U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Natexco Corporation
--------------------------------------
(Name of Small Business Issuer in its charter)
Nevada 84-1480636
-------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3255 Norfolk Road
Victoria, British Columbia, Canada V8R 6H5
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(Address of principal executive offices) (Postal Code)
Issuer's telephone number, (250) 598-2373
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
------------------------------ ------------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of class)
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Item 1. Description of Business.
(a) Business Development.
Natexco Corporation ("Natexco") was organized under the laws of the
State of Nevada on March 3, 1998. Natexco's initial business plan was to provide
promotional, advertising and public relations services in the United States to
smaller Canadian companies lacking the personnel and facilities to conduct such
activities outside Canada. On July 30, 2000, Natexco acquired all 300 issued and
outstanding shares of common stock of Security Software Systems, Inc. ("Security
Software"), a Florida corporation organized on October 17, 1996, for the sum of
$25,000 in cash. Immediately following the consummation of the transaction,
Security Software became a wholly-owned subsidiary of Natexco. Natexco is
engaged in the business of developing, manufacturing, marketing and selling
security computer software designed for access control for use by guarded
communities, office buildings, high-rise condominiums, private estates, country
clubs and other secure facilities.
During the period from December 5, 1998, through May 18, 2000, Natexco
raised gross proceeds in the amount of $40,100 from the sale of an aggregate of
50,000 shares of preferred stock, representing all of the outstanding shares of
preferred stock of Natexco as of the date hereof, to an Isle of Man, British
Islands, corporation, a British Columbia, Canada, corporation and a Colorado
corporation. The Isle of Man, British Islands, corporation paid $100 in cash
($.01 per share) in consideration for the purchase of 10,000 shares. Each other
corporation paid cash in the amount of $20,000 ($1.00 per share) in
consideration for the purchase of 20,000 shares. The sales of preferred stock to
these two companies were made in reliance upon the exemption from registration
with the U.S. Securities and Exchange Commission (the "Commission") provided by
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Natexco received gross proceeds in the sum of $2,400 from the sale of a
total of 2,400,000 shares of common stock, representing all of Natexco's
outstanding shares of common stock as of the date hereof, to thirty-four persons
in an offering conducted during the period from February 25 through March 31,
1999, pursuant to the exemption from registration with the Commission under
Section 3(b) of the 1933 Act and Rule 504 of Regulation D promulgated
thereunder.
Natexco's executive offices are presently located at 3255 Norfolk Road,
Victoria, British Columbia V8R 6H5, and the telephone and facsimile number for
Natexco is (250) 598-2373. The telephone and facsimile numbers for Natexco in
the United States are (303) 691-6163 and (303) 691-5154, respectively.
See (b) "Business of Issuer" immediately below for a description of
Natexco's current operations and future proposed activities.
(b) Business of Issuer.
General
Natexco, a development-stage enterprise, develops, manufactures,
markets, sells and distributes security computer software through Security
Software, its wholly-owned subsidiary. The offices of Security Software are
located at 5 Pinion Road, Bailey, Colorado 80421, and the telephone number,
toll-free telephone number and facsimile number are (303) 816-4744, (888)
480-7774 and (303) 816-2671, respectively. Security Software's web site and
e-mail address are www.simscorp.net/secureservices.html and
[email protected], respectively. To date, management of Natexco has devoted
substantially all of its time and effort to organizational matters, acquiring
Security Software, the development of Security Software's security computer
software product and obtaining financing.
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As of the date hereof, Natexco has only one security computer software
product marketed under the name of "Secure Entry Interface" ("SEI"). SEI is
designed for use by guarded communities, office buildings, high-rise
condominiums, private estates, country clubs and other secure facilities for
access control. The computer software permits guard personnel immediate access
to vital information to assist in the regulation, and expedite the flow of
traffic into and out, of any secure facility where access is controlled by a
gatehouse or lobby security system. The security software product is designed to
enhance the speed and efficiency of access control operations through the use of
advanced computer technology, data and/or pictorial recording and retrieval
techniques. Security Systems realized revenues of $30,024 and $33,116 from sales
of SEI during the fiscal years ended December 31, 1999, and 1998, respectively,
and revenues of $100 from product sales during the period from January 1, 2000
(inception), through July 29, 2000.
Natexco's success is dependent upon the commercial acceptance of SEI,
which is not assured, and our ability to develop and achieve commercial
viability for other security software products. Through the date hereof,
Security Software has realized limited revenues from product sales and a net
loss. There can be no assurance that Natexco will be successful in developing
products in addition to SEI; that SEI and any other products will achieve
commercial viability in the future; that future product sales or revenues will
be significant; that any sales will be profitable; that Natexco will have
sufficient funds available for further research and development of its current
and proposed products; or that Natexco will be capable of attracting and
retaining the qualified software programmers and other technical personnel
needed for future product development and enhancement. We are largely dependent
upon the proceeds anticipated to be received from future equity and/or debt
financing(s) with which to continue our existing operations and carry out our
proposed operations. Natexco is not expected to become a viable business entity
unless it achieves profitable operations, which is not anticipated in the
foreseeable future. Because of Natexco's significant operating losses, our
independent auditor has expressed a "going concern" qualification in the
Independent Auditors' Report on, and footnotes to, Natexco's financial
statements.
Natexco may expand through the acquisition of other companies,
including other software development companies. While Company management is
continuously monitoring such opportunities, no such companies are acquisition
targets as of the date hereof, nor are there any negotiations for the
acquisition of any software development companies ongoing as of the date hereof.
Products
Security Software's sole product as of the date hereof is a security
computer software product marketed under the name of "Secure Entry Interface."
The software product is designed to regulate access to controlled facilities
such as guarded communities, office buildings, high-rise condominiums, private
estates, country clubs and other secure facilities by providing guard personnel
with immediate access to vital information. Personnel use this information to
regulate and expedite the flow of traffic through any secure facility that is
regulated by a gatehouse or other type of security system. The SEI security
software product uses advanced computer technology, data and/or pictorial
recording and retrieval techniques for the purpose of improving the processing
speed and efficiency of secure facilities. The computer software is recorded on
a master digital magnetic support, published on compact disks and accompanied by
a printed user manual. We do our own copying and publishing of the SEI security
computer software. The computer program is proprietary, but not copyrighted.
Natexco may apply for copyright or patent protection for SEI in the future at
such time, if ever, that the program contains or encompasses copyrightable or
patentable elements. Security Software markets the SEI computer software. We are
aware of competing products that sell for prices both higher and lower than the
price of SEI. Except for local sales tax regulations, we are not aware of any
governmental rules or regulations relating to the production, publishing,
marketing or distribution of our security computer software product.
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Natexco intends to develop additional features for SEI in order to
enhance the product and make it more attractive and serviceable for prospective
customers. Such features may include automatic visual and voice recognition of
entry requests through video camera images and voice inputs to computer
recognition software. Additional recognition technology may be incorporated in
the SEI program to enable computer-enhanced fingerprint and/or eyeball iris
identification. We believe that the technology for the above-described features
is available from suppliers "off-the-shelf" and would be easily adaptable to the
existing SEI program. As of the date hereof, Natexco has not yet fully
researched, developed or implemented any of these proposed additional features
or technologies.
Intellectual Property and Proprietary Rights
Natexco regards all or portions of the designs and technologies
incorporated in SEI as proprietary and attempts to protect them with trade
secret laws. Our policy is to proceed without trademark or patent protection
until such time, if ever, that the SEI or other program contains or encompasses
copyrightable or patentable elements. It may be possible for unauthorized third
parties to copy certain portions of our products or to "reverse engineer" or
otherwise obtain and use to Natexco's detriment information that we regard as
proprietary. Moreover, the laws of some foreign countries do not afford the same
protection to our proprietary rights as do United States laws. There can be no
assurance that any of our efforts to protect Natexco's proprietary technology
will be adequate or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technologies.
Marketing
Management has employed traditional marketing methods in order to
advertise and promote SEI. These marketing activities have included advertising
in local newspapers, trade journals and periodicals and mailings of brochures
to, among others, various secure facilities, including, but not limited to,
guarded communities, office buildings, high-rise condominiums, private estates
and country clubs, and property managers of the foregoing.
Competition
The market for security computer software is intensely competitive and
fragmented. Natexco will be in competition with numerous other companies of all
sizes located both inside and outside the United States engaged in the
development, manufacturing, marketing, sale and/or distribution of security
computer software. To our knowledge, no definitive market survey has been
performed to date in order to determine the respective market shares of our
competitors. As of the date hereof, Natexco is an insignificant competitor in
the market for security computer software. Therefore, we are subject to the
effects of better-financed competitors and their research and development
efforts, and price discounting. In this regard, virtually all of the companies
and other organizations with which we will be in competition are established and
have far greater financial resources, substantially greater experience and
larger staffs than Natexco. Additionally, many of such organizations have proven
operating histories, which we lack. We expect to face strong competition from
both such well-established companies and small independent companies like
ourselves.
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We believe that, in the future, there will be an increasing number of
companies engaged in the manufacture, marketing and sale of computer software
designed to monitor and control access to secure buildings, including the type
of software that we offer. We compete on the basis of the technical advances in
our product and our reputation among customers as a quality provider of security
computer software and customer support services. We are aware of competing
products that sell for prices both higher and lower than the price of SEI and,
to a lesser extent, we compete on the basis of price. Our opportunity to
increase our sales may be limited by our financial resources and other
weaknesses, including, among others, our under-capitalization, cash shortage,
limitations with respect to personnel, technological, financial and other
resources and lack of a customer base and market recognition. In addition, our
business may be subject to decline because of generally increasing costs and
expenses of doing business, thus further increasing anticipated competition.
Additionally, it is anticipated that there may be significant technological
advances in the future and Natexco may not have adequate creative management and
resources to enable it to take advantage of such advances. The effects of any
such technological advances on Natexco, therefore, cannot be presently
determined. There can be no assurance that our efforts to achieve a niche in the
security computer software market will be successful.
Research and Development
Since the acquisition of Security Software on July 30, 2000, Natexco
has been, and will continue to be, actively engaged in research and development
in order to enhance SEI and produce new products. During its 1998 and 1999
fiscal years, Security Software was engaged, utilizing Mr. John H. Tetstill and
Ms. Terese M. Tetstill, President and Secretary/Treasurer, respectively, in
research and development to develop additional features for SEI, including
automatic visual and voice recognition of entry requests through video camera
images and voice inputs to computer recognition software, in order to enhance
the product and make it more attractive and serviceable for prospective
customers. Additionally, recognition technology may be incorporated in the SEI
program to enable computer-enhanced fingerprint and/or eyeball iris
identification. Management intends to continue this program through the 2000 and
2001 fiscal years. Natexco expects to spend approximately $5,000 of its own
funds on this project and other research and development activities in fiscal
2000. We believe, without assurance, that funds generated from the Company's
operations will be sufficient to meet its research and development needs in the
foreseeable future. Natexco may apply for copyright or patent protection for SEI
in the future at such time, if ever, that the program contains or encompasses
copyrightable or patentable elements.
Employees and Consultants
As of the date hereof, Natexco employs four individuals, including
Messrs. Gerald A. and Anthony Mulhall, the President and Secretary/Treasurer of
Natexco, respectively, and Mr. John H. and Ms. Terese M. Tetstill, the President
and Secretary/Treasurer of Security Software, respectively, on a part-time
basis. No cash compensation has been awarded to, earned by or paid to any of the
foregoing for all services rendered in all capacities to Natexco and/or Security
Software through July 30, 2000. Commencing on July 30, 2000, Mr. and Ms.
Tetstill receive compensation, payable quarterly, in the amount of 30% of
Security Software's gross sales and $8.00 per hour of time devoted to Security
Software, respectively. Except for Ms. Tetstill, who will only devote time to
Security Software, the executive officers and directors of Natexco and Security
Software plan to devote only such time to the affairs of Natexco and/or Security
Software that each deems necessary. For the foreseeable future, neither Mr.
Gerald A. Mulhall nor Mr. Anthony Mulhall will receive any compensation in any
form for their services rendered in all capacities to Natexco and/or Security
Software. It is anticipated that at such time, if ever, as Natexco's financial
position permits, assuming that Natexco is successful in raising additional
funds through equity and/or debt financing and/or generating a sufficient level
of revenue from operations, Messrs. Gerald A. and Anthony Mulhall, the President
and Secretary/Treasurer of Natexco, respectively, and Mr. John H. and Ms. Terese
M. Tetstill, the President and Secretary/Treasurer of Security Software,
respectively, will receive reasonable salaries and other appropriate
compensation, such as bonuses, coverage under medical and/or life insurance
benefit plans and participation in stock option and/or other profit sharing or
pension plans, for services as executive officers of Natexco or Security
Software and may receive fees for their attendance at meetings of the Board of
Directors. Natexco has no plans to retain any consultants or pay consulting fees
to any person to perform services for Natexco or Security Software in any
capacity. None of Natexco's employees are represented by a labor union. Natexco
has never had a strike or lockout and considers its employee relations to be
good.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
Plan of Operation
Natexco's business plan, from the date of its organization until the
acquisition of Security Software on June 30, 2000, was to provide promotional,
advertising and public relations services in the United States to smaller
Canadian companies lacking the personnel and facilities to conduct such
activities outside Canada. Since the acquisition of Security Software, Natexco
has been engaged in the business of developing, manufacturing, marketing,
selling and distributing computer software designed to assist security and guard
personnel in managing the inflow of traffic to, and the outflow of traffic from,
a building or secure property. Security Software has generated only minimal
revenue and a net loss from operations through the date hereof. For the period
from January 1 through July 29, 2000, and the years ended December 31, 1999, and
1998, Security Software realized total net sales of $100 (unaudited), $30,024
and $33,116, respectively, and a net loss of $(6,811) ($(22.70) per share)
(unaudited), $(12,008) ($(40.03) per share) and $(6,695) ($(22.32) per share),
respectively. Natexco realized no revenues and a net loss of $(24,781) ($(.01)
per share) (unaudited), $(2,635) (less than $.01 per share) and $(2,008) for the
nine months ended September 30, 2000, the year ended December 31, 1999, and the
period from March 3, 1998 (inception) through December 31, 1998, respectively.
The increased net loss realized by Natexco for the nine months ended September
30, 2000, was the result, primarily, of increased selling, general and
administrative expenses. Giving effect to Natexco's acquisition of Security
Software on an unaudited basis, the combined companies realized a pro forma net
loss of $(6,961) ($(23.20) per share), $(13,768) ($(45.89) per share) and
$(18,942) ($(63.14) per share) for the period from January 1 through July 29,
2000, and the years ended December 31, 1999, and 1998, respectively.
We intend to generate increased product sales in the future through the
development of new products; the enhancement of SEI with additional features
designed to make the software more appealing and serviceable; and the
expenditure of additional funds for marketing, advertising and/or promotion. We
are considering the enhancement of SEI with additional features such as
automatic visual recognition of entry requests through video camera images,
voice recognition of entry requests through voice inputs to computer recognition
software and computer-enhanced fingerprint and eyeball iris identification.
While we believe that the technology for these features is available from
suppliers "off-the-shelf" and would be easily adaptable to the existing SEI
program, we have not yet fully researched, developed or implemented any of these
proposed additional features or technologies. The implementation of our plans to
enhance SEI, develop new products and expend additional funds for marketing,
advertising and/or promotion is dependent upon Natexco's ability to raise
additional capital from equity and/or debt financing and/or achieve profitable
operations. We believe that the revenue generated from our business will not be
sufficient to finance these and other future activities and that it will be
necessary to raise additional funds through equity and/or debt financing in the
next twelve months. Although we intend to explore all available alternatives for
debt and/or equity financing, including, but not limited to, private and public
securities offerings, there can be no assurance that we will be able to generate
additional capital for research and development and/or other purposes. In the
event that only limited additional financing is received, we expects our
opportunities in the security computer software market to be limited. Further,
even if we succeed in obtaining the level of funding necessary to increase sales
through the enhancement of SEI, the development of new products and/or the
expenditure of additional funds for marketing, advertising and/or promotion,
this will not ensure that operations will be profitable.
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Financial Condition, Capital Resources and Liquidity
As of September 30, 2000, Natexco had total assets of $53,324
(unaudited), including total current assets (cash) of $30,761 (unaudited),
equipment and software development costs (net of accumulated depreciation and
amortization) of $1,978 (unaudited) and goodwill (net of accumulated
amortization of $1,871) of $20,585 (unaudited), total current liabilities of
$33,048 (unaudited) and a working capital deficit of $(2,287) (unaudited). As of
December 31, 1999, Natexco had total assets consisting of current assets (cash)
of $2,477, total current liabilities of $220 and working capital of $2,257. The
increase in Natexco's cash from $2,477 as of December 31, 1999, to $30,761
(unaudited) as of September 30, 2000, is the result of proceeds received from
sales of preferred stock and a loan of $20,000 from an affiliated company. The
goodwill of $20,585 (unaudited) and equipment and software development costs of
$1,978 (unaudited) shown on Natexco's Balance Sheet as of September 30, 2000,
result from the acquisition by Natexco on July 30, 2000, of all of the
outstanding common stock of Security Software; which transaction has been
recorded as a purchase in Natexco's financial statements. Goodwill represents
the excess of the purchase price for the common stock, over the fair value of
the assets, of Security Software. As of September 30, 2000, and December 31,
1999, Natexco's total shareholders' equity was $20,276 (unaudited) and $2,257,
respectively, including retained deficits of $(29,424) (unaudited) and $(4,643)
(unaudited), respectively. As of July 29, 2000, and December 31, 1999, Security
Software had total assets, consisting of current assets (cash), equipment (net
of accumulated depreciation) and software development costs (net of accumulated
amortization), of $2,599 (unaudited) and $5,463, respectively, total current
liabilities of $55 (unaudited) and $269, respectively, and working capital of
$2,544 (unaudited) and $420, respectively. Security Software's total
shareholders' equity was $2,544 (unaudited) and $5,194, including retained
deficits of $(46,417) (unaudited) and $(39,456), respectively, as of July 29,
2000, and December 31, 1999, respectively.
To date, Natexco has been funded through the sale of preferred and
common stock for gross proceeds in the amount of $40,100 and $2,400,
respectively, and a $20,000 loan from an affiliate. We have experienced working
capital shortages from time-to-time and we expect that such working capital
shortages may continue until such time as we are successful in raising
additional capital and/or achieving profitable operations. While our independent
auditor has presented our financial statements on the basis that Natexco is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business over a reasonable length of
time, it has noted that our significant operating losses raise a substantial
doubt about our ability to continue as a going concern. Natexco's future success
will be dependent upon our ability to develop effective and competitive security
computer software and new products that meet customers' changing requirements.
Should our efforts to raise additional capital through equity and/or debt
financing fail, management is expected to provide the necessary working capital
so as to permit Natexco to continue as a going concern.
Item 3. Description of Property.
Natexco maintains its offices rent-free at the residence of its
President located at 3255 Norfolk Road, Victoria, British Columbia, Canada V8R
6H5. Security Software maintains its offices rent-free at the residence of its
President located at Pinion Road, Bailey, Colorado 80421. We anticipate the
continued utilization of these offices on a rent-free basis until such time, if
ever, as we obtain sufficient funding from debt and/or equity financing and/or
generate a level of earnings sufficient to enable us to rent office space in
Canada and Colorado from independent third parties. The space currently occupied
by Natexco and Security Software is expected to be adequate to meet our
foreseeable future needs. Natexco's telephone and facsimile number is (250)
598-2373. The telephone and facsimile numbers for Security Software are (303)
816-4744/(888) 480-7774 (toll-free) and (303) 816-2671, respectively.
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Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
ownership of Natexco's common stock as of November 20, 2000, by each shareholder
known by us to be the beneficial owner of more than five per cent of Natexco's
outstanding shares of common stock, each executive director and director of
Natexco and Security Software and all executive officers and directors of
Natexco and Security Software as a group. Under the General Rules and
Regulations of the Commission, a person is deemed to be the beneficial owner of
a security if such person has or shares the power to vote or direct the voting,
or dispose or direct the disposition, of such security. Each of the shareholders
named in the table has sole voting and investment power with respect to the
shares of common stock beneficially owned.
Shares Percentage
Beneficially of
Beneficial Owner Owned (1) Class (1)
-------------------------------------- ------------ ----------
Charles P. Neild 150,000 6.25%
14266 32nd Avenue
White Rock, British Columbia, Canada
V3P 2J5
Michelle Neild 150,000 6.25%
15318 North Bluff Road, Suite #104
White Rock, British Columbia, Canada
V4B 3E7
Mansfield Consultants Limited 150,000 6.25%
97 Cronk Liauyr
Tromode Douglas
Isle of Man, British Islands
1M2 5LR
Gerald A. Mulhall (2) (3) 110,000 4.58%
3255 Norfolk Road
Victoria, British Columbia, Canada
V8R 6H5
Anthony Mulhall (2) 100,000 4.17%
3255 Norfolk Road
Victoria, British Columbia, Canada
V8R 6H5
John H. Tetstill (4) -0- 0.00%
5 Pinion Road
Bailey, Colorado 80421
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Terese M. Tetstill (4) -0- 0.00%
5 Pinion Road
Bailey, Colorado 80421
All executive officers and directors 660,000 27.5%
of Natexco and Security Software
as a group (four persons)
------------------
(1) Represents the number of shares of common stock owned of record and
beneficially by each named person or group, expressed as a percentage
of 2,400,000 shares of Natexco's common stock outstanding as of
November 20, 2000.
(2) Executive officer and member of the Board of Directors of Natexco.
(3) Does not include 20,000 shares of preferred stock owned of record and
beneficially by Aboyne Management, Ltd., a British Columbia, Canada,
corporation of which Mr. Mulhall is the President and a controlling
shareholder.
(4) Executive officer and member of the Board of Directors of Security
Software.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
Executive Officers and Directors
Set forth below are the names, ages, positions with Natexco or Security
Software, a 100%-owned subsidiary of Natexco, and business experience of the
executive officers and directors of Natexco and Security Software.
Name Age Position
---- --- -------------
Gerald A. Mulhall (1) 69 President and Director of Natexco
Anthony Mulhall (1) 41 Secretary, Treasurer and Director of Natexco
John H. Tetstill (2) 59 President and Director of Security Software
.
Terese M. Tetstill (2) 54 Secretary, Treasurer and Director of Security
Software
------------------
(1) The above-named persons may be deemed to be "promoters" and
"parents" of Natexco, as those terms are defined under the General Rules and
Regulations promulgated under the Securities Act of 1933, as amended.
(2) The above-named persons may be deemed to be "promoters" and
"parents" of Security Software, as those terms are defined under the General
Rules and Regulations promulgated under the 1933 Act.
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General
Directors hold office until the next annual meeting of Natexco's
shareholders and until their respective successors have been elected and
qualify. Officers serve at the pleasure of the Board of Directors. Messrs.
Gerald A. and Anthony Mulhall and John H. Tetstill and Ms. Terese M. Tetstill
expect to devote such time and effort to the business and affairs of Natexco
and/or Security Software as may be necessary to perform their responsibilities
as executive officers and directors and/or otherwise. Set forth below under
"Business Experience" is a description of the business experience of Messrs.
Gerald A. and Anthony Mulhall and Tetstill and Ms. Tetstill.
Family Relationships
Messrs. Gerald A. and Anthony Mulhall are father and son, respectively.
Mr. John H. and Ms. Terese M. Tetstill are husband and wife, respectively.
Business Experience
Gerald A. Mulhall has served as the President and a director of Natexco
since November 23, 1998. Since May 1999, he has been the President and a
principal shareholder of Aboyne Management, Ltd., a privately-held British
Columbia, Canada, corporation. Mr. Mulhall has been self-employed as a
management consultant with offices in Victoria, British Columbia, Canada, for
the past approximately 20 years since approximately 1980. From 1974 through
1980, he served as the President of MS Management Services Ltd., Edmonton,
Alberta, Canada, a consulting firm. Mr. Mulhall was employed as the Director,
OAS, of the University of Alberta, Canada, from 1969 through 1974. From 1967
through 1969, he was employed as a manager of Atco Industries Ltd., Calgary,
Alberta, Canada, a company engaged in the prefabricated housing business. Mr.
Mulhall was a self-employed management consultant with offices in Edmonton,
Alberta, Canada, from 1966 through 1967. He served, from 1963 through 1966, as
the Vice-President of the Montreal and Canadian Stock Exchanges. From 1961
through 1963, Mr. Mulhall served as a management consultant to Woods Gordon &
Co., Montreal, Quebec, Canada, a consulting firm. He was employed as a
supervisor by BP Canada Limited, Montreal, Quebec, Canada, a publicly-held oil
and gas company, from 1957 through 1961. Mr. Mulhall has served as a Director of
the Management Advisory Institute of the University of Alberta and as a lecturer
to the Department of Extension, University of Alberta, Canada, and the Grant
McEwan Community College, Edmonton, Alberta, Canada. He received a Business
Administration degree from Sir George William University, Montreal, Quebec,
Canada, in 1962 and a P. Mgr. degree from the Canadian Institute of Management,
Ottowa, Canada, in 1975.
Anthony Mulhall has served as the Secretary, the Treasurer and a
director of Natexco since December 1, 1998. For the past approximately six
years, he has been a professional marine diver working on a contract basis for
various seafood product companies in the province of British Columbia, Canada.
John H. Tetstill has served as the President and a director of Security
Software since October 24, 1996. He has been employed by Governor's Ranch
Homeowners Association, Littleton, Colorado, as a property manager since August
1999. From March 1993 through May 1999, Mr. Tetstill was employed as a
regional/general manager by Vista Properties Management, Vero Beach, Florida. He
received a B.A. degree in English literature from Hastings College of Further
Education, Hastings, England, United Kingdom, in 1959.
Terese M. Tetstill has served as the Secretary, the Treasurer and a
director of Security Software since October 24, 1996. Since April 2000, Ms.
Tetstill has been employed by Conference and Management Specialists, Denver,
Colorado, as a bookkeeper. From August 1993 through May 1999, she was employed
as a bookkeeper/financial secretary by Lost Tree Chapel, North Palm Beach,
Florida.
10
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Item 6. Executive Compensation
No cash compensation has been awarded to, earned by or paid to Messrs.
Gerald A. Mulhall or Anthony Mulhall, the President and Secretary/Treasurer,
respectively, of Natexco for all services rendered in all capacities to Natexco
since November 23, 1998, and December 1, 1998, respectively, and/or Security
Software, a 100%-owned subsidiary of Natexco, since July 30, 2000. Messrs.
Gerald A. and Anthony Mulhall became executive officers and directors of Natexco
on November 23, 1998, and Natexco acquired all of the outstanding common stock
of Security Software, as a result of which transaction Security Software became
a wholly-owned subsidiary of Natexco, on July 30, 2000. No cash compensation has
been awarded to, earned by or paid to Mr. John H. Tetstill or Ms. Terese M.
Tetstill, the President and Secretary, respectively, of Security Software, for
all services rendered in all capacities to Natexco since July 30, 2000, and/or
Security Software since the company's inception on October 17, 1996. For the
foreseeable future, neither Mr. Gerald A. Mulhall nor Mr. Anthony Mulhall will
receive any compensation in any form for their services rendered in all
capacities to Natexco and/or Security Software. Commencing on July 30, 2000, Mr.
and Ms. Tetstill receive compensation, payable quarterly, in the amount of 30%
of Security Software's gross sales and $8.00 per hour of time devoted to
Security Software, respectively. Neither Messrs. Gerald A. Mulhall, Anthony
Mulhall or Tetstill nor Ms. Tetstill holds any option to purchase any of
Natexco's securities. Except for Ms. Tetstill, who will only devote time to
Security Software, the executive officers and directors of Natexco and Security
Software plan to devote only such time to the affairs of Natexco and/or Security
Software that each deems necessary.
Natexco does not provide its officers or employees with pension, stock
appreciation rights, long-term incentive or other plans and has no intention of
implementing any such plans for the foreseeable future. In the future, we may
offer stock options to prospective employees and/or consultants; however, no
such options have been granted as of the date hereof. It is possible that in the
future we may establish various executive incentive programs and other benefits,
including reimbursement for expenses incurred in connection with Natexco's
operations, Company automobiles and life and health insurance, for our executive
officers and directors, but none has yet been granted. The provisions of such
plans and benefits will be at the discretion of our Board of Directors.
Under Nevada law and pursuant to Natexco's Articles of Incorporation,
the officers and directors of Natexco may be indemnified for various expenses
and damages resulting from their acting in such capacity and as directors of a
subsidiary. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to officers or directors of
Natexco pursuant to those provisions, Natexco has been informed by its counsel
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the 1933 Act and is
therefore unenforceable.
Compensation of Directors
Directors of Natexco and Security Software receive no compensation
pursuant to any standard arrangement for their services as directors.
11
<PAGE>
Item 7. Certain Relationships and Related Transactions.
On March 31, 1999, Natexco issued and sold an aggregate of 2,400,000
shares of common stock to a total of thirty-four persons, including Messrs.
Gerald A. and Anthony Mulhall, the President and Secretary/Treasurer,
respectively, and directors of Natexco, in our offering of common stock
conducted pursuant to Rule 504 of Regulation D under Section 3(b) of the 1933
Act. Messrs. Gerald A. and Anthony Mulhall purchased 110,000 and 100,000 shares
of common stock, respectively, for cash consideration of $110 and $100,
respectively.
On each of May 18 and March 21, 2000, Natexco issued and sold 10,000
shares of preferred stock (a total of 20,000 shares) to Aboyne Management, Ltd.
("Aboyne"), a British Colombia, Canada, corporation, in consideration for the
cash sum of $20,000. Mr. Gerald A. Mulhall, the President and a director of
Natexco, is the President and principal shareholder of Aboyne.
On March 21, 2000, Aboyne Management, Ltd., loaned the sum of $20,000
to Natexco; which loan is evidenced by that certain unsecured Promissory Note
dated March 21, 2000, in the principal amount of $20,000, bearing interest at
the rate of 10% per annum, due March 20, 2001. At September 30, 2000, accrued
interest expense related to the note totaled $1,048 (unaudited).
Mr. Gerald A. Mulhall, President and a director of Natexco, provides
office space, located at 3255 Norfolk Road, Victoria, British Columbia, Canada,
to Natexco rent-free. The office space was valued at $700 (unaudited) and $200
per month for the periods from July 30 through September 30, 2000, and March 3,
1998 (inception), through July 29, 2000, respectively. The value of the office
space is included in Natexco's Financial Statements that commence on page F-1
hereof as rent expense with a corresponding credit to additional paid-in
capital.
Mr. John H. Tetstill, President and a director of Security Software,
provides office space, located at 5 Pinion Road, Bailey, Colorado, rent-free to
Security Software. The office space was valued at $500 (unaudited) per month and
is included in Natexco's Financial Statements that commence on page F-1 hereof
as rent expense with a corresponding credit to additional paid-in capital.
Because of their present management positions, organizational efforts
and/or percentage share ownership of Natexco, Messrs. Gerald A. and Anthony
Mulhall may be deemed to be "parents" and "promoters" of Natexco, as those terms
are defined in the 1933 Act and the applicable General Rules and Regulations
thereunder. Mr. John H. and Ms. Terese M. Tetstill may be deemed to be "parents"
and "promoters" of Security Software because of their present management
positions with, and organizational efforts on behalf of, Security Software.
Because of the above-described relationships, transactions between and among
Natexco, Security Software, Messrs. Gerald A. Mulhall and Anthony Mulhall,
Aboyne and Mr. and Ms. Tetstill, such as the sale of Natexco's common and
preferred stock to Messrs. Gerald A. Mulhall and Anthony Mulhall and Aboyne as
described hereinabove, should not be considered to have occurred at
arm's-length.
Item 8. Description of Securities.
Description of Capital Stock
Natexco's authorized capital stock consists of 20,000,000 shares of
common stock, $.001 par value per share, and 5,000,000 shares of preferred
stock, $.001 par value per share.
12
<PAGE>
Description of Common Stock
All shares of common stock have equal voting rights and, when validly
issued and outstanding, are entitled to one vote per share in all matters to be
voted upon by shareholders. The shares of common stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as
fully-paid and nonassessable shares. Cumulative voting in the election of
directors is not permitted; which means that the holders of a majority of the
issued and outstanding shares of common stock represented at any meeting at
which a quorum is present will be able to elect the entire Board of Directors if
they so choose and, in such event, the holders of the remaining shares of common
stock will not be able to elect any directors. In the event of liquidation of
Natexco, each shareholder is entitled to receive a proportionate share of
Natexco's assets available for distribution to shareholders after the payment of
liabilities and after distribution in full of preferential amounts, if any, to
be distributed to holders of the preferred stock. All shares of Natexco's common
stock issued and outstanding are fully-paid and nonassessable.
Dividend Policy. Holders of shares of the common stock are entitled to
share pro rata in dividends and distributions with respect to the common stock
when, as and if declared by the Board of Directors out of funds legally
available therefor, after requirements with respect to preferential dividends
on, and other matters relating to, the preferred stock, if any, have been met.
Natexco has not paid any dividends on its common stock and intends to retain
earnings, if any, to finance the development and expansion of its business.
Future dividend policy is subject to the discretion of the Board of Directors
and will depend upon a number of factors, including future earnings, capital
requirements and the financial condition of Natexco.
Transfer Agent and Registrar. The Transfer Agent and Registrar for
Natexco's common stock is Corporate Stock Transfer, Inc., 3200 Cherry Creek
Drive South, Suite #430, Denver, Colorado 80209.
Description of Preferred Stock
Shares of preferred stock may be issued from time to time in one or
more series as may be determined by the Board of Directors. The voting powers
and preferences, the relative rights of each such series and the qualifications,
limitations and restrictions thereof shall be established by the Board of
Directors, except that no holder of preferred stock shall have preemptive
rights. As of November 20, 2000, Natexco had 50,000 shares of preferred stock
issued and outstanding. No such share of preferred stock is convertible,
redeemable or entitled to voting rights, but has the following preferences:
(i) The right to receive, pro rata, a mandatory dividend of 10% of
Natexco's adjusted gross profit as reflected on its annual corporate income tax
return to be paid within ten days of the filing thereof;
(ii) Upon dissolution or winding up of Natexco, 10% of the assets of
Natexco to be distributed on a pro rata basis prior to division and distribution
of assets to the holders of common stock.
Additionally, all shares of preferred stock have all of the
preferences, limitations and rights otherwise provided by law and the Articles
of Incorporation of Natexco. The rights, privileges and preferences with respect
to the preferred stock may be amended or modified with the consent of the
holders of at least two-thirds of the preferred stock then outstanding.
13
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters.
(a) Market Information.
There has been no established public trading market for the common
stock since Natexco's inception on March 3, 1998.
(b) Holders.
As of November 20, 2000, Natexco had thirty-four shareholders of record
of its 2,400,000 issued and outstanding shares of common stock.
(c) Dividends.
Natexco has never paid or declared any dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future.
Item 2. Legal Proceedings.
Neither Natexco nor Security Software knows of any legal proceedings to
which either company is a party or to which the property of either company is
the subject that are pending, threatened or contemplated or any unsatisfied
judgments against either Natexco or Security Software.
Item 3. Changes in and Disagreements with Accountants.
Cordovano & Harvey, P.C., 201 Steele Street, Suite #300, Denver,
Colorado 80206, has reported upon Natexco's Consolidated Balance Sheets as of
September 30, 2000 (unaudited), and December 31, 1999, the related Consolidated
Statements of Operations and Consolidated Statements of Cash Flows for the year
ended December 31, 1999, from March 3, 1998 (inception), through December 31,
1998, and for the nine months ended September 30, 2000, and 1999 (unaudited),
and the related Consolidated Statement of Shareholders' Equity from March 3,
1998 (inception), through September 30, 2000 (unaudited). Cordovano & Harvey,
P.C., has also reported upon the Balance Sheets of Security Software as of July
29, 2000 (unaudited), and December 31, 1999, the Statements of Operations and
Statements of Cash Flows for the years ended December 31, 1999 and 1998, and
from January 1, 2000, through July 29, 2000 (unaudited), and the Statement of
Shareholders' Deficit from January 1, 1998, through July 29, 2000 (unaudited).
Cordovano & Harvey, P.C., has been appointed as Natexco's independent accountant
for the fiscal year ending December 31, 2000. There has been no change in
Natexco's independent accountant during the period commencing with Natexco's
retention of Cordovano & Harvey, P.C., through the date hereof.
14
<PAGE>
Item 4. Recent Sales of Unregistered Securities.
Natexco issued and sold, on May 18, 2000, 20,000 shares of preferred
stock to Desert Bloom Investments, Inc., a Colorado corporation, in
consideration for $20,000 in cash. On each of May 18 and March 21, 2000, Natexco
issued and sold 10,000 shares of preferred stock (a total of 20,000 shares) to
Aboyne Management, Ltd., in consideration for the cash sum of $20,000. Aboyne is
a British Colombia, Canada, corporation of which Mr. Gerald A. Mulhall, the
President and a director of Natexco, is the President and principal shareholder.
Natexco issued and sold, on December 5, 1998, 10,000 shares of preferred stock
to Eastbury Consultants, Ltd., an Isle of Man, British Islands, corporation, in
consideration for cash in the amount of $10,000. Natexco relied, in connection
with the sale of the above-described shares of preferred stock, upon the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"). To make the exemption available, Natexco
relied upon the fact that the issuance and sale of the shares by Natexco did not
constitute a public securities offering together with the fact that Desert Bloom
Investments, Inc., Aboyne Management, Ltd., and Eastbury Consultants, Ltd., are
all accredited investors. These investors had access to the prospectus dated
February 25, 1999, used in connection with Natexco's common stock offering
conducted under Rule 504 of Regulation D under Section 3(b) of the 1933 Act, as
described in more detail below, and/or the information provided in the
prospectus. Further, Natexco did not use public solicitation or general
advertising in connection with the offering. In connection with the sale of the
shares of preferred stock to Desert Bloom Investments, Inc., Natexco also relied
upon the exemption from registration provided under Section 11-51-308(1)(p) of
the Colorado Uniform Securities Act, as amended.
On March 31, 1999, Natexco issued and sold an aggregate of 2,400,000
shares of common stock to a total of thirty-four persons, all of whom are
residents of either Canada, the Isle of Man, British Islands, or London,
England, United Kingdom, for cash consideration totaling $2,400. The sales were
made by Natexco in reliance upon the exemption from registration with the U.S.
Securities and Exchange Commission provided under Section 3(b) of the 1933 Act
and Rule 504 of Regulation D promulgated thereunder. No underwriter was employed
in connection with the offering and sale of the shares. The facts relied upon by
Natexco to make the Federal exemption available include, among others, the
following:
(i) The aggregate offering price for the offering of the shares of
common stock did not exceed $1,000,000, less the aggregate offering price for
all securities sold within the twelve months before the start of and during the
offering in reliance on any exemption under Section 3(b) of, or in violation of
Section 5(a) of, the 1933 Act;
(ii) The required number of manually executed originals and true copies
of Form D were duly and timely filed with the U.S. Securities and Exchange
Commission;
(iii) No general solicitation or advertising was conducted by Natexco
in connection with the offering of any of the shares; and
(iv) The fact that Natexco has not been since its inception:
(a) Subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended;
(b) An "investment company" within the meaning of the
Investment Company Act of 1940, as amended; or
(c) A development stage company that either has no specific
business plan or purpose or has indicated that its business plan is to
engage in a merger or acquisition with an unidentified company or
companies, or other entity or person.
15
<PAGE>
Item 5. Indemnification of Directors and Officers.
Article Ninth of Natexco's Articles of Incorporation contains
provisions providing for the indemnification of directors and officers of
Natexco as follows:
NINTH. Indemnification of Officers and Directors. The Board of
Directors of the Corporation shall have the power to:
A. Indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation), by reason of the fact that he is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Corporation and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in the best interests of the Corporation and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
unlawful.
B. Indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of the Corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
the best interests of the Corporation; but no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the Corporation unless and only to the extent that the court in which
such action or suit was brought determines upon application that, despite the
adjudication of liability, but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnification for such expenses
which such court deems proper.
C. Indemnify a Director, officer, employee or agent of the Corporation
to the extent that such person has been successful on the merits in defense of
any action, suit or proceeding referred to in Subparagraph A or B of this
Article or in defense of any claim, issue, or matter therein, against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection therewith.
D. Authorize indemnification under Subparagraph A or B of this Article
(unless ordered by a court) in the specific case upon a determination that
indemnification of the Director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
said Subparagraph A or B. Such determination shall be made by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or, if such a quorum is not
obtainable or even if obtainable a quorum of disinterested directors so directs,
by independent legal counsel in a written opinion, or by the shareholders.
16
<PAGE>
E. Authorize payment of expenses (including attorney's fees) incurred
in defending a civil or criminal action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding as authorized in
Subparagraph D of this Article upon receipt of an undertaking by or on behalf of
the Director, officer, employee or agent to repay such amount unless it is
ultimately determined that he is entitled to be indemnified by the Corporation
as authorized in this Article.
F. Purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Corporation or who is or was
serving at the request of the Corporation as a Director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provision of this Article.
The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
these Articles of Incorporation, and the Bylaws, agreement, vote of shareholders
or disinterested directors or otherwise, and any procedure provided for by any
of the foregoing, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of heirs, executors and administrators of such a person.
Article __ of Security Software's Articles of Incorporation contains
provisions providing for the indemnification of directors and officers of
Security Software as follows:
The corporation shall indemnify each Officer and Director, including
former Officers and Directors, to the full extent permitted by law.
Neither Natexco nor Security Software has any agreements with any of
its directors or executive officers providing for indemnification of any such
persons with respect to liability arising out of his or her capacity or status
as an officer and/or director.
At present, there is no pending litigation or proceeding involving a
director or executive officer of Natexco or Security Software as to which
indemnification is being sought.
PART F/S
The Consolidated Financial Statements of Natexco Corporation and its
wholly-owned subsidiary, Security Software Systems, Inc., required by Regulation
SB commence on page F-1 hereof in response to Part F/S of this Registration
Statement on Form 10-SB and are incorporated herein by this reference.
17
<PAGE>
PART III
Item 1. Index to Exhibits.
Item
Number Description
------ -----------
3.1* Articles of Incorporation of Natexco Corporation filed March 3, 1998.
3.2* Bylaws of Natexco Corporation.
10.1* Promissory Note dated March 21, 2000, in the principal amount
of $20,000 payable by Natexco Corporation to Aboyne Management, Ltd.
------------------
*Filed herewith.
Item 2. Description of Exhibits.
The documents required to be filed as Exhibit Number 2 in Part III of
Form 1-A filed as part of this Registration Statement on Form 10-SB are listed
in Item 1 of this Part III above. No documents are required to be filed as
Exhibit Numbers 3, 5, 6 or 7 in Part III of Form 1-A, and the reference to such
Exhibit Numbers is therefore omitted. No additional exhibits are filed hereto.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATEXCO CORPORATION
(Registrant)
Date: November 21, 2000 By: /s/ Gerald A. Mulhall
-------------------------------
Gerald A. Mulhall, President
Date: November 21, 2000 By: /s/ Anthony Mulhall
-------------------------------
Anthony Mulhall, Secretary and
Treasurer
18
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
NATEXCO CORPORATION
<S> <C>
Independent auditors' report........................................................................................F-2
Consolidated balance sheets, December 31, 1999 and September 30, 2000 (Unaudited)...................................F-3
Consolidated statements of operations, year ended December 31, 1999, from
March 3, 1998 (inception) through December 31, 1998, and for the nine
months ended September 30, 2000 and 1999 (Unaudited)...........................................................F-4
Consolidated statement of shareholders' equity, March 3, 1998 (inception)
through September 30, 2000 (Unaudited).........................................................................F-5
Consolidated statements of cash flows, year ended December 31, 1999, from
March 3, 1998 (inception) through December 31, 1998, and for the nine
months ended September 30, 2000 and 1999 (Unaudited)...........................................................F-7
Notes to consolidated financial statements..........................................................................F-8
SECURITY SOFTWARE SYSTEMS, INC.
Independent auditors' report.......................................................................................F-15
Balance sheets, December 31, 1999 and July 29, 2000 (Unaudited)....................................................F-16
Statements of operations, years ended December 31, 1999 and 1998,
and from January 1, 2000 through July 29, 2000 (unaudited)....................................................F-17
Statement of shareholders' deficit, January 1, 1998 through
July 29, 2000 (Unaudited).....................................................................................F-18
Statements of cash flows, years ended December 31, 1999 and 1998,
and from January 1, 2000 through July 29, 2000 (unaudited)....................................................F-19
Notes to financial statements......................................................................................F-20
</TABLE>
F-1
<PAGE>
To the Board of Directors and Shareholders
Natexco Corporation
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Natexco Corporation (the
"Company") as of December 31, 1999 and the related statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1999 and the
period from March 3, 1998 (inception) through December 31, 1998. 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 Natexco Corporation as of
December 31, 1999 and the results of its operations and its cash flows for the
year ended December 31, 1999 and the period from March 3, 1998 (inception)
through December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note A to the financial
statements, the Company's significant operating losses raise a substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regard to those matters are also described in Note A. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Effective July 30, 2000, Natexco Corporation acquired all of the issued and
outstanding voting stock of Security Software Systems, Inc. (SSSI). Pro forma
financial information provided in Note F, giving effect to the Company's
acquisition of SSSI, is on an unaudited basis.
Cordovano and Harvey, P.C.
Denver, Colorado
October 6, 2000
F-2
<PAGE>
NATEXCO CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash.......................................................................................$ 2,477 $ 30,761
------- --------
Total current assets 2,477 30,761
Equipment and software development costs, net of accumulated
depreciation and amortization (Note C)..................................................... - 1,978
Goodwill, net of accumulated amortization of
$-0- and $1,871 (unaudited), respectively (Note F)......................................... - 20,585
------- --------
$ 2,477 $ 53,324
======= ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities...................................................$ - $ 12,000
Due to officer (Note B).................................................................... 220 -
Accrued interest payable, related parties (Note B)......................................... - 1,048
Notes payable, related parties (Note B).................................................... - 20,000
------- --------
Total current liabilities 220 33,048
------- --------
Commitment (Note G)............................................................................. - -
Shareholders' equity (Note D):
Preferred stock, $.001 par value, 5,000,000 shares authorized;
ten percent pro rata distribution upon liquidation; 10,000 and
50,000 shares issued and outstanding, respectively...................................... 10 50
Common stock, $.001 par value; 20,000,000 shares
authorized; 2,400,000 and 2,400,000 (unaudited) shares
issued and outstanding, respectively.................................................... 2,400 2,400
Additional paid-in capital................................................................. 4,490 47,250
Retained deficit........................................................................... (4,643) (29,424)
------- --------
Total shareholders' equity 2,257 20,276
------- --------
$ 2,477 $ 53,324
======= ========
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
NATEXCO CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
March 3, 1998
For the (Inception) For the Nine Months Ended
Year Ended through September 30,
December 31, December 31, -----------------------------
1999 1998 2000 1999
------------ -------------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating expenses:
Selling, general and
administrative......................................$ 235 $ 8 $ 20,933 $ 235
Rent, related party (Note B)........................... 2,400 2,000 2,800 1,800
--------- -------- --------- ---------
Operating loss (2,635) (2,008) (23,733) (2,035)
Interest expense, related parties (Note B)................. - - (1,048) -
--------- -------- --------- ---------
Net loss before income taxes (2,635) (2,008) (24,781) (2,035)
Income tax expense (Note E)................................ - - - -
--------- -------- --------- ---------
Net loss $ (2,635) $ (2,008) $ (24,781) $ (2,035)
========= ======== ========= =========
Basic and diluted loss per common share....................$ * N/A $ (0.01) $ *
========= ======== ========= =========
Basic and diluted weighted average common
shares outstanding.....................................2,400,000 - 2,400,000 1,600,000
========= ======== ========= =========
</TABLE>
* Less than $.01 per share
See accompanying notes to the financial statements.
F-4
<PAGE>
NATEXCO CORPORATION
Consolidated Statement of Shareholders' Equity
March 3, 1998 (Inception) through September 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- -------------------- Paid-in Retained
Shares Par Value Shares Par Value Capital Deficit Total
------- --------- ------ --------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 3, 1998 (inception)......................... - $ - $ - $ - $ - $ -
Sale of preferred shares ($.001/share) (Note D)............10,000 10 - - 90 - 100
Office space contributed by Company's
president (Note B)...................................... - - - - 2,000 - 2,000
Net loss for the period from March 3, 1998
(inception) through December 31, 1998................... - - - - - (2,008) (2,008)
------ ------ --------- ------- ------- ------ ------
Balance, December 31, 1998.................................10,000 10 - - 2,090 (2,008) 92
Common shares sold in a private offering
($.001/share) (Note D).................................. - - 2,400,000 2,400 - - 2,400
Office space contributed by Company's
president (Note B)...................................... - - - - 2,400 - 2,400
Net loss for the year ended December 31, 1999.............. - - - - - (2,635) (2,635)
------ ------ --------- ------- ------- ------ ------
Balance, December 31, 1999.................................10,000 10 2,400,000 2,400 4,490 (4,643) 2,257
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
NATEXCO CORPORATION
Consolidated Statement of Shareholders' Equity
March 3, 1998 (Inception) through September 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- -------------------- Paid-in Retained
Shares Par Value Shares Par Value Capital Deficit Total
------- --------- ------ --------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of preferred shares ($1.00/share)
(Note D) (Unaudited)....................................40,000 40 - - 39,960 - 40,000
Office space contributed by Company's
president (Note B) (Unaudited).......................... - - - - 2,800 - 2,800
Net loss for the nine months ended
September 30, 2000 (Unaudited).......................... - - - - - (24,781) (24,781)
------ ------ --------- ------- -------- -------- -------
Balance, September 30, 2000 (Unaudited)....................50,000 $ 50 2,400,000 $ 2,400 $ 47,250 $(29,424) $20,276
====== ====== ========= ======= ======== ======== =======
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
NATEXCO CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
March 3, 1998
For The (Inception) For The Nine Months Ended
Year Ended through September 30,
December 31, December 31, ------------------------------
1999 1998 2000 1999
------------ ------------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................$ (2,635) $.(2,008) $ (24,781) $ (2,035)
Transactions not requiring cash:
Depreciation and amortization........................ - - 2,492 -
Office space contributed by the Company's
president (Note B)................................ 2,400 2,000 2,800 1,800
Changes in current assets and current liabilities:
Increase in accounts payable and accrued
liabilities net of $55 (September 30, 2000)
effect from acquisition of subsidiary.......... 220 - 12,773 220
-------- -------- --------- --------
Net cash used by operating activities........................ (15) (8) (6,716) (15)
-------- -------- --------- --------
Cash flows from investing activities:
Acquisition of subsidiary............................... - - (25,000) -
-------- -------- --------- --------
Net cash used by operating activities........................ - - (25,000) -
-------- -------- --------- --------
Cash flows from financing activities:
Proceeds from notes payable (Note B).................... - - 20,000 -
Proceeds from stock sales............................... 2,400 100 40,000 2,400
-------- -------- --------- --------
Net cash provided by operating activities.................... 2,400 100 60,000 2,400
-------- -------- --------- --------
Net change in cash 2,385 92 28,284 2,385
Cash, beginning of period.................................... 92 - 2,477 92
-------- -------- --------- --------
Cash, end of period $ 2,477 $ 92 $ 30,761 $ 2,477
======== ======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................$ - $ - $ - $ -
======== ======== ========= ========
Income taxes............................................$ - $ - $ - $ -
======== ======== ========= ========
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE>
NATEXCO CORPORATION
Notes to Consolidated Financial Statements
Note A: Organization and business and summary of significant accounting policies
Organization and business
Natexco Corporation (the "Company") was incorporated in the state of Nevada on
March 3, 1998. On July 30, 2000, the Company purchased all of the outstanding
common shares of Security Software Systems, Inc. (SSSI), a Florida corporation,
for $25,000. The Company and SSSI were unrelated prior to the acquisition. The
Company's primary operations since July 30, 2000 have been devoted to selling
product through its wholly owned subsidiary and registering its common stock
with the Securities and Exchange Commission (SEC) on Form 10-SB.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company has incurred operating losses since inception.
This factor, among others, may indicate that the Company will be unable to
continue as a going concern for reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis and ultimately to attain
profitability.
Up to the time of the acquisition, the Company's operations consisted of
searching for products and services in Canada that, in the Company's opinion,
could be acquired for marketing in the United States or vice versa. With the
purchase of SSSI, the Company intends to continue the publishing and sale of its
security computer software entitled Secure Entry Interface (SEI). The Company
also intends to develop additional elements of SEI, which could enhance the
product and make it more attractive and serviceable to prospective customers.
The Company's management intends to raise additional capital through the sale of
its common stock or sale of convertible debentures or other debt instruments.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
Summary of significant accounting policies:
Principles of Consolidation
The Company's consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, SSSI. All material intercompany
accounts and transactions have been eliminated in consolidation.
F-8
<PAGE>
NATEXCO CORPORATION
Notes to Consolidated Financial Statements
Use of 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, liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all short-term, highly liquid investments with an original
maturity date of three months or less to be cash equivalents. Cash and cash
equivalents are stated at cost, which approximates fair value.
Equipment and depreciation
Equipment is stated at cost less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets, which is estimated to be five years. Expenditures for repairs and
maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments, which extend the useful lives of existing equipment,
are capitalized and depreciated. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the consolidated
statements of operations.
Software development costs and amortization
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," initial costs are charged to operations as research prior to the
development of a detailed program design or a working model. Thereafter, the
Company capitalizes the direct costs and allocated overhead associated with the
development of software products. Costs incurred subsequent to the product
release are charged to operations.
Capitalized costs are amortized over the estimated product life on a
straight-line basis. Unamortized costs are carried at the lower of book value or
net realizable value.
Income taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
F-9
<PAGE>
NATEXCO CORPORATION
Notes to Consolidated Financial Statements
Impairment of long-lived assets and certain identifiable intangibles
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indicators of impairment are
present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. In addition, the
recoverability of goodwill is further evaluated under provisions of APB Opinion
No. 17, Intangible Assets, based upon estimated fair value. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying value or fair value, less
costs to sell.
Fair value of financial instruments
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, accounts payable, and
other accrued liabilities approximate fair value due to the short-term maturity
of the instruments.
Loss per share
The Company reports loss per share using a dual presentation of basic and
diluted loss per share. Basic loss per share excludes the impact of common stock
equivalents. Diluted loss per share utilizes the average market price per share
when applying the treasury stock method in determining common stock equivalents.
At December 31, 1999, there is no variance between the basic and diluted loss
per share as there were no potentially dilutive securities outstanding.
Note B: Related party transactions
The President provided office space to the Company at no charge for all periods
presented. From March 3, 1998 (inception) through July 29, 2000, office space
was valued at $200 per month, and from July 30, 2000 through September 30, 2000,
office space was valued at $700 (unaudited) per month. The contributed office
space is included in the accompanying financial statements as rent expense with
a corresponding credit to additional paid-in capital.
On March 21, 2000, an affiliate advanced the Company $20,000 (unaudited) in
exchange for a note payable. The note bears interest at 10 percent and matures
on March 20, 2001. Accrued interest expense related to the note totaled $1,048
(unaudited) at September 30, 2000.
During the nine months ended September 30, 2000, the Company sold 20,000 shares
of its preferred stock to an affiliated company for $20,000 (unaudited) pursuant
to an exemption from registration claimed under Section 4(2) of the Securities
Act of 1933, as amended. The preferred stock held the preferences listed in Note
D.
F-10
<PAGE>
NATEXCO CORPORATION
Notes to Consolidated Financial Statements
Note C: Equipment and software development costs
The Company's equipment consisted of computer equipment acquired in the SSSI
purchase on July 30, 2000. Depreciation expense from July 30, 2000 through
September 30, 2000 totaled $204 (unaudited).
Software development costs acquired in the SSSI purchase on July 30, 2000
totaled $417. Amortization expense from July 30, 2000 through September 30, 2000
totaled $417 (unaudited).
Note D: Shareholders' equity
Preferred Stock
The Company is authorized to issue five million shares of $.001 par value
preferred stock, which may be issued in series with such preferences and voting
rights as determined by the Board of Directors.
On December 5, 1998, the Company sold 10,000 shares of its preferred stock for
$100 pursuant to an exemption from registration claimed under Section 4(2) of
the Securities Act of 1933, as amended. The preferred stock held the following
preferences: (1) non-voting, (2) pro rata, mandatory dividend of 10 percent of
the Company's adjusted gross profit as reflected on its annual corporate income
tax return, and (3) upon dissolution or winding down of the Company, 10 percent
of the assets of the Company distributed on a pro rata basis to the holders of
preferred stock prior to division and distribution of assets to the holders of
the Company's common stock. The Company reported adjusted gross losses on its
1999 and 1998 corporate income tax returns. Accordingly, no preferred stock
dividend is reported in the accompanying financial statements.
During the nine months ended September 30, 2000, the Company sold 20,000 shares
of its preferred stock for $20,000 (unaudited) pursuant to an exemption from
registration claimed under Section 4(2) of the Securities Act of 1933, as
amended. The preferred stock held the above preferences. This sale, along with
the preferred stock sale described in Note B, resulted in 50,000 (unaudited)
shares of preferred stock outstanding at September 30, 2000.
Common Stock
On March 31, 1999, pursuant to an exemption from registration claimed under
Section 3(b) and Regulation D, Rule 504 of the Securities Act of 1933, as
amended, the Company sold 2,400,000 shares of its common stock for $2,400.
F-11
<PAGE>
NATEXCO CORPORATION
Notes to Consolidated Financial Statements
Note E: Income taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate follows:
March 3, 1998
For The (Inception)
Year Ended Through
December 31, December 31,
1999 1998
-------------- --------------
U.S. statutory federal rate................... 15.00% 15.00%
State income tax rate,
net of federal benefit..................... 4.04% 4.04%
Contributed rent.............................. -17.34% -18.96%
Net operating loss for which no
tax benefit is currently available......... -1.70% -0.08%
------------ ----------
0.00% 0.00%
============ ==========
Deferred taxes consisted of the following:
March 3, 1998
For The (Inception)
Year Ended Through
December 31, December 31,
1999 1998
------------ -------------
Deferred tax assets, net operating loss....... $ 47 $ 2
Valuation allowance........................... (47) (2)
--------- ---------
$ - $ -
========= =========
The valuation allowance offsets the net deferred tax asset for which there is no
assurance of recovery. The current tax benefits as of December 31, 1999 and 1998
were $47 and $2, respectively. The change in the valuation allowance for the
year ended December 31, 1999 and from March 3, 1998 (inception) through December
31, 1998 totaled $45 and $2, respectively. The net operating loss carryforward
expires through the year 2019.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
F-12
<PAGE>
NATEXCO CORPORATION
Notes to Consolidated Financial Statements
Should the Company undergo an ownership change as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation
which could reduce or defer the utilization of these losses.
Note F: Acquisitions
On July 30, 2000, the Company purchased all of the outstanding common stock of
SSSI in exchange for $25,000 (unaudited) cash. Net assets of SSSI as of the date
of the acquisition totaled $2,544 (unaudited), which approximated fair value.
The excess of the purchase price over the fair value of the assets, in the
amount of $22,456 (unaudited), has been allocated to goodwill and is being
amortized on the straight-line method over 24 months. Amortization expense of
$1,871 (unaudited) has been recorded against the goodwill in the accompanying
consolidated financial statements for the nine months ended September 30, 2000.
The Company has recorded the transaction as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The accompanying consolidated
financial statements include the results of operations of SSSI from the date of
the acquisition, July 30, 2000 through September 30, 2000.
The following unaudited pro forma condensed consolidated statements of
operations gives effect to the acquisition of SSSI as if it had occurred at the
beginning of the periods presented. The unaudited pro forma financial
information should be read in conjunction with the separate audited financial
statements and notes thereto of each of the companies included in the pro forma.
The unaudited pro forma condensed consolidated statements of operations are not
necessarily indicative of results of operations had the acquisition occurred at
the beginning of the periods presented nor of results to be expected in the
future.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Pro forma
Natexco SSSI Adjustments Consolidated
---------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Sales...................................................$ - $ 100 $ - $ 100
Cost of sales...........................................$ - $ - $ 30 $ 30
Operating expenses......................................$ 20,933 $ 6,911 $ 6,711 $ 34,555
Loss from operations....................................$ (20,933) $(6,911) $ (6,741) $ (34,585)
Interest expense........................................$ (1,048) $ - $ - $ (1,048)
Net loss................................................$ (24,781) $(6,911) $ (6,741) $ (38,433)
Net loss per share - basic and diluted..................$ (0.01) $(23.04) $ 23.03 $ (0.02)
Basic and diluted common shares
outstanding.......................................... 2,400,000 300 (300) 2,400,000
</TABLE>
F-13
<PAGE>
NATEXCO CORPORATION
Notes to Consolidated Financial Statements
Pro forma adjustments - 2000
The consolidated financial statements of Natexco include the results of
operations of SSSI for the period from July 30, 2000 through September 30, 2000.
The financial information of SSSI presented in the pro forma statement includes
the results of operations for SSSI for the period from January 1, 2000 through
July 29, 2000. The adjustments include (1) increased amortization expense of
$6,550 resulting from the goodwill as if it had been amortized for the full nine
months, (2) compensation expense of $32, including $2 for payroll taxes, based
on the terms of the employment agreement discussed in Note G and (3)
compensation expense of $161, including $11 for payroll taxes, for shareholder
distributions.
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Pro forma
Natexco SSSI Adjustments Consolidated
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Sales.................................................$ - $ 30,024 $ - $ 30,024
Cost of sales.........................................$ - $ 18,519 $ 9,696 $ 28,215
Operating expenses....................................$ 2,635 $ 23,513 $ 13,123 $ 39,271
Loss from operations..................................$ (2,635) $(12,008) $(22,819) $ (37,462)
Interest expense......................................$ - $ - $ - $ -
Net loss..............................................$ (2,635) $(12,008) $(22,819) $ (37,462)
Net loss per share - basic and diluted................$ * $ (40.03) $ 40.01 $ (0.02)
Basic and diluted common shares
outstanding.........................................2,400,000 300 (300) 2,400,000
</TABLE>
* Less than $.01 per share
Pro forma adjustments - 1999
The adjustments include (1) increased amortization expense of $11,228 resulting
from the goodwill as if it had been amortized for the full year, (2)
compensation expense of $9,696, including $689 for payroll taxes, based on the
terms of the employment agreement discussed in Note G and (3) compensation
expense of $1,895, including $135 for payroll taxes, for shareholder
distributions.
The unaudited pro forma condensed consolidated financial information do not show
any adjustments for a change in the income tax benefit as the total pro forma
consolidated benefit for income taxes would be offset by any valuation allowance
due to any deferred tax asset derived from net operating losses. The valuation
allowance offsets the net deferred tax asset for which there is no assurance of
recovery.
Note G: Commitment
The Company has an employment agreement with the former owner of SSSI. The
agreement is dated June 30, 2000 and carries a one-year term. The agreement
allows for the former owner of SSSI to receive a commission equal to 30 percent
of gross sales on any pending sales or sales made in the future up to the time
of the termination of the agreement. During the period from June 30, 2000
through September 30, 2000, the Company incurred no compensation expense related
to the agreement.
F-14
<PAGE>
To the Board of Directors and Shareholders
Security Software Systems, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the balance sheet of Security Software Systems, Inc. (an
S-corporation) as of December 31, 1999 and the related statements of operations,
shareholders' equity, and cash flows, for the years ended December 31, 1999 and
1998. 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 audits 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 Security Software Systems, Inc.
as of December 31, 1999, and the results of its operations and its cash flows
for the years ended December 31, 1999 and 1998, in conformity with generally
accepted accounting principles.
Cordovano and Harvey, P.C.
Denver, Colorado
October 6, 2000
F-15
<PAGE>
SECURITY SOFTWARE SYSTEMS, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, July 29,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash................................................................................$ 689 $ -
Total current assets 689 -
Equipment, net of accumulated depreciation totaling
$3,513 and $4,230 (unaudited), respectively (Note C)................................ 2,899 2,182
Software development costs, net of accumulated amortization
of $8,125 and $9,583 (unaudited), respectively (Note D)............................. 1,875 417
------- -------
$ 5,463 $ 2,599
======= =======
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities............................................$ 269 $ 55
------- -------
Total current liabilities 269 55
------- -------
Shareholders' equity:
Common stock, $1.00 par value; 1,000 shares authorized; 300
and 300 (unaudited) shares issued and outstanding, respectively.................. 300 300
Additional paid-in capital (Note B)................................................. 44,350 48,661
Retained deficit....................................................................(39,456) (46,417)
------- -------
Total shareholders' equity 5,194 2,544
------- -------
$ 5,463 $ 2,599
======= =======
</TABLE>
See accompanying notes to the financial statements.
F-16
<PAGE>
SECURITY SOFTWARE SYSTEMS, INC.
Statements of Operations
<TABLE>
<CAPTION>
January 1,
For The Years Ended 2000
December 31, through
-------------------------- July 29,
1999 1998 2000
-------- -------- ---------
(Unaudited)
<S> <C> <C> <C>
Sales, net..............................................................$ 30,024 $ 33,116 $ 100
Cost of sales........................................................... 18,519 18,359 60
-------- -------- --------
Gross profit 11,505 14,757 40
-------- -------- --------
Operating expenses:
Selling, general and administrative................................ 17,513 15,452 3,351
Rent, related party (Note B)....................................... 6,000 6,000 3,500
-------- -------- --------
Net loss $(12,008) $ (6,695) $ (6,811)
======== ======== ========
Basic loss per common share.............................................$ (40.03) $ (22.32) $ (22.70)
======== ======== ========
Basic weighted average common shares outstanding........................ 300 300 300
======== ======== ========
Pro Forma Information:
Net loss...........................................................$(12,008) $ (6,695) $ (6,811)
Shareholder distributions.......................................... (1,760) (12,247) (150)
-------- -------- --------
Pro forma net loss before income taxes............................. (13,768) (18,942) (6,961)
Pro forma income tax provision..................................... - - -
-------- -------- --------
Pro forma net loss $(13,768) $(18,942) $ (6,961)
======== ======== ========
Pro forma basic loss per common share..............................$ (45.89) $ (63.14) $ (23.20)
======== ======== ========
Pro forma basic weighted average common
shares outstanding............................................. 300 300 300
======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-17
<PAGE>
SECURITY SOFTWARE SYSTEMS, INC.
Statement of Shareholders' Equity
January 1, 1998 through July 29, 2000 (Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Retained
Shares Par Value Capital Deficit Total
------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998.......................... 300 $ 300 $ 19,186 $ (6,746) $ 12,740
Capital contribution by the Company's
president...................................... - - 10,500 - 10,500
Shareholder distributions......................... - - - (12,247) (12,247)
Office space contributed by Company's
president (Note B)............................. - - 6,000 - 6,000
Net loss for the year ended
December 31, 1998.............................. - - - (6,695) (6,695)
----- ----- -------- -------- --------
Balance, December 31, 1998........................ 300 300 35,686 (25,688) 10,298
Capital contribution by the Company's
president...................................... - - 2,664 - 2,664
Shareholder distributions......................... - - - (1,760) (1,760)
Office space contributed by Company's
president (Note B)............................. - - 6,000 - 6,000
Net loss for the year ended
December 31, 1999.............................. - - - (12,008) (12,008)
----- ----- -------- -------- --------
Balance, December 31, 1999........................ 300 300 44,350 (39,456) 5,194
Capital contribution by the Company's
president (unaudited).......................... - - 811 - 811
Shareholder distributions......................... - - - (150) (150)
Office space contributed by Company's
president (Note B) (unaudited)................. - - 3,500 - 3,500
Net loss for the period from January 1, 2000
through July 29, 2000 (unaudited).............. - - - (6,811) (6,811)
----- ----- -------- -------- --------
Balance, July 29, 2000 (unaudited)................ 300 $ 300 $ 48,661 $ (46,417) $ 2,544
===== ===== ======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-18
<PAGE>
SECURITY SOFTWARE SYSTEMS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
January 1,
For The Years Ended 2000
December 31, through
-------------------------- July 29,
1999 1998 2000
-------- -------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...........................................................$ (12,008) $ (6,695) $ (6,811)
Transactions not requiring cash:
Depreciation and amortization................................... 3,728 3,729 2,175
Office space contributed by the Company's
president (Note B)........................................... 6,000 6,000 3,500
Changes in current assets and current liabilities:
Increase in receivables and other current assets............. 2,019 (1,809) -
Increase in accrued liabilities.............................. (29) 298 (214)
--------- -------- --------
Net cash provided by (used in) operating activities..................... (290) 1,523 (1,350)
--------- -------- --------
Cash flows from financing activities:
Distributions to shareholders...................................... (1,760) (12,248) (150)
Capital contributions by shareholders.............................. 2,664 10,500 811
--------- -------- --------
Net cash provided by (used in) financing activities..................... 904 (1,748) 661
--------- -------- --------
Net change in cash 614 (225) (689)
Cash, beginning of period............................................... 75 300 689
--------- -------- --------
Cash, end of period $ 689 $ 75 $ -
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...........................................................$ - $ - $ -
========= ======== ========
Income taxes.......................................................$ - $ - $ -
========= ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-19
<PAGE>
SECURITY SOFTWARE SYSTEMS, INC.
Notes to Financial Statements
Note A: Nature of organization and summary of significant accounting policies
Nature of organization
The Company was incorporated under the laws of Florida on October 17, 1996. The
Company manufactures and sells security computer software entitled Secure Entry
Interface (SEI). SEI is designed for access control for use by guarded
communities, office buildings, high-rise condominiums, private estates, country
clubs and other secure facilities.
On July 30, 2000, the shareholders of the Company entered into a Purchase
Agreement with Natexco Corporation (Natexco), whereby the shareholders received
$25,000 in exchange for 100 percent of the outstanding common stock of the
Company. As a result, the Company became a wholly owned subsidiary of Natexco.
Summary of significant accounting policies
Use of 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, liabilities, and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Equipment and depreciation
Equipment is stated at cost and depreciated using the straight-line method over
the estimated useful lives of the assets. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on the disposition of equipment
are reflected in income.
Income taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S-corporation. In lieu of corporation income
taxes, the shareholders of an S-corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the accompanying financial statements.
Revenue recognition
The Company recognizes revenue when its product is shipped.
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SECURITY SOFTWARE SYSTEMS, INC.
Notes to Financial Statements
Software development costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," initial costs are charged to operations as research prior to the
development of a detailed program design or a working model. Thereafter, the
Company capitalizes the direct costs and allocated overhead associated with the
development of software products. Costs incurred subsequent to the product
release are charged to operations.
Capitalized costs are amortized over the estimated product life on a
straight-line basis. Unamortized costs are carried at the lower of book value or
net realizable value.
Loss per share
The Company reports loss per share using a dual presentation of basic and
diluted loss per share. Basic loss per share excludes the impact of common stock
equivalents. Diluted loss per share utilizes the average market price per share
when applying the treasury stock method in determining common stock equivalents.
However, the Company has a simple capital structure for the periods presented
and, therefore, there is no variance between the basic and diluted loss per
share.
Fair value of financial instruments
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
carrying amounts of cash, accounts payable and other current liabilities
approximate fair value due to the short-term maturity of the instruments.
Note B: Related party transactions
The President provided office space to the Company at no charge for all periods
presented. The office space was valued at $500 per month and is included in the
accompanying financial statements as rent expense with a corresponding credit to
additional paid-in capital.
Note C: Equipment
The Company's equipment consisted of computer equipment at July 29, 2000 and
December 31, 1999. Depreciation expense totaled $1,228, $1,228 and $717
(unaudited) for the years ended December 31, 1999 and 1998 and for the period
from January 1, 2000 through July 29, 2000, respectively.
Note D: Software development costs
The Company recorded software development costs of $10,000 in 1996. These costs
represent the direct costs and allocated overhead associated with the
development of SEI. Amortization expense totaled $2,500, $2,500 and $1,458
(unaudited) for the years ended December 31, 1999 and 1998 and for the period
from January 1, 2000 through July 29, 2000, respectively.
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SECURITY SOFTWARE SYSTEMS, INC.
Notes to Financial Statements
Note E: S-corporation termination
The Company's S-corporation tax status was involuntarily terminated as of July
30, 2000 in conjunction with its purchase by Natexco Corporation. The financial
statements show the pro forma effect on net loss and net loss per share of
shareholder distributions totaling $1,760, $12,247 and $150 (unaudited) for the
years ended December 31, 1999 and 1998 and the period from January 1, 2000
through July 29, 2000, respectively, as if the distributions were compensation
expense to the shareholders.
The pro forma information also shows pro forma tax expense for the years ended
December 31, 1999 and 1998 and for the period from January 1, 2000 through July
29, 2000 (unaudited). Deferred taxes consisted of a net tax asset due to
operating loss carryforwards, which were fully allowed for in a valuation
allowance. The valuation allowance offsets the net deferred tax asset for which
there is no assurance of recovery.
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