FORM 10 QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUATERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT OF 1934
For the Quarterly Period Ended MARCH 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 14(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________________ to__________________
Commission File Number 017114
------
DEFAULT PROOF CREDIT CARD SYSTEM,INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2686523
------- ----------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation) Number)
1545 MILLER ROAD, CORAL GABLES, FLORIDA 33146-230
- ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 666-1460
--------------
Registrant's telephone number, including area code
- ------------------------------------------------------------------------------
(Former name, former address and fiscal year, if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements of the past 90 days.
Yes X No _
-
The number of shares outstanding of the registrant common stock is 1,277,351 (as
of March 31, 2000).
Transitional Small Business Disclosure Format
Yes X No _
-
<PAGE>
C O N T E N T S
PAGE
----
ACCOUNTANT'S REPORT 2
FINANCIAL STATEMENTS
BALANCE SHEET 3
STATEMENTS OF OPERATIONS 4
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY 5 - 12
STATEMENTS OF CASH FLOWS 13
NOTES TO FINANCIAL STATEMENTS 14 - 20
<PAGE>
Susan M. Garcia, P.A.
Certified Public Accountants
901 Ponce de Leon Boulevard, Suite 606
Coral Gables, Florida 33134
Telephone: (305) 446-7313 - Facsimile: (305) 446-7815
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Default Proof Credit Card System, Inc.
I have reviewed the accompanying balance sheet of Default Proof Credit Card
System, Inc. (a development stage company) as of March 31, 2000, and the related
statements of operations, stockholders' deficiency and cash flows for the
three-month then ended. These financial statements are the responsibility of the
Company's management.
I conducted my review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on my review, I am not aware of any material modifications that should be
made to the accompanying financial statements for them to be in conformity with
generally accepted accounting principles.
The accompanying 1999 financial statements of Default Proof Credit Card System,
Inc. (a development stage company) were compiled by me in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. A compilation is limited to
presenting in the form of financial statements information that is the
representation of management. I have not audited or reviewed the 1999 financial
statements and, accordingly, do not express an opinion or any other form of
assurance on them.
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.
/s/ Susan M. Garcia, P.A.
- --------------------------
Coral Gables, Florida
May 9, 2000
Member: American Institute of Certified Public Accountants - Florida Institute
of Certified Public Accountants
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Office Equipment $ 9,071
Deferred Patent Costs, Net 1,161 $ 3,945
----------- -----------
TOTAL ASSETS $ 10,232 $ 3,945
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accrued Expenses $ 29,265 $ 26,516
Due to Director 108,009 60,062
----------- -----------
TOTAL CURRENT LIABILITIES $ 137,274 $ 86,578
----------- -----------
Stockholders' Deficiency
Common Stock, $0.01 Par Value, 2,500,000
Shares Authorized, 1,277,351 Issued and Outstanding $ 12,774 $ 12,194
Additional Paid-In Capital 4,008,565 3,970,660
Deficit Accumulated During Developmental Stage (4,148,381) (4,065,487)
------------ -----------
TOTAL DEFICIENCY IN ASSETS (127,042) (82.633)
------------ -----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIENCY $ 10,232 $ 3,945
=========== ===========
</TABLE>
See Accountant's Report.
4
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
---------- ---------
EXPENSES
General & Administrative $ 35,571 $ 19,780
Depreciation & Amortization
Total Expenses 35,571 19,780
---------- ---------
NET LOSS $ (35,571) $ 19,780
========== =========
Basic Loss per Common Share
Loss before extraordinary income $ (0.01) $ (0.016)
---------- ---------
Net Loss per Common Share $ (0.01) $ (0.016)
========== =========
Diluted Loss per Common Share
Loss before extraordinary income $ (0.01) $ (0.016)
---------- ---------
Net (Loss) Earnings per Common Share $ (0.01) $ (0.016)
========== =========
Weighted Average Number of Common
Shares Outstanding $ 11,982,962 $ 1,219,351
============ ===========
See Accountant's Report.
5
<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 Accountant's Report
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, 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 Accountant's Report.
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, 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 Accountant's Report.
8
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
----------------------- ADDITIONAL DURING THE
# OF SHARES PAID-IN DEVELOPMENT
ISSUED AMOUNT CAPITAL STAGE TOTAL
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 11,643,510 11,644 3,903,460 (3,977,260) (62,156)
Jan. 22/98--to a Financial Public Relations Co.
for Professional Services Rendered (X) 200,000 200 21,800 22,000
Apr. 13/98--for Professional Services Rendered (X) 100,000 100 14,900 15,000
Jun. 4/98--for Professional Services Rendered (Y) 50,000 50 8,950 9,000
Aug. 4/98--for Professional Services Rendered (R) 50,000 50 7,950 8,000
Dec. 31/98--Net Loss (71,231) (71,231)
----------- -------- ---------- ------------- ---------
BALANCE - DECEMBER 31, 1998 12,043,510 $ 12,044 $3,959,560 ($ 4,048,491) ($ 76,887)
Feb. 1/99--10 to 1 Reverse Stock Split (10,839,159)
Various/99--for Professional Services Rendered 66,000 660 22,825 23,485
Dec. 31/99--Net Loss (64,319) (64,319)
----------- -------- ---------- ------------- ---------
BALANCE - DECEMBER 31, 1999 $1,270,351 $ 12,704 $3,982,385 ($4,112,810) ($117,721)
Feb. 28/00--for Professional Services Rendered 7,000 70 26,180 26,250
Mar. 31/00--Net Loss (35,571) (35,571)
----------- -------- ---------- ------------- ---------
BALANCE - MARCH 31, 2000 1,277,351 12,774 4,008,565 (4,148,381) (127,042)
=========== ========= ========== ============= =========
</TABLE>
See Accountant's Report.
9
<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 Accountant's Report.
10
<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 Accountant's Report.
11
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
(Y) Non-cash consideration received consisted of consulting services related to
the preparation of 10K filing. The shares of stock issued for non-cash
consideration were recorded at the fair market value of the shares at the
date of issuance.
See Accountant's Report.
12
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
----- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (35,571) $ (19,780)
Adjustments to Reconcile Net (Loss) Gain to
Net Cash Used in Operating Activities:
Stock Issued in lieu of Cash for Prof. Services 26,250 11,250
Increase (Decrease) in Accrued Expenses 750 200
------------- ---------
NET CASH USED IN OPERATING ACTIVITIES (8,571) (8,330)
------------ ---------
INVESTING ACTIVITIES
Purchases of Property & Equipment (9,071)
-----------
NET CASH USED IN INVESTING ACTIVITIES (9,071)
-----------
FINANCING ACTIVITIES
Capital Contributions
Net Receipts/Advances to Stockholder 17,642 8,330
------------ ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,642 8,330
------------ ---------
NET INCREASE (DECREASE) IN CASH -- --
CASH - BEGINNING -- --
CASH - ENDING -- --
============ =========
</TABLE>
See Accountant's Report.
13
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS ACTIVITY
Default Proof Credit Card System, Inc. (the "Company") was incorporated on
August 14, 1985 under the laws of the State of Florida. The Company 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
14
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) March 31, 2000
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 Line of
Credit system. The Company is now engaged in discussions with several
financial institutions for its development. In the absence of achieving
profitable operations, or obtaining debt or equity financing, the Company
may not have sufficient funds to continue through December 31, 2000.
15
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 2000
NOTE 3. DUE TO DIRECTOR
Due to director consisted of various non-interest bearing and due upon
demand advances to a stockholder.
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
16
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 2000
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
17
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 2000
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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Net (loss) income
As reported $ ( 35,571) $ (19,780)
Pro-forma $ (35,571) $ (19,780)
Net (loss) income per common share
As reported $ (0.01) $ (0.016)
Pro-forma $ (0.01) $ (0.016)
</TABLE>
A summary of the status of the Company's fixed stock option plan and
non-plan options as of March 31, 2000 and 1999, and changes during the
years then ended is presented below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
--------------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
SHARES PRICE SHARES* PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 303,000 $ 0.33 212,500 $ 0.33
Granted 100,000 $ 0.33
Exercised -- -- -- --
Forfeited (9,500) $ (0.25)
-------- ------- -------- -------
Outstanding at end of year 303,000 $ 0.33 303,000 $ 0.33
======== ========
Options exercisable at year-end 303,000 $ 0.33 303,000 $ 0.33
======== ========
</TABLE>
* The 1998 shares have been restated to reflect 10 to 1 reverse stock
split.
18
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 2000
NOTE 6. STOCK OPTIONS (CONTINUED)
STOCK BASED COMPENSATION (CONTINUED)
Weighted-average fair value of options granted during the year:
FOR THE THREE MONTHS ENDED
--------------------------
2000 1999
---- ----
Below market $ -- $ --
At market $0.38 $ --
Above market $0.33 $0.33
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------
<S> <C> <C> <C>
Weighted
Number Average Weighted
Range of Outstanding Remaining Average
Exercise at Contractual Exercise
PRICES 3/31/00 LIFE PRICE
----------------- ------------- -------------- --------
$0.38 100,000 3.00 years $ 2.9
$0.01 - $0.05 174,500 2.76 years $ 2.76
$0.075 - $0.125 28,500 2.59 years $ 2.59
</TABLE>
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 March 31, 2000, 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.
19
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 2000
NOTE 9. SUBSEQUENT EVENTS
On April 24, 2000, The U.S. Patent and Trademark Office sent notice of
allowance that the Patent pending, The Company's ATM prepaid debit cards
and allowed all of its eight claims.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
--------------------------------------
(Registrant)
DATE: May 11, 2000 By: /s/ Vincent Cuervo
----------------------------------------
Vincent Cuervo, Chairman and
Chief Executive Officer
DATE: May 11, 2000 By: /s/ Pedro Llaguno
----------------------------------------
Pedro Llaguno, Secretary
21
