SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934[NO FEE REQUIRED]
For the transition period from __________ to ________
COMMISSION FILE NO. 0-17114
DEFAULT PROOF CREDIT CARD SYSTEM, INC
(Name of small business issuer in its charter)
FLORIDA 59-2686523
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1545 MILLER ROAD, CORAL GABLES, FLORIDA 33146
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number:(305)666-1460
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Securities Registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
Securities Registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $ 0.001
-------------------------------
(Title of Class)
Check whether the issuer (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
Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B, contained in this form 10-KSB and no disclosure will be
contained, to the best of registrant's knowledge, in definite proxy information
statements incorporated by reference Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[X].
The issuer's revenue for its most recent fiscal year was: Nil
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 January 29,
1999, was: Common Stock. $0.001 par value - 1,204,351
The number of shares outstanding of the registrant's common stock $0.001
par value as of December 31, 1998 was: 12,043,510
The number of shares outstanding of the registrant's common stock $0.01 par
value, after the issuer's 1 for 10 reverse split on February 5, 1999, was:
1,204,351
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS.
Default Proof Credit Card System, Inc. (the "Company"), was incorporated in
August 1985 under the laws of the State of Florida. The Company engages 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 and second secured type card were marketed under the trademark
Resource (the Resource System), and business processes which are related to
prepaid stored value secured debit cards (patents pending) to be marketed as an
Automated Teller Machine Debit Card Dispenser [2 patents pending]("ATMDCD"), and
the UBUYDEBITCARDS.COM ["UBDC"] (patent pending)and UBUYCREDITCARDS.COM [patent
pending] both a prepaid stored value debit or credit cards that soon will be
offered through the Company's web sites in the INTERNET.
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 ATM Debit Card Dispenser, patents
pending, on the other hand, allows an applicant to made cash deposits or charges
to any bank card at an Automated Teller Machines which will dispense to the
applicant a debit card with a prepaid stored value amount equal to the cash
deposited less a small service fee. The issued debit card will have equal
functions as any other MasterCard, Visa, Optima, Discover, etc, now in the
market.
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.
Vincent Cuervo, President and CEO of Default Proof Credit Card System,
Inc., is the sole inventor of the Automated Teller Machine DEBIT CARDS
DISPENSERS patents pending (ATMDCD) and the ubuydebitcards.com and
ubuycreditcards.com [patent pending] filed with the U.S. Patent and Trademark
Office, Washington, D.C.
<PAGE>
The Automated Teller Machine Debit Card Dispensers [patents pending], there
is no assurance that the related patents to these patents pending will be
granted by the Patent and Trademark Office, relates to modified automated teller
machine debit cards dispensers, and more, particularly to those that are
computerized (ATM). This patent pending will provide a system for dispensing and
controlling debit cards. These cards will require a minimum of paperwork,
maintenance and financial disclosure from a card purchaser, and unlike typical
online debit cards, the patent pending stored-value card will require no formal
banking relationship. This system, and new technology, incorporated into
existing Automated Teller Machines(ATMs), and installed in future manufactured
ATMs, will permit consumers to purchase stored value prepaid debit cards from
widely available ATMs using cash, or through charges to existing debit and/or
credit cards. These compatible elements, inexpensive to manufacture and
maintain, are easily installed and adapted to the operational systems in use
today.
Existing Automated Teller Machines on the market today are accessed for
cash advances by the insertion of a valid credit/debit card and entry of an
assigned PIN number, against the credit line balance on such credit/debit card.
Cash advances are approved or denied based on the current available credit line
on a credit card, or the cash balance of a debit cardholder's bank account. Once
operative, the patent pending system will not provide cash advances while
processing the request for an interest free prepaid stored value debit card.
Very much the opposite. Applicants will have access to any one of the thousands
of Automated Teller Machines (ATMs), (worldwide approx. over 400,000), and
purchase a stored value prepaid debit card making cash deposits or charges to
other bank card in varying amounts ($300;$ 1,000; $ 3,000 and up). The amount
deposited will be determined by the potential cardholder's means and needs and
will determined the prepaid secured debit or ATM card's credit line.
Even though there is not need for bank affiliation the debit cards still
must be issued by a participating bank or financial institution in order to
access regional, national and international electronic funds transfer networks.
However, though it may still be issue by such an institution, they will be
dispensed through modified or new Automated Teller Machines.
The Company will offer licenses to the manufacturers of both new and
previously manufactured ATMs (Diebold; NCR; Siemens; Wang Global; Hitachi;
Triton; Tidel Technologies, etc) in order to make hardware and software
modifications necessary to incorporated new patented elements. As a result, the
utility and functionality of ATMs will be expanded.
When the combination of these elements is realized, an ATM machine will
perform new functions. For the easy purchase of a debit card, the ATM will
accept cash deposits or charges to another bank card. It will dispense a plastic
debit or ATM card with the same functions of most online debit cards. It will
allow a cardholder to receive cash from ATM or purchasing merchandise or
services by entering a confidential personal PIN number at the point of sale. It
will also facilitate car rentals, airline and hotel reservations, etc.
<PAGE>
The cash deposited will be scanned for counterfeit bills. The applicant
will provide its postal zip number or mother's maiden name for security reasons.
The purchaser will select and enter four confidential numbers for his/her
personal and confidential PIN number.
Following these easy steps, a receipt will be provided showing the prepaid
amount of the line-of-credit, less a service fee that will varied in accordance
with the amount of the stored value purchased (2%; 3% or 4%). The issuing bank's
customer service toll-free number will be provided, printed on the back of the
card, along with other sundry information. The ATM will dispense the debit card
with its 16 digits, the issuing bank's name and the issue date. Now the card
will be ready for use. The cardholder will have the option to reload the card at
any of the issuing bank's ATM machines. In case of reload, the service fee would
be reapplied.
THE CARDHOLDER:
In order to obtain this debit card, a cardholder: Will not need to have
his/her good, fair or bad credit checked. Will not suffer issuing delays or
paperwork, immediate issue of an online debit card will follow completion of
transactions requirement. Will determine the line-of-credit when applying for
the card. The deposit amount would correspond to his/her means and needs. Will
not have to pay fees for late payments, over the limit usage, or interest
charges. It can be purchased or reloaded 24 hours a day. ATMs are open 24 hours
a day, with around the clock availability while most banks close by 2.00 p.m.
Monday through Friday. Foreign currency capability may be added. Other valuable
features are included in the patent pending.
THE ISSUING BANKS:
Would enjoy foreseeable limited and/or minimal liability. Will not have to
suffer charge offs, over the limit usage, or delinquencies. The financial
institutions will enjoy earnings similar or higher profits that the ones now
obtain collecting merchant discount fees and ATMs transactions fees. Will also
benefit from the CASH FLOAT of deposits made from the debit card's purchases, as
now happens when traveler's checks are purchased. Millions of dollars will
become available for some time to the issuing bank as a line-of-credit on those
cards purchased, before the cardholder uses them. Paperwork will be reduced as
we; as time. There would be no need for Equifax or Credit Bureau reports. The
bank issuing the debit card will not have to prepare and mail monthly statements
if so desires. The Point Of Sale terminals will remain the same as the ones now
in use. There will be no need to install new or different expensive terminals at
the Point of Sale (POS). The same online terminals currently being in use will
suffice. They will start servicing individuals in the Sub-Prime market. Due to a
variety of reasons such as poor credit, bankruptcy, divorces, college students,
etc., over 40 million people cannot have a bank card. The technology of this
patents pending will make it possible for banks and financial institutions to
service this untapped , sub-prime market, and merchants will not be required to
purchase new POS expensive terminals.
This expanded functionality will represent future opportunities for branch
banks. Not only will the ATM be convenient, more personalized and more
enjoyable, but now it does more too.
<PAGE>
MARKET
With this new ATM technology financial institutions that have been shifting
operations for quite sometime to electronically networked enterprises will be
helped. ATMs have lead the change, providing consumers with quick, convenient
access to cash. Everyone knows how it works: personal I.D., number in, cash out,
but automated teller machines haven't fulfilled yet all the customer's needs
yet.
After an initial placement of ATMs in banks and other financial
institutions, they will be placed at gas stations, theaters, stores and
supermarkets, also they can now be found in hotel lobbies, fast food stores,
convenience stores, drug stores, malls, nightclubs, service stations, airports,
hospitals, and many other places. Several ATM manufacturers are now offer
theater coupons or vouchers, video advertising, and check cashing capabilities
for personal and two party checks.
SALES PLAN
Being this a new product, we cannot provide a very detailed plan as yet but
we can give an overview of where we want to go. The success of the telephone
card must be taken into account to realize that the potential available in this
product is several times greater than the phone card in revenue and earning.
Both of these cards offer convenience to the consumer, but the dollar values
being much higher here. There are three areas of sales opportunities, one with
financial institutions, our own bank with its own ATM machines and lastly, by
way of Automated Teller Machines manufacturers.
Regarding the licensing of financial institutions, we will approach large
money-centered banks that are heavily involved in the deployment of ATMs on and
off premises, also licenses offering the system will be available to smaller
institutions who are now deploying off premise ATMs, and will like to enter this
market.
There are several major ATMs manufacturers, Diebold Inc; NCR Inc.; Siemens;
Triton Systems Inc.; Tidel Technologies Inc., etc. The new patent pending system
should be of interest to all of these manufacturers, as it would provide
additional sources of revenue. There are over 400,000 ATMs presently operating
and of them a large percentage is considered not in top shape or without updated
technology, which would require the installation of the new elements that would
modify these machines into debit card dispensers. Once the new system makes the
expected impact in the market, it is likely that new manufactured machines will
include this system.
ATMs are either owned by or leased by financial institutions, or in some
cases they are owned and leased by the manufacturers to merchants or to small
banks. Fees per ATM transactions are paid to owners, lessors, banks, etc., banks
are aware of the profitability of the ATMs they now operate and the fee income
per transaction the ATMs generate, the benefits and savings obtained from
electronic banking, and the speed at which the ATM market is expanding.. Debit
cards and ATM cards are becoming very popular and are been accepted everywhere.
<PAGE>
PATENTS PENDING POTENTIAL REVENUE
Forecasting revenues for a brand new product is not easy. Based on
information of the existence of over 40 million individuals who can't obtain
credit, debit or ATM cards for a variety of different reasons (bad credit,
divorcees, students, bankruptcies, etc.), this could be the first expected group
to purchase stored value prepaid debit cards.
Revenue will be from the Company own ATMs . This will include the 2%; 3% or
4% of the stored value line of credit of the prepaid debit card issued as the
processing fee, the normal fee a bank receives when a credit card is used to
purchase merchandise or cash advances, the ATM's transaction fees and the
earnings on the cash float the bank will have at its disposal, less the lease
payment for the space where they are deployed.
Revenues should also be expected from licensing ATM manufacturers, and from
licenses sold to financial institutions. It is not possible at this time to
forecast revenues that may be generated from the ATM manufacturers.
Revenue projections derived from ATMs owned by the Company, from
partnerships or licensing multiple of banks are possible from frequent available
information published in trade magazines. To be counted will be the Company's
earnings from the processing fees against the stored value line of credit issued
in the prepaid debit card, example: $1000 line of credit 4% fee will generate
$40.per card, will, this will provide a significant source of revenue to the
Company.
ATMs currently generate an average of $400(gross) in fees per month per ATM
from conventional transactions. We are only making these projections at this
time because we want to examine the incremental business that this ATM Debit
Card Dispenser will generate. It can be assumed that starting with owing 500
ATMs which may produce 500 x $400 x 12 months = 2.4 million dollars. We believe,
even though there no assurance, it is possible to generate this average or at
least close to this number. Part of these earnings will go to the cost of
renting space for our owned ATMS.
Once the company's revenue stream starts to come online, this will allow
for additional ATM machines to be purchased and placed. This will also allow for
increased advertising and promotion which should increase the amount of ATM
debit cards being purchased per machine. The above does not reflect reloads, nor
other individuals whom, while in good credit rating, purchases a prepaid stored
value 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 ATMDCD applicants will be able to use
the approximated five thousands of Automated Teller Machine (ATM) in the
worldwide market today, and make cash deposits that may vary
($100;$200;$300;$500;$ 1,000; $ 2,000; $ 3,000 and up) which will determine the
amount of the ATMDCD of the prepaid secured debit card, and in accordance with
his/her means and needs. The bank card will be issued by a participating bank or
financial institution and dispensed through an Automated Teller Machine. On
those ATMs manufactured and presently operative, the Company will license those
ATM manufacturers for the installing of the necessary additional patented
elements (software, hardware) described in the patent pending to broader their
present functionality. For future ATMs, the manufacturers will be license to
install these compatible new elements at the time they are manufactured.
<PAGE>
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.
If cash is deposited it 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 ATMDCD requested and paid for, less a service fee (from 2% to 4%); the
issuing bank's customer toll free number, which will be also printed on the back
of the bank card, and other sundry information.
PLANNED MARKETING OF THE AUTOMATED DEBIT CARDS DISPENSER (ATMDCD)
The Company believes that the ATMDCD 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
individuals will be able to prepaid the stored value desired for a line of
credit by using the ATMDCD.
Individuals who for whatever reason want to manage their funds, or the
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 ATMDCD is that its much more safer than
cash while working, is 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 ATM's debit cards will function
just like cash, while providing a safety element.
Travelers wishing to prepaid their traveling expenses, in stead of just
charging it. The ATMDCD 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 its safety Individuals not wanting to
go through all the hassle of applying and maintaining a present offered 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.
<PAGE>
There are other multiple uses of the ATMDCD that the Company is presently
studying and identifying. It is clear to the Company that the total and complete
penetration of bank cards such as MasterCard and/or Visa, coupled with the
widespread distribution of ATMs, create exciting new possibilities for the
future cash less society. We see the ATMDCD System as an integral part of this
phenomenon.
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
MasterCard or Visa 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. Before the issuance of a credit card
collateralized by the Resource System the consent to assignment to the Company
of the cash surrender value from the policyholder should be obtained. The
Company will then notify the insurance company of the assignment.
The successful application of the Resource System, although it is not
dependent upon acceptance by insurance companies, it is dependent among other
things, upon the cooperation of insurance companies in registering the
assignments in their records and confirming assignments to the Company.
Although the Company has not experienced 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 assignments received of the cash surrender value of
certain life insurance policies by them from 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, one due to the death of the policyowner.
<PAGE>
ITEM 2. DESCRIPTiON OF PROPERTY.
The Company's executive offices consisting of approximately 750 square
feet, are located at 1545 Miller Road, Coral Gables, FL 33146 and its telephone
(305) 666-1460, its Fax No. is (305) 665-3462. E-Mail [email protected] and the
Web site addresses are: htt://members.aol.com/dpccsystem/ and
ubuydebitcards.com/confidential/
The Company is the worldwide owner of the United States Patent Numbers
4,718,009 and 5,2025,138; the Canada Patent Number 1,280, 213; has an
understanding agreement with the inventor for the worldwide rights and ownership
of the Patents Pending(3) related to two Automated Teller Machines Debit Cards
Dispenser the UBUYDEBITCARDS.COM and UBUYCREDITCARDS.COM patents pending. Two
Domain Name registrations for use in the Internet.
THE PATENTS PENDING STATUS
The Company's patents pending are pending the U.S. Patent and Trademark
Office granting the related patents. Even though there is no assurance, the
Company expects to receive the Grant for the ATM DEBIT CARDS DISPENSER at early
1999 winter and that the ubuydebitcards.com is expected to follow.
There is no assurance that related patents will be granted by the U.S.
Patent and Trademark Office on all or any of the above mentioned patents
pending.
The UBUYDEBITCARDS.COM and UBUYCREDITCARDS.COM, Internet Domain Names are
integrated to the Company's intellectual property, as it is the trademark
Resource.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material litigation and is not aware of
any potential claims which will give rise to material liability.
ITEM 4. SUBMISSION OF MATTERS tO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the
three months ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
The Company's common stock is traded in the over-the-counter market and
prices are quoted on the National Association of Securities Dealers Automated
Quotation System (NASDAQ)Small Cap Market in the Bulletin Board under the symbol
"DPRS".
The following table sets forth the high and low bid information for the
Company's common stock monthly during 1998. The quotations provided below
reflect inter-dealer prices, without mark ups, mark down or commission and may
not represent actual transactions.
<PAGE>
FISCAL 1998 HIGH LOW
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02/06/98 .0125 .125
03/06/98 .42 .30
04/03/98 .0625 .18
05/01/98 .40 .25
06/05/98 .28 .22
07/02/98 .22 .18
08/07/98 .16 .125
09/04/98 .125 .12
10/02/98 .125 .125
11/06/98 .125 .09
12/04/98 .08 .08
12/31/98 .35 .23
On December 31, 1998 the Company had approximately 209 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.
DIVIDENDS
The Company has never paid any cash dividend on its common stock and does
not anticipate paying cash dividends in the near future. The payment of
dividends by the Company will depend on its earnings, financial condition and
other business and economic factors affecting the Company at that time which the
Board of Directors may consider relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS 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 ATM Debit Cards Dispenser,
patents pending to one or several banks or financial institutions or joint
venture.
The company would will consider to raise 14 million dollars to enter,
through the acquisition or control of a small Florida bank, the off premise ATM
business. It will require 3.5 to 5 million dollars for the purchase of 500
automated teller machines that can dispense Debit cards (at about 7 to 9,000
dollars each). The balance will be used for administrative, marketing,
advertising and promotion expenses.
The ATM Debit Card Dispensers will be placed in fast food stores, airports,
gasoline stations, bus terminals, etc. The company will pay rent for the space
the ATM occupies or a percentage of the earnings per installed machine. The
cards dispensed by an ATM will be issued through the company-owned bank as well
as by licensed institutions issuing credit and debit cards now.
Owning or having controlling interest in a bank will allow the capture of
extra revenue along with a potential for very significant cash float. An
important consideration here is that having the Company its own bank allows us
to generate a huge cash float from debit card purchase balances that cardholders
on average will not use immediately. This allows us to generate considerable
income off this float. As an issuing bank the company will also receive 50% of
the transactions fees that VISA, MASTERCARD charges to their merchants, i.e.
projection - 120 million line of credit eventually translates to 120,000,000 x
1.7% transaction fee x 50% to issuing bank = 1,020,000 dollars in revenue. The
Company is now having substantive interviews, meetings and conversations.
THE COMPANY
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 $75,000 in
developing computer software and acquiring computer hardware for the operation
of the Resource System. The Company has expended in excess of $ 550,000 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.
Patents fees applications, as well as Patent's attorneys legal fees,
maintenance patent fees, are close to $100,000 of Company expenses. The Company
expend well over $225,000 in developing the Resource System. The Company also
expended over $ 1,000,000 in litigation with State Street Bank and Trust Company
(State Street Bank), American Express litigation over the Company's RESOURCE
trademark in 1991, Securities attorneys legal fees, and in other legal and
C.P.A.'s fees. The State Street Bank litigation forced the Company to attempted
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 the system being used by a bank in an authorized fashion. Banks, which were
very interested in the Resource System backed off once the litigation was
initiated. Subsequent efforts to raise capital failed. The litigation was
settled in 1993 after almost five years, leaving the Company without economic
resources.
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 bank cards
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 new interest.
Conversations with several banks' officers are encouraging, since they are
demonstrating interest in the Company's secured credit/debit card products.
Marketing efforts will continue jointly with the offering of the Company's ATM
DEBIT CARDS DISPENSER, patents pending, and the about to be launched late in
1999 Fall our Internet UBUYDEBITCARDS.COM patent pending, all of them with new
exciting Company's technology. There is no assurance that these patents pending
will be granted related patents.
<PAGE>
EMPLOYEES
As of the date hereof, the Company has no employees other than its
President and the Counsel and Company's Secretary and the valuable acquisition
of David J. Koss as a consultant, a very helpful relationship. 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 7. FINANCIAL STATEMENTS
CONTENTS PAGE
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AUDITORS' REPORT............................................. F-2
FINANCIAL STATEMENTS
BALANCE SHEET....................................F-3
STATEMENTS OF OPERATIONS.........................F-6
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY.....F-8
STATEMENTS OF CASH FLOW..........................F-10
NOTES TO FINANCIAL STATEMENTS.............................F-11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 16, 1999, the Company engaged INFANTE, LAGO & Company as its
independent certified public accountants to audit the Company's Consolidated
Financial Statements for the year ended December 31, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Vincent Cuervo, President 70 Director
Ciro B. Sosa, Vice President 71 Director
Pedro P. Llaguno, Vice President 68 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.
<PAGE>
VINCENT CUERVO has been President and Chairman of the Board of Directors of
the Company since its inception in August 1985. From January 1984 until March
1986 he was the general managing agent for Travelers Life Insurance Co., Ltd.,
and Summit National Life Insurance Company. From September 1962 through December
1983, he was general managing agent for Crown Life Insurance Company for South
Florida. Mr. Cuervo holds Juris Doctor Degree from the University of Havana,
Cuba. 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. 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. Mr. Cuervo may be deemed a "parent" or
"promoter" of the Company, as those terms are defined under the federal
securities laws. The Company lost the services of a long time friend, Officer
and Director, David I. B. Williams who died.
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 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 10. 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, 1998 exceeded one Dollar.
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
<PAGE>
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE AGGREGATED OPTION/SAR
EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE
NONE.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information on early January 1999 and at
February 18, 1999 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. The filing by a shareholder of Schedule 13D related to the number of
shares beneficially owned by this shareholders exceeding 5% of the Company
outstanding shares.
Name of Beneficial Amount and Nature of Percentage of
Owner Beneficial Ownership Outstanding Shares Owned
----- -------------------- ------------------------
VINCENT CUERVO
Miami, FL 33143 3,482,916 29%
CIRO B. SOSA
Miami, FL 33145 242,762 2%
PEDRO P. LLAGUNO
Miami, FL 33145 161,425 1.4%
KATHY WiLLIAMS
Mississuaga, Ontario 197,500 1.6%
ERIC H. SPELLMAN 835,000 6.2%
Larchmont, NY
Officers/directors,
promoters, as a group 4,919,603 38.4%
The Company is not aware of any arrangements which may result in a change
of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATE TRANSACTIONS.
Last November 1997 the Company acquired from Vincent Cuervo, all the
worldwide rights, licenses, and ownership of the ATM Debit Card Dispenser
patents pending filed with the US Patent and Trademark Office, Washington, D.C.
earlier in 1997. Under the understanding 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 US Patent
and Trademark Office a Notice of Allowance notifying Vincent Cuervo and/or the
Company that its patent application has been allowed and subsequently the issue
of a related Patent to this patent pending (ATMDCD) will be issued. 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 and the understanding agreement
will be void and canceled. There is no assurance that the U.S. Patent and
Tredemark Office will grant the patents on any or all of the patents pending.
<PAGE>
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, 1998 there are 12,043,510
currently outstanding shares, and 4,919,603 of the Company outstanding shares
are restricted shares. The Company also has 380,000 Stock Options of the
Company's Common Stock $0.001 par value at an exercise price ranging from $0.50
to $1.25 per share (an average exercise price of $0.75 per share), and another
1,400,000 Stock Options of the Company's Common Stock $0.001 par value to
purchase shares until February 2, 2000, at an exercise price of $0.10 and $0.15
cents per share, and 1,250,000 Stock Options of the Company's Common Stock
$0.001 to purchase shares exercisable for five year periods at a price of $0.14
or the last preceding day on which the Company's shares were trade as reported
on the NASDAQ/NMS:BB to July 17, 1998.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.
SOCK OPTIONS
On August 2, 1993 the Company issued to its principal stockholder Dr.
Vincent Cuervo and one of its officers, Pedro P.Llaguno, Esq., Stock Options to
purchase stock of the Company's Common Stock $0.001 par value to purchase 70,000
Vincent Cuervo , and 20,000 Pedro P. llaguno yearly for a term of five years,
and exercisable for a term of five years from the date of each Stock Option
annually issued. The Stock Option price range varies from $0.50 to $1.25. The
Stock Option issued on August 2, 1993 to both, Vincent Cuervo and Pedro P.
Llaguno, were not exercised on August 2, 1998, the expiration date and were
canceled. No stock options have been forfeited or exercised and all outstanding
awards continue to be exercisable as of December 31, 1998. On February 1995, the
Company issued to its principal shareholder Vincent Cuervo and one of its
officers P. P. Llaguno, Stock Options to purchase 200,000 Vincent Cuervo and
150,000 Pedro P. Llaguno, Esq., of the Company's Common Stock $0.001 par value
yearly for a term of five years, and exercisable for a term of five years from
the date of each Stock Option annually issued. The Stock Option price at $0.10
and $0.15 respectably. No stock options have been forfeited or exercised and all
outstanding awards continue to be exercisable as of December 31, 1998. On July
17, 1998, the Company issued to its principal shareholder Vincent Cuervo and to
one of its officer Pedro P. Llaguno, Stock options to purchase 200,000 Vincent
Cuervo and 50,000 Pedro P. Llaguno, Esq., of the Company's Common Stock $0.001
par value yearly for a term of five years, and exercisable for a term of five
years from the date of each Stock Option annually issued. The Stock Option price
is of $0.14. No stock options have been forfeited or exercised and all
outstanding awards continue to be exercisable as of December 31, 1998. The above
stock options to purchase the Company's Common Stock, were issued 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 no bearing interest loans to the Company for the
payment of its administrative expenses. The officer, P.P. Llaguno has rendered
his legal services, and many other services beyond his obligations at no charge.
<PAGE>
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 the Securities
Act of 1934 as amended.
All the above Stock Option shares are Company's Common Stock $0.001 par
value per share and when exercised will be subject to the reverse split of 10
Common Stock $0.001 per 1 Common stock $0.01 under the reverse ten for one split
dated February 5, 1999 stipulations.
SECURITIES TRANSFER AGENT
The Transfer Agent for the Company's Securities is ChaseMellon Shareholders
Services, L.L.C., Overpeck Centre, 85 Challenger Road, Ridgefield Park, NJ
07660.
RECENT SALES OF UNREGISTERED SECURITIES.
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 marketing and business plan packages
of the Company's new patents pending acquisitions. The Company issued 276,000
shares of the Common Stock $0.001 par value for their 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 canceled in January 1998. In January 16, 1998
the Company entered into an agreement with F.P.I. ,Inc. Financial consultants
with offices at 1776 Oxford Ct., Highland Park, IL 60035 the Company issued
Common Stock $0.001 par value per share for their services, seven certificates
three(3) for 100,000 each and four (4) for 75,000 each for payments in the
following twelve months duration of the agreement. Due to termination of the
agreement on 8-18-98 four (4) certificates for 75,000. Shares each, and one(1)
certificate for 100,000 were canceled and returned to the Company's Stock
Transfer Agent for cancellation and for entering in the Company's reserve. In
February 11, 1998 the Company issued 100,000 shares of the Company's Common
Stock $0.001 par value per share to A.G.I, Consultants in accordance with the
agreement entered on October 31, 1997 for services related with the Company's
preparation of the filings and reports in payment for services, on that date the
shares closed at $0.08 per shares. In April 13, 1998 the Company issued 100,000
shares of the Company's Common Stock $0.001 par value per share to Alan Parker
for computer, Edgar transmitting, and Internet related services, in payments for
services, on 4/17/98 the shares closed at $0.15 per share. In June 4, 1998 the
Company issued to Alberni & Alberni, P.A. of 4649 Ponce de Leon Blvd., Suite
#404, Coral Gables, FL 33146 50,000 shares of the company's Common Stock $0.001
<PAGE>
par value per share in lieu of cash payment for services. On September 23, 1997
an agreement was signed by Alberni & Alberni, P.A. and the Company as payment
for C.P.A. services related to the 10-K for 12/31/97. On April 13, 1998 due to
the economic conditions, the Company was unable to pay Alberni & Alberni, P.A.
the $5,000 requested for the services rendered, and at that date Board of
Directors Meeting it was resolved to offered A&A P.A. the Company Common Stock
Shares $0.001 par value in payment for those services. After weeks of
conversations and in view of the cash flow conditions of the Company, A&A, P.A.
accepted the shares and on June 4, 1998 the Stock Transfer Agent ChaseMellon,
was requested to issued the shares. On June 5, 1998 the shares closed at $0.22
per share. In August 4, 1998 the Company issued 50,000 shares of the Common
Stock $0.001 par value per share to Eduardo Garcia accountant, for the IRS and
State Tax bookkeeping and filing services in payment for services, on August 7,
1998 the shares closed at $0.12 per share. 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. EXHIBITS AND REPORTS ON FORM 8-K
Attached hereto and filed as a part of this Report are the financial
statements. The Exhibits described below are incorporated by reference herein.
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.
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.
<PAGE>
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
REPORTS ON FORM 8 K EXHIBIT #1 REPORT ON FORM 8-K Reverse Split 10 for 1
filed 2-1-99
ITEM 13(B) EXHIBITS
The Exhibits described above are incorporated by reference herein. *
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 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.
<PAGE>
EXHIBIT #1.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8 - K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
February 1, 1999
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 0-17114
(State or other Jurisdiction (Commission File No.)
Of Incorporation or Organization)
59-2686523
(I.R.S. Employer Identification Number)
(305) 666-1460
1545 Miller Road
Coral Gables, Florida 33146-2309
(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number,
including Area Code: (305) 666-1460
ITEM 5. Registrant's Reverse Stock Split of Corporation's Common Stock
Shares
The Board of Directors of Default Proof Credit Card System, Inc.
(OTC-BB:DPRS) on an Extraordinary Meeting held today February 1, 1999, after the
casting and tallying of the votes submitted from January 14. 1999 to this date
by the Company's shareholders resulting in the approval of the proposed ten-for
one reverse split by a 99% of all the votes received, has unanimously voted to
implement a ten-for-one reverse split of the Company's Common Stock. The reverse
stock split will become effective as of the close of business on February 4,
1999. On February 5, 1999 for each pre-split ten (10) shares of the Company's
Common Stock $0.001 par value the holder of record will receive one post-split
share of the Company's Common stock $0.01 par value per post split share. The
new stock certificates will have a new cusip number 244626 40 4.
The new certificates will be issued in the normal course of business
whenever the appropriate transfer is requested by the shareholders.
<PAGE>
Fractional shares resulting from the reverse stock split will be settled in cash
at the shares closing price of the shares traded at the close of business of the
effective date February 4, 1999. The reverse split will decrease the number of
shares outstanding, but not the value of shares held by the shareholders.
Shareholders will maintain the same percentage of equity as before the split.
The Company will make a news release through the news media, Business Wire, Wall
Street Journal, etc., for the general public information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on its behalf by the undersigned hereunto
duly authorized.
Default Proof Credit Card System,Inc.
(Registrant)
Date: October __, 1999 By: /s/ VINCENT CUERVO
Vncent Cuervo, President & CEO
C O N T E N T S
Page
AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
BALANCE SHEET F-3
STATEMENTS OF OPERATIONS F-6
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY F-8
STATEMENTS OF CASH FLOWS F-10
NOTES TO FINANCIAL STATEMENTS F-11
<PAGE>
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, 1998, and the
related statements of operations, stockholders' deficiency and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit. The financial statements of Default
Proof Credit Card Systems, Inc. (a development stage company), were audited by
other auditors whose report, dated March 17, 1998, on those statements included
an explanatory paragraph that described the 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. (a development stage company) as of December 31, 1998 and the
results of its operations and its cash flows for the year then ended in
conformity with 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 2 to the
financial statements the Company's dependence on outside financing, lack of
existing commitments from lenders to provide necessary financing, lack of
sufficient working capital, and losses since inception raise substantial doubts
about its ability to continue as a going concern. Management's plans concerning
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.
September 7, 1999
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
December 31, 1998
ASSETS
Deferred Patent Costs, Net $ 1,161
===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accrued Expenses $ 26,316
Due to Directors 51,732
--------------
Total Current Liabilities 78,048
--------------
Stockholders' Deficiency
Common Stock, $.001 Par Value, 25,000,000
Shares Authorized, 12,043,510 Issued and Outstanding 12,044
Additional Paid-In Capital 3,959,560
Deficit Accumulated During Developmental Stage (4,048,491)
--------------
Total Stockholders' Deficiency (76,887)
--------------
$ 1,161
==============
See accompanying notes to financial statements.
F-3
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
<TABLE>
<CAPTION>
Cumulative From
August 14, 1985 For The Years Ended
(Inception) December 31,
Through --------------------
December 31, 1998 1998 1997
----------------- ---- ----
<S> <C> <C> <C>
EXPENSES
General & Administrative $ 3,016,206 $ 71,231 $ 63,590
Officer Salary 986,556 - -
Marketing 393,358 - -
Depreciation & Amortization 98,707 - -
Expired Public Offering Costs 179,211 - -
------------ ------------ -----------
Total Expenses 4,674,038 71,231 63,590
------------ ------------ -----------
OTHER INCOME (EXPENSE)
Litigation Settlements (Note 7) (90,000) - -
Interest & Other Income 423,220 - -
Loss on Marketable Securities (96,529) - -
Loss on Sale of Equipment (34,144) - -
------------- ----------- ----------
Total Other Income (Expense) 202,547 - -
------------- ----------- ----------
Net Loss before Income Taxes and
Extraordinary Item (4,471,491) (71,231) (63,590)
Income tax benefit 25,436 - 25,436
------------- ----------- ----------
Net Loss before Extraordinary Item (4,446,055) (71,231) (38,154)
Extraordinary item - Gain from restructuring of
debt (net of Income Taxes of $165,200) 257,800 - 247,800
Benefit from utilization of net operating
loss carryforward 139,764 - 139,764
------------- ----------- ----------
NET (LOSS) INCOME $ (4,048,491) $ (71,231) $ 349,410
============= ============ ==========
Basic Loss per Common Share
Loss before extraordinary income $ (0.54) $ (0.01) $ -
Extraordinary item (net, plus Tax
Benefits) $ (0.05) $ - $ 0.03
------------- ----------- ----------
Net (Loss) Earnings per Common Share $ (0.49) $ (0.01) $ 0.03
============= ============== ==========
Diluted Loss per Common Share
Loss before extraordinary income $ (0.45) $ (0.01) $ -
Extraordinary item (net, plus Tax
Benefits) $ (0.04) $ - $ 0.03
------------- ----------- ----------
Net (Loss) Earnings per Common Share $ (0.41) $ (0.01) $ 0.03
============= ============== ==========
Weighted Average Number of Common
Shares Outstanding 8,287,754 11,982,962 11,589,462
============ ============= ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
-------------- Additional During the
# of Shares Paid-In Development
Issued Amount Capital Stage Total
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
To a Director, for Cash & Other Property
(A, B, C) 2,518,000 2,518 11,705 14,223
To Directors & Officers for non-Cash
Considerations Received (A, B, D) 582,750 583 16,900 17,483
To Others for non-Cash Considerations
Received (A, B, D) 49,250 49 1,428 1,477
--------- ------ ------- ---------- ------
BALANCE - DECEMBER 31, 1985 3,150,000 3,150 30,033 - 33,183
Private Placement Offering, Net of
Issuance Costs of $16,453 (A, E) 312,500 312 108,235 108,547
Patent License Costs (M) (125,000) (125,000)
Dec. 31/86--Net Loss (44,461) (44,461)
------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1986 3,462,500 3,462 13,268 (44,461) (27,731)
May 7/87-- to a Director/Officer for Property
(A, B, C) 500,000 500 (500)
May 12/87-- to a Director/Officer for Cash
(A, F) 100,000 100 39,900 40,000
Reversal of Accrued License Costs (M) 25,000 25,000
Capital Contribution by Principal Stockholder 78,076 78,076
Oct. 12/87-- Public Offering, net of Costs $76,314 1,131,010 1,132 1,336,318 1,337,450
Dec. 31/87--Net Loss (176,052) (176,052)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1987 5,193,510 5,194 1,492,062 (220,513) 1,276,743
Apr. 7/88-- to Directors/Officers for Property
(A, G) 800,000 800 800
May 1/88-- to Others for non-Cash Considerations
Received (A, H) 95,750 96 (96)
May 19/88-- Proceeds from Public Offering, net of
Public Offering Costs of $487,287 2,300,000 2,300 1,810,413 1,812,713
Patent License Costs (M) (100,000) (100,000)
Warrants Converted at $1.25 per Share 128,300 128 160,247 160,375
Dec. 31/88--Net Loss (405,875) (405,875)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1988 8,517,560 8,518 3,362,626 (626,388) 2,744,756
Warrants Converted at $2.00 per Share 3,000 3 5,997 6,000
Issuance of Stock by Principal Stockholder 110,000 110,000
Dec. 31/89--Net Loss (1,129,559) (1,129,559)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1989 8,520,560 $ 8,521 $ 3,478,623 ($ 1,755,947) $ 1,731,197
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Stockholders' Equity (Deficiency) (Continued)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
-------------- Additional During the
# of Shares Paid-In Development
Issued Amount Capital Stage Total
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1989 8,520,560 $ 8,521 $ 3,478,623 ($ 1,755,947) $ 1,731,197
Dec. 31/90--Net Loss (1,175,201) (1,175,201)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1990 8,520,560 8,521 3,478,623 (2,931,148) 555,996
Jul. 10/91--to Various Parties for Professional
Services Rendered (A, I) 125,000 125 7,375 7,500
Oct. 3/91-- To Directors & Officers for non-Cash
Considerations Received (A, J) 85,000 85 5,015 5,100
Dec. 31/91--Net Loss (430,800) (430,800)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1991 8,730,560 8,731 3,491,013 (3,361,948) 137,796
Aug. 12/92-- to an Individual for Professional
Services Rendered (A, K) 50,000 50 2,950 3,000
Dec. 31/92--Net Loss (173,144) (173,144)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1992 8,780,560 8,781 3,493,963 (3,535,092) (32,348)
Feb. 12/93-- to a Related Entity in Consideration
for Deferral of Loan Repayment (A, L) 46,850 47 2,753 2,800
Dec. 31/93--Net Loss (450,366) (450,366)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1993 8,827,410 8,828 3,496,716 (3,985,458) (479,914)
Feb. 22/94-- to Various Parties for Professional
Services Rendered (A, N) 75,000 75 7,425 7,500
Jul. 25/94--to an Individual for Professional
Services Rendered (A, O) 30,000 30 5,970 6,000
Jul. 25/94-- to Various Parties for Secretarial
Services Rendered (A, P) 10,000 10 1,990 2,000
Dec. 31/94--Net Loss (198,366) (198,366)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 8,942,410 8,943 3,512,101 (4,183,824) (662,780)
Jul. 25/95--to an Individual for Professional
Services Rendered (A, Q) 125,000 125 18,625 18,750
Dec. 31/95--Net Loss (103,635) (103,635)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 9,067,410 $ 9,068 $ 3,530,726 ($ 4,287,459) ($ 747,665)
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Stockholders' Equity (Deficiency) (Continued)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
-------------- Additional During the
# of Shares Paid-In Development
Issued Amount Capital Stage Total
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 9,067,410 $ 9,068 $ 3,530,726 ($ 4,287,459) ($ 747,665)
-----------------------------------------------------------------------
Jul. 12/96--to an Individual for Professional
Services Rendered (A, R) 25,000 25 3,725 3,750
Jul. 12/96--to an Individual for Professional
Services Rendered (A, K) 60,000 60 8,940 9,000
Aug. 28/96--to an Individual for Professional
Services Rendered (A, S) 30,000 30 4,470 4,500
Aug. 28/96--to an Individual for Professional
Services Rendered (A, T) 50,000 50 7,450 7,500
Sep. 13/96--to the President/Principal Shareholder
in Exchange for Accrued Salaries Waiver up to
12/31/96 (A, U) 2,000,000 2,000 298,000 300,000
Dec. 31/96--Net Loss (39,711) (39,711)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 11,232,410 11,233 3,853,311 (4,327,170) (462,626)
Feb. 26/97--to Director/Officer for Professional
Services Rendered (A, V) 50,000 50 8,950 9,000
Feb. 26/97-- to an Individual for Professional
Services Rendered (A, W) 15,000 15 2,685 2,700
Nov. 5/97-- to an Individual for Professional
Services Rendered (A, P) 20,000 20 2,980 3,000
Nov. 5/97--to a Financial Public Relations Company
for Professional Services Rendered (A, X) 226,100 226 24,634 24,860
Nov. 5/97-- to a Consulting Company for Professional
Services Rendered (A, Y) 100,000 100 10,900 11,000
Dec. 31/97--Net Gain 349,910 349,910
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 11,643,510 11,644 3,903,460 (3,977,260) (62,156)
Jan 22/98--to a Financial Public Relations Co.
for Professional Services Rendered (X) 200,000 200 21,800 22,000
Apr. 13/98--for Professional Services Rendered (X) 100,000 100 14,900 15,000
Jun. 4/98--for Professional Services Rendered (Y) 50,000 50 8,950 9,000
Aug. 4/98--for Professional Services Rendered (R) 50,000 50 7,950 8,000
Dec. 31/98--Net Loss (57,947) (57,947)
-----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 12,043,510 $ 12,044 $3,957,060 ($ 4,035,207) ($ 66,103)
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Stockholders' Equity (Deficiency) (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 $1.50 per share until April 12, 1990 (extended to August 2,
1991). On May 4, 1990 the Company, pursuant to a Resolution adopted by its
Board of Directors at a special meeting of its Board of Directors,
terminated and canceled the warrants.
(C) Other property consisted of an exclusive license to a patent and a service
mark recorded at par value ($.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 development of the Company. The
shares of stock 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 by
its Board of Directors at a Special Meeting of its Board of Directors,
terminated and canceled the warrants.
(G) Property consists of an exclusive license Patent No. 4,718,009, a
Registered Trademark "Resource", and a Continuation-In-Part of a patent
application called "Debit Card". The Canadian patent for Default Proof
Credit Card System was granted and the Company was advised that fees for
issuance of such patent were due before December 12, 1990. The Company paid
such fees on October 30, 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 contributors' 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, net of discounts for restricted stock (approximately $1.00 per
share). A corresponding charge was made 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 market value of the shares at the date of
issuance.
See accompanying notes to financial statements.
F-8
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Stockholders' Equity (Deficiency) (Continued)
(L) Non-cash consideration received consisted of a deferral on a loan repayment
to an entity controlled by the Company's 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.
(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 market value 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
to 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 no 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 investor relations. The shares of stock issued
for non-cash services were recorded 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 10K 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 to financial statements.
F-9
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative from Years ended
Aug. 14, 1985 to December 31
Dec. 31, 1998 1998 1997
------------- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (Loss) Gain $ (4,048,991) $ (71,231) $ 349,410
Adjustments to Reconcile Net (Loss) Gain to
Net Cash Used in Operating Activities:
Depreciation & Amortization 100,535 2,784 -
Loss on Marketable Securities 130,741 - -
Expired Public Offering Costs 110,000 - -
Cancellation of Stockholder Note Receivable 55,490 - -
Stock Issued in lieu of Cash for Prof. Services 190,460 56,500 50,560
Stock Issued in lieu of Cash for Waived Salaries 294,000 - -
Loss on Sale of Equipment 34,144 - -
Decrease (Increase) in Other Assets (25,480) - -
Increase (Decrease) in Accrued Expenses 38,781 11,947 (405,550)
------ ------ --------
Net Cash Used in Operating Activities (3,120,320) - (5,580)
========== ======== ======
INVESTING ACTIVITIES
Purchases of Marketable Securities (130,741) - -
Purchases of Property & Equipment (136,980) - -
Patent License Expenditures (201,864) - -
Proceeds from Sale of Equipment 22,994 - -
------
Net Cash Used in Investing Activities (446,591) - -
FINANCING ACTIVITIES
Proceeds from Issuance of Stock-Private Offerings 108,547 - -
Proceeds from Issuance of Stock-Public Offerings 3,150,163 - -
Proceeds from Issuance of Stock-Exercise of Warrants 240,358 - -
Capital Contributions 78,076 - -
Net Receipts/Advances to Stockholder (10,233) - 5,580
------- ---------- -----
Net Cash Provided by Financing Activities 3,566,911 - 5,580
--------- ---------- -----
NET INCREASE (DECREASE) IN CASH - - -
CASH - BEGINNING - - -
--------- ---------- -----
CASH - ENDING $ - $ - $ -
========== ========== ======
Supplemental disclosures:
Common Stock & Options issued for Services Rendered $ - $ - $ -
========== ========== ======
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 31, 1998
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. The Company is engaged
in the development and marketing of a patented financial business system for
extending lines of credit on a collateralized basis to consumers. The Company's
offices are located in Coral Gables, Florida. The Company is in the development
stage and its operation to date have largely consisted of the research and
development of its product.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings (Loss) Per Common Share
- --------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" which simplifies the standards for computing earnings per share ("EPS")
previously found in APB No. 15, "Earnings Per Share". It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the diluted EPS computation. The Company
adopted SFAS No. 128 in January 1998 and its implementation did not have an
effect on the financial statements. EPS has been restated for all prior periods
presented. Net loss per common share (basic and diluted) is based on the net
loss divided by the weighted average common shares outstanding during each year.
The Company's potentially issuable shares of common stock pursuant to
outstanding stock options has been excluded from the calculation of diluted loss
per share in 1998 since the effect would have been anti-dilutive to the
Company's net loss per common share.
Patent 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 from the date of issuance of the patents.
Income Taxes
- ------------
The Company accounts for income taxes pursuant to the provisions of FASB No. 109
"Accounting for Income Taxes", which requires, among other things, a liability
approach to calculating deferred income taxes. The asset and liability approach
requires the recognition Notes to Financial Statements (Continued) December 31,
1998
F-11
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 31, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
of deferred tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. The Company has had operating losses since inception and
accordingly has not provided for income taxes. Realization of the benefits
related to the net operating loss carryforwards may be limited in any one year
due to IRS Code Section 382, change of ownership rules.
New Accounting Pronouncements
- -----------------------------
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities", provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. The SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company's management
does not expect this SOP to have a material impact on the Company's financial
position or results of operations.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires computer
software costs associated with internal use software to be expensed as incurred
until certain capitalization criteria are met. The Company will adopt SOP 98-1
on January 1, 1999. Adoption of this statement is not expected to have a
material impact on the Company's financial position, results of operations or
cash flows.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Statement applies to all entities and is
effective for all fiscal quarters of the fiscal years beginning after June 15,
1999. The Company did not engage in derivative instruments or hedging activities
in any periods presented in the financial statements.
NOTE 2. GOING CONCERN CONSIDERATION
The accompanying financial statements have been prepared assuming the Company
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 achieving
profitable operations, or obtaining debt or equity financing, the Company may
not have sufficient funds to continue through December 31, 1998.
F-12
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1998
NOTE 3. DUE FROM STOCKHOLDER
Due from stockholder consisted of various non-interest bearing and due upon
demand advances.
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. Two new patents are now in
process.
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 permanently 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
1988 STOCK OPTION PLAN
In August 1988, the Company adopted the 1988 Stock Option Plan. Under this plan,
stock options to purchase 600,000 shares of common stock may be granted to
employees, officers and other persons providing services to the Company, a
parent or a subsidiary of the Company.
The 1988 Stock Option Plan is intended to qualify as an "Incentive Stock Option
Plan" under Section 422A of the Internal Revenue Code. Under the Stock Option
Plan, incentive stock options may be granted at not less than 100 percent of the
fair market value of the Company's common stock at the date the option is
granted (110% of fair market value for 10% or greater shareholders) and options
granted to any one participant may not exceed
F-13
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1998
NOTE 6. STOCK OPTIONS (Continued)
1988 STOCK OPTION PLAN (Continued)
$100,000 in option price per year. Options may be granted within ten (10) years
from the adoption of the 1988 Stock Option Plan. Each option granted under the
1988 Stock Option Plan must be exercised within ten (10) years from the date of
grant.
No options were granted under the 1988 Stock Option Plan.
OTHER STOCK OPTIONS
During 1998, five-year non-plan options to purchase 695,000 shares of common
stock at prices ranging between $0.14 and $1.50 per share were granted to the
President and Vice President of the Company. These options were fully vested at
the date of grant.
During 1997 five-year non-plan options to purchase 445,000 shares of common
stock, at prices ranging between $0.15 and $1.25 per share were granted to the
President and Vice President of the Company. These options were fully vested at
the date of grant.
At December 31, 1998 and 1997 total non-plan options outstanding were 2,125,000
and 1,525,000, respectively. At December 31, 1998 and 1997 2,125,000 and
1,525,000, respectively, of the non-plan options were fully vested.
As of December 31, 1998 and 1997 the Company has agreed to grant its President
other five-year non-plan options of 5,250,000 and 2,250,000, respectively,
contingent upon the issuance of certain patents. These options will have
exercise prices of $0.10 and $0.15, respectively.
STOCK BASED COMPENSATION
As required by Statement of Financial Accounting Standards ("SFAS") 123,
pro-forma information regarding net loss and loss per share has been determined
as if the Company had accounted for its employee stock options under the fair
value method of that statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998; risk-free rate of return of
5.0%; dividend yield of 0.0%; volatility factor of the expected market price of
the Company's common stock of 1.41 and expected lives ranging from 1 to 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have not vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the
F-14
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1998
NOTE 6. STOCK OPTIONS (Continued)
STOCK BASED COMPENSATION (Continued)
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, the existing models, in management's opinion, do not necessarily
provide a reliable single measure of the fair value of its stock options.
Under the accounting provisions of SFAS No. 123, the Company's pro-forma net
loss and loss per share would have been:
Year Ended December 31,
1998 1997
---- ----
Net (loss) income
As reported $ ( 71,231) $ 349,410
Pro-forma $ (115,978) $ 347,518
Net (loss) income per common share
As reported $ (0.01) $ 0.03
Pro-forma $ (0.01) $ 0.03
A summary of the status of the Company's fixed stock option plan and non-plan
options as of December 31, 1998 and 1997, and changes during the years then
ended is presented below:
Year Ended December 31,
--------------------------------------
1998 1997
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 1,525,000 $ 0.33 1,080,000 $ 0.30
Granted 695,000 $ 0.33 445,000 $ 0.38
Exercised - - - -
Forfeited (95,000) $(0.25) - -
--------- ------ --------- ------
Outstanding at end of year 2,125,000 $ 0.33 1,525,000 $ 0.33
Options exercisable at year-end 2,125,000 $ 0.33 1,525,000 $ 0.33
F-15
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1998
Notes to Financial Statements (Continued)
December 31, 1998
NOTE 6. STOCK OPTIONS (Continued)
STOCK BASED COMPENSATION (Continued)
Weighted-average fair value of options granted during the year:
Year Ended December 31,
-----------------------
1998 1997
---- ----
Below market $ - $0.15
At market $ - $0.15
Above market $0.33 $1.25
Options Outstanding and Exercisable
----------------------------------------------------
Weighted
Number Average Weighted
Range of Outstanding Remaining Average
Exercise at Contractual Exercise
Prices 12/31/98 Life Price
------ -------- ---- -----
$0.10 - $0.50 1,745,000 2.76 years $ 0.16
$0.75 - $1.25 285,000 2.59 years $ 1.00
$1.50 95,000 4.59 years $ 1.50
NOTE 7. INCOME TAXES
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $4 million, that expires through 2013.
The Company has a deferred tax asset of approximately $1,490,000 as a result of
net operating loss carryforwards, which is offset by a valuation allowance of
the same amount due to the uncertainties behind its realization.
NOTE 8. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 1998, the board of directors authorized a 10-for-1
reverse split effective after the close of business on February 4, 1999 for the
Company's common stock.
Subsequent to December 31, 1998, 40,000 shares of post-split common stock were
granted to an outside firm for services.
Between February 11, 1999 and April 15, 1999 the Company issued 10,000 shares of
its post-split common stock to its President.
F-16
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1998
NOTE 8. SUBSEQUENT EVENTS (UNAUDITED) (Continued)
In May 1999 options to purchase 25,000 shares of the Company's post-split common
stock were granted to the Company's current President. Such options are
exercisable at $0.38 per share, are non-qualified and expire in May 2009.
On June 25, 1999, Vincent Cuervo resigned his position as President of the
Company, and David Koss was appointed as President and Chief Financial Officer.
