SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or
15(d) of
the Securities and Exchange act of
1934
For the fiscal year ended December 31, 1997
Commission File No. 0-17114
DEFAULT PROOF CREDIT CARD SYSTEM, INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
CHARACTER)
FLORIDA 59-86523
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4520 Sunset Drive
Miami, Florida 33143
(Address of principal (ZipCode)
executive offices)
Registrant's telephone number, including area code:
(305)856-4711
Securities Registered pursuant to Section 12(b) of the Act:
None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $ 0.001
Indicate by check mark whether the registrant (1) has filed
all reports required to be file by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
The aggregate market value of the voting stock held by no-
affiliates of the registrant (based upon the NASDAQ average
bid and asked prices as of March 15, 1998.
Common Stock. $0.001 par value - 1,164,351.00
The number of shares outstanding of each of the registrant's
classes of common stock as of December 31, 1997.
Common Stock. $0.001 par value - 11,643,51
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 14a-3(d)
Annual Report Item
Under Rule 14A-3(D)
(1) Financial Statements
(2) Form of Financial
Statements
(3) Supplementary
Financial
Information
(4) Accountants and
Financial Disclosure,
changes and
disagreements
(5) (i) Select Financial
Data
(ii)Management's
Discussion and
Analysis of Financial
Condition and Result
of Operations
(6) Business of Registrant
(7) Industry Segments
(8) Directors and
Executive Officers
(9) Market Price of Common
Stock, Dividends
(10) Annual Report on Form
10-K
(11) Form of Annual Report
Caption or Location
in Form 10-K
Financial Statements and
Supplementary Data
Financial Statements and
Supplementary Data
Financial Statements and
Supplementary Data
Changes in and
Disagreements
With
AccountantsandFinancial
Disclosure
Selected Financial Data
Management's Discussion and
Analysis
of Financial Condition and
Results of Operations
Business
Business
Directors and Executive
Officers of Registrant
Market for Registrants
Common Equity and Related
Stockholders Matters
Not applicable
Not applicable
PART I
ITEM 1. BUSINESS
Default Proof Credit Card System, Inc. (the "Company"),
was organized in August 1985 to engage in the development
and marketing of proprietary methods and systems for
issuing secured credits and debit cards that are a "safer
lending risk" for the issuer. The Company first secured type
card is marketed under the trademark Resource (the Resource
System), and the next card (Patent Pending) to be marketed
as a Line Of Credit System (LOC ). The Resource System is
designed to enable owners of life insurance policies with
cash surrender values to obtain a collateralized line of
credit pursuant to the issuance by a participating bank or
other financial institution of a credit or debit card, such
as MasterCard or Visa. The LOC Syste, on the other hand,
allows an applicant to made cash deposits in Automatic
Teller Machines which will dispense to the applicant a
debit card with a line of credit amount equal to the cash
deposited less a small service fee. The issued bankcard will
be equal as any other one such as MasterCard or Visa.
Under the Resource System, applicants who own life
insurance with cash surrender values will assign to the
Company, as collateral, the cash surrender values of their
life insurance policies in exchange for a line of credit to
be granted by a Participating Institution equal to at least
80% of the assigned collateral through the issuance of a
credit or a debit card, or any other credit instrument.
Other than with respect to the cash surrender values, the
assignments will not affect any provisions of such life
insurance policies. The collateral will be used to protect
the participating institutions against the cardholder's
failure to pay the credit/debit cards charges when due. In
the event of such failure, the Company, as guarantor will
agree to pay the participating institution the defaulted
amount and, in turn, will be reimbursed by the cardholder's
life insurance company from the proceeds of a loan made by
the insurance company to the policyholder and charged, as a
policy loan, to the cardholder's insurance policy. Although
the foregoing represents the method the Company intends to
use in the implementing of the Resource System, it is
possible that the actual operation of the Resource System,
if any, may vary from the foregoing plan.
Although the Company anticipates that it will receive
the proceeds of an assign cash surrender value within seven
business days from a claim of the Company, there can be no
assurance that the Company will receive such proceeds within
that period. If the Company does not receive such proceeds
3
prior to the Company's obligation to pay a participating
institution, the Company's ability to make such payment will
be dependent upon the Company's capital. See Financial
Statements and Report of Independent C.P.A.
THE LINE OF CREDIT SYSTEM
Last November 1997 the Company acquired from Vincent
Cuervo, President of the Company, all the worldwide rights,
licenses, and ownership of the Line Of Credit System(LOC)
Patent Pending filed with the U.S. Patent and Trademark
Office, Washington, D.C. earlier in 1997. Under the
purchase agreement between the Company and Vincent Cuervo,
the Company will issue to Vincent Cuervo 2,250,000. Stock
Option of the Company's Common Stock $.001 par value per
share, at an exercising Option Price of $0.15 per share,
the day after the Company receives from the U.S. Patent and
Trademark Office a Notice of Allowance notifying the
Company that its patent application had been allowed and
subsequently the issue of a related Patent to this patent
pending (LOC). If the U.S. Patent and Trademark Office does
not issue the related patent the Company will not grant
the stock option to Vincent Cuervo.
Through the Company's Patent Pending LOC System a debit
card will be made available to consumers, through modified
ATMs, after the implementation of new software and hardware
elements to the existing Automatic Teller Machines, and into
the new ones manufactured. These compatible elements will be
easily installed and adapted to the operational systems in
use today. The existing Automatic Teller Machines in the
market today, consists, wherein the machine accesses with
the insertion of a credit/debit card in good standing and
the entering of its assigned PIN number, for cash advances
charged against the credit line balance in such credit/debit
card. Cash advances are approved or denied depending on the
remaining availability of credit in the credit card, or cash
balance in the bank account on a debit card.
The Company's Patent Pending, once operative, does not
provide cash advances while processing the solicitation of
the interest free prepaid debit card, very much the
opposite. Under the LOC System applicants will be able to
use the thousands of Automatic Teller Machine (ATM) in the
market today, and make cash deposits that may vary
($500;$ 1,000; $ 2,000; $ 3,000 and up) which will determine
the amount of the Line Of Credit (LOC) of the prepaid
secured debit card, and in accordance with his/her means and
needs. The bankcard will be issued by a participating bank
or financial institution and dispensed through an Automatic
Teller Machine. On those ATMs manufactured and presently
operative, the Company will license those ATM builders to
4
install the necessary additional patented elements
(software, hardware) described in the patent pending to
broader their present functionality.For future built ATMs,
the builders will be license to install these compatible new
elements at the time they are manufactured.
Once the simple coupling of these elements, the ATM
will perform new functions, it will accept cash deposits and
dispense a debit card ready to be used for merchandise
purchases, cash advances, car rentals, airlines and hotel
reservations, etc.
The cash deposited will be scanned for counterfeit
bills, the applicant will provide his postal zip number or
mother's maiden name for security reasons, he or she will
select and enter the four confidential numbers for the PIN
number. Following these steps the ATM will provide a
receipt showing the LOC requested and paid for, less a
service fee (maybe 2%); the issuing bank's customer free
number, which will be also printed on the back of the
bankcard, and other sundry information.
The ATM will dispense the debit card with its 16
numbers (0000 0000 0000 0000) and the issuing bank's logo,
it will have the issued date printed and nothing else. Now
it will be ready for use. The cardholder may reload the
card at any of the issuing bank ATM machines, the service
fee will apply again. The cardholder will not need to have
his/her good, fair or bad credit checked. There will not be
issuing delays or paperwork. There will be instant issue.
It will be up to the applicant to determine the line of
credit amount when applying for the card, in accordance
to his/her means and needs. The ATM machines are open 24
hours every day, banks are usually closed at 2.00 p.m.
Monday through Friday. Foreign currency capability may be
added. Other important features are available in the patent
pending.
The issuing banks will enjoy foreseeable limited
and/or minimal liability, and a) The banks issuing these
ATM dispensed prepaid or stored-value cards will not suffer
any charges off, over limit usage, or delinquencies; b)
Similar or higher profits - These cards may have all of the
same capabilities of any other existing bankcards. The
cardholder will be able to purchase merchandise or make cash
advances at any ATM. The bank would receive the same
merchant discount fees (between 2% to 4%) from any
purchase, and the same ATM fees (about $2.50 per each) on
any cash advance; c) New source of profits- The bank issuing
these cards would benefit of the CASH FLOW from the
deposits made for the debit card's acquisition, as it now
happens with the money when traveler's checks are
purchased. Millions of dollars will become line of credit
for some time, in those cards
5
purchased, before the cardholder use them.; d) No paperwork-
There would be no need for Equifax or Credit Bureau reports.
The issuing bank will not have to issue and mail monthly
statements; e) Use of the same terminals as the ones that
now are in use- There will be no need to install new
different expensive terminals at neither end. Same online
transactions will be used; f) Servicing approx. 40 million
individuals in the Sub-Prime market- Because of different
reasons (poor credit record; bankruptcy; divorces; college
students, etc...) about 40 million people can not have a
bankcard. Now the financial institutions will be able to
service that untapped market, an g) It is not a Smart
Card.
This expanding ATM functionality will represent future
opportunities for branch banks. This way, not only is the
ATM easier, more personalized and more enjoyable, but it
does more, too.
As of today, eventhough there is not assurance that a
related patent will be issued, the Company has received
favorable actions from the Patent and Trademark Office in
Washington, D.C., and the Company's patent pending
continues through the Patent Office's usual process.
The Company's operations commenced in 1986 with the
licensing to it by the Company's President of the "default
proof" method and system, all patents and other proprietary
rights to the system and the right to use the registered
trademark Resource.
Since inception, the Company has expended approximately
$50,000 in developing computer software and acquiring
computer hardware for the operation of the Resource System.
The Company has expended approximately $ 350,000 for
advertising which has included newspaper and television
advertising, video tapes, and brochures and applications
which were distributed through the mail and to various
stores and businesses. The Company has expended
approximately $ 225,000 in developing the Resource System
and obtaining patents therefor. The Company also expended
approximately $ 1,000,000 in litigation with State Street
Bank and Trust Company (State Street Bank).The State Street
Bank litigation forced the Company to attempt to raise more
capital in order to implement a new strategy that involved
the purchase of its own bank. The litigation and lack of
funds basically put the company in a defensive position with
very little possibilities to raise funds for a
system being used by a bank in an unauthorized fashion.
Banks, which were very interested in the Resource System
backed off once the litigation was initiated. Subsequent
efforts to raise capital failed.
In mid 1997, the Company renewed it's marketing efforts
6
and early in 1998 the management contracted financial
consultants, F.P.I. Inc., to promote the Resource System.
As it is well known from the news media, charge offs and
delinquencies in the credit card Industry are higher than
it is desirable to the bankcards issuing financial
institutions, and it now appears that the effort to
protect its patent rights will pay off after all. The
renewed marketing efforts offering the Company's Resource
System to banks for licensing has developed some new
interest. Conversations with several banks' officers are
encouraging, since they are demonstrating interest in the
secured credit/debit card products. Marketing efforts will
continue jointly with the offering of the Company's LOC
System Patent Pending new product.
THE RESOURCE SYSTEM
The Resource System is designed to provide individuals
with a convenient method of obtaining , at fair low cost,
immediate access to credit which is collateralized by the
cash surrender value of their life insurance policies.
Applicants who wish to obtain a credit card using the
Resource System will transmit to the Company an application
in which they assign the cash surrender values of their
insurance policy to the Company as collateral. The
participating financial institution will then issue to the
applicant a Visa or MasterCard with an initial line of
credit equal to at least 80% of the cash surrender value of
the policy. The Company will guarantee the cardholder's
obligation to the banks through the registered assignment by
the life insurance company who issued the life insurance
policy, of the cash values in the life insurance policy of
the cardholder/policyholder. These cash surrender values
are owned by the cardholder and will be utilized by the
Company only if he or she becomes delinquent in paying
his credit balance to the issuing bank. Any
cardholder/policyowner will be able to request and obtain a
release of the assignment of the life insurance policy by
paying any outstanding balance on the credit card, returning
the credit/debit card to the participating financial
institution and providing the Company with a written request
for a release.
If a cardholder becomes delinquent, the participating
bank or financial institution, after unsuccessfully pursuing
its own collection procedures, will notify the Company of
the existence and amount of delinquency. Prior to receiving
payment from the Company, the participating financial
institution will be required to, among other things, release
the Company from any future obligations or liability
regarding the delinquent cardholder and cancel the credit or
debit card. The Company will request a defaulting
cardholder's life insurance company to provide to the
Company with the amount
7
necessary to cover the delinquent outstanding balances owed
by such cardholder by creating a loan against the
cardholder's policy. Upon receipt of the policy loan funds,
the Company will recover its processing costs, the amount
to be paid to the participating institutions plus interest
incurred between the date the Company pays the participating
institution and the date the Company is paid by the life
insurance company, at the same rate charged on the bankcard.
If, at any time that the Company is required to pay a
participating institution, the Company has not then received
the proceeds of the assigned cash surrender value of a
defaulting cardholder, then to the extent that the Company
has the capital therefor, the Company will pay the
participating institution the amount it is owed by the
cardholder. The Company will only obtain from the life
insurance company the amount necessary to be reimbursed
in full for the amount it paid to the participating
institution to pay in full any delinquent outstanding
balances owed by the cardholder plus interest and processing
costs. Although the foregoing represents the method the
Company intends to use and implement the Resourcer
System, it is possible that the actual operation, if any,
of the Resource System may vary from the foregoing plan.
There can be no assurance that the Resource System can be
successfully implemented or, if so implemented, that the
Company will ever earn a profit.
The ability of a cardholder to assign the cash
surrender value of a life insurance policy is governed by
the terms of the insurance policy which is a contract
between the insurance company and the policy holder. The
Company believes that an insurance company can not terminate
an assignment of a cash surrender value to the Company
without the consent of the Company. Although the Company has
never experienced a situation where, pursuant to the terms
of a life insurance policy, the cash surrender value was
unassignable, there can be no assurance that this will not
occur. The Company has not yet engaged any legal counsel to
conduct research with respect to the existence of any laws,
rules or regulations which may preclude or limit the
Company's ability to receive assignments
of cash surrender values of life insurance policies or which
may allow a life insurance company to terminate such
assignments without the consent of the Company. Any
litigation resulting from attempts by the Company,
Participating Institutions or insurance companies in
connection with the Resource System would adversely affect
the Company's cash flow, if any.
Prior to issuing a credit card collateralized by the
Resource System, the Company must obtain the consent to the
assignment of the cash surrender value from the
policyholder. The Company will then notify the insurance
company of the assignment. The successful application of the
Resource System,
8
although not dependent upon acceptance by insurance
companies, is dependent among other things, upon the
cooperation of insurance companies in registering
assignments in their records and confirming assignments to
the Company.
Although the Company has not experience any difficulty
with insurance companies in this respect, there can be no
assurance there will be no difficulties in the future. From
1988 to 1991, approximately 350 life insurance companies
acknowledged the assignment of the cash surrender value
of certain life insurance policies by them to the
Company. In only two instances did the Company collect
from the cash surrender value of a cardholder's policy
to apply it to a delinquent payment.
MARKETING THE LOC SYSTEM
The Company believes that the LOC System can be
effectively marketed to selected members of the general
public that fall among the following categories:
* Individuals that have no credit or can only qualify
for low lines of credit, or wish to establish their credit
worthiness for the future. This individual will be able to
prepay their line of credit by the use of the LOC System_.
* Individuals who for whatever reason want to manage
their funds, or other funds they may want to make available
to others, within a predetermine budget or allowance. This
will allow individuals with the need not to exceed their
prepaid budget, to do so while still carrying a debit card.
* It will allow Companies that have employees in an
allowance to issue prepaid cards, instead of travel
advances. Parents may send their children to college with
a controlled monthly budget.
* One important feature of the LOC System is that its
much more safer than cash while working just like cash. In
today's environment, safety is a paramount issue.
With the proliferation of Visa and MasterCard in just
about every retail outlet, and the strong presence of ATMs,
the LOC System will function just like cash, while
providing a safety element.
* Travelers wishing to prepay their traveling expenses,
in stead of just charging it The LOC System may be
obtained in any currency desired and used just like cash in
the visiting country. It will work just like travelers
checks with the added convenience of a debit card and the
safety it represents.
* Individuals not wanting to go through all the hassle of
applying and maintaining a debit card. There will be no
application, no delays, no credit reports, no payments and
no paperwork. But probably most important to some
individuals, there will be no overspending.
9
There are other multiple uses of the LOC debit card
that the Company is presently studying and identifying. It
is clear to the Company that the total and complete
penetration of bankcards such as MasterCard and/or Visa,
coupled with the widespread distribution of ATMs, create
exciting new possibilities for the future cashless society.
We see the LOC System as an integral part of this
phenomenon.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is the worldwide owner of the United
States Patent Numbers 4,718,009 and 5,2025,138; the
Canadian Patent Number 1,280, 213; the worldwide rights and
ownership of the Patent Pending related to Automatic Teller
Machines (LOC SYSTEM), and the trademark Resource.
The Company's executive offices are located at 4520
Sunset Rd., Miami, Florida 33143, and its telephone
number is (305) 856-4711.The Company's executive
offices consist of approximately 400 square feet.
ITEM 3. LEGAL PROCEEDINGS
Not applicable. No legal proceedings pending.
ITEM 4. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
During the next twelve months, the Company plans to (i)
either begin marketing of the Resource System with one or
more Financial Institutions, or license, joint venture, or
sell the
Resource System to a bank or financial institution, (ii) to
begin the licensing of its LOC System to one or several
banks or financial institutions or joint venture the LOC
System_.
The Company is now having substantive interviews and
conversations with several banks and financial
institutions' officers regarding the implementation of its
systems. It is the first time in the last three years
that such interest has been shown. There is no assurance
that such discussions will realize any of the Company
objectives, and there can be no assurance that any of its
plans can be realized.
The Company realizes that in order to undertake the
marketing of one or both of its concepts, it must raise
capital, something that it has not been able to do since its
original public issuance. It is with this reality check,
that the Company its now entertaining the joint venture or
sale of one of its products.
10
ITEM 5. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information at March 2, 1998
based on information obtained from the persons named below,
with respect to the beneficial ownership of shares of
Common Stock by (I) each person known by the Company to be
owner of more than 5% of the outstanding shares of Common
Stock. (ii) each director, and (iii) all officers and
directors as a group.
Name of Beneficial Amount and Nature of Percentage of
Owner Beneficial Ownership Outstanding
Shares Owned
Vincent Cuervo
Miami, FL 33143 3,779,416 33%
Ciro B. Sosa
Miami, FL 33145 242,762 2%
Pedro P. Llaguno
Miami, FL 33145 161,425 1.4%
Dave I.B.Williams 197,500 1.6%
(died in 1997)
Officers/directors
as a group 4,381,103 38%
The Company is not aware of any arrangements which may
result in a change of control of the Company.
ITEM 6. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS OF THE REGISTRANT.
The directors and executive officers of the Company are
as follows:
Name Age Position
Vincent Cuervo, President 68 Director
Ciro B. Sosa, Vice President 71 Director
Pedro P. Llaguno, Vice President 67 Director
All directors hold office until the next annual meeting
of stockholders and the election and qualification of their
successors. Officers are elected annually by the Board of
Directors and serve at the discretion of the Board.
Vincent Cuervo has been President and Chairman of the
Board of Directors of the Company since its inception in
11
August 1985. From January 1984 until March 1986 he was the
general managing agent for Travelers Life Insurance Co., O.
Ltd., and Summit National Life Insurance Company. From
September 1962 through December 1983, he was general
managing agent for Crown Life Insurance Company for the area
encompassing Dade, Broward and Monroe Counties in Florida,
all of South America, Central America, the Caribbean and
Spain. During such time he was responsible for supervising
over 200 life insurance brokers and agents. Mr. Cuervo holds
a Juris Doctorate degree from Havana University, Cuba.
10
Ciro B. Sosa has been a Vice-President and a Director
of the Company since January 1986. Since 1964, Mr. Sosa has
been owner of Futura Advertising, an advertising agency
located in Coral Gables, Florida. In addition, from 1982
through 1983, Mr. Sosa was a real estate broker.
Pedro P.Llaguno has been Secretary and a Director of
the Company since January 1986. Since 1977 Mr. Llaguno has
been an attorney at Law practicing in Miami, Florida.
Mr. Cuervo may be deemed a "parent" or "promoter" of
the Company, as those terms are defined under the federal
securities laws.
In 1997 the Company lost the services of a long time
friend, Officer and Director, David I. B. Williams who died.
He has not been replaced as an Officer or Director.
The Company is in the process of interviewing several
individuals to replace Mr. Williams vacancy.
There are no family relationships between any of the
Company's directors or executive officers. During the last
five years none of the following events occurred with
respect to any executive officer or director of the Company
as of the date hereof.
(i) Any bankruptcy petition was filed by or against any
business of which such person was a general partner or an
executive officer at or within two years before the time of
such filing;
(ii) Any conviction in a criminal proceeding or being
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(iii) Being subject to any order, judgement or decree,
not subsequently reserved, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking
activities; and
(iv) Being found by a court of competent jurisdiction
(in a civil action), the Securities and Exchange Commission
or the
12
Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the
judgement has not been reversed, suspended or vacated.
ITEM 7. EXECUTIVE COMPENSATION
General. The following table sets forth the total
annual compensation paid or accrued by the Company to or for
the account of the Company's chief executive officer and any
other executive officer whose total compensation for the
fiscal year ended December 31, 1997 exceeded $ 40,000.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
Name and (# of Shares) (# of Shares)
Principal Salary Other Annual Restricted Options/SAR
All Other
Position Year $Bonus Comp. $ Stock
Awards
NONE
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option/SAR Exercises In Last Fiscal Year
And FY-End Option/SAR Value
NONE
ITEM 8. Employment Agreement.
On September 1, 1988, Dr. Vincent Cuervo, the
president/principal stockholder entered into an employment
agreement with the Company. Pursuant to the agreement, the
President and CEO is to receive an annual salary of $
144,000, increased annually by the grater of 5% or the
increase in the consumer price index.
On July 25, 1994, at the Company's Special Meeting of
The Board of Directors, the Company renew the September 1,
1988 Employment Agreement between Dr. Vincent Cuervo and the
Company for another five year term, commencing on September
1, 1994.
In January 1991 at his request the salary was reduced
to $ 60,000 annually and the rights to those increases have
been waived by him since then. The agreement also provided
for the Company's payment of Dr. Cuervo's health, life, and
disability insurance premiums, and other benefits, all of
them, at his request, also have been waived on March 1991.
13
Since January 1994 Vincent Cuervo has waived all
monetary compensation and benefits paid to him. Effective
January 1, 1997 all of his accrued compensation, to which
he was entitled under the present employment agreement
between the Company and Cuervo in exchange for shares of the
Company's Common Stock $0.001 par value per share. All other
term of Cuervo's employment agreement remain as of this
date, valid and in force. The Board of Directors has agreed
to enter into discussions with Cuervo and other officers,
regarding their future annual compensation and benefits at
such time on which the Company's earnings will merit
compensation payments to its officers.
ITEM 9. EMPLOYEES
As of the date hereof, the Company had no employees
other than its President and the Counsel and Company's
Secretary. Cuervo and Llaguno have received Stock Options
Grants (see: Stock Options) for all work (without monetary
compensation) done by them in the last several years. Those
stock options to Cuervo were granted also, because of his
loans, at no interest, to the Company, and other expenses
paid by him on behalf of the Company.
ITEM 10. SECURITIES OUTSTANDING
The Company is authorized to issue 25,000,000 shares of
$0.001 par value common stock (the "Shares"). As of
December 31, 1997 there are 11,643,510 currently outstanding
shares, and 4,998,103 of the Company outstanding shares are
restricted shares. The Company also has 475,000 Stock
Options at an exercise price ranging from $0.25 to $1.25 per
share (an average exercise price of $0.75 per share), and
another 1,400,000 Stock Options to purchase shares until
February 2, 2000, at an exercise price of $0.10 and $0.15
cents per share.
See Stock Options.
The holders of Common Stock are entitled to one vote
for each share held of record on all matters to be voted on
by shareholders. There is no cumulative voting with respect
to the election of directors, with the result that the
holders of more than 50% of the shares voted can elect all
the directors.
ITEM 11. STOCK OPTIONS CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
On August 2, 1993 the Company granted to its principal
stockholder Dr. Vincent Cuervo and one of its officers,
Pedro P. Llaguno, Esq., options to purchase stock in
accordance to the following:
14
Name Date of #ofShares Exercise Expiration
Grant Issuable Price Date
Cuervo 8/2/93 70,000 $ 0.25 8/2/98
Llaguno 8/2/93 25,000 $ 0.25 8/2/98
Cuervo 8/2/94 70,000 $ 0.50 8/2/99
Llaguno 8/2/94 25,000 $ 0.50 8/2/99
Cuervo 8/2/95 70,000 $ 0.75 8/2/2000
Llaguno 8/2/95 25,000 $ 0.75 8/2/2000
Cuervo 8/2/96 70,000 $ 1.00 8/2/2001
Llaguno 8/2/96 25,000 $ 1.00 8/2/2001
Cuervo 8/2/97 70,000 $ 1.25 8/2/2002
Llaguno 8/2/97 25,000 $ 1.25 8/2/2002
On February 1995, the Company granted to its principal
stockholder, Dr. Cuervo and one of its officers P.P. Llaguno
options to purchase stock in accordance to the following:
Name Date of # of Shares Exercise Expiration
Grant Issuable Price Date
Cuervo 2/2/95 200,000 $ 0.10 2/2/2000
Llaguno 2/2/95 150,000 $ 0.10 2/2/2000
Cuervo 2/2/96 200,000 $ 0.15 2/2/2001
Llaguno 2/2/96 150,000 $ 0.15 2/2/2001
Cuervo 2/2/97 200,000 $ 0.15 2/2/2002
Llaguno 2/2/97 150,000 $ 0.15 2/2/2002
Cuervo 2/2/98 200,000 $ 0.15 2/2/2003
Llaguno 2/2/98 150,000 $ 0.15 2/2/2003
The above stock options to purchase the Company's
Common Stock, were granted to the Company's
President/Principal Stockholder for his daily work and
services. He received minimal compensation during 1993, and
no compensation since early 1994, at which time Dr. Cuervo
also waived his salary and bonuses up to that date. Since
March 1994 he has made loans to the Company for the payment
of its administrative expenses, bills, patent maintenance
fees, etc.., from Dr. Cuervo's personal funds and without
charging interest to the Company. These numerous loans were
in the tens of thousands of dollars. The officer, Pedro P.
Llaguno has rendered his legal services, and many other
services beyond his obligations at no charge to the Company.
The above stock options are available and contingent
upon the individuals providing their continuing services to
the Company. In the event of termination, options through
the year of termination will be available. The options are
deemed restricted stock pursuant to Rule 144 promulgated
under Securities Act of 1993, as amended.
15
PART II
ITEM`12. MARKET FOR REGISTRANT'S COMMON EQUITY
Dividends and Other Stockholder Matters.
The Common Stock of the Company have been traded in the
over-the-counter market and the Bulletin Board under the
Symbol DPRS.
The following table sets forth volume, high and low bid
prices for the Company's Common Stock weekly during 1997 and
early 1998 weekly as quoted on the E. Bulletin Board.
Date Volume High/Ask Low/Bid Close
01/03/97 10,000 0.14 0.14 0.14
01/24/97 6,000 0.15 0.14 0.15
01/31/97 121,000 0.14 0.11 0.13
02/07/97 30,000 0.15 0.13 0.13
02/28/97 154,500 0.22 0.14 0.21
03/07/97 135,500 0.18 0.13 0.14
03/14/97 9,300 0.17 0.13 0.14
04/18/97 68,000 0.20 0.17 0.17
04/25/97 315,800 0.24 0.20 0.24
05/16/97 173,400 0.25 0.20 0.21
06/27/97 128,700 0.25 0.19 0.25
07/04/97 31,100 0.20 0.20 0.20
08/04/97 9,000 0.17 0.15 0.17
10/03/97 28,500 0.18 0.15 0.14
11/21/97 725,800 0.50 0.15 0.22
11/28/97 296,800 0.29 0.20 0.28
12/05/97 243,000 0.34 0.16 0.16
12/12/97 37,900 0.19 0.15 0.17
12/26/97 4,500 0.12 0.12 0.12
01/02/98 23,000 0.12 0.12 0.12
03/20/98 324,800 0.25 0.17 0.21
To date, the Company has not paid any dividends on its
Common Stock. The payment of dividends, if any, in the
future is within the discretion of the Board of Directors
and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant
factors. The Board does not intent to declare any dividends
in the foreseeable future, but instead intends to retain all
earnings, if any, for use in the Company's business
operations. As of December 31, 1997 there were approximately
211 holders of record of the Company's Common Stock. A
number of those record holders are brokers and other
institutions holding shares in " street name" for more than
one beneficial owner.
Securities Transfer Agent
The Transfer Agent for the Company's Securities is
Chase
16
Mellon Shareholders Services, L.L.C., Overpeck Centre, 85
Challenger Rd., Ridgefield Park, NJ 07660.
Recent Sales of Unregistered Securities.
On February 22, 1994 the Company issued 25,000 shares
to Emil Chabala in consideration for his past, present and
future services. Mr. Chabala made contacts with Credit Union
officers for issuing the Resourcer System bankcards in
Philadelphia and Washington, D.C. Also on that date the
Company issued 25,000. shares to Salvador Cuervo(brother to
the President of the Company) for similar efforts with
investors in Mexico City, Mexico. Also on that date to Jose
Abascal for his efforts in Puerto Rico. In all cases they
made phone calls and traveled at their own expenses.
On July 1994 the Company issued 30,000. shares to
william Tribwaser for his arranged meeting and agreement
between the Company and Onix Corp., an investment banker.
Also on that date the Company issued 5,000. shares to Robert
Parma for the
secretarial services related to Onix Corp. in connection to
the private placement preparation. Also in that date the
Company issued 5,000. shares to Yolanda G. Ricard for her
past and present services. Mrs. Ricard supplied secretarial
services to the Company without pay.
On July 25, 1995 the Company issued to Dr. Eric H.
Spellman, 125,000 shares of the Company's Common Stock, as
consideration for his past, present and future services. Dr.
Spellman provided business meetings between the Company and
investment bankers, and investors. The value attributable to
such shares was $ 125.
On June 12, 1996 the Company issue 25,000 shares of the
Company's Common Stock, to Eduardo Garcia, the Company's
accountant, in consideration for his present and future
services' fees to be accrued; and it issued Dr. Alan Parker
60,000 shares of the Company's Common Stock, in
consideration for his past, and continuing maintenance
service on the Company's computer hardware and software,
including the WWW pages in the Internet.
On August 28, 1996 the Company issued 30,000. shares to
Arturo Padrera for his past, present and future services.
Mr. Padrera supplied consulting services in connection with
obtaining investors fro Ecuador, S.A. Also on that date the
Company issued 50,000. shares to John H. Faro, Esq., for
services related to patent infringement with a new patent
related to ours on 401K pension plans funded with life
insurance cash values.
On August 28, 1996 the Company issued to Dr. Vincent
Cuervo, President and principal shareholder of the Company,
2,000,000 shares of the Company's Common Stock $0.001 par
value per share in consideration of Dr. Cuervo's waiving,
effective January 1, 1997 all of his accrued salaries and
bonuses in the amount of several hundreds of thousand of
17
dollars and money loaned to the Company up to and to be
effective December 31, 1996.
On February 1997 the Company issued to Ciro B. Sosa, a
Director of the Company for his services to the Company. Mr
Sosa has supplied advertising, marketing, and supplies to
the Company at no charge since 1991. Also on that the
Company issued 15,000 shares to Marina S. Klein for her
services. Mrs. Klein supplied frequent securities legal
advice since May 1995.
On November 1997 the Company issued 20,000. shares to
Yoland Ricard for her past, present and future services.
Mrs. Ricard provided the Company with her secretarial
services without compensation. Also on that date, the
Company issued to A.G.I. Consulting for present services.
A.G.I. Consulting is engaged in advice and preparation of
the Company's 1997 form 10-K. Also on that date the Company
issued 276,100. shares (and cancelled 50,000. shares
subsequently) to International Buying Power, Corporation,
Boca Raton, FL., I.B.P. Corp., was involved in financial
public relations services to promote the Company's new
Patent Pending LOC System_ secured debit card among
investors.
In November 10, 1997 the Company entered into an
agreement with International Buying Power, Corp., a
financial public relations network. The agreement purpose
was the distribution of news and marketing of the
Company's new Patent Pending acquisition LOC System _. The
Company issued 276,100. shares of the Common Stock $0.001
per share as payment for the services. On December 16, 1997
the Company terminated the contract as provided. At the time
of termination the Company had withheld the last 50,000.
shares under the contract. These 50,000. shares were
subsequently cancelled in January 1998.
The foregoing sales were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933
inasmuch as no public offering was involved.
ITEM 13. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(1) Liquidity and Capital Resources
Management believes that the Company's cash position is
insufficient to support its operations for any given period
of time. The Company expects to continue with the financial
assistance of the President of the Company, Dr. Vincent
Cuervo, while the marketing efforts started in mid 1997 and
the remarkable interest developed by the new patent pending,
LOC SYSTEM_ will created a favorable financial condition to
allow the Company to succeed in its planned programs.
18
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
Attached hereto and filed as a part of this Report are
the financial statements and the exhibits listed below.
ITEM 15(a)(1) Financial Statements:
Report of Independent Certified Public Accountants
Balance Sheets
Statement of Loss
Statement of Stockholders' Equity
Notes to Financial Statements
ITEM 15(a)(2) Financial Statement Schedules
All schedules are omitted as not applicable or because
the required information is included in the Financial
Statements and Notes thereto.
ITEM 15(a)(3) Exhibits:
3.1* Certificate of Incorporation of Registrant
3.2* By-Laws of Registrant
4.1** Form of Certificate evidencing Common Stock,
$.001 par value
4.2** Form of Redeemable Common Stock Purchase
Warrant (1988 Public Offering )
4.3** Form of Warrant Agreement between Registrant,
the Underwriter (Normandy Securities, Inc.) and Continental
Stock Transfer and TrustCo. (1988 Public Offering)
4.6**** Form of Option Agreement for 60,000 option
shares for Marina S. Klein.
19
10.1* License Agreement between Vincent Cuervo and
the Registrant dated August 14, 1985
10.2** Amendments to License Agreement between
Vincent Cuervo and the Registrant
10.3* Agreement dated August 14, 1986 between
Vincent Cuervo and SSS Associates and Felix Guardiola.
10.4** Lease between Registrant and Douglas Entrance
Restoration and Development Group.
10.4(a) Lease between Registrant and Miami Board of
Realtors.
10.5*** Employment Agreement between the Company and
Vincent Cuervo.
10.6** Employment Agreement between the Company and
Hugh Vanhoose.
10.7** Sales Agreement between the Company and James
Branam Jr.
10.8** Form of 1988 Stock Option Plan.
14**** Material Foreign Patents - Notice of
Allowance for Patent from Canada's Consumer and Corporate
Affairs.
(28)**** Minutes of Special meeting of the Board of
Directors of Default Proof Credit Card System, Inc. for
January 9, 1990
ITEM 15(b) Reports on Form 8 K
None
ITEM 15(c) Exhibits
The Exhibits described above in Item 14(a)(3) are
incorporated by reference herein.
ITEM 15(d) Not applicable
___________________________
* Incorporated by reference to the Company's
Annual Report on Form 10-K, file No.33-9185A for the fiscal
year ended December 31, 1987.
** Incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-22677, filed
20
with the SEC on August 3, 1988, and incorporated by
reference herein.
*** Previously filed as an exhibit the Company's
Annual Report on form 10-K, File No. 90-17114, for the
fiscal year ended December 31, 1988.
**** Previously filed as an Exhibit the Company's
Annual Report in Form 10-K, File No.0-7114, for the fiscal
year ended December 31, 1990.
***** Form 10-SB\A filed November 1994 General
Form for Registration of Small Business Issuers Pursuant to
Section 12(b) or (g) of The Securities and Exchange
Commission.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) Default Proof Credit Card System, Inc.,
By: (Signature and Title)VINCENT CUERVO
Vincent Cuervo, President
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and dates indicated.
By (Signature and Title) Vincent Cuervo
Vincent Cuervo, President,
Director and Chief Executive Officer
Date March 25, 1998
By (Signature and Title) Ciro B. Sosa
Ciro B.Sosa,Vice President,Director
Date March 25, 1998
By (Signature and Title) Pedro P. Llaguno
Pedro P. Llaguno, Secretary, Vice
President and Director.
Date March 25, 1998
22
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Financial Statements
December 31, 1997, 1996, 1995 and 1994
C O N T E N T S
Page
AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEET F-4
STATEMENT OF OPERATIONS F-5
STATEMENT OF CASH FLOWS F-6
STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS) F-7
NOTES TO FINANCIAL STATEMENTS F-12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Default Proof Credit Card System, Inc.
We have audited the accompanying balance sheet of Default
Proof Credit Card System, Inc., (a development stage
company) as of December 31, 1997, and the related statements
of operations, stockholders' equity (deficiency in assets)
and cash flows for the years ended December 31, 1997, 1996,
1995 and 1994. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit. The 1993 financial
statements, which included the cumulative period from August
14, 1985 (inception) to December 31, 1993, were audited by
other auditors whose report, dated June 8, 1994, included an
explanatory paragraph which raised substantial doubt about
the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Default Proof Credit Card System, Inc. as of
December 31, 1997 and the results of its operations and its
cash flows for each of the years ended December 31, 1997,
1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
Further, based on our audit and the report of the other
auditors, the amounts reported in the statements of
operations, shareholders' equity (deficiency in assets) and
cash flows for the cumulative period from August 14, 1985
(inception) to December 31, 1997, are fairly presented.
As discussed in Note 2, as of December 31, 1997, the Company
has suffered losses prior to commencement of operations and
has a working capital deficiency. These factors raise
substantial doubt about its ability to continue as a going
concern. Management's plans with regard to these matters
are also described in Note 2. The financial statements do
not include any adjustments that might result from the
outcome of this uncertainty.
Alberni & Alberni, P.A.
Certified Public Accountants
Coral Gables, Florida
March 17, 1998
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
December 31, 1997
ASSETS
CAPITALIZED PATENT COST $ 3,945
Total Assets $ 3,945
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES
Accrued Expenses $ 26,711 Due to Directors $ 39,390
Total Current Liabilities $ 66,101
DEFICIENCY IN ASSETS
Common Stock, $.001 Par Value, 25,000,000
Shares Authorized, 11,643,510 Issued and
Outstanding 11,644
Additional Paid-In Capital 3,903,460
Deficit Accumulated During
Developmental Stage (3,977,260)
Total Deficiency in Assets (62,156)
Total Liabilities and Deficiency in Assets $3,945
See Accompanying Notes and Auditors' Report
F-4
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Operations
Years Ended December 31
1997 1996
1995
EXPENSES
General & Administrative $ 63,590 $ 39,711 $
43,204
Officer Salary -0- -0-
72,000
Marketing -0- -0- -
0-
Depreciation & Amortization -0- -0- -
0-
Expired Public Offering -0- -0- -
0-
Total Expenses $ 63,590 $ 39,711 $
115,204
OTHER INCOME (EXPENSE)
Cancellation of Debt 413,000 -0-
10,000
Litigation Settlements(Note7) -0- -0-
- - -0-
Interest & Other Income -0- -0-
1,569
Loss on Marketable Securities -0- -0-
- - -0-
Loss on Sale of Equipment -0- -0-
- - -0-
Total Other Income (Expense) 413,000 -0-
11,569
NET LOSS (GAIN) $ (349,410) $ 39,711 $
103,635
NET LOSS (GAIN)
PER COMMON SHARE $ (.031) $ .004 $
.012
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 11,344,228 9,636,560 8,942,410
See Accompanying Notes and Auditors' Report
F-5(a)
DEFAULT PROOF
CREDIT CARD SYSTEM, Inc.,
Statements of Operations
(continued)
Cumulative
Cumulative
from Aug.14, from
Aug.14,
1985(incep.)
1985(Incep.)
1994 to Dec.31,1993 to
Dec.31,1997
EXPENSES
General & Administrative $ 105,583 $ 2,692,887 $
2,944,975
Officers Salary 90,000 824,556
986,556
Marketing -0- 393,358
393,358
Depreciation & Amortization 2,908 95,799
98,707
Expired Public Offering Costs -0- 179,211
179,211
Total Expenses 198,491 4,185,811
4,602,807
OTHER INCOME (EXPENSE)
Cancellation of Debt -0- -0-
423,000
Litigation Settlements(note7) -0- (90,000)
(90,000)
Interest & Other Income 125 421,016
422,720
Loss on Marketable Securities -0- (96,529)
(96,529)
Loss on Sale of Equipment -0- (34,144)
(34,144)
Total Other Income (Expense) 125 200,353
625,047
NET LOSS (GAIN) $ 198,366 $ 3,985,458 $
3,977,760
PER COMMON SHARE $ .022 $ .545 $
.490
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSATANDING 8,906,577 7,315,870
8,113.061
See Accompanying Notes to Auditor's Report.
F-5(b)
F-5(b)
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statements of Cash Flows
Years Ended
December 31
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Gain $ 349,410 $ (39,711) $
(103,635)
Adjustments to Reconcile Net (Loss)
Gain to net cash Used in Operating
Activities:
Depreciation & Amortization -0- 1,767
200
Offering
Cancellation of Stockholder Notes
Receivable -0- -0-
-0-
Stock Issued in lieu of Cash for
Prof. Services 50,560 30,750 18,750
Stock Issued in lieu of Cash for
Waived Salaries
-0- 294,000 -0-
Loss on Sale of Equipment
-0- -0- -0-
Decrease in Other Receivables -0-
7,500 -0-
Decrease (Increase) in Other Assets -0-
-0- -0-
Increase (Decrease) in Accrued
Expenses (405,550)
(299,700) 85,410
Total Adjustments (354,990)
34,317 104,360
Net Cash Provided By
(Used in) Operating Activities (5,580)
(5,394) 725
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Marketable Securities -0- -0- -0-
Purchases of Property & Equipment -0- -0- -0-
Patent License Expenditures
-0- -0- -0-
Proceeds from Sale of Equipment -0- -0- 6,001
Proceeds from (Issuance of
Contingency Bond -0- -0-
-0-
Net Cash Provided by
(Used in ) Operating Activities -0- -0-
6,001
See Accompanying Notes to Auditor's Report
F-6(a)
DEFAULT PROOF CREDIT CARD SYSTEM,
INC.
Statements of Cash Flows
(continued)
Years Ended December
31
1997 1996
1995
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of
Stock-Private Offerings -0- -0-
-0-
Proceeds from Issuance of
Stock-Public Offerong -0- -0-
-0-
Proceeds from Issuance of
Stock-Exercise of Warrants -0- -0-
-0-
Proceeds from Capital Contributions -0- -0-
-0-
Net Receipts/Advances to Stockholders 5,580 5,394
(6,761)
Net Cash Provided by(used in)
Financing Activities 5,580 5,394
(6,761)
NET INCREASE(DECREASE)
IN CASH AND EQUIVALENTS -0- -0-
(35)
CASH AND EQUIVALENTS-BEGINING -0- -0-
35
CASH AND EQUIVALENTS-ENDING $ -0- -0-
-0-
See Accompanying Notes and Auditors' Report
F-6(b)
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statements of Cash Flows
(continued)
Cumulative
Cumulative
from Aug,14 from Aug.14
1985(Incep.)
1985(Incep.)
1994 to Dec.31,1993 toDec.31,1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Gain $ (198,366) $(3,985,458)
$(3,977,760)
Adjustments to Reconcile Net (Loss)
Gain to Net Cash Used in Operation
Activities:
Depreciation and Amortization 2,908 92,876
97,751
Loss on Marketable Securities -0- 130,741
130,741
Expired Public Offering Costs -0- 110,000
110,000
Cancellation of Stockholder
Note Receivable -0- 55,490
55,490
Stock Issued in Liu of Cash
for Prof. Services 15,500 18,400
133,960
Stock Issued in lieu of Cash
for Waived Salaries -0- -0-
294,000
Loss on Sale of Equipment -0- 34,144
34,144
Decrease on Sale of Receivables -0- (7,500)
-0-
Decrease (Increase) in Other Assets -0-
(25,480) (25,480)
Increase(Decrease) in Accrued
Expenses 78,700 567,974
26,834
Total Adjustments 97,108 976,645
857,440
Net Cash Provided By
(Used in)Operating Activities (101,258) (3,008,813)
(3,120,320)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Marketable Securities -0- (130,741)
(130,741)
Purchases of Property and Equipment -0- (136,980)
(136,980)
Patent License Expenditures -0- (201,864)
(201,864)
Proceeds from Sale of Equipment -0- 16,993
22,994
Proceeds from (Issuance of Contingency
Bond -0- -0-
-0-
Net Cash Provided by (Used in)
Operating Activities -0- (452,592)
(446,591)
See Accompanying Notes and Auditors' Report.
F-6(c)
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statements of Cash Flows
(continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Stock-
Private Offerings -0- 108,547
108,547
Proceeds from Issuance of Stock-
Public Offerings -0- 3,150,163
3,150,163
Exercise of Warrants -0- 240,358
240,358
Proceeds from Capital Contributions -0- 78,076
78,046
Net Receipts/Advances to Stockholder 61,914
(76,360) (10,233)
Net Cash Provided by
(Used in ) Financing Activities 61,914 3,500,784
3,566,911
NET INCREASE (DECREASE)
IN CASH AND EQUIVALENTS (39,679) 39,379
-0-
CASH AND EQUIVALENTS-BEGINNING 39,379 -0-
-0-
CASH AND EQUIVALENTS-ENDING $ 35 $39,379
-0-
See Accompanying Notes and Auditors' Report.
F-6(d)
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Stockholders' Equity (Deficiency in Assets)
Deficit
Accumulated
Common Stock Additional during the
# of Shares Paid-In Development
Issued Par Value Capital Stage
Total
BALANCE-12/31/85 $ -0- $ -0- $ -0- $ -0- $
-0- To a Director for
Cash &Other
Property (A, B, C)2,518,000 2,518 11,705 -0-
14,223
To Directors &
Officers for
Non-Cash
Consideration
Received (A, B, D) 582,750 583 16,900 -0-
17,483
To Others for
Non-Cash
Consideration
Received(A,B,D) 49,250 49 1,428 -0-
1,477
3,150,000 3,150 30,033 -0-
33,183
Private Placement
Offering, net of
Issuance Costs of
$16,453(A, E) 312,500 312 108,235 -0-
108,547
Patent License
Costs (M) -0- -0- (125,000) -0-
(125,000)
Net Loss -0- -0- -0- (44,461)
(44,461)
BALANCE-12/31/86 3,462,500 3,462 13,268 (44,461)
(27,731)
May 7, 1987, to a
Director/Officer
for Property(A,B,C) 500,000 500 (500) -0-
-0-
May 12, 1987, to a
Director/Officer
for Cash (A, F) 100,000 100 39,900 -0-
40,000
Reversal of Accrued
License Costs (M) -0- -0- 25,000 -0-
25,000
Capital Contribution
by the Principal
Stockholder -0- -0- 78,076 -0-
78,076
October 14, 1987,
Proceeds from
Public Offering,
Net of Public
Offering Costs
of $76,314 1,131,010 1,132 1,336,318 -0-
1,337,450
Net Loss -0- -0- -0-
(176,052)(176,052)
See Accompanying Notes and Auditors' Report.
F-7
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Stockholders' Equity (Deficiency in Assets)
(Continued)
Balance-12/31/87 5,193,510 5,194 1,492,062
(220,513)1,276,743
April 7,1988,to
Directors/Officers
for Property(A,G) 800,000 800 -0- -0- -0-
May, 1988, to Others
for Non-Cash
Consideration
Received (A, H) 95,750 96 (96) -0- -
0-
August 19, 1988,
Proceeds from
Public Offering
Costs of$487,287 2,300,000 2,300 1,810,413 -0-
1,812,713
Patent License
Costs (M) -0- -0- (100,000) -0-
(100,000) Warrants Converted
at $1.25 Per Share 128,300 128 160,247 -0-
160,375
Net Loss -0- -0- -0-
(405,875)(405,875)
BALANCE-12/31/88 8,517,560 8518 3,362,626
(626,388)2,744,756
Warrants Converted
at $2.00 Per Share 3,000 3 5,997 -0-
6,000
Issuance of Stock by
Principal Stockholder -0- -0- 110,000 -0-
110,000
Net Loss -0- -0- -0-
(1,129,559)(1,129,559) BALANCE-12/31,19898,520,560 8521
3,478,623(1,755,947)(1,731,197)
Net Loss -0- -0- -0-
(1,175,201)(1,175,201)
BALANCE-12/31/19908,520,560 8521 3,478,623 (2,931,148)
555,996
July 10, 1991, to
Various Parties for
ProfessionalServices
Rendered (A,I) 125,000 125 7,375 -0-
7,500
October 3, 1991 to
Directors/Officers for
Non-cash Consideration
Received (A, J) 85,000 85 5,015 -0-
5,100
Net Loss -0- -0- -0- (430,800)
(430,800)
BALANCE-12/31/19918,780,560 8731 3,491,013 (3,361,948)
137,796
August 12, 1992,
to an Individual for
Professional Services
Rendered (A, K) 50,000 50 2,950 -0-
3,000
Net Loss -0- -0- -0- (173,144)
(173,144)
See Accompanying Notes and Auditors' Report
F-8
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Stockholders' Equity (Deficiency in Assets)
(Continued)
BALANCE-12/31/1992 8,780.560 8781 3,493,963 (3,535,092)
(32,348)
February 12, 1993,
To a Related Entity
in Consideration
for deferral of
Loan Repayment(A,L) 46,850 47 2,753 -0-
2,800
Net Loss -0- -0- -0- (450,366)
(450,366)
Balance-12/31/1993 8,827,410 8828
3,496,716(3,985,458)(479,914)
February 22,1994,
to Various Parties
for Professional
Services Rendered(A,N)75,000 75 7,425 -0-
7,500
July 25,1994,
to an Individual for
Professional Services
Rendered (A,O) 30,000 30 5,970 -0-
6,000
July 25, 1994, to
Various Parties for
Secretarial Services
Rendered (A,P) 10,000 10 1,990 -0-
2,000
Net Loss -0- -0- -0-
(198,366)(198,366)
BALANCE-12/31/1994 8,942,410 8943
3,512,101(4,183,824)(662,780)
July 25,1995,to an
Individual for
Professional Services
Rendered (A, Q) 125,000 125 18,625 -0-
18,750
Net Loss -0- -0- -0- (103,635)
(103,636)
BALANCE-12/31/1995 9,067,410 8943
3,512,101(4,183,824)(747,665)
July 12,1996,to an
Individual for
Accounting Services
Rendered to date(A,R) 25,000 25 3,725 -0-
3,750
July12,1996,to an
Individual for
Professional Services
Rendered (A, K) 60,000 60 8,940 -0-
9,000
August28,1996,to an
Individual for
Professional Services
Rendered(A,S) 30,000 30 4,470 -0-
4,500
See Accompanying Notes and Auditors' Report.
F-9
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Stockholders' Equity (Deficiency in Assets)
(Continued)
August 28, 1996, to
an Individual for
Professional Services
Rendered (A, T) 50,000 50 7,450 -0-
7,500
September 13,1996,to
the President and
Principal Stockholder
in Exchange for Accrued
Salaries Waiver up to
12/31/96 (A, U) 2,000,000 2,000 298,000 -0-
300,000
Net Loss -0- -0- -0- (39,711)
(39,711)
BALANCE- December
31,1996 11,232,410 11233
3,853,311(4,327,170)(462,626)
February 26,1997,to
a Director/Officer for
Professional Services
Rendered(A,V) 50,000 50 8,950 -0-
9,000
February 26,1997,to
an Individual for
Professional Services
Rendered (A, W) 15,000 15 2,685 -0-
2,700
November 5,1997,to
an Individual for
Professional Services
Rendered (A, P) 20,000 20 2,980 -0-
3,000
November 5,1997,to a
Financial Public
Relations Service
Company for Professional
Services Rendered
(A, X) 226,000 226 24,634 -0-
24,860
November 5,1997,to a
Consulting Company
Professional for
Services Rendered
(A, Y) 100,000 100 10,900 -0-
11,000
Net Gain -0- -0- -0- 349,910
349,910
BALANCE-
12/31//97 11,643,510 $ 11644 $3,903,460
$(3,977,260)(62,156)
See Accompanying Notes to Financial Statements and Auditors'
Report.
F-10
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Stockholders' Equity (Deficiency in Assets)
(Continued)
(A) The shares are subject to restrictions on transfers
imposed by Rule 144 of the Securities Act of 1993, as
amended.
(B) In addition to the shares of common stock issued, the
same number of warrants were issued entitling the
shareholder to purchase one share of common stock at $1.50
per share until April 12, 1990 (extended to August 2, 1991).
On May 4, 1990 the Company pursuant to a Resolution adopted
by its Board of Directors a a special meeting of its Board
of Directors, terminated and cancelled the warrants.
(C) Other property consisted of an exclusive license to a
patent and a service mark recorded at par value ($.001)
of the shares of common stock issued. At the time of
issuance of the shares, the fair market value of the
property exchanged was not determinable.
(D) Non-cash consideration received consisted of
professional services rendered in connection with the
organization and developmentof the Company.The
sharesofstock issued for non- cash services were recorded at
the fair market value of the services rendered.
(E) The Company sold 312,500 shares of $.001 par value
common stock at $.40 per share in a private placement
offering during August 1986.
(F) In addition to the shares of common stock issued, the
shareholder received three hundred thousand warrants,
each entitling him to purchase one share of common stock at
$1.50 per share until April 12, 1990 (extended to August 2,
1991). On May 4, 1990 the Company, pursuant to a
Resolution adopted at a Special Meeting of its board
of Directors terminated and cancelled the warrants.
(G) Property consists of an exclusive license U.S.Patent
No.4,718,009; U.S. Patent No.5,205,138; a Registered
Trademark "Resource". The Canadian patent for Default Proof
Credit Card System was granted and the Company was advised
that fees for issuance of patent before December 12,
1990.The shares of common stock were recorded at fair market
value(1.00 per share).Additional paid-in capital was
reduced by $799,200 to adjust for the excess of the fair
market value of the shares issued over the contributots'
cost of the license agreement.
(H) Non-cash consideration received consisted of services
rendered in connection with the Company's 1987 self-
underwriting public offering.The shares of common stock
were recorded at fair market value at the date of
issuance,
See Accompanying Notes and Auditors' Report.
F-11
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Stockholders' Equity (Deficiency in Assets)
(Continued)
net of discounts for restricted stock (approximate $1,00
per share). A corresponding charge was made to additional
paid-in
to additional paid-in capital to reflect the
public offering costs.
(I) Non-cash consideration received consisted of
professional services rendered in connection with the
lawsuit between the Company and State Street Bank & Trust
Company. The shares of stock issued for non-cash
services were recorded at the fair market value at the date
of issuance.
(J) Shares were issued to the directors and officers of
the Company as consideration for their services as
directors of the Company. The shares
of stock issued for non-cash services were recorded at the
fair market value of the shares at the date of issuance.
(K) Non-cash consideration received consisted of
professional services rendered for software consulting.The
shares of
stock issued for non-cash services were
recorded at the fair fair market value of the shares at
the date of issuance.
(L) Non-cash consideration received consisted of a
deferral on a loan repayment to an entity controlled by
the Company's principal principal stockholder.The shares
of stock issued for non-cash consideration were recorded at
the fair market value of the shares at the date of issuance.
(M) In connection with a license agreement between the
Company and its principal stockholder, the stockholder was
paid a fee in the amount of $200,000 from the proceeds and
earnings of the Company's October 1987 self-underwriting
public offering. The $200,000 fee was charged to
additional paid-in capital.
(N) Non-cash consideration received consisted of promotion
efforts with Credit Union officers. The shares of stock
issued for non-cash services were recorded at the fair
market value of the shares at the date of issuance.
(O) Non-cash consideration received consisted of arranging
meetings and an agreement . The shares of stock issued
for non-cash services were recorded at the fair market
value of the shares at the date of issuance.
(P Non-cash consideration received consisted of
secretarial and typing services. The shares of stock issued
for non-cash services were recorded at the fair market value
of the shares at the date of service.
(Q) Non-cash consideration received consisted of arranging
various meetings with bankers, investors etc. The
shares of stock issued for non-cash services were recorded
at the fair market value of the shares at the date of
service.
See Accompanying Notes and Auditors' Report. F-12
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Statement of Stockholders' Equity (Deficiency in Assets)
(Continued)
(R) Non-cash consideration received consisted of
accounting services performed to date. The shares of stock
issued for non-cash services were recorded at the fair
markevalue of the shares at the date of service.
(S) Non-cash consideration received consisted of
introductions to investors in Ecuador. The shares of stock
issued for non- cash services were recorded at the fair
market value of the shares at the date of service.
(T) Non-cash consideration received consisted of work
related to possible infringement on Company's patent.
The shares of stock issued for non-cash services were
recorded at the fair market value of the shares at the
date of service.
(U) Non-cash consideration received consisted of waiver of
accrued salaries up yp 12/31/96. The shares of stock
issued for non-cash services were recorded at the fair
market value of the shares at the date of service.
(V) Non-cash consideration received consisted of
advertising and marketing services supplied at n o
charge since 1995. The shares of stock issued for non-cash
services were recorded at the fair market value of the
shares at the date of service.
(W) Non-cash consideration received consisted of security
legal advice since May 1995.The shares of
stock issued for non-cash services were recorded at the
fair market value of the shares at the date of service.
(X) Non-cash consideration received consisted of services
related to communications relating to
n ve stor relations. The shares of
stock issued for non-cashserviceswererecorded at the fair
market value of the shares at the date of service.
(Y) Non-cash consideration received consisted of
consulting services related to the preparation of 10-K
filing. The shares of stock issued for non-cash
consideration were recorded at the fair market value of the
shares at the date of issuance.
See Accompanying Notes and Auditors' Report.
F-13
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Notes to Financial Statements
December 31, 1997, 1996, 1995 and 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business Activity
Default Proof Credit Card System, Inc. (the Company)
was incorporated on August 14, 1985 under the laws of
the State of Florida. For the period from August
14, 1985 (inception) to December 31, 1985, the Company
was promoting and marketing the Resource System ( a
Registered Servicemark). Activities through March
1989 have been limited to the sale of its
securities, planning, procurement of personnel and
limited marketing activities including the sale of
Resource System applications. The Company's principal
business activity is to market, sell anddistribute a
patented financial business system forextending lines
of credit on a collaterized basis to consumers.
During the period from April 1989 through February
1993, the Company's development activities were
severely impeded as a result of litigation involving
the use of proprietary information believed to be owned
by the Company. In February 1993, the Company
settled its dispute with a certain financial
institution.
In 1997, the Company filed for a new patent. The
patent pending, as well as the original Resource System,
have generated interest and the Company is now engaged in
discussions with several financial institutions for
the licensing or joint venture of this product.
Net Loss Per Common Share
Net loss per common share was computed based on the
weighted average number of common shares outstanding.
No assumption was made for the exercise of common stock
options into common shares since the effect of their
exercise would decrease net loss per share.
Patent License Costs
Costs incurred in connection with obtaining the
license agreement of a patent have been capitalized and
are being amortized using the straight-line method
over 17 years fromthe date of issuance of the patents.
Income Taxes
The Financial Accounting Standards Board has adopted
Statement No. 109, "Accounting for Income Taxes",
which significantly changes existing practice by
requiring, among other things, a liability approach
to calculating deferred income taxes. The statement
is effective for years beginning after December 15,
1992. The adoption of FASBNo.109 by the Company for
the year ended December 31, 1997 did not have a
material effect othe Company's financial
statements.
See Auditors' Report. F-14
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Notes to Financial Statements
(Continued)
December 31, 1997, 1996, 1995 and 1994
At December 31, 1997, the Company had a deferred tax
asset of approximately $1,580,000 as a result of net
operating loss carryforwards, which is offset by a
valuation allowance in the same amount due to the
uncertainties behind its realization. The Company
has been unable to obtain tax benefits from its
net operating losses incurred since inception.
At December 31, 1997, the Company has tax net
operating loss carryforwards available of
approximately $4,000,000 expiring between 2000 and
2011.
Cash and Equivalents
Cash and equivalents consist of cash and all short-
term, highly liquid investments that are readily
convertible to known amounts of cash.
NOTE 2. GOING CONCERN CONSIDERATION
The accompanying financial statements have been
prepared assuming the Comapny will continue as a going
concern. The Company suffered losses prior to
commencement of operations and has a working capital
deficiency. Management intends to actively market
the Resource System and a new (patent pending) Line
of Credit system. The Company is now engaged in
discussions with several financial institutions for its
development.In the absence of
achievingprofitableoperations, or obtaining debt or
equity financing, the Company may not have sufficient
funds to continue through December 31, 1998.
NOTE 3. DUE FROM STOCKHOLDER
Due from stockholder consisted of various advances,
non- interest bearing and due upon demand.
NOTE 4. LICENSE AGREEMENT
The Company's president and principal stockholder
was issued two U.S. patents and one Canadian patent
between January 1988 and February 1991, and also
registered in the U.S. the trademark "Resource". On
February 9, 1993, the Company entered into a
license agreement which revoked the prior agreement
dated January 8, 1991, which provides the Company
the exclusive rights and use of the aforementioned
patents and trademark for an indefinite period of time in
return for nominal consideration to the stockholder.
A new patent is now in process on a new card system.
See Auditors' Report.
F-15
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Notes to Financial Statements
(Continued)
December 31, 1997, 1996, 1995 and 1994
NOTE 5. EMPLOYMENT AGREEMENT
On September 1, 1988, the president/principal
stockholder entered into an employment
agreement with the Company. Pursuant to the agreement,
the stockholder is to receive an annual salary of
$144,000, increased annually by the greater of 5%
or the increase in the consumer price index. However,
rights to this salary and its increases have been
waived by the stockholder until such time as the
Company's cash flows improve. The agreement
terminates upon the stockholder's seventieth
birthday, or his death or disability, whichever occurs
first. The agreement also provides that in the event of
a termination for other than cause, death or
disability, he shall receive severance pay in the
amount equal to his salary, payable during the
remainder of his employment term.
NOTE 6. STOCK OPTIONS, CERTAIN RELATIONSHIPS AND
RELATEDTRANSACTIONS
On August 22, 1993, the Company granted to its
principal stockholder, (A) and one of its
officers, (B) options to purchase stock in
accordance with the following:
# of Shares Exercise
Expiration Individual Date of Grant Issuable
Price Date
A 8/2/93 70,000 $0.25 8/2/98
B 8/2/93 25,000 $0.25 8/2/98
A 8/2/94 70,000 $0.50 8/2/99
B 8/2/94 25,000 $0.50 8/2/99
A 8/2/95 70,000 $0.75 8/2/00
B 8/2/95 25,000 $0.75 8/2/00
A 8/2/96 70,000 $1.00 8/2/01
B 8/2/96 25,000 $1.00 8/2/01
A 8/2/97 70,000 $1.25 8/2/02
B 8/2/97 25,000 $1.25 8/2/02
In February 1995, the Company granted to its
principal stockholder, (A) and one of its
officers, (B) options to purchase stock in accordance
with the following:
# of Shares Exercise
Expiration Individual Date of Grant Issuable
Price Date
A 2/2/95 200,000 $0.10 2/2/00
B 2/2/95 200,000 $0.10 2/2/00
A 2/2/96 200,000 $0.15 2/2/01
B 2/2/96 150,000 $0.15 2/2/01
A 2/2/97 200,000 $0.15 2/2/02
B 2/2/97 150,000 $0.15 2/2/02
A 2/2/98 200,000 $0.15 2/2/03
B 2/2/98 150,000 $0.15 2/2/03
See Auditors' Report.
F-16
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Notes to Financial Statements
(Continued)
December 31, 1997, 1996, 1995 and 1994
The above stock options to purchase the Company's
Common Stock were granted to the
Company'spresident/principal stockholder for
his daily work and services. He received
minimal compensation during 1993, and no compensation
since early 1994, at which time he waived his salary,
bonuses and all other benefits. Since
March 1994, he has made loans to the
Company for the payment of its administrative expenses,
bills, patent maintenance fees, etc., from his personal
funds and without charging interest to the Company.
These numerous loans were in
the tens of thousands of dollars. The
officer has rendered his legal services, and many other
services beyond his obligations at no charge to the Company.
The above stock options are available and contingent
upon the individuals providing their continuous
services to the Company. In the event of
termination, options through the year
of termination will be available. The options are
deemed restricted stock pursuant to Rule 144 promulgated
under Securities Act of 1993, as amended.
See Auditors' Report.
F-17
