UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
-------------------
Commission File Number: 000-25947
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NORTH AMERICAN LIABILITY GROUP, INC.
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(Formerly Stanfield Educational Alternatives, Inc.)
(Name of Small Business Issuer in its Charter)
Florida 65-0386286
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2929 East Commercial Boulevard, Suite 610, Ft. Lauderdale, FL 33308
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(Address of Principal Executive Offices) (Zip Code)
11891 U.S. Highway One, Suite 100 North Palm Beach, FL 33408
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(Former Address of Principal Executive Offices)
(954) 771 5500
---------------------------
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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.
[X] YES [] NO
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer is a
development stage company, and as such has yet to generate substantial
revenues.
As of April 14, 2004, the issuer had 125,124,898 shares of Common Stock
outstanding.
Documents incorporated by reference: NONE
PART I
This Annual Report on Form 10-KSB contains forward-looking
statements that are not statements of historical fact. Forward-looking
statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially from such statements. These
forward-looking statements are based on the Company's expectations and
are subject to a number of risks and uncertainties, including but not
limited to, those risks associated with economic conditions generally and
the economy in those areas where the Company has or expects to have
assets and operations; risks relating to changes in interest rates and
in the availability, cost and terms of financing; risks related to the
performance of financial markets; risks related to changes in domestic
and foreign laws, regulations and taxes; risks associated with future
profitability; and other factors discussed elsewhere in this report.
Item 1. Description of Business
-----------------------
North American Liability Group, Inc. (formerly known as Stanfield
Educational Alternatives, Inc. ("Stanfield") and formerly known as
Innovative Technology Systems, Inc.("Innovative")) (the "Company") is
presently a development stage company.
On December 30, 1999, we entered into an agreement with The National
Children's Reading Foundation to purchase intellectual properties and
certain fixed assets at fair market value. Lawrence W. Stanfield, who was
then our CEO and President, was the sole shareholder of The National
Children's Reading Foundation. On January 12, 2000, we changed our name
to Stanfield Educational Alternatives, Inc. On April 24, 2000, we
opened our first corporate advancement center, and we had planned to open
two additional centers in the fall of 2000. However, as of December 31,
2001 these plans were abandoned and the Corporate center was closed. At
this time, we were an educational corporation and franchiser of the
Stanfield Ed-vancement Centers, a network that provided a comprehensive
range of educational and tutorial services to individuals of all ages. We
also developed and published a variety of specialized educational
programs including a computer global Internet educational campus in
various languages. We developed a variety of educational programs for
children of all ages for both video and television production.
2
Change in Business Focus and Change in Control
----------------------------------------------
However, we were never able to commence meaningful business
operations or generate sufficient revenues or capital to launch our
business in a meaningful sense. As such, we abandoned our plans to
operate as an educational corporation. As a result, on June 20, 2003,
Larry Stanfield entered into an agreement, subject to some conditions,
to transfer his holdings in us to Bradley Wilson and Mr. Wilson became
our sole officer and director. Those contingencies have all been met. At
that time, due to our lack of business operations, we could be defined
as a "shell" company whose sole purpose at the time was to locate and
consummate a reverse merger or reverse acquisition with an unidentified
private entity.
On October 2, 2003, we completed a triangular merger with Nor-
American Liability Corporation ("Nor-American"). Nor-American is a newly
formed Florida corporation that was created to support the development
of captive insurance programs. Nor-American is a development stage
company that has received no revenues to date. At the closing, the
Company acquired all of Nor-American's issued and outstanding shares of
common stock in exchange for 160,000,000 "unregistered" and "restricted"
shares of our common stock. The exchange was on a 16 for 1 basis, with
Nor-American having 10,000,000 shares of common stock issued and
outstanding. As a result of the Merger, Nor-American became a wholly-
owned subsidiary of us.
Through our new subsidiary, we intend to provide services to
professional groups seeking to obtain affordable professional liability
insurance rates through the creation of captive insurance companies. We
anticipate our services to include evaluation, development and management
of captive insurance programs. We will seek physicians, attorneys,
condominium associations and other business and professional groups in
similar industries to assist in the creation and management of captive
insurance programs. There is no assurance that we will be able to
accomplish any of these goals.
Employees
---------
As of December 31, 2003, we had one employee. This employee is
considered full-time and is not represented by a union. We believe our
relationship with our employee to be good.
Environmental Laws
------------------
We believe we are in compliance with all environmental laws. Future
compliance with environmental laws is not expected to have a material
adverse effect on the business.
Item 2. Properties
----------
While operating as Stanfield, we defaulted on our previous lease
agreement and in fact was evicted from its offices. We have recently
signed a one year lease ending December 31, 2004 for approximately 1500
square feet to maintain its Executive offices, located at 2929 East
Commercial Boulevard, Suite 610, Ft. Lauderdale, FL 33308. The rent is
$1,415 per month and is currently prepaid for one (1) month. The monthly
3
rent includes heat and utilities. The Company has paid a refundable
security deposit of $2,830. In addition, we lease an apartment for one
member of the Subsidiary's Board of Directors. The lease is non-
cancelable and expires November 30, 2004. Rent and fees paid at December
31, 2003 amount to $3,438. The amount of rent remaining to be paid at
December 31, 2003 was $15,695, all of which is due to be paid in 2004.
Item 3. Legal Proceedings
-----------------
Due to our financial difficulties, we defaulted on a number of debt
and lease obligations. We were evicted from our premises and several
judgments totaling approximately $310,000 were entered against us. We are
currently trying to resolve these obligations through settlements.
However, there is no assurance that we will be able to settle on terms
favorable to us and if we are unable to do so, this will have a material
adverse affect on our ability to operate properly in the future.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No items were submitted to a vote of security holders during the
year ended December 31, 2003.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Our common stock is listed for trading on the Over-the-Counter
Bulletin Board inter-dealer trading system. The Company's trading symbol
is NALG. We declared no dividends on our common stock during the year
ended December 31, 2003, and we do not anticipate paying dividends in the
future. The high and low closing inter-dealer sales prices for each
quarter of the last fiscal year are as follows:
2003 2002*
HIGH LOW HIGH LOW
1st Qtr 13.00 6.00 1.01 0.51
2nd Qtr 10.00 3.00 1.60 0.60
3rd Qtr 8.00 0.25 1.45 0.25
4th Qtr 2.00 0.25 0.15 0.10
*Does not give effect to any stock splits.
As of December 31, 2003, the number of shareholders of record was
approximately 390.
4
Item 6. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
FORWARD LOOKING STATEMENTS
All statements contained herein that are not historical facts,
including but not limited to, statements regarding the anticipated impact
of future capital requirements and future development plans are based on
current expectations. These statements are forward looking in nature and
involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: amount of revenues earned by the Company's
operations; the availability of sufficient capital to finance the
Company's business plan on terms satisfactory to the Company; general
business and economic conditions; and other risk factors described in the
Company's reports filed from time to time with the Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which statements are made pursuant to the
Private Securities Litigation Reform Act of 1995 and, as such, speak only
as of the date made.
Results of Operations
---------------------
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
---------------------------------------------------------------------
We had no revenues for the years ended December 31, 2003 and
December 31, 2002. Our prior operations failed to generate any revenues
and since merging with Nor-American, a newly formed company, we have also
had no revenues. There is no assurance that we will have revenues in
fiscal 2004.
As we had no sales in either 2003 or 2002, we had no cost of sales
for those fiscal years.
Operating expenses for 2003 were $178,937 as compared to $122,861
for 2002, an increase of approximately $56,000 or 45%. This increase was
due to the Company ceasing its operations in the education business and
its initial costs for reorganizing itself as a management services
business.
Other expenses for the year ended December 31, 2003 were $137,479
as compared to $303,370 for the year ended December 31, 2002, a decrease
of approximately $166,000 or 55%. Again, this was due to the cessation
of operations.
The Company's net loss for the year ended December 31, 2003 was
$316,416 as compared to $426,231 for the year ended December 31, 2002,
a decrease of approximately $110,000 or 26%. This decrease in net loss
was primarily due to the decrease in other expenses as referenced above.
As a result of the foregoing, for the year ended December 31, 2003,
the Company had a loss per share of $0.01 as compared to a loss per share
of $15.35 for the year ended December 31, 2002, on both a basic and fully
diluted basis. No conversion of common stock equivalents has been assumed
as such conversion would have an antidilutive effect on diluted loss per
common share amounts. Once again, the Company attributes the decrease in
loss per share to the decrease in the Company's other expenses and to the
5
issuance of shares in fiscal 2003.
Other Events
------------
On October 2, 2003, we completed a triangular merger with Nor-
American Liability Corporation. Nor-American is a newly formed Florida
corporation that was created to support the development of captive
insurance programs. Nor-American is a development stage company that has
generated no revenues to date. At the closing, we acquired all of Nor-
American's issued and outstanding shares of common stock in exchange for
160,000,000 "unregistered" and "restricted" shares of our common stock.
The exchange was on a 16 for 1 basis, with Nor-American having 10,000,000
shares of common stock issued and outstanding. As a result of that
merger, Nor-American became our wholly owned subsidiary and we changed
our name to our current name, North American Liability Group, Inc.
We intend through our new subsidiary, to provide services to
professional groups seeking to obtain affordable professional liability
insurance rates through the creation of captive insurance companies. Our
services are anticipated to include evaluation, development, and
management of captive insurance programs. We will seek physicians,
attorneys, condominium associations and other business and professional
groups in similar industries to assist in the creation and management of
captive insurance programs. There is no assurance that we will be
successful in launching our intended business.
The controlling shareholder of Nor-American Liability Corporation
was Bradley Wilson, and pursuant to the terms of the Plan and Agreement
of Merger, the shareholders of Nor-American Liability Corporation
received 160,000,000 shares of common stock of the Registrant. As of
December 31, 2003, taking into account a forward split of the 2001A
Convertible Preferred Stock, and the issuance of new stock pursuant to
the terms of the merger, and assuming conversion of all of the
outstanding shares of 2001A Convertible Preferred Stock, the former
shareholders of Nor-American Liability Corporation owned 51.4% of the
common stock of the Registrant on a fully diluted basis. The transaction
involved the retirement and cancellation of 775,000 shares of 2001A
Convertible Preferred Stock equivalent to 96,875,000 shares of common
stock, which was owned by John W. Bylsma, the former controlling
shareholder. As of December 31, 2003, Mr. Wilson owned or controlled
50.8% of the common stock of the Company, assuming full conversion of all
outstanding preferred stock.
The source of the consideration used by the Nor-American
stockholders to acquire their interest in the Company was the exchange
of their respective shares of the outstanding securities of Nor-American.
The primary basis of the "control" by the Nor-American stockholders is
stock ownership and/or management positions.
The principal terms of the Plan and Agreement of Merger were:
1. The issuance of 160,000,000 "unregistered" and "restricted"
shares of our common stock in exchange for all of Nor-
6
American's issued and outstanding shares of common stock. The
exchange was on a 16 for 1 basis, with Nor-American having
10,000,000 shares of common stock issued and outstanding. As
a result of the Merger, Nor-American became our wholly owned
subsidiary.
2. The cancellation of 775,000 shares of 2001A Convertible
Preferred Stock owned by our former controlling shareholder,
as outlined above.
3. The issuance of 56,625,000 shares of "unregistered" and
"restricted" common stock to holders of 2001A Convertible
Preferred Stock, which does not include any issuance in
connection with any of the shares referred to in paragraph 2
above.
4. A forward split of the remaining 2001A Convertible Preferred
Stock, such that 94,375,000 shares of 2001A Convertible
Preferred Stock were issued and outstanding, which are
convertible into common stock of the Company.
5. An agreement to change our name to "North American Liability
Group, Inc." within thirty days of the closing of the Merger,
which was effective on November 12, 2003.
On February 5, 2004 the Company cancelled 158,000,000 shares of its
Common stock. The cancelled shares were held by Bradley Wilson, Chairman
of the Company and Regency Financial Group, each canceling 79,000,000
shares. In consideration of canceling their shares, 30,000,000 and
20,000,000 shares of Class B Preferred stock were issued to Mr. Wilson
and Regency, respectively. Shares of Class B Preferred stock carry 10
votes per share and cannot be converted to Common stock prior to
September 1, 2005.
Liquidity and Capital Resources
-------------------------------
On December 31, 2003, the Company had a working capital deficit of
approximately $1,560,000. Since its inception, the Company has continued
to sustain losses. The Company's operations since inception have been
funded by the sale of common and preferred stock, and proceeds from loans
secured by the Company's common stock. These funds have been used for
working capital and capital expenditures and other corporate purchases.
The Company has had losses of approximately $4,300,000 since inception.
The Company is seeking financing through equity financing. There can be
no assurance that the Company will be able to obtain funding at terms
acceptable to the Company. These factors indicate that the Company may
not be able to continue as a going concern.
Recent Accounting Pronouncements
--------------------------------
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46"). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities
7
(VIE's) created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.
The Company has not identified any VIE's for which it is the primary
beneficiary or has significant involvement.
In December 2003, the FASB issued FIN No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to
address certain FIN 46 implementation issues. The effective dates and
impact of FIN 46 and FIN 46-R are as follows:
a. For special purpose entities (SPE's) created prior to February
1, 2003, the Company must apply either the provisions of FIN
46 or early adopt the provisions of FIN 46-R at the end of the
first interim or annual reporting period ending after December
15, 2003.
b. For non-SPE's created prior to February 1, 2003, the Company
is required to adopt FIN 46-R at the end of the first interim
or annual reporting period ending after March 15, 2004.
c. For all entities, regardless of whether a SPE, that were
created subsequent to January 31, 2003, the provisions of FIN
46 were applicable for variable interests in entities obtained
after January 31, 2003. The Company is required to adopt
FIN 46-R at the end of the first interim or annual reporting
period ending after March 31, 2004.
The adoption of the provisions applicable to SPE's and all other
variable interests obtained after January 31, 2003 did not have a
material impact on the Company's consolidated financial statements. The
Company is currently evaluating the impact of adopting FIN 46-R
applicable to non-SPE's created prior to February 1, 2003, but does not
expect a material impact.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
The Company has no disagreements with the accountants.
ITEM 8A. CONTROLS AND PROCEDURES
-----------------------
In accordance with Exchange Act Rules 13a-15 and 15d-15, the
Company's management carried out an evaluation with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, its
principal executive officer and principal financial officer,
respectively, of the effectiveness of the Company's disclosure controls
and procedures as of the end of the period covered by this report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded as of the end of the period covered by this Form 10-KSB
8
that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company
required to be included in periodic reports filed under the Securities
Exchange Act of 1934, as amended. There were no changes in the Company's
internal controls over financial reporting identified in connection with
the evaluation by the Chief Executive Officer and Chief Financial Officer
that occurred during the Company's fourth quarter that have materially
affected or are reasonably likely to materially affect the Company's
internal controls over financial reporting.
PART III
Item 9. Directors, Executive Officers Promoters and Control Persons
-----------------------------------------------------------
This table sets forth the name, age and position of each director
and executive officer of the Company:
Name of Director Age Position
Bradley Wilson 45 Director, Chairman and President
Bradley Wilson - Director, Chairman and President. Mr, Wilson has
served in these capacities since October 2003. Mr. Wilson currently is
President of Merbank Capital Corporation, a private consulting company
in Orlando, Florida and president of Koala International Wireless Inc.,
a publicly traded company ("KIWI"). Previously, he was Director of Great
Wall Food and Beverage Corp., a U.S. public company (symbol: GWFB) and
President of Noble Brands, Inc.(symbol: NBBD).
Item 10. Executive Compensation
----------------------
Our President and sole director did not receive any remuneration
from us during the fiscal year. We have accrued compensation for Mr.
Fischer (a director of our subsidiary) in the amount of $73,900 and David
Tews (also a director of our subsidiary) has received $30,00 in
compensation. See "Certain Relationships and Related Transactions." The
ompany has no stock option, retirement, pension, or profit-sharing
programs for the benefit of directors, officers or other employees, but
the Board of Directors may recommend adoption of one or more such
programs in the future.
Employment and Consulting Agreements
------------------------------------
Our wholly-owned subsidiary North American Liability Corporation
("the Subsidiary"), entered into an Employment Agreement with the
Subsidiary's Chairman and CEO, Harold Fischer. Under this agreement,
which is for a term of three years, Fischer is to receive a base annual
salary of $200,000 plus an incentive bonus of up to one time his salary
based upon his performance. The Subsidiary was also to issue, upon
execution of the agreement, to the employee 1,000,000 shares of common
stock. Furthermore, the Subsidiary was to grant to the employee, at the
date of the agreement, 4,000,000 Rule 144 shares of common stock which
are to be held in escrow and released to the employee in three equal
9
installments on the first, second, and third anniversary of employment.
No shares have been issued by the Subsidiary under this Employment
Agreement.
James Jarboe is engaged by the Company's wholly-owned subsidiary,
North American Liability Corporation ("the Subsidiary"), as a Consultant
and Member of its Board of Directors, reporting to its Chairman, in an
agreement dated September 18, 2003. The term of the agreement is two (2)
years and it provides for (i) an annual salary of $24,000 paid in equal
installments on a monthly basis, subject to deductions and withholdings
as required by law, (ii) incentive bonuses for investment procurement (5%
of proceeds raised in cash plus 5% in common stock at closing and for
Group or Policy procurement (a fair commercial market fee to be
determined at the time of the Group or Policy completed with the
Subsidiary), and (iii) participation in any or all healthcare plans the
Subsidiary provides at the consultant's expense. Upon execution of the
agreement the Company agreed to immediately grant an option to purchase
2,000,000 shares of common stock under Rule 144 at 85% of the then
current stock price on a day to be determined within 30 days of the
effective date of the agreement. Upon termination the consultant is
entitled to receive salary and bonuses earned and expenses incurred up
to the time of termination, subject to reduction for losses to the
Company due to theft, embezzlement, fraud or similar loss caused by the
consultant.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
As of December 31, 2003, there were 247,820,898 shares of our common
stock, no par value outstanding. The following tabulates holdings of our
shares by each person who, subject to the above, at the date of this
registration, holds of record or is known by our management to own
beneficially more than 5.0% of the common shares and, in addition, by all
of our directors and officers individually and as a group. To the best
of our knowledge, each named beneficial owner (1) has sole voting and
investment power with respect to the shares set forth opposite his name.
Name and Address of Beneficial Beneficial
Beneficial Owner(1) Ownership Ownership
------------------- ---------- -------------
Bradley Wilson 78,000,000 31.47%
James Rice(2) 78,000,000 31.47%
All Directors and Executive
Officers as a Group (1 persons) 78,000,000 31.47%
(1) The addresses for these shareholders is care of the company.
(2) Mr. Rice's shares are owned by Regency Financial Corp., a company
which Mr. Rice controls.
10
Item 12. Certain Relations and Related Transactions
------------------------------------------
The president, current and former principal stockholders, and
certain employees from time to time made advances to us. The advances
have been made for financing and working capital purposes. At December
31, 2003 and 2002 respectively, the total of such advances and accrued
interest was $261,917 and $451,168.
We lease an apartment for one the members of our subsidiary's Board
of Directors. The lease is non-cancelable and expires November 30, 2004.
Rent and fees paid at December 31, 2003 amount to $3,438. The amount of
rent remaining to be paid at December 31, 2003 was $15,695, all of which
is due to be paid in 2004.
We have a one year agreement to reimburse apartment rental costs for
one of our subsidiary's Board of Directors. The amount of reimbursement
paid during the year ended December 31, 2003 was $1,500. The amount of
rental reimbursement to be paid in 2004 is $16,500.
One member of of our subsidiary's Board of Directors has been paid
fees for raising working capital for the Company. During the year ended
December 31, 2003, the total of the fees paid was $30,000.
Our wholly-owned subsidiary has an Employment Agreement with Harold
Fischer who is the subsidiary's Chairman and CEO. Under this agreement,
which is for a term of three years, Fischer is to receive a base annual
salary of $200,000 plus an incentive bonus of up to one time his salary
based upon his performance. The Subsidiary was also to issue, upon
execution of the agreement, to the employee 1,000,000 shares of common
stock. Furthermore, the Subsidiary was to grant to the employee, at the
date of the agreement, 4,000,000 Rule 144 shares of common stock which
are to be held in escrow and released to the employee in three equal
installments on the first, second, and third anniversary of employment.
No shares have been issued by the Subsidiary under this Employment
Agreement.
The Subsidiary also has a Consulting Agreement with James Jarboe as
Consultant and Director. Under this agreement, which is for a term of two
years, Jarboe is to receive base annual compensation of $24,000, plus a
bonus to be paid in cash and stock of 10% of any debt or equity capital
raised.
We settled a note payable to the former controlling shareholder.
With principal and accumulated interest, the debt amounted to $444,088.
In the settlement, we paid $200,000, the current president contributed
$185,000, and $59,088 was forgiven.
11
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS
(a) EXHIBIT No. EXHIBIT NAME
31.1 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002,
promulgated under the Securities Exchange Act of 1934,
as amended
32.1 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
Audit Fees billed for fiscal 2003 and 2002 for professional
services rendered by the principal accountant for the audit of the
registrant's annual financial statements and review of financial
statements included in the registrant's Form 10-QSB were $14,864 and
$33,290, respectively.
There were no other fees billed to us by our principal
accountant.
12
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Boca Raton,
Florida on April 14, 2004.
North American Liability Group, Inc.
By: /s/ Bradley Wilson
-----------------------------------
Bradley Wilson
President, Chief Executive Officer
In accordance with the requirements of the Securities Act of
1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/Bradley Wilson D/P 4/14/04
----------------------------
Bradley Wilson
13
Independent Auditors' Report
----------------------------
To the Stockholders and Board of Directors of
North American Liability Group, Inc.:
We have audited the accompanying consolidated balance sheets of
North American Liability Group, Inc. and Subsidiary (a
development stage company) (the "Company") as of December 31,
2003 and 2002 and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for
the years then ended, and for the period March 23, 1999
(inception) to December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of North American Liability Group, Inc. and Subsidiary
as of December 31, 2003 and 2002 and the results of their
operations and their cash flows for the years then ended, and for
the period March 23, 1999 (inception) to December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming
that North American Liability Group, Inc. (a development stage
company) will continue as a going concern. As discussed in Note
12 to the financial statements, the Company's net loss during the
development period raises substantial doubt about the entity's
ability to continue as a going concern. Management's plans and
intentions with regard to these matters are discussed in Notes
1(a) and 12. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ TEDDER, JAMES, WORDEN & ASSOCIATES, P.A.
Orlando, Florida
March 25, 2004
F-1
NORTH AMERICAN LIABILITY GROUP, INC.
AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
December 31, 2003 and 2002
Dec. 31, Dec. 31,
2003 2002
----------- -----------
Assets
------
Current assets:
Cash $ 27,648 $-
Prepaid expenses 1,415 -
----------- -----------
Total current assets 29,063 -
Property and equipment, net 2,497 -
Other Assets:
Deposits 4,400 -
----------- -----------
Total other assets 4,400 -
----------- -----------
Total assets $ 35,960 $ -
=========== ===========
Liabilities and Stockholders' Deficiency
----------------------------------------
Current liabilities:
Accounts payable $ 192,155 $ 176,908
Accrued expenses 585,108 383,728
Due to related parties 261,917 451,168
Notes payable 551,466 226,466
----------- -----------
Total current liabilities 1,590,646 1,238,270
----------- -----------
Stockholders' deficiency:
Series 2001 convertible preferred stock 42,470 47,847
Series 2001 A convertible preferred stock - -
Series 2001 B convertible preferred stock - -
Class B preferred stock - -
Common stock 2,708,109 2,702,732
Accumulated deficit (4,305,265) (3,988,849)
----------- -----------
Total stockholders' deficiency (1,554,686) (1,238,270)
----------- -----------
Total liabilities and stockholders'
deficiency $ 35,960 $ -
=========== ===========
See accompanying notes to the consolidated financial statements.
F-2
NORTH AMERICAN LIABILITY GROUP, INC.
AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative for
the period
from March 23,
1999 (inception)
Year ended Year ended to
December 31, December 31, December 31,
2003 2002 2003
------------ ------------ ----------------
Gross revenues $ - $ - $ 45,744
Cost of sales - - 264
------------ ------------ ----------------
Net revenue - - 45,480
Operating expenses 178,937 122,861 3,552,853
Other income(expenses):
Other income 59,088 - 59,088
Interest expense (196,567) (79,292) (316,953)
Impairment of assets - (224,078) (315,027)
Provision for loss on non-cancelable leases - - (225,000)
------------ ------------ ----------------
Total other income(expenses) (137,479) (303,370) (797,892)
------------ ------------ ----------------
Net (loss) $ (316,416) $ (426,231) $ (4,305,265)
============ ============ ================
Loss per common share:
Basic and diluted (0.01) (15.35)
============ ============
Weighted average common shares outstanding:
Basic and diluted 53,014,718 27,761
============ ============
See accompanying notes to the consolidated financial statements.
F-3
NORTH AMERICAN LIABILITY GROUP, INC.
AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficiency)
Years ended December 31, 2003 and 2002
and the period from May 23, 1999 (Inception) to December 31, 2003
Additional
Preferred Stock Common Stock Paid in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- -------- --------- ---------- ---------- ----------- -----------
Balance March 23, 1999 (inception) - $ - - $ - $ - $ - $ -
Issuance of stock - - 1,510,000 1,510 241,524 - 243,034
Shares issued to reflect
re-capitalization of reverse
acquisition - - 5,435,000 241,524 (241,524) - -
Net loss - - - - - (233,968) (233,968)
---------- -------- --------- ---------- ---------- ----------- -----------
Balances at December 31, 1999 - - 6,855,000 243,034 - (233,968) 9,066
Issuance of common stock - - 405,140 403,140 - - 403,140
Issuance of common stock for
services - - 2,069,250 2,055,405 - - 2,055,405
Net loss - - - - - (2,422,299) (2,422,299)
---------- -------- --------- ---------- ---------- ----------- -----------
Balances at December 31, 2000 - - 9,329,390 2,701,579 - (2,656,267) 45,312
Reverse stock split - - (9,211,435) - - - -
Issuance of Series 2001
convertible preferred stock 25,500 49,000 - - - - 49,000
Issuance of Series 2001 A
convertible preferred stock 5,603,000 - - - - - -
Issuance of Series 2001 B
convertible preferred stock 5,643,175 - - - - - -
Net loss - - - - - (906,351) (906,351)
---------- -------- --------- ---------- ---------- ----------- -----------
Balances at December 31, 2001 11,271,675 49,000 117,955 2,701,579 - (3,562,618) (812,039)
Conversion of Series 2001
convertible preferred stock
to common stock (600) (1,153) 2,679 1,153 - - -
Conversion of Series 2001 A
convertible preferred stock
to common stock (4,073,000) - 4,073,000 - - - -
Conversion of Series 2001 B
convertible preferred stock
to common stock (2,915,731) - 2,915,731 - - - -
Cancellation of common stock - - (54,051) - - - -
Net loss - - - - - (426,231) (426,231)
---------- -------- --------- ---------- ---------- ----------- -----------
Balances at December 31, 2002 4,282,344 $ 47,847 7,055,314 $2,702,732 $ - $(3,988,849) $(1,238,270)
See accompanying notes to the consolidated financial statements.
F-4
NORTH AMERICAN LIABILITY GROUP, INC.
AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficiency), Continued
Years ended December 31, 2003 and 2002
and the period from May 23, 1999 (Inception) to December 31, 2003
Additional
Preferred Stock Common Stock Paid in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- -------- ----------- ---------- ---------- ----------- -----------
Conversion of Series 2001
convertible preferred stock
to common stock (2,800) (5,377) 6,000 5,377 - - -
Cancellation of common stock in
100 for 1 reverse stock split - - (6,990,424) - - - -
Cancellation of Series 2001 B
convertible preferred stock
for voidance of series (2,727,444) - - - - - -
Cancellation of Series 2001 A
convertible preferred stock
of the prior controlling
shareholder (775,000) - - - - - -
Issuance of Series 2001 A
convertible preferred stock in
125 for 1 forward stock split 94,375,000 - - - - - -
Conversion of Series 2001 A
convertible preferred stock
for common stock in 1 for 75
merger agreement (755,000) - 56,625,000 - - - -
Conversion of Series 2001 A
to common stock (31,125,000) - 31,125,000 - - - -
Issuance of common stock in
merger agreement - - 160,000,000 - - - -
Issuance of common stock for
rounding - - 8 - - - -
Net loss - - - - - (316,416) (316,416)
---------- -------- ----------- ---------- ---------- ----------- -----------
Balances at December 31, 2003 63,272,100 $ 42,470 247,820,898 $2,708,109 $ - $(4,305,265) $(1,554,686)
========== ======== =========== ========== ========== =========== ===========
See accompanying notes to the consolidated financial statements.
F-5
NORTH AMERICAN LIABILITY GROUP, INC.
AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative for
the period
from March 23,
1999 (inception)
Year ended Year ended to
December 31, December 31, December 31,
2003 2002 2003
------------ ------------ ----------------
Cash flows from operating activities
Net loss $ (316,416) (426,231) (4,305,265)
Adjustments to reconcile net loss to net
cash used in operating activities:
Forgiveness of related party note payable (59,088) - (59,088)
Depreciation and amortization 49 50,235 293,772
Loss on impairment of assets - 224,078 315,027
Provision for loss on non-cancelable leases - - 225,000
Common stock issued for services - - 2,055,405
Increase (decrease) in cash caused by
changes in:
Other current assets (1,415) - (1,415)
Other assets (4,400) - (4,400)
Accounts payable 15,247 (34,779) 192,155
Accrued expenses 201,380 104,109 425,115
Due to related parties 69,837 82,588 521,005
------------ ------------ ----------------
Net cash used in operating activities (94,806) - (342,640)
Cash flows from investing activities:
Acquisition of property and equipment (2,546) - (276,999)
Cash flows from financing activities:
Repayment of note payable to related party (200,000) - (200,000)
Proceeds from issuance of preferred stock - - 49,000
Proceeds from issuance of capital stock - - 646,174
Due to related parties - - (399,353)
Proceeds from issuance of notes payable 325,000 - 551,466
------------ ------------ ----------------
Net cash provided by financing activities 125,000 - 647,287
------------ ------------ ----------------
Net increase(decrease) in cash 27,648 - 27,648
Cash at beginning of period - - -
------------ ------------ ----------------
Cash at end of period $ 27,648 $ - $ 27,648
============ ============ ================
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ - $ 15,310
============ ============ ================
Noncash activity:
Purchase of intangible assets from related party $ - $ - $ 399,353
============ ============ ================
Reduction of capital lease obligation upon
impairment of assets $ - $ - $ 65,006
============ ============ ================
See accompanying notes to the consolidated financial statements.
F-6
NORTH AMERICAN LIABILITY GROUP, INC.
(A Development Stage Company)
Notes to Financial Statements
(1) Summary of Significant Business and Accounting Policies
(a) Organization
In December 1999, Innovative Technology Systems, Inc.
("Innovative") authorized and entered into an agreement
effecting a tax-free exchange in a reorganization pursuant
to IRS Code 368(a)(1)(A). Pursuant to the agreement,
Innovative exchanged one share of its previously
authorized but unissued shares of no par common stock in
exchange for two shares of Stanfield Educational
Alternatives, Inc. ("Stanfield") common stock. In
accordance with the agreement, Innovative acquired all of
the issued and outstanding shares of Stanfield in exchange
for shares of Innovative. For accounting purposes, the
acquisition has been treated as an acquisition of
Innovative by Stanfield and as a recapitalization
("Reverse Acquisition") of Stanfield. Subsequent to the
recapitalization, Innovative changed its name to Stanfield
Educational Alternatives, Inc.
On October 2, 2003, Stanfield completed a triangular
merger with Nor-American Liability Corporation. Nor-
American is a newly formed Florida corporation that was
created to support the development of captive insurance
programs. Nor-American is a development stage company that
has received no revenues to date. At the closing, the
Company acquired all of Nor-American's issued and
outstanding shares of common stock in exchange for
160,000,000 "unregistered" and "restricted" shares of the
Company's common stock. The exchange was on a 16 for 1
basis, with Nor-American having 10,000,000 shares of
common stock issued and outstanding. As a result of the
merger, Nor-American became a wholly owned subsidiary of
Stanfield. Following the merging of the companies,
Stanfield changed its name to North American Liability
Group, Inc., referred to as "the Company" hereinafter.
The Company, through its new subsidiary, will provide
services to professional groups seeking to obtain
affordable professional liability insurance rates through
the creation of captive insurance companies. The company's
services are anticipated to include evaluation,
development, and management of captive insurance programs.
The company will seek physicians, attorneys, condominium
associations and other business and professional groups in
similar industries to assist in the creation and
management of captive insurance programs.
The controlling shareholder of Nor-American Liability
Corporation was Bradley Wilson, and pursuant to the terms
of the Plan and Agreement of Merger, the shareholders of
Nor-American Liability Corporation received 160,000,000
shares of common stock of the Registrant. As of December
31, 2003, taking into account a forward split of the 2001A
Convertible Preferred Stock, and the issuance of new stock
pursuant to the terms of the merger, and assuming
conversion of all of the outstanding shares of 2001A
Convertible Preferred Stock, the former shareholders of
Nor-American Liability Corporation owned 51.4% of the
common stock of the Registrant on a fully diluted basis.
The transaction involved the retirement and cancellation
F-7
(1) Summary of Significant Business and Accounting Policies,
Continued
of 775,000 shares of 2001A Convertible Preferred Stock
equivalent to 96,875,000 shares of common stock, which was
owned by John W. Bylsma, the former controlling
shareholder. As of December 31, 2003, Mr. Wilson owned or
controlled 50.8% of the common stock of the Company,
assuming full conversion of all outstanding preferred
stock.
The source of the consideration used by the Nor-American
stockholders to acquire their interest in the Company was
the exchange of their respective shares of the outstanding
securities of Nor-American. The primary basis of the
"control" by the Nor-American stockholders is stock
ownership and/or management positions.
The principal terms of the Plan and Agreement of Merger
were:
1. The issuance of 160,000,000 "unregistered" and
"restricted" shares of the Company's common stock in
exchange for all of Nor-American's issued and outstanding
shares of common stock. The exchange was on a 16 for 1
basis, with Nor-American having 10,000,000 shares of
common stock issued and outstanding. As a result of the
Merger, Nor-American became a wholly owned subsidiary of
the Company.
2. The cancellation of 775,000 shares of 2001A
Convertible Preferred Stock owned by the Company's former
controlling shareholder, as outlined above.
3. The issuance of 56,625,000 shares of "unregistered"
and "restricted" common stock to holders of 2001A
Convertible Preferred Stock, which does not include any
issuance in connection with any of the shares referred to
in paragraph 2 above.
4. A forward split of the remaining 2001A Convertible
Preferred Stock, such that 94,375,000 shares of 2001A
Convertible Preferred Stock were issued and outstanding,
which are convertible one-for-one for common stock of the
Company.
5. An agreement to change the name of the Company to
"North American Liability Group, Inc." within thirty days
of the closing of the Merger, which was effective on
November 12, 2003.
The Company is in its development stage and needs
substantial additional capital to complete its development
and to reach an operating stage. The accompanying
financial statements have been prepared assuming that the
Company will continue as a going concern, and therefore,
will recover the reported amount of its assets and satisfy
its liabilities on a timely basis in the normal course of
its operations. See note 12 for a discussion of
management's plans and intentions.
(b) Principles of Consolidation
The financial statements include the accounts of North
American Liability Group, Inc. and its wholly owned
subsidiary, Nor-American Liability Corporation,
collectively referred to as the "Company". All significant
accounts and transactions have been
F-8
(1) Summary of Significant Business and Accounting Policies,
Continued
eliminated in the consolidation.
(c) Revenue Recognition
The Company records revenue as earned when goods or
services are provided.
(d) Cash and Cash Equivalents
Cash includes cash on hand; cash in banks and all highly
liquid investments with a maturity of three months or
less at the time of purchase.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation
for financial statement purposes is computed using the
straight-line method over the estimated useful lives of
the individual assets, which range from 3 to 5 years.
The Company reviewed its long-lived assets and
intangibles for impairment and recorded an impairment
charge to write off all long-lived assets and intangibles
during 2002.
(f) Fair Value of Financial Instruments
The Company's financial instruments include cash,
accounts payable, and amounts due to related parties.
Due to the short-term nature of these instruments, the
fair value of these instruments approximate their
recorded value. The Company has other liabilities which
it believes are stated at estimated fair market value.
(g) Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenue and expenses during the reporting
period. Actual results could differ from those
estimates.
(h) Income Taxes
The Company uses the asset and liability method of
accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable
to differences between the financial statements carrying
amounts of existing assets and liabilities and their
respective tax bases. 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.
F-9
(1) Summary of Significant Business and Accounting Policies,
Continued
(i) Loss Per Share
Basic loss per common share amounts are based on the
weighted average shares outstanding of 53,014,718 and
27,761 for the years ended December 31, 2003 and 2002,
respectively. Diluted loss per common share amounts
reflect the potential dilution that could occur if
convertible preferred shares are converted into common
stock. No conversion is assumed if such conversion would
have an anti-dilutive effect on diluted loss per common
share amounts.
(2) Recent Financial Accounting Standards
In January 2003, the FASB issued FIN No. 46, "Consolidation
of Variable Interest Entities," ("FIN 46"). FIN 46 clarifies
the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest
entities (VIE's) created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003.
The Company has not identified any VIE's for which it is
the primary beneficiary or has significant involvement.
In December 2003, the FASB issued FIN No. 46 (revised
December 2003), "Consolidation of Variable Interest
Entities" ("FIN 46-R") to address certain FIN 46
implementation issues. The effective dates and impact of
FIN 46 and FIN 46-R are as follows:
(i) For special purpose entities (SPE's) created prior to
February 1, 2003, the Company must apply either the
provisions of FIN 46 or early adopt the provisions of
FIN 46-R at the end of the first interim or annual
reporting period ending after December 15, 2003.
(ii) For non-SPE's created prior to February 1, 2003, the
Company is required to adopt FIN 46-R at the end of the
first interim or annual reporting period ending after
March 15, 2004.
(iii) For all entities, regardless of whether a SPE, that
were created subsequent to January 31, 2003, the
provisions of FIN 46 were applicable for variable
interests in entities obtained after January 31, 2003.
The Company is required to adopt FIN 46-R at the end of
the first interim or annual reporting period ending
after March 31, 2004.
The adoption of the provisions applicable to SPE's and
all other variable interests obtained after January 31,
2003 did not have a material impact on the Company's
consolidated financial statements. The Company is
currently evaluating the impact of
F-10
(2) Recent Financial Accounting Standards, Continued
adopting FIN 46-R applicable to non-SPE's created
prior to February 1, 2003, but does not expect a material
impact.
(3) Property and Equipment
During 2002, the book value of the assets of the Company
related to its former line of business, with an undepreciated
cost of $24,621, were determined to have no future value to
the Company and were written off to expense.
Subsequent to the merger in 2003, the Company purchased new
computer and telephone equipment.
At December 31, 2003 and 2002, property and equipment
consisted of the following:
2003 2002
-------- --------
Furniture and equipment $ 2,546 $ -
Less accumulated depreciation (49) -
-------- --------
Property and equipment, net $ 2,497 $ -
======== ========
Depreciation expense for the years ended December 31, 2003
and 2002 was $49 and $10,299, respectively.
(4) Leases
Operating
---------
During 2000 the Company entered into a lease for office and
storage space under a non-cancelable operating lease with an
original lease term of five years. Lease payments totaled
$6,840 per month and increased on a yearly basis. During
2001, the lease was amended to
reflect the Company's relocation to a smaller suite within
the building. The Company has defaulted on this lease
obligation. The lessor has expressed an intention to enforce
the terms of the lease, and in December 2001, the Circuit
Court of Duval County entered a Final Summary Judgment
against the former President, individually, for $33,892 for
unpaid rent and against the Company for $223,733 for non-
cancelable obligations under the lease. The amounts accrued
interest at the rate of 11.0% for the remainder of 2001, 9.0%
for the year ended 2002, and 6.0% for the year ended 2003. As
a result, the Company has included non-cancelable obligations
and accrued interest under this lease of $259,921 and
$244,894 in accrued expenses as of December 31, 2003 and
2002, respectively. Interest accrued on this lease
obligation during the years ended December 31, 2003 and 2002
was $15,027 and $21,161, respectively. No lease payments were
made during the years ended December 31, 2003 and 2002.
After the merger in 2003, the Company leased office space for
its Executive offices. The Company is obligated under a non-
cancelable operating lease for this space through December
2004. No rent expense was incurred for the year ended
December 31, 2003. At December 31, 2003 the Company had
prepaid one (1) month of rent amounting to $1,415, and had
made a refundable security deposit of $2,830.
Future minimum rental payments in 2004 under this lease
amount to $15,562.
F-11
(4) Leases, Continued
Capital
-------
During 2001, the Company defaulted on a number of leases
classified as capital leases. Certain of the assets under
these leases have been abandoned or returned to the lessor;
others have been maintained by the Company because the lessor
has elected to enforce the terms of the lease. For those
leases for which assets were abandoned or returned to the
lessor, the Company reduced its capital lease obligations in
2001 by $65,006. In October 2002, the Circuit Court of Duval
County entered a default final judgment against the Company
and other individuals in the amount of $85,985 for one lease.
This amount accrued interest at the rate of 9% for the
remainder of 2002 and at 6% for 2003. As a result, the
Company has included non-cancelable obligations and accrued
interest under this lease of $93,315 and $87,920 in accrued
expenses as of December 31, 2003 and 2002, respectively.
Interest accrued on this lease obligation during the years
ended December 31, 2003 and 2002 was $5,395 and $1,935,
respectively. No payments were made on this lease obligation
during the year ended December 31, 2003.
(5) Intangible Assets
At December 31, 2003 and 2002, the Company had no intangible
assets.
During 2002, the intangible assets of the Company related to
its operations in the educational business, with an
unamortized cost of $199,457 were determined to have no
future value to the Company and were written off to expense.
Amortization expense for the years ended December 31, 2003
and 2002 was $0 and $39,936, respectively.
(6) Capitalization
(A) COMMON STOCK
In the first half of 2003, the Company issued 6,000 shares of
its common stock in voluntary conversions of 2,800 shares of
its Series 2001 Convertible Preferred stock.
On July 30, 2003, the Majority Shareholders and the Board of
Directors approved amendments to the Articles of
Incorporation which were designed to reorganize the capital
structure of the Company. The Articles increased the total
number of authorized common shares to 500,000,000. The
stock has no par value.
On September 1, 2003, the Company affected a one hundred-for-
one reverse split of its outstanding common stock.
In accordance with the Plan and Agreement of Merger, as
described in Note 1, the Company issued 56,625,000 shares of
common stock as a result of a 75-to-1 conversion of its
Series 2001A Convertible Preferred stock outstanding at the
time of the merger. In addition, the Company issued
160,000,000 shares of common stock in a 16-to-1 exchange for
the 10,000,000 issued and outstanding shares of Nor-American
Liability Corporation.
Following the merger, 31,125,000 shares of common stock were
issued in a voluntary 1-to-1 conversion of outstanding shares
of Series 2001A convertible preferred stock.
F-12
(6) Capitalization, Continued
At December 31, 2003 and 2002, the Company had outstanding
247,820,898 and 7,055,314 shares of common stock,
respectively.
(B) PREFERRED STOCK
In 2001, Series 2001 Convertible Preferred stock was approved
to be issued in a private offering as follows:
(i) Holders of Series 2001 Convertible Preferred Stock
shall receive preference in the event of liquidation,
dissolution or winding up of the corporation.
Specifically, in the event of liquidation, dissolution
or winding up holders of Series 2001 Preferred Stock
shall be paid Five Dollars ($5.00) per share for each
Preferred Share, plus all declared and unpaid dividends.
(ii) Shares of Series 2001 Convertible Preferred Stock
shall have no voting rights.
(iii) Each share of Series 2001 Convertible Preferred
Stock may, at the option of the holder, be converted
into common stock of the corporation at any time after
twelve months after the issuance of such shares. The
conversion ratio per share of the Series 2001 Convertible
Preferred Stock shall be the lesser of $5.00 per
share or 30% below the trading price of the common stock
as priced the prior trading day to conversion. This
conversion ratio is subject to change in the event
of subdivision of common stock or issuance of a stock
dividend.
During the year ended December 31, 2003, the Company
cancelled 2,800 shares of its Series 2001 Convertible
Preferred stock in voluntary conversions to 6,000 shares of
its common stock. As of December 31, 2003 and 2002, the
number of shares outstanding of Series 2001 Convertible
Preferred stock was 22,100 and 24,900, respectively.
On July 30, 2003, the Majority Shareholders and the Board of
Directors approved amendments to the Articles of
Incorporation which were designed to reorganize the capital
structure of the Company. The Articles increased the total
number of authorized preferred shares to 150,000,000, of
which 100,000,000 are Series 2001A Convertible Preferred
stock with the following characteristics:
(i) Each share of 2001A Convertible Preferred Stock
entitles the holder thereof to one vote, either in person
or by proxy, at meetings of shareholders, and such vote
shall be equal to the voting rights of the common stock
and shall be counted with the common stock toward
election of directors or such other action as the
class of common stock shall be entitled.
(ii) Each share of Series 2001A Convertible Preferred Stock
may, at the option of the holder, be converted into
shares of common stock on a one for one basis at any time
after February 1, 2002.
F-13
(6) Capitalization, Continued
Prior to the Plan and Agreement of Merger taking effect, the
Company cancelled 775,000 shares of Series 2001A Convertible
Preferred shares held by the former President of the Company.
In accordance with the Plan and Agreement of Merger, the
Company issued 94,375,000 shares of Series 2001A Convertible
Preferred in a 125-to-1 forward stock split.
Following the merger, 31,125,000 outstanding shares of Series
2001A convertible preferred stock were cancelled in a
voluntary 1-to-1 conversion to shares of common stock.
On December 15, 2003, the Company entered into a Sales
Restriction Agreement with certain holders of Series 2001A
Preferred stock to prohibit the holders from selling or
otherwise transferring their interest in the stock between
June 20, 2003 and June 19, 2004. Subject to the Agreement
are 4,062,900 Common shares and 6,771,500 Series 2001A
Preferred shares.
At December 31, 2003 and 2002, respectively, 63,250,000 and
1,530,000 shares of Series 2001 A Convertible Preferred stock
were issued and outstanding.
In the above action of July 30, 2003, the Company voided the
Series 2001 B Convertible Preferred stock and cancelled its
2,727,444 outstanding shares. It also created a new Class B
Preferred stock, the main feature of which is the existence
of ten votes per share for each share of this series. At
December 31, 2003 and 2002, there were 0 and 2,727,444
outstanding shares of Series 2001B Convertible Preferred
stock, respectively. At December 31, 2003 no Class B
Preferred shares had been issued.
(7) Income Tax
The Company has no provision for taxes as they have a net
operating loss of approximately $4,300,000 that expires in
varying times through the year 2023. The total deferred tax
asset associated with the net operating loss has been reduced
by a valuation allowance to $0 at December 31, 2003 and 2002,
and no net deferred asset has been recorded, as the
possibility of utilizing the net operating loss is dependent
on the Company achieving profitable operations. U.S. tax
rules impose limitations on the use of net operating losses
and tax credits following certain defined changes in stock
ownership. The Company has not completed the complex
analysis required by the Internal Revenue Code to determine
if an ownership change has occurred. If such a change were
deemed to have occurred, the limitation could reduce or
eliminate the amount of these benefits that would be
available to offset future taxable income each year, starting
with the year of ownership change.
(8) Related Party Transactions
The president, current and former principal stockholders, and
certain employees from time to time made advances to the
Company. The advances have been made for financing and
working capital purposes. At December 31, 2003 and 2002
respectively, the total of such advances and accrued interest
was $261,917 and $451,168.
F-14
(8) Related Party Transactions, Continued
The Company leases an apartment for one member of the
Subsidiary's Board of Directors. The lease is non-cancelable
and expires November 30, 2004. Rent and fees paid at
December 31, 2003 amount to $3,438. The amount of rent
remaining to be paid at December 31, 2003 was $15,695, all of
which is due to be paid in 2004.
The Company has a one year agreement to reimburse apartment
rental costs for one of the Subsidiary's Directors. The
amount of reimbursement paid during the year ended December
31, 2003 was $1,500. The amount of rental reimbursement to
be paid in 2004 is $16,500.
One member of the Subsidiary's Board of Directors has been
paid fees for raising working capital for the Company.
During the year ended December 31, 2003, the total of the
fees paid was $30,000.
The Company, through its wholly-owned subsidiary North
American Liability Corporation ("the Subsidiary"), has an
Employment Agreement with the Subsidiary's Chairman and CEO
Harold Fischer. Under this agreement, which is for a term of
three years, Fischer is to receive a base annual salary of
$200,000 plus an incentive bonus of up to one time his salary
based upon his performance. The Subsidiary was also to
issue, upon execution of the agreement, to the employee
1,000,000 shares of common stock. Furthermore, the
Subsidiary was to grant to the employee, at the date of the
agreement, 4,000,000 Rule 144 shares of common stock which
are to be held in escrow and released to the employee in
three equal installments on the first, second, and third
anniversary of employment. No shares have been issued by
the Subsidiary under this Employment Agreement.
The Subsidiary also has a Consulting Agreement with James
Jarboe as Consultant and Director. Under this agreement,
which is for a term of two years, Jarboe is to receive base
annual compensation of $24,000 plus a bonus to be paid in
cash and stock of 10% of any debt or equity capital raised.
The Company settled its note payable to the former
controlling shareholder. With principal and accumulated
interest, the debt amounted to $444,088. In the settlement,
the Company paid $200,000, the current president contributed
$185,000, and $59,088 was forgiven.
(9) Accrued Expenses
Accrued expenses at December 31, 2003 and 2002, consisted of
the following:
2003 2002
------- -------
Accrued lease obligations 309,718 309,718
Accrued interest 201,490 74,010
Accrued salaries 73,900 -
------- -------
585,108 383,728
======= =======
F-15
(10) Notes Payable
Notes payable at December 31, 2002 consisted of note
agreements with various individuals bearing interest at
rates varying from 9% to 12%. Because these notes were in
default, the total outstanding balance of $226,466 at
December 31, 2002 was classified as current liabilities.
Except for the accrual of additional interest, no changes
were noted in these obligations in the year ended December
31, 2003.
To finance its current operations in 2003 after the merger,
the Company arranged two secured loans with individual
lenders amounting to $325,000. The loans have a term of
180 days and, at maturity the total repayment amount
including interest is $487,500. Interest for the year ended
December 31, 2003 has been accrued in the amount of $75,903.
These loans are secured by 650,000 free-trading shares of
the Company's common stock, held in trust. In the event the
Company does not pay the repayment amount when due, the
collateral shares, upon demand of the respective lender,
will be forfeited and delivered to that lender as payment in
full, releasing the Company of all liability to that lender.
No lender has made a demand and no shares have been
delivered.
(11) Subsequent Transactions
On February 2, 2004, the Company cancelled 158,000,000 shares
of its Common stock. The cancelled shares were held by
Bradley Wilson, Chairman of the Company and a non-related
party, each canceling 79,000,000 shares. In consideration of
canceling
their shares, 30,000,000 and 20,000,000 shares of Class B
Preferred stock were issued to Mr. Wilson and the non-related
party, respectively. Shares of Class B Preferred stock
carry 10 votes per share and cannot be converted into common
stock prior to September 1, 2005.
(12) Going Concern Matters
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal
course of business. Due to its past financial difficulties,
the Company has accumulated debts, including judgments, and
accrued interest of approximately $1,100,000 relating to its
former line of business and maintains these on its balance
sheet as current liabilities. Interest on these balances is
accruing at a rate of approximately $13,000 per quarter as of
December 31, 2003. The Company is continuing in its efforts
to resolve these obligations and others through settlements.
However, there is no assurance that the Company will be able
to settle in terms agreeable to the Company and if it does
not do so, this will have a material adverse affect on the
ability of the Company to operate properly in the future. As
shown in the financial statements, the Company has incurred
cumulative losses of $4,305,265 during its development stage
and has classified all of its debt as current for the years
ended December 31, 2003 and 2002. These factors among others
may dictate that the Company will be unable to continue as a
going concern for a reasonable period of time.
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