10QSB/A 1 qsbq2.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the period ended September 30, 2005 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to ______________. Commission file number 33391190 NATCO INTERNATIONAL INC. (Exact name of small business issuer as specified in its charter) Delaware 48-1099142 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) #200, 13018 - 80 Avenue Surrey, BC, Canada, V3W 3B2 (address of principal executive offices) (604) 507-6657 (Issuer's telephone number) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the previous 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $0.001 par value - 9,337,364 shares outstanding as of September 13,2005. Transitional Small Business Disclosure format (check one): Yes ( ) No (X) NATCO INTERNATIONAL INC. FORM 10-QSB Quarter Ended September 30, 2005 Table of Content PART I - FINANCIAL INFORMATION ITEM I. Financial Statements 1 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 ITEM 3. Controls and Procedures 22 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 23 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 24 ITEM 3. Defaults Upon Senior Securities 24 ITEM 4. Submission of Matters to a vote of Security Holders 24 ITEM 5. Other Information 24 ITEM 6. Exhibits 24 Signatures 25 Part 1 - FINANCIAL INFORMATION ITEM 1. NATCO INTERNATIONAL INC. (formerly Spectrum International Inc.) INTERIM FINANCIAL STATEMENTS September 30, 2005 (Expressed in US Dollars) Unaudited Page 1 Statement 1 Natco International Inc. (formerly Spectrum International Inc.) Interim Balance Sheets Expressed in U.S. Dollars Unaudited

September 30, March 31, Assets 2005 2005 ---------------------------------------------------------------------------- Current Accounts Receivable $ 1,995 $ 3,077 Inventory (Note 3) 29,287 27,921 Prepaid expenses 1,001 962 -------------------------------- 32,283 31,960 Property, Plant and Equipment (Note 4) 13,284 11,066 Product Rights (Note 5) 1 1 -------------------------------- $ 45,568 $ 43,027 ============================================================================ Liabilities ---------------------------------------------------------------------------- Current Bank indebtedness (Note 6) $ 61,126 $ 54,829 Accounts payable 91,184 86,200 Accrued liabilities 388 23,191 Due to related parties (Note 7) 38,703 38,944 -------------------------------- 191,401 203,164 Bank Indebtedness (Note 6) 5,744 8,406 Due to Related Parties (Note 7) 918,124 818,836 -------------------------------- 1,115,269 1,030,406 -------------------------------- Continued Operations (Note 1) Commitments (Note 10) Contingent Liability (Note 12) Stockholders' Deficiency ---------------------------------------------------------------------------- Capital Stock Authorized: 50,000,000 common shares, with a par value of $0.001 5,000,000 preferred shares, with a par value of $0.001 Issued: 9,377,364 (2004-9,377,364) common shares-Statement 3 (Note 8) 9,377 9,377 Additional paid-in capital - Statement 3 469,172 469,172 Share subscriptions (Note 8c) 33,053 25,000 Other comprehensive income - Statement 3 (198,442) (161,475) Deficit -statement 3 (1,382,861) (1,329,453) -------------------------------- (1,069,701) (987,379) -------------------------------- $ 45,568 $ 43,027 On behalf of the Board Raj Gurm, director John H. Rennie, director ============================================================================

See accompanying notes Page 2 Statement 2 Natco International Inc (formerly Spectrum International Inc.) Interim Statements of Operations For the Six Months Ended September 30 Expressed in U.S. Dollars Unaudited

2005 2004 ---------------------------------------------------------------------------- Sales $ 3,607 $ 16,483 Cost of sales 1,611 11,711 -------------- -------------- Gross profit (2005-55.3%; 2004-29.0%) 1,996 4,772 -------------- -------------- Expenses Advertising and promotion - 60 Bank charges 685 1,089 Consulting fees - 2,250 Depreciation 1,528 1,530 Insurance 29 17 Legal and accounting 5,044 10,704 Office and other 446 1,048 Rent 6,878 12,052 Research and development 56 12,873 Salaries and benefits 25,531 29,740 Telephone and utilities 1,629 1,812 ---------------------------------- 41,826 73,175 ---------------------------------- Loss Before Other Items (39,830) (68,403) ---------------------------------- Other Items Other income 654 5,492 Interest expense (14,232) (13,380) ---------------------------------- (13,578) (7,888) ---------------------------------- Net loss for the Period $ (53,408) $ (76,291) ============================================================================ Weighted average number of shares outstanding 9,377,364 9,377,364 ============== ============== Basic and diluted loss per share $ (0.01) $ (0.01) ============== ============== =============================================================================

See accompanying notes Page 3 Statement 3 Natco International Inc (formerly Spectrum International Inc.) Interim Statements of Stockholders' Deficiency Expressed in U.S. Dollars Unaudited

Common Common Additional Other Shares Shares Paid-in Shares Comprehensive (Number) (Amount) Capital Subscribed Income (Loss) Deficit Total ------------------------------------------------------------------------------------------------------------------ Balance (deficiency) - March 31, 2002 8,393,928 $8,394 $417,516 $33,549 $19,886 $(822,300) $(342,955) Issuance of shares at CDN$0.07 per share(Note 8b) 430,714 431 18,207 (18,638) - - - Issuance of shares at CDN$0.15 per share(Note 8b) 160,000 160 14,751 (14,911) - - - Issuance of shares at CDN$0.07 per share(Note 8b) 85,714 85 3,732 - - - 3,817 Issuance of shares at CDN$0.08 per share Plus warrant(Note 8b) 307,008 307 14,966 - - - 15,273 Share Subscription(Note 8c) - - - 20,000 - - 20,000 Change in foreign Currency Translation Adjustment - - - - (33,224) - (33,224) Net Loss - - - - - (186,247) (186,247) ------------------------------------------------------------------------------------------------------------------ Balance (deficiency) - March 31, 2003 9,377,364 9,377 469,172 20,000 (13,338) (1,008,547) (523,336) Change in foreign Currency Translation Adjustment - - - - (73,045) - (73,045) Net Loss - - - - - (153,084) (153,084) ------------------------------------------------------------------------------------------------------------------- Balance (deficiency) - March 31, 2004 9,377,364 9,377 469,172 20,000 (86,383) 1,161,631) (749,465) Share subscription(Note 8c) - - - 5,000 - - 5,000 Change in foreign Currency Translation Adjustment - - - - (75,092) - (75,092) Net Loss - - - - - (167,822) (167,822) ------------------------------------------------------------------------------------------------------------------- Balance (deficiency) - March 31, 2005 9,377,364 $9,377 $469,172 $25,000 $(161,475) (1,329,453) (987,379) Share subscription(Note 8c) - - - 8,053 - - 8,053 Change in foreign Currency Translation Adjustment - - - - (36,967) - (36,967) Net Loss - - - - - (53,408) (53,508) ------------------------------------------------------------------------------------------------------------------- Balance (deficiency) - September 30, 2005 9,377,364 $9,377 $469,172 33,053 (198,442) (1,382,861) (1,069,701) ===================================================================================================================

See accompanying notes. Page 4 Statement 4 Natco International Inc. (formerly Spectrum International Inc.) Interim Statements of Cash Flows For the Six Months Ended September 30 Expressed in U.S. Dollars Unaudited

Cash flows provided by (Used In) 2005 2004 ------------------------------------------------------------------------------ Operating activities Net loss $(53,408) $(76,291) Adjustments to determine cash flows: Depreciation 1,528 1,530 Change in non-cash working capital: Accounts receivable 1,082 6,968 Inventory (1,366) (32) Prepaid Expenses (39) (247) Accounts Payable 4,984 (23,236) Accrued Liabilities (22,803) (19,707) -------------------------------- (70,022) (111,015) -------------------------------- Financing activities Bank indebtedness 3,635 (6,204) Due to related parties 99,047 152,855 Share Subscriptions 8,053 - -------------------------------- 110,735 146,651 -------------------------------- Foreign exchange (40,713) 35,636 Cash position - Beginning of Year - - -------------------------------- Cash position, End of Year $ - $ - ============================================================================== Supplementary cash flows information: Interest paid $14,232 $ 13,380 Income taxes paid $ - $ - ============================================================================== Supplementary schedule of non-cash Investing and financing activities: Property, plant and equipment - foreign currency translation adjustment $ 3,746 $ - ==============================================================================

See accompanying notes Page 5 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 1. Nature of Operations and Going Concern The company was incorporated as Spectrum Trading Inc. under the laws of the Province of British Columbia, Canada, on November 21, 1990. On May 14, 1999, the company was discontinued in British Columbia and was reincorporated as Spectrum International Inc. in the State of Delaware, U.S.A. Effective June 3, 2004, the company changed its name from Spectrum International Inc. to Natco International Inc. The company has two products, a jewellery cleaner and a tire sealant, which It is currently selling. These financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes that the company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. The company has incurred significant operating losses over the past three years and has a substantial stockholders' deficiency and a working capital deficiency. The company's continued existence is dependent upon its ability to raise additional capital and to achieve profitable operations. It is management's intention to pursue market acceptance for its products and identify equity funding sources until such time as there is sufficient operating cash flow to fund operating requirements. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities, the reported revenues and expenses and the balance sheet classifications used. ============================================================================= 2. Summary of Significant Accounting Policies a) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, term deposits and short term highly liquid investments with a term to maturity of less than one year from inception which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of changes in value. b) Use of Estimates In conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year. Actual results could differ from those reported. c) Foreign Currency Transactions The company's functional currency is the Canadian dollar and the reporting currency is the U.S. dollar. Assets and liabilities are translated from the functional to the reporting currency at the exchange rate in effect at the balance sheet date and equity at historical rates. Revenue and expenses are translated at rates in effect at the time of the transactions. Resulting unrealized translation gains and losses are accumulated in a separate Component of stockholders' equity - other comprehensive income (loss). Realized foreign currency transaction gains and losses are credited or charged directly to operations. Page 6 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 2. Summary of Significant Accounting Policies - Continued d) Inventory Inventory is stated at the lower of cost and net realizable value. Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventory to its present location and conditions, and is calculated using the first-in first-out method. Net realizable value is determined by reference to sales proceeds of items sold in the ordinary course of business after the balance sheet date or by management estimates based on prevailing market conditions. e) Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is provided annually on the diminishing balance method to write-off the assets over their estimated useful lives as follows: * Computer and office equipment - 30% * Manufacturing equipment - 20% f) Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered. g) Financial Instruments The company's financial instruments consist of accounts receivable, bank indebtedness, accounts payable and amounts due to related parties. The fair values of these financial instruments approximate their carrying values. h) Stock-Based Compensation In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which requires entities to calculate the fair value of stock awards granted to employees. This statement provides entities with the option of electing to expense the fair value of employee stock-based compensation or to continue to recognize compensation expense under previously existing accounting pronouncements and provide pro forma disclosures of net earnings (loss) and, if presented, earnings (loss) per share, as if the above- referenced fair value method of accounting was used in determining compensation expense. The company accounts for stock-based employee or director compensation arrangements in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). Stock options issued to non-employees are recorded at the fair value of the services received or the fair value of the options issued, whichever is more reliably measurable. Compensation is charged to expense over the shorter of the service or vesting period. Unearned amounts are shown as deferred compensation in shareholders' equity. Page 7 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 2. Summary of Significant Accounting Policies - Continued i) Revenue Recognition The company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. j) Advertising Policy The company expenses all advertising costs as incurred. k) Research and Development Research and development is expensed as incurred. l) Shipping and Handling The company includes the cost of shipping and handling as a component of cost of sales in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." m) Long-Lived Assets The company monitors the recoverability of long-lived assets, including property, plant and equipment and product rights, based on estimates using factors such as current market value, future asset utilization, business climate and future undiscounted cash flows expected to result from the use of the related assets. The company policy is to record any impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable equal to the excess of the asset's carrying value over its fair value. n) Loss Per Share The company computes net loss per common share using SFAS No. 128 "Earnings Per Share." Basic loss per common share is computed based on the weighted average number of shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average shares outstanding assuming all dilutive potential common shares were issued. There were no dilutive potential common shares at September 30, 2004 and 2003.Because the company has incurred net losses and has no potentially dilutive common shares, basic and diluted loss per share are the same. Additionally, for the purposes of calculating diluted loss per share, there were no adjustments to net loss. o) Obligations Under Capital Leases Leases are classified as either capital or operating. Leases that transfer substantially all of the benefits and risks of ownership of property to the company are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded with its related long-term financing. Payments under operating leases are expensed as incurred. p) Segmented Reporting SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", changed the way public companies report information about Segments of their business in their quarterly reports issued to stockholders. It also requires entity-wide disclosures about the products and services an Entity provides, the material countries in which it holds assets and reports Revenues and its major customers. The company's sales are generated in one Geographical area, Canada. The company currently operates in two product segments: jewellery cleaners and accessories, and tire sealants. Page 8 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 2. Summary of Significant Accounting Policies - Continued q) Recent Accounting Pronouncements Page 9 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 2. Summary of Significant Accounting Policies - Continued q) Recent Accounting Pronouncements - Continued i) SFAS No. 123R In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, "Share Based Payment". SFAS 123R is a revision of SFAS No. 123 "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". SFAS 123R does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans". SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with Ltd exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The scope of SFAS 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123R as of the first interim or annual reporting period that begins after June 15, 2005. Public entities that file as small business issuers will be required to apply SFAS 123R in the first interim or annual reporting period that begins after December 15, 2005. For non-public entities, SFAS 123R must be applied as of the beginning of the first annual reporting period beginning after December 15, 2005. The adoption of this standard is expected to have a material effect on the Company's results of operations and financial position. Page 10 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 2. Summary of Significant Accounting Policies - Continued q) Recent Accounting Pronouncements - Continued ii) SFAS No. 151 In November 2004, the FASB also issued SFAS No.151, "Inventory Costs, an amendment of ARB No.43, Chapter 4". This standard is effective for the fiscal years beginning after June 15, 2005, therefore the Company will adopt it on April 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead costs to inventory be based on the normal capacity of the production facilities. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position. iii) SFAS No. 153 In December 2004, the FASB issued SFAS 153 - Exchanges of Non-Monetary Assets- An amendment of APB 29. This statement amends APB 29, which is based on the Principle that exchanges of non-monetary assets should be measured at the fair value of the assets exchanged with certain exceptions. SFAS 153 eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning on or after June 15, 2005. iv) SFAS No. 153 In December 2004, the FASB issued SFAS 153 - Exchanges of Non-Monetary Assets - An amendment of APB 29. This statement amends APB 29, which is based on the principle that exchanges of non-monetary assets should be measured at the fair value of the assets exchanged with certain exceptions. SFAS 153 eliminates the exception for non-monetary exchanges of similar productive assets and replacesit with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning on or after September 15, 2005 r) Derivative Financial Instruments The company was not a party to any derivative financial instruments during any of the reported fiscal periods s) Product Warranty The company's policy is to replace tire sealant and jewellery cleaner products if faulty. Products will be replaced within a reasonable time from the date of sale. =============================================================================== Page 11 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 3. Inventory Details are as follows: September 30, March 31, 2005 2005 -------------------------------- Raw materials $ 27,538 $ 25,805 Finished Goods 1,749 2,116 -------------------------------- $ 29,827 $ 27,921 ----------------------------------------------------------------------- 4. Property, Plant and Equipment Details are as follows: September 30, March 31, 2005 2005 Accumulated Net Book Net Book Cost Depreciation Value Value ----------------------------------------------------------------------- Computer & Office Equipment $ 16,864 $ 15,302 $ 1,562 $ 1,365 Manufacturing Equipment 67,416 55,694 11,722 9,701 ----------------------------------------------------------------------- $ 84,280 $ 70,996 $ 13,284 $ 11,066 ----------------------------------------------------------------------- ======================================================================= 5. Product Rights The company has the exclusive and continuing rights to the product formulations and distribution of a tire sealant product. These rights were acquired from a related party and have been recorded at $1, representing the carrying value to the related party. =============================================================================== Page 12 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 6. Bank Indebtedness Details are as follows: September 30, March 31, 2005 2005 -------------------------- Checks written in excess of funds on deposit $ 16,798 $ 11,175 TD Canada Trust, loan secured by a General Security Agreement on all assets of the company and by personal guarantees made by two shareholders including a director and officer of the company, interest at bank prime plus 2% (March 31, 2005 - 2%). The loan is due on demand; however, the bank allowed the company to repay the loan by making fixed monthly payment of CDN$416, therefore a portion of this loan was classified as long-term liability. 4,434 6,032 Royal Bank, loan secured by a General Security Agreement on all assets of the company and by a personal guarantee of a director and officer, interest at bank prime plus 2% (March 31, 2005 - 2%). The loan is due on demand; however, the bank allowed the company to repay the loan by making fixed monthly payment of CDN$673, therefore a portion of this loan was classified as long- term liability. 10,740 12,771 Wells Fargo Bank, loan unsecured with interest at 11.5%. The bank allows the company make monthly interest payments only; however the loan is due on demand, therefore the entire loan is classified as current liability. 34,898 33,257 ----------------------------- 66,870 63,235 Less: Current Portion (61,126) (54,829) ----------------------------- Long-term portion 5,744 8,406 ----------------------------- Minimum principal loan repayments for the next five years are as follows: 2006 $ 61,126 2007 5,744 ------------------- $ 66,870 ------------------- =============================================================================== Page 13 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 7. Related Party Transactions Other than as disclosed elsewhere in these financial statements, the following amounts have been recorded as transactions with related parties: a) Amounts due to related parties are as follows: September 30, March 31, 2005 2004 -------------------------- Loans payable to relatives of a director and officer of the company. The loans are unsecured, are due on demand, and bear interest at bank prime plus 0.5% (March 31, 2005 - 0.5%). Except for a current portion of $38,703 (March 31, 2005 - $38,944). The creditors have agreed not to demand payment within the next 12 months. Therefore, a portion of these loans have been classified as non-current liabilities. $ 295,368 $ 284,454 Loans payable to a director and officer of the company. The loans are unsecured, do not have fixed terms of repayment, and bear interest at 8.33% to 11% (March 31, 2005 - 8.33% to 11%). The creditors have agreed not to demand payment within the next 12 months. Therefore, these loans have been classified as non-current liabilities. 304,920 256,404 Wages and bonus payable to a director and officer of the company. This liability is unsecured, due on demand and non-interest bearing (March 31, 2005 - nil%). The creditor has agreed not to demand payment within the next 12 months. Therefore, these loans have been classified as non-current liabilities. 321,252 283,003 Loan payable to a relative of a director and officer of the company. The loan is unsecured, due on demand, bears an interest at 7% per annum and requires monthly payments of interest only. The creditor has agreed not to demand payment of this loan within the next 12 months. Therefore, this loan has been classified as a non-current liability. 35,287 33,919 -------------------------- $ 956,827 $ 857,780 Less: Current portion (38,703) (38,944) -------------------------- Long-term portion $ 918,124 $ 818,836 -------------------------- b) Interest expense on amounts due to directors and an officer was $11,976 (2004 - $11,210). c) Salaries and benefits include $25,531 (2004 - $28,803) paid to a director and officer of the company. d) As at September 30, 2005, a director and officer of the company held approximately 59% of the issued and outstanding shares of the company. e) Sales include $501 (2004- $Nil) to a company with a director in common =============================================================================== 8. Capital Stock a) Authorized Stock The company has authorized 50,000,000 common shares with a par value of $0.001 per share. Each common share shall entitle the holder to one vote, in person or proxy on any matter on which action of the stockholder of the corporation is sought. The company has authorized 5,000,000 shares of preferred stock with a par value of $0.001 per share. The holders of preferred stock have no rights except as determined by the Board of Directors of the company and/or provided by Delaware General Corporate Law. Page 14 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 8. Capital Stock - Continued b) Share Issuances i) During fiscal 2002, the company agreed to issue 430,714 common shares to settle debt in the amount of $18,638 to a director and officer of the company and two directors. These shares were issued in fiscal 2003. ii) During fiscal 2002, the company agreed to issue 160,000 common shares to settle debt in the amount of $14,911 to non-related parties. These shares were issued in fiscal 2003. iii) During fiscal 2003, the company issued 85,714 common shares for proceeds of $3,817 to a company owned by a director of the company. iv) During fiscal 2003, the company issued 307,008 common shares for proceeds of $15,273. Of these shares, 281,424 were issued to a company owned by a director of the company. c) Share Subscriptions During fiscal 2003, the company received $20,000 as subscriptions for 200,000 shares at $0.10 per share. During fiscal 2005, the company received $5,000 as subscriptions for 100,000 shares at $0.05 per share During fiscal 2006, the company received $8,053 as a subscription for 100,000 shares at $0.08053 per share Management is planning to issue these shares subsequent to the period-end d) Warrants During fiscal 2003, the company issued 307,008 units, consisting of 307,008 shares and 307,008 share purchase warrants. These warrants were convertible to shares at a price of $0.25 per share. These warrants expired September 6, 2004. e) Stock Options Stock option activity pursuant to the employees stock option plan, is summarized as follows: Weighted Number of Exercise Average Options Price Exercise Expiry Price Date ------------------------------------------------- April 2002 Outstanding at March 31, 2002 134,000 CDN $0.15 CDN $0.15 -April 2004 Expired (67,000) CDN $0.15 CDN $0.15 April 2002 Cancelled to be re-priced (67,000) CDN $0.15 CDN $0.15 April 2004 Granted (re-Priced) 67,000 $0.10 $0.10 May 8, 2007 Granted 517,000 $0.10 $0.10 May 8, 2007 ------------------------------------------------- Outstanding at March 31, 2003 584,000 $0.10 $0.10 May 8, 2007 Granted 67,000 $0.10 $0.10 April 30 2008 ------------------------------------------------- May 8, 2007 Outstanding at March 31, 2004 651,000 $0.10 $0.10 -April 30 2008 Granted 67,000 $0.10 $0.10 April 30 2009 ------------------------------------------------- May 8, 2007 Outstanding at March 31, 2005 718,000 CD $0.10 CD $0.10 -Apr 30,2009 Granted 67,000 $0.10 $0.10 Apr 30 2010 ------------------------------------------------- May 8, 2007 Outstanding at Sept 30, 2005 785,000 CDN $0.10 CDN $0.10 -Apr 30,2010 Page 15 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 8. Capital Stock - Continued f) Stock Options - Continued The company has also committed to issue to the Chief Executive Officer 67,000 share purchase options every year in April. These options will be exercisable at $0.10 per share and will expire five years after the date of grant. Further bonus options are available to the Chief Executive Officer. These bonus options entitle the Chief Executive Officer to purchase shares at 20% below the market, up to a value determined by 5% of the amount of annual profits from sales in excess of $2,500,000 up to $3,999,999 and 8% of the amount of annual profits from sales in excess of $4,000,000. To date, sales have not exceeded $2,500,000 and thus no bonus options have been issued. The company accounts for its stock option plan in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. Had compensation cost for the stock option plan been determined based on the fair value at the grant date consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the total pro forma value of stock options expense granted to directors and officers for the period ended September 30, 2005 would be $4,180 (2004 - $4,155). This value is estimated at the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 2005 2004 ----------------------------- Risk-free interest rate 3.5% 3.4% Expected dividend yield - - Expected stock price volatility 72% 73% Expected option life in years 5 5 The resulting pro forma loss per share for the year is as follows: 2005 2004 ----------------------------- Loss as reported $ (53,408) $ (76,291) Stock compensation expense (1,565) (4,155) ----------------------------- Pro forma loss $ (54,973) $ (80,446) ----------------------------- Loss per common share $ (0.01) $ (0.01) Pro forma loss per common share $ (0.01) $ (0.01) Option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable single measure of the fair value of the company's stock options. =============================================================================== Page 16 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 9. Income Taxes At September 30, 2005, the company has net operating losses carried forward of approximately $1,098,000 that may be offset against taxable income from 2020 to 2025. No future tax benefit has been recorded in the financial statements, as the company believes that it is more likely than not that carry-forwards will expire unused. Accordingly, the potential tax benefit of the loss carry-forwards are offset by a valuation allowance of the same amount. =============================================================================== 10. Commitments The company is committed to lease office and warehouse space at CDN $1,402 per month until September 2007. =============================================================================== 11. Segmented Information The company has two product lines which are jewellery cleaners and accessories, and tire sealant. The sales and cost of sales allocated to each product line are disclosed below: September 30, September 30, 2005 2004 ----------------------------- Jewellery cleaner and accessories Sales $ 2,968 $ 11,271 Cost of sales (1,519) (9,451) ----------------------------- Gross Profit 1,449 1,820 ----------------------------- Tire Sealant Sales 639 5,213 Cost of sales (92) (2,261) ----------------------------- Gross profit 547 2,952 ----------------------------- Total gross profit 1,996 4,772 Expense, net of other income (55,404) (81,063) ----------------------------- Net loss $ (53,408) $ (76,291) ----------------------------- Accounts receivable and inventory are allocated to the product lines as illustrated in the following schedule. All other assets are common to both product lines: September 30, March 31, 2005 2005 ------------------------------ Accounts Receivable Jewellery cleaner and accessories $ 1,797 $ 2,675 Tire Sealant 198 402 ------------------------------ $ 1,995 $ 3,077 ------------------------------ Inventory Jewellery cleaner and accessories $ 18,503 $ 17,785 Tire Sealant 10,784 10,136 ------------------------------ $ 29,287 $ 27,921 =============================================================================== Page 17 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements September 30, 2005 Expressed in US Dollars Unaudited =============================================================================== 12. Contingent Liability The company was a defendant in a legal action for payment of services. The plaintiff claimed that the amount owing is approximately CDN$52,000 plus and costs.Management believed that the company's liability was approximately CDN$28,000 which has been recorded as a liability in these financial statements. On October 5, 2005 the company and the plaintiff settled the claim for CDN$50,000 in an out of court settlement. The remaining portion of CDN$22,000 of the settlement will be recorded in the next period ending December 31, 2005. Page 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATION Background and Overview The following summary should be read in conjunction with the financial statements and accompanying notes to them included elsewhere in this report. We have been in existence as a company (including our predecessor British Columbia Corporation) since 1990. However, we began to concentrate on our current business activities in 1997; prior to that time we had few shareholders and were primarily dormant. We have yet to make a profit on current operations. As of September 30, 2005, we had incurred a deficit of $(1,382,861) and $(1,329,453) as of March 31, 2005, which has continued to increase. This deficit includes losses incurred by our predecessor over the several years of our development. Most of our losses have been recent and incurred in the development of our current product lines. As an example, our deficit as of October 31, 1998, was approximately $(130,000). We have had sales in both the jewelry cleaner and tire sealants product lines since 1998, but sales have not contributed a significant amount to offset expenses. In the six months ended September 30, 2005 as compared to the period September 30, 2004, we had net loss of $(53,408) and $(76,291) respectively. Current period loss was primarily financed by increased related party loans of $99,047, and shares subscriptions received of $8,053. Payables have continued to increase, and are of concern to us. This concern has been exacerbated by the loss of our funding due to delays in registration of our SB-2, which went effective May 9, 2005. However, we require approximately $750,000 in the next 12 months to bring the company to profitability. In any event, as revenues are not expected to cover overhead, we expect losses to continue for this fiscal year and we will need to either raise working capital to cover those loses by equity or debt offerings, or shareholders loans as we do not anticipate increases in payables being a sufficient source of capital for that period. The company Started trading on the Over the Counter Bulletin Board in August 2005. The company is now looking for debit and/or equity financing. We are expecting to close a funding of at least $250,000 before the end of December 2005. Page 19 Results of Operations Six month period ended September 30, 2005 Due to lack of funds and inventory the sales have been declining for some time. Sales in the first and second quarter of the fiscal year 2006 decreased to $3,607 as compared to same time period last year at $16,483. We lost $53,408 in first two quarters as compared to $76,291 in the comparative period last year. This decrease in loss is due to two employee being laid off in December of 2004. The sales and profitability of the company is not expected to improve until company can get some funding and buy some inventory and bring back the two employees. Liquidity and Capital Resources Natco has financed its operations through equity investment from investors, shareholder loans, and credit facilities from Canadian chartered banks and increases in payables and share subscriptions. More recently most of the financing has been by way of debt financing from related parties. In the period from April 1, 2004 to September 30, 2005 current assets increased by $323 and property, plant and equipment increased $2,218. In the same period bank debt increased by $3,635, payables increased by $4,984, and accrued liabilities decreased by $22,803. However, due to related parties increased by $99,047 in the same period. The deficit during that period increased from $1,329,453 to $1,382,861. During the six months ended Sept 30, 2005 Natco used $70,022 (2004 - $111,015) of cash in its operating activities, primarily for general and administrative expenses such as salaries, legal and accounting , and rent. Cash provided by financing activities was $110,735 (2004 - $146,651), which consisted of $99,047 in cash advanced by related parties, $3,635 increase bank debt and 8,053 from share subscriptions. No notes were paid down in the period ended September 30, 2005. Page 20 The company owes $956,827 to related parties the breakdown of which is listed in the financial statements, Note 7. We had a contingent liability of up to $90,000CDN. A claim against us was filed in Supreme court of British Columbia, Canada (Action #36122). This action was commenced by our former Auditors for professional fees allegedly due and owing. The amount claimed by the Plaintiff is $52,028.75(approximately US$37,500) plus interest and costs. On October 5, 2005, we have settled this matter out of court for CDN$50,000. See details in Part II, Item 1. The Company has been sustaining a loss on operations of about $160,000 per year in the past two fiscal years. If we satisfy current liabilities of $191,401 as of September 30, 2005 plus working capital requirements will likely require $300,000. We have estimated that if we can bring in $750,000 in additional capital either long term debt, equity or some combination, which are yet to be secured than we can pay the current obligations we believe we need to pay, and have enough working capital for the fiscal year ending March 31 2006. We believe this sum, less the payments we have indicated, would provide us with sufficient working capital for marketing and other expenses and that, if our assumption that the additional marketing will be sufficient to raise sales is correct, we will have the sales to cover our overhead. We may need more capital to satisfy inventory, receivables, and other current, non-cash assets for current cash requirements. It may take us three to six months to raise the required money. Our estimated fixed costs at this time are approximately $6,500 per month: $1,500 in building Lease, $1,000 Utilities, $3,000 loan interest and principle payments, and remaining $1,000 for miscellaneous expenses). We can get about $300 per month from the current levels of sales. That means, we will have to raise approximately $6,200 per month until funding is in place. We will also require further 15 to 20 thousand dollars for legal and accounting fees related to public company compliance. We will look for new sources of funding such as CDN$20,000 line of credit secured by the company in February 2005. However, this will just keep the company going for the time being. If the company is to grow and prosper, the company must raise the above mentioned $750,000. This money will allow us to payback account payables and some debt, reducing monthly payment and interest expenses, hence increasing the company cash position to invest in growth. It will also allow us to spend some money on marketing of our products to increase the sales levels. If we are unable to finance the company by debt or equity financing, or combination of the two, we will have to look for other sources of funding to meet our requirements. That source has not been identified as yet but most likely will be debt financing using the managements' trading shares as collateral. However there is no guarantee that we will be successful in raising any additional capital. In light of our funding issues, we have postponed all plans to buy any new equipment for the plant or office for at least next 12 months or until the company has secured $750,000 in funding. The company will not be selling any of its assets in that time period. Our financial statements have been prepared on the going concern basis under which an entity is considered to be able to realize its assets and Page 21 satisfy its liabilities in the ordinary course of business. Operations to date have been primarily financed by long-term debt and equity transactions as well as increases in payables and related party loans. Our future operations are dependent upon the identification and successful completion of additional long-term or permanent equity financing, the continued support of creditors and shareholders, and, ultimately, the achievement of profitable operations. There can be no assurance that we will be successful. If we are not, we will be required to reduce operations or liquidate assets. We will continue to evaluate our projected expenditures relative to our available cash and to seek additional means of financing in order to satisfy working capital and other cash requirements. Our auditors' report on the March 31, 2005 financial statements includes an explanatory paragraph that states that as we have suffered recurring losses from operations, substantial doubt exists about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the company's management, including the Company's Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information that is required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules of the Securities Exchange Commission. There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Page22 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A claim against us was filed in Supreme court of British Columbia, Canada (Action #36122). This action was commenced by our former Auditors for professional fees allegedly due and owing. The amount claimed by the Plaintiff is $52,028.75(approximately US$37,500) plus interest and costs. This matter was settled out of court on October 5, 2005. The settlement requires us to pay CDN$50,000 to the plantiff. The company does not have the money to pay this debt at this time, however, we expect some debt funding from an insider to take care of this debt in December of 2005. A consent Judgment against the company has been filed with the Supreme Court of British Columbia. Page 23 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS 31.1 Certificate of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certificate of Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certificate of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certificate of controller Pursuant to Section 906 of the Sarbanes-Oxley act of 2002. Page24 SIGNATURES In accordance with Section 13 of the exchange act, the registrant has duly Caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Natco International, Inc. By: /s/ Raj-Mohinder S. Gurm ------------------------------------ Name: Raj-Mohinder S. Gurm Date: December 21,2005 Title Chief Executive Officer & CFO Pursuant to the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Raj-Mohinder S. Gurm ------------------------------------------------------------- Director, CEO and CFO December 21,2005 /s/John H. Rennie ------------------------- Director, Secretary December 21,2005 /s/Gerry Podersky-Cannon ------------------------- Director December 21,2005 /s/Stephen Sleigh ------------------------- Director, Controller December 21,2005