercised within ten years of the date of grant.
o To various employees of the Company, options to purchase up to 175,000
shares of common stock at an exercise price of $0.843 per share. These
options vest one-fourth on each of the first, second, third and fourth
anniversaries of the grant date. These options may be exercised within ten
year of the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting For Certain Transactions Involving Stock
Compensation, An Interpretation of APB Opinion No. 25. The Company adopted the
Interpretation on July 1, 2000. The interpretation requires, among other things,
that stock options that have been modified be accounted for as variable.
Management anticipates the implementation of FASB Interpretation No. 44, will
not have a material effect as the Company's financial position or results of
operations.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Quarterly Report contains forward-looking statements, including
statements regarding, among other things, (a) the growth strategies of Nexland,
Inc. (the "COMPANY"), (b) anticipated trends in the Company's industry, (c) the
Company's future financing plans and (d) the Company's ability to obtain
financing and continue operations. In addition, when used in this Quarterly
Report, the words "believes," "anticipates," "intends," "in anticipation of,"
and similar words are intended to identify certain forward-looking statements.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, many of which are beyond
the Company's control. Actual results could differ materially from these
forward-looking statements as a result of changes in trends in the economy and
the Company's industry, reductions in the availability of financing and other
factors. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Quarterly Report will in
fact occur. The Company does not undertake any obligation to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.
GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of operation. The Company's ultimate ability to attain
profitable operations is dependent upon obtaining additional financing adequate
to complete its marketing and promotional activities, and to achieve a level of
sales adequate to support its cost structure. Through September 30, 2000, the
Company has incurred losses totaling $2,394,142, all of which raise substantial
doubt about the Company's ability to continue as a going concern.
As previously reported in its Form 10-K ("FORM 10-K") for the year
ended December 31, 1999, the Company needed to increase the sales of the
Company's product and raise additional capital to continue its operations.
Management believes that resources will be available from private and public
sources in 2000 to continue the marketing of its internet sharing devices.
Management has established plans designed to increase the sales of the Company's
products. Management intends to seek new capital from new equity securities
offerings that will provide funds needed to increase liquidity, fund internal
growth and fully implement its business plan. The Company has no commitment for
any additional capital and no assurances can be given that the Company will be
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successful in raising any new capital. The Company's inability to increase its
sales and/or to raise new capital will have a material adverse effect on the
Company's ability to continue its operations and financial condition and on its
ability to continue as a going concern. See "Management's Plan of Operations and
Discussion and Analysis - Liquidity and Capital Resources."
SIGNIFICANT PLANT OR EQUIPMENT PURCHASES
The Company does not currently anticipate any significant plant or
equipment purchases during the next twelve months.
CHANGES IN THE NUMBER OF EMPLOYEES
The Company currently has sixteen (16) employees. If the Company is
successful in increasing its sales level or in raising significant new capital,
the Company anticipates hiring twelve (12) additional personnel during the
remainder of 2000. The Company believes that these personnel will be adequate to
accomplish the tasks set forth in its plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SALES
During the three and the nine month period ended September 30, 2000,
sales increased substantially from the comparable period in 1999. These
increases in sales were attributed to the Company's expansion and the increased
marketability of its product. The operations of the Company's Canadian
subsidiary began in September 2000 and were not significant during the three
months ended September 30, 2000.
COST OF SALES
Cost of sales increased consistent with the increases in sales. The
gross profit improved as a result of the Company being able to better manage its
manufacturing costs due to economies of scale for its internet sharing devices.
The Company began to market its product during the later part of 1999.
The operations of the Company's Canadian subsidiary began in September 2000 and
were not significant during the three months of September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased in the three and the nine
month period ended September 30, 2000 over the comparable period in 1999. The
increases of $1,173,923 for the nine
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months ended September 30, 2000 over the comparable period in 1999 are primarily
attributable to increases in personnel ($226,000) and increases in professional
and consulting costs ($442,000), increases in rent ($46,000) and a penalty
($240,000) as a result of the Company's late filing of its Form S-1.
Expense in connection with issuance of common stock increased by $1,229,165
during the nine month period ended September 30, 2000, as compared to the same
period in the prior year. The increase was directly related to amortization of
unearned compensation ($104,165) and severance charge recorded $(1,125,000),
related to resignation of the Company's Chief Executive Officer.
The operations of the Company's Canadian subsidiary began in September 2000 and
were not significant during the three months ended September 30, 2000.
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INTEREST EXPENSE
Interest expense for the three and nine month period ended September 30, 2000
increased by $5,400 and $16,472, respectively. These increases pertain to
interest accrued on the notes payable-related parties.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 30, 2000, the net cash used by the
Company in operating activities aggregated $194,215. This was largely
attributable to increased operating expenses, purchases of inventory, deposits
and offset by increases in accounts payable. The Company's net cash provided by
financing activities aggregated $304,844 during the nine months ended September
30, 2000, consisting of proceeds from exercise of options and warrants and
issuance of common stock.
Since inception, the Company has relied principally upon the proceeds of private
equity financings/loans to fund its working capital requirements and capital
expenditures.
The Company estimates that it will expend approximately $3,000,000 on new
products, increasing its sales force and additional research and development. In
addition, present operating costs are approximately $70,000 per month and are
expected to increase to approximately $250,000 per month by the fourth quarter
of 2000.
The Company must obtain additional capital in order to increase marketing and
sales efforts. The Company intends to raise additional capital through the
exercise of the Class A and Class B Warrants for shares of Common stock, loans,
and/or to enter into arrangements for such purposes with third parties. There is
no assurance that the Company will be able to raise such additional capital or
that, if available, the terms of such financing will be commercially acceptable
to the Company. The Company has no significant operating history.
CAPITAL EXPENDITURES
During the nine months ended September 30, 2000, the Company's net capital
additions were $26,375.
No significant capital additions were made during the comparable period in 1999.
INFLATION
The Company has not been materially affected by the impact of inflation.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Officers and Directors of the Company believe that to the best of
their knowledge, neither the Company nor any of its officers and Directors are
parties to any legal proceeding or litigation. Further, the Officers and
Directors know of no threatened or contemplated legal proceedings or litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 25, 2000, pursuant to an employment contract between the
Company and Enrique Dillon, the Company issued 1,170,000 shares of common stock
to Enrique Dillon. On May 1, 2000, pursuant to an employment contract between
the Company and Martin Dell'Oca, the Company issued 200,000 shares of common
stock to Martin Dell'Oca. Because the shares were issued for services, neither
transaction involved the payment of money to the Company. The shares under both
employment contracts, are subject to forfeiture in the event the employees
resign or are terminated for cause prior to the initial two-year terms of their
respective employment agreements. Pending the forfeiture periods, the shares are
held in escrow. The Company relied upon the exemption provided by SS.4(2) of the
Securities Act, for "transactions by an issuer not involving any public
offering."
On June 30, 2000, the employment agreement between the Company and
Enrique Dillon was terminated. Pursuant to the severance agreement, the
1,170,000 shares of common stock issued in connection with the employment
agreement were forfeited and cancelled. In connection with the severance
agreement, the Company issued 500,000 shares of common stock to Enrique Dillon
in consideration of the termination of the employment agreement. As a result,
the Company recorded a charge to operations in the amount of $1,125,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
The Company has amended its 10K for the fiscal year ended 1999. The
method of accounting for business combinations has been determined to be
inappropriate.
ITEM 6. EXHIBITS
The following documents are incorporated by reference from the
Registrant's Form S-1 Registration Statement filed with the Securities and
Exchange Commission (the "Commission") Commission File No. 333-3074 on April 1,
1996 and declared effective by the Commission on August 16, 1996.
Number
Document
3.1 Articles of Incorporation
3.2 Amended Articles of Incorporation
3.3 Bylaws of the Company
4.1 Specimen certificate for Common Stock
4.2 Specimen certificate for Class A Redeemable Warrant
4.3 Specimen certificate for Class B Redeemable Warrant
The following documents are incorporated by reference from the Registrant's Form
10-K Annual Report for the period ended December 31, 1997:
Number
Document
99.1 Stock Purchase Agreement
99.2 Employment Agreement with Fred Schmid
The following documents are incorporated by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1998:
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Number
Document
3.3 Amended Articles of Incorporation dated
December 31, 1997
3.4 Amended Articles of Incorporation dated
April 15, 1998
The following documents are incorporated by reference from the
Registrant's Form 8-K Report filed with the Securities and Exchange Commission
(the "Commission") Commission file #333-3074, on December 3, 1999:
Number
Document
10.1 March 14, 2000 Consulting Agreement between
Nexland S.A. and the Company
10.2 November 17, 1999, Mutual Non-Competition
Agreement between Nexland, S.A. and the Company
10.3 November 17, 1999, Co-Operation Agreement between
Smerwick, Ltd. and the Company
The following documents are incorporated by reference from the
Registrant's Form 8-K filed with the Securities and Exchange Commission (the
"Commission") Commission file #333-3074, on March 14, 2000
Independent Auditor's Report
Financial Statements and Pro Forma Financial Statements for the periods
ending December 31, 1997, December 31, 1998 and November 17, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nexland, Inc.
Dated: November 13, 2000 By: /s/ Martin Dell'Oca
--------------------------------
Martin Dell'Oca
Chief Financial Officer
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