FORM 10 QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
For the Quarterly Period Ended JUNE 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 14(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________________ to__________________
Commission File Number 017114
------
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2686523
--------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation) Number)
1545 MILLER ROAD, CORAL GABLES, FLORIDA 33146-2309
--------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(305) 666-1460
--------------
Registrant's telephone number, including area code
-------------------------------------------------------------------------------
(Former name, former address and fiscal year, if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements of the past 90 days.
Yes X No _
-
The number of shares outstanding of the registrant common stock is 1,281,851 (as
of June 30, 2000).
Transitional Small Business Disclosure Format
Yes X No _
-
<PAGE>
C O N T E N T S
PAGE
----
FINANCIAL STATEMENTS
BALANCE SHEET 3
STATEMENTS OF OPERATIONS 4
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY 5 - 11
STATEMENTS OF CASH FLOWS 12
NOTES TO FINANCIAL STATEMENTS 13 - 20
-2-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
June 30, 2000
ASSETS
Office Equipment $ 9,416
Deferred Patent Costs, Net 1,161
----------
TOTAL ASSETS $ 10,577
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accrued Expenses $ 28,816
Due to Director 116,882
----------
TOTAL CURRENT LIABILITIES $ 145,698
----------
Stockholders' Deficiency
Common Stock, $0.01 Par Value, 2,500,000
Shares Authorized, 1,281,851 Issued and Outstanding $ 12,819
Additional Paid-In Capital 4,018,490
Deficit Accumulated During Developmental Stage (4,166,430)
----------
TOTAL DEFICIENCY IN ASSETS (135,121)
----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIENCY $ 10,577
==========
See Accountant's Report.
-3-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
JUNE 30, 2000
--------------------------
EXPENSES
General & Administrative $ 53,620
Depreciation & Amortization -
---------------
Total Expenses 53,620
---------------
NET LOSS $ (53,620)
===============
Basic Loss per Common Share
Loss before extraordinary income $ (0.01)
--------------
Net Loss per Common Share $ (0.01)
===============
Diluted Loss per Common Share
Loss before extraordinary income $ (0.01)
--------------
Net (Loss) Earnings per Common Share $ (0.01)
==============
Weighted Average Number of Common
Shares Outstanding 1,198,296
==============
See Accountant's Report.
-4-
<PAGE>
<TABLE>
<CAPTION>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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.
-5-
<PAGE>
<TABLE>
<CAPTION>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
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.
-6-
<PAGE>
<TABLE>
<CAPTION>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
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.
-7-
<PAGE>
<TABLE>
<CAPTION>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
DEFICIT
COMMON STOCK ACCUMULATED
------------------------- ADDITIONAL DURING THE
# OF SHARES PAID-IN DEVELOPMENT
ISSUED AMOUNT CAPITAL STAGE TOTAL
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 ...................... 11,643,510 11,644 3,903,460 (3,977,260) (62,156)
Jan. 22/98--to a Financial Public Relations Co. ..
for Professional Services Rendered (X) ....... 200,000 200 21,800 -- 22,000
Apr. 13/98--for Professional Services Rendered (X) 100,000 100 14,900 -- 15,000
Jun. 4/98--for Professional Services Rendered (Y) 50,000 50 8,950 -- 9,000
Aug. 4/98--for Professional Services Rendered (R) 50,000 50 7,950 -- 8,000
Dec. 31/98--Net Loss ............................. -- -- -- (71,231) (71,231)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1998 ...................... 12,043,510 $ 12,044 $ 3,959,560 ($ 4,048,491) ($ 76,887)
Feb. 1/99--10 to 1 Reverse Stock Split ........... (10,839,159) -- -- -- --
Various/99--for Professional Services Rendered ... 66,000 660 22,825 -- 23,485
Dec. 31/99--Net Loss ............................. -- -- -- (64,319) (64,319)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1999 ..................... $ 1,270,351 $ 12,704 $ 3,982,385 ($ 4,112,810) ($ 117,721)
Feb. 28/00--for Professional Services Rendered ... 7,000 70 26,180 -- 26,250
Mar. 31/00--Net Loss ............................. -- -- -- (35,571) (35,571)
------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2000 ........................ 1,277,351 12,774 4,008,565 (4,148,381) (127,042)
Apr. 12/00--for Professional Services Rendered ... 4,000 40 8,680 -- 8,720
Apr. 12/00--for Professional Services Rendered ... 500 5 1,245 -- 1,250
Jun. 30/00--Net Loss ............................. -- -- -- (18,049) (18,049)
------------ ------------ ------------ ------------ ------------
BALANCE - JUNE 30, 2000 .......................... 1,281,851 12,819 4,018,490 (4,166,430) (135,121)
============ ============ ============ ============ ============
</TABLE>
See Accountant's Report.
-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 Accountant's Report
-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 Accountant's Report.
-10-
<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.
-11-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
JUNE 30, 2000
--------------------------
OPERATING ACTIVITIES
Net Loss $ (18,049)
Adjustments to Reconcile Net (Loss) Gain to
Net Cash Used in Operating Activities:
Stock Issued in lieu of Cash for Prof. Services 9,970
Increase (Decrease) in Accrued Expenses (449)
-------------
NET CASH USED IN OPERATING ACTIVITIES (8,528)
-------------
INVESTING ACTIVITIES
--------------------
Purchases of Property & Equipment (345)
-------------
NET CASH USED IN INVESTING ACTIVITIES (345)
-------------
FINANCING ACTIVITIES
--------------------
Capital Contributions
Net Receipts/Advances to Stockholder 8,873
-------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,873
-------------
NET INCREASE (DECREASE) IN CASH -
CASH - BEGINNING -
CASH - ENDING $ -
=============
See Accountant's Report.
-12-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS ACTIVITY
Default Proof Credit Card System, Inc. (the "Company") was
incorporated on August 14, 1985 under the laws of the State of
Florida. The Company owns the intellectual property of several
U.S. Patents and patent pending applications and is engaged in
the marketing of secured credit cards and of the ATM Prepaid
Debit Cards Dispenser for which received notice of patent
allowance on April 24, 2000, the over the counter sale and
dispensing of prepaid debit cards (patent pending) and the
e-commerce internet dispensed of prepaid debit cards under the
Domain name ubuydebitcards.com also patent pending. The Company's
offices are located in Coral Gables, Florida. The Company is in
the development stage and its operation to date have largely
consisted of the research, marketing and development of its
products.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
EARNINGS (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" which simplifies the
standards for computing earnings per share ("EPS") previously
found in APB No. 15, "Earnings Per Share". It replaces the
presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the diluted EPS computation. The Company
adopted SFAS No. 128 in January 1998 and its implementation did
not have an effect on the financial statements. EPS has been
restated for all prior periods presented. Net loss per common
share (basic and diluted) is based on the net loss divided by the
weighted average common shares outstanding during each year. The
Company's potentially issuable shares of common stock pursuant to
outstanding stock options has been excluded from the calculation
of diluted loss per share in 1998 since the effect would have
been anti-dilution to the Company's net loss per common share.
See Accountant's Report.
-13-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000
PATENT COSTS
Costs incurred in connection with obtaining the license agreement
of a patent have been capitalized and are being amortized using
the straight-line method over 17 years from the date of issuance
of the patents.
INCOME TAXES
The Company accounts for income taxes pursuant to the provisions
of FASB No. 109 "Accounting for Income Taxes", which requires,
among other things, a liability approach to calculating deferred
income taxes. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities.
The Company has had operating losses since inception and
accordingly has not provided for income taxes. Realization of the
benefits related to the net operating loss carry forwards may be
limited in any one year due to IRS Code Section 382, change of
ownership rules.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities", provides guidance on the financial
reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be
expensed as incurred. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998.
The Company's management does not expect this SOP to have a
material impact on the Company's financial position or results of
operations.
In March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires
computer software costs associated with internal use software to
be expensed as incurred until certain capitalization criteria are
met. The Company will adopt SOP 98-1 on January 1, 1999. Adoption
of this statement is not expected to have a material impact on
the Company's financial position, results of operations or cash
flows..SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", establishes accounting and reporting
standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Statement applies to
all entities and is effective for all fiscal quarters of the
fiscal years beginning after June 15, 1999. The Company did not
engage in derivative instruments or hedging activities in any
periods presented in the financial statements.
See Accountant's Report.
-14-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000
NOTE 2. GOING CONCERN CONSIDERATION
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. The Company
suffered losses prior to commencement of operations and has a
working capital deficiency. Management intends to actively market
the Resource System and a new Line of Credit system. The Company
is now engaged in discussions with several financial institutions
for its development. In the absence of achieving profitable
operations, or obtaining debt or equity financing, the Company
may not have sufficient funds to continue through December 31,
2000.
NOTE 3. DUE TO DIRECTOR
Due to director consisted of various non-interest bearing loans
and advances made by the director, and under agreement, payable
in cash or with shares of the Company `s Common Stock $0.01 par
value per share, upon demand by the director.
NOTE 4. LICENSE AGREEMENT
The Company's C.E.O. and principal stockholder was issued two
U.S. patents and one Canadian patent between January 1988 and
February 1991, and also registered in the U.S. the trademark
"Resource". On February 9, 1993, the Company entered into a
license agreement which revoked the prior agreement dated January
8, 1991, which provides the Company the exclusive rights and use
of the aforementioned patents and trademark for an indefinite
period of time in return for nominal consideration to the
stockholder. The Company C.E.O. has transferred to the Company
all the worldwide rights and ownership of three patent
applications for stock options to purchase shares of the Company,
the stock options to be granted if the patent applications
received from the U.S. Patent and Trademarks offices the related
patent allowances. On April 24, 2000 the U.S. Patent and
Trademark Office notice of allowance of the patent application
ATM Prepaid Debit Cards Dispenser notifying that all its eight
claims were allowed. The other patents pending, the sale,
dispensed and activated over the counter prepaid debit cards, as
well as the purchase, sale and dispensed through the Internet
e-commerce, the known as the domain name ubuydebitcards.com are
now in process of receive patent allowances
NOTE 5. EMPLOYMENT AGREEMENT
On September 1, 1988, the president/principal stockholder, C.E.O.
and Director entered into an employment agreement with the
Company. Pursuant to the agreement, the stockholder is to receive
an annual salary of $144,000, increased annually by the greater
of 5% or the increase in the consumer price index. However,
rights to this salary and its increases have been permanently
waived by the stockholder until such time as the Company's cash
flows improve. On June 25th, 1999 the agreement was renewed in
its entirety by the Board of Directors with the exemption of
paragraphs number 1 EMPLOYMENT TERM, and paragraph number 3.
POSITION. UNDER EMPLOYMENT TERM, providing the Executive is not
in default, or has not been removed pursuant to paragraph 6, the
agreement was renewed and extended until the executive seventieth
sixth (76) birthday, or his death or disability, whichever
See Accountant's Report.
-15-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000
occurs first. Under paragraph 3. POSITION was agreed that during
the Employment Term, the Executive shall have the Position of
Chief Executive Officer (CEO) and Chairman of the Board of
Directors of the Company. The agreement also provides that in the
event of a termination for other than cause, death or disability,
he shall receive severance pay in the amount equal to his salary,
payable during the remainder of his employment term.
NOTE 6. STOCK OPTIONS
1988 STOCK OPTION PLAN
In August 1988, the Company adopted the 1988 Stock Option Plan.
Under this plan, stock options to purchase 600,000 shares of
common stock may be granted to employees, officers and other
persons providing services to the Company, a parent or a
subsidiary of the Company.
The 1988 Stock Option Plan is intended to qualify as an
"Incentive Stock Option Plan" under Section 422A of the Internal
Revenue Code. Under the Stock Option Plan, incentive stock
options may be granted at not less than 100 percent of the fair
market value of the Company's common stock at the date the option
is granted (110% of fair market value for 10% or greater
shareholders) and options granted to any one participant may not
exceed $100,000 in option price per year. Options may be granted
within ten (10) years from the adoption of the 1988 Stock Option
Plan. Each option granted under the 1988 Stock Option Plan must
be exercised within ten (10) years from the date of grant.
No options were granted under the 1988 Stock Option Plan.
OTHER STOCK OPTIONS
During 1998, five-year non-plan options to purchase 695,000
shares of common stock at prices ranging between $0.14 and $1.50
per share were granted to the President and Vice President of the
Company. These options were fully vested at the date of grant.
During 1997 five-year non-plan options to purchase 445,000 shares
of common stock, at prices ranging between $0.15 and $1.25 per
share were granted to the President and Vice President of the
Company. These options were fully vested at the date of grant.
At December 31, 1998 and 1997 total non-plan options outstanding
were 2,125,000 and 1,525,000, respectively. At December 31, 1998
and 1997 2,125,000 and 1,525,000, respectively, of the non-plan
options were fully vested.
As of December 31, 1998 and 1997 the Company has agreed to grant
its President, CEO and inventor other five-year non-plan options
to purchase of the Company Common Stock $0.001 par value per
share in the amounts of 2,250,000 and 3,000,000 respectively,
contingent upon the issuance of patent allowances related to
certain patent applications. These options will have exercise
prices of $0.10 and $0.15, respectively.
See Accountant's Report.
-16-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000
As of May 19, 2000 the Company has agreed to grant its C.E.O. and
inventor other ten year non-plan options to purchase the
Company's Common Stock $0.01 par value per share in the amount of
500,ooo shares, contingent upon the issuance of patent allowance
related to certain patent application.
STOCK BASED COMPENSATION
As required by Statement of Financial Accounting Standards
("SFAS") 123, pro-forma information regarding net loss and loss
per share has been determined as if the Company had accounted for
its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998; risk-free rate
of return of 5.0%; dividend yield of 0.0%; volatility factor of
the expected market price of the Company's common stock of 1.41
and expected lives ranging from 1 to 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have not vesting
restriction and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics
significantly different from traded options, and because changes
in the subjective input assumptions can materially affect the
fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of
the fair value of its stock options.
Under the accounting provisions of SFAS No. 123, the Company's
pro-forma net loss and loss per share would have been:
FOR THE THREE MONTHS
ENDED JUNE 30, 2000
-----------------------
Net (loss) income
As reported $ (56,400)
Pro-forma $ (56,400)
Net (loss) income per common share
As reported $ (0.01)
Pro-forma $ (0.01)
See Accountant's Report.
-17-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000
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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1999 1998
----------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
SHARES PRICE SHARES* PRICE
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 212,5000 $ 0.33 152,500 $ 0.33
Granted 100,000 69,500 $ 0.33
Exercised - - - -
Forfeited (9,500) (9,500) $ (0.25)
-------
Outstanding at end of year 303,000 $ 0.33 212,500 $ 0.33
========== =======
Options exercisable at year-end 303,000 $ 0.33 212,500 $ 0.33
========== =======
</TABLE>
* The 1998 shares have been restated to reflect 10 to 1 reverse stock split.
See Accountant's Report.
-18-
<PAGE>
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000
NOTE 6. STOCK OPTIONS (CONTINUED)
STOCK BASED COMPENSATION (CONTINUED)
Weighted-average fair value of options granted during the year:
YEAR ENDED DECEMBER 31,
1999 1998
---- ----
Below market $ - $ -
At market $0.38 $ -
Above market $0.33 $0.33
OPTIONS OUTSTANDING AND EXERCISABLE
Weighted
Number Average Weighted
Range of Outstanding Remaining Average
Exercise at Contractual Exercise
PRICES 12/31/99 LIFE PRICE
-------------------- ------------ ------------ ---------
$0.38 100,000 3.00 years $ 2.9
$0.01 - $0.05 174,500 2.76 years $ 2.76
$0.075 - $0.125 28,500 2.59 years $ 2.59
NOTE 7. COMMON STOCK SPLIT
On February 1, 1999, the Board of Directors of the company approved a 10 to 1
reverse stock split.
NOTE 8. INCOME TAXES
At December 31, 1999, the Company had a net operating loss carry forward of
approximately $4 million, that expires through 2013.
The Company has a deferred tax asset of approximately $1,500,000 as a result of
net operating loss carry forwards, which is offset by a valuation allowance of
the same amount due to the uncertainties behind its realization.
NOTE 9. SUBSEQUENT EVENTS
On April 24, 2000, The U.S. Patent and Trademark Office sent to the Company
Notice of Allowance for the ATM prepaid debit cards dispenser and allowed all of
its eight claims.
See Accountant's Report.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto daily authorized.
DEFAULT PROOF CREDIT CARD SYSTEM, INC.
--------------------------------------
(Registrant)
DATE: July 21, 2000 By: /s/ Vincent Cuervo
----------------------------------------
Vincent Cuervo, Chairman and
Chief Executive Officer
DATE: July 21, 2000 By: /s/ Pedro Llaguno
----------------------------------------
Pedro Llaguno, Secretary
-20-
