10QSB 1 form10qsbq1.txt QUATERLEY 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 June 30, 2006 ( ) 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 ( ) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) 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 June 30,2006 Transitional Small Business Disclosure format (check one): Yes ( ) No (X) NATCO INTERNATIONAL INC. FORM 10-QSB Quarter Ended June 30, 2006 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 June 30, 2006 (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

June 30, March 31, Assets 2006 2006 ---------------------------------------------------------------------------- Current Inventory (Note 3) $ 10,798 $ 8,643 Prepaid expenses 14,225 629 Assets held in discontinued operations 4,471 3,199 -------------------------------- 29,494 12,471 Property, Plant and Equipment (Note 4) 11,254 8,579 Product Rights (Note 5) 1 1 -------------------------------- $ 40,749 $ 21,051 ============================================================================ Liabilities ---------------------------------------------------------------------------- Current Bank indebtedness (Note 6) $ 63,215 $ 62,985 Accounts payable 95,498 85,874 Accrued liabilities 26,072 29,532 Due to related parties (Note 7) 1,123,051 1,062,039 Liabilities held in discontinued operations (Note 12) 0 5,613 -------------------------------- 1,307,836 1,246,043 Bank Indebtedness (Note 6) - - Due to Related Parties (Note 7) - - -------------------------------- 1,307,836 1,246,043 -------------------------------- 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 (2005-9,377,364) common shares-Statement 3 (Note 8) 9,377 9,377 Additional paid-in capital - Statement 3 469,172 469,172 Share subscriptions (Note 8c) 83,063 33,063 Other comprehensive income - Statement 3 (256,359) (205,653) Deficit -Statement 3 (1,557,340) (1,530,951) -------------------------------- (1,267,087) (1,224,992) -------------------------------- $ 40,749 $ 21,051 ============================================================================

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

2006 2005 ---------------------------------------------------------------------------- Sales $ - $ 629 Cost of sales - 487 -------------- -------------- Gross profit (2005-51.0%; 2004-32.7%) - 142 -------------- -------------- Expenses Bank charges 1,326 335 Travel 6,644 - Depreciation 768 753 Insurance 33 29 Legal and accounting 277 4,210 Office and other 624 411 Rent 3,758 3,387 Research and development - - Salaries and benefits 16,729 10,067 Telephone and utilities 808 1,410 ---------------------------------- 30,967 20,602 ---------------------------------- Loss Before Other Items (30,967) (20,460) ---------------------------------- Other Items Other income 188 483 Interest expense (11,661) (6,089) ---------------------------------- (42,440) (26,066) ---------------------------------- Loss from continuing operations Net Income(loss) from discontinued operations(Note 12) 1,051 1,085 Net loss for the Period $ (41,389) $ ( 24,981) ============================================================================ Weighted average number of shares outstanding 9,377,364 9,377,364 ============== ============== Basic and diluted loss per share $ (0.00) $ (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) - - - 8,063 - - 8,063 Change in foreign Currency Translation Adjustment - - - - (44,178) - (44,178) Net Loss - - - - - (201,498) (201,498) ------------------------------------------------------------------------------------------------------------------- Balance (deficiency) - March 31, 2006 9,377,364 $9,377 $469,172 33,063 (205,653) (1,530,951) (1,224,992) Share subscription(Note 8c) - - - 50,000 - - 50,000 Change in foreign Currency Translation Adjustment - - - - (50,706) - (50,706) Net Loss - - - - - (41,389) (41,389) ------------------------------------------------------------------------------------------------------------------- Balance (deficiency) - June 30, 2006 9,377,364 $9,377 $469,172 83,063 (256,359) (1,572,340)(1,267,087) ===================================================================================================================

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

Cash flows provided by (Used In) 2006 2005 ------------------------------------------------------------------------------ Operating activities Net loss $ (41,389) $ (24,981) Adjustments to determine cash flows: Depreciation 768 753 Stock-based compensation _____ - Change in non-cash working capital: Accounts receivable - 1,384 Inventory (2,155) (234) Prepaid Expenses (13,596) 12 Accounts Payable 9,624 4,176 Accrued Liabilities (3,460) (22,823) -------------------------------- Net cash used in continued operations (50,208) (41,713) Net cash used in discontinued operations (6,885) - -------------------------------- (57,093) (41,713) -------------------------------- Financing activities Bank indebtedness (230) 1,428 Due to related parties 61,012 17,959 Share Subscriptions 50,000 8,053 -------------------------------- 111,242 27,440 -------------------------------- Foreign exchange (54,149) 14,273 Cash position - Beginning of Year - - -------------------------------- Cash position, End of Year $ - $ - ============================================================================== Supplementary cash flows information: Interest paid $ 1,529 $ 5,489 Income taxes paid $ - $ - ============================================================================== Supplementary schedule of non-cash Investing and financing activities: Property, plant and equipment - foreign currency translation adjustment $ 3,443 $ 3,053 ==============================================================================

See accompanying notes Page 5 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements June 30, 2006 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 dissolved in British Columbia and was reincorporated as Spectrum International Inc. in the State of Delaware, U.S.A. Effective September 3, 2004, the company changed its name from Spectrum International Inc. to Natco International Inc. The Company had two products, a jewelry cleaner and a tire sealant. Neither product generated sufficient revenue to be profitable, and the Company discontinued its production of jewelry cleaner in March 2006and is in the process of discontinuing its production of tire sealant. The Company intends to focus on marketing and distributing professional beauty products in Canada and India. 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 years and has a substantial stockholders' deficiency and a working capital deficiency. The Company's continued existence is dependent upon (i) its ability to establish a marketing and distribution network for professional beauty products in Canada and India, (ii) its ability to raiseadditional 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 June 30, 2006 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 carry forwards. 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 Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment", which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees' requisite service period (generally the vesting period of the equity grant). Before January 1, 2006, the Company accounted for stock-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and complied with the disclosure requirements of SFAS No. 123, "Accounting for Stock Based Compensation". The Company adopted SFAS 123(R) using the prospective method, which requires the Company to record compensation expense over the vesting period for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, financial statements for the periods prior to January 1, 2006 have not been restated to reflect the fair value method of expensing share-based compensation. Adoption of SFAS No. 123(R) does not change the way the Company accounts for share-based payments to non-employees, with guidance provided by 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". Page 7 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements June 30, 2006 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 June 30, 2006 and 2005.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 operated in two product segments: jewelry cleaners and accessories, and tire sealants. The company discontinued its jewelry cleaner business at March 31, 2006. Page 8 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements June 30, 2006 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 June 30, 2006 Expressed in US Dollars Unaudited =============================================================================== 2. Summary of Significant Accounting Policies - Continued q) Recent Accounting Pronouncements - Continued i) 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. ii) 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. iii) SFAS No. 154 In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also redefines "restatement" as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS 154 will have a significant impact on the financial statements. 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 its 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 June 30, 2006 Expressed in US Dollars Unaudited =============================================================================== 3. Inventory Details are as follows: June 30, March 31, 2006 2006 -------------------------------- Raw materials $ 9,827 $ 7,866 Finished Goods 971 777 -------------------------------- $ 10,798 $ 8,643 ----------------------------------------------------------------------- 4. Property, Plant and Equipment Details are as follows: June 30, March 31, 2006 2006 Accumulated Net Book Net Book Cost Depreciation Value Value ----------------------------------------------------------------------- Computer & Office Equipment $ 18,614 $ 17,353 $ 1,261 $ 221 Manufacturing Equipment 69,176 59,183 9,993 8,358 ----------------------------------------------------------------------- $ 87,790 $ 76,536 $ 11,256 $ 8,579 ----------------------------------------------------------------------- =============================================================================== 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 June 30, 2006 Expressed in US Dollars Unaudited =============================================================================== 6. Bank Indebtedness Details are as follows: June 30, March 31, 2006 2006 -------------------------- Checks written in excess of funds on deposit $ 1,528 $ 1,562 HSBC demand revolving loan for a maximum amount of CDN$20,000 ($17,136), secured by a General Security Agreement on all assets of the Company (first charge) and by personal guarantees made by a director and officer of the Company, interest at bank prime plus 2%. 17,136 17,136 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. 1,704 1,630 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. 6,235 7,565 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. 36,612 35,092 ----------------------------- 63,215 62,985 Less: Current Portion (63,215) (62,985) ----------------------------- Long-term portion - - ----------------------------- =============================================================================== Page 13 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements June 30, 2006 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: June 30, March 31, 2006 2006 -------------------------- 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% (2005 - 0.5%). $177,515 $ 168,744 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% (2005 - 8.33% to 11%). 462,406 433,510 Wages and bonus payable to a director and officer of the Company. This liability is unsecured, due on demand and non-interest bearing (2005 - nil%). 442,143 422,106 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. 40,987 37,679 _______________________ $1,123,501 $ 1,062,039 Less: Current portion (1,123,501) (1,062,039) ______________________ Long-term portion $ - - ______________________________ b) Interest expense on amounts due to directors and an officer was $10,131 (2005 - $5,133). c) Salaries and benefits include $16,729 (2005 - $10,067) accrued to a director and officer of the Company. d) As at June 30, 2006, a director and officer of the company held approximately 59% of the issued and outstanding shares of the Company. e) Sales include $Nil(2005- $433) 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 June 30, 2006 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 During fiscal 2006, the Company received $50,000 as a subscription for 500,000 shares at $0.10 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 employee 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 Apr 30, 2008 ------------------------------------------------- May 8, 2007 Outstanding at March 31, 2004 651,000 $0.10 $0.10 -Apr 30, 2008 Granted 67,000 $0.10 $0.10 Apr 30, 2009 ------------------------------------------------- May 8, 2007 Outstanding at March 31, 2005 718,000 $0.10 $0.10 -Apr 30, 2009 Granted 67,000 $0.10 $0.10 Apr 30, 2010 -------------------------------------------------- May 8, 2007 Outstanding at March 31, 2006 785,000 $0.10 $0.10-Apr 30, 2010 Granted 67,000 $0.10 $0.10 Apr 30, 2011 Granted __700,000 $0.10 $0.10 May 19, 2011 -------------------------------------------------- May 8, 2007 Outstanding at June 30, 2006 1,552,000 $0.10 $0.10-Apr 30, 2011 -------------------------------------------------- Page 15 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements June 30, 2006 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 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. Until December 31, 2005, the Company accounted for its stock option plan in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. Effective January 1, 2006, the Company is accounting for stock based compensation using SFAS 123(R) Share Based Payment. Had compensation cost for the stock option plan been determined for the period ending June 30, 2006 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 would be $1,565. This value is estimated at the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 2006 ------------- Risk-free interest rate 2.5% Expected dividend yield - Expected stock price volatility 73% Expected option life in years 5 The resulting pro forma loss per share for the year was as follows: 2006 ------------- Loss as reported $ (41,839) Stock compensation expense (857) ------------- Pro forma loss $ (42,696) ------------- Loss per common share $ (0.00) Pro forma loss per common share $ (0.00) Stock option expense for the period ending June 30, 2006 was $1,857, and has been included in the salaries and benefits expense on the Statement of operations. This value is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions. 2006 ------------- Risk-free interest rate 2.5% Expected dividend yield - Expected stock price volatility 73% Expected option life in years 5 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 June 30, 2006 Expressed in US Dollars Unaudited =============================================================================== 9. Income Taxes Income Taxes The Company has accumulated net operating losses for federal income tax purposes of approximately $917,000, which may be carried forward and used to reduce taxable income of future years. These losses expire as follows: 2020 $ 180,000 2021 117,000 2022 135,000 2023 141,000 2024 97,000 2025 109,000 2026 138,000 ------- $ 917,000 ------- Details of future income tax assets are as follows: March 31, March 31, Future income tax assets: 2006 2005 -------------------------------------- Non-capital tax loss $ 312,000 $ 265,000 Valuation allowance (312,000) (265,000) -------------------------------------- $ - $ - -------------------------------------- The potential future tax benefits of these losses have not been recognized in these financial statements due to uncertainty of their realization. When the future utilization of some portion of the carry forwards is determined not to be "more likely than not," a valuation allowance is provided to reduce the recorded tax benefits from such assets. =============================================================================== 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 had two product lines which are jewelery cleaners and accessories, and tire sealant. The jewelery cleaner line was discontinued as of March 31, 2006. The sales and cost of sales allocated to each product line are disclosed below: June 30, June 30, 2006 2005 ----------------------------- Jewellery cleaner and accessories Sales $ 1,051 $ 1,849 Cost of sales - (764) ----------------------------- Gross Profit 1,051 1,085 ----------------------------- Tire Sealant Sales - 629 Cost of sales - (487) ----------------------------- Gross profit - 142 ----------------------------- Total gross profit 1,051 1,227 Expense, net of other income (42,440) (26,208) ----------------------------- Net loss $ (41,389) $ (24,981) ----------------------------- 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: June 30, March 31, 2006 2006 ------------------------------ Accounts Receivable Jewellery cleaner and accessories $ 4,471 $ 3,199 Tire Sealant - - ------------------------------ $ 4,471 $ 3,199 ------------------------------ Inventory Jewellery cleaner and accessories $ 809 $ - Tire Sealant 9,989 8,643 ------------------------------ $ 10,798 $ 11,842 =============================================================================== Page 17 Natco International Inc. (formerly Spectrum International Inc.) Notes to Interim Financial Statements June 30, 2006 Expressed in US Dollars Unaudited =============================================================================== 12. Discontinued Operations The Company discontinued operations of its jewelery cleaners and accessories line due to lack of demand for the product as of March 31, 2006. There were no property, plant and equipment remaining to produce this line of operations. As at June 30, 2006, accounts receivable relating to the jewelery cleaners line were $4,471 (March 31, 2006 - $3,199). As of June 30, 2006, inventory relating to the discontinued line of business was $Nil (March 31, 2006 - $Nil) and accounts payable were $Nil (March 31, 2006 - $5,613). Net gain from discontinued operations is as follows: 2006 2005 --------------------------------- Sales $ 1,051 $ 1,849 Cost of Sales - (764) --------------------------------- Net gain from Discontinued Operations $ 1,051 $ 1,085 --------------------------------- 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 yet to make a profit on current operations. As of June 30, 2006, we had incurred a deficit of $(1,557,340) and $(1,530,951) as of March 31, 2006, 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. 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. At March 31, 2006, we discontinued the operations of our jewelry cleaner line. We are trying to sell the tire sealant business. If the sale does not materialize, it will be discontinued as well in the next 60 days. In the three months ended June 30, 2006 as compared to the period June 30, 2005, we had net loss of $(42,440) and $(26,066) respectively. Current period loss was primarily financed by increased related party loans of $61,012 and shares subscriptions received of $50,000. Payables have continued to increase Our 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 receivables 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 has changed its business focus from jewelery cleaners and tire Sealants (discontinued) to beauty products. The company is now seeking debt and/or equity financing to fund its new product line. The Company is actively negotiating a funding of approximately $300,000; no commitments have been obtained but management expects that a funding may take place before the end of October 31, 2006. The money raised will be used to pay down debt and to buy inventory for expansion into India with professional beauty products. Page 19 Results of Operations Three month period ended June 30, 2006 The company is in the process of changing the business focus from jewelery cleaners and tire sealants to beauty products. The jewelery cleaner line has been discontinued and the tire sealant line will be discontinued in the next 60 days. However, there are no revenues from the new business yet. Consequently we had no sales in the first quarter of this year. Therefore, it is not meaningful to compare our results of operations to our prior year since our prior years operations have been or will be discontinued. 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. Most of the financing has been debt financing from related parties. In the period from April 1, 2006 to June 30, 2006 current assets increased by $17,023 and property, plant and equipment increased by $2,675. In the same period bank debt decreased by $230, payables increased by $9,624, and accrued liabilities decreased by $3,460. However, amounts due to related parties increased by $61,012 in the same period. The deficit during that period increased from $1,530,951 to $1,557,340. During the three months ended June 30, 2006 Natco used $41,309 (2005 - $24,981) 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 $111,242 (2005 - $27,440), which consisted of $61,012 in cash advanced by related parties, $230 decrease bank debt and $50,000 from share subscriptions. No notes were paid down in the period ended June 30, 2006 Page 20 The company owes $1,123,501 to related parties, the breakdown of which is listed in the financial statements, Note 7. 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 settled this matter out of court for CDN$50,000. On August 1, 2006, all money owing was paid. 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. We plan to satisfy our current liabilities of $1,307,836 as of June 30, 2006 by converting most of our debt to equity and paying the balance of approximately $200,000 with additional financing. We estimate that if we can raise $1,000,000 in additional capital either through long term debt, equity or some combination, which is yet to be obtained, then we can pay the current obligations we believe we need to pay, and have enough working capital for the fiscal year ending March 31, 2007. We believe this sum, less the payments we have indicated, would provide us with sufficient working capital for marketing and other expenses to begin our new business of supplying professional beauty supplies to India nd Canada. This assumes that additional marketing will be sufficient to establish sales of our professional beauty products we will have the sales to cover our overhead. We will need additional capital to satisfy inventory, receivables, expansion to India and other current, non-cash assets for current cash requirements . We estimate we will have to raise an additional $2,000,000 in the next 12 to 18 months to complete the expansion to India. Our estimated fixed costs at this time are approximately $6,500 per month, which Includes $1,500 for lease payments, $1,000 for utilities, $3,000 for loan interest and principle payments, and $1,000 for miscellaneous expenses. We receive about $300 per month from the current levels of sales That means, we will have to raise approximately $6,200 per month until additional funding is in place. We will also require an additional $15,000 to $20,000 for legal and accounting fees related to public company compliance. We will seek new sources of funding such as increasing the 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 $3,000,000. This money will allow us to pay down account payables and debt, reducing monthly payment and interest expenses, hence increasing the company cash position to invest in growth. It will also allow us to invest more money in the 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 management's 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 the next 12 months or until the company has secured at least $50,000 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, 2006 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 the 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 was obliged to pay this amount by July 31, 2006, and this amount plus interest/expenses of $3,691.34 was paid to the plaintiff on August 1, 2006. Page 23 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company received subscription for 500,000 common shares at $.10 Per share. Total amount paid to the company was $50,000. These Shares have not been issued at this time. They will be issued in the Next 30 days. 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 2.1 Articles of Incorporation (1) 2.2 Bylaws (2) 31.1 Certificate of Chief Executive Officer and CFO 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. (1) Incorporated herein by reference to Form SB-2A filed with the U.S. filed with the U.S. Securities and Exchange Commission on May 14, 2003. (2) Incorporated herein by reference to Form SB-2 filed with the U.S. filed with the U.S. Securities and Exchange Commission on June 26, 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: August 21, 2006 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, Chief Executive Officer and Chief Financial Officer August 21, 2006 /s/Stephen Sleigh ------------------------- Director, Controller August 21, 2006