DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10 QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT OF 1934
For the Quarterly Period Ended SEPTEMBER 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 14(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________________ to__________________
Commission File Number 017114
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DEFAULT PROOF CREDIT CARD SYSTEM, INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2686523
------- ----------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation) Number)
1545 MILLER ROAD, CORAL GABLES, FLORIDA 33146-2309
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 666-1460
--------------
Registrant's telephone number, including area code
-------------------------------------------------------------------------------
(Former name, former address and fiscal year, if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements of the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant common stock is 1,284,351 (as
of September 30, 2000).
Transitional Small Business Disclosure Format
Yes X No
--- ---
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
C O N T E N T S
PAGE
----
FINANCIAL STATEMENTS
BALANCE SHEET 3
STATEMENTS OF OPERATIONS 4
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY 5 - 10
STATEMENTS OF CASH FLOWS 11
NOTES TO FINANCIAL STATEMENTS 12 - 18
-2-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
September 30, 2000
ASSETS
------
Cash $ 84
Office Equipment 9,794
Deferred Patent Costs, Net 1,161
----------
TOTAL ASSETS $ 11,039
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accrued Expenses $ 13,882
Due to Director 125,283
----------
TOTAL CURRENT LIABILITIES $ 139,165
----------
Stockholders' Deficiency
Common Stock, $0.01 Par Value, 2,500,000
Shares Authorized, 1,284,351 Issued and Outstanding $ 12,844
Additional Paid-In Capital 4,020,340
Deficit Accumulated During Developmental Stage (4,161,310)
----------
TOTAL DEFICIENCY IN ASSETS (128,126)
----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIENCY $ 11,039
==========
-3-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
-------------------------
INCOME
Other Income $ 14,934
--------------
EXPENSES
General & Administrative $ 63,434
Depreciation & Amortization -
Total Expenses 63,434
--------------
NET LOSS $ (48,500)
===============
Basic Loss per Common Share
Loss before extraordinary income $ (0.01)
---------------
Net Loss per Common Share $ (0.01)
===============
Diluted Loss per Common Share
Loss before extraordinary income $ (0.01)
----------------
Net (Loss) Earnings per Common Share $ (0.01)
===============
Weighted Average Number of Common
Shares Outstanding 1,198,296
===============
-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 - 4,223
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>
-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>
-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)
</TABLE>
-7-
<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, 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 (71,231) (71,231)
---------- -------- ---------- ----------- ---------
BALANCE - DECEMBER 31, 1998 12,043,510 $ 12,044 $3,959,560 ($4,048,491) ($ 76,887)
Feb. 1/99--10 to 1 Reverse Stock Split (10,839,159)
Various/99--for Professional Services Rendered 66,000 660 22,825 23,485
Dec. 31/99--Net Loss (64,319) (64,319)
---------- -------- ---------- ----------- ---------
BALANCE - DECEMBER 31, 1999 $1,270,351 $ 12,704 $3,982,385 ($4,112,810) ($117,721)
Feb. 28/00--for Professional Services Rendered 7,000 70 26,180 26,250
Mar. 31/00--Net Loss (35,571) (35,571)
---------- -------- ---------- ----------- ---------
BALANCE - MARCH 31, 2000 1,277,351 12,774 4,008,565 (4,148,381) (127,042)
Apr. 12/00--for Professional Services Rendered 4,000 40 8,680 8,720
Apr. 12/00--for Professional Services Rendered 500 5 1,245 1,250
Jun. 30/00--Net Loss (18,049) (18,049)
---------- -------- ---------- ----------- ---------
BALANCE - JUNE 30, 2000 1,281,851 12,819 4,018,490 (4,166,430) (135,121)
========= ====== ========= =========== =========
Jul. 26/00--for Professional Services Rendered 2,500 25 1,850 1,875
Sep. 30/00--Net Income 5,120 5,120
BALANCE - SEPTEMBER 30, 2000 1,284,351 12,844 4,020,340 (4,161,310) (128,126)
========= ====== ========= =========== =========
</TABLE>
-8-
<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.
-9-
<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.
-10-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
-------------------------
OPERATING ACTIVITIES
Net Loss $ (48,500)
Adjustments to Reconcile Net (Loss) Gain to
Net Cash Used in Operating Activities:
Stock Issued in lieu of Cash for Prof. Services 38,095
Increase (Decrease) in Accrued Expenses (14,633)
----------
NET CASH USED IN OPERATING ACTIVITIES (25,038)
----------
INVESTING ACTIVITIES
Purchases of Property & Equipment (9,794)
----------
NET CASH USED IN INVESTING ACTIVITIES (9,794)
----------
FINANCING ACTIVITIES
Capital Contributions
Net Receipts/Advances to Stockholder 34,916
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,916
---------
NET INCREASE (DECREASE) IN CASH 84
CASH - BEGINNING 0
CASH - ENDING $ 84
=========
-11-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
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 owns the intellectual property of several U.S.
Patents and patent pending applications and is engaged in the
marketing of secured credit cards and of the ATM Prepaid Debit Cards
Dispenser for which received notice of patent allowance on April 24,
2000, the over the counter sale and dispensing of prepaid debit cards
(patent pending) and the e-commerce internet dispensed of prepaid
debit cards under the Domain name ubuydebitcards.com also patent
pending. 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, marketing and development of its
products.
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-dilution to the Company's
net loss per common share.
-12-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000
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 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
carry forwards 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.
-13-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000
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 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, 2000.
NOTE 3. DUE TO DIRECTOR
Due to director consisted of various non-interest bearing loans and
advances made by the director, and under agreement, payable in cash or
with shares of the Company`s Common Stock $0.01 par value per
share, upon demand by the director.
NOTE 4. LICENSE AGREEMENT
The Company's C.E.O. 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. The Company C.E.O. has transferred
to the Company all the worldwide rights and ownership of three patent
applications for stock options to purchase shares of the Company, the
stock options to be granted if the patent applications received from
the U.S. Patent and Trademarks offices the related patent allowances.
On April 24, 2000 the U.S. Patent and Trademark Office notice of
allowance of the patent application ATM Prepaid Debit Cards Dispenser
notifying that all its eight claims were allowed. The other patents
pending, the sale, dispensed and activated over the counter prepaid
debit cards, as well as the purchase, sale and dispensed through the
Internet e-commerce, the known as the domain name ubuydebitcards.com
are now in process of receive patent allowances
NOTE 5. EMPLOYMENT AGREEMENT
On September 1, 1988, the president/principal stockholder, C.E.O. and
Director 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. On June 25th,
1999 the agreement was renewed in its entirety by the Board of
Directors with the exemption of paragraphs number 1 EMPLOYMENT TERM,
and paragraph number 3. POSITION. UNDER EMPLOYMENT TERM, providing the
Executive is not in default, or has not been removed pursuant to
paragraph 6, the agreement was renewed and extended until the
executive seventieth sixth (76) birthday, or his death or disability,
whichever occurs first.
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<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000
Under paragraph 3. POSITION was agreed that during the Employment
Term, the Executive shall have the Position of Chief Executive Officer
(CEO) and Chairman of the Board of Directors of the Company. 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 $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, CEO and inventor other five-year non-plan options to
purchase of the Company Common Stock $0.001 par value per share in the
amounts of 2,250,000 and 3,000,000 respectively, contingent upon the
issuance of patent allowances related to certain patent applications.
These options will have exercise prices of $0.10 and $0.15,
respectively.
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<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUE)
September 30, 2000
As of May 19, 2000 the Company has agreed to grant its C.E.O. and
inventor other ten year non-plan options to purchase the Company's
Common Stock $0.01 par value per share in the amount of 500,ooo
shares, contingent upon the issuance of patent allowance related to
certain patent application.
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 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:
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000
------------------------
Net (loss) income
As reported $ ( 48,500)
Pro-forma $ (48,500)
Net (loss) income per common share
As reported $ (0.01)
Pro-forma $ (0.01)
A summary of the status of the Company's fixed stock option plan and
non-plan options as of December 31, 1999 and 1998, and changes during
the years then ended is presented below:
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1999 1998
------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES* PRICE
-------- --------- -------- --------
Outstanding at beginning of year 212,5000 $ 0.33 152,500 $ 0.33
-16-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000
Granted 100,000 69,500 $ 0.33
Exercised - - - -
Forfeited (9,500) (9,500) $ (0.25)
-------
Outstanding at end of year 303,000 $0.33 212,500 $ 0.33
========== =======
Options exercisable at year-end 303,000 $0.33 212,500 $ 0.33
========== =======
* The 1998 shares have been restated to reflect 10 to 1 reverse stock split.
-17-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000
NOTE 6. STOCK OPTIONS (CONTINUED)
STOCK BASED COMPENSATION (CONTINUED)
Weighted-average fair value of options granted during the year:
YEAR ENDED DECEMBER 31,
1999 1998
---- ----
Below market $ - $ -
At market $0.38 $ -
Above market $0.33 $0.33
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE
PRICES 12/31/99 LIFE PRICE
--------------- --------- ------------- ---------
$0.38 100,000 3.00 years $ 2.9
$0.01 - $0.05 174,500 2.76 years $ 2.76
$0.075 - $0.125 28,500 2.59 years $ 2.59
NOTE 7. COMMON STOCK SPLIT
On February 1, 1999, the Board of Directors of the company approved a
10 to 1 reverse stock split.
NOTE 8. INCOME TAXES
At December 31, 1999, the Company had a net operating loss carry
forward of approximately $4 million, that expires through 2013.
The Company has a deferred tax asset of approximately $1,500,000 as a
result of net operating loss carry forwards, which is offset by a
valuation allowance of the same amount due to the uncertainties behind
its realization.
NOTE 9. PATENT ISSUED
On August 15, 2000, The U.S. Patent and Trademark Office issued the
Patent Number 6,105,009, the Automated Teller Machine Dispenser of
Debit Cards. The Patent Certificate was received on August 23, 2000.
-18-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
Dated: November 2, 2000 By: /s/ Vincent Cuervo
--------------------------------------
Vincent Cuervo, Chief Executive Officer
Dated: November 2, 2000 By: /s/ Pedro P. Llaguno
--------------------------------------
Pedro P. Llaguno, Secretary and Vice President
-19-
