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, 1999
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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
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(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
(Address of principal executive offices) (Zip Code)
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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 $ 0.01
(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 February 4, 2000, was: Common
Stock. $0.01 par value: $2,858,290. The number of shares outstanding of the
registrant's common stock $0.01 par value as of December 31, 1999 was: 1,270,351
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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 value secured debit cards (patents pending) to be marketed as
an Automated Teller Machine Debit Card Dispenser [patent pending]("ATMDCD"), and
the UBUYDEBITCARDS.COM ["UBDC"] (patent pending)and UBUYCREDITCARDS.COM [patent
pending] both a prepaid 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, patent 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
DISPENSER patent pending (ATMDCD) and the ubuydebitcards.com and
ubuycreditcards.com [patent pending] filed with the U.S. Patent and Trademark
Office, Washington, D.C.
The Automated Teller Machine Debit Card Dispensers [patent pending],
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there is no assurance that the related patents to these patent pending
will be granted by the U.S. Patent and Trademark Office, relates to existent and
future ones to be manufactured modified automated teller machine to become 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 not require previous or formal
banking relationship with the issuing bank. This system, and new technology,
incorporated into existing Automated Teller Machines(ATMs), and installed in
future manufactured ATMs, will permit consumers to purchase and design a desire
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 or 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 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 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. There are
approximated 50 Million, in the United States alone, who do not have a bank
relationship.
The Company will consider offering 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 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.
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The cash deposited may 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 or her personal and confidential PIN number. Besides cash the user can
charge the whole amount to a credit, debit, bank or ATM card benefitting of the
25 days grace period for balance payment in those cards.
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 prepaid stored value debit card purchased, 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. There is no assurance of a related
patent being granted.
THE CARDHOLDER:
In order to obtain this debit card, a cardholder: Will not need to have his or
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. Due to it's flexibility will design and determine the
line-of-credit when applying for the card. The deposit amount would correspond
to purchaser 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 may 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 46 million people
cannot have a bank card.
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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. There is no assurance that the related patent will be granted.
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. Worldwide 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
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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.
ATM DEBIT CARDS DISPENSER (PATENT 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 3% or
4% of the prepaid 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 or her means and needs.
The bank card will be issued by a participating bank or financial
institution and dispensed through an Automated Teller Machine.
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UBUYDEBITCARDS.COM (patent pending)
The present patent pending differs from present methods and ways of
soliciting and purchasing. Through the use of cyberspace and Internet,
subscribers will apply for a prepaid debit card with any select line of credit
that can be used with more than one card to transfer funds and other incentives.
The prepaid debit card will be issued by a participating bank or financial
institution and in the future may be dispensed by an Automated Teller
Machine(ATMDCD), or received directly at the participating issuing bank office,
or by mail if so desired.
UBDC comes to solve the problem of obtaining a debit card in an efficient and
economical way. There is no assurance that a related patent will be issued.
PLANNED MARKETING OF THE COMPANY"S PREPAID DEBIT CARDS
AUTOMATED TELLER MACHINES DEBIT CARDS DISPENSER(PATENT PENDING)
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AND UBUYDEBITCARDS.COM (PATENT PENDING)
The Company believes that prepaid debit cards 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 purchasing the Company prepaid debit cards.
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 prepaid
debit card 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 and the Internet, the prepaid
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. This prepaid debit card 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.
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There are other multiple applications of the prepaid debit card 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 this debit card create
exciting new possibilities for the future cash less society. We see this product
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.
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.
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. Furniture, office equipment and several
computers. 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, on
February 8, 2000 Dr. Vincent Cuervo, CEO of the Company and the Company's Patent
Attorney visited at the U.S. Patent Office in Washington D.C. with the examiner
and left with confidence that after that meeting it is expected to receive the
Grant for the ATM DEBIT CARDS DISPENSER as early as April 2000, and that the
ubuydebitcards.com is also expected to follow shortly.
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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, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
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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.
FISCAL 1999 HIGH CLOSE
02/05/99 .010 .08
03/26/99 11/16 5/8
04/09/99 11/16 11/16
05/07/99 .70 9/16
06/04/99 3/8 3/8
07/02/99 1-1/8 .51
08/06/99 7/8 3/8
09/03/99 2-/8 2-1/4
10/01/99 1-/8 1-7/8
11/05/99 2. 1.88
12/03/99 2-1/8 1-13/16
12/31/99 3. 2-15/16
On December 31, 1999 the Company had approximately 211 holders of
record of the Company's common stock. A number of those record holders are
brokers and other institutions holding shares in "street name" for more than one
beneficial owner.
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
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payment of dividends 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 25 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, on February 29, 2000 the Company and First Southern Bank at 2000
Glades Rd., Suite 206, Boca Raton, Florida 33431 and the News Release was
distributed through the financial news media, the first paragraph of it follows:
MIAMI, FL (Business Wire) February 29, 2000: DEFAULT PROOF CREDIT CARD SYSTEM,
(OTC-BB: DPRS) (the "Company") announced it has entered into an agreement with
Boca Raton, Florida based FIRST SOUTHERN BANK ("FSB"). FSB will be licensed to
issue prepaid, debit cards purchased by users of the Company's dynamic new
INTERNET Web-Site UBUYDEBITCARDS.COM(TM)(C) (patent pending) in the World Wide
Web. FIRST SOUTHERN BANK will issue the prepaid debit cards' PIN required
MASTERCARD(R). Pursuant to the agreement, as soon as possible, DEFAULT PROOF and
First Southern Bank will launch UBUYDEBITCARDS.COM on the WORLD WIDE WEB.
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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
$95,000 in developing computer software and acquiring computer hardware for the
operation of the Resource System. The Company has expended in excess of $
630,000 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 $130,000 of Company expenses. The Company
expend well over $245,000 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.
EMPLOYEES
As of the date hereof, the Company has 3 employees serving also as
officers, like the CEO, the Counsel and Company's Secretary and the valuable
acquisition of David J. Koss first as a consultant and in June 1999 was
appointed as President and C.F.O. 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
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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. Also David
J. Koss was granted 25,000 Stock Options per year for a period of four years
from the date of his appointment as President of the Company.
ITEM 7. FINANCIAL STATEMENTS
CONTENTS
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AUDITORS' REPORT...........................................F-2
FINANCIAL STATEMENTS
BALANCE SHEET.....................................F-3
STATEMENTS OF OPERATIONS..........................F-4
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY..... F-5-F-10
STATEMENTS OF CASH FLOW...........................F-11
NOTES TO FINANCIAL STATEMENTS..............................F-12 - F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING .
AND FINANCIAL DISCLOSURE
On February 9, 2000, the Company engaged Joel S. Baum, CPA, President
of BAUM & Co.,P.A., 1515 University Drive, Suite 209, Coral Springs, FL 33071 as
its independent certified public accountants to audit the Company's Consolidated
Financial Statements for the year ended December 31, 1999. The reason for this
change is for their high expensive fees and charges at times when the Company
can not afford such expenses. EXHIBIT #2
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, C.E.O. 71 Director
David J. Koss. President 40
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.
12
<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., O.
Ltd., and Summit National Life Insurance Company. From September 1962 through
December 1983, he was general managing agent for Crown Life Insurance Company
for 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.
DAVID J. KOSS, a 17 year financial services professional and with a large
experience in the banking industry. 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.
13
<PAGE>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
NAME AND (# OF SHARES) (# OF SHARES)
PRINCIPAL SALARY OTHER ANNUAL RESTRICTED OPTIONS/SAR ALL OTHER
POSITION YEAR $BONUS COMP. $ STOCK AWARDS
NONE
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE
NONE
ITEM 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 348,291 29%
CIRO B. SOSA
Miami, FL 33145 24,276 2%
PEDRO P. LLAGUNO
Miami, FL 33145 16,142 1.4%
KATHY WILLIAMS
Mississuaga, Ontario 19,750 1.6%
DAVID J. KOSS 10,000 0.9
Miami, Fl 33145
ERIC H. SPELLMAN 83,500 6.2%
Larchmont, NY
Officers/directors,
promoters, as a group 501,960 39.3%
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 225,000. Stock Option
of the Company's Common Stock
14
<PAGE>
$.01 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.
On the Special Meeting, that took place on October 2, 1998, of the
Company's Board of Directors was unanimously approved an agreement between
Vincent Cuervo and the Company regarding the amount of money, the result of the
numerous loans, at no interest, made by V. Cuervo to the Company, providing with
this loans and or payments of the expenses, the continuity of its operations and
existence. It was approved that Vincent Cuervo will have the choice of demanding
the full payment in cash, or to be issued in his name one Common Stock $0.01
(post split) par value per share for each one dollar the Company owes Vincent
Cuervo at the time he demands payment of the debt the Company owes him.
On December 1998 the Company acquired from Vincent Cuervo, all the
worldwide rights, licenses, and ownership of the UBUYDEBITCARDS.COM patent
pending filed with the US Patent and Trademark Office, Washington, D.C. earlier
in 1998. Under the understanding agreement between the Company and Vincent
Cuervo, the Company will issue to Vincent Cuervo 300,000. Stock Option of the
Company's Common Stock $0.01 par value per share, at an exercising Option Price
of $0.10 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 UBUYDEBITCARDS.COM will be issued.
If the U.S. Patent and Trademark Office does not issue the related
patent(s) the Company will not grant the stock options 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.
SECURITIES OUTSTANDING
The Company is authorized to issue 2,500,000 shares of $0.01 par value
common stock (the Shares). As of December 31, 1999 there are 1,270,351 currently
outstanding shares, and 491,960 of the Company outstanding shares are restricted
shares. The Company also has 38,000 Stock Options of the Company's Common Stock
$0.01 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 140,000 Stock Options of
the Company's Common Stock $0.01 par value to purchase shares until February 2,
2000, at an exercise price of $0.10 and $0.15 cents per share, and 125,000 Stock
Options of the Company's Common Stock $0.01 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:OTC-BB on 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.
15
<PAGE>
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 $0.01 par value to purchase 7,000
Vincent Cuervo , and 2,000 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
20,000 Vincent Cuervo and 15,000 Pedro P. Llaguno, Esq.,of the Company's Common
Stock $0.01 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, 1999.
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 20,000 Vincent Cuervo and 5,000 Pedro P. Llaguno, Esq., of the
Company's Common Stock $0.01 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, 1999.
On June 29, 1999 on a Special Meeting of the Company's Board Of
Directors David J. Koss, newly appointed President and Chief Financial Officer,
was granted 25,000 Stock Option Shares per year for four years of the Company's
Common Shares $0.01 par value per share at an exercise price of $0.38 per
shares. David J. Koss will receive the Option Shares each year or to such time
he shall cease providing services to the Company for whatever reason, including
the year in which his services to the Company are terminated. The Option Shares
shall be deemed restricted stock pursuant to Rule 144 promulgated under the
Securities Act of 1933, as amended.
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. Vincent Cuervo received minimal compensation during 1993 fi, and no
compensation since 1994 first quarter, 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. David J. Koss have not received
salary or refund of personal expenses since mid 1998.
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.
16
<PAGE>
All the above Stock Option shares are Company's Common Stock $0.01 par
value per share and adjusted 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 Registrar and
Transfer Company, 10 Commerce Dr., Cranford, NJ 07016.
RECENT SALES OF UNREGISTERED SECURITIES.
On February 5, 1999 the Company issued 10,000 shares of the Company's
Common Stock $0.01 par value per share to Maria T. C. Schafer web master in
payment for her previous and present services. The shares price at the close was
$0.80 per share. Also on September 30, 1999 there were issued to Mrs, Schafer
5,000. Shares of the Company's Common Stock $0.01 per share. At market close the
price per share was $1.50 per share.
On February 5,1999 the Company issued 40,000 shares of the Company's
Common Stock $0.01 par value per share to Eric H. Spellman in payment for
several years of services to the Company. The shares price at the close was
$0.80 per share.
On February 11, 1999 and April 15, 1999 the Company issued 10,000
shares of the Company's Common Stock $0.01 par value per share in payment of his
services. The price of the share at the market close on February 11, 1999 was
$0.80.
On October 21, 1999 one thousand (1,000) shares of the Company's Common
Stock $0.01 par value per share, were issued to David Hunt in payment of
services . The price per share at the close of the market was $1.81 per share.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT #1
On February 1, 1999 the Registrant approved a Reverse Stock Split of
the 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
17
<PAGE>
whenever the appropriate transfer is requested by the shareholders. 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.
Attached hereto and filed as a part of this Report are the financial
statements. The Exhibits described below are incorporated by reference herein.
EXHIBIT #2
REGISTRANT'S CHANGING OF CERTIFIED PUBLIC ACCOUNTANT'S FIRM.
The Board of Directors of Default Proof Credit Card System, Inc. (OTC-BB:DPRS)
on this Extraordinary Meeting held today February 12, 2000 approves this
unanimously resolution terminating the services of Infante, Lagos and Company as
the Company's certified public accounts who were responsible for the preparation
and completion of Default Proof Credit Card System, Inc. for the year ended
December 31, 1998 audited balance sheet and financials filed on 1999. The end of
their services to be effective on this February 11th., 2000. The reason for this
change is for their high expensive fees and charges at times when the Company
can not afford such expenses.
On this above mentioned Meeting of the Board of Directors it was also
unanimously approved, effective February 11th., 2000 the engagement agreement
with Joel S. Baum, C.P.A., President of BAUM & COMPANY, P.A. at 1515 University
Drive, Suite 209, Coral Spring, Florida 33071. The new certified public accounts
firm will be responsible for the audit of the balance sheet and financials of
Default Proof Credit Card System, Inc., for the year ending on December 31, 1999
and the related statements of income, retained earnings, and cash flows for the
year then ended. The new engaged certified public accountants, while promising
the same quality services, offered reasonable and accessible cost to the
Company.
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
Trust Company. (1988 Public Offering)
4.6**** Form of Option Agreement for 60,000 option shares for Marina S.
Klein.
18
<PAGE>
10.1* License Agreement between Vincent Cuervo and the Registrant dated
August 14, 1985
10.2** Amendments to License Agreement between Vincent Cuervo and the
Registrant
10.3* Agreement dated August 14, 1986 between Vincent Cuervo and SSS
Associates and Felix Guardiola.
10.4** Lease between Registrant and Douglas Entrance Restoration and
Development Group.
10.4(a) Lease between Registrant and Miami Board of Realtors.
10.5*** Employment Agreement between the Company and Vincent Cuervo.
10.6** Employment Agreement between the Company and Hugh Vanhoose.
10.7** Sales Agreement between the Company and James Branam Jr.
10.8** Form of 1988 Stock Option Plan.
14**** Material Foreign Patents - Notice of Allowance for Patent from
Canada's Consumer and Corporate Affairs.
(28)**** Minutes of Special meeting of the Board of Directors of Default
Proof Credit Card System, Inc. for January 9, 1990
REPORTS ON FORM 8 K
EXHIBIT #1 REPORT ON FORM 8-K
Reverse Split 10 for 1 filed 2-1-99
EXHIBIT #2 REPORT ON FORM 8-K
Change of Auditor CPA
ITEM 13(B) EXHIBITS
The Exhibits described above are incorporated by reference here:
* 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.
19
<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)
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.
20
<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: February 1, 1999 By: /S/ VINCENT CUERVO
---------------
Vincent Cuervo, President & CEO
EXHIBIT #2.
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 12, 2000
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)
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
21
<PAGE>
ITEM 5. REGISTRANT'S CHANGING OF CERTIFIED PUBLIC ACCOUNTANT'S FIRM.
------------------------------------------------------------
The Board of Directors of Default Proof Credit Card System, Inc. (OTC-BB:DPRS)
on this Extraordinary Meeting held today February 12, 2000 approves this
unanimously resolution terminating the services of Infante, Lagos and Company as
the Company's certified public accounts who were responsible for the preparation
and completion of Default Proof Credit Card System, Inc. for the year ended
December 31, 1998 audited balance sheet and financials filed on 1999. The end of
their services to be effective on this February 11th., 2000. The reason for this
change is for their high expensive fees and charges at times when the Company
can not afford such expenses.
On this above mentioned Meeting of the Board of Directors it was also
unanimously approved, effective February 11th., 2000 the engagement agreement
with Joel S. Baum, C.P.A., President of BAUM & COMPANY, P.A. at 1515 University
Drive, Suite 209, Coral Spring, Florida 33071. The new certified public accounts
firm will be responsible for the audit of the balance sheet and financials of
Default Proof Credit Card System, Inc., for the year ending on December 31, 1999
and the related statements of income, retained earnings, and cash flows for the
year then ended. The new engaged certified public accountants, while promising
the same quality services, offered reasonable and accessible cost to the
Company.
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: FEBRUARY 11, 2000 By: /S/ VINCENT CUERVO
----------------- ---------------
Vincent Cuervo
President & CEO
CERTIFICATION BY CORPORATE SECRETARY
I hereby certify that the following is a true and correct copy of a resolution
duly and regularly passed by the Directors of DEFAULT PROOF CREDIT CARD SYSTEM,
INC., at a extraordinary meeting of the Board of Directors held on the 11th.,
day February, 2000 at the Corporate offices situated at 2050 Coral Way, Suite #
404, City of Miami, County of Miami-Dade, Florida, 33145 and that as such
meeting a quorum of Directors was present and voting; and I further certify that
said Resolution is still in force and effect and has not been revoked, modified
nor changed in any manner.
RESOLVED:
The Board of Directors of Default Proof Credit Card System, Inc. (OTCBB:DPRS) on
this Extraordinary Meeting held today February 11, 2000, approves this
unanimously resolution terminating the services of Infante, Lago and Company as
the Company's certified public accounts who were responsible for the preparation
and completion of Default Proof Credit
22
<PAGE>
Card System, Inc.,for the year ended December 31, 1998 audited balance sheet and
financials filed on 1999. The end of their services to be effective on this
February 11th., 2000. The reason for this change is for their high expensive
fees and charges at times when the Company can not afford such expenses.
On this above mentioned Meeting of the Board of Directors it was also
unanimously approved, effective February 11th., 2000 the engagement agreement
with Joel S. Baum, C.P.A., President of BAUM & COMPANY, P.A. at 1515 University
Drive, Suite #209, Coral Springs, Florida 33071. The new certified public
accountants firm will be responsible for the audit of the balance sheet of
Default Proof Credit Card System, Inc., as of December 31, 1999 and the related
statements of income, retained earnings, and cash flows for the year then ended.
The new engaged certified public accountants, while promising the same quality
service, offered a more reasonable and accessible cost to the Company.
Dated at the City of Miami, Florida this 12th., February, 2000
/S/ PEDRO P. LLAGUNO, ESQ.
----------------------------
Pedro P. Llaguno, Secretary
<PAGE>
Appendix "A"
C O N T E N T S
Page
----
AUDITORS' REPORT............................................... F-2
FINANCIAL STATEMENTS
BALANCE SHEET........................................ F-3
STATEMENTS OF OPERATIONS............................. F-4
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY......... F-5 - F-10
STATEMENTS OF CASH FLOWS............................. F-11
NOTES TO FINANCIAL STATEMENTS................................. F-12 - F-17
F-1
<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, 1999, 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, 1999 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.
Coral Springs, Florida
February 29, 2000
/s/ Baum & Company, P.A.
------------------------
F-2
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
December 31, 1999
ASSETS
Deferred Patent Costs, Net $ 1,161
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accrued Expenses $ 28,515
Due to Directors 90,367
-----------
Total Current Liabilities 118,882
-----------
Stockholders' Deficiency
Common Stock, $0.01 Par Value, 2,500,000
Shares Authorized, 1,270,351 Issued and
Outstanding 12,704
Additional Paid-In Capital 3,982,385
Deficit Accumulated During Developmental Stage (4,112,810)
Total Stockholders' Deficiency (117,721)
-----------
$ 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, 1999 1999 1998
------------- -------------
<S> <C> <C> <C>
EXPENSES
General & Administrative ......................... $ 3,080,525 $ 64,319 $ 71,231
Officer Salary ................................... 986,556 -- --
Marketing ........................................ 393,358 -- --
Depreciation & Amortization ...................... 98,707 -- --
Expired Public Offering Costs .................... 179,211 -- --
------------- ------------- --------------
Total Expenses ................................... 4,738,357 64,319 71,231
------------- ------------- --------------
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 ....... (4,535,810) (64,319) (71,231)
Income tax benefit ........................................ 25,436 -- --
---------- ------------ -------------
Net Loss before Extraordinary Item ........................ (4,510,374) -- (71,231)
Extraordinary item - Gain from restructuring of
debt (net of Income Taxes of $165,200) ................ 257,800 -- --
Benefit from utilization of net operating loss carry forward 139,764 -- --
------------ ------------ -------------
NET (LOSS) INCOME ......................................... $ (4,112,810) $ (64,319) $ (71,231)
============ ============ =============
Basic Loss per Common Share
Loss before extraordinary income ................. $ (0.55) $ (0.01) $ (0.01)
Extraordinary item (net, plus Tax Benefits) ...... $ (0.05) $ -- $ --
------------- ------------- --------------
Net (Loss) Earnings per Common Share ...................... $ (0.50) $ (0.01) $ (0.01)
============ ============ =============
Diluted Loss per Common Share
Loss before extraordinary income ................. $ (0.46) $ (0.01) $ (0.01)
Extraordinary item (net, plus Tax Benefits) ...... $ (0.04) $ -- $ --
------------- ------------- --------------
Net (Loss) Earnings per Common Share ...................... $ (0.42) $ (0.01) $ (0.01)
============ ============ =============
Weighted Average Number of Common
Shares Outstanding .................................... 8,287,754 11,982,962 11,982,962
</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 -- 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>
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)
</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)
<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)
=========== ============ ============ ============ ==========
</TABLE>
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)
(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-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.
See Accompanying Notes to Financial Statements
F-10
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
(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.
Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative from Years ended
Aug. 14, 1985 to December 31
Dec. 31, 1999 1999 1998
-------------- ------- -------
OPERATING ACTIVITIES
- --------------------
<S> <C> <C> <C>
Net (Loss) Gain ......................................... $(4,048,991) $ (64,319) $ (71,231)
Adjustments to Reconcile Net (Loss) Gain to
Net Cash Used in Operating Activities:
Depreciation & Amortization .................... 100,535 2,784 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
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
----------- ----------- ------------
Net Cash Used in Operating Activities .......... (3,120,320) -- --
----------- ----------- ------------
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) -- --
----------- ----------- ------------
Net Cash Provided by Financing Activities ...... 3,566,911 -- --
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH ................ -- -- --
CASH - BEGINNING ............................... -- -- --
----------- ----------- ------------
CASH - ENDING .................................. $ -- $ -- $ --
=========== =========== ============
</TABLE>
See Accompanying Notes to Financial Statements
F-11
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 31, 1999
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, 1999
F-12
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
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,
1999.
F-13
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1999
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-14
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1999
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 3,000,000 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-15
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1999
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,
-----------------------
1999 1998
--------- ---------
Net (loss) income
As reported $( 64,319) $ (71,231)
Pro-forma $(104,197) $ (115,978)
Net (loss) income per common share
As reported $ (0.01) $ (0.01)
Pro-forma $ (0.01) $ (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:
Year Ended December 31,
-----------------------------------------
1999 1998
------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares* Price
------- -------- -------- ---------
Outstanding at beginning of year 212,500 $ 0.33 152,500 $ 0.33
Granted ........................ 10,000 $ 0.33 69,500 $ 0.33
Exercised ...................... -- -- -- --
Forfeited ...................... (9,500) $ (0.25) (9,500) $ (0.25)
------- -------- ------- --------
Outstanding at end of year ..... 213,000 $ 0.33 212,500 $ 0.33
======= =======
Options exercisable at year-end 213,000 $ 0.33 212,500 $ 0.33
======= =======
* The 1998 shares have been restated to reflect 10 to 1 reverse stock split.
F-16
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements (Continued)
December 31, 1999
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 10,000 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.
F-17
