UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest event Reported): February 27, 2006
(February 27, 2006)
LEXICON UNITED INCORPORATED
----------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 000-33131 06-1625312
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
4500 Steiner Ranch Blvd., Suite#1708, Austin, Texas 78732
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(512) 266-3507
-------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which reflect our views with
respect to future events and financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. These
forward-looking statements are identified by, among other things, the words
"anticipates", "believes", "estimates", "expects", "plans", "projects",
"targets" and similar expressions. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Important factors that may cause actual results to differ
from those projected include the risk factors specified below.
When used in this report, the terms "Company", "we", "our" and "us" refer to
Lexicon United Incorporated and its consolidated subsidiaries, including, after
February 27, 2006, ATN Capital & Participacoes Ltda.
ITEM 2.01: COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On February 27, 2006, we acquired eighty percent (80%) of the outstanding
capital stock of ATN Capital & Participacoes Ltda. or ATN, a Brazilian limited
company, pursuant to a share exchange agreement among the Company, ATN, Omar
Malheiro Silva Araujo and Manuel da Costa Fraguas, the two stockholders of ATN
or ATN Stockholders.
As consideration to the acquisition of ATN, we issued 2,000,000 shares of our
common stock to the two ATN Stockholders. As a result, Upon the consummation of
such share exchange, the ATN Stockholders became holders of 23.72% of our common
stock and ATN became our 80% majority-owned subsidiary. None of the ATN
Stockholders had any prior relationship with us, our affiliates, any of our
directors or officers or any of their associates.
FORM 10-SB DISCLOSURE
As disclosed elsewhere in this report, on February 27, 2006, we acquired 80% of
the outstanding capital stock of ATN. Item 2.01(f) of Form 8-K states that if
the registrant was a shell company like we were immediately before the
transaction disclosed under Item 2.01 (i.e., the acquisition transaction), then
the registrant must disclose the information that would be required if the
registrant were filing a general form for registration of securities on Form 10
or, as in our case, Form 10-SB.
Accordingly, we are providing below the information that would be included in a
Form 10-SB if ATN were to file a Form 10-SB. Please note that the information
provided below relates to the combined Company after the acquisition of ATN,
except that information relating to periods prior to the date of the acquisition
only relate to Lexicon United Incorporated unless otherwise specifically
indicated.
DESCRIPTION OF BUSINESS
Our History
Our corporate name is Lexicon United Incorporated. We were incorporated in the
state of Delaware on July 17, 2001. During the period from our inception through
February 27, 2006, we had no operations other than organizational matters and
conducting a search for an appropriate acquisition target. On February 27, 2006,
we acquired an eighty percent equity interest in ATN Capital & Participacoes
Ltda., a Brazilian limited company, pursuant to a share exchange agreement among
us, ATN and the two stockholders of ATN. Pursuant to the share exchange
agreement, we issued to ATN's two stockholders 2,000,000 shares of our common
stock in the aggregate (constituting 23.72% of our outstanding common stock). As
a result of the share exchange, ATN became our majority-owned subsidiary.
Accordingly, our current operations consist solely of those conducted by our
majority-owned subsidiary, ATN.
ATN was incorporated in Brazil in April 1997. ATN is a consumer receivables
company that specializes in the management and servicing of consumer receivables
for third parties in Brazil. The information contained in this report about our
business reflects the historical business of ATN.
1
Our Business Generally
We have been in the collection business for over 8 years. We provide a wide
range of accounts receivable management services to our clients. Our focus is on
the recovery of delinquent accounts (generally, accounts that are 60 days or
more past due). We generate revenue from the recovery of delinquent accounts
receivable on a contingency fee basis. Our contingent fees typically are around
15 percent of the amounts recovered on behalf of our clients. Our average fee
for contingency-based revenue was approximately 15 percent during the fiscal
year ended December 31, 2004 and 2003. We do not acquire accounts receivable for
our own account. Our services are limited to managing the recovery of accounts
receivable for our third-party clients.
The types of receivables that we generally manage include charged-off
receivables, which are accounts receivable that have been written-off by the
originators and may have been previously serviced by collection agencies and
semi-performing receivables, which are accounts receivable where the debtor is
currently making partial or irregular monthly payments, but the accounts may
have been written-off by the originators.
An Overview of Our Industry
The servicing and collection of charged-off and semi-performing consumer
receivables in Brazil is a growing industry that is driven by:
o increasing levels of consumer debt;
o increasing defaults of the underlying receivables; and
o increasing utilization of third-party providers to collect such
receivables.
According to financial bulletins, consumer credit in Brazil has been increasing
at an annual rate of 15 percent on average and the credit card market will be
steadily growing.
We believe that as a result of the difficulty in collecting these receivables
and the desire of originating institutions to focus on their core businesses and
to generate revenue from these receivables, originating institutions are
increasingly electing to outsource the servicing of these receivables.
Strategy
Our primary objective is to utilize our management's experience and expertise to
effectively grow our business by identifying, evaluating and servicing consumer
receivable portfolios and maximizing collections of such receivables in a cost
efficient manner.
Our strategy includes utilizing the systemization of our operations to reduce
overhead costs and to provide intensive training to our call center
representatives to increase our percentage of successful account receivable
collections.
Our management team also includes statisticians that have developed models that
guide our collection efforts and assist us in deciding the extent to which we
believe we can successfully recover a charged-off or semi-performing receivable.
Our Services
Engagement Planning.
Our approach to accounts receivable management and collection for each client is
determined by a number of factors, including account size and demographics, the
client's specific requirements and management's estimate of the collectibility
of the account. We have standard accounts receivable management and collection
methods that we employ to collect accounts receivable. These methods were
developed based on our 8 years of experience in this industry. In order to
properly serve our customers we carefully study our customer's account
receivable needs and employ the proper collection method for each particular
client. In most cases, our approach to accounts receivable collection changes
over time as the relationship with the client develops and both parties evaluate
2
the most effective means of recovering accounts receivable. Our standard
approach, which may be tailored to the specialized requirements of each client,
defines and controls the steps that will be undertaken by us on behalf of the
client and the manner in which we will report data to the client. Through our
systematic approach to accounts receivable management and collection, we remove
most decision making from the recovery staff and ensure uniform, cost-effective
performance.
Once the approach has been defined, we transfer pertinent client data into our
information system. When the client's records have been established in our
system, we begin the recovery process.
Account Notification.
We initiate the recovery process by forwarding a preliminary letter that is
designed to seek payment of the amount due or open a dialogue with client's
customers who cannot afford to pay at the current time. Telephone
representatives remind the client's customer of their obligation, inform them
that their account has been placed for collection with us and begin a dialogue
to develop a friendly payment program.
Determination of Obligor Contact Data.
In cases where the client's customer's contact information is unknown, we
conduct research through the "CreditLink" system to determine a means of
contacting the customer debtor. "CreditLink" is a paid service that assists with
investigations into customer contact information, and costs approximately $300
per month. Once we have located the client's customer, the notification process
can begin.
Payment Process.
After we receive payment from the client's customer, depending on the terms of
our contract with the client, we can either remit the amount received minus our
fee to the client or remit the entire amount received to the client and
subsequently bill the client for our collection services.
Activity Reports.
Clients are provided with a system-generated set of customized reports that
fully describe all account activity and current status. These reports are
typically generated daily; however, the information included in the report and
the frequency that the reports are generated can be modified to meet the needs
of the client.
Quality Tracking.
We emphasize quality control throughout all phases of the accounts receivable
management and collection process. Some clients may specify an enhanced level of
supervisory review and others may request customized quality reports. Large
financial services organizations will typically have exacting performance
standards which require sophisticated capabilities, such as documented complaint
tracking.
Collection Strategy
At the outset of each engagement, we perform a collectibility analysis utilizing
information prepared by our statisticians. This analysis is the basis for our
collection efforts and dictates our strategy for any particular receivable or
group of receivables. We continuously refine this analysis to determine the most
effective collection strategy to pursue for each account.
Our collection strategies consist of:
o Call Centers. We maintain an inbound and outbound collection call
center at ATN's executive offices in Rio De Janeiro in Brazil. Our
collections department is divided into two client teams, each team
consisting of a collection manager and six or seven collection
supervisors, each assigned to an individual client. Each collection
supervisor is in charge of anywhere from 4 to 15 collectors.
Collectors are trained to use a friendly but firm approach to assess
the willingness of the customer to pay. They attempt to work with
customers to evaluate sources and means of repayment to achieve a
full or negotiated lump sum settlement or develop payment programs
customized to the individual's ability to pay. In cases where a
payment plan is developed, collectors encourage debtors to pay
through automatic payment arrangements, if available.
3
o Legal Action. We generally outsource those accounts where it appears
the debtor is able but unwilling to pay. We utilize lawyers that are
independent from us, but who are located on our premises. These
lawyers specialize in collection matters and we pay them a
contingency fee on amounts collected. The name of the firm that we
use is Andrada & Negreiros Associates. Prior to sending accounts to
the law firm, our collectors communicate to the debtor our intention
to have a lawyer evaluate the suitability of the account for
litigation if payment arrangements cannot be established.
o Direct Mail. We have an in-house marketing team that develops mail
campaigns. The mail campaigns generally offer debtors targeted
discounts on their balance owed to encourage settlement of their
accounts and provide us with a low cost recovery method.
o Removal from Restricted Lists. There are two restrictions imposed
upon debtors in Brazil that fail to pay their debts when they come
due. The first is called "Serasa", which is a restriction imposed by
every Brazilian bank. Such debtor's names are put on the Serasa
restricted list and no Brazilian Bank will provide them credit. The
second restricted list is called "SPC", which is a restriction
imposed by Brazilian merchants. Once a debtor's name is put on the
SPC list, merchants will no longer provide the debtor with credit.
Once we agree with the debtor on a payment program and the debtor
makes the first installment towards such program, we notify our
client that a payment has been made. The client then causes such
debtor's name to be removed from such lists. The removal of a
debtor's name from such lists is very beneficial to the debtor, who
may then be able to obtain limited credit and who no longer has to
suffer the other negative social effects of being on such lists.
Technology and Infrastructure
Our customer contact center utilizes the NEO system. Our Information Technology
staff is comprised of approximately four employees. We provide our services
through the operation of our main call center, located in Rio de Janeiro,
Brazil, which utilizes 140 persons, and two smaller call centers: one located in
Vitoria, Brazil, using about 15 people, and the other located in Niteroi, using
about two people.
We maintain disaster recovery contingency plans and have implemented procedures
to protect against the loss of data resulting from power outages, fire and other
casualties. We believe fast recovery and continuous operation are ensured.
We spent approximately $30,000 and $35,000 on research and development
activities during fiscal years ended December 31, 2004 and 2003, respectively.
Quality Assurance and Client Service
In the accounts receivable management industry, a company's reputation for
quality service is of the utmost importance. We regularly measure the quality of
our services by capturing and reviewing such information as the amount of time
spent talking with clients' customers, level of customer complaints and
operating performance. In order to provide ongoing improvement to our telephone
representatives' performance and to ensure compliance with our policies and
standards, quality assurance personnel supervise each telephone representative
on a frequent basis and provide ongoing training to the representative based on
this review.
We maintain a client service department to promptly address client issues and
questions and alert senior executives of potential problems that require their
attention. In addition to addressing specific issues, a team of client service
representatives contacts clients on a regular basis in order to establish a
close rapport, determine clients' overall level of satisfaction, and identify
practical methods of improving their satisfaction.
4
Major Customers
We have approximately 15 clients. Unibanco accounts for approximately 40% of our
revenues.
Personnel and Training
All of our call center personnel receive comprehensive training that instructs
in each of the following topics:
o how to use the system;
o how to communicate with the client;
o scripts; and
o role playing.
These programs are conducted through a combination of classroom and role-playing
sessions. New employees receive training on how to use our operating systems and
on how to approach clients. Special orientations are also given out to employees
on the respect of customer's codes and how to respect creditors' rights. Various
upgrades and incentives are closely monitored by our human resource supervisor,
including an upscale gradual commission that is awarded to each employee reaches
at least 70% of the targeted performance.
As of January 15, 2006, we had a total of approximately 113 full-time employees
and 41 trainees and 24 cooperatives. Our employees are not represented by a
labor union. We believe that our relations with our employees are satisfactory.
Sales and Marketing
Our sales force is comprised of ATN's senior management team, which markets our
accounts receivable services to potential clients.
Competition
The accounts receivable management and collection industry in Brazil is highly
competitive. We compete with a large number account receivable management
providers, including Sincred, Mastercob and Easycob. Some of our competitors may
offer more diversified services and/or operate in broader geographic areas than
we do. In addition, many companies perform accounts receivable management
services through their own in-house staff. Moreover, many larger clients retain
multiple outsourcing providers, which exposes us to continuous competition in
order to remain a preferred vendor. We believe that the primary competitive
factors in obtaining and retaining clients are the ability to provide customized
solutions to a client's requirements, personalized quality service,
sophisticated call and information systems, and price.
Regulation
The accounts receivable management industry in Brazil is regulated by Brazil
Consumer Defense Code (Law 8078 of September 11, 1990). The Consumer Defense
Code is a regulatory entity designed to maintain a standard procedure to protect
the privacy and rights of the debtors. It is intended to limit and outline the
collection procedure so that such procedure remains within acceptable commercial
practice. No pressure or harassment is permitted. We believe that we are in
compliance in all material respects with all applicable regulations.
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase any of our common stock. If any of these risks or uncertainties
actually occurs, our business, financial condition or results of operations
could be materially adversely affected. In this event you could lose all or part
of your investment.
5
Financial Risks
We only have approximately $1,000,000 in cash and if we are unable to raise more
money we will be required to delay, scale back or eliminate our marketing and
development programs.
As of February 24, 2006, we had approximately $1,000,000 in cash available to
fund our operations, which includes cash held by both Lexicon and ATN on a
consolidated basis. The amounts and timing of our expenditures will depend
primarily on our ability to raise additional capital. We may seek to satisfy our
future funding requirements through new offerings of securities or from other
sources, including loans from our controlling stockholders. Additional financing
may not be available when needed or on terms acceptable to us. We have no
current commitment for additional financing. Unavailability of financing may
require us to delay, scale back or eliminate some or all of our marketing and
development programs. To the extent we raise additional capital by issuing
equity securities, your ownership interest would be diluted.
Risks Relating To Our Business
Our business is dependent on our ability to grow internally.
Our business is dependent on our ability to grow internally, which is dependent
upon:
o Our ability to retain existing clients and expand our existing
client relationships; and
o Our ability to attract new clients.
Our ability to retain existing clients and expand those relationships is subject
to a number of risks, including the risk that:
o We fail to maintain the quality of services we provide to our
clients;
o We fail to maintain the level of attention expected by our clients;
o We fail to successfully leverage our existing client relationships
to sell additional services; and
o We fail to provide competitively priced services to our clients
Our ability to attract new clients is subject to a number of risks, including:
o The market acceptance of our service offerings;
o The quality and effectiveness of our sales personnel; and
o The competitive factors within the accounts receivable management
industry in Brazil.
If our efforts to retain and expand our client relationships and to attract new
clients do not prove effective, it could have a materially adverse effect on our
business, results of operations and financial condition.
If we are not able to respond to technological changes in telecommunications and
computer systems in a timely manner, we may not be able to remain competitive.
Our success depends in large part on our sophisticated telecommunications and
computer systems. We use these systems to identify and contact large numbers of
debtors and record the results of our collection efforts. If we are not able to
respond to technological changes in telecommunications and computer systems in a
timely manner, we may not be able to remain competitive. We anticipate that it
will be necessary to invest in technology in the future to remain competitive.
During the fiscal years ended December 31, 2004 and 2003, we invested
approximately $40,000 and $50,000 in technology, respectively. We expect that in
future years we will have to invest similar amounts in technology.
Telecommunications and computer technologies are changing rapidly and are
characterized by short product life cycles, so we must anticipate technological
developments. If we are not successful in anticipating, managing, or adopting
technological changes on a timely basis or if we do not have the capital
resources available to invest in new technologies, our business could be
materially adversely affected.
We are highly dependent on our telecommunications and computer systems.
As noted above, our business is highly dependent on our telecommunications and
computer systems. These systems could be interrupted by terrorist acts, natural
disasters, power losses, or similar events. Our business is also materially
dependent on services provided by various local telephone companies. If our
equipment or systems cease to work or become unavailable, or if there is any
6
significant interruption in telephone services, we may be prevented from
providing services. Because we generally recognize revenue only as accounts
receivables are collected, any failure or interruption of services would mean
that we would continue to incur payroll and other expenses without any
corresponding income.
An increase in communication rates or a significant interruption in
communication service could harm our business.
Our ability to offer services at competitive rates is highly dependent upon the
cost of communication services provided by various local telephone companies.
Any change in the telecommunications market that would affect our ability to
obtain favorable rates on communication services could harm our business.
Moreover, any significant interruption in communication service or developments
that could limit the ability of telephone companies to provide us with increased
capacity in the future could harm existing operations and prospects for future
growth.
We compete with a large number of providers in the accounts receivable and
collection industry in Brazil. This competition could have a materially adverse
effect on our future financial results.
In the accounts receivable management and service industry in Brazil, we compete
with sizable corporations, as well as many regional and local firms. We may lose
business to competitors that offer more diversified services and/or operate in
broader geographic areas than we do. We may also lose business to regional or
local firms who are able to use their proximity to or contacts with local
clients as a marketing advantage. In addition, many companies perform the
accounts receivable management services offered by us in-house. Many larger
clients retain multiple accounts receivable service providers, which exposes us
to continuous competition in order to remain a preferred provider. Because of
this competition, in the future we may have to reduce our fees to remain
competitive and this competition could have a materially adverse effect on our
future financial results.
Many of our clients are concentrated in the financial services sector. If this
sector performs poorly or if there are any adverse trends in this sector it
could materially adversely affect us.
For the year ended December 31, 2004 and 2003, we derived approximately 100
percent of our revenue from clients in the financial services sector. If this
sector performs poorly, clients in this sector may do less business with us, or
they may elect to perform the services provided by us in-house. If there are any
trends in this sector to reduce or eliminate the use of third-party accounts
receivable service providers, it could harm our business.
All of our operations take place in Brazil. Various factors relating to our
Brazilian operations could affect our performance, including fluctuations in
currency exchange rates.
All of our revenues are derived from Brazil. Political or economic instability
in Brazil could have an adverse impact on our results of operations due to
diminished revenues. Our future revenue, costs of operations and profit results
could also be affected by a number of other factors related to our Brazilian
operations, including changes in economic conditions in Brazil, changes in a
country's political condition, trade protection measures, licensing and other
legal requirements, and local tax issues.
Unanticipated currency fluctuations in the Brazilian Real could lead to lower
reported consolidated results of operations due to the translation of these
currencies into U.S. dollars when we consolidate our financial results.
We provide accounts receivable collection and management services to our
Brazilian clients utilizing Brazilian labor sources. A decrease in the value of
the U.S. dollar in relation to the Brazilian Real could increase our cost of
doing business in Brazil.
Our success depends on our senior management team and the senior management team
of our operating subsidiary, ATN, and if we are not able to retain them, it
could have a materially adverse effect on us.
We are highly dependent upon the continued services and experience of our senior
management team. We depend on the services of our senior management team to,
among other things, continue the development and implementation of our growth
strategies, and maintain and develop our client relationships.
7
We are dependent on our employees and a higher turnover rate would have a
material adverse effect on us.
We are dependent on our ability to attract, hire and retain qualified employees.
The Brazilian accounts receivable service and management industry, by its
nature, is labor intensive and experiences a high employee turnover rate. Many
of our employees receive modest hourly wages and some of these employees are
employed on a part-time basis. A higher turnover rate among our employees would
increase our recruiting and training costs and could materially adversely impact
the quality of services we provide to our clients. If we were unable to recruit
and retain a sufficient number of employees, we would be forced to limit our
growth or possibly curtail our operations. Growth in our business will require
us to recruit and train qualified personnel at an accelerated rate from time to
time. We cannot assure you that we will be able to continue to hire, train and
retain a sufficient number of qualified employees to meet the needs of our
business or to support our growth. If we are unable to do so, our results of
operations could be harmed. Any increase in hourly wages, costs of employee
benefits or employment taxes in Brazil could also have a materially adverse
affect.
We may experience variations from quarter to quarter in operating results and
net income that could adversely affect the price of our common stock.
Factors that could cause quarterly fluctuations include, among other things, the
following:
o The timing of our clients' accounts receivable collection programs
and the commencement of new contracts and termination of existing
contracts;
o Customer contracts that require us to incur costs in periods prior
to recognizing revenue under those contracts;
o The effects of a change of business mix on profit margins;
o The timing of additional selling, general and administrative
expenses to support new business;
o Fluctuations in foreign currency exchange rates;
o The amount and timing of new business; and
o That our business tends to be slower during summer and holiday
seasons.
Most of our accounts receivable management contracts do not require clients to
place accounts with us, may be terminated on 30 or 60 days notice and are on a
contingent fee basis. We cannot guarantee that existing clients will continue to
use our services at historical levels, if at all.
Under the terms of most of our accounts receivable management contracts, clients
are not required to give accounts to us for collection and usually have the
right to terminate our services on 30 or 60 days notice. Accordingly, we cannot
guarantee that existing clients will continue to use our services at historical
levels, if at all. In addition, most of these contracts provide that we are
entitled to be paid only when we collect accounts. Therefore, under applicable
accounting principles, we can recognize revenues only upon the collection of
funds on behalf of clients.
We rely on our client Unibanco for a significant portion of our revenues. The
loss of Unibanco as our client or its failure to pay us could reduce revenues
and adversely affect results of our operations.
We receive approximately 35 percent of our revenues from our client Unibanco. We
are exposed to customer concentration and Unibanco is not contractually
obligated to continue to use our services at historic levels or at all, subject
only to notice periods for termination. If Unibanco were to significantly reduce
the amount of service, fail to pay, or terminate the relationship altogether,
our business could be harmed.
We have engaged in transactions with members of our Board of Directors,
significant stockholders, and entities affiliated with them; future transactions
with related parties could pose conflicts of interest.
In the past, we have engaged in transactions with members of our Board of
Directors, significant stockholders, and entities affiliated with them, which
inherently give rise to conflicts of interest. For example, certain of these
parties have previously provided debt financing to us and have received
additional equity interests, such as shares of our stock upon the conversion of
such debt financing. Transactions with related parties such as these pose a risk
that such transactions are on terms that are not as beneficial to us as those
that may be arranged with third parties.
8
Concentrated Control Rirsk
The management team collectively has the power to make all major decisions
regarding the company without the need to get consent from any stockholder or
other person.
Our management team, including the management of our subsidiary, ATN,
collectively owns 95.70% of the outstanding common stock. Management, therefore,
has the power to make all major decisions regarding our affairs, including
decisions regarding whether or not to issue stock and for what consideration,
whether or not to sell all or substantially all of our assets and for what
consideration and whether or not to authorize more stock for issuance or
otherwise amend our charter or bylaws. The management team is in a position to
elect all of our directors and to dictate all of our policies.
Market Risks
There has been no established public trading market for our common stock. If a
market in our stock is ever developed, our stock price may become highly
volatile.
Since we are relatively thinly capitalized and our stock is a penny stock, if a
market in our stock is ever developed, our stock price may become highly
volatile. There has been no established public trading market for our common
stock and, none of our shares are currently eligible for sale in a public
trading market. The likely market for our stock would be the Over-the-Counter
Bulletin Board or the Pink Sheets. As a result, investors may find it difficult
to dispose of our securities, or to obtain accurate quotations of the price of
our securities This lack of information limits the liquidity of our common
stock, and likely will have an adverse effect on the market price of our common
stock and on our ability to raise additional capital.
If an active trading market does develop, the market price of our common stock
is likely to be highly volatile due to, among other things, the relatively low
revenue nature of our business and because we are a thinly capitalized company.
Further, even if a public market develops, the volume of trading in our common
stock will presumably be limited and likely be dominated by a few individual
stockholders. The limited volume, if any, will make the price of our common
stock subject to manipulation by one or more stockholders and will significantly
limit the number of shares that one can purchase or sell in a short period of
time.
The equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies' securities
that have often been unrelated to the operating performance of these companies.
Any such fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. As a result, stockholders may be
unable to sell their shares, or may be forced to sell them at a loss.
We do not intend to pay dividends to our stockholders, so you will not receive
any return on your investment in our company prior to selling your interest in
us.
We have never paid any dividends to our stockholders. We currently intend to
retain any future earnings for funding growth and, therefore, do not expect to
pay any dividends in the foreseeable future. If we determine that we will pay
dividends to the holders of our common stock, we cannot assure that such
dividends will be paid on a timely basis. As a result, you will not receive any
return on your investment prior to selling your shares in our company and, for
the other reasons discussed in this "Risk Factors" section, you may not receive
any return on your investment even when you sell your shares in our company and
your shares may become worthless.
9
A significant number of our shares will be eligible for sale and their sale or
potential sale may depress the market price of our common stock.
Sales of a significant number of shares of our common stock in the public market
could harm the market price of our common stock. We have authorized 40,000,000
shares of common stock. As of February 24, 2006, we had outstanding 8,456,250
shares of common stock. Accordingly, we have 31,543,750 shares of common stock
available for future sale.
Because our stock is considered a penny stock, any investment in our stock is
considered to be a high-risk investment and is subject to restrictions on
marketability.
Our common stock is a "penny stock" within the meaning of Rule 15g-9 to the
Securities Exchange Act of 1934, which is generally an equity security with a
price of less than $5.00. Our common stock is subject to rules that impose sales
practice and disclosure requirements on certain broker-dealers who engage in
certain transactions involving a penny stock. Under the penny stock regulations,
a broker-dealer selling penny stock to anyone other than an established customer
or "accredited investor" must make a special suitability determination for the
purchaser and must receive the purchaser's written consent to the transaction
prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an
individual with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 individually or $300,000 together with his or her spouse is considered
an accredited investor.
In addition, the penny stock regulations require the broker-dealer to:
o deliver, prior to any transaction involving a penny stock, a disclosure
schedule prepared by the Securities and Exchange Commission relating to
the penny stock market, unless the broker-dealer or the transaction is
otherwise exempt;
o disclose commissions payable to the broker-dealer and the Registered
Representative and current bid and offer quotations for the securities;
and
o send monthly statements disclosing recent price information with respect
to the penny stock held in a customer's account, the account's value and
information regarding the limited market in penny stocks.
Because of these regulations, broker-dealers may encounter difficulties in their
attempt to sell shares of our common stock, which may affect the ability of
holders of our capital stock to sell their shares in the secondary market and
have the effect of reducing the level of trading activity in the secondary
market. These additional sales practice and disclosure requirements could impede
the sale of our securities. In addition, the liquidity of our securities may be
decreased, with a corresponding decrease in the price of our securities. Our
common stock in all probability will be subject to such penny stock rules and
our stockholders will, in all likelihood, find it difficult to sell their
securities.
Certain provisions of our Certificate of Incorporation and Delaware law may make
it more difficult for a third party to effect a change- in-control.
Our Certificate of Incorporation authorizes the Board of Directors to issue up
to 10,000,000 shares of preferred stock. The preferred stock may be issued in
one or more series, the terms of which may be determined at the time of issuance
by the Board of Directors without further action by the stockholders. These
terms may include voting rights including the right to vote as a series on
particular matters, preferences as to dividends and liquidation, conversion
rights, redemption rights and sinking fund provisions. The issuance of any
preferred stock could diminish the rights of holders of our common stock, and
therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of the
Board of Directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control.
In addition, we are also subject to Section 203 of the Delaware General
Corporation Law that, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder. The preceding provisions of our Certificate of
Incorporation, as well as Section 203 of the Delaware General Corporation Law,
could discourage potential acquisition proposals, delay or prevent a
change-in-control and prevent changes in our management, even if such things
would be in the best interests of our stockholders.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ND RESULTS OF
OPERATIONS
Our Business Overview
General
We are engaged in the business of managing and servicing accounts receivables
for large financial institutions in Brazil. Our focus is on the recovery of
delinquent accounts (generally, accounts that are 60 days or more past due).
We generate revenue from the recovery of delinquent accounts receivable on a
contingency fee basis. Our contingent fees typically are around 15 percent of
the amounts recovered on behalf of our clients. Our average fee for
contingency-based revenue was approximately 15 percent during the fiscal year
ended December 31, 2004 and 2003. We do not acquire accounts receivable for our
own account, however, we may do so in the future if we are able to raise
sufficient capital for this purpose. Our services are currently limited to
managing the recovery of accounts receivable for our third-party clients.
The portfolios of consumer receivables that we service consist of one or more of
the following types of consumer receivables:
o charged-off receivables - accounts that have been written-off by the
originators and may have been previously serviced by collection agencies;
o semi-performing receivables - accounts where the debtor is making
partial or irregular monthly payments, but the accounts may have been
written-off by the originators; and
o performing receivables - accounts where the debtor is making regular
monthly payments that may or may not have been delinquent in the past.
Results of Operations
Income Statement Items
The following table summarizes the results of our operations during the nine
months ended September 30, 2005 and 2004 and provides information regarding the
dollar and percentage increase or (decrease) from the current fiscal period to
the prior fiscal period:
Nine Months Ended September 30, 2005 and 2004
- -------------------------------------------------------------------------------------------------------------
Percentage
Increase Increase
Line Item 9/30/05 9/30/04 (Decrease) (Decrease)
- -------------------------------------------------------------------------------------------------------------
Net Revenues $ 1,554,087 $ 1,131,290 $ 422,797 37%
- -------------------------------------------------------------------------------------------------------------
Cost of Sales $ 838,856 $ 647,002 $ 191,854 30%
- -------------------------------------------------------------------------------------------------------------
Gross Profit $ 715,231 $ 484,288 $ 230,943 48%
- -------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses $ 614,481 $ 593,187 $ 21,294 7%
- -------------------------------------------------------------------------------------------------------------
Interest Expense $ 19,809 $ 12,849 $ 6,960 54%
- -------------------------------------------------------------------------------------------------------------
Total Expenses $ 634,290 $ 606,036 $ 28,254 5%
- -------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 80,941 $ (121,748) $ 202,689 166%
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) per share of
common stock $ .16 $ (0.24) $ .40 167%
- -------------------------------------------------------------------------------------------------------------
Net Revenues increased due primarily to increased collections of receivables
from our service portfolios from our customers.
11
The Cost of Sales increase was primarily due to an increase in servicing costs.
The increase in receivable servicing expenses resulted from the increase in our
average outstanding accounts that we serviced during the nine month period ended
September 30, 2004 coupled with increased costs associated with court costs,
data processing costs, salaries, payroll taxes and benefits, professional fees,
telephone charges and rent.
Selling, General and Administrative Expenses increased due primarily to an
increase in payroll expenses and related fringe benefits based on an increase in
payments for our "pay for performance programs" to our employees, which gives
the proper incentives for our employees to increase collections, which increased
our revenues.
Interest Expense increased due primarily to an increase in our notes payable to
our Banks.
Years Ended December 31, 2004 and 2003
- ---------------------------------------------------------------------------------------------------------------
Percentage
Increase Increase
Line Item 12/31/04 12/31/03 (Decrease) (Decrease)
- ---------------------------------------------------------------------------------------------------------------
Revenues $ 1,633,963 $ 949,018 $ 684,945 72%
- ---------------------------------------------------------------------------------------------------------------
Cost of Sales $ 881,511 $ 565,382 $ 316,129 56%
- ---------------------------------------------------------------------------------------------------------------
Gross Profit $ 752,452 $ 383,636 $ 368,816 96%
- ---------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses $ 993,408 $ 538,428 $ 454,980 93%
- ---------------------------------------------------------------------------------------------------------------
Interest Expense $ 17,132 $ 12,742 $ 4,390 34%
- ---------------------------------------------------------------------------------------------------------------
Total Expenses $ 1,010,540 $ 551,170 $ 459,370 83%
- ---------------------------------------------------------------------------------------------------------------
Net Loss $ (258,088) $ (167,534) $ (90,554) 54%
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) per share of
common stock $ (0.52) $ (0.34) $ (.18) 53%
- ---------------------------------------------------------------------------------------------------------------
Net Revenues increased due primarily to the revenue derived the increased
collections of receivables from our service portfolios from our customers.
The Cost of Sales increase was primarily due to an increase receivable servicing
costs. The increase in receivable servicing expenses resulted from the increase
in our average outstanding accounts serviced by us during the year ended
December 31, 2004 coupled with increased costs associated with court costs, data
processing costs, salaries, payroll taxes and benefits, professional fees,
telephone charges and rent.
Selling, General and Administrative Expenses increased primarily due to:
o An increase in payroll expenses and related fringe benefits of based on
an increase in payments for our "pay for performance programs" to our
employees, which gives the proper incentives for our employees to increase
collections, which increased our revenues.
o An increase in collection expenses, which includes telephone, mailings
and other collection expenses.
Interest Expense increased $4,390 due primarily to an increase in our notes
payable to our Banks.
Balance Sheet Items - Consolidated
September 30, 2005
We had total current assets of $1,257,723 as of September 30, 2005, of which
$1,043,302 was cash. Our total assets as of September 30, 2005 were $2,247,459.
We had total current liabilities of $970,543 as of September 30, 2005. Our total
stockholders' equity as of September 30, 2005 was $1,276,916.
Changes in our balance sheet items reflect, among other things, the net of
amounts expended for our operations and our increased bank loan.
12
December 31, 2004
We had total current assets of $1,325,790 as of December 31, 2004, of which
$1,061,512 was cash. Our total assets as of December 31, 2004 were $1,594,610.
We had total current liabilities of $931,468 and total liabilities of $1,975,756
as of December 31, 2004. Our total stockholders' deficiency as of December 31,
2004 was $381,146.
Changes in our balance sheet items reflect, among other things, the net of
amounts expended for our operations and increased bank loan.
Cash Flows Items
September 30, 2005- ATN Capital & Participacoes Ltda.
We provided $59,952 in cash from our operating activities during the nine-month
period ended September 30, 2005 as compared to $74,718 used in the prior nine
month period. The difference of $134,670, or a 180% increase, is attributable
primarily to the following factors:
o Increased collection of our accounts receivable of $58,572
o Increase in our accounts payable of $60,187
o Increase in our net profit of $202,689
These increases were offset by decreases in:
o Accounts payable to credit card companies of $165,715
o Advances from our stockholders of $51,461
We used $27,533 in cash from our investing activities during the nine-month
period ended September 30, 2005 as compared to $11,011 used in the prior period.
This increase is due primarily to the purchase of property and equipment for our
office.
We used a net $8,687 from financing activities during the nine-month period
ended September 30, 2005 as compared we received a net of $75,954 during the
prior period. This decrease is due primarily to the repayment of our bank loan
December 31, 2004- ATN Capital & Participacoes Ltda.
We used $11,099 in cash from our operating activities during the year ended
December 31, 2004 as compared to $54,004 used in the prior year ended December
31, 2003. The increase of $42,905, or a 79% increase in the operating activities
funds, is attributable primarily to the following factors:
o Increase in our accrued liabilities of $107,438
o Increase in our payable to credit card companies of $163,297
The above increases were offset by a decrease primarily due to the following:
o Decrease in collection of our accounts receivable of $66,028
o Repayment of our advances from Shareholders of $48,651
o Increase in our net loss of $90,554
We used $16,861 in cash from our investing activities during the year ended
December 31, 2004 as compared to $88,145 used in the prior year. This decrease
of 71,284 is due primarily to a decrease in the purchase of property and
equipment for our office.
We provided a net $49,328 from our financing activities during the year ended
December 31, 2004 as compared to where we received a net of $152,944 during the
prior year. This decrease in 2004 is due primarily to the net repayment of our
bank loan
13
December 31, 2004- Lexicon United Incorporated
We used $7,446 in cash from our operating activities during the year ended
December 31, 2004 as compared to $40,000 provided for in the prior year ended
December 31, 2003. The decrease of $47,446, or a 119% decrease in the operating
activities funds, is attributable primarily to the decrease in our loans from
officers of $100,000.
The above decrease was offset by an increase primarily due to the following:
o Increase in accounts payable and accrued expense of approximately
$48,000
o Decrease in our loss of approximately $5,000
We provided a net $1,012,000 from our financing activities during the year ended
December 31, 2004 as compared to where we used a net of $40,000 during the prior
year. This increase in 2004 is due primarily to a $1,000,000 loan we received
from an officer.
Liquidity and Capital Resources
Operations to date have been primarily financed by debt and equity transactions.
As a result, our future operations will continue to be dependent upon the
successful completion of additional equity financing and the timing and terms
thereof, as well as support of principal stockholders. Implementation of our
business acquisition and growth strategies has increased our need for working
capital if we are to be able to seek out and capitalize on available business
opportunities and attain our intended growth. Additionally, even if we continue
to raise working capital, there can be no assurance that the net proceeds will
be sufficient to enable us to develop our business to a level where we will be
able to generate profits and positive cash flows. Our financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts nor to amounts and classification of liabilities that may
be necessary should we be unable to continue as a going concern.
We had total current assets of $1,257,723 as of September 30, 2005, of which
$1,043,302 was cash. We had total current liabilities of $970,543 as of
September 30, 2005. Our total stockholders' equity as of September 30, 2005 was
$1,276,916.
We believe that our current working capital will be sufficient to sustain our
operations at our current levels for the next twelve months. We will require
additional working capital to operate beyond such period.
Our financial statements have been prepared on the basis that we will continue
as a going concern, which contemplates the realization and satisfaction of our
liabilities and commitments in the normal course of business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
DESCRIPTION OF PROPERTY
Our executive offices in the U.S.A. are located at 4500 Steiner Ranch Boulevard,
Suite 1708, Austin, Texas 78732. This space is the residence of our Secretary
and we utilize the space on a rent-free basis pursuant to a verbal understanding
with our Secretary.
ATN's executive offices are located at 177 Av. Rio Branco, 7th and 8th Floors,
Rio de Janeiro, Brazil 20040-007. ATN's office space consists of approximately
500 square meters of space on two floors of a 22-story building in downtown Rio
de Janeiro. ATN occupies the entire 7th and 8th floor of this building. ATN's
space consists of 500 square meters which is used as a call center, 100 square
meters of administrative offices, consisting of 5 offices in total; and one
conference rooms consisting of 18 square meters of space.
ATN has the right to use this property pursuant to a lease agreement with Santa
Casa de Misericordia do Rio de Janeiro. The rent payment is R$ 7,600.00 (seventy
thousand six hundred reais) and the lease expires on April 30, 2010.
ATN also has a second office in Vitoria, Brazil with a space of 100 square
meters and 15 employees. This office engages primarily in recovering delinquent
accounts in the state of Espirito Santo.
ATN has a third office is in Niteroi, Brazil with a space of 35 square meters
and 3 employees. This office engages primarily in selecting recovered account
for possible new credit card issuance as well as in public relation for ATN.
14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our
common stock as of February 24, 2006 (i) by each person who is known by us to
beneficially own more than 5% of our common stock; (ii) by each of our officers
and directors; and (iii) by all of our officers and directors as a group:
- --------------------------------------------------------------------------------------------------------------------------
Amount & Nature of
Title of Class Name & Address of Beneficial Percent of
Beneficial Owner Office, If Any Ownership(1) Class(2)
- --------------------------------------------------------------------------------------------------------------------------
Omar Malheiro Silva Araujo President, Chief 1,400,000 16.56%
Common Stock 177 Av. Rio Branco, 7th Floor Executive Officer
$0.001 par value Rio de Janeiro, Brazil and director of ATN
20040-007
- --------------------------------------------------------------------------------------------------------------------------
Manuel da Costa Fraguas General Manager 600,000 7.10%
Common Stock 177 Av. Rio Branco, 7th Floor and director of ATN
$0.001 par value Rio de Janeiro, Brazil
20040-007
- --------------------------------------------------------------------------------------------------------------------------
Keyano Invest Inc. 5,818,750(3) 68.81%
Common Stock C/o VP Bank attention Mr. Diego Piccoli
$0.001 par value Bleicherweg 50 CH 8039
Zurich Switzerland
- --------------------------------------------------------------------------------------------------------------------------
Elie Saltoun President, CEO, 5,818,750(3) 68.81%
Common Stock 4500 Steiner Ranch Blvd. Treasurer and
$0.001 par value Suite 1708 Director
Austin, Texas 78732
- --------------------------------------------------------------------------------------------------------------------------
Jeffrey Nunez Secretary and 250,000 2.96%
Common Stock 4500 Steiner Ranch Blvd. Director
$0.001 par value Suite 1708
Austin, Texas 78732
- --------------------------------------------------------------------------------------------------------------------------
Common Stock All officers and directors as a group 6,068,751 71.77%
$0.001 par value (2 persons named above)
- --------------------------------------------------------------------------------------------------------------------------
(1)Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Each of the beneficial owners listed above has
direct ownership of and sole voting power and investment power with respect to
the shares of our common stock.
(2)A total of 8,456,250 shares of our Common Stock are considered to be
outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner above,
any options exercisable within 60 days have been included in the denominator.
3 Our president, CEO, Treasurer and director, Elie Saltoun, owns fifty percent
of Keyano Invest Inc. Accordingly, Mr. Saltoun and Keyano are deemed to be
affiliates. Mr. Saltoun is deemed to be the beneficial owner of any securities
owned by Keyano, and vice versa. Therefore, the 5,818,750 shares of our common
stock owned by Keyano include the 500,000 shares of common stock held by Mr.
Saltoun. Conversely, the 5,818,750 shares of our common stock owned by Mr.
Saltoun include the 5,318,750 shares held by Keyano. Mr. Saltoun disclaims
beneficial ownership of the shares held by Keyano and Keyano disclaims
beneficial ownership of the shares held by Mr. Saltoun.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
Set forth below are the names of our directors, officers and significant
employees, their ages, all positions and offices that they hold with us, the
period during which they have served as such, and their business experience
during at least the last five years.
15
- --------------------------------------------------------------------------------------------------------------
Name Age Positions Held Experience
- --------------------------------------------------------------------------------------------------------------
Elie Saltoun 67 Chief Executive Elie Saltoun was our director and Secretary since
Officer, President inception. On November 4, 2004, he resigned as
and Treasurer since Secretary and became our Chief Executive Officer,
November 2004 President and Treasurer. From October 1998 until
April 2001, he was a director of, and was (until
April 2, 2001) the Chief Executive Officer and
President of, PanAgra International Corporation.
PanAgra is now called Minghua Group International
Holdings Limited and it is a company that develops
and manufactures hybrid vehicles powered by a
combination of a combustion diesel engine and an
electric power system. During the period that Mr.
Saltoun was the Chief Executive Officer and
President of PanAgra (from October 1998 through
April 2001), it was a blank check company. Since
May 2005 through present, Mr. Saltoun has acted as
a principal of Keyano Invest Inc., a corporate
consulting firm based in Brazil.
- --------------------------------------------------------------------------------------------------------------
Jeffrey Nunez 45 Secretary since During the period from our inception until
November 2004 November 4, 2004, Mr. Nunez was our director,
Chief Executive Officer, President and Treasurer.
He resigned from all of those positions (except he
remained a director) on November 4, 2004 and on
such date he was appointed as our Secretary. From
September 2000 to October 2003, Jeffrey G. Nunez
has served as the Senior Director of Investments
and Operations at Chicago Investment Group, Inc.
From October 2003 to present Mr. Nunez has been
self employed acting as a consultant to public
companies under the name Broad Street Capital.
- --------------------------------------------------------------------------------------------------------------
Omar Malheiro Silva 52 President, Chief Mr. Araujo has been the President, Chief Executive
Araujo Executive Officer and Officer and director of our subsidiary ATN since
director of ATN since April 1997. Mr. Araujo is the co-founder of ATN.
April 1997 From 1991 to 1997, Mr. Araujo served as the Chief
Financial Officer and director of Cartao Unibanco
Visa where he supervised the cash flow of the
credit card division. Mr. Araujo has a MBA in
Finance.
- --------------------------------------------------------------------------------------------------------------
Manuel da Costa Fraguas 59 General Manager and Mr. Fraguas has been the General Manager and
director of ATN since director of our subsidiary ATN since its inception
April 1997 on April 1997. Mr. Fraguas is the co-founder of
ATN. Mr. Fraguas has a master in Production
Engineering.
- --------------------------------------------------------------------------------------------------------------
There are no agreements or understandings for any of our executive officers or
directors to resign at the request of another person and no officer or director
is acting on behalf of nor will any of them act at the direction of any other
person.
Directors are elected until their successors are duly elected and qualified.
Mr. Saltoun devotes approximately 25% of his business time to our affairs with
the remaining time being spent on the affairs of Keyano Invest Inc. Mr. Nunez
devotes approximately 25% of his time to our affairs with the remaining time
being spent on the affairs of Broad Street Capital. Each of Mr. Araujo and
Fraguas devotes 100% of his business time to the operation and business of our
subsidiary ATN.
To the best of our knowledge, except as set forth herein, none of our directors,
director nominees or executive officers has been involved in any transactions
with us or any of our directors, executive officers, affiliates or associates
which are required to be disclosed pursuant to the rules and regulations of the
SEC. None of the directors, director designees or executive officers to our
knowledge has been convicted in a criminal proceeding, excluding traffic
violations or similar misdemeanors, or has been a party to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree or final order enjoining the person from future violations of,
or prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws, except for matters
that were dismissed without sanction or settlement.
16
Audit Committee and Audit Committee Financial Expert
We do not currently have an audit committee financial expert, nor do we have an
audit committee. Our entire board of directors, which currently consists of Mr.
Saltoun and Mr. Nunez, handles the functions that would otherwise be handled by
an audit committee. We do not currently have the capital resources to pay
director fees to a qualified independent expert who would be willing to serve on
our board and who would be willing to act as an audit committee financial
expert. As our business expands and as we appoint others to our board of
directors we expect that we will seek a qualified independent expert to become a
member of our board of directors. Before retaining any such expert, our board
would make a determination as to whether such person is independent.
Director Compensation
We have no standard arrangements in place to compensate our directors for their
service as directors or as members of any committee of directors. In the future,
if we retain non-employee directors, we may decide to compensate them for their
service to us as directors and members of committees.
Family Relationships
There are no family relationships among our directors or officers.
Code of Ethics
Our board of directors has adopted a code of ethics that our principal financial
officer, principal accounting officer or controller and any person who may
perform similar functions are subject to. Currently Elie Saltoun, our Chief
Executive Officer, President and Treasurer, Jeffrey G. Nunez, our Secretary,
Omar Malheiro Silva Araujo, the Chief Executive Officer and President of ATN,
and Manuel da Costa Fraguas, the General Manager of ATN, are our and ATN's only
officers and directors, therefore, they are the only persons subject to the Code
of Ethics. If we retain additional officers in the future to act as our
principal financial officer, principal accounting officer, controller or persons
serving similar functions, they would become subject to the Code of Ethics. The
Code of Ethics does not indicate the consequences of a breach of the code. If
there is a breach, our board of directors would review the facts and
circumstances surrounding the breach and take action that it deems appropriate,
which action may include dismissal of the employee who breached the code.
Currently, since Messrs Saltoun and Nunez serve as directors and are also our
officers, they are largely responsible for reviewing their own conduct under the
Code of Ethics and determining what action to take in the event of their own
breach of the Code of Ethics.
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to our Chief Executive Officer, for
services during the last three fiscal years in all capacities to us, our
subsidiaries and predecessors. No executive officer received compensation of
$100,000 or more in any of the last three fiscal years.
17
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Securities All
Name Annual Restricted Under-lying Other
And Principal Comp- Stock Options/ LTIP Compen-
Position Salary Bonus ensation Awards SARs Payouts Sation
Year ($) ($) ($) ($) (#) ($) ($)
Elie Saltoun 2005 0 0 0 0 0 0 $ 0
Chief Executive Officer 2004 0 0 0 0 0 0 $ 0
2003 0 0 0 0 0 0 $ 0
Bonuses and Deferred Compensation
We do not have any bonus, deferred compensation or retirement plan. We do not
have a compensation committee; all decisions regarding compensation are
determined by our Board of Directors.
Options and Stock Appreciation Rights
We do not currently have a stock option or other equity incentive plan.
Employment Contracts
All of our employees, including our executive officers, are employed at will and
none of our employees has entered into an employment agreement with us.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 27, 2006, we consummated the transactions contemplated by a share
exchange agreement among us, ATN, Omar Malheiro Silva Araujo and Manuel da Costa
Fraguas, both directors and officers of ATN. Pursuant to the share exchange
agreement, we acquired eighty percent of the outstanding capital stock of ATN in
exchange for 2,000,000 shares of our common stock, in the aggregate. As a result
of this transaction, Messrs. Araujo and Fraguas became the owners of 23.72% of
our outstanding capital stock.
On November 22, 2005, we entered into a Debt Conversion Agreement with Keyano
Invest Inc., the holder of our convertible promissory note having a principal
amount plus accrued interest of $1,063,750. Under the Debt Conversion Agreement,
we converted Keyano's note and any accrued interest into our common stock at a
rate of $0.20 per share. 5,318,750 shares of our common stock were delivered to
Keyano and the note was cancelled. Keyano is an affiliate of our director and
current Chief Executive Officer, President and Treasurer, Elie Saltoun, who is
the owner of a 50% interest in Keyano.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
18
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no disagreements regarding accounting and financial disclosure
matters with our independent certified public accountants.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is qualified in
its entirety by the provisions of our Articles of Incorporation and bylaws, as
amended, all of which have been filed as exhibits to this report.
Common Stock
We are presently authorized to issue 40,000,000 shares of $0.001 par value
common stock and 10,000,000 shares of preferred stock, $0.001 par value per
share. We presently have 8,456,250 shares of common stock outstanding and no
shares of preferred stock outstanding.
The holders of our common stock are entitled to equal dividends and
distributions per share with respect to the common stock, when and if declared
by our Board of Directors, from funds legally available therefore. No holder of
any shares of common stock has a preemptive right to subscribe for any of our
securities, nor are any common shares subject to redemption or convertible into
other of our securities. Upon our liquidation, dissolution or winding up, and
after payment to creditors and preferred stockholders, if any, our assets will
be divided pro-rata on a share-for-share basis among the holders of the shares
of common stock. Each share of common stock is entitled to one vote with respect
to the election of any director or any other matter upon which stockholders are
required or permitted to vote. Holders of our common stock do not have
cumulative voting rights. The holders of more than 50% of the combined shares
voting for the election of directors may elect all of the directors if they
choose to do so, and, in that event, the holders of the remaining shares will
not be able to elect any members to the Board of Directors.
Preferred Stock
We are authorized to issue up to 10,000,000 shares of $0.001 par value Preferred
Stock. Under our Certificate of Incorporation, the Board of Directors has the
power, without further action by the holders of the common stock, to designate
the relative rights and preferences of the preferred stock, and to issue the
preferred stock in one or more series as designated by the Board of Directors.
The designation of rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, any of which may be dilutive of the interest of the holders of the
common stock or the preferred stock of any other series. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control without further stockholder action and may adversely affect the rights
and powers, including voting rights, of the holders of common stock. In certain
circumstances, the issuance of preferred stock could depress the market price of
the common stock. The Board of Directors effects a designation of each series of
preferred stock by filing with the Delaware Secretary of State a Certificate of
Designation defining the rights and preferences of each such series. Documents
so filed are matters of public record and may be examined in accordance with
procedures of the Delaware Secretary of State, or copies thereof may be obtained
from us upon request.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future.
Share Purchase Warrants
We have not issued and do not have outstanding any warrants to purchase shares
of our common stock.
Options
We have not issued and do not have outstanding any options to purchase shares of
our common stock.
19
Convertible Securities
We do not have outstanding any securities that are convertible to our common
stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article FIFTH of our Certificate of Incorporation provides that we must
indemnify any and all persons who we have the power to indemnify under the
General Corporation Law of the State of Delaware for and against any and all of
the expenses, liabilities, or other matters referred to in or covered by that
law. This indemnification is not exclusive of any other right to which those
indemnified may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in their official
capacity and as to action in another capacity while holding such position with
the company. This indemnification is to continue as to a person who has ceased
to be a director, officer, employee, or agent and will inure to the benefit of
the heirs, executors and administrators of that person.
We have not entered into any indemnification agreements with our officers and
directors, however, we may enter into an indemnification agreement with them or
others who become our officers and/or directors in the future.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There has been no established public trading market for our common stock and,
none of our shares of our common stock are eligible for sale in a public trading
market. There is no current price quoted for our common stock.
None of our common stock or preferred stock is subject to outstanding options or
warrants and we have no outstanding securities that are convertible into our
common stock or preferred stock. None of our stock is eligible to be sold
pursuant to Rule 144 under the Securities Act.
As February 24, 2006, our common stock was held by 81 stockholders of record.
Continental Stock Transfer and Trust Company is currently acting as our transfer
agent. Contact information for Continental Stock Transfer and Trust Company is
as follows: 17 Battery Place, New York, New York 10004, telephone (212)
509-4000.
RECENT SALES OF UNREGISTERED SECURITIES
Reference is made to the disclosure set forth under Item 3.02 of this report,
which disclosure is incorporated by reference into this section.
ITEM 3.02: UNREGISTERED SALES OF EQUITY SECURITIES
On February 27, 2006, we issued 2,000,000 shares of our common stock to the two
stockholders of ATN, Omar Malheiro Silva Araujo and Manuel da Costa Fraguas. The
shares were offered and sold in reliance upon an exemption from registration
requirements of the Securities Act afforded by Section 4(2) of the Securities
Act for offers and sales of securities that do not involve a public offering.
On November 22, 2005, we entered into a Debt Conversion Agreement with Keyano
Invest Inc., the holder of our convertible promissory note having a principal
amount plus accrued interest of $1,063,750. Under the Debt Conversion Agreement,
we converted Keyano's note and any accrued interest into our common stock at a
rate of $0.20 per share. 5,318,750 shares of our common stock were delivered to
Keyano and the note was cancelled. The shares were offered and sold in reliance
upon an exemption from registration requirements of the Securities Act afforded
by Section 4(2) of the Securities Act for offers and sales of securities that do
not involve a public offering.
In issuing securities in reliance on Section 4(2) of the Securities Act as
specified above, our reliance was based upon the following factors: (a) the
issuance of the securities was an isolated private transaction by us which did
not involve a public offering; (b) there were only a limited number of offerees;
(c) there were no subsequent or contemporaneous public offerings of the
securities by us; (d) the securities were not broken down into smaller
denominations; and (e) the negotiations for the sale of the stock took place
directly between the offeree and us.
20
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS
In connection with the closing of the acquisition of ATN (as described in Item
2.01 of this report), as of February 27, 2006, ATN became our majority-owned
subsidiary. ATN's current executive officers Omar Malheiro Silva Araujo and
Manuel da Costa Fraguas remain the same positions after the closing.
For certain biographical and other information regarding Messrs Araujo and
Fraguas, see the disclosure under Item 2.01 of this report, which disclosure is
incorporated herein by reference.
ITEM 5.06: CHANGE IN SHELL COMPANY STATUS
Reference is made to the disclosure set forth under Item 2.01 of this report,
which disclosure is incorporated herein by reference.
ITEM 9.01: FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Filed herewith are (i) the audited financial statements of ATN for the fiscal
years ended December 31, 2004 and 2003; (ii) the unaudited financial statements
of ATN for the nine months ended September 30, 2005; (iii) the audited financial
statements of the Company for the fiscal years ended December 31, 2004 and 2003
and (iv) the unaudited financial statements of the Company for the nine months
ended September 30, 2005.
(b) Pro forma financial information
Filed herewith is the pro forma consolidated Financial Statements of the Company
and ATN for the requisite periods.
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1 Share Exchange Agreement, dated December 12, 2005, among
the Company, ATN Capital & Participacoes Ltda, Omar
Malheiro Silva Araujo and Manuel da Costa Fraguas
(incorporated by reference to Exhibit 10.1 in the
Company's current report on Form 8-K filed on December
16, 2005)
2.2 Amendment No. 1 to the Share Exchange Agreement, dated
February 27, 2006, among the Company, ATN Capital &
Participacoes Ltda, Omar Malheiro Silva Araujo and
Manuel da Costa Fraguas (incorporated by reference to
Exhibit 10.1 in the Company's current report on Form 8-K
filed on February 27, 2006)
3.1 Certificate of Incorporation of the Company as filed
with the Secretary of State of the State of Delaware on
July 17, 2001 (incorporated by reference to Exhibit 2.1
in the Company's Form 10-SB filed on August 28, 2001)
3.2 Bylaws of the Company adopted on July 17, 2001
(incorporated by reference to Exhibit 2.2 in the
Company's Form 10-SB filed on August 28, 2001)
10.1 Debt Conversion Agreement, dated November 22, 2005,
between the Company and Keyano Invest Inc. (incorporated
by reference to Exhibit 10.1 in the Company's current
report on Form 8-K filed on November 28, 2005)
21
10.2 Lease Agreement between the Company and SANTA CASA DA
MISERICORDIA DO RIO DE JANEIRO dated May 2, 2005
10.3 Lease Agreement between the Company and SANTA CASA DA
MISERICORDIA DO RIO DE JANEIRO dated May 2, 2005
14 Code of ethics (incorporated by reference to Exhibit 14
in the Company's annual report for the fiscal year of
2003 filed on February 15, 2005)
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, in the City of Rio de Janeiro, Brazil on February 27, 2006.
LEXICON UNITED INCORPORATED
By: /s/ Elie Saltoun
------------------------------------
Elie Saltoun
Chief Executive Officer, President
and Treasurer
23
Lexicon United Incorporated
Index to Financial Statements
ATN CAPITAL & PARTICIPACOES, LTDA. Page
FINANCIAL STATEMENTS FOR THE TWO YEARS ENDED DECEMBER 31, 2004 AND 2003
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Notes to Financial Statements F-6 - F-10
LEXICON UNITED INCORPORATED
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Balance Sheets F-12
Statements of Operations F-13
Statements of Cash Flows F-14
Notes to Financial Statements F-15 - F-16
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2004 and 2003
Report of Independent Registered Public Accounting Firm F-18
Balance Sheets F-19
Statements of Operations F-20
Statements of Cash Flows F-21
Statement of Stockholders' Deficit F-22
Notes to Financial Statements F-23 - F-25
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENT F-26
ATN CAPITAL & PARTICIPACOES, LTDA.
FINANCIAL STATEMENTS
FOR THE TWO YEARS ENDED
DECEMBER 31, 2004 AND 2003
AND THE NINE MONTHS ENDED
SEPTEMBER 30, 2005 (UNAUDITED)
MEYLER & COMPANY, LLC
CERTIFIED PUBLIC ACCOUNTANTS
ONE ARIN PARK
1715 HIGHWAY 35
MIDDLETOWN, NJ 07748
Report of Independent Registered Public Accounting Firm
To the Board of Directors
and Stockholders
ATN Capital & Participacoes, Ltda.
Rio de Janeiro, Brazil
We have audited the accompanying balance sheets of ATN Capital &
ParticipacoesLtda., a Brazilian company, as of December 31, 2004 and 2003 and
the related statements of operations and stockholder's equity (deficit), and
cash flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in
all material respects, the financial position of ATN Capital & Participacoes
Ltda. as of December 31, 2004 and 2003, and the results of its operations and
its cash flows for each of the two years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has incurred cumulative losses of
$449,323 since inception, has negative working capital of $546,593, and there
are existing uncertain conditions the Company faces relative to its ability to
obtain capital and operate successfully. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
/s/ Meyler & Company, LLC
Middletown, NJ
February 5, 2006
F-1
ATN CAPITAL & PARTICIPACOES LTDA.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004 2003
----------- ----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 94,370 $ 56,958 $ 30,690
Accounts receivable 119,187 55,229 75,748
Advances to suppliers 20,577
Other receivables 92,332 98,562 96,911
Prepaid expenses 2,902 10,487 17,544
----------- ----------- -----------
Total Current Assets 308,791 321,236 241,470
FIXED ASSETS, net of accumulated depreciation
of $222,505 $167,293 and $99,866, respectively 327,436 268,820 283,729
----------- ----------- -----------
Total Assets $ 636,227 $ 590,056 $ 525,199
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of loan payable to banks $ 330,155 $ 241,252 $ 148,271
Accounts payable 70,642 2,729 977
Accrued expenses 166,132 159,782 144,918
Amounts payable to credit card companies 28,700 180,000
Accrued contingent liabilities 278,000 187,000 63,000
Capital advances to be returned 57,916 97,066 138,447
----------- ----------- -----------
Total Current Liabilities 931,545 867,829 495,613
LONG TERM PORTION OF LOANS PAYABLE TO BANKS 44,288 64,108
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock, par value R$1.00 per share,
500,000 shares authorized and outstanding 382,919 382,919 382,919
Accumulated deficit (368,382) (449,323) (191,235)
Comprehensive loss (309,855) (255,657) (226,206)
----------- ----------- -----------
Total Stockholder's Equity (Deficit) (295,318) (322,061) (34,522)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
DEFICIT $ 636,227 $ 590,056 $ 525,199
=========== =========== ===========
See accompanying notes to financial statements.
F-2
ATN CAPITAL & PARTICIPACOES LTDA.
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended For the Years Ended
September 30, December 31,
-------------------------------- ---------------------------------
2005 2004 2004 2003
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
Revenues $ 1,554,087 $ 1,131,290 $ 1,633,964 $ 949,018
Costs and expenses:
Cost of services 838,856 647,002 881,512 565,382
General administrative expenses 593,607 553,412 940,251 487,903
Interest expense 19,809 12,849 17,132 12,742
Depreciation 20,874 39,775 53,157 50,525
-------------- -------------- -------------- --------------
Total Costs and Expenses 1,473,146 1,253,038 1,892,052 1,116,552
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 80,941 $ (121,748) $ (258,088) $ (167,534)
============== ============== ============== ==============
See accompanying notes to financial statements.
F-3
ATN CAPITAL & PARTICIPACOES LTDA.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended For the Years Ended
September 30, December 31,
2005 2004 2004 2003
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 80,941 $ (121,748) $ (258,088) $ (167,534)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation 20,874 39,775 53,157 50,525
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 58,572 (60,105) (66,028) (18,400)
Decrease (increase) in other receivables 22,317 (21,250) 6,279 (22,908)
Decrease (increase) in advances to suppliers 19,997 20,319 (7,971)
Decrease (increase) in prepaid expenses 8,556 17,050 7,811 (16,074)
Increase (decrease) in accounts payable 60,187 6,884 1,512 (812)
Increase (decrease) in accrued expenses (23,805) (26,561) 1,855 11,538
Increase (decrease) in amounts payable to
credit card companies (165,715) 163,297 58,502
Increase in accrued contingent liabilities 49,486 65,146 107,438 59,130
Increase (decrease) in capital advances to be
refunded (51,461) 6,094 (48,651)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities 59,952 (74,718) (11,099) (54,004)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (27,533) (11,011) (16,861) (88,145)
------------ ------------ ------------ ------------
Net cash used in investing activities (27,533) (11,011) (16,861) (88,145)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in loans payable to bank (8,687) 75,954 49,328 152,944
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH 23,732 (9,775) 21,368 10,795
EFFECT OF EXCHANGE RATE CHANGES ON
CASH 13,680 (288) 4,900 4,256
CASH AT BEGINNING OF PERIOD 56,958 30,690 30,690 15,639
------------ ------------ ------------ ------------
CASH AT END OF PERIOD $ 94,370 $ 20,627 $ 56,958 $ 30,690
============ ============ ============ ============
See accompanying notes to financial statements.
F-4
ATN CAPITAL & PARTICIPACOES LTDA.
STATEMENT OF STOCKHOLDERS' DEFICIT
Common Accumulated Comprehensive
Stock Deficit Loss Total
------------ ------------ ------------ ------------
Balance, December 31, 2002 $ 382,919 $ (23,701) $ (220,607) $ 138,611
Net loss for the year ended December 31, 2003 (167,534) (167,534)
Change in comprehensive loss (5,599) (5,599)
------------ ------------ ------------ ------------
Balance, December 31, 2003 382,919 (191,235) (226,206) (34,522)
Net loss for the year ended December 31, 2004 (258,088) (258,088)
Change in comprehensive loss (29,451) (29,451)
------------ ------------ ------------ ------------
Balance, December 31, 2004 382,919 (449,323) (255,657) (322,061)
Net income for the nine months ended
September 30, 2005 (unaudited) 80,941 80,941
Change in comprehensive loss (54,198) (54,198)
------------ ------------ ------------ ------------
Balance, December 31, 2005 (unaudited) $ 382,919 $ (368,382) $ (309,855) $ (295,318)
============ ============ ============ ============
See accompanying notes to financial statements.
F-5
ATN CAPITAL & PARTICIPACOES LTDA.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Unaudited September 30, 2005)
NOTE A - NATURE OF BUSINESS
ATN Capital & Participacoes Ltda. (the "Company"), a Brazilian Company
incorporated in April 1997, is in the business of managing and servicing
accounts receivable for large financial institutions. The Company's focus
is on the recovery of delinquent accounts (generally, accounts that are 60
days or more past due). The Company generates revenues from the recovery
of the delinquent accounts receivable on a contingency fee basis.
Going Concern
As indicated in the accompanying financial statements, the Company has
incurred cumulative net operating losses of $449,323 since inception and
has a negative working capital of $546,593 at December 31, 2004. At
September 30, 2005, the cumulative operating loss was $368,382 and the
negative working capital was $622,754. Management's plans include merging
with a public company in order to raise capital through the equity markets
to fund future operations and generating of revenue through its business.
Failure to raise adequate capital and generate adequate sales revenues
could result in the Company having to curtail or cease operations.
Additionally, even if the Company does raise sufficient capital to support
its operating expenses and generate adequate revenues, there can be no
assurances that the revenue will be sufficient to enable it to develop
business to a level where it will generate profits and cash flows from
operations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. However, the accompanying
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. These financial statements do not include
any adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and related notes. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with a maturity of
three months or less. There are no cash equivalents at September 30, 2005,
December 31, 2004, and December 31, 2003.
Equipment and Depreciation
Equipment is stated at cost and is depreciated using the straight line
method over the estimated useful lives of the respective assets. The
estimated useful life of office equipment is five years. Routine
maintenance, repairs and replacement costs are expensed as incurred and
improvements that extend the useful life of the assets are capitalized.
When equipment is sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and any
resulting gain or loss is recognized in operations.
F-6
ATN CAPITAL & PARTICIPACOES LTDA.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Unaudited September 30, 2005)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company derives its revenue primarily from collection of distressed
debt. When satisfactory agreements are reached between the debtor and the
credit card company, a commission is earned and recorded.
Fair Values of Financial Instruments
The Company uses financial instruments in the normal course of business.
The carrying values of cash equivalents, accounts receivable, accounts
payable, accrued expenses and other current liabilities approximate their
fair value due to the short-term maturities of these assets and
liabilities.
Income Taxes
The Company accounts for income taxes using the liability method, which
requires the determination of deferred tax assets and liabilities based on
the differences between the financial and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
differences are expected to reverse. Deferred tax assets are adjusted by a
valuation allowance, if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets
will not be realized.
Income tax provisions require the use of management judgments, which are
subject to challenge by various taxing authorities. Significant estimates
used in accounting for income taxes relate to determination of taxable
income and the determination of differences between book and tax bases.
Net Loss Per Common Share
The Company computes per share amounts in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is
computed by dividing the income (loss) available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS is based on the weighted-average number of shares of common
stock and common stock equivalents outstanding during the period.
Consolidated Financial Statements
The consolidated financial statements include the Company and its wholly
owned subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options, restricted stock, employee stock
purchase plans and stock appreciation rights. SFAS No. 123 requires
employee compensation expense to be recorded using the fair value method.
F-7
ATN CAPITAL & PARTICIPACOES LTDA.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Unaudited September 30, 2005)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation
The Company considers the Brazilian currency (Reais) to be its functional
currency. Assets and liabilities were translated into U.S. dollars at the
period end exchange rates. The equity accounts were translated at
historical rates. Statement of Operations amounts were translated using
the average rate during the year. Gains and losses resulting from
translating foreign currency financial statements were accumulated in
other comprehensive income (loss), a separate component of stockholder's
equity (deficit).
Business Combinations and Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations". SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which the Company adopted during 2004. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill and the
identification of reporting units for purposes of assessing potential
future impairment of goodwill.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 changes the
accounting for long-lived assets to be held and used by eliminating the
requirement to allocate goodwill to long-lived assets to be tested for
impairment, by providing a probability weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of possible future cash flows and by
establishing a primary-asset approach to determine the cash flow
estimation period for a group of assets and liabilities that represents
the unit of accounting for long-lived assets to be held and used. SFAS No.
144 changes the accounting for long-lived assets to be disposed of other
than by sale by requiring that the depreciable life of a long-lived asset
to be abandoned be revised to reflect a shortened useful life and by
requiring the impairment loss to be recognized at the date a long-lived
asset is exchanged for a similar productive asset or distributed to owners
in a spin-off if the carrying amount of the asset exceeds its fair value.
SFAS No 144 changes the accounting for long-lived assets to be disposed of
by sale by requiring that discontinued operations no longer be recognized
at a net realizable value basis (but at the lower of carrying amount or
fair value less costs to sell), by eliminating the recognition of future
operating losses of discontinued components before they occur, and by
broadening the presentation of discontinued operations in the income
statement to include a component of an entity rather than a segment of a
business. A component of an entity comprises operations and cash flows
that can be clearly distinguished operationally, and for financial
reporting purposes, from the rest of the entity.
F-8
ATN CAPITAL & PARTICIPACOES LTDA.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Unaudited September 30, 2005)
NOTE C - OFFICE EQUIPMENT
Equipment is comprised of the following:
September 30, December 31,
------------------------
2005 2004 2003
---------- ---------- ----------
Office equipment, primarily computers $ 299,327 $ 226,716 $ 191,215
Leasehold improvements 250,614 209,397 192,380
---------- ---------- ----------
549,941 436,113 383,595
Less accumulated depreciation 222,505 167,293 99,866
---------- ---------- ----------
$ 327,436 $ 268,820 $ 283,729
========== ========== ==========
NOTE D - NOTE PAYABLE TO BANK
The Company has several loans with various Brazilian banks and financial
institutions. The loans are secured by personal guarantees of the
Company's principal shareholders and bear interest at rates ranging from
2.48% to 6%. An analysis of the current and long-term portion is as
follows:
September 30, December 31,
------------------------
2005 2004 2003
---------- ---------- ----------
Total loans outstanding $ 330,155 $ 285,540 $ 212,379
Less: current portion 330,155 241,252 148,271
---------- ---------- ----------
Long-term portion $ $ 44,288 $ 65,108
========== ========== ==========
The majority of the loans expire in November 2005 and have been renewed
for one year.
NOTE E - ACCRUED CONTINGENT LIABILITIES
The Company is responsible to the Brazilian taxing authorities for a
municipal service tax at the rate of 5% based upon salaries by location.
Since the Company paid taxes at rates lower than the 5%, it is
contingently liable for the balance. The Company is in dispute with the
taxing authorities relating to this matter. Since it is probable that such
amount will be paid, a contingency provision has been recorded in the
financial statements.
NOTE F - CAPITAL ADVANCES TO BE RETURNED
The Company's two major stockholders have taken capital contributions from
investors who were to be stockholders. It was subsequently decided to
return the capital contributions as cash resources become available. There
is currently no demand by these investors to have the funds immediately
returned.
NOTE G - INCOME TAXES
No provision has been made for income taxes for the nine months ended
September 30, 2005 since the Company has a net operating carry forward
loss of approximately $368,000 which has an unlimited carry forward
period.
F-9
ATN CAPITAL & PARTICIPACOES LTDA.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(Unaudited September 30, 2005)
NOTE H - UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements at September 30, 2005 and 2004
have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the U.S.
Securities and Exchange Commission, and should be read in conjunction with
the audited financial statements and notes thereto for the year ended
December 31, 2004 and 2003. In the opinion of management, all adjustments
consisting of normal recurring accruals considered necessary for a fair
presentation of financial position and the results of operations for the
nine months ended September 30, 2005 and 2004 have been included.
Operative results for the nine months ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the full
year.
NOTE I - SUBSEQUENT EVENTS
On December 12, 2005, (amended January 18, 2006) the Company entered into
a share exchange agreement with Lexicon United Incorporated, a U.S. Public
Company. Under the terms of the agreement, the Company would exchange
400,000 shares of its currently outstanding shares held by the two
principal stockholders for 2,000,000 shares of Lexicon United
Incorporated. The share exchange agreement provides Lexicon an 80%
interest in the Company.
F-10
LEXICON UNITED INCORPORATED
(A Development Stage Company)
UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
F-11
LEXICON UNITED INCORPORATED
(A Development Stage Company)
BALANCE SHEETS
(Unaudited)
September 30, December 31,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 948,932 $ 1,004,554
------------ ------------
Total Current Assets 948,932 1,004,554
Equipment, net of depreciation of $213 2,630
------------ ------------
Total Assets $ 951,562 $ 1,004,554
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Interest payable to officer $ 56,801 $ 19,300
Accounts payable 513 10,957
Accrued expenses 26,485 21,382
Loans payable to officer 12,000 12,000
------------ ------------
Total Current Liabilities 95,799 63,639
------------ ------------
LONG-TERM DEBT - Convertible promissory note-
related party 1,000,000 1,000,000
------------ ------------
Total Liabilities 1,095,799 1,063,639
STOCKHOLDERS' DEFICIT
Preferred stock $0.001 par value, 10,000,000
shares authorized, none issued and outstanding
Common stock $0.001 par value, 40,000,000
shares authorized, 1,125,000 and 4,450,000 issued and outstanding
at September 30, 2005 and December 31, 2004, respectively 1,125 4,450
Paid-in-capital 101,375 98,050
Deficit accumulated during development stage (246,737) (161,585)
------------ ------------
Total Stockholders' Deficit (144,237) (59,085)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 951,562 $ 1,004,554
============ ============
See accompanying notes to financial statements.
F-12
LEXICON UNITED INCORPORATED
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
Three Months Three Months Nine Months Nine Months Inception
Ended Ended Ended Ended July 17, 2001 to
September 30, September 30, September 30, September 30, September 30,
2005 2004 2005 2004 2005
-------------- -------------- -------------- -------------- --------------
ADMINISTRATIVE EXPENSES
INCOME
Interest income $ 7,511 $ 17,840 $ 22,939
-------------- -------------- --------------
Total Income 7,511 17,840 22,939
-------------- -------------- --------------
COSTS AND EXPENSES
Selling, general and
administrative 22,675 $ 6,663 65,278 $ 6,663 231,962
Depreciation 71 213 213
-------------- -------------- -------------- -------------- --------------
Total Costs and Expenses 22,746 6,663 65,491 6,663 232,175
-------------- -------------- -------------- -------------- --------------
NET OPERATING LOSS (15,235) (6,663) (47,651) (6,663) (209,236)
OTHER EXPENSE
Interest expense (12,500) (37,501) (37,501)
-------------- -------------- -------------- -------------- --------------
NET (LOSS) $ (27,735) $ (6,663) $ (85,152) $ (6,663) $ (246,737)
============== ============== ============== ============== ==============
NET LOSS PER COMMON
SHARE (Basic) $ (0.01) $ (0.00) $ (0.02) $ (0.00) $ (0.04)
-------------- -------------- -------------- -------------- --------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,125,000 1,125,000 1,125,000 1,125,000 1,576,556
============== ============== ============== ============== ==============
NET LOSS PER COMMON SHARE
(FULLY DILUTED) $ (0.01) $ (0.00) $ (0.01) $ (0.00) $ (0.03)
-------------- -------------- -------------- -------------- --------------
FULLY DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 2,158,225 1,648,731 2,169,301 1,939,252 1,850,210
============== ============== ============== ============== ==============
See accompanying notes to financial statements.
F-13
LEXICON UNITED INCORPORATED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
For the For the Period
Nine Months July 17, 2001
Ended (Inception) to
September 30, September 30,
2005 2005
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (85,152) $ (246,737)
Depreciation 213 213
Changes in operating assets and liabilities:
Accounts payable (10,444) 513
Interest payable to officer 37,501 56,801
Accrued expenses 5,103 26,485
---------------- ----------------
Net Cash Used in Operating Activities (52,779) (162,725)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (2,843) (2,843)
---------------- ----------------
Net Cash Used in Investing Activities (2,843) (2,843)
CASH FLOWS FROM FINANCING ACTIVITIES
Cancellation of common stock issuances (40,000)
Sale of common stock 142,500
Note payable to officer 1,000,000
Loan payable to officer 12,000
---------------- ----------------
Net Cash Provided by Financing Activities 1,114,500
NET (DECREASE) INCREASE IN CASH (55,622) 948,932
CASH BEGINNING OF PERIOD 1,004,554
---------------- ----------------
CASH END OF PERIOD $ 948,932 $ 948,932
================ ================
See accompanying notes to financial statements.
F-14
LEXICON UNITED INCORPORATED
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
in order to make the financial statements not misleading have been
included. Results for the three and nine months ended September 30, 2005
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. For further information, refer to the
financial statements and footnotes thereto included in the Lexicon United
Incorporated annual report on Form 10 KSB for the year ended December 31,
2004.
NOTE B - GOING CONCERN
As shown in the accompanying financial statements, the Company has
incurred cumulative net operating losses of $246,737 since inception and
is considered a company in the development stage. Management's plans are
to seek a viable merger candidate which is a going concern and reverse
merge with it. It also seeks to raise capital for working capital and
potential capital projects. However, even if the Company does find a
viable merger candidate to reverse merge, and raises capital in the
capital markets, there can be no assurances that the revenues and profits
will be sufficient to enable it to continue as a going concern. These
matters raise substantial doubt about the Company's ability to continue as
a going concern. However, the accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business.
These financial statements do not include any adjustments relating to the
recovery of the recorded assets or the classification of the liabilities
that might be necessary should the Company be unable to continue as a
going concern.
NOTE C - STOCKHOLDERS' DEFICIT
On April 29, 2004, the majority stockholders of the Company authorized a 4
for 1 reverse split. Accordingly, all per share figures in the financial
statement have been restated.
NOTE D - SUBSEQUENT EVENTS
On November 22, 2005, the Company entered onto a Debt Conversion Agreement
with Keyano Interest, Inc. ("Keyano") to convert the convertible
promissory note in the amount of $1,000,000 plus accrued interest of
$63,750 into common stock of Lexicon United Incorporated. The conversion
price was adjusted from $1.00 per share to $0.20 per share as an incentive
to convert the loan. As a result of the conversion, Keyano received
5,318,750 shares of restricted common stock and the note was cancelled.
On December 12, 2005, (amended January 18, 2006) Lexicon United
Incorporated (the "Company") entered into a Share Exchange Agreement (the
"Share Exchange Agreement") with ATN Capital & Participacoes Ltda., a
Brazilian limited company ("ATN"), Omar Malheiro Silva Araiyo, and Manuel
da Costa Froguas, each shareholders of ATN (the "ATN Shareholders")
pursuant to which the Company agreed to acquire four hundred thousand
(400,000) shares of outstanding capital stock of ATN ("ATN Shares") from
the ATN shareholders, in exchange for two million (2,000,000) shares of
the Company's common stock, in the aggregate. The ATN Shares constitute
eighty percent (80%) of ATN's issued and outstanding shares.
F-15
LEXICON UNITED INCORPORATED
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE D - SUBSEQUENT EVENTS (CONTINUED)
In connection with the share exchange agreement, the Company has valued
the 2,000,000 shares issued at $0.25 per share for an aggregate value of
$500,000.
F-16
LEXICON UNITED INCORPORATED
(A Development Stage Company)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2004
F-17
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Lexicon United Incorporated
New York, NY
We have audited the accompanying balance sheets of Lexicon United Incorporated
(a Development Stage Company) as of December 31, 2004 and 2003 and the related
statements of operations, stockholders' deficit and cash flows for each of the
two years in the period ended December 31, 2004. These financial statements are
the responsibility of Lexicon United Incorporated's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as at December 31,
2004 and 2003, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 2004 in conformity with U.S.
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has incurred a net loss of $161,585 since
inception and there are existing uncertain conditions the Company faces relative
to its ability to obtain capital and operate successfully. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note B. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ Meyler & Company, LLC
Middletown, NJ
March 29, 2005
F-18
LEXICON UNITED INCORPORATED
(A Development Stage Company)
BALANCE SHEETS
December 31,
------------------------------
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 1,004,554
------------
Total Assets $ 1,004,554
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Interest payable to officer $ 19,300
Accounts payable 10,957 $ 957
Accrued expenses 21,382 2,600
Loans payable to officer 12,000
------------ ------------
Total Current Liabilities 63,639 3,557
------------ ------------
LONG-TERM DEBT - Convertible promissory note-
related party 1,000,000
------------ ------------
Total Liabilities 1,063,639 3,557
STOCKHOLDERS' DEFICIT
Preferred stock $0.001 par value, 10,000,000
shares authorized, issued and outstanding
Common stock $0.001 par value, 40,000,000
shares authorized, 4,450,000 in 2004 and
2003 issued and outstanding 4,450 4,450
Paid-in-capital 98,050 98,050
Deficit accumulated during development stage (161,585) (106,057)
------------ ------------
Total Stockholders' Deficit (59,085) (3,557)
------------ ------------
$ 1,004,554 $
============ ============
See accompanying notes to financial statements.
F-19
LEXICON UNITED INCORPORATED
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Period
July 17, 2001
Year Ended (Inception)
December 31, to
----------------------------------- December 31,
2004 2003 2004
--------------- --------------- ---------------
INCOME
Interest income $ 5,099 $ 5,099
--------------- ---------------
Total Income 5,099 5,099
COSTS AND EXPENSES
Selling, general and
administrative 60,627 $ 61,057 166,684
--------------- --------------- ---------------
Total Costs and Expenses 60,627 61,057 166,684
--------------- --------------- ---------------
NET LOSS $ (55,528) $ (61,057) $ (161,585)
=============== =============== ===============
NET LOSS PER COMMON
SHARE $ (0.01) $ (0.01) $ (0.02)
=============== =============== ===============
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 4,450,000 6,817,123 6,707,451
=============== =============== ===============
NET LOSS PER COMMON
SHARE (FULLY DILUTED) $ (0.01) $ (0.01) $ (0.02)
=============== =============== ===============
FULLY DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 7,414,633 6,817,123 7,154,006
=============== =============== ===============
See accompanying notes to financial statements.
F-20
LEXICON UNITED INCORPORATED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Period
July 17, 2001
Year Ended (Inception)
December 31, to
----------------------------------- December 31,
2004 2003 2004
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (55,528) $ (61,057) $ (161,585)
Changes in operating assets and liabilities:
Due from officer 100,000
Accounts payable 10,000 957 10,957
Interest payable to officer 19,300 19,300
Accrued expenses 18,782 100 21,382
--------------- --------------- ---------------
Net Cash Used in Operating Activities (7,446) 40,000 (109,946)
CASH FLOWS FROM FINANCING ACTIVITIES
Cancellation of common stock issuances (40,000) (40,000)
Sale of common stock 142,500
Note payable to officer 1,000,000 1,000,000
Loans payable to officer 12,000 12,000
--------------- --------------- ---------------
Net Cash (Used in) Provided by Financing
Activities 1,012,000 (40,000) 1,114,500
--------------- --------------- ---------------
NET (DECREASE) INCREASE IN CASH 1,004,554 1,004,554
CASH BEGINNING OF PERIOD
--------------- --------------- ---------------
CASH END OF PERIOD $ 1,004,554 $ $ 1,004,554
=============== =============== ===============
SUPPLEMENTAL DATA:
Interest income $ 5,099 $ 5,099
See accompanying notes to financial statements.
F-21
LEXICON UNITED INCORPORATED
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIT
July 17, 2001 to December 21, 2004
Common Stock Additional
----------------------------- Contributed Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
Issuance of common stock @ $0.01 per share 7,000,000 $ 7,000 $ 63,000 $ 70,000
Issuance of common stock @ $0.05 per share 1,240,000 1,240 60,760 62,000
Net loss for the period July 17, 2001 to
December 31, 2001 $ (35,937) (35,937)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 8,240,000 8,240 123,760 (35,937) 96,063
Issuance of common stock @ $0.05 per share 210,000 210 10,290 10,500
Net loss for year ended December 31, 2002 (9,063) (9,063)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 8,450,000 8,450 134,050 (45,000) 97,500
Cancellation of previously issued shares (4,000,000) (4,000) (36,000) (40,000)
Net loss for year ended December 31, 2003 (61,057) (61,057)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 4,450,000 4,450 98,050 (106,057) (3,557)
Net loss for year ended December 31, 2004 (55,528) (55,528)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 4,450,000 $ 4,450 $ 98,050 $ (161,585) $ (59,085)
============ ============ ============ ============ ============
See accompanying notes to financial statements.
F-22
LEXICON UNITED INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Lexicon United Incorporated was incorporated on July 17, 2001 under the
laws of the State of Delaware to engage in any lawful corporate
undertaking, including, but not limited to, selected mergers and
acquisitions. Lexicon has been in the development stage since its
inception and has had no operations to date other than issuing of shares
of its common stock to Lexicon's three founding stockholders.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Business Combinations and Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations". SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS NO. 142, "Goodwill and Other Intangible
Assets", which the Company adopted during 2004. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill and the
identification of reporting units for purposes of assessing potential
future impairment of goodwill.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 changes the
accounting for long-lived assets to be held and used by eliminating the
requirement to allocate goodwill to long-lived assets to be tested for
impairment, by providing a probability weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of possible future cash flows and by
establishing a primary-asset approach to determine the cash flow
estimation period for a group of assets and liabilities that represents
the unit of accounting for long-lived assets to be held and used. SFAS No.
144 changes the accounting for long-lived assets to be disposed of other
than by sale by requiring that the depreciable life of a long-lived asset
to be abandoned be revised to reflect a shortened useful life and by
requiring the impairment loss to be recognized at the date a long-lived
asset is exchanged for a similar productive asset or distributed to owners
in a spin-off if the carrying amount of the asset exceeds its fair value.
SFAS No 144 changes the accounting for long-lived assets to be disposed of
by sale by requiring that discontinued operations no longer be recognized
at a net realizable value basis (but at the lower of carrying amount or
fair value less costs to sell), by eliminating the recognition of future
operating losses of discontinued components before they occur, and by
broadening the presentation of discontinued operations in the income
statement to include a component of an entity rather than a segment of a
business. A component of an entity comprises operations and cash flows
that can be clearly distinguished operationally, and for financial
reporting purposes, from the rest of the entity.
F-23
LEXICON UNITED INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Common Share
The Company computes per share amounts in accordance with Statement of
Financial Accounting standards ("SFAS") No. 128, "Earnings per Share."
SFAS per share ("EPS") requires presentation of basic and diluted EPS.
Basic EPS is computed by dividing the income (loss) available to Common
Stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is based on the weighted-average number of
shares of Common Stock and Common Stock equivalents outstanding during the
periods.
NOTE B - GOING CONCERN
As shown in the accompanying financial statements, the Company has
incurred cumulative net operating losses of $161,585 since inception and
is considered a company in the development stage. Management's plans are
to seek a viable merger candidate which is a going concern and reverse
merge with it. It also seeks to raise deficit capital for working capital
and potential capital projects. However, even if the Company does find a
viable merger candidate to reverse merge, and raises deficit capital in
the capital markets, there can be no assurances that the revenues and
profits will be sufficient to enable it to continue as a going concern.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. However, the accompanying financial
statements have been prepared on a going concern basis, which contemplates
the realization of assets and satisfaction of liabilities in the normal
course of business. These financial statements do not include any
adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE C - INCOME TAXES
The Company has adopted Financial Accounting Statement SFAS No. 109,
Accounting for Income Taxes. Under this method, the Company recognizes a
deferred tax liability or asset for temporary differences between the tax
basis of an asset or liability and the related amount reported on the
financial statements. The principal types of differences, which are
measured at the current tax rates, are net operating loss carry forwards.
At December 31, 2004, these differences resulted in a deferred tax asset
of approximately $41,000. SFAS No. 109 requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred
tax assets. Since realization is not assured, the Company has recorded a
valuation allowance for the entire deferred tax asset, and the
accompanying financial statements do not reflect any net asset for
deferred taxes at December 31, 2004.
The Company's net operating loss carry forwards amount to $161,585 and
expire through 2018.
NOTE D - LONG-TERM DEBT - CONVERTIBLE PROMISSORY NOTE - RELATED PARTY
On August 12, 2004, the Company issued a convertible promissory note to
Keyano Corporation, a company 50% owned by the President of the Company,
in the amount of $1,000,000 with a simple rate of interest of 5% per
annum. The principal and related interest is due on August 12, 2007. The
principal and all accrued interest is convertible into the Company's
common stock based upon a share price of $0.25 per share. The agreement
provides for an antidilution provision relating to stock splits and
recapitalization.
F-24
LEXICON UNITED INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004
NOTE E - STOCKHOLDERS' DEFICIT
In July 2001, the Assistant Treasurer who was also a major shareholder of
the Company, acquired 4,000,000 shares of the Company's common stock for
$40,000. The Company, in a separate transaction, allowed the Assistant
Treasurer to hold $100,000 in custody during his travels to Asia in
connection with a proposed business venture. It was subsequently
discovered in August 2003, that the funds were not used for the intended
purposes and that the Assistant Treasurer absconded with the funds and has
left the United States. The Board of Directors, on August 4, 2003,
cancelled the shares originally issued to the Assistant Treasurer and
wrote off the $100,000 held in custody by the Assistant Treasurer.
NOTE F - SUBSEQUENT EVENT
On February 28, 2005, the Company entered into a non-binding letter of
intent with ATN Capital & Participacoes Ltda. ("ATN") relating to the
acquisition of 80% of the issued and outstanding capital stock of ATN.
This non-binding letter of intent contemplates that the Company could pay
to certain holders of the 80% interest of ATN, in the aggregate, $219,230
in cash and issue to such holders, in the aggregate, such number of shares
of the Company's common stock, which would constitute 75% of the Company's
issued and outstanding common stock. The letter of intent also
contemplates that the Company will have at least $107,692 in cash at the
closing which would be available for ATN's working capital needs after the
closing.
The letter of intent is non-binding and also subject to several
conditions, including due diligence by both parties, negotiation and
execution of a binding agreement relating to the acquisition, negotiation
of employment agreements with management of ATN, approval by the Company's
board of directors, negotiation and execution of a shareholder's agreement
between the Company and the holders of the remaining 20% shareholders of
ATN.
ATN is based in Brazil and is engaged in the business of credit collection
and credit counseling.
F-25
LEXICON UNITED INCORPORATED
PRO-FORMA FINANCIAL STATEMENT
September 30, 2005
Lexicon ATN Capital & Pro Pro
United Participacoes Forma Forma
Incorporated Ltda. Adjustments Balance
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 948,932 $ 94,370 $ 1,043,302
Accounts receivable 119,187 119,187
Other receivables 92,332 92,332
Prepaid expenses 2,902 2,902
-------------- -------------- --------------
Total Current Assets 948,932 308,791 1,257,723
INVESTMENT IN SUBSIDIARY $ (500,000)(3)
500,000(2)
FIXED ASSETS, net of accumulated
depreciation 2,630 327,436 330,066
GOODWILL 659,670(3) 659,670
-------------- -------------- -------------- --------------
$ 951,562 $ 636,227 $ 659,670 $ 2,247,459
============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of loans payable
to banks $ 330,155 $ 330,155
Accounts payable $ 513 70,642 71,155
Accrued expenses 26,485 166,132 192,617
Amounts payable to credit card
companies 28,700 28,700
Accrued contingent liabilities 278,000 278,000
Capital advances to be returned 57,916 57,916
Loans payable to officer 12,000 12,000
$ (63,750)(1)
Interest payable on note 56,801 6,949(1)
-------------- -------------- -------------- --------------
95,799 931,545 (56,801) 970,543
LONG TERM DEBT
Convertible promissory note to
related party 1,000,000 (1,000,000)(1)
STOCKHOLDERS' EQUITY DEFICIT
Preferred stock $0.001 par value,
10,000,000 shares authorized, none
issued and outstanding
Common stock $0.001 par value,
40,000,000 shares authorized, 5,319(1)
issued and outstanding 1,125,000 at
September 30, 2005 and 8,443,750
on Pro-Forma basis 1,125 2,000(2) 8,444
1,058,431(1)
Paid-in-capital 101,375 498,000(2) 1,657,806
Accumulated deficit (246,737) (368,382) 294,705(3) (327,363)
(6,949)(1)
Common stock, par value R$1.00
per share, 500,000 shares authorized
and outstanding 382,919 (382,919)(3)
Comprehensive loss (309,855) 247,884(3) (61,971)
-------------- -------------- -------------- --------------
Total Stockholders' Equity
(Deficit) (144,237) (295,318) 1,716,471 1,276,916
-------------- -------------- -------------- --------------
$ 951,562 $ 636,227 $ 659,670 $ 2,247,459
============== ============== ============== ==============
References:
(1) To record conversion of convertible promissory notes at $0.20 per
share to common stock and record 5,318,750 shares.
(2) To record the issuance of 2,000,000 shares of the Company's common
stock at $0.25 per share in connection with the share exchange agreement
to acquire ATN Capital & Participacoes, Ltda.
(3) To eliminate investment in 80% owned subsidiary.
See accompanying notes to Pro-Forma Financial Statement.
F-26
LEXICON UNITED INCORPORATED
NOTES TO PRO-FORMA FINANCIAL STATEMENT
September 30, 2005
NOTE A - CONVERTIBLE PROMISSORY NOTE
On November 22, 2005, the Company entered onto a Debt Conversion Agreement
with Keyano Interest, Inc. ("Keyano") to convert the convertible
promissory note in the amount of $1,000,000 plus accrued interest of
$63,750 into common stock of Lexicon United Incorporated. The conversion
price was adjusted from $1.00 per share to $0.20 per share as an incentive
to convert the loan. As a result of the conversion, Keyano received
5,318,750 shares of restricted common stock and the note was cancelled.
NOTE B - ACQUISITION OF ATN CAPITAL & Participacoes LTDA.
On December 12, 2005, (amended January 18, 2006) Lexicon United
Incorporated (the "Company") entered into a Share Exchange Agreement (the
"Share Exchange Agreement") with ATN Capital & Participacoes Ltda., a
Brazilian limited company ("ATN"), Omar Malheiro Silva Araiyo, and Manuel
da Costa Froguas, each shareholders of ATN (the "ATN Shareholders")
pursuant to which the Company agreed to acquire four hundred thousand
(400,000) shares of outstanding capital stock of ATN ("ATN Shares") from
the ATN shareholders, in exchange for two million (2,000,000) shares of
the Company's common stock, in the aggregate. The ATN Shares constitute
eighty percent (80%) of ATN's issued and outstanding shares.
In connection with the share exchange agreement, the Company has valued
the 2,000,000 shares issued at $0.25 per share for an aggregate value of
$500,000.
The fair value of the net assets acquired is as follows at September 30,
2005:
Cash $ 94,370
Accounts receivable 119,187
Other receivables 92,332
Prepaid expenses 2,902
Fixed assets 327,436
Liabilities assumed (931,545)
-----------
$ (295,318)
80% acquisition $ 236,254
Purchase price 500,000
-----------
Goodwill 736,254
Less: 20% minority interest in
common stock of ATN (76,584)
-----------
Net Goodwill $ 659,670
===========
Pro-Forma statement of operations for the nine months ended September 30,
2005 is as follows:
Revenues $ 1,544,087
Costs and expenses (1,558,298)
-----------
Net loss $ (14,211)
===========
Net loss per share $ (0.01)
===========
F-27
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Share Exchange Agreement, dated December 12, 2005, among the
Company, ATN Capital & Participacoes Ltda, Omar Malheiro Silva
Araujo and Manuel da Costa Fraguas (incorporated by reference
to Exhibit 10.1 in the Company's current report on Form 8-K
filed on December 16, 2005)
2.2 Amendment No. 1 to the Share Exchange Agreement, dated
February 27, 2006, among the Company, ATN Capital &
Participacoes Ltda, Omar Malheiro Silva Araujo and Manuel da
Costa Fraguas (incorporated by reference to Exhibit 10.1 in
the Company's current report on Form 8-K filed on February 27,
2006)
3.1 Certificate of Incorporation of the Company as filed with the
Secretary of State of the State of Delaware on July 17, 2001
(incorporated by reference to Exhibit 2.1 in the Company's
Form 10-SB filed on August 28, 2001)
3.2 Bylaws of the Company adopted on July 17, 2001 (incorporated
by reference to Exhibit 2.2 in the Company's Form 10-SB filed
on August 28, 2001)
10.1 Debt Conversion Agreement, dated November 22, 2005, between
the Company and Keyano Invest Inc. (incorporated by reference
to Exhibit 10.1 in the Company's current report on Form 8-K
filed on November 28, 2005)
10.2 Lease Agreement between the Company and SANTA CASA DA
MISERICORDIA DO RIO DE JANEIRO dated May 2, 2005 dated May 2,
2005
10.3 Lease Agreement between the Company and SANTA CASA DA
MISERICORDIA DO RIO DE JANEIRO dated May 2, 2005 dated May 2,
2005
14 Code of ethics (incorporated by reference to Exhibit 14 in the
Company's annual report for the fiscal year of 2003 filed on
February 15, 2005)