Amendment to Registration of Securities (General Form) — Form 10
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10-12G/A — Amendment No. 3 to Form 10 Filed August 21, 2008
Document Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
AMENDMENT NO. 3
to
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
Prepaid Card Holdings, Inc.
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(Name of Small Business Issuer in its charter)
Nevada 76-0222016
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
18500 Von Karman, Suite 530 Irvine, CA 92612
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 877-237-6260 x 110
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
-------------------------- -------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
(Do not check if a smaller
reporting company)
1
TABLE OF CONTENTS
Item 1. Description of Business. ..........................................3
Item 1A. Risk Factors. ....................................................19
Item 2. Financial Information. ...........................................22
Item 3. Description of Property. .........................................27
Item 4. Security Ownership of Certain Beneficial
Owners and Management. ...........................................27
Item 5. Directors and Executive Officers, Promoters
and Control Persons. .............................................28
Item 6. Executive Compensation. ..........................................31
Item 7. Certain Relationships and Related Transactions. ..................37
Item 8. Legal Proceedings. ...............................................38
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters. ...................38
Item 10. Recent Sales of Unregistered Securities. .........................40
Item 11. Description of Securities. .......................................43
Item 12. Indemnification of Directors and Officers. .......................47
Item 13. Financial Statements and Supplementary Data. .....................47
Item 14. Changes in and Disagreements with Accountants. ...................47
Item 15. Financial Statements and Exhibits. ...............................47
Signatures. ..................................................................48
2
ITEM 1. DESCRIPTION OF BUSINESS.
A. BUSINESS DEVELOPMENT.
Prepaid Card Holdings, Inc., previously known as Berman Holdings, Inc., a Nevada
Corporation ("PCH," or the "Company"), through its wholly-owned operating
subsidiaries Berman Marketing Group, Inc., a California Corporation ("BMG") and
Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom")
offering card association branded payment cards directly to consumers through
its issuing bank, does not participate in other typical commercial banking
services such as making loans, accepting deposits, etc., is in the business of
marketing and management of general use prepaid cards.
The Company was originally incorporated on October 8, 1986 as Nately National
Corporation, and on April 7, 1987 changed its name to National HealthCare
Alliance, Inc. to better reflect the business of the Company at the time. On
June 22, 2005, the Ninth Judicial District Court of the State of
placeStateNevada entered an order granting custodianship of the Company to
Robert K. McBride, due to the finding that the Company had been abandoned by its
prior management. Mr. McBride was elected sole director and appointed officer
of the Company.
On October 11, 2007, the Company acquired BMG as its operating business. The
Company then changed its name to Berman Holdings, Inc. on November 2, 2007 to
better reflect its operating business, and changed its trading symbol from NHAL
to BRMN. The Company changed its name to Prepaid Card Holdings, Inc. on May 2,
2008 to better reflect its operating business and changed its trading symbol
from BRMN to PPDC. BMG was formed on February 2, 2007 by the Company's
president, Bruce Berman. On March 8, 2008, the Company acquired Merchant
Processing International, Inc. dba Bank Freedom ("Bank Freedom") from the
Company's president, Bruce Berman, as its second operating business. Our
operations are currently divided between BMG and Bank Freedom, our two operating
businesses. BMG manages all of our marketing operations, while Bank Freedom
manages our prepaid card products, including the processing, banking, printing,
customer service, and infrastructure necessary for the management and delivery
of prepaid cards. Bank Freedom also manages our merchant processing services
portfolio, discussed in more detail below.
The Company has not been in bankruptcy, receivership, or any similar proceeding,
and, to the best knowledge of management, has not defaulted on the terms of any
note, loan, lease, or other indebtedness or financing arrangement requiring the
issuer to make any material payments.
The Company began operations in February 2008 as it began the process of
accepting orders and shipping the Bank Freedom Prepaid MasterCard, which was
first shipped to its customers approximately March 1, 2008. Prior to that, the
Company was in the development stage and focused on establishing relationships
with key operational partners.
--------------------
1. Bank Freedom operates in the prepaid card market solely through an
agreement with a third party issuing bank. It is not a traditional
commercial "bank" and, other than offering card association branded payment
cards directly to consumers through its issuing bank, does not participate
in other typical commercial banking services such as making loans,
accepting deposits, etc.
3
B. FINANCIAL INFORMATION ABOUT SEGMENTS
As defined by generally accepted accounting principles ("GAAP"), we do not have
any segments separate and apart from our business as a whole. Accordingly,
there are no measures of revenue from external customers, profit and loss, or
total assets aside from what is reported in the Financial Statements attached to
this Form 10.
C. BUSINESS OF THE COMPANY
EXECUTIVE SUMMARY
Through our operating subsidiaries, Berman Marketing Group, Inc. ("BMG") and
Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom"), and
strategic alliances with processors, operators and other companies, we operate
in the prepaid general use card business, as well as the merchant processing
services businesses.
Our Bank Freedom prepaid card business focuses on the general use debit, ATM,
Point of Sale ("POS") and signature-based VISA and MasterCard card markets. Our
primary target audience for this business is an estimated 100 million unbanked
and underbanked individuals in the United States.(FN 2) We believe we are
qualified to capture this market due to the following strategic and tactical
advantages:
- Marketing - Our executives possess critical marketing experience necessary
to gain market share in the underbanked demographic. Specifically, from
2003 to 2007 our CEO Bruce Berman developed Berman Investment Group LLC
("BIG") into a successful marketing company. BIG sold approximately
$20,000,000 in personal finance and business development products to a
similar customer demographic through Direct-to-Web direct marketing
practices, including television commercials and infomercials, radio, direct
mail, print media and internet marketing. We believe this experience is
critical to the success of our company due to the industry's nature of
being highly dependent on successful marketing
- Operations - Our executives have significant experience in overseeing the
development of integrated business systems in the past. One of those
systems is known as the Enpointe System, developed for Berman Investment
Group, Inc. ("BIG"), a company owned by Bruce Berman our CEO. The Company
plans to use the Enpointe system owned by BIG for the deployment of the
Company's prepaid card programs.
- Technology - We have technology infrastructure capacity to scale to over
10,000 customer acquisitions per day, which is housed in a level 3 NOC
Sarbanes Oxley compliant technology center. However, the Company does not
anticipate this type of traffic.
--------------------
2. "The Race is On in Prepaid" - Edgar, Dunn, and Company, INSIGHT Volume 24,
Sept. 2007
4
- Compliance and Fraud Detection - Our executives have extensive internet
fraud detection and prevention experience.
- According to Industry Insiders the underbanked Market is untapped and not
penetrated.(FN 3) Single digit percentages of market penetration are
estimated (less than 9%).
Our new Bank Freedom prepaid cards and services will target several markets
including the estimated 100 million people who either do not have access to
credit, do not have a checking account, or who wish for the convenience of a
prepaid method of using the debit/ATM/credit card networks. The 100 million
estimated is people living in the United States of America, which desire the
flexibility of giving their family members access to funds without the risk of
credit.
The company intends to raise capital for advertising, operations, acquisitions
and general business development.
BUSINESS MODEL AND STRATEGY
Our Bank Freedom prepaid card business model is a two part process: acquisition
and education.
Typical usage patterns of existing prepaid cards suggest that the first three
months of usage are loads (placing funds on the card) and ATM transactions while
the fourth and beyond months are POS, debit, and signature based transactions.
While ATM transactions do generate revenue, our business model is to encourage
POS, signature, and debit transactions, as these types of transactions generate
significant revenue through transaction fees and interchange fees (fees charged
to merchants for credit and debit card processing services). We believe we will
achieve success by encouraging the acceptance and use of the prepaid card for
these everyday activities.
Therefore, our business strategy is to first engage in a market campaign to
acquire customers, and then to educate and influence our customers to adopt the
prepaid card into their daily financial management. This will require
continuous marketing and touch points both prior to and after customer
acquisition.
Revenue
-------
We derive revenues through fees charged to the cardholders. Those sources may
include:
- Interchange fees
- Bill pay fees
- Domestic and International ATM transaction fees
- Debit purchase and PIN decline fees
- Monthly maintenance fees
--------------------
3. Mark Troughton - President, Green Dot, Inc. ATM, Debit and Prepaid Show -
La Jolla CA. Oct. 2007
4. ATM, Debit, and Prepaid Forum, La Costa, CA - October 2007
5
Pricing
-------
We believe there is a threshold the unbanked consumer will pay for the benefits
of a prepaid card. So far, this threshold has yet to be determined. Major
players in the market have successfully entered the market, but with estimates
of only 5% to 9% market penetration.(FN 6)
Critical to a long-standing relationship with our targeted demographic is
pricing. We believe there are several key strategic concepts that will move our
card offering beyond the current thinking. In particular:
Do not gouge the customer: There is an apparent perception that prepaid cards
offer issuers an opportunity to gouge the customers. We believe this is a
problematic strategy as more and more issuers find their way into the market.
Offer Free Services and/or Rebates: Everybody likes getting something free -
specifically our targeted demographic.
Following these two points of emphasis, we will determine the optimal type and
amount of pricing in order to maximize our penetration of the market.
Merchant Processing Services
------------------------------
In addition to our primary business of our Bank Freedom prepaid cards, we
realize revenue by selling merchant processing services for retail companies
nationally, receiving revenues in the form of commissions paid as a percentage
of credit card volume for the retailers engaged.
Bank Freedom, one of our two operating subsidiaries, from 2005 to September 2007
focused exclusively on selling merchant services that enable US businesses to
accept credit and debit cards. As a result, Bank Freedom has built a portfolio
of merchant accounts that generate commissions on each credit card transaction
processed by the business. In October of 2007, Bank Freedom changed its focus
and dedicated its resources to developing prepaid card solutions. Currently,
only 5% of Bank Freedom's resources are dedicated to managing the merchant
portfolio with the remaining resources dedicated to prepaid card products
Merchant processing services realized revenues of $141,263 from acquisition
through June 30, 2008. The Bank Freedom prepaid card, despite beginning
operations, did not receive any revenues until April, 2008. The Bank Freedom
card realized revenues of $127,723 through June 30, 2008. The prepaid card
business model earns revenues through interchange and service fees after
issuance of the cards. Prepaid Card Holdings, Inc. had an accumulated deficit
of $2,982,419 through June 30, 2008. We intend to continue to offer merchant
processing services to national retail companies and act as an independent sales
organization for Columbus Bank and trust.
--------------------
5. Mark Troughton - President, Green Dot, Inc. ATM, Debit and Prepaid Show -
La Jolla CA. Oct. 2007. See "Market Penetration," below.
6
PRINCIPAL PRODUCTS AND SERVICES
Types of Prepaid Card
------------------------
There are two basic types of prepaid cards: closed loop and open loop. They
have the following characteristics:
Closed Loop: Closed loop cards have replaced the traditional "gift certificate"
and are commonly known as "gift cards." Purchasers buy a card for a fixed amount
and can only use the card at the merchant that issues the card. Generally, few
if any laws govern these types of cards. Card issuers or sellers are not
required to obtain a license. Closed loop cards are not subject to the Patriot
Act, as they generally cannot identify a customer.
Semi-Closed Loop Cards: Cardholders are permitted to redeem the cards at
multiple merchants within a geographic area. These types of cards are issued by
a third party, rather than the retailer who accepts the card. Examples include
university cards and mall gift cards.
Open Loop Cards: All of our prepaid cards are open loop cards. Open loop
prepaid cards are the most regulated of the prepaid cards. An example is the
Payroll card. Payroll cards are used by employers to pay employees. The
employee is issued a card that permits access to an account established by the
employer. At the end of each pay period, the employee's ability to draw money
from that account is increased by the amount of his or her wages. The card may
be used at an Automated Teller Machine (ATM) to obtain cash, and, in some
instances, may be used at a store to pay for goods purchased. The payroll card
is particularly useful for employees who do not have a regular checking or
savings account at a financial institution because they can access their wages
conveniently.
Distinguishing features in an open loop prepaid are:
- Reloadability
- Higher reload amount limits
- Wide-ranging sources of funds (credit card, cash, corporate
payroll, ACH, other prepaid cards)
- More purchase locations
- Greater network access (ATM, POS, Signature, etc.)
- Easier cash access (ATM, remittance)
- More stringent identification processes
- Lower risk and a more evenly shared risk of loss
Under the Open loop umbrella, there are numerous types of cards being offered
today with various degrees of risk to the issuer. These include:
7
- Payroll
- Health Benefits
- Corporate travel and expense
- Incentive
- Remittance
- Government benefits
- Disaster relief
Our Prepaid Cards
-------------------
Bank Freedom Prepaid MasterCard: Our Bank Freedom Prepaid MasterCards were
first shipped in March, 2008. The initial demand for our Bank Freedom
MasterCard exceeded our expectations. As of August 19, 2008, we had shipped a
total of 79,184 cards. Of these, 10, 722 are actively being used. A total of
$12,174,511 has been loaded onto Bank Freedom cards by our cardholders via our
reloading partner, Green Dot, and through direct deposits.
Spanish MasterCard: On June 1, 2008 we launched a Spanish version website for
our Bank Freedom Prepaid MasterCard Card program. Spanish speaking customers can
go to www.bancolibertadtarjeta.com and order a Bank Freedom Prepaid MasterCard
from a website entirely in Spanish. Bank Freedom has always had bilingual
customer service agents and a bilingual website for its customers to access
their prepaid card accounts; however, to help new Spanish speaking customers to
better understand the benefits of the product they are ordering, we are
releasing this new card enrollment website.
Bank Freedom VISA: Bank Freedom received approval from our issuing bank and
VISA International to release the Bank Freedom Prepaid VISA card. We anticipant
the release of our VISA card in the third quarter of 2008.
Cash Reloading Agreement with Green Dot
--------------------------------------------
In December, 2007, Bank Freedom entered into an exclusive agreement with Green
Dot to provide cash loading services for card programs managed by Bank Freedom.
In May, 2008, Green Dot offered Bank Freedom branding on its point of purchase
displays nationally. The Bank Freedom logo will appear on the Green Dot
MoneyPak retail displays.
According to Green Dot Corporation, Bank Freedom's logo and brand will appear on
Green Dot's point of purchase displays in all Walgreens and CVS/Pharmacy
locations throughout the US. Green Dot has rolled out the Walgreens branding in
July 2008 and plans to roll out the CVS branding during September 2008.
See "Cash Reload Options," below, for a more detailed discussion of Green Dot
and its competitors.
8
MARKETING
Using our management's experience in the credit card processing field, we have
developed and offered the Bank Freedom prepaid MasterCard and plan to offer the
Bank Freedom Prepaid VISA card in Q3 of 2008. These cards target the 100
million customers who have difficulty securing credit cards and bank
accounts.(FN 8)
During the company's first year in the prepaid card market, our goal is to
acquire new prepaid card customers. This will be accomplished through:
- Gaining a market share through direct marketing and establishing a client
base;
- Maintaining a broad range of prepaid cards offerings; and
- Using economies of scale to reduce cost, increase margins, and negotiate
preferential agreements.
In order to create awareness of our prepaid cards, the company plans to do the
following:
- Develop a comprehensive direct marketing campaign;
- Match competitive pricing models;
- Implement our business plan more quickly and effectively than our
competitors by leveraging existing technology infrastructure previously
developed for marketing to the underbanked, leveraging our CEO's experience
in customer service of the underbanked, and our management team's
experience in Internet technologies; and
- Develop national branding that uses affiliate marketing and related
marketing efforts.
Our Value Proposition
-----------------------
Through established direct marketing methods known to our executive staff, we
intend to propose the following value points to our potential customers:
- Provide access to financial networks for all people: 10% to 13%
of U.S. households, primarily low-to-moderate-income, minorities, and
recent immigrants, do not have bank accounts. (FN 9) This represents
100 million people who do not have access to the purchasing online,
travel reservation system, and the convenience of debit and ATM
networks.
- Safer than Cash: If the card is lost or stolen, the consumer does
not lose the cash. This is important with younger customers and the
elderly.
- Bill Pay: Though online or IVR bill pay, consumers can pay bills
at significantly reduced cost than money orders or retail payment
outlets.
- Payroll Deposit: Consumers can have their payroll checks deposits
made directly to the card at no cost. This eliminates the typical 3%
rate check cashing services offer to the unbanked and the underserved.
--------------------
6 See "Market for Prepaid Cards," below.
7 "Sizing the Market," US Banker, August 1, 2006.FDIC Chairman Don Powell
9
- Access to cash via the worldwide ATM Network: Access to cash
without the hassle of check cashing services 24/7.
- Consumer Recourse: Cash has no recourse. When a consumer wants to
return the product when cash is involved they are at the mercy of the
retailer for a refund. Leveraging the VISA/MasterCard associations,
the consumer has alternative recourse for refunds.
- Easy Approval: No credit check, no employment necessary, only
need valid ID for approval. People with credit and banking problems.
- Send Money To Anyone: Using our remittance services, customers
can send money to any person.
Marketing Tools
----------------
We intend to directly market our prepaid cards using the following traditional
and non-traditional means:
- Direct Radio and television to web (sending customers to the
internet to order)
- Direct Radio and television to call centers (sending customers to
telephones)
- Email campaigns to managed opt-in lists of individuals known to
have credit issues and or in need of a credit card.
- Affiliate networks including banner, contextual, search engine
optimizations
- Pay-per-click (PPC) and Search Engine Marketing (SEM) campaigns
- Direct mail
Competitive Advantages
-----------------------
Several companies have a meaningful presence in the prepaid card industry.
However, they do not yet have any significant traction in the radio or
television direct response market. Their presence extends only to the Internet
and an occasional TV or radio ad with little air time. Some of our competitors
include: All Access (Net Spend), Green Dot, Vision Premier, RushCard, Western
Union, AccountNow, and Wired Plastic.
There are several smaller, general spending prepaid card programs that do not
represent significant market share or recognition. They focus on the internet
as their main strategy of application and enrollment. We believe this creates a
competitive advantage for the Company and allows us to truly leverage our
marketing skills to exploit a more dynamic marketing strategy, including in the
areas of direct response and other media markets.
Marketing Technology and Infrastructure
---------------------------------------
Through our operating subsidiary, we have a non-exclusive right to BIG software
and hardware technology housed at Equinix facility (http://www.equinix.com/).
BIG's technology foundation is capable of handling more than 10,000 orders per
day through scalable platforms using
10
Microsoft's SQLServer, multi-redundant databases, web servers, and routers. All
technology is highly customizable allowing unlimited number of web sites access
to common databases while tracking unlimited marketing campaigns. For
compensation of the non-exclusive use of this hardware and software we will pay
approximately $1,675 a month to Equinox and $100 a month to Limelight for the
hosting of this hardware and software on an annual basis. We will also pay for
any software or hardware modifications we request.
The hardware and software infrastructure we are using is a state-of-the-art
marketing system that allows us to release multiple websites and track visitors'
performance from multiple marketing URLs and channels. Our operating subsidiary
currently owns over 700 website URLs that can be run all at the same time with
this system. Through minute by minute reporting, BMG can tailor marketing and
focus on key geographic using internet, print, radio, and television. The
Company is spending approximately $60,000 in custom modifications to this
software in order for it to best operate the Company's unique requirements.
MARKET FOR PREPAID CARDS
Timing to enter the prepaid card market is excellent as the market is just
becoming established. (FN 8) Major obstacles have prevented market penetration
due to problems with reloading cards, inconsistent pricing strategies, and lack
of marketing knowledge for the demographic. (FN 9) A recent survey stated the
75% of the customers cited "ease of reload" as their number one concern for a
prepaid card. (FN 10)
However, based on the momentum of the reload network, the successful penetration
of Green Dot into major retail outlets and the successful alignment of
MasterCard with Green Dot, we believe the major obstacle to prepaid card market
adoption is cleared and the prepaid card market is finally ready to explode.
The demand for prepaid cards has increased dramatically over the past three
years. Independent market data indicates that there is a need for prepaid cards
for about 100 million customers. Customer demographics are persons:
- With poor or no credit;
- With a history of poor checking account management;
- Who pay bills through cashiers' checks and other store front outlets;
- Who use check cashing services; and
- Who may have companions needing transfer of funds to other
countries. (FN 11)
--------------------
8 "The Race is On in Prepaid" - Edgar, Dunn, and Company, INSIGHT Volume 24,
Sept. 2007
9 "The Race is On in Prepaid" - Edgar, Dunn, and Company, INSIGHT Volume 24,
Sept. 2007
10 Mark Troughton - President, Green Dot, Inc. ATM, Debit and Prepaid Show -
La Jolla CA. Oct. 2007
11 "General-Use Prepaid Cards: The Path to Gaining Mainstream Acceptance" -
James C. McGrath Corresponding author, Payment Cards Center, Federal
Reserve Bank of Philadelphia - March, 2007
11
According to Aite Group, U.S. demand is expected to reach over $178 billion in
transaction dollars over the next three years. Recognizing this need caused us
to increase our presence to take advantage of this growth. The prepaid market is
growing at a rapid rate.
Green Dot's Effect on the Market
-------------------------------------
Critical to the successful implementation of the prepaid card market is the
availability to reload the prepaid cards. Prior to early 2007, reloading of
prepaid cards was difficult. However, with recent success of Green Dot, that has
changed.
The Green Dot MoneyPak(R) is a safe, affordable way of turning cash into a
digital form of payment. It is the leading product for loading cash onto
prepaid cards, and can be used to make payments and add cash to accounts.
Available at over 50,000 retailers nationwide, MoneyPak is a reload and payment
solution that empowers consumers who don't use conventional banking and credit
card systems with electronic cash payment options. Consumers can purchase a
MoneyPak for the suggested retail price of $4.95 or less at any Green Dot
retailer location.
There can be no assurance, however, that the growth will continue at the present
rate, or at all, and the demand for our prepaid cards may not keep up with
increases in supply, in which case we may face heightened competition and be
unable to sell sufficient quantities of our cards to maintain our volume and
profit margin.
Industry Market Size
----------------------
The sale and use of prepaid general use cards has increased dramatically over
the past 5 years and we believe the market size to be 100 million people. We
believe based on market data(FN 12) the market for prepaid cards transactions
will raise from 4.5 billion in 2007 to 7.0 billion by 2010. (FN 13)
It has also been estimated that the value of all prepaid card transactions in
the United States will increase from $113 billion in 2007 to $178 billion in
2010.
[GRAPHS OF UNBANKED CONSUMERS OMITTED HERE BUT INCLUDED IN THE PDF VERSION]
--------------------
12. ISOMetrics - The Green Sheet August 13, 2007. The Aite Group,
www.aitegroup.com.
13. ISOMetrics - The Green Sheet August 13, 2007. The Aite Group,
www.aitegroup.com.
12
The national average for bounced-check fees has reached $27.40. On average,
banks charge $1.25 for using an out-of-network ATM. One-third of all consumer
purchases in the United States are made through debit cards. (FN 14)
Consumers that utilize money service businesses (check cashing, Moneygram,
Western Union and the like) for financial services will generally pay higher
fees when compared with customers of traditional financial institutions. For
example, a product cost comparison estimated the annual cost of a basic bank
account to be $79 compared to total annual fees of $246 when using a check
cashing outlet. (FN 15)
Market Penetration
-------------------
So far, it is estimated that only about 5% to 9% of the Market has been
penetrated. We believe the lack of prior penetration is twofold. First, prior to
June 2007 the options available to load
cash onto a prepaid card were limited. In June 2007 an agreement was announced
where customers could go to Wal-Mart and several other prominent retailers and
add cash to their prepaid cards. There are now approximately 50,000 Greed Dot
enabled retail locations where customers can add cash to their cards which is
eliminating a prior obstacle to market penetration.
We believe the second reason for low market penetration to this point in time is
poor pricing structure by the competition. Most competitors require an
"Activation Fee" for a prepaid card. The fee can range from $4.95 to $29.95,
though some competitors will now waive that fee if customers load their cards
with direct deposits of $500 or more. Some competitors require the fee to be
paid before the card is issued from an existing bank account or credit card.
This pricing philosophy is counter in the nature of the underbanked demographic
who do not have a bank account or credit card to make the purchase.
Economic Outlook
-----------------
The economic outlook for the US economy does not reflect well on the common
citizen. According to the Wachovia Economic Group Monthly Outlook report for May
2008, the forecast is not good, stating, "Private domestic demand has already
fallen more than it did in the 2001 recession and will likely fall more this
year than any other time since the deep 1981-82 recession." With the US economy
heavily dependent on domestic spending, our prospects for a rapid recovery are
slim. Gasoline and food prices continue to spike and put considerable downward
pressure on the average family income.
We believe the downturn in the economy will increase the number of underbanked
persons in the US over the next three years, in the following way:
--------------------
14. BankRate.com
15. Federal Reserve Bank of Kansas City - "Strategies for Banking the Unbanked:
How Banks are Overcoming Entrance Barriers" - January 2006.
16. Mark Troughton - President, Green Dot, Inc. ATM, Debit and Prepaid Show -
La Jolla CA. Oct. 2007.
13
- Fewer dollars will be in consumers' pockets. Living paycheck to
paycheck, there is no room for mistakes - no savings to buffer errors
in banking.
- Overdrafts of checking accounts will occur. The banks, with
little compassion in their current financial crisis, are not likely to
dismiss overdraft fees. Consumers with no money to cover the overdrawn
accounts will walk away from the banks.
- Banking policies will force more into underbanked status. The
consumer, after walking away from the overdrafted account, is placed
in the Chex System. Unless the consumer immediately corrects the
situation, the consumer will not be able to secure a direct deposit
account for 3 years. They are now "underbanked".
Market Obstacles
-----------------
The key barriers to entry to this market are twofold: education and trust. Key
ethnic and disenfranchised groups are not aware of the process and the security
of a general-purpose prepaid card. Acceptance of the new way of handling money
is critical, and education through continuous marketing touch points is
mandatory to successfully penetrate and retain this market.
Competition
-----------
With an estimated 5% to 9% market penetration, the prepaid general use card has
no clear performers. Active prepaid card programs that represent measurable
penetration include:
- AccountNow
- RushCard
- All Access (NetSpend)
- Green Dot Money Card
- Vision VISA Prepaid Card
- Western Union Prepaid Card
Reloading Options
------------------
The cash reload process is the key component to a successful general purpose
reloadable prepaid card. There are numerous reloading options for consumers of
general purpose reloadable cards including payroll bank to card, card to card,
money order, cashier's check and cash.
Direct Deposit
Our Bank Freedom Prepaid MasterCard offers free direct deposit services for
loading customers' paychecks directly onto our prepaid card accounts. Customers
who don't have checking accounts can avoid paying for expensive check cashing
services with direct deposit. As an incentive to sign up and stay with Bank
Freedom the company currently waives its $4.95 monthly fee for customers who use
direct deposit. The company believes that once a customer signs up, and has
their payroll or benefits directly deposited on the card, our cardholder
retention rate will increase.
14
Cash Reloading Networks
There are several cash reload networks available today. These include:
GREEN DOT - www.greendotonline.com - The Green Dot MoneyPak is the leading
product for loading cash onto prepaid cards, and can be used to make payments
and add cash to accounts. Usable in over 50,000 retail locations including
Wal-Mart, Walgreens, CVS/Pharmacy, Rite Aid, Radio Shack, Kroger, Ralphs,
Food4Less and Fred Meyer, consumers can purchase a MoneyPak for the suggested
retail price of $4.95 or less at any Green Dot retailer location.
WESTERN UNION - www.westernunion.com - Western Union operates approximately
40,000 retail cash reload centers nationally. A significant portion of these
locations overlaps with Green Dot retailers. The remaining locations are
typically cash advance and payday loan centers. In addition, the cardholder
must locate a licensed Western Union customer service representative to complete
the load transaction using a complex form.
MONEYGRAM - www.moneygram.com - MoneyGram operates approximately 30,000 cash
reload centers nationally. A significant portion of these locations overlap
with Green Dot
retailers. The remaining difference operate in Ace Cash centers. Ace cash
centers offer payday loans and expensive check cashing services. In addition,
the cardholder must locate a licensed Western Union customer service
representative to complete the load transactions using a complex form.
READYLINK - Visa Sponsored network. 7-Eleven joins Safeway which announced in
December 2006 that it would offer Visa prepaid reloading facilities from 1,550
retail outlets operating under the Safeway, Carrs, Dominick's, Genuardi's, Pak
'n Save, Pavilions, Randalls, Vons and Tom Thumb brand names. Fifth Third Bank
will serve as prepaid card acquirer for Safeway, according to Visa.
REPOWER - MasterCard sponsored reload network. Announced a partnership with
Green Dot in July 2007. The joint venture extends the rePower network to
50,000+ reload locations.
OPERATIONS
Operational Partnerships
-------------------------
Operationally, there are five key partnership components we must have to issue
prepaid cards. They are:
1. Issuing bank
2. Card Association (MasterCard and/or Visa)
3. Processor
4. Manufacturer/printer
5. Cash Load Network
15
Issuing Bank: An issuing bank is a bank that offers card association branded
payment cards directly to consumers. Merchant Processing International, Inc. DBA
Bank Freedom ("Bank Freedom")(FN 17), signed an agreement with Meta Payment
Systems a prepaid card on November 19, 2007 to issue our branded payment cards.
Meta Payment Systems is a leading issuing bank for prepaid card products within
the US. We received approval to issue cards from MetaBank on November 19, 2007.
Card Associations: A card association is a network of issuing banks and
acquiring banks that process payment cards of a specific brand, including Visa,
MasterCard, American Express, etc. Bank Freedom obtained approval from
MasterCard in December 2007 to issue the Bank Freedom Prepaid MasterCard Card.
Processor: A processor is a company that connects to the various networks (Visa,
MasterCard, Discover, STAR, Cirrus, etc.) and handles the electronic
transactions. They also provide services for customer care (to the end user), an
interactive voice response ("IVR") telephone-based customer service system, and
web based services for balance inquiries, dispute resolution, replacement cards,
and other support issues. Bank Freedom signed an agreement with I2C, Inc. for
prepaid card processing and support services on November 19, 2007.
Manufacturer: The card manufacturer is the company that prints, embosses and
delivers the cards to new cardholders. Bank Freedom signed an agreement with
EFT Source for card printing, personalization, and fulfillment services on
December 14, 2007. EFT Source provides printing, inventory, and delivery of
Bank Freedom's prepaid cards. Integration between I2C, Inc. and EFT Source
occurred on February 15, 2008 for secure transmission of cardholder orders for
printing and delivery.
Cash Load Network: The cash load network is a company that allows your customers
to load cash on to their card accounts. We have chosen Green Dot as our cash
load network. The Green Dot MoneyPak is the leading product for loading cash
onto prepaid cards, and can be used to make payments and add cash to accounts.
Usable in over 50,000 retail locations including Wal-Mart, Walgreens,
CVS/Pharmacy, Rite Aid, Radio Shack, Kroger, Ralphs, Food4Less and Fred Meyer,
consumers can purchase a MoneyPak for the suggested retail price of $4.95 or
less at any Green Dot retailer location.
In-House Operations
--------------------
Our operations consist of the following major groups. They are:
Sales and Marketing: To acquire customers, we have engaged in an aggressive
marketing campaign to drive prospects to our websites to order their prepaid
card.
--------------------
17. Bank Freedom operates in the prepaid card market solely through an
agreement with a third party issuing bank. It is not a traditional
commercial "bank" and, other than offering card association branded payment
cards directly to consumers through its issuing bank, does not participate
in other typical commercial banking services such as making loans,
accepting deposits, etc.
16
Activation: Critical to our success is the activation and initial loading of
the card. We have begun a separate customer service marketing effort that uses
email to contact low activity card accounts to increase card activations and
loads.
Secondary Marketing: We engage in a persistent touch process that reminds the
customers to use their card (reload, ATM, pay bills, etc). This revenue
generating group (part of internet marketing) is critical to ongoing
profitability and card usage.
Customer Service: We provide 24/7 customer service to our cardholders in both
English and Spanish. We handle all inbound customer services calls between the
hours of 8:00 AM and 5:00 PM, Monday to Friday with our internal staff of
customer service representatives. During the off hours (5:00 PM to 8:00 AM
Monday to Friday, and Saturday to Sunday), our processor I2C, Inc. provides
customer services in both English and Spanish.
Technology: We have three fully operational main technology centers used in our
operations:
1. Marketing - The technology used by Marketing for the acquisition of new
customers is housed in our Level 3 NOC in Equinix Network Center in Los
Angeles, CA. This scalable system can handle 10,000 new card orders a day,
and is fully redundant with separation of routing, firewall, web servers,
database servers, and RAID Level 5 storage.(FN 18)
2. Processing - Our processor, I2C, Inc. (www.i2cinc.com) provides
multi-location, redundant 24/7 processing of cardholder transactions. We
integrate our marketing systems with I2C's platform for secure order
processing and management. All customer information is maintained and
secured by encrypted data systems certified by MasterCard and VISA
associations.
3. Printing and Fulfillment - Our printer, EFTSource (www.eftsource.com)
provides secure manufacturing infrastructure and information systems for
card printing, personalization and fulfillment. EFTSource is certified by
both MasterCard and VISA and provides redundant fulfillment capabilities.
OTHER MATTERS
Employees
---------
Not including our three executive officers, Prepaid Card Holdings, Inc.
currently has no employees. Berman Marketing Group, a wholly owned subsidiary
of the Company, has three full time employees. Bank Freedom, Inc., a wholly
owned subsidiary of the Company, has two full time employees. We believe our
relationship with our employees is good.
--------------------
18. Bank Freedom current uses highly effective technology located in Equinix
downtown Network Operations Center. We deploy multiple, redundant web
servers, routers, switches, database servers, and hot-swappable RAID level
5 disk arrays capably of handling many hundreds of thousands of unique
visitors a day (which is equal to systems deployed by Fortune 500
companies).
17
Research and Development
--------------------------
During the last two full fiscal years, we have not engaged in any research and
development activities. In the event that we undertake research and development
activities in the future, the costs of those efforts will not be bourn directly
by our consumers.
Intellectual Property
----------------------
We have applied for trademarks for "Bank Freedom", "Bank Freedom Card", and "a
card for everyone".
Regulation
----------
Open loop prepaid cards are subject to several forms of regulation. The most
notable of these regulations include Regulation E, the Electronics Funds
Transfer Act; the Anti-money Laundering and Bank Secrecy Act; the customer
identification program of the Patriot Act; customer security and privacy
provisions of the Gramm Leach Bylie act; and the funds availability requirement
of Regulation CC.
As open loop prepaid cards are essentially bank accounts, we anticipate that our
business will continue to be heavily regulated. Although we have extensive
experience in this area, and we have taken the necessary steps to comply with
regulations, compliance can represent a costly expense and there is no assurance
that the steps we have taken and will take will be sufficient to prevent adverse
regulatory action. If we are unable to successfully comply with all relevant
regulation, it could materially affect our business.
We currently produce no product and conduct no activity that is subject to
environmental laws. All manufacturing is undertaken by a third party.
Nevertheless, it is possible that our activities could fall within the ambit of
environmental regulation in the future. If so, compliance with environmental
laws could become a significant cost, and could materially affect our business.
18
ITEM 1A. RISK FACTORS.
The Company faces a number of risks and uncertainties.
RISK FACTORS CONCERNING OUR BUSINESS AND OPERATIONS:
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT FOR INVESTORS
TO PREDICT OUR FUTURE PERFORMANCE BASED ON OUR CURRENT OPERATIONS.
BMG, one of our operating businesses, was organized February 23, 2007, and since
inception has spent the majority of its time developing its business plan. The
Company accordingly has a limited operating history, which may not be a reliable
indicator of our future performance. The company will not realize profitability
unless it can successfully implement its plan of operation.
WE WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON
ACCEPTABLE TERMS. IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL, AS NEEDED, THE
FUTURE GROWTH OF OUR BUSINESS AND OPERATIONS WOULD BE SEVERELY LIMITED.
Our plan of operation requires substantial capital investment. Our future
capital requirements, however, depend on a number of factors, including our
ability to expand into the prepaid card market and to establish strategic
relationships that enable us to market our product. Our ability to implement
our plan of operation will depend upon our ability to raise additional capital,
possibly through the issuance of long-term or short-term indebtedness or the
issuance of our equity securities in private or public transactions.
If we raise additional capital through the issuance of debt, this will result in
increased interest expense. If we raise additional funds through the issuance
of equity or convertible debt securities, the percentage ownership of the
Company held by existing shareholders will be reduced and those shareholders may
experience significant dilution. In addition, new securities may contain
rights, preferences or privileges that are senior to those of our common stock.
We may be unable to obtain acceptable financing necessary to implement our plan
of operation on suitable terms, if at all. Our ability to develop our business
would suffer if we are unable to raise the additional funds on acceptable terms,
which would have the effect of limiting our ability to increase our revenues or
possibly attain profitable operations in the future.
WE PLAN TO EXPAND OUR BUSINESS INTO A NEW PRODUCT LINE WHERE WE HAVE SOME
RELATED EXPERIENCE BUT NO DIRECT EXPERIENCE, WHICH COULD AFFECT OUR ABILITY TO
MARKET OUR PRODUCT SUCCESSFULLY.
Our management's prior experience is limited to the Credit Card Processing
industry in general and other unrelated industries. We have no direct prior
experience in the Prepaid Card Market. Our ability to compete in the Prepaid
Card Market may be adversely affected if our management is unable to adapt their
skills to this new market.
19
WE DEPEND ON KEY EMPLOYEES AND PERSONNEL TO OPERATE OUR BUSINESS, WHICH COULD
ADVERSELY AFFECT THE COMPANY'S ABILITY TO OPERATE IF WE ARE UNABLE TO RETAIN OR
REPLACE THESE PERSONS.
Our future success is largely dependent upon its existing management team,
including Bruce Berman, our Chief Executive Officer, and Robert Christiansen,
our Chief Operating Officer. The loss of one or more of these officers or
directors through injury, death or termination of employment could result in the
investment of significant time and resources for recruiting and replacement. In
addition, we may not be able to find the right mix of talent and experience to
replace our existing team. The existing team may not be able to successfully
manage the growth of the Company or attract the new talent that will be
necessary to run the Company at a high level.
THE NATURE OF OUR PRODUCT MAY MAKE OUR CUSTOMERS VULNERABLE TO IDENTITY THEFT
AND OTHER TYPES OF FRAUD, WHICH COULD SUBJECT THE COMPANY TO COSTLY LEGAL ISSUES
AND A DIMINISHED LEVEL OF CUSTOMER TRUST.
Like credit cards, prepaid cards such as debit and ATM cards carry an inherent
risk of identity theft and other fraud. In addition, a recent presentation by a
Kansas City Federal Reserve Board Member ranked prepaid cards as "the perfect
storm" for money laundering.
Although management has extensive experience in dealing with these issues in the
Credit Card Processing industry, we may be unable to adequately protect our
customers from such fraud. Management believes that while an amount of fraud is
unavoidable, through extensive controls and vigilance we can minimize this risk
to what the industry considers an appropriate level. If we cannot maintain
fraud at minimal levels, it could expose the Company to legal action which would
cost the Company time, manpower and money. It could also reduce the level of
trust that we have developed with our customers, and compromise our efforts to
develop our brand.
WE FACE COMPETITION FROM SEVERAL SOURCES, WHICH MAY MAKE IT MORE DIFFICULT TO
ENTER THE NEW PREPAID CARD MARKET.
Management believes that the prepaid card industry has only penetrated less than
9% of its potential market, and has plenty of room for the Company to enter and
compete effectively. Nevertheless, we have several direct competitors in the
prepaid card industry. In addition, we compete with several alternatives to
prepaid cards, including credit cards, bank accounts, money service bureaus
(i.e. Western Union, Moneygram), and so forth. If we are unable to adequately
separate ourselves from these sources of competition, it could materially
adversely affect our business.
RISK FACTORS CONCERNING INVESTMENT IN OUR COMPANY:
THERE IS ONLY A LIMITED PUBLIC MARKET FOR OUR SHARES, AND IF AN ACTIVE MARKET
DOES NOT DEVELOP, INVESTORS MAY HAVE DIFFICULTY SELLING THEIR SHARES.
There is a limited public market for our common stock. We cannot predict the
extent to which investor interest in us will lead to the development of an
active trading market or how liquid that
20
trading market might become. If a trading market does not develop or is not
sustained, it may be difficult for investors to sell shares of our common stock
at a price that is attractive. As a result, an investment in our common stock
may be illiquid and investors may not be able to liquidate their investment
readily or at all when he/she desires to sell.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. The SEC generally
defines "penny stock" to be any equity security that has a market price less
than $5.00 per share, subject to exceptions.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors, and may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Sales of our common stock in the public market could lower the market price of
our common stock. Sales may also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
our management deems acceptable or at all.
21
ITEM 2. FINANCIAL INFORMATION
FORWARD LOOKING STATEMENTS: STATEMENTS ABOUT OUR FUTURE EXPECTATIONS ARE
"FORWARD-LOOKING STATEMENTS" AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. WHEN
USED HEREIN, THE WORDS "MAY," "WILL," "SHOULD," "ANTICIPATE," "BELIEVE,"
"APPEAR," "INTEND," "PLAN," "EXPECT," "ESTIMATE," "APPROXIMATE," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INHERENT IN OUR BUSINESS, INCLUDING
THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS," IN THIS DISCLOSURE STATEMENT,
AND ARE SUBJECT TO CHANGE AT ANY TIME. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT.
This Management's Discussion and Analysis and Plan of Operation should be read
in conjunction with the following financial statements included in this Form 10
(the "Financial Statements):
- Prepaid Card Holdings, Inc. unaudited financial statements for
the quarter ended June 30, 2008;
- Prepaid Card Holdings, Inc. audited financial statements for the
years ended December 31, 2006 and 2007;
- Merchant Processing International, Inc. dba Bank Freedom audited
financial statements for the year ended December 31, 2007.
The financial statements have been prepared in accordance with generally
accepted accounting policies in the United States ("GAAP"). Except as otherwise
disclosed, all dollar figures included therein and in the following management
discussion and analysis ("MD&A") are quoted in United States dollars.
PLAN OF OPERATION
The Company's two most recent full fiscal years have had no revenue and
represent a dormant state of the Company. In 2007, the Company acquired Berman
Marketing Group, Inc. and the Company changed its name to Berman Holdings, Inc.
As of June 30, 2008, the Company had begun operations and realized $268,986 in
revenues since inception, including $141,263 resulting from merchant processing
services and $127,723 resulting from the Bank Freedom prepaid cards. The Bank
Freedom prepaid card aspect of our business, despite beginning operations in
March 2008, did not receive any revenues until April 2008.
The following is a discussion of the Company's plan of operation over the next
twelve months, including a discussion of cash requirements and efforts currently
underway to initiate theCompany's plan. See the Company's Description of
Business, above, for a more detailed discussion of the Company's business
strategy and planned operations.
22
Business Plan
Through our operating subsidiaries, Berman Marketing Group, Inc. ("BMG") and
Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom"), we
operate in the prepaid general use debit, ATM, Point of Sale ("POS") and
signature-based VISA and MasterCard market. Our primary target audience for our
Bank Freedom prepaid cards is an estimated 100 million unbanked and underbanked
individuals in the United States.
We market and issue the Bank Freedom Prepaid MasterCard to consumers, and derive
revenues through fees charged to the cardholders and interchange fees paid by
merchants who accept MasterCards. The fees may include, among others, bill pay
fees, ATM transaction fees, and monthly maintenance fees. We also manage a
portfolio of merchant processing services accounts, which accounts for
approximately 5% of the activities of Bank Freedom.
As of December 31, 2007, we had acquired our operating marketing business, BMG,
and had negotiated several partnerships necessary for implementation of our
business plan, including marketing, card production and printing, and vendor
channel development. Our plan for 2008 was to acquire an issuing bank and begin
the marketing and issuance of our first prepaid cards.
In March, 2008, the Company acquired Bank Freedom, which has signed an agreement
with Meta Payment Systems to issue prepaid cards. In March, 2008, the Company
began issuance of the Bank Freedom Prepaid MasterCard Card. We issued a
Spanish version of the Bank Freedom Prepaid MasterCard in June 2008 and plan to
issue the Bank Freedom Prepaid VISA card in the third quarter of 2008.
The goals of the Company over the next twelve months include:
- Issuance of the Bank Freedom Prepaid Visa, which we hope to begin
in the next three months;
- Create brand awareness for Bank Freedom prepaid cards via press,
radio, TV and the Internet
- Develop strong marketing relationships with key internet
affiliates to reduce cost of sales through improved conversion of card
order web sites
- Increase internet search engine optimization to increase the
number of low and no cost card orders
The Company does not anticipate posting a net profit for 2008 as it ramps up its
planned marketing campaigns for customer acquisition. Significant revenues are
not anticipated to be immediately recognized as card usage and integration into
customers' lifestyles may take several months. In addition, the Company
anticipates significant startup costs involved with building the prepaid card
brand which could have an impact on the Company's liquidity.
23
Significant Employee Changes
In 2007, the Company acquired BMG from Bruce Berman in consideration for
majority control of the Company. Following the acquisition, Mr. Berman became
president and sole director of the Company. Since then, the Company has hired a
Chief Operating Officer and a Vice President of Finance, but has hired no other
employees.
Following the acquisition of BMG and Bank Freedom, the Company, as consolidated
with both of its subsidiaries, now has a total of 8 full time employees, of
which three are executive officers of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise principally from our working capital needs,
including the cost of goods and marketing costs. Although in the future we
intend to fund our liquidity requirements through a combination of cash on hand
and revenues from operations, as of June 30, 2008, the Company had incurred
$2,494,598 in expenses and had realized only $268,986 in revenues.
Accordingly, our ability to initiate our plan of operations and continue as a
going concern is currently dependent on our ability to raise external capital.
We have raised $350,000 on the issuance of three convertible notes. We believe
that it will be very difficult to obtain any form of debt financing without
equity conversion terms due to our current lack of revenues from operations and
the current state of our balance sheet, including a lack of hard assets against
which to borrow. Accordingly, we are focusing on obtaining equity financing.
In November, 2007, and January, 2008, the Company raised approximately
$1,500,000 in two private offerings, before costs. In addition, we are
currently seeking $750,000 in additional financing, and we may be required to
seek additional funding.
We hope to raise sufficient capital to finance marketing programs to gain market
share. We believe the cost of marketing general purpose prepaid debit cards
will increase as more competitors enter the market. These new competitive
forces will increase media costs on television and radio.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2008
-------------------------------
Revenues
During the quarter, merchant processing services realized revenues of $114,003
and the Bank Freedom prepaid card realized revenues of $127,723. Merchant
processing revenues are generated in the form of commissions paid as a
percentage of credit card volume for the retailers engaged, while the prepaid
card business model earns revenues through interchange and service fees after
issuance of the cards.
24
Cost of Sales
During the quarter, we incurred $177,682 in costs directly attributed to our
sales. These include, bank and Mastercard Association fees, merchant processing
fees, and fulfillment costs.
Expenses
During the quarter, we incurred $1,492,923 in expenses which consisted of the
following:
EXPENSES:
Sales $ 713,127
Professional Fees 309,987
Selling General and Administrative Costs 469,809
Sales - consist of internet marketing to potential cardholders using various
affiliate marketing channels and pay-per-click campaigns. This category also
includes direct mail, radio commercial production, radio air time, and printing
expense necessary to attract new cardholders.
Professional Fees - consist of accounting, legal and other professional fees
including the cost of the fair market value for the stock provided to investor
representatives for investor referrals
Selling General and Administrative Costs - consist of insurance, office supplies
and expense, payroll expenses, investor referral fees and other miscellaneous
expenses.
Quarter Ended March 31, 2008
--------------------------------
Revenues
During the quarter, the Company had begun operations and realized $27,260 in
revenues resulting from merchant processing services. No revenues from the Bank
Freedom prepaid cards were realized until April, 2008. We believe that it is
typical in our industry for there to be substantial lag between card issuance
and revenue recognition.
Expenses
During the quarter, we incurred $823,993 in expenses which consisted of the
following:
EXPENSES:
Sales $ 291,003
Professional Fees 124,907
Selling General and Administrative Costs 408,083
Sales - consist of internet marketing to potential cardholders using various
affiliate marketing channels and pay-per-click campaigns. This category also
includes direct mail, radio commercial production, radio air time, and printing
expense necessary to attract new cardholders.
25
Professional Fees - consist of accounting, legal and other professional fees.
Selling General and Administrative Costs - consist of insurance, office supplies
and expense, payroll expenses, investor referral fees and other miscellaneous
expenses.
Year Ended December 31, 2007*
---------------------------------
*The following results of operation for the year ended December 31, 2007 combine
the results of the Company and its operating subsidiaries, BMG and Bank Freedom.
Bank Freedom was acquired during the quarter ended March 31, 2008.
Revenues
During the year, we had no revenues as we had not begun operations and our
activities were limited to developing our business plan, retaining key employees
and establishing relationships with key operational partners.
Expenses
During the year, we incurred 723,692 in expenses which consisted of the
following:
EXPENSES:
Stock for Services 548,750
Professional Fees 97,329
Selling General and Administrative Costs 77,613
Stock for Services - consist of the fair market value for the stock provided to
the company founder and investor representatives for investor referrals
Professional Fees - consist of accounting, legal and other professional fees
Selling General and Administrative Costs - consist of insurance, office supplies
and expense, payroll expenses, investor referral fees and other miscellaneous
expenses
OFF-BALANCE SHEET ARRANGEMENTS
The company has no off-balance sheet arrangements.
26
CONTRACTUAL OBLIGATIONS
At December 31, 2007, our contractual obligations were:
WITHIN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ------- ------- ---------- ---------- ----------
Office Lease(1) $94,416 $94,416 $ - $ - $ -
Hardware and
Software Lease(2) 19,800 19,800 $ - $ - $ -
Total: $114,216 $114,216 $ - $ - $ -
(1) The company is obligated under a lease arrangement for office space expiring
in December, 2008. Monthly rent is due on the first of each month in the amount
of $10,052 based upon the pro-rata share of office space occupied. Beginning on
September 1, 2008, the company will reduce its occupation of the office space
such that monthly rent will be $3,500 expiring December 2008.
(2) The Company is obligated under a sub-lease arrangement for hardware and
software expiring in November 2008. Monthly terms approximate $1,800 a month.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company currently operates at an office located 18500 Von Karman Suite 530,
Irvine, CA 92612. The office is in good condition.
BMG, the Company's wholly owned operating subsidiary, is renting this space on a
sublease from BIG under a lease from The Irvine Company which expires in
December, 2008. Monthly rent is due on the first of each month in the amount of
$10,052 based upon the pro-rata share of office space occupied. Beginning on
September 1, 2008, the company will reduce its occupation of the office space
such that monthly rent will be $3,500 expiring December 2008. Within our Irvine
location are desktop computers and office equipment and for approximately 24
staff members.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows the beneficial ownership of our common stock as of
October 31, 2008. The table shows the amount of shares owned by:
(1) each person known to us who owns beneficially more than five
percent of the outstanding shares of any class of the Company's stock,
based on the number of shares outstanding as of October 31, 2008;
(2) each of the Company's Directors and Executive Officers; and
(3) all of its Directors and Executive Officers as a group.
AMOUNT OF SHARES PERCENT OF SHARES
IDENTITY OF BENEFICIALLY BENEFICIALLY
PERSON OR GROUP OWNED OWNED(2,4) CLASS
------------------- ---------------- ------------------ ------
Bruce Berman
CEO and Chairman 297,325,000(3) 74.9% Common
------------------- ---------------- ------------------ ------
27
------------------- ---------------- ------------------ ------
Robert Christiansen
COO and Director 85,000,000(1,3) 19.8% Common
------------------- ---------------- ------------------ ------
All Directors and
Officers as a Group 319,237,500 80.4% Common
------------------- ---------------- ------------------ ------
(1) Includes 21,250,000 shares and options to purchase up to 63,750,000 shares
held by Mr. Berman. Mr. Berman had issued an option to Mr. Christiansen to
purchase up to 127,500,000 shares of his stock, which was reduced to 106,250,000
on July 28, 2008. As of July 29, 2008, these options are exercisable on the
following schedule: (a) 42,500,000 shares once the Company has 30,000 activated
cards (these options were exercised on May 27, 2008); (b) an additional
42,500,000 shares (reduced to 21,250,000 on July 28, 2008) once the Company has
70,000 issued cards and the Company's revenues exceed $500,000 per month; and
(c) an additional 42,500,000 shares once the company has 120,000 issued cards
and the Company's revenues exceed $825,000 per month. Mr. Christiansen may
exercise those options upon reaching those milestones upon payment to Mr. Berman
of an exercise price of $.0001 per share for the options. If the conditions are
not met, the warrants referred to in (b) above expire August 1, 2011, and the
warrants referred to in (c) above expire August 1, 2012.
(2) The percentage of shares owned is based on 396,966,390 shares being
outstanding as of October 31 , 2008. Where the beneficially owned shares of any
individual or group in the following table includes any options, warrants, or
other rights to purchase shares in the Company's stock, the percentage of shares
owned includes such shares as if the right to purchase had been duly exercised.
(3) On July 28, 2008, senior management of the Company agreed to cancel and
return to treasury a total of 127,500,000 shares of the Company's common stock.
Bruce Berman agreed to cancel 106,250,000 of his shares, and Robert Christiansen
agreed to cancel 21,250,000 of his shares.
In addition, Mr. Christiansen agreed to restructure his option agreement with
Mr. Berman. The total number of options to purchase shares held by Mr. Berman
was been reduced by 21,250,000, and the remaining options have been made
conditional on additional Company performance milestones. 42,500,000 options
conditional on the issuance of 70,000 cards have been reduced to 21,250,000, and
made conditional also on the Company's revenues exceeding $500,000 per month.
42,500,000 options conditional on the issuance of 120,000 cards have been made
conditional also on the Company's revenues exceeding $825,000 per month.
As a result of the cancellation, the Company's amount of common stock
outstanding was reduced from 524,466,390 to 396,966,390, a drop of 24.3%.
Proportionate ownership by all shareholders will increase by 32.1%.
(4) BENEFICIAL OWNERSHIP OF SECURITIES: Pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, involving the determination of beneficial
owners of securities, a beneficial owner of securities is person who directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise has, or shares, voting power and/or investment power with respect to
the securities, and any person who has the right to acquire beneficial ownership
of the security within sixty days through means including the exercise of any
option, warrant or conversion of a security.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
DIRECTOR AND EXECUTIVE OFFICER SUMMARY
The following table sets forth the names, ages, and principal offices and
positions of our current directors, executive officers, and persons we consider
to be significant employees. The Board of Directors elects our executive
officers annually. Our directors serve one-year terms or until their
28
successors are elected, qualified and accept their positions. The executive
officers serve terms of one year or until their death, resignation or removal by
the Board of Directors. There are no family relationships or understandings
between any of the directors and executive officers. In addition, there was no
arrangement or understanding between any executive officer and any other person
pursuant to which any person was selected as an executive officer.
NAME OF DIRECTOR OR OFFICER AGE POSITION
--------------------------- --- ---------------------------------------
Chief Executive Officer
Chairman of the Board of Directors
Bruce Berman 51 and Principal Financial Officer
Robert Christiansen 47 Chief Operating Officer and Director
Vice President, Internet Marketing for
Rick Galasieski 33 Berman Marketing Group, Inc.
EXECUTIVE OFFICER AND DIRECTOR BIOS
BRUCE BERMAN: Chief Executive Officer, Chairman of the Board of Directors, and
Principal Financial Officer
n 2001, Mr. Berman founded Berman Investment Group LLC ("BIG"). From 2003 to
2007 at BIG, Mr. Berman led the development and marketing of over $20,000,000 in
financial empowerment books and CDs, including his book, "I Got Here. You Can
Too!" , a book on how to start, fund, and run companies that has approximately
500,000 copies in circulation, and 15 financial empowerment CD's targeted at a
similar demographic as Bank Freedom consisting of Credit and Debt Repair,
Internet Marketing, Real Estate, Sales, Negotiating, using eBay, Being Your Own
Boss, and Residual Income. He wrote, produced, performed, and aired ten TV
commercials, twenty radio commercials and was responsible for the purchasing and
airing over 100,000 spots specifically targeted at a similar demographic.
As a business consultant from 1990 to 2000, Mr. Berman started a NASD
broker-dealer and advised companies on formation, capital raising, investor
relations, mergers and acquisitions, marketing growth and becoming public.
Other Companies founded and headed by Mr. Berman include TAEI, a pioneer in wind
energy development in the US, from 1983 to 1989, and Cal American Leasing, an
equipment leasing company, from 1980 to 1983. With TAEI, he purchased several
companies within the industry including a NASD licensed broker dealer, a
licensed construction company and a manufacturing facility which in a few short
years employed over 100 staff.
Mr. Berman was nominated by Sprint for the Ernst & Young "Entrepreneur of the
Year Award" for a technology development company he founded in 1999 and took
public in 2000.
29
ROBERT CHRISTIANSEN: Chief Operating Officer and Director
In addition to serving as Chief Operating Officer of the Company, Mr.
Christiansen is vice president of BIG and Bank Freedom. Prior to joining Berman
Investment Group in June of 2006, Mr. Christiansen founded and operated
NightShift Design, an internet consulting firm focused on internet retail
properties while leveraging SEO, affiliate, and PPC marketing programs to drive
sales, from 2002 to 2006. In 2000, Mr. Christiansen launched the Southern
California operations of All Bases Covered, Inc, a professional consulting
company focused on small business technology services. From 2000 to 2002, Mr.
Christiansen grew the western region of All Bases Covered from 10 to over 400
employees in 10 western states, and revenues from $0 to $40 million in two years
through organic growth and acquisition. He developed and executed corporate
marketing plan and implemented national sales training and operational best
practices programs based on successes. From 1986 to 2000, Mr. Christiansen held
various positions including VP of Consulting Services for Artios Corporation, a
technology provider for then international paper industry.
OTHER SIGNIFICANT EMPLOYEES AND CONSULTANTS
In addition to the above listed Executive Officers and Directors, we consider
the following non-executive officers to be instrumental to the conduct of our
business:
RICK GALASIESKI: Vice President, Internet Marketing for Berman Marketing Group,
Inc.
Rick Galasieski serves as the Vice President of Internet Marketing for Berman
Marketing Group, Inc. In 2002 Mr. Galasieski founded Epic Results, Inc., an
interactive internet marketing firm specializing in driving keyword targeted
traffic to web properties, which he ran until joining the Company in 2007. In
2000 he co-founded EdgeFocus, Inc., which was acquired by Wireless Logic Group,
a leading supplier of Wi-Fi services to multi-dwelling units across the
Southwestern United States. From 2000 to 2002, he served as their Vice
President of Operations and Strategic Development.
In 1998 Mr. Galasieski co-founded Broadband Digital Group, Inc. From 1998 to
2000, he was instrumental in growing this company from its inception to over 200
employees, which was acquired by Winfire, Inc., and grew to the number six
broadband company in the United States at the time. The company had over 50,000
active DSL subscribers and over 500,000 desktop software clients when the
subscriber base was sold off to the regional bell operating companies. Mr.
Galasieski received his BS in Marketing from Arizona State University.
JOHN WEBER, JR.: Vice President, Finance and Vice President, Compliance for Bank
Freedom
Mr. Weber joined the Company on May, 26, 2008 and served as the Vice Present of
Finance and Vice President of Compliance for the Company and each of the
Company's subsidiaries until his resignation. He currently serves as Head of
the Company's Accounting Advisory Board. From 2002 until he joined the Company,
Mr. Weber served as a Corporate Auditor / Investigator for Boeing. At Boeing,
he assessed the control environment around financial reporting, compliance, and
operations for various Boeing businesses. In addition, Mr. Weber worked
directly with
30
Boeing Legal and Ethics divisions to investigate allegations that potentially
compromised the control environment and Corporate Governance at Boeing. His
responsibilities included the assessment of risk around financial controls,
compliance, operations and the effectiveness of the Corporate Governance of the
company. Mr. Weber was instrumental in executing compliance measures with
respect to the requirements of Sarbanes-Oxley, including creating and monitoring
Boeing's internal controls over financial reporting, and verifying the truth and
accuracy of financial statement assertions. He also has extensive experience in
auditing the preparation of public company financial statements, including
forecasts. From 2000 to 2002, he was a Senior Financial Analyst for the
Intermodal Services Division of GE Capital, where he was responsible for
forecasting, profit and loss statements, analyzing actual results and providing
analysis between forecast and actual.
Mr. Weber received a Masters of Business Administration in Finance from
Pepperdine University, and a Bachelor of Business Administration in Accounting
from Gonzaga University. He is a Certified Public Accountant in the State of
California.
LEGAL AND DISCIPLINARY HISTORY
No officer, director or control person of the Company has been the subject of:
1. A conviction in a criminal proceeding or named as a defendant in a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
2. The entry of an order, judgment, or decree, not subsequently reversed,
suspended or vacated, by a court of competent jurisdiction that permanently
or temporarily enjoined, barred, suspended or otherwise limited such
person's involvement in any type of business, securities, commodities, or
banking activities;
3. A finding or judgment by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission, the Commodity Futures
Trading Commission, or a state securities regulator of a violation of
federal or state securities or commodities law, which finding or judgment
has not been reversed, suspended, or vacated; or
4. The entry of an order by a self-regulatory organization that permanently or
temporarily barred, suspended or otherwise limited such person's
involvement in any type of business or securities activities.
ITEM 6. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION AND ANALYSIS
Objectives and Philosophy ofour Executive Compensation Program
--------------------------------------------------------------------
We do not have a standing compensation committee. Our board of directors as a
whole makes the decisions as to employee benefit programs and officer and
employee compensation. The primary objectives of our executive compensation
programs are to:
31
- attract, retain and motivate skilled and knowledgeable individuals;
- ensure that compensation is aligned with our corporate strategies and
business objectives;
- promote the achievement of key strategic and financial performance measures
by linking short-term and long-term cash and equity incentives to the
achievement of measurable corporate and individual performance goals; and
- align executives' incentives with the creation of stockholder value.
To achieve these objectives, our board of directors evaluates our executive
compensation program with the objective of setting compensation at levels they
believe will allow us to attract and retain qualified executives. In addition,
a portion of each executive's overall compensation is tied to key strategic,
financial and operational goals set by our board of directors. We also
generally provide a portion of our executive compensation in the form of options
that vest over time, which we believe helps us retain our executives and align
their interests with those of our stockholders by allowing the executives to
participate in our longer term success as reflected in asset growth and stock
price appreciation.
Named Executive Officers
--------------------------
The following table identifies our principal executive officer, our principal
financial officer and our most highly paid executive officers, who, for purposes
of this Compensation Disclosure and Analysis only, are referred to herein as the
"named executive officers."
Name Corporate Office
------------------- ---------------------------------------
Bruce Berman Chief Executive Officer
Robert Christiansen Chief Operating Officer
Rick Galasieski Vice President, Internet Marketing, BMG
Components of our Executive Compensation Program
-----------------------------------------------------
At this time, the primary elements of our executive compensation program are
base salaries and option grant incentive awards, although the board of directors
has the authority to award cash bonuses, benefits and other forms of
compensation as it sees fit.
We do not have any formal or informal policy or target for allocating
compensation between short-term and long-term compensation, between cash and
non-cash compensation or among the different forms of non-cash compensation.
Instead, we have determined subjectively on a case-by-case basis the appropriate
level and mix of the various compensation components. Similarly, we do not rely
extensively on benchmarking against our competitors in making compensation
related decisions, although we may consider industry compensation trends as one
of many factors in our case-by-case determination of proper compensation
Base salaries
--------------
Base salaries are used to recognize the experience, skills, knowledge and
responsibilities required of our named executive officers. Base salary, and
other components of compensation,
32
may be evaluated by our board of directors for adjustment based on an assessment
of the individual's performance and compensation trends in our industry.
Equity awards
-------------
Our stock option award program is the primary vehicle for offering long-term
incentives to our executives. Our equity awards to executives have typically
been made in the form of warrants. We believe that equity grants in the form of
warrants provide our executives with a direct link to our long-term performance,
create an ownership culture, and align the interests of our executives and our
stockholders.
To date, the Company has issued warrants to Rick Galasieski and Ryan Guenthart
to purchase 5,000,000 shares of common stock each. The warrants will vest
annually in three equal installments beginning in May, 2009, at an exercise
price of $0.075, and will terminate immediately upon termination of employment
for cause, and 6 months after termination of employment for any other reason.
The Company had previously granted warrants to John Weber, Jr. on these terms,
but Mr. Weber resigned as Vice President of Finance prior to the vesting of any
right to purchase shares.
The Company has issued 5,000,000 additional warrants to Mr. Weber pursuant to
his consultation agreement with the Company. The warrants to Mr. Weber will
vest 1,000,000 upon the Company being accepted to the OTCBB, and 500,000 for
each timely filing of the next eight periodic reports beginning with the
quarterly report for the period ended September 30, 2008. The Company had
previously granted 5,000,000 warrants to Mr.
We also anticipate reserving 5,000,000 shares for warrants to be issued to an
Advisory Board that we intend to establish, and 5,000,000 shares for warrants to
be issued pursuant to an employee compensation plan.
Cash bonuses
-------------
Our board of directors has the discretion to award cash bonuses based on our
financial performance and individual objectives. The corporate financial
performance measures (revenues and profits) will be given the greatest weight in
this bonus analysis. We have not yet granted any cash bonuses to any named
executive officer nor have we yet developed any specific individual objectives
while we wait to attain revenue and profitability levels sufficient to undertake
any such bonuses.
Benefits and other compensation
-------------------------------
Our named executive officers are permitted to participate in such health care,
disability insurance, bonus and other employee benefits plans as may be in
effect with the Company from time to time to the extent the executive is
eligible under the terms of those plans. As of the date of this Registration
Statement, with exception to health care, we have not implemented any such
employee benefit plans. Mr. Berman, Mr. Christiansen, and Mr. Weber's health
care costs are paid by the company.
33
CURRENT EXECUTIVE COMPENSATION
Summary Annual Salary
-----------------------
As discussed above, we have agreed to pay the Named Executive Officers an annual
salary. Base salary may be increased from time to time with the approval of the
board of directors. The following table summarizes the agreed annual salary of
each of the named executive officers.
Name Annual Salary
------------------- --------------
Bruce Berman $ 1*
Robert Christiansen $ 120,000
Rick Galasieski $ 72,000
* Mr.Berman has agreed to defer receiving an annual salary
commensurate with his contributions to the Company until the Company has
reached certain milestones, as more fully described below.
Agreed Compensation
-------------------
Bruce Berman, Chief Executive Officer - The Company has paid no compensation to
Mr. Berman. Mr. Berman agreed to be paid an annual salary of $1 for his
services as Chief Executive Officer until the earlier of January 2, 2009 or upon
the issuance of 70,000 cards by the Company, whereupon the Company intended to
pay Mr. Berman a salary of $297,500 per year. The Company reached that milestone
on June 25, 2008; however, Mr. Berman has agreed to forego salary for the
entirety of 2008. The company will need to negotiate with Mr. Berman for the
year 2010 and beyond.
Robert Christiansen, Chief Operating Officer - Mr. Christiansen is paid an
annual salary of $120,000 for his services as Chief Operating Officer. On June
25, the Company reached the milestone 70,000 cards issued, whereupon the Company
intended to increase his salary to $127,500 through January 1, 2010. Mr.
Christiansen has agreed to waive the salary increase due to him. The company
will need to negotiate with Mr. Christiansen for the year 20 and beyond.
On October 15, 2008, if the Company is projected to operate profitably in
November 2008 exclusive of marketing costs, and the Company has raised $350,000
in additional financing between August 15, 2008 and October 15, 2008, the
Company will pay Mr. Weber an annual salary of $120,000. If those conditions
are not satisfied, Mr. Weber's employment will terminate on October 15, 2008
unless renegotiated.
Rick Galasieski: Vice President, Internet Marketing for Berman Marketing Group,
Inc. - Effective August 15, 2008, Mr. Galasieski will be paid an annual salary
of $72,000 for his services as Vice President of Internet Marketing for Berman
Marketing Group, Inc. In addition, he will also receive warrants to purchase
5,000,000 shares of the Company's common stock, vested annually in three equal
installments beginning in May, 2009, at an exercise price of $0.075, and
additional warrants to purchase 5,000,000 shares of common stock that will vest
on August 15, 2009 at an exercise price of $0.05. The warrants terminate
immediately upon termination of his employment for cause, and 6 months after
termination of his employment for any other reason.
34
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2007
The Company currently does not participate in any equity award plan. During
fiscal 2007, we did not grant any equity awards under any equity award plan.
OPTION EXERCISES FOR FISCAL 2007
During fiscal 2007, none of the named executive officers exercised options.
NONQUALIFIED DEFERRED COMPENSATION
We currently offer no defined contribution or other plan that provides for the
deferral of compensation on a basis that is not tax-qualified to any of our
employees, including the named executive officers.
COMPENSATION OF DIRECTORS
We intend to use a combination of cash and equity-based compensation to attract
and retain candidates to serve on our board of directors. We do not compensate
directors who are also our employees for their service on our board of
directors. Therefore, Mr. Berman did not receive any compensation for his
service on our board of directors, and we have not provided any compensation to
any member of our Board of Directors for the fiscal year ended December 31,
2007.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a standing Compensation Committee. Our entire board of
directors participated in deliberations concerning executive officer
compensation.
COMPENSATION COMMITTEE REPORT
The board of directors has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K with management and,
based on such review and discussions, the board of directors has recommended
that this Compensation Discussion and Analysis be included in this Registration
Statement on Form 10.
35
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid to, or accrued by,
the Company's highest paid executive officers during the fiscal year ended
December 31, 2007. No restricted stock awards, long-term incentive plan payout
or other types of compensation, other than the compensation identified in the
chart below and its accompanying notes, were paid to these executive officers
during that fiscal year. Similar information for the fiscal year ended December
31, 2006 is not included as the Company was dormant for that period.
[Enlarge/Download Table]
NAMED ANNUAL ANNUAL OTHER COMPENSATION LONG TERM
EXECUTIVE COMPENSATION COMPENSATION ANNUAL RESTRICTED COMPENSATION LTIP
OFFICER(1) YEAR SALARY ($) BONUS ($) COMPENSATION STOCK OPTIONS PAYOUTS ALL OTHER
------------------- ---- ------------- ------------- ------------ ------------ ------------ ------- ---------
Bruce Berman 2007 1 0 0 0 0 0 0
Robert Christiansen 2007 30,000(2) 0 0 0 0 0 0
<FN>
1. This table does not include Mr. Galasieski because he began his employment on January 1, 2008.
2. Mr. Christiansen began his employment in October, 2007. He was paid a pro rata portion of his agreed $120,000 annual salary.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
The following table sets forth information regarding the outstanding warrants
held by our named officers as of October 31, 2008.
[Enlarge/Download Table]
OPTION AWARDS
--------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF EQUITY INCENTIVE PLAN AWARDS: OPTION
SECURITIES UNDERLYING SECURITIES UNDERLYING NUMBER OF SECURITIES EXERCISE OPTION
UNEXERCISED OPTIONS UNEXERCISED OPTIONS UNDERLYING UNEXERCISED PRICE EXPIRATION
NAME (#) EXERCISABLE (#) UNEXERCISABLE UNEARNED OPTIONS ($) DATE
--------------------- --------------------- ----------------------------- --------- ----------
Rick Galasieski - 5,000,000 - 0.075 *
<FN>
*Warrants expire upon termination of employment for cause, or 6 months after termination of employment for any
other reason.
36
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
BERMAN INVESTMENT GROUP LLC
Bruce Berman, the Company's Chief Executive officer, owns Berman Investment
Group LLC ("BIG"). BIG is allowing on a non-exclusive basis Berman Marketing
Group, Inc. ("BMG"), a wholly owned subsidiary of the Company, to use its
hardware, software, Data Base, Business Support Facilities and Equipment In
exchange for appropriate compensation. If something happened to BIG, BMG could
incur substantial costs to reproduce the aforementioned. BIG currently uses the
hardware, software and database for its own purposes. The company has no right
to sell, transfer, assign or rent its rights to or the use of either the
hardware, software or database to any person, entity or third party other than
one of its operating subsidies for their own use.
The Company has also engaged BIG as a consultant. The Company is also required
to reimburse BIG for costs incurred, however BIG has not incurred any costs
resulting from the consulting agreement and is currently not seeking
reimbursement.
MERCHANT PROCESSING INTERNATIONAL, INC. DBA BANK FREEDOM
Prior to March 8, 2008, Bruce Berman, the Company's Chief Executive Officer,
owned Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom").
Bank Freedom is a registered Independent Sales Organization ("ISO") with
Columbus Bank and Trust and is authorized by Visa and MasterCard as a merchant
account provider that specializes in all areas of bankcard processing. Bank
Freedom has been approved by a sponsoring bank as well as MasterCard and Visa to
issue prepaid debit cards.
Bank Freedom had an exclusive agreement with BMG to pay BMG 80% of the gross
revenue it receives for all debit card issued. Because of the purchase of MPI,
this agreement is canceled.
Bank Freedom received approval to issue cards from a bank, Visa and MasterCard.
Bank Freedom is marketing its Bank Freedom Prepaid MasterCard card and had
shipped a total of 76,877 cards through August 4, 2008.
Effective January 25, 2008, the Company entered into an Acquisition and Stock
Purchase Agreement to purchase all 600 shares of Bank Freedom, representing 100%
of the issued and outstanding common stock, from Mr. Berman. In consideration
for the controlling stake in Bank Freedom, the Company issued Mr. Berman
22,500,000 shares of common stock, and executed a note in the amount of
$750,000, payable in monthly installments over two years with a simple interest
rate of 7.25%. This agreement was approved by a majority of disinterested
shareholders of the Company. Following the transaction, the Company filed a dba
to do business as "Bank Freedom." The Company has recently filed in California
to change the name of Merchant Processing International, Inc., dba Bank Freedom
to Bank Freedom, Inc.
On July 3, 2008, the Company restructured the note owed to Mr. Berman. The term
of the note was increased from two years to four years, the interest rate was
changed from a fixed 7.25%
37
to prime, not to exceed 7.25%, and reduced fixed payments from $31,250 of
principal plus interest to $17,272, which includes both principal and interest.
The prime rate is currently 5%. A majority of the directors not including Mr.
Berman has determined this restructuring to be in the best interest of the
Company and its shareholders.
LEASED PROPERTY
The Company currently operates at 18500 Von Karman Suite 530, Irvine, CA 92612.
BMG, the Company's wholly owned operating subsidiary, is renting this space on a
sublease from BIG under a lease from The Irvine Company.
DIRECTOR INDEPENDENCE
The Company is not listed on any national exchange, or quoted on any
inter-dealer quotation service, that imposes independence requirements on any
committee of the Company's directors, such as an audit, nominating or
compensation committee. The Company does not have any independent directors on
its Board. The company's Board of Directors consists of Bruce Berman and Robert
Christiansen, neither of whom are independent.
ITEM 8. LEGAL PROCEEDINGS.
The company has one material dispute with one of its vendors regarding the
validity of approximately $360,000 of services the company was billed for. The
company is currently negotiating with the vendor to resolve the issue.
Other than the foregoing, the Company is not a party to any material legal
proceedings and, to the Company's knowledge, no such proceedings are threatened
or contemplated by any party.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock is quoted in United States markets on the Pink Sheets,
maintained by Pink Sheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." There is no assurance that the common stock
will continue to be traded on the Pink Sheets or that any liquidity exists for
our shareholders. We currently have no plan to apply to have our common stock
listed or quoted on any other market, quotation service, or exchange, however we
may in the future.
MARKET PRICE
The following table shows the high and low per share price quotations of the
Company's common stock as reported by the PinkSheets for the periods presented.
These quotations reflect
38
inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not necessarily represent actual transactions. The PinkSheets market is
extremely limited and the prices quoted by brokers are not a reliable indication
of the value of the common stock. The periods presented represent fiscal
quarters, with the fourth quarter of each year ending on December 31.
The Company acquired its current operating business on October 11, 2007. Prior
to then, the Company's common stock rarely traded and did not reflect any
existing business. As a consequence, pricing prior to such date would not
reflect any real stock transactions or pricing and has been omitted.
HIGH LOW
Fiscal 2007
Fourth Quarter (from October 11) 0.11 0.06
Fiscal 2008
First Quarter 0.17 0.06
Second Quarter 0.13 0.07
Third Quarter (through August 20) 0.12 0.04
As of December 31, 2007, the Company had 500,000,000 shares of common stock
authorized with 456,874,837 shares issued and outstanding, and approximately
4,128,209 freely tradable shares in the public float. These shares were held by
approximately 250 shareholders of record and Company estimates by a total of
approximately 290 beneficial shareholders.
PENNY STOCK REGULATIONS
Our common stock is quoted in United States markets on the PinkSheets,
maintained by PinkSheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." On May 22, 2008 the last reported sale price
of our common stock was $0.11 per share. As such, the Company's common stock may
be subject to provisions of Section 15(g) and Rule 15g-9 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as
the "penny stock rule."
Section 15(g) and Rule 15g-9 sets forth certain requirements for transactions in
penny stocks, in particular that either (1) the transaction meets one of a few
specific exemptions, or (2) the broker dealer executing the transaction for a
customer (a) obtain informed consent from the customer and (b) make an
individualized determination of the customer's suitability for trading in penny
stocks based on personal financial information. Rule 15g-9(d) incorporates the
definition of "penny stock" that is found in Rule 3a51-1 of the Exchange Act.
The SEC generally defines "penny stock" to be any equity security that has a
market price less than $5.00 per share, subject to certain exceptions. As long
as the Company's common stock is deemed to be a penny stock, trading in the
shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors.
39
DIVIDENDS
The Company has not issued any dividends on the common stock to date, and does
not intend to issue any dividends on the common stock in the near future. We
currently intend to use all profits to further the growth and development of the
Company.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On October 23, 2008, the Company issued warrants to a consultant to purchase up
to 5,000,000 shares at an exercise price of $0.05. The warrants vest 1,000,000
upon the Company's acceptance to the OTCBB, and 500,000 for each timely filing
of the periodic reports due for the periods from September 30, 2008 to June 30,
2010. The warrants terminate immediately upon termination of employment for
cause, and 6 months after termination of employment for any other reason. This
issuance was completed in accordance with Section 4(2) of the Securities Act in
an offering without any public offering or distribution. These shares are
restricted securities and include an appropriate restrictive legend.
On July 15, 2008, Mr. Blundin converted $50,000 of the $100,000 convertible note
issued to him May 8, 2008 into common shares at a conversion price of $0.05, for
a total of 1,000,000 shares. We currently have outstanding $50,000 of the
original $100,000 due to Mr. Blundin on that note. This issuance was completed
in accordance with Section 4(2) of the Securities Act in an offering without any
public offering or distribution. These shares are restricted securities and
include an appropriate restrictive legend. Mr. Blundin is known to the Company
to have sufficient income and net worth to qualify as an "Accredited Investor"
as defined by Rule 501(a) of the Securities Act.
From July 8 to July 15, 2008, the Company issued 600,000 shares valued at
$30,000 to accredited investors as finders' fees in connection with the
conversion of $175,000 of convertible notes. This issuance was completed in
accordance with Section 4(2) of the Securities Act in an offering without any
public offering or distribution. These shares are restricted securities and
include an appropriate restrictive legend. The accredited investors executed
and delivered representations containing facts that establish them as
"Accredited Investors" as defined by Rule 501(a) of the Securities Act. The
Company investigated the representations and determined that they were accurate.
On July 7, 2008, Mr. Blundin converted one of the two $125,000 convertible notes
issued to him on April 29, 2008, into common shares at a conversion price of
$0.05, for a total of 2,500,000 shares. The company paid off the other note for
$125,000 issued on that date. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend. Mr. Blundin is known to the Company to have sufficient
income and net worth to qualify as an "Accredited Investor" as defined by Rule
501(a) of the Securities Act.
On June 18, 2008, the Company issued 4,000,000 shares, 2,000,000 Class A
warrants, and 2,000,000 Class B warrants, valued at $200,000 to accredited
investors at a price of $0.05 per
40
share. The Class A warrants are convertible into common stock for 12 months
after issuance at an exercise price of $0.10. The Class B warrants are
convertible into common stock for 18 months after issuance at an exercise price
of $0.15. This issuance was completed in accordance with Section 4(2) of the
Securities Act in an offering without any public offering or distribution. These
shares are restricted securities and include an appropriate restrictive legend.
The accredited investors executed and delivered representations containing facts
that establish them as "Accredited Investors" as defined by Rule 501(a) of the
Securities Act. The Company investigated the representations and determined that
they were accurate.
From February 5 to May 6, 2008, the Company issued 15,000,000 shares, 7,500,000
Class A warrants, and 7,500,000 Class B warrants, valued at $750,000, to 9
accredited investors as subscriptions to the January, 2008 Private Offering, at
a price of $0.05 per share. The Class A warrants are convertible into common
stock for 12 months after issuance at an exercise price of $0.10. The Class B
warrants are convertible into common stock for 18 months after issuance at an
exercise price of $0.15. This issuance was completed in accordance with Section
4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend. The accredited investors executed and delivered
representations containing facts that establish them as "Accredited Investors"
as defined by Rule 501(a) of the Securities Act. The Company investigated the
representations and determined that they were accurate.
From April 7 to May 8, 2008, the Company issued 1,625,000 shares valued at
$81,250 to accredited investors as finders' fees in connection with the January,
2008 Private Offering, and 92,803 shares to accredited investors as finders'
fees in connection with the November, 2007 Private Offering. This issuance was
completed in accordance with Section 4(2) of the Securities Act in an offering
without any public offering or distribution. These shares are restricted
securities and include an appropriate restrictive legend. The accredited
investors executed and delivered representations containing facts that establish
them as "Accredited Investors" as defined by Rule 501(a) of the Securities Act.
The Company investigated the representations and determined that they were
accurate.
On May 8, 2008 the Company issued one Convertible Note with a principal amount
of $100,000, to William B. Blundin, an accredited investor. The note is
convertible at 85% of the bid price of the stock on the exercise date, with a
maximum of $0.05, and a minimum of $0.025. In all, the notes can be converted
into a maximum of 4,000,000 shares. In the event the Convertible Note is
converted by the holder or holders, the common stock would be diluted by between
2,000,000 shares and 4,000,000 shares. In connection with the note, the Company
issued Mr. Blundin 150,000 shares of Common Stock as an incentive for making the
notes. The Company issued 125,000 of these shares on April 7, 2008 in
anticipation of completing an earlier note that was not completed; with Mr.
Blundin's permission, these shares were applied to the Note of May 8. The
remaining 25,000 shares were issued on May 8, 2008. This issuance was completed
in accordance with Section 4(2) of the Securities Act in an offering without any
public offering or distribution. These shares are restricted securities and
include an appropriate restrictive legend. Mr. Blundin executed and delivered
representations containing facts that establish him as an "Accredited Investor"
as defined by Rule 501(a) of the Securities Act. The Company investigated the
representations and determined that they were accurate.
41
On May 5, 2008, the Company issued warrants to two employees to purchase
5,000,000 shares each, vested annually in three equal installments beginning in
May, 2009, at an exercise price of $0.075. The warrants terminate immediately
upon termination of employment for cause, and 6 months after termination of
employment for any other reason. The warrants to one of the employees terminated
before any right to purchase shares had vested due to the employee's
resignation. This issuance was completed in accordance with Section 4(2) of the
Securities Act in an offering without any public offering or distribution. These
shares are restricted securities and include an appropriate restrictive legend.
On April 29, 2008, the Company issued two Convertible Notes with a combined
principal amount of $250,000, to William B. Blundin, an accredited investor.
The notes are convertible at 85% of the bid price of the stock on the exercise
date, with a maximum of $0.05, and a minimum of $0.025. The notes can be
converted into a maximum of 10,000,000 shares. In the event the Convertible
Notes are converted by the holder or holders, the common stock would be diluted
by between 5,000,000 shares and 10,000,000 shares. In connection with the
Notes, the Company issued Mr. Blundin 250,000 shares of Common Stock as an
incentive for making the notes. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend. Mr. Blundin is known to the Company to have sufficient
income and net worth to qualify as an "Accredited Investor" as defined by Rule
501(a) of the Securities Act.
On January 25, 2008, the Company issued 22,500,000 shares to Bruce Berman, the
Company's President, for 100% of the outstanding equity of Merchant Processing
International Inc. This issuance was completed in accordance with Section 4(2)
of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
On January 2, 2008, the Company issued 1,781,250 shares, valued at $89,062.50,
to accredited investors on the conversion of warrants issued as subscriptions to
the November, 2007 Private Offering at an exercise price of $0.05 per share.
This issuance was completed in accordance with Section 4(2) of the Securities
Act in an offering without any public offering or distribution. These shares
are restricted securities and include an appropriate restrictive legend. The
accredited investors executed and delivered representations containing facts
that establish them as "Accredited Investors" as defined by Rule 501(a) of the
Securities Act. The Company investigated the representations and determined
that they were accurate.
From December 4, 2007 to January 22, 2008, the Company issued 2,062,500 shares
valued at $68,750 to accredited investors as finders' fees in connection with
the November, 2007 Private Offering. This issuance was completed in accordance
with Section 4(2) of the Securities Act in an offering without any public
offering or distribution. These shares are restricted securities and include an
appropriate restrictive legend. The accredited investors executed and delivered
representations containing facts that establish them as "Accredited Investors"
as defined by Rule 501(a) of the Securities Act. The Company investigated the
representations and determined that they were accurate.
42
From December 4, 2007 to January 22, 2008, the Company issued 22,500,000 shares,
11,250,000 Class A warrants, and 11,250,000 Class B warrants to accredited
investors as subscriptions to the Company's November, 2007 Private Offering
valued at $750,000. The Class A warrants are convertible into common stock for
12 months after issuance at an exercise price of $0.05. The Class B warrants are
convertible into common stock for 18 months after issuance at an exercise price
of $0.10. This issuance was completed in accordance with Section 4(2) of the
Securities Act in an offering without any public offering or distribution. These
shares are restricted securities and include an appropriate restrictive legend.
The accredited investors executed and delivered representations containing facts
that establish them as "Accredited Investors" as defined by Rule 501(a) of the
Securities Act. The Company investigated the representations and determined that
they were accurate.
On October 11, 2007 the Company issued 425,000,000 shares to Bruce Berman, the
Company's President for 100% of BMG, valued at $425,000. This issuance was
completed in accordance with Section 4(2) of the Securities Act in an offering
without any public offering or distribution. These shares are restricted
securities and include an appropriate restrictive legend.
On May 17, 2007, Robert K. McBride, the Company's former Chief Executive
Officer, converted debt owed to him for his salary into 13,000,000 common
shares, valued at $22,000. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
In 2005 the Company issued a Convertible Note with an original principal amount
of $50,000 to Robert K. McBride, the Company's former Chief Executive Officer.
The note can be converted into a maximum of 400,000 shares of the Company's
common stock regardless of how many shares of Common Stock are issued or
outstanding at the time of exercise or any interim forward or reverse stock
splits or reorganizations. In the event the Convertible Note is converted by
the holder or holders, the common stock would be diluted by 400,000 shares.
This issuance was completed in accordance with Section 4(2) of the Securities
Act in an offering without any public offering or distribution. The Note would
be considered a restricted security.
ITEM 11. DESCRIPTION OF SECURITIES.
The following sets forth the material terms of the Company's securities.
However, a more detailed description of our securities is contained in the
Company's Articles of Incorporation.
COMMON STOCK
Our Articles of Incorporation authorize the issuance of up to 1,000,000,000
shares of common stock, par value $0.001, after increasing it from 500,000,000
on January 14, 2008. There were 396,966,390 shares of common stock issued and
outstanding as of August 20, 2008.
Holders of our common stock are entitled to one vote per share on all matters to
be voted on by the stockholders. Holders of common stock are entitled to
receive ratably such dividends, if any,
43
as may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution, or winding up of the
Company, the holders of common stock are entitled to share ratably in all of our
assets which are legally available for distribution after payment of all debts
and other liabilities and liquidation preference of any outstanding common
stock.
Holders of our common stock have no preemptive rights to purchase common stock.
There are no conversion or redemption rights or sinking fund provisions with
respect to the common stock. The outstanding shares of common stock are validly
issued, fully paid and non-assessable.
NUMBER OF SHARES OUTSTANDING
As of December 31, 2007, the Company had 500,000,000 shares of common stock
authorized with 456,874,837 shares issued and outstanding and approximately
4,128,209 freely tradable shares in the public float. These shares were held by
approximately 250 shareholders of record and Company estimates by a total of
approximately 290 beneficial shareholders.
As of December 31, 2006, the Company had 51,000,000 shares of common stock
authorized, 12,529,837 shares issued and outstanding and 4,028,209 freely
tradable shares in the public float. These shares were held by 238 shareholders
of record and the Company estimates by a total of 271 beneficial shareholders.
As of December 31, 2005, the Company had 51,000,000 shares of common stock
authorized, 12,529,837 shares issued and outstanding of which 4,028,209 were
freely tradable shares in the public float. These shares were held by 238
shareholders of record and the Company estimates by a total of 271 beneficial
shareholders.
PREFERRED STOCK
Our Articles of Incorporation do not authorize the issuance of Preferred Stock.
There are presently no shares of preferred stock outstanding.
CONVERTIBLE NOTES
In 2005, the Company issued a Convertible Note with an original principal amount
of $50,000 to Robert McBride, the Company's former Chief Executive Officer. The
note can be converted into a maximum of 400,000 shares of the Company's common
stock regardless of how many shares of Common Stock are issued or outstanding at
the time of exercise or any interim forward or reverse stock splits or
reorganizations. In the event the Convertible Note is converted by the holder
or holders, the common stock would be diluted by 400,000 shares.
On April 29, 2008, the Company issued two Convertible Notes with a combined
principal amount of $250,000, and on May 8, 2008 issued one Convertible Note
with a principal amount of $100,000, to William B. Blundin, an accredited
investor. The notes are convertible at 85% of the bid price of the stock on the
exercise date, with a maximum of $0.05, and a minimum of $0.025. In all, the
notes can be converted into a maximum of 14,000,000 shares. In the event the
44
Convertible Notes are converted by the holder or holders, the common stock would
be diluted by between 7,000,000 shares and 14,000,000 shares.
On July 7, 2008, we paid off one of the two $125,000 convertible notes held by
William Blundin and issued April 29, 2008, and Mr. Blundin converted the second
into common shares at a conversion price of $0.05, for a total of 2,500,000
shares.
On July 15, 2008, Mr. Blundin converted $50,000 of the $100,000 convertible note
issued to him May 8, 2008 into common shares at a conversion price of $0.05, for
a total of 1,000,000 shares. We currently have outstanding $50,000 of the
original $100,000 due to Mr. Blundin on that note.
WARRANTS
The Company completed two private offerings in November, 2007 and January, 2008.
Each of the offerings included Series A and Series B warrants in addition to
shares of common stock. The following table summarizes the warrants currently
outstanding from the Company's November, 2007 and January 2008 private
offerings:
Series Outstanding Exercise Price Expiration Date
------ ----------- --------------- ----------------------
A 9,468,750 $ 0.05 January 2, 2009
A 7,500,000 $ 0.10 February-March, 2009
B 11,250,00 $ 0.10 July 2, 2009
B 7,500,000 $ 0.15 August-September, 2009
The Company has issued 2,000,000 additional Series A warrants at an exercise
price of $0.10, expiring on June 18, 2009, and 2,000,000 additional Series B
warrants at an exercise price of $0.15, expiring on December 18, 2009. Prior to
exercise, the holders of the warrants will have no rights as shareholders. The
warrants do not contain any cashless exercise option.
In addition, the Company has issued warrants to Rick Galasieski, an employee of
the Company or its subsidiaries, and Ryan Guenthart, a former employee of the
Company or its subsidiaries, to purchase 5,000,000 shares of common stock each.
The warrants will vest annually in three equal installments beginning in May,
2009, at an exercise price of $0.075, and will terminate immediately upon
termination of employment for cause, and 6 months after termination of
employment for any other reason. The Company has issued warrants to John Weber,
Jr. to purchase up to 5,000,000 shares at an exercise price of $0.05. The
warrants vest 1,000,000 upon the Company's acceptance to the OTCBB, and 500,000
for each timely filing of each of the eight periodic reports due for the periods
from the quarter ended September 30, 2008 to the quarter ended June 30, 2010.
We will also issue Mr. Galasieski an additional 5,000,000 warrants pursuant to
our employment with him effective August 15, 2008. The warrants will vest on
August 15, 2009 and will have an exercise price of $0.05. The warrants will
terminate immediately upon termination of employment for cause, and 6 months
after termination of employment for any other reason.
No other outstanding options or warrants to purchase shares of Company common
stock.
45
DIVIDEND POLICY
Holders of the Company's common stock will be entitled to receive cash dividends
when declared by the Board of Directors of the Company, out of funds legally
available for payment thereof. However, if dividends are not declared by the
Board of Directors, no dividends shall be paid. Under Nevada Revised Statutes
Sec. 78.228(2), a corporation is prohibited from paying dividends if the
Company, as a result of paying such dividends, would not be able to pay its
debts as they come due, or if the Company's total liabilities and preferences to
preferred shareholders if any exceed total assets. Any payment of cash
dividends of the Common Stock in the future will be dependent upon the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, as well as other factors the Board of
Directors deems relevant.
It is not anticipated that any cash dividends will be paid in the foreseeable
future. While the Company's dividend policy will be based on the operating
results and capital needs of the business, it is anticipated that all earnings,
if any, will be retained to finance the future expansion of the Company's
business. Therefore, prospective investors who anticipate the need for
immediate income by way of cash dividends from their investment should not
purchase the Shares offered.
REPORTS TO STOCKHOLDERS
The Company intends to comply with the periodic reporting requirements of the
Securities Exchange Act of 1934. The Company plans to furnish its stockholders
with an annual report for each fiscal year ending December 31, 2007 containing
financial statements audited by its independent certified public accountants.
The SEC maintains an Internet site at www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The public may also read and copy any materials we
file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549 (call 1-800-SEC-0330 for information).
TRANSFER AGENT
The transfer agent and registrar for our Common Stock is:
Pacific Stock Transfer Company
500 E. Warm Springs Road, Suite 240
Las Vegas NV 89119
Phone: (702) 361-3033
Fax: (702) 433-1979
46
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada Revised Statutes ("NRS") Sec. 78.7502 provides, in effect, that any
person made a party to any action by reason of the fact that he is or was a
director, officer, employee or agent of our company may and, in certain cases,
must be indemnified by our company against, in the case of a non-derivative
action, judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees) actually and reasonably incurred by him as a result
of such action; and in the case of a derivative action, against amounts paid in
settlement and expenses (including attorneys' fees) actually and reasonably
incurred, if in either type of action he either (1) Is not liable for a breach
of his fiduciary duties to the Company pursuant to NRS 78.138, or (2) acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of our company and in, with respect to any criminal, had
reasonable cause to believe his conduct was lawful. This indemnification does
not apply, in a derivative action, to matters as to which it is adjudged that
the director, officer, employee or agent is liable to our company, unless upon
court order it is determined that, despite such adjudication of liability, but
in view of all the circumstances of the case, he is fairly and reasonably
entitled to indemnification for expenses.
At present, there is no pending litigation or proceeding involving any director
or officer as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any
director or officer.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Set Forth Below.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
As of January 1, 2007, the Company had no operations and had not engaged an
accountant. We appointed Gruber & Company LLC as our certified public auditing
firm on November 12, 2007.
Since engaging them, there have been no disagreements between the Company and
Gruber & Company LLC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope of procedure, which
disagreements, if not resolved to the satisfaction of such firm, would have
caused them to make reference to the subject matter thereof in their report on
the Company's financial statements for such periods.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS
Please see the following financial statements set forth below beginning on page
F-1:
- Financial statements for the quarter ended June 30, 2008 (unaudited);
- Financial statements for the years ended December 31, 2007 and
December 31, 2006;
47
- Financial statements of Merchant Processing International, Inc.
dba Bank Freedom for the years ended December 31, 2007 and December
31, 2006.
EXHIBITS
3.1 Articles of Incorporation, as amended, of Prepaid Card Holdings, Inc.*
3.2 Bylaws of Prepaid Card Holdings, Inc.*
10.1 Technology, Data Usage and Facilities Agreement between Berman
Investment Group, LLC and Berman Marketing Group, Inc.*
10.2 Prepaid Debit Card Co-Brand Marketing Agreement between Berman Marketing
Group, Inc. and Merchant Processing International, Inc. dated November
25, 2007.*
10.3 Consulting Agreement between Berman Investment Group and National Health
Care Alliance dated October12, 2007.*
10.4 Card Program Management Agreement between Merchant Processing
International, Inc. and MetaBank, dba Meta payment Systems dated
November 19, 2007.*
10.5 Electronic Transaction Processing Services Agreement between Merchant
Processing International, Inc. and i2c, Inc. dated November 15, 2007.*
10.6 Card Production Service Agreement between Merchant Processing
International, Inc. and EFT Source, Inc. dated December 19, 2007.*
10.7 Sponsored Membership Agreement between Merchant Processing
International, Inc. and Green Dot Corporation dated January 10, 2008.*
10.8 Risk & Information Analytics Agreement between Berman Marketing Group,
Inc. and LexisNexis Risk & Information Analytics Group Inc. dated March
12, 2008.*
10.9 Web Services Marketplace Usage Agreement between Merchant Processing
International, Inc. and StrikeIron, Inc. dated March 26, 2008.*
* Filed with the Company's registration statement on Form 10, SEC file no.
000-53270, originally filed June 9, 2008.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
PREPAID CARD HOLDINGS, INC.
(Registrant)
Date: November 3, 2008 By: /s/ Bruce Berman
---------------------- --------------------------
Bruce Berman
Chief Executive Officer
48
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PREPAID CARD HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS
THE QUARTER ENDED JUNE 30, 2008 (UNAUDITED)
Consolidated Balance Sheets as at March 31, 2008. ......................F-3
Consolidated Statement of Operations for the quarter ended
March 31, 2008. ......................................................F-4
Consolidated Statements of Changes in Stockholders' Equity for
the quarter ended March 31, 2008. ....................................F-5
Consolidated Statements of Cash Flows for the quarter ended
March 31, 2008. ......................................................F-6
Notes to Financial Statements. .........................................F-7
THE YEAR ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
and the Period From June 22, 2005 (Inception) to December 31, 2007
Report of Independent Registered Public Accounting Firm. ..............F-15
Consolidated Balance Sheets as at December 31, 2007
and December 31, 2006. ..............................................F-16
Consolidated Statement of Operations for the years ended
December 31, 2007 and December 31, 2006. ............................F-17
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2007 and December 31, 2006. ........F-18
Consolidated Statements of Cash Flows for the years ended
December 31, 2007 and December 31, 2006. ............................F-19
Notes to Financial Statements. ........................................F-20
MERCHANT PROCESSING INTERNATIONAL, INC. DBA BANK FREEDOM FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2007
Report of Independent Registered Public Accounting Firm. ..............F-26
Balance Sheets as at December 31, 2007 and December 31, 2006. .........F-27
Statements of Operations for the years ended December 31,
2007 and December 31, 2006. .........................................F-28
Statements of Changes in Stockholders' Equity for the years
ended December 31, 2007 and December 31, 2006. ......................F-29
Statements of Cash Flows for the years ended December 31,
2007 and December 31, 2006. .........................................F-30
Notes to Financial Statements. ........................................F-31
F-1
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
F-2
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008
ASSETS (UNAUDITED)
JUNE 30, DECEMBER 31,
Current Assets: 2008 2007
------------ ------------
Cash and Cash Equivalents $ 416,242 $ 577,331
Accounts Receivable 47,347 -
------------ ------------
Due from Affiliate 2,094 -
------------ ------------
Prepaid Expenses 28,140 -
------------ ------------
Total Current Assets $ 493,823 $ 577,331
Fixed Assets - net 5,006 3,973
Other Assets:
Goodwill - -
Deposits 10,000 -
------------ ------------
Total Other Assets 10,000 -
------------ ------------
Total Assets $ 508,829 $ 581,304
============ ============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and
Accrued Expenses $ 526,797 $ 3,454
Notes Payable - Related Party 190,625 -
Notes Payable - Unrelated Party 350,000 -
------------ ------------
Total Current Liabilities 1,067,422 3,454
Long Term Liabilities - Related Party 562,500 -
------------ ------------
Total liabilities 1,629,922 3,454
------------ ------------
Stockholders Equity:
Common Stock, authorized
1,000,000,000 shares, 520,366,390
and 476,873,587issued and
outstanding @.001 per share 520,366 476,874
Subscription Receivable - (114,163)
Additional Paid in Capital 1,340,960 935,569
Retained Deficit (2,982,419) (720,430)
------------ ------------
Total Stockholders' Equity (Deficit) (1,121,093) 577,850
------------ ------------
Total Liabilities and Stockholders Equity (Deficit) $ 508,829 $ 581,304
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
QUARTER ENDED JUNE 30, 2008
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2008 2007 2008 2007
------------ ---------- ------------ ---------
Revenues
Card Operations $ 127,723 $ - $ 127,723 $ -
Pressing Services 114,003 200,227 141,263 436,361
------------ ---------- ------------ ---------
Total Revenues 241,726 200,227 268,986 436,361
Cost of Revenues 177,682 11,556 177,682 113,707
------------ ---------- ------------ ---------
Gross Profit 64,044 188,671 91,304 322,654
Expenses:
Sales 731,019 - 1,022,022 -
Professional Fees 309,987 18,572 434,894 18,572
General and Administrative 439,223 152,631 823,382 220,696
Related Party Expense-Rent 30,586 29,960 54,510 29,960
------------ ---------- ------------ ---------
Total 1,510,815 201,163 2,334,708 269,228
Profit (Loss) from
operations (1,446,771) (12,492) (2,243,404) 53,426
Other income 1,415 161 1,415 161
Net Profit (Loss) $(1,445,356) $ (12,331) $(2,241,989) $ 53,587
============ ========== ============ =========
Profit (Loss) per share $ $ $ $
============ ========== ============ =========
Weighted Average
Shares Outstanding
============ ========== ============ =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
[Enlarge/Download Table]
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTER ENDED JUNE 30, 2008
Addit-
Subscr- ional Retained
Common Stock Preferred Stock Subscription iption Paid in Earnings
Shares Amount Shares Amount Receivable Payable Capital (Deficit) Total
------------ --------- ------ ------- ------------ -------- ---------- ------------ ------------
Balance January
1, 2008 476,873,589 $476,874 $ $ (114,163) $ - $ 935,569 $ (720,430) $ 577,850
Shares for
Combination 22,500,000 22,500 (732,348) (709,848)
------------ --------- ------ ------- ------------ -------- ---------- ------------ ------------
Subscription
Cash Received 114,163 114,163
Shares for Cash 10,500,000 10,500 489,500 500,000
Shares for Cash 9,000,000 9,000 441,000 450,000
Shares Issued for
Services 1,992,803 1,992 186,739 188,731
Shares Cancelled (500,000) (500) 500 -
Net (Loss) for the
six months ended
June 30, 2008 - - - - - - - (2,241,989) (2,241,989)
------------ --------- ------ ------- ------------ -------- ---------- ------------ ------------
Balance June 30, 2008 520,366,390 $520,366 - $ - $ - $ - $1,320,960 $(2,962,419) $(1,121,093)
============ ========= ====== ======= ============ ======== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
QUARTER ENDED JUNE 30, 2008
FOR THE SIX MONTHS ENDED
JUNE 30,
Cash Flows from Operating Activities: 2008 2007
------------ --------
Net (Loss) for the period: $(2,241,989) $53,587
Depreciation 686 723
Common Stock issued 211,232 -
Changes in Assets and Liabilities
Accounts Receivable (47,347)
------------ --------
Due from Affiliate (2,094) -
Prepaid Expenses and Deposits (38,140) (6,509)
Accounts Payable and Accrued Expenses 523,342 6,518
------------ --------
Net Cash flows used for Operating Activities (1,594,310) -
Cash Flows Used for Investing Activities -
Business Combination and Fixed Assets (734,067)
Cash Flows from Financing Activities
Issuance of note 1,103,125 -
Proceeds from the Issuance of Common Stock 950,000 -
Collection of subscription Receivable 114,163 -
------------ --------
Net Cash Flows from Financing Activities 2,167,288 -
------------ --------
Net Increase (Decrease) in cash (161,089) 54,319
Cash-beginning 577,331 822
------------ --------
Cash-end $ 416,242 $55,141
============ ========
Supplemental disclosures:
Interest Paid $ - $ -
Income Taxes paid $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PREPAID CARD HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Prepaid Card Holdings, Inc. formerly Berman Holdings, Inc. (the "Company") was
incorporated under the name Nately National Corporation in the state of Nevada
on October 8, 1986 and then changed its name National Health Care Alliance, Inc.
The Company was dormant until October 11, 2007 when the Company acquired Berman
Marketing Group, a wholly owned subsidiary as its operating business. In October
2007 the name was changed from National Health Care Alliance, Inc. to Berman
Holdings, Inc. In March of 2008 the Company acquired Merchant Processing
International, from a related party, and it became a wholly owned subsidiary. In
May of 2008 the Company changed its name to Prepaid Card Holdings, Inc. The
company trades under the symbol PPDC on the pink sheets.
The Company is in the prepaid general use debit, ATM, POS and signature based
card market. The Company's primary target audience is the non banked and
underserved individuals in the country.
Basis of Presentation/Going Concern
--------------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred losses and has yet to begin total operations. These
conditions raise substantial doubt as to the Company's ability to continue as a
going concern. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. These
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The accompanying consolidated financial
statements have been prepared on the accrual basis of accounting in accordance
with accounting principles generally accepted in the United States.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries Berman Marketing Group, Inc and Merchant
Processing International. All material inter company balances and transactions
have been eliminated on consolidation. The acquisition of Merchant Processing
International has been accounted for as a transfer of assets under common
control, and accordingly is accounted for in all periods presented.
F-7
Stock Based Compensation
--------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. For
stock based compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant. For stock-based awards the value is based on the
market value for the stock on the date of grant. Stock option awards are valued
using the Black-Scholes option-pricing model.
During the period 1,992,803 shares were issued for services totaling $188,732.
These shares were issued from April 4, 2008 to May 8, 2008 at market prices
between .09 and .10 cents per share to four individuals for consulting services.
This expense is recognized in the Statement of Operations as part of
"professional fees." We estimate the fair value of the consulting services at
market price. These issuances had no effect on our cash flows.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
F-8
Impairment of Long-Lived Assets
-------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long-lived asset to be held and
used.
Revenue Recognition
--------------------
The company recognizes revenue both from merchant processing costs and activity
charges for card usage. These fees are transactionally based and recorded at the
time of occurrence.
For the merchant processing services, the company receives revenues in the form
of commissions paid resulting from a percentage of credit card volume for the
retailers engaged. This revenue is recognized on a monthly basis under the
accrual basis of accounting.
For the Bank Freedom prepaid cards operations, we derive revenues through fees
charged to the cardholders. Those sources may include:
- Interchange
- Bill pay fees
- Domestic and International ATM transaction fees
- Debit purchase and PIN decline fees
- Monthly maintenance fees
These fees are debited on the card and recognized as revenue immediately
Income Taxes
-------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to
F-9
common shareholders by the weighted average number of common shares available.
Diluted earnings (loss) per share is computed similar to basic earnings (loss)
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Diluted earnings (loss) per share has not been presented since the effect of the
assumed conversion of options and warrants to purchase common shares would have
an anti-dilutive effect.
Recently Issued Accounting Pronouncements
--------------------------------------------
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141(R)). This Statement provides greater consistency in the accounting and
financial reporting of business combinations. It requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires the acquirer to disclose the nature and financial effect of the
business combination. FAS 141(R) is effective for fiscal years beginning after
December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of
fiscal 2009 and are currently assessing the impact the adoption will have on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in
Consolidated Financial Statements (FAS 160). This Statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for
fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later
than the first quarter of fiscal 2009 and are currently assessing the impact the
adoption will have on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to
measure at fair value eligible financial instruments and certain other items
that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 in the first quarter of fiscal 2008. The
adoption of SFAS No. 159 had no effect on our financial position and results of
operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires company plan
sponsors to display the net over- or under-funded position of a defined benefit
postretirement plan as an asset or liability, with any unrecognized prior
service costs, transition obligations or actuarial gains/losses reported as a
component of other comprehensive income in shareholders' equity. SFAS No. 158
is effective for fiscal years ending after December 15, 2006. We adopted the
recognition provisions of SFAS No. 158 as of the end of fiscal 2007. The
adoption of SFAS No. 158 did not have an effect on the Company's financial
position or results of operations
F-10
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the application of SFAS No. 157 may change
current practice for some entities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We adopted SFAS No. 157 in the first
quarter of fiscal 2008. There was no impact with the adoption of SFAS No. 157 on
our financial position and results of operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the application of SFAS No. 109, Accounting for Income
Taxes, by defining a criterion that an individual tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, but earlier adoption is permitted. We adopted FIN 48
effective January 1, 2007. There was no impact on our financial position and
results of operations upon the adoption of FIN 48.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 22,500,000 shares of stock, for the acquisition of Merchant
Processing International, an entity who was owned by the majority stockholder of
the Company.
The company is owed money from an affiliate of $2,046 for expenses paid on
behalf of the affiliate. The affiliate is controlled and owned by the Company's
President.
The company owes on a note a related party, its President $750,000 with interest
at 5% due over 48 months starting July 1, 2008.
The Company is obligated under a sub-lease arrangement with Berman Investment
Group, a related party for hardware and software expiring in November 2008.
Monthly terms approximate $1,800 a month. There were no expenses incurred
during the period.
The Company also sub-leases its rental space from Berman Investment Group, an
entity owned by a related party now for approximately $10,000 per month.
During the period ended June 30, 2008 and 2007, total related party expenses
incurred were $54,510 and $29,960, respectively, and shown as related party
expenses in the profit and loss statement.
F-11
The Company has also engaged Berman Investment Group (BIG) as a consultant. The
Company is also required to reimburse BIG for costs incurred, however BIG has
not incurred any costs resulting from the consulting agreement and is currently
not seeking reimbursement.
NOTE 3 - BUSINESS COMBINATION
The Company has accounted for the acquisition of Merchant Processing, Inc. as a
business combination under common control on the amount paid for Merchant
Processing International in excess of its book value. The Company issued
22,500,000 shares of stock, valued at par, due to the related party interest, of
$22,500 and incurred a note payable for $750,000, the total of which was
$772,500. This amount exceeded the book value by $732,348 which was charged
against additional paid in capital.
NOTE 4- ACCOUNTS RECEIVABLE
The Company has accounts receivable from Banks on the amounts transacted for the
previous month, consisting of processing fees and charges.
NOTE 5 - FIXED ASSETS
Furniture and Fixtures $ 8,648
Computers 3,682
-----------
Total 12,330
Accumulated Depreciation (7,324)
Net Fixed Assets $ 5,006
NOTE 6 - NOTE PAYABLE
Related Party
--------------
The Company is indebted to its main shareholder for the purchase of the
subsidiary for $750,000 payable over 48 months with interest at 5%. Included in
this note is unpaid interest at June 30, 2008 of $3,125. The interest expense
is also included in the general and administrative expenses in the statement of
operations.
Unrelated Party
----------------
The Company is also obligated under a note to an individual unrelated to the
Company for $350,000. The note bears interest at 10%. In July of 2008 $275,000
of this note was reduced by the issuance of shares of common stock totaling
3,500,000 shares plus a payoff of $125,000.
The balance of the note of $50,000 is due in January of 2009.
NOTE 7- COMMON STOCK TRANSACTIONS
During the first quarter 2008 the Company issued 33,000,000 shares of stock,
22,500,000 shares for the purchase of the subsidiary and the balance of
10,500,000 shares for $500,000 cash. Also during the quarter subscription
receivables of $114,163 were collected.
During the second quarter of 2008 the company issued 10,992,803 shares and
cancelled 500,000 shares. Of the shares issued 9,000,000 were issued for cash of
$450,000, and 1,992,803 for services totaling $188,732.
F-12
NOTE 8 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, Accounting for
Income Taxes, using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period,that includes the enactment date.
The Company has a net loss carryforward equal to approximately $700,000. The
deferred tax asset related to this carryforward has been reserved in full based
upon the weight of available evidence, that it is more likely than not that the
deferred tax assets will not be realized.
NOTE 9 - SUBSEQUENT EVENTS
In July 2008 the company issued 3,500,000 shares of stock to reduce debt of
$175,000.
On July 28, 2008 senior management of the Company has agreed to cancel and
return to treasury a total of 127,500,000 shares of the Company stock.
F-13
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
AND FROM JUNE 22, 2005 (INCEPTION) THROUGH DECEMBER 31, 2007
F-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Prepaid Card Holdings, Inc.
We have audited the accompanying balance sheet of Prepaid Card Holdings , Inc.
(A Development Stage Company) as of December 31, 2007 and 2006 and the related
statements of operations, stockholders equity and cash flows for the years then
ended and for the period of inception of June 22, 2005 to December 31, 2007.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (placecountry-regionUnited States). Those standards
require that we plan and perform our audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. 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 the Company as at December 31,
2007 and 2006 and the results of its' operations and its' stockholders equity
and cash flows for the years then ended and for the period June 22, 2005 to
December 31, 2007 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the notes to these financial
statements the Company has incurred losses. This raises substantial doubt about
its ability to continue as a going concern. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
\s\ Gruber & Company LLC
Gruber & Company LLC
Lake St. Louis MO 63367
February 21, 2008
F-15
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
DECEMBER 31,
2007 2006
---------- ---------
Assets
Current Assets
Cash and Cash Equivalents $ 577,331 $ 822
---------- ---------
Prepaid Costs 2,346
Fixed Assets - Net 3,973 5,730
---------- ---------
Total assets $ 581,304 $ 8,898
========== =========
Liabilities and Stockholders Equity
Accounts Payable and Accrued Expenses $ 3,454 $ 32,225
---------- ---------
Total Liabilities 3,454 32,225
Stockholders' Deficit
Common Stock, authorized
1,000,000,000 shares, 476,873,587
and 12,529,837 issued and
outstanding @.001 per share 476,874 12,530
Subscription Receivable (114,163) -
Subscription Payable - -
Additional Paid in Capital 935,569 (20,000)
Deficit Accumulated During
the Development Stage (720,430) (15,857)
---------- ---------
Total Stockholders' Deficit 577,850 (23,327)
---------- ---------
Total Liabilities and Stockholders' Deficit $ 581,304 $ 8,898
========== =========
The accompanying notes are an integral part of these financial statements.
F-16
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
FOR THE YEARS ENDED
DECEMBER 31,
2008 2007
------------- -----------
Revenues $ 937,936 $ 1,173,992
Cost of Sales 297,943 314,261
------------- -----------
Gross Profit 639,993 859,731
Expenses
Related Party-Rent 77,592
Stock for Services 548,750 -
Professional Fees 97,329 137,587
Selling General and Administrative Costs 620,895 725,471
------------- ------------
Total 1,344,566 863,058
------------- ------------
Net Loss $ (704,573) $ (3,327)
============= ============
(Loss) per share $ (0.01) $ 0.00
============= ============
Weighted Average Shares Outstanding 129,616,816 12,529,837
============= ============
FROM JUNE 22, 2005
(INCEPTION) TO
DECEMBER 31, 2007
-------------------
Revenues $ -
-------------------
Expenses
Stock for Services 548,750
Professional Fees 97,329
Selling General and
Administrative Costs 99,613
-------------------
Total 745,629
===================
Net Loss $ (745,629)
The accompanying notes are an integral part of these financial statements.
F-17
[Enlarge/Download Table]
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Additional Retained
Common Stock Preferred Stock Subscription Subscription Paid in Earnings
Shares Amount Shares Amount Receivable Payable Capital (Deficit) Total
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Balance June 22,
2005 (Inception) 12,529,837 $ 12,530 $ $ - $ - $ $ (12,530) $ -
Balance December
31, 2005 12,529,837 12,530 - - (12,530) -
Combination of
entities 12,529,837 12,530 - - (20,000) - (20,000)
Net (Loss) for
the year ended
December 31, 2006 - - - - - - - (3,327) (3,123)
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Balance December
31, 2006 12,529,837 12,530 - - - - (20,000) (15,857) (23,327)
Stock issued
for cash 21,750,000 21,750 - - - - 713,250 - 735,000
Shares receivable 2,531,250 2,531 - - (114,163) - 111,632 - -
Shares issued
for services 2,062,500 2,063 - - - - 121,687 - 123,750
Net (Loss) for
the year ended
December 31, 2007 - - - - - - - (704,573) (704,573)
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Stock issued
for debt 13,000,000 13,000 - - - - 9,000 - 22,000
Stock issued
for founder 425,000,000 425,000 - - - - - - 425,000
----------- -------- -------- -------- -------------- ------------- ----------- ---------- ----------
Balance December
31, 2007 476,873,587 $476,874 - $ - $ (114,163) $ - $ 935,569 $(720,430) $ 577,850
=========== ======== ======== ======== ============== ============= =========== ========== ==========
F-18
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
[Enlarge/Download Table]
FOR THE YEARS ENDED JUNE 22, 2005
DECEMBER 31, (INCEPTION) TO
2007 2006 DECEMBER 31, 2007
------------- ---------- -------------------
Cash Flows from Operating Activities:
Net Profit (Loss) for Year $ (704,573) $ (3,327) $ (745,692)
Common Stock issued for services 548,750 - 548,750
Changes in Assets and Liabilities/prepaid 2,346 (2,346)
Accounts Payable and Accrued Expenses (28,771) 32,225 3,454
------------- ---------- -------------------
Depreciation 1,757 - (193,488)
Cash Flows from Operating Activities (180,491) (26,552) -
Cash Flows from Investing Activities - - -
------------- ---------- -------------------
Purchase of Fixed Assets - (5,730) -
Net Cash Used by Investing Activities - - -
Cash Flows from Financing Activities
Stock issued for debt 22,000 - 22,000
Proceeds from the Issuance of Common Stock 735,000 (20,000) 735,000
Issuance of Preferred Stock net of assets - - -
------------- ---------- -------------------
Net Cash Flows from Financing Activities 757,000 (20,000) 757,000
------------- ---------- -------------------
Net Increase (Decrease) in cash 576,509 822 563,512
Cash-beginning 822 - -
------------- ---------- -------------------
Cash-end $ 577,331 $ 822 $ 563,512
============= ========== ===================
Supplemental disclosures:
Interest Paid $ - $ - $ -
Income Taxes paid $ - $ - $ -
The accompanying notes are an integral part of these financial statements.
F-19
PREPAID CARD HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Berman Holdings, Inc. (the "Company") was incorporated under the name Nately
National Corporation in the state of Nevada on October 8, 1986 and
then changed its name National Health Care Alliance, Inc. The Company was
dormant until October 11, 2007 when the Company acquired Berman Marketing Group,
a wholly owned subsidiary as its operating business. In October 2007 the name
was changed from National Health Care Alliance, Inc. to Berman Holdings, Inc.
The company trades under the symbol BRMN on the pink sheets.
The Company intends to enter in early 2008 the prepaid general use debit, ATM,
POS and signature based card market. The Company's primary target audience is
the non- banked and underserved individuals in the country.
Basis of Presentation/Going Concern
--------------------------------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company has
incurred losses and has yet to begin operations. These conditions raise
substantial doubt as to the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty. These financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The accompanying
financial statements have been prepared on the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States.
The Company is a development stage enterprise after its dormant period which
commenced in October 2007 as planned principal operations have not commenced.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Berman Marketing Group, Inc. All material inter
company balances and transactions have been eliminated on consolidation.
Stock Based Compensation
--------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related
F-20
services are rendered. For stock based compensation the Company recognizes an
expense in accordance with SFAS No. 123 and values the equity securities based
on the fair value of the security on the date of grant. For stock-based awards
the value is based on the market value for the stock on the date of grant. Stock
option awards are valued using the Black-Scholes option-pricing model.
In 2007 425,000,000 shares were issued as founders' shares to the founder at
par. In 2006 2,062,750 shares were issued for services valued at $123,750. The
shares were issued to four individuals all with a market price of.06 cents, for
consulting services. Both items are included in the statement of operations.
We estimate the fair value of the consulting services at market price. These
issuances had no effect on our cash flows.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
Impairment of Long-Lived Assets
-------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
F-21
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and
liabilities that represents the unit of accounting for a long-lived asset to be
held and used.
Income Taxes
-------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
Recently Issued Accounting Pronouncements
--------------------------------------------
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141(R)). This Statement provides greater consistency in the accounting and
financial reporting of business combinations. It requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires the acquirer to disclose the nature and financial effect of the
business combination. FAS 141(R) is effective for fiscal years beginning after
December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of
fiscal 2009 and are currently assessing the impact the adoption will have on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in
Consolidated Financial Statements (FAS 160). This Statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for
fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later
F-22
than the first quarter of fiscal 2009 and are currently assessing the impact the
adoption will have on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to
measure at fair value eligible financial instruments and certain other items
that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 in the first quarter of fiscal 2008. The
adoption of SFAS No. 159 did not have an impact on our financial position and
results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires company plan
sponsors to display the net over- or under-funded position of a defined benefit
postretirement plan as an asset or liability, with any unrecognized prior
service costs, transition obligations or actuarial gains/losses reported as a
component of other comprehensive income in shareholders' equity. SFAS No. 158 is
effective for fiscal years ending after December 15, 2006. We adopted the
recognition provisions of SFAS No. 158 as of the end of fiscal 2007. The
adoption of SFAS No. 158 did not have an effect on the Company's financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the application of SFAS No. 157 may change
current practice for some entities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We adopted SFAS No. 157 in the first
quarter of fiscal 2008. The adoption of SFAS No. 157 had no impact on our
financial position and results of operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the application of SFAS No. 109, Accounting for Income
Taxes, by defining a criterion that an individual tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, but earlier adoption is permitted. We adopted FIN 48
effective January 1, 2007. There was no impact on our financial position and
results of operations upon the adoption of FIN 48
F-23
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 425,000,000 shares of its stock as founders shares to its
president.
Based upon a marketing agreement, during 2007 the Company paid $52,000 to
Merchant Processing International, Inc. a company which the President is a
shareholder.
The Company has also engaged Berman Investment Group (BIG) as a consultant. The
Company is also required to reimburse BIG for costs incurred, however BIG has
not incurred any costs resulting from the consulting agreement and is currently
not seeking reimbursement.
The Company is obligated under a sub-lease arrangement for office space expiring
in December 2008. Monthly terms indicate an amount of approximately $10,000 per
month. These expenses were $77,592 and $0 respectively and are shown separately
on the income statement.
The Company is obligated under a sub-lease arrangement for hardware and software
expiring in November 2008. Monthly terms approximate $1,800 a month. There
were no expenses incurred during the periods.
NOTE 3 - COMMON STOCK TRANSACTIONS
During 2007 the Company issued 464,343,750 shares of which 425,000,000 was for
its founder, 13,000,000 for debt reduction of $22,000, 21,750,000 for cash of
$725,000, 2,062,500 for services valued at market totaling $123,750, 2,531,250
for subscription receivable of $114,163. The founder also contributed capital of
$10,000.
NOTE 4 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, Accounting for
Income Taxes, using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period,that includes the enactment date.
The Company has a net loss carryforward equal to approximately $700,000. The
deferred tax asset related to this carryforward has been reserved in full based
upon the weight of available evidence, that it is more likely than not that the
deferred tax assets will not be realized.
NOTE 5 - SUBSEQUENT EVENT
In January 2008 the Company received the subscription amount included in note 3
above.
F-24
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Merchant Processing International Inc.
We have audited the accompanying balance sheet of The Merchant Processing
International Inc. as of December 31, 2007 and 2006 and the related statements
of operations, stockholders equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform our audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 the Company as at December 31,
2007 and 2006 and the results of its' operations and its' stockholders equity
and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
\s\ Gruber & Company LLC
Lake St. louis MO 63367
Gruber & Company LLC
Dated May 25, 2008
F-26
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
BALANCE SHEETS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
DECEMBER 31, DECEMBER 31,
2007 2006
-------------- --------------
Assets
Current Assets
Cash and Cash Equivalents $ 13,819 $ 822
Prepaid Costs - 2,346
-------------- --------------
13,819 3,168
Fixed Assets - Net 3,973 5,730
-------------- --------------
Total assets $ 17,792 $ 8,898
Liabilities and Stockholders Equity (Deficit)
Accounts Payable and
Accrued Expenses $ - $ 10,225
-------------- --------------
Total Liabilities - 10,225
Stockholders Equity (Deficit)
Common Stock, authorized,
1,000,000 shares, $.01 par value,
500,000 issued and
outstanding respectively 5,000 5,000
Treasury Stock (25,000) (25,000)
Additional Paid in Capital
Retained Deficit 37,792 18,673
-------------- --------------
Total Stockholders' Equity (Deficit) 17,792 (1,327)
-------------- --------------
Total Liabilities and Stockholders
Equity (Deficit) $ 17,792 $ 8,898
============== ==============
The accompanying notes are an integral part of these financial statements.
F-27
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
FOR THE YEARS ENDED
DECEMBER 31,
2007 2006
-------- ----------
Revenues
Revenues-Processing Services $937,936 $1,173,992
Cost of Sales 298,003 314,261
-------- ----------
Gross Profit 639,993 859,731
Expenses
Consulting 260,337 262,512
Professional Fees 19,209 137,587
Selling General and Administrative Costs 341,328 440,755
-------- ----------
Total 620,874 840,584
-------- ----------
Profit from Operations 19,119 18,877
Other Income (expense) - -
-------- ----------
Net Profit $ 19,119 $ 18,877
======== ==========
Profit (Loss) Per Share $ 3.82 $ 3.78
======== ==========
Weighted Average Shares Outstanding 5,000 5,000
======== ==========
The accompanying notes are an integral part of these financial statements.
F-28
[Enlarge/Download Table]
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Common Stock Treasury Stock Retained
Shares Amount Shares Amount APIC Earnings (Deficit) Total
------- ------- ------ --------- ----- ------------------- ---------
Balance, January 1, 2006 500,000 $ 5,000 - $ - $ - $ (204) $ 4,796
Treasury Stock issued - - - (25,000) - - (25,000)
Net Profit for the Year ended December 31, 2006 - - - - - 18,877 18,877
------- ------- ------ --------- ----- ------------------- ---------
Balance December 31, 2006 500,000 5,000 - (25,000) - 18,673 (1,327)
Net Profit for the Year ended December 31, 2007 - - - - - 19,119 19,119
------- ------- ------ --------- ----- ------------------- ---------
Balance December 31, 2007 500,000 5,000 - (25,000) - 37,792 17,792
======= ======= ====== ========= ===== =================== =========
F-29
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
FOR THE YEARS ENDED
DECEMBER 31,
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
2007 2006
--------- ---------
Cash Flows from Operating Activities:
Net Profit for Year $ 19,119 $ 18,877
Adjustments to reconcile net loss to
cash used by operating activities
Depreciation 3,076 3,106
Changes in Assets and Liabilities
Decrease in Prepaid Expenses 2,346 11,847
Accounts Payable and Accrued Expenses (10,225) (27,024)
--------- ---------
14,316 6,806
Cash Flows from Investing Activities
Purchase of Fixed Assets (1,319) (535)
--------- ---------
Net Cash Used by Investing Activities (1,319) (535)
Cash Flows from Financing Activities
Repurchase of Treasury Stock - (25,000)
--------- ---------
Net Cash Flows from Financing Activities - (25,000)
--------- ---------
Net Increase (Decrease) in cash 12,997 (18,729)
Cash-beginning 822 19,551
--------- ---------
Cash-end $ 13,819 $ 822
========= =========
Supplemental disclosures:
Interest Paid $ - $ -
Income Taxes paid $ - $ -
The accompanying notes are an integral part of these financial statements.
F-30
MERCHANT PROCESSING INTERNATIONAL, INC.
DBA
BANK FREEDOM
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Merchant Processing International, Inc. (the "Company") was incorporated in the
state of California on July 18, 2005. The Company is a credit card processing
firm.
Basis of Presentation
-----------------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
Stock Based Compensation
--------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. For
stock based compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant. For stock-based awards the value is based on the
market value for the stock on the date of grant. Stock option awards are valued
using the Black-Scholes option-pricing model. There were zero shares issued
during the periods.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
F-31
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
Impairment of Long-Lived Assets
-------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long-lived asset to be held and
used.
Revenue Recognition
--------------------
The company recognizes revenue from merchant processing costs. These fees are
transactionally based and recorded at the time of occurrence.
For the merchant processing services, the company receives revenues in the form
of commissions paid resulting from a percentage of credit card volume for the
retailers engaged. This revenue is recognized on a monthly basis under the
accrual basis of accounting.
Income Taxes
-------------
The Company for 2006 and 2007 was a subchapter S Corporation, whereby the
individual shareholders report their proportional income of the Company earnings
and therefore there is no provision for income taxes included in these financial
statements.
Earnings Per share
--------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to
F-32
common shareholders by the weighted average number of common shares available.
Diluted earnings (loss) per share is computed similar to basic earnings (loss)
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Diluted earnings (loss) per share has not been presented since the effect of the
assumed conversion of options and warrants to purchase common shares would have
an anti-dilutive effect.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141(R)). This Statement provides greater consistency in the accounting and
financial reporting of business combinations. It requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires the acquirer to disclose the nature and financial effect of the
business combination. FAS 141(R) is effective for fiscal years beginning after
December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of
fiscal 2009 and are currently assessing the impact the adoption will have on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in
Consolidated Financial Statements (FAS 160). This Statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for
fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later
than the first quarter of fiscal 2009 and are currently assessing the impact the
adoption will have on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to
measure at fair value eligible financial instruments and certain other items
that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 in the first quarter of fiscal 2008. There was
no impact from the adoption of SFAS No. 159 on our financial position and
results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires company plan
sponsors to display the net over- or under-funded position of a defined benefit
postretirement plan as an asset or liability, with any unrecognized prior
service costs, transition obligations or actuarial gains/losses reported as a
component of other comprehensive income in shareholders' equity. SFAS No. 158 is
effective for fiscal years ending after December 15, 2006. We adopted the
recognition provisions of SFAS No. 158 as of the end of fiscal 2007. The
adoption of SFAS No. 158 did not have an effect on the Company's financial
position or results of operations.
F-33
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the application of SFAS No. 157 may change
current practice for some entities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We adopted SFAS No. 157 in the first
quarter of fiscal 2008. There was no impact on our financial position and
results of operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the application of SFAS No. 109, Accounting for Income
Taxes, by defining a criterion that an individual tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, but earlier adoption is permitted. We adopted FIN 48
effective January 1, 2007. There was no impact on our financial position and
results of operations upon the adoption of FIN 48.
NOTE 2 - FIXED ASSETS
Fixed Assets consist of Computers, Furniture and Fixtures and other office
equipment with asset lives of between three and five years. At December 31,
2007:
Computers $ 3,682
Furniture, Fixtures Equipment 6,807
-------
Total $10,489
Accumulated Depreciation 6,516
-------
Net $ 3,973
Depreciation Expense in 2007 and 2006 was 3,076 and 3,106.
NOTE 3 - RELATED PARTY TRANSACTIONS
During 2006 the Company paid a management fee of $21,000 to its majority
stockholder.
NOTE 4- LEASE COMMITMENT
The Company has a month to month sub lease agreement.
NOTE 5-SUBSEQENT EVENT
On March 14, 2008, the Company was acquired by a company traded on the pink
sheets, a privately operated trading forum, for 22,500,000 shares of the entity
plus $750,000, interest only to June 1, 2008, at 7.25%, then monthly payments of
$31,250 for 24 months.
F-34
Dates Referenced Herein and Documents Incorporated by Reference
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