UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) November 10, 2005
CARDIFF INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Colorado
(State or Other Jurisdiction of Incorporation)
000-49709 84-1044583
(Commission File Number) (IRS Employer Identification No.)
5717 Tanner Ridge Ave., Westlake Village, CA 91362
(Address of Principal Executive Offices) (Zip Code)
818-879-9722
(Registrant's Telephone Number, Including Area Code)
4685 South Highland Drive, Suite 202, Salt Lake City, Utah 84117
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions (see General Instruction A.2. below):
[] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[] Pre-commencement communications pursuant to Rule 14d-2(b) under
the Exchange Act (17 CFR 240.14d-2(b))
[] Pre-commencement communications pursuant to Rule 13e-4(c) under
the Exchange Act (17 CFR 240.13e-4(c))
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ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
General
On November 10, 2005, Cardiff International, Inc. ("Cardiff"), a
Colorado corporation, acquired Legacy Card Company, Inc. ("Legacy"), a
privately held Nevada corporation in a triangular merger transaction (the
"Merger"). The Plan and Agreement of Merger (the "Plan of Merger"), a copy of
which was attached to the Form 8-K Current Report dated and filed November 1,
2005, and which is incorporated herein by reference, was entered into on
November 1, 2005. See Item 9.01. The effective date of the Merger was
November 10, 2005. As a result of the Merger, Legacy is now a wholly-owned
subsidiary of Cardiff and the stockholders of Legacy prior to the Merger are
now the controlling stockholders of Cardiff.
Legacy was formed as a California limited liability company in August
2001. In April 2005, Legacy was converted into a Nevada corporation.
Additional information about the business of Legacy is set forth in Item 2.01
of this Form 8-K.
The Plan of Merger provided for the issuance by Cardiff to the
stockholders of Legacy of up to an aggregate 18,000,000 shares of Cardiff
common stock, par value $0.001 per share in connection with the Merger. At the
effective time of the Merger, and without any action on the part of Legacy
stockholders, each share of Legacy common stock (except for shares held in
treasury and dissenting shares) was converted into the right to receive four
shares of common stock of Cardiff. Legacy shares held by stockholders of
Legacy who effectively dissent from the Merger and perfect their appraisal
rights under Nevada corporate law are not converted or exchanged. Rather, the
holders thereof will be entitled to payment from Legacy as the surviving
corporation of the fair value of such shares in accordance with Nevada law.
However, any holder who does not perfect such holder's appraisal rights, or
withdraws or loses such rights, will have his, her or its shares exchanged for
such holder's pro rata share of the Merger consideration. As of the effective
time of the Merger, all shares of Legacy common stock were deemed to be no
longer outstanding and automatically cancelled and retired. The shares of
Cardiff common stock issued in connection with the Merger are restricted
securities and will bear a restricted legend. Cardiff waived the condition to
the closing of the Merger that required Legacy to raise a total of not less
than $1,875,000 prior to closing, with at least $1,000,000 of that sum having
been raised by closing, and with a certain portion of the shares that were
required to be issued in connection with such funding having been placed in
escrow pending the completion of such funding by January 15, 2006.
As a result of the Merger, the former stockholders of Legacy are now the
controlling stockholders of Cardiff.
As part of the Merger and as further described below under Item 5.02,
the officers and directors of Cardiff, resigned from their positions as
officers and directors of Cardiff and the officers and directors of Legacy
were appointed as officers and directors of Cardiff at the effective time of
the Merger. Cardiff filed a Schedule 14(F) with the Securities and Exchange
Commission on November 1, 2005.
Legacy obtained written consent to the Merger from the holders of
approximately 53.6% of its shares (the "Majority Stockholders") in lieu of a
meeting of stockholders. Notice of the Merger was sent to non-consenting
stockholders of Legacy in accordance with Nevada corporate law. Notice was
also provided to such stockholders of their appraisal rights under Nevada law.
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Loan Transaction - Convertible Notes and Warrants
Prior to and after the Merger, Legacy has raised or will attempt to
raise approximately $1,875,000 in the form of convertible promissory notes
(the "Notes"). As of November 1, 2005, a total of $1,057,699 of the Notes had
been issued. The Notes bear interest at the rate of 8% per annum, are
unsecured, and are payable six months from the date of issuance. Each of the
Notes is convertible into shares of common stock (these will be shares of
Cardiff common stock, at the price of $1.10 per share. If all of the Notes
are issued, of which there can be no assurance, a total of 1,704,545 shares of
Cardiff will be issued in the conversion of the Notes. As additional
consideration for the purchase of the Notes, each of the Note purchasers was
or will be granted a Warrant which entitles the Note holder to purchase shares
of Cardiff common stock at the price of $1.75 per share. Assuming that all
$1,875,000 of the Notes are issued, Warrants to purchase 852,273 shares of
Cardiff will be issued to the Note holders. The Warrants expire five years
from the date of issuance.
Other Matters
At Closing of the Merger, Corporate Capital Management LLC ("CCM")
and/or The VentureBanc, Inc. ("VentureBanc") shall pay Jenson Services, Inc.,
a Utah corporation ("Jenson Services"), the sum of $225,000, $25,000 of which
has already been deposited into the Trust Account of Leonard W. Burningham,
Esq., counsel for the Company, in consideration of Jenson Services'
indemnification of the Company and Legacy with respect to any and all past
liabilities of any type or nature of the Company existing or arising prior to
Closing, and the Company shall issue an aggregate of 1,175,000 shares of the
Company Common Stock to CCM and VentureBanc, in such proportion as they shall
agree in writing. It is not anticipated that either will become a five
percent stockholder of the Company.
The following persons have agreed to enter into certain Letter
Agreements that will provide:
Subject to and in consideration of the Closing of the Merger,
Charles Calello, the Company's current President and a director, Carole
Beroff and Jenson Services, will cancel an aggregate of 535,407 shares
of the Company Common Stock currently owned by them. Mr. Calello will
cancel 125,000 shares; Ms. Beroff will cancel 160,407 shares; and Jenson
Services will cancel 250,000 shares.
In consideration of the payment of a pro rata portion of the
estimated $20,000 expenses of the Company in connection with the Merger,
the following persons will be issued an aggregate of 535,116 shares of
the Company Common Stock that are "restricted securities" as defined in
Rule 144 as promulgated under the Securities Act of 1933, as amended:
Charles Calello, 178,289 shares; Carole Beroff, 178,414 shares; Duane S.
Jenson, 17,841 shares; Travis T. Jenson, 80,286 shares; and Thomas J.
Howells, 80,286 shares. Messrs. D. Jenson, T. Jenson and T. Howells are
all directors, executive officers and principal shareholders of Jenson
Services. The holders of these shares are to be accorded "piggy back"
registration rights to have their respective shares included in any
registration statement that may be filed with the Securities and
Exchange Commission at no cost to such holders.
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ITEM 2.01. COMPLETION OF ACQUISITION OF ASSETS
As a result of the Merger described above, on November 1, 2005 Legacy
became a subsidiary of Cardiff. Legacy is a marketing and sales firm that has
developed the "Commitment 529 Tuition Card," a MasterCard, which combines a
Section 529 College Savings Plan with the credit card (the "Legacy Credit
Card"). The Legacy Credit Card will be issued by the Metris Companies, a
national financial services company. The Legacy Card is not currently
available but it is expected to be launched in St. Louis, Missouri in the
fourth quarter of 2005.
As set forth above, the aggregate consideration for the Merger was up to
18,000,000 shares of the common stock of Cardiff. At the effective time of the
Merger and without any action on the part of Legacy stockholders, each one
share of Legacy common stock (except for shares held in treasury and
dissenting shares) was converted into the right to receive four shares of
Cardiff common stock. Shares held by stockholders of Legacy who effectively
dissent from the Merger and perfect their appraisal rights under Nevada
corporate law are not converted or exchanged. Rather, the holders thereof will
be entitled to payment from Legacy as the surviving corporation of the fair
value of such shares in accordance with Nevada law.
Further information regarding the Company, Legacy and certain related
matters is included in this Item 2.01 below.
Overview of Cardiff Prior to the Merger
Cardiff is an inactive, publicly held, SEC reporting company. Cardiff
was incorporated under the laws of the State of Colorado under the name
"Cardiff Financial, Inc.," on October 14, 1986. Effective April 1989, Cardiff
completed an acquisition transaction with, and changed its name to, United
American, Inc. The transaction was subsequently rescinded and on December 4,
1989, Cardiff changed its name from United American, Inc., to Cardiff
International, Inc. Since that time, Cardiff has been a shell corporation
seeking to commence active business operations by acquiring a business
opportunity.
Immediately prior to the Merger with Legacy, there were approximately
725,000 shares of Cardiff common stock issued and outstanding. Following the
Merger, there are 19,900,000 shares of Cardiff common stock issued and
outstanding assuming no Legacy stockholders exercised dissenters' rights in
connection with the Merger. Additionally, up to 1,704,545 shares of Cardiff
may be issued in connection with the conversion of Legacy convertible
promissory notes and up to 852,273 shares of Cardiff common stock may be
issued upon the exercise of warrants issued to the holders of such convertible
promissory notes. Such warrants will be exercisable at a price of $1.75 per
share.
Legacy Acquisition Corp. ("LAC") was a Nevada corporation which, prior
to the Merger, was a wholly-owned subsidiary of Cardiff. LAC was formed
solely to facilitate the Merger. As a result of the Merger, LAC was merged
into Legacy and no longer exists as of the effective time of the Merger.
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Description of Business of Legacy
Legacy was formed to offer and market a unique credit card. Legacy is a
marketing and sales firm that has developed the "Commitment 529 Tuition Card,"
a MasterCard that provides card users with an opportunity to save for their
children's education on a tax-free basis while making purchases utilizing the
Legacy Credit Card. The Legacy Credit Card has been developed to be tied into
a card user's "529 College Savings Plan" which is described below. The Legacy
Card is a regular MasterCard but with the tax-free savings added benefits to
the card holder. There are numerous credit cards that offer users cash back
or other rewards. Legacy management believes that the Legacy credit card
program is a unique value-added credit card program that allows consumers
using the Commitment 529 Tuition Card to save for a child's college education
while making normal consumer purchases. The Commitment 529 Tuition Card is a
unique, tax-free educational savings reward credit card that concentrates
consumer loyalty and buying on national retailers in the Legacy merchant
coalition.
The potential success of the Legacy Card involves the participation of
four groups: (i) Legacy as the marketer of the Card, (ii) Metris Companies as
the issuer of the Legacy Card, (iii) a coalition of merchants who will make
contributions to the consumer's designated 529 Education Account, and (iv) the
card user. As a result of contributions made to a card user's 529 Savings
Plan, we expect that the card user will be loyal customers of coalition
merchants and the Metris Companies.
The Commitment 529 Tuition Card is being launched in St. Louis, Missouri
during the last calendar quarter of 2005. Several retailers have signed-on to
the Legacy tuition rewards program. These retailers will contribute an
anticipated 1% to 10% a card user spends to the cardholder's child's "529"
tax-free educational fund account. This retailer contribution is expected to
be supplemented by a 0.5% to 1.0% contribution from Metris Bank, the credit
card issuer. The Metris contribution is applicable no matter where the
cardholder shops, encouraging regular and daily use of the Legacy card.
The Commitment 529 Tuition Card marketing plan is the result of four
years development, focus groups and other market research studies. The Legacy
brand, image, programming, sales and marketing have been designed with the
intent to appeal to American parents and grandparents of saving for a child's
college expenses.
Description of Section 529 Plans
Section 529 plans were authorized by congress to provide tax incentives
for savings for qualified higher education expenses (QHEE). Earnings in 529
plans are tax-free if withdrawals are made for QHEE, otherwise there is a 10%
penalty on the earnings, which are taxed at ordinary rates. Although
nonqualified withdrawals are subject to a 10% penalty on the earnings, taxes
on the earnings are deferred until withdrawal. Federal legislation was passed
in 1996 to allow states to create section 529 plans.
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Section 529 plans are of two types. One is a tuition credit plan and the
other is a savings plan. Section 529 provides that 'qualified state tuition
programs' shall be exempt from taxation. Such plans must be established and
maintained by a State or agency or instrumentality thereof. Most states have
outsourced the management of their programs to investment advisory or
financial services firms. While each state has its own specific requirements,
the salient requirements applicable to all plans are:
1. Only cash contributions are allowed.
2. There must be separate accounting for each designated beneficiary.
3. There may be no investment direction by any contributor to, or
designated beneficiary under, such program. The account owner may choose among
several broad-based investment options once per year.
4. No interest in the program may be used as security for a loan.
5. The program must provide adequate safeguards to prevent contributions
on behalf of a designated beneficiary in excess of those necessary to provide
for the QHEE of the beneficiary.
6. There must be a penalty imposed on distributions from an account that
are not used for QHEE, except death or disability of the designated
beneficiary, or to the extent the designated beneficiary receives a
scholarship.
QHEE include tuition, fees, books, supplies, and equipment required for
the enrollment or attendance of a designated beneficiary at an eligible
educational institution. Reasonable costs for room and board are also QHEE for
students who are enrolled at least half-time. An eligible educational
institution is one which is described in section 481 of the Higher Education
Act of 1965 (20 U.S. C. 1088) and which is eligible to participate in a
program under Title IV of such act. Designated beneficiary is the individual
designated at the commencement of the participation in the qualified state
tuition program. If the designated beneficiary is changed, the new beneficiary
must be a member of the original designated beneficiary's family (as defined
in the code) to avoid treatment as a nonqualified withdrawal.
Launching the Card
We anticipate that the Commitment 529 Tuition Card will be launched in
St. Louis, Missouri, during the last quarter of 2005. Local participation
from the Chamber of Commerce has assisted Legacy in obtaining merchant
participation and in structuring events for card solicitation. Our event
marketing program is anticipated to include stadium events, concerts, sporting
events, shopping malls, etc. Additional local advertising will include radio
coverage, billboard/outdoor advertising, and public relations. Legacy
believes that special event marketing efforts will provide a platform allowing
it to have access to a large base of potential card holders.
The Legacy Card is more than a MasterCard. Legacy believes it is a
unique new way for America's families to save for college while spending.
Unlike most other rewards programs (airline miles, 1% cash back), the Legacy
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reward program brings to bear a strong emotive pull saving for the card
users'child. Legacy's consumer benefit analysis suggests that typical
American parents using the Legacy credit card will save over $7,500 toward
their child's college tuition.
To produce these tangible benefits for its cardholders, Legacy has
established a merchant coalition. Each of its merchants involved in the Legacy
Card Plan has agreed to make a 1-10% (estimated 3%) contribution to the Legacy
cardholder's child's 529 account. For families, they "save while they spend,"
on purchases they would have made anyway. For our coalition merchants, we have
introduced a new marketing dynamic that is expected to change consumer buying
patterns/preferences, increasing consumer expenditures at participating
merchants.
Legacy believes its program has significant advantages for the
MasterCard issuer, the Metris Companies, by inducing consumers to maintain
their credit card with Metris during the period college savings is of concern
for parents.
Merchant Coalition
As of October 18, 2005, a total of approximately 400 St. Louis area
Merchants have signed up to participate in the Legacy Merchant Coalition.
These Merchants include, but are not limited to the following: Alamo Car
Rental, National Car Rental, The Ritz Carlton Hotel, Silver Dollar City, Six
Flaggs, St. Louis Zoo, St. Louis Science Center, White Waters Amusement Parks,
Harrah's Casino, Ameristar Casino's, Medicine Shoppe (16 locations), Clarkson
Eye Care Centers, Schnuck Groceries (49 locations), Bass Pro, U-Gas (30
locations), Kinko's, etc.
Each Merchant participating in the Legacy Merchant Coalition enters into
an agreement with Legacy to contribute a portion of the purchases made by the
Legacy card holder, to the Legacy card holder's 529 Savings Plan. The amount
of the contribution ranges from 1% to 10% and is expected to average
approximately 3%.
Metris Companies Inc., the Issuing Bank
Legacy has entered into an agreement with Metris Companies, Inc.
("Metris") to be the issuer of the Commitment 529 MasterCard. Metris is a New
York Stock Exchange listed company. According to its public filings at
December 31, 2004, Metris had approximately 2.2 million gross active credit
card accounts with approximately $6.6 billion in managed credit card
receivables. As of December 31, 2004, Metris was the 11th largest bankcard
issuer in the United States.
Among other services, MCI offers co-branded credit cards through
partnerships with other companies. Legacy has entered into a Co-Brand Credit
Card Agreement with Metris. Our MasterCard will carry the "Commitment 529
Tuition Card" branding. Metris has agreed to compensate Legacy as follows:
$50 on each activated card
50 basis points on total card spending
1% on all interest charges earned by Metris
$5 annually for each "active" card outstanding
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Under Legacy's agreement with Metris, Metris will be the exclusive
issuer of the Legacy Card, own the credit card account, own the customer list,
manage the credit card accounts, and develop credit policies relating to the
account. Legacy will market the credit card, prepare lists of potential card
holders, and develop a merchant coalition group.
529 Fund Managers
One or more Section 529 Fund Managers will administer the 529 Plans for
card holders. These administrators are expected to be national brokerage
firms. We anticipate that the Fund Managers will compensate Legacy as follows:
* $2- $4 average per activation for each new account activated.
* 100 basis points for all 529 funds under management from the 529
card.
Various Agreements
In connection with the activities related to the launch of the Legacy
Credit Card in St. Louis, Legacy has entered into several short-term
agreements with independent marketing, advertising and other consultants. It
is intended that each of the consultants will provide services to legacy which
will aid in the marketing of the Legacy Credit Card. These consulting
agreements include the following:
Consultant Contract Date Termination Date Monthly
Fee
Delray Consulting & Management 9/1/05 February 2006 $3,000(1)
Rodney Boyd 9/1/05 December 2005 $5,000(1)
Buck Communication Group 9/1/05 December 2005 $5,000(1)
Delta One Investments 3/23/05 March 23, 2006 (2)
(1) In addition to the monthly fee, the consultant will be paid a Royalty
based upon the number of Legacy Credit Cards issued to customers of certain
associations. The royalty is to be paid for a period of three years.
(2) An initial retainer of $5,000 was paid to the consultant. The
consultant charges $200 per hour for services actually rendered.
In June 2005, Legacy entered an agreement with Relay, Inc. to produce
and execute Legacy's Missouri statewide credit card program launch, including
the initial launch market of St. Louis. The total fee to be paid to Relay is
$1,359,450 plus up to a $641,000 bonus if not less than 200,000 Legacy Credit
Cards are activated within 90 days from the initial launch date.
On August 30, 2004, Legacy entered into an "Outsourcing of Services
Agreement" with CEO America, Inc. ("CEOA"). CEOA is in the business of
tracking of credit card transactions and micro-contributions, and related
administrative services. The Agreement provides that the credit card issuer
8
(Metris Companies) will forward credit card sales information to CEOA. CEOA
will review the transaction files and determine the amount due to Metris
Companies, and the amount to be allocated to a credit card user's 529 Savings
Account. The Agreement is for a term of five years. A monthly minimum fee of
$12,500 is paid under the Agreement subject to increase based upon the number
of Legacy Credit Cards activated and the number of credit card transactions
processed by CEOA.
Employees
Legacy currently has six employees but anticipates it will hire
additional personnel as the Legacy credit card is launched.
Management's Discussion and Analysis or Plan of Operation.
The following discussion of Legacy's financial condition and results of
operations should be read in conjunction with Legacy's Financial Statements
and Notes thereto for the same period. This Management's Discussion and
Analysis of Financial Condition and Results of Operations contain descriptions
of Legacy's expectations regarding future trends affecting its business. These
forward-looking statements and other forward-looking statements made elsewhere
in this document are made in reliance upon safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The following discussion
sets forth certain factors we believe could cause actual results to differ
materially from those contemplated by the forward-looking statements.
Overview
Legacy Card Company is a marketing and sales firm that has developed the
529 Tuition Card, a MasterCard. Legacy anticipates the Legacy credit card will
be available to the public commencing in the last calendar quarter of 2005.
The Legacy Credit Card will be issued by Metris Bank. Legacy's business plan
calls for it to generate revenue from as customers sign up for the credit card
as well as when purchases are made with the Legacy credit card. Legacy has
generated no revenues since its inception and has expended considerable funds
in developing its business plan, and funding its operations to date.
Legacy was formed as a limited liability company but in April 2005, it
was converted into a Nevada corporation. The financial statements attached
hereto for the years ended December 31, 2004 and 2003 reflect its status as a
limited liability company. The financial statements for the six months ended
June 30, 2005, reflect Legacy's status as a corporation.
The auditors report for the years ended December 31, 2004 and 2003
include a going concern qualification.
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Liquidity and Capital Resources
At December 31, 2004 and 2003
Since Legacy's inception, its principal sources of liquidity have been
funds raised from the sale of its equity securities, advances from members and
loans in the form of debentures and convertible notes. At December 31, 2004
and 2003, we had cash and cash equivalents of $5,144 and ($119) respectively.
At December 31, 2004 we also had a deposit in escrow in the amount of $442,000
which represented proceeds from a loan agreement from an unaffiliated third
party. Subsequent to December 31, 2004, the balance in the escrow account
deposit was repaid to the lenders under the loan agreement.
Net cash used in operating activities was $542,665 and $1,173,518 in
2004 and 2003, respectively. The decreased amount of net cash used in
operating activities during 2004 compared to 2003 was attributable to a
reduction in operating expenses during the 2004.
Net cash used in investing activities was -0- and $45,473 in 2004 and
2003, respectively.
Net cash provided by financing activities was $547,928 and $1,211,295 in
2004 and 2003, respectively. The cash flows from financing activities in 2004
were attributable to proceeds from unaffiliated third party debentures of
$451,428, and $96,500 of proceeds from member advances. In 2003 cash from
financing activities was attributed to $740,295 of proceeds from member
advances and $471,000 from capital contributions.
Legacy has incurred operating losses since its inception and at December
31, 2004, it had an accumulated deficit of $3,850,066.
Current liabilities at December 31, 2004 and 2003 consisted of primarily
of accounts payable of $818,387 and $508,689 respectively, amounts due to
members of $826,591 and $685,499 respectively and current portion of long term
debt of $382,000 and -0- respectively.
Long term debt was $618,000 at December 31, 2004 and -0- at December 31,
2003. The long term debt was incurred as the result of a loan transaction with
Legacy Investors, LLC, a Florida limited liability company. The long term
debt consisted of $500,000 in the form of a convertible debenture and $500,000
in the form of an initial debenture, both of which bear interest at 10% per
annum. The convertible debenture is matures August 2006 and is convertible
into preferred stock interests of Legacy. The initial debenture is payable in
36 monthly installments. In May 2005, the Company paid $382,000 of the amount
back to the lender.
During fiscal 2004 and 2003, the Company borrowed funds from its
officers, Gary R. Teel and Daniel Thompson. These loans bear interest at 6%
per annum. The balances due at December 31, 2004 and 2003 to Mr. Teel were
$413,296 and $342,750 respectively. The balances due at December 31, 2004 and
2003 to Mr. Thompson were $413,295 and $342,749 respectively.
Gary R. Teel and Daniel Thompson, the officers and directors of Legacy,
have entered into employment agreements with Legacy calling for a monthly
salary of $25,000 ($300,000 annually). In fiscal 2003 and 2004 and through
September 30, 2005 Mr. Teel and Mr. Thompson each waived their entire salary.
This waiver of salary not only reduced Legacy's operating expenses and loss,
it reduced the amount of capital needed to fund Legacy's operations.
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Elsewhere in this Form 8-K, we have described certain litigation and a
judgment entered against Legacy. Legacy has included $261,958 on its balance
sheet for such judgment, together with interest, but is attempting to have the
judgment amount reduced in a further court proceeding or negotiated to a
lesser amount. There can be no assurance that Legacy will be able to reduce
the judgment amount.
There can be no assurance that Legacy will be able to obtain sufficient
capital from debt or equity transactions or from operations in the necessary
time frame or on terms acceptable to us. Should we be unable to raise
sufficient funds, we may be required to curtail our operating plans and
possibly relinquish rights to portions of our technology or products. In
addition, increases in expenses or delays in product development may adversely
impact Legacy's cash position and may require cost reductions. No assurance
can be given that Legacy will be able to operate profitably on a consistent
basis, or at all, in the future.
At June 30, 2005
As described above, Legacy has financed its operations principally
through private sales of equity securities, advances from shareholders and
loans in the form of convertible and non-convertible debentures and notes. In
addition, Legacy repaid $182,325 of amounts advanced from members during the
six months ended June 30, 2005. As of June 30, 2005, Legacy had cash and cash
equivalents of $298,239.
During the quarter ended June 30, 2005, Legacy raised $1,057,699 through
the issuance of convertible notes (the "Notes"). The Notes mature six months
from the date of issuance, accrue interest at 8% per annum. The notes also
may be converted, at the option of the Investors, into shares of our common
stock at a conversion price of $1.75 per share. The conversion price is
subject to adjustment based on certain condition.
Net cash used in operating activities was $582,279 and $90,827 during
the six months ended June 30, 2005 and June 30, 2004, respectively. The
increase in net cash used in operating activities during 2005 compared to 2004
was attributable to an increase in operating expenses during the six months
ended June 30, 2005, compared to the six months ended June 30, 2004.
Net cash flow provided by financing activities was $875,374 and $88,000
during the six months ended June 30, 2005 and June 30, 2004, respectively.
The cash flows from financing activities during the six months ended June 30,
2005 were attributable to $1,057,699 of proceeds from a private placement of
convertible debt and repayment of $182,235 in member advances compared to
$88,000 of proceeds from member advances during the six months ended June 30,
2004.
Legacy has incurred operating losses since its inception and at June 30,
2005, had an accumulated deficit of $4,564,799.
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Current liabilities at June 30, 2005 primarily consisted of accounts
payable of $812,039, amounts due to shareholders of $653,930, interest payable
of $81,429 and notes payable of $1,675,699. Legacy anticipates that at least
$1,000,000 of the debt will converted into Cardiff common stock.
For the six months ended June 30, 2005, Mr. Gary Teel and Mr. Daniel
Thompson were paid no salary and their entire salary was waived. This waiver
of salary not only reduced Legacy's operating expenses and loss, it reduced
the amount of capital needed to fund Legacy's operations.
Legacy believes that in order to continue our operations, development of
its products, and implementation of its business plan, Legacy will need
additional financing. Legacy intends to raise proceeds of $875,000 from the
sale of additional convertible notes in the near term. Additionally, Legacy
anticipates that its credit card will be launched in the last quarter of 2005
and if this occurs Legacy anticipates it will commence generating revenues
shortly thereafter. Legacy anticipates that it will continue to operate at a
loss for the foreseeable future. There can be no assurance that Legacy will
be successful in obtaining financing or in its efforts to increase revenues
and decrease operating costs. If Legacy is unable to obtain additional
financing, Legacy may be required to reduce operations, reduce or discontinue
further research and development, and/or reduce or eliminate further
acquisition activities.
Results of Operations
For the Years Ended December 31, 2004 and 2003
Legacy had no operating revenues for the years ended December 31, 2004
or December 31, 2003.
Legacy had operating expenses of $1,040,047 for the year ended December
31, 2004 and $1,565,302 for the year ended December 31, 2003, representing a
decrease of $525,255. The decrease in operating expenses in 2004 was
primarily due to reductions in salaries and wages of $247,343, consulting fees
of $64,913, and research and development expenses of $137,213.
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Legacy had a net loss of $1,058,911 for the year ended December 31, 2004
and a net loss of $1,608,882 for the year ended December 31, 2003,
representing a decrease of $549,971 during 2004.
For Six Months ended June 30, 2005 and 2004
Legacy had no operating revenues during the six months ended June 30,
2005 and 2004.
Legacy had operating expenses of $650,914 for the six months ended June
30, 2005 compared to $500,845 for the six months ended June 30, 2004,
representing an increase of $150,069 for the six months ended June 30, 2005.
The increase in operating expenses in 2005 was primarily due to advertising
costs of $200,000 related to the pre-launch activities of the Legacy credit
card.
Legacy had a net loss of $714,733 for the six months ended June 30, 2005
compared to a net loss of $514,015 for the quarter ended June 30, 2004,
representing an increase of $200,718 during the six months ended June 30,
2005. This increase was the result of increased operating expenses related to
the pre-launch advertising costs incurred.
The preparation of our financial statements, in accordance with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. On an ongoing basis, management
evaluates its estimates and assumptions, including those related to income
taxes, revenue recognition, restructuring initiatives and contingencies. Our
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources will be based on historical
experience of the operations we may acquire and on various other factors that
are believed to be reasonable under the circumstances. Accordingly, actual
results may differ from these estimates.
Legacy believes the following critical accounting policies, among
others, will affect its more significant judgments and estimates used in the
preparation of our Consolidated Financial Statements.
Interest Rate Risk
Legacy currently has notes payable that accrue interest at a fixed rate.
Legacy anticipates that a substantial amount of our future debt and the
associated interest expense will be subject to changes in the level of
interest rates. Increases in interest rates would result in incremental
interest expense.
Inflation
We do not believe that inflation will negatively impact our business
plans.
13
Description of Property
Currently, Legacy has not entered into any lease agreement for office
facilities. It is currently using facilities in St. Louis provided to it by
the St. Louis Chamber of Commerce and a townhouse provided by its president
Daniel Thompson. Legacy will obtain additional facilities as needed.
Security Ownership of Certain Beneficial Owners and Management
Immediately prior to the Merger, there were 725,000 shares of Cardiff
issued and outstanding. Immediately following the effective date of the
Merger there are 19,900,000 shares of Cardiff issued and outstanding. Assuming
no Legacy stockholder exercises dissenters' rights under Nevada law, the
following table sets forth information regarding shares of Cardiff common
stock beneficially owned as of November 1, 2005 by: (i) each of our officers
and directors; (ii) all officers and directors as a group; and (iii) each
person known by us to beneficially own five percent or more of the outstanding
shares of its common stock.
Shareholder Common Stock Percentage
Gary R. Teel 6,494,848 (1) 32.6%
Daniel Thompson 3,343,864 (2) 16.8%
Robert Fallon -0- -0-
All officers and directors
as a group 3 persons 9,838,712 49.4 %
TOTAL 19,900,000 100 %
(1) Includes 4,094,848 shares issued in the name of Mr. Teel,
1,200,000 shares owned by the Teel Family Trust, and 1,200,000 shares owned by
Mr. Teel's children.
(2) Includes 1,743,864 shares issued in the name of Mr. Thompson,
1,000,000 shares owned by the Thompson Family Trust, and 600,000 shares owned
by Mr. Thompson's minor children.
14
Directors and Executive Officers
As a result of the Merger, the current directors and officers of
Cardiff and Legacy, who will serve until the next annual meeting of
shareholders or until their successors are elected or appointed and qualified,
are set forth below:
Name Position
Gary R. Teel Chairman of the Board/Secretary/Treasurer
Daniel Thompson CEO/President/Director
Robert Fallon Chief Marketing Officer
Background information about the Company's officers and directors is as
follows:
Gary Teel. Mr. Teel has over 20 years experience in national advertising
sales, and the provision of product placement services for the entertainment
industry. He has launched several co-branded credit cards including special
card programs for the cities of Branson MO; Pigeon Forge TN; and Myrtle Beach
SC. Gary is past president of Premier Entertainment Services Inc., a product
placement company that specialized in generating valuable exposure for branded
products on television and in feature films. His major corporate clients
included The Coca-Cola Company and General Mills. He later formed Creative
Film Promotions, Inc., where he was involved in all aspects of film
production. Previously, he was as a partner of Teel-Weir Advertising Agency.
Mr. Teel has a BA degree from the University of Nebraska.
Daniel Thompson. Mr. Thompson was appointed CEO/President of Legacy in
June 2002. Formerly a television and entertainment industry professional with
a 30-year career that embraces network and cable advertising sales programming
production and product placement, Mr. Thompson was president of Creative
Entertainment Services, which he founded and successfully sold in a
transaction worth over $5 million. Mr. Thompson also founded and successfully
sold an industry service company Creative Television Marketing, a producer
of short-form advertising concepts: Closed-Captioning Sponsorships, 10-Second
Promotional Advertising vehicles, and network Game Show Merchandising. He also
oversaw new business for A Creative Group, a full service entertainment
marketing company. Mr. Thompson also founded CableRep USA, a media sales firm
specializing in local market cable advertising, which he sold to Cox Cable in
1981. Mr. Thompson attended Wayne State University, Bellevue College, and
College of Continuing Studies at University of Nebraska at Omaha.
Robert Fallon. Mr. Fallon joined the company as East Coast V.P. Sales
in July of 2002, and was promoted to Chief Marketing Officer in March of 2003.
Fallon has 25 years in marketing/branding with Ocean Spray, Gillette, and
Schick. His responsibilities in these positions included packaging,
merchandising promotions, market research, channel management, pricing
strategy, public relations, agency management, and direct profit and loss
responsibility. While at Ocean Spray, Mr. Fallon headed Design Promotions and
Marketing Communications, where he was involved with numerous lifestyle
marketing tie-in events with such corporate partners as the NFL, Sony, Reebok,
Universal Studios, Disney, America's Cup, NCAA, Pepsi/Frito Lay, Ringling
Bros.and NBC. Mr. Fallon is a graduate of Northeastern University with an MBA
from Suffolk University. He is President and Chairman of the Board of the
Promotion Marketing Association and serves on the Corporate Executive Council
of WGBH Television Boston.
15
Other Involvement in Certain Legal Proceedings
Except as provided herein, there have been no events under any
bankruptcy act, no criminal proceedings and any judgments or injunctions
material to the evaluation of the ability and integrity of any director or
executive officer during the last five years.
Adrian Butash v. Legacy Card Company, et al. LASC Case No.: SC 081 779.
Mr. Butash filed a Complaint against Legacy Card Company, and individual
officers, Daniel Thompson and Gary Teel, for claimed back wages. He alleges
that his employment was not terminated in January of 2002 but continued for a
period of time thereafter under the terms and conditions of the original
contract. The matter was forced to trial on or about June 2, 2005 without
counsel representing Legacy Card Company and/or the individual officers. The
Court issued its Ruling and Order which was subsequently challenged by the
individuals and the Company. Consequently, the Court found that Butash was
entitled to a sum of $261,958.42 in back pay under the breach of contract
theory. The Court also found Daniel Thompson joint and severally liable for
this sum allegedly paying himself a salary and not paying Mr. Butash. (It is
our understanding that evidence now exists that shows this finding to have
been in error.) At present, the parties are in settlement discussions as well
as considering a further post trial motion to provide evidence that was
previously unavailable to extricate Mr. Thompson from any finding of joint and
several liability. As well, based on no liability found against Mr. Teel, Mr.
Thompson and the Company for the alleged Labor Code violations in a post trial
motion, the Company anticipates filing a further post trial motion to recover
its attorneys' fees incurred as well as certain recoverable costs. In
addition evaluation is ongoing concerning an appeal pending court
determinations of the aforementioned post trial motions. The Company has
accrued $261,958 with respect to this claim.
No Board Committees
We do not have any committees established by our Board of Directors.
Accordingly we have no audit committee, compensation committee, nominating
committee or any other committee. Cardiff's common stock is currently traded
on the OTCBB. If Cardiff were ever to meet the qualifications for listing on
a securities exchange or for quotation on NASDAQ, it would be required to have
an audit committee and possibly other board committees.
Code of Ethics
Neither Cardiff nor Legacy has adopted a code of ethics. The recently
appointed Board of Directors intends to adopt a code of ethics prior to
December 31, 2005.
16
Executive Compensation.
The following table sets forth certain information concerning
compensation for services rendered for the past three years to the Company's
Chief Executive Officer and to the Company's most highly compensated officers
other than the CEO, whose annual salary and bonus exceeded $100,000:
Annual Compensation Long Term Compensation
Awards Payouts
All
Name and Other LTIP Other
Principal Annual Stock Options Pay- Comp-
Position Year Salary Bonus Compen-Awards SAR's(#)outs ensat'n
- --------------------------------------------------------------------------
Gary R. Teel 2004 -0- -0- -0- -0- -0- -0- -0-
Chairman 2003 -0- -0- -0- -0- -0- -0- -0-
2002 -0- -0- -0- -0- -0- -0- -0-
Daniel Thompson 2004 -0- -0- $67,500 -0- -0- -0- -0-
CEO 2003 -0- -0- -0- -0- -0- -0- -0-
2002 -0- -0- -0- -0- -0- -0- -0-
Mr. Teel and Mr. Thompson each waived their unpaid salary since
the inception of Legacy. We anticipate salaries will be paid to each of them
commencing in the first quarter of 2006.
Employment Agreements
On June 3, 2002 we entered into employment agreements with each of Gary
R. Teel and Daniel Thompson. The terms of the agreements are similar and
include the following terms: (1) monthly salaries of $25,000, (ii) annual
bonus of 2% pre-tax profits, (iii) five year term; (iv) medical and health
benefits; (v) termination without cause results in compensation paid for four
years, (vi) the sale of the Company results in compensation paid for three
years. Mr. Teel and Mr. Thompson each waived there salary since the inception
of Legacy. We anticipate salaries will be paid to each of them commencing in
the first quarter of 2006.
On August 3, 2005, Legacy entered into an employment agreement with Ruth
Martin Fisher. Under the agreement, Ms. Fisher will be Legacy's Executive
Vice President, Strategic Marketing. The term of the agreement is 60 months.
The agreement provides for a monthly salary of $15,000. In addition to her
base salary, Ms. Fisher is entitled to an annual performance bonus of 1/2 of
1% of Gross Pre-Tax Profit. The agreement provides for an option to purchase
200,000 shares at $1.25. The option vests six months after employment was
commenced. The agreement provides for a vehicle allowance of $15,000 per year
commencing 30 days after the Legacy Credit Card is launched. If Ms. Fisher is
terminated without cause or if Legacy is sold, she is entitled to five years
of current salary.
On August 5, 2005, Legacy entered into an employment agreement with
Jacob Herschend. Under the agreement, Mr. Herschend is Legacy's Vice
President of Corporate Marketing and Sales. The term of the agreement is 60
months. The agreement provides for a monthly salary of $6,266, which will
increase to $8,333 when the St. Louis Pilot Program is completed. In addition
to his base salary, Mr. Herschend is entitled to an annual performance bonus
of 1/2 of 1% of Gross Pre-Tax Profit. The agreement provides for an option to
purchase 125,000 shares at $1.25. If Mr. Herschend is terminated without
cause, he is entitled to six months compensation. If Legacy is sold, he is
entitled to one year of compensation.
17
On August 23, 2005, Legacy entered into an employment agreement with
Lauren Fee. The term of the agreement is 12 months. The agreement provides
for a monthly salary of $2,330, which will increase to $2,630 when the St.
Louis Pilot Program is completed.
Stock Options Granted in the Last Fiscal Year
No options to purchase shares of Legacy were granted to any of its
officers or directors since its inception.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option
Values
No officer or director of Legacy owned any options to purchase shares of
Legacy's common stock at December 31, 2004 and no options were exercised by
Legacy's officers and directors for the year ended December 31, 2004.
Equity Compensation Plan Information
Neither Legacy nor Cardiff has adopted any equity compensation plans as
of the effective time of the Merger. It is likely that one or more equity
compensation plans be adopted in the near future.
Description of Securities.
The authorized capital stock of Cardiff consists of 30,000,000 shares of
common stock, $0.001 par value. The authorized capital stock of Legacy
consists of 100,000,000 shares of common stock, $0.001 par value. Neither
Legacy's Articles of Incorporation nor Cardiff's Articles of Incorporation
authorize a class of preferred stock. The following information is applicable
to both Cardiff common stock and Legacy common stock:
Voting Rights. Each holder of common stock is entitled to one vote per
share. Holders of common stock are entitled to vote on all matters submitted
to our shareholders, including the election of directors. Holders of common
stock do not have cumulative voting rights when electing directors. At
stockholder meetings, a quorum is present if a majority of the issued and
outstanding shares entitled to vote is present in person or by proxy. The
affirmative vote of a majority of the shares present at any meeting is
required for approval of matters submitted to the stockholders, unless the law
requires a higher number.
Holders of common stock are entitled to receive dividends, when and as
declared by the board of directors. Any such dividends may be paid in cash,
property or shares of common stock. Pursuant to the certificate defining the
rights of the holders of Viking's preferred stock, dividends may not be paid
to holders of our common stock unless dividends are first paid to holders of
our preferred stock.
18
Preemption, Conversion, Redemption and Sinking Funds. Holders of common
stock have no preemptive rights or conversion rights, no redemption or sinking
fund provisions and are not liable to further call or assessment.
Liquidation Rights. Upon liquidation, holders of common stock are
entitled to share ratably in any assets available for distribution after
payment of a preference to holders of preferred stock, if and when such
preferred stock is issued in the future.
Market Price of and Dividends
Legacy is, and has always been a privately held company and now is a
wholly-owned subsidiary of Cardiff. There is not, and never has been a public
market for the securities of Legacy. Cardiff's common stock is quoted on the
OTC "Bulletin Board" under the symbol "CDIF".
Changes in and Disagreements with Accountants.
None.
Recent Sales of Unregistered Securities.
See Item 302 of this Form 8-k.
Indemnification of Directors and Officers.
The Articles of Incorporation of Legacy contains a provision eliminating
the personal liability of the directors for money damages except under certain
circumstances. The Articles of Incorporation of Cardiff do not contain a
similar provision. Legacy's Articles of Incorporation contain no provision
relating to indemnification but its bylaws do require or permit
indemnification of officers, directors and others subject to certain
conditions. Both the Articles of Incorporation and bylaws of Cardiff contain
provisions for indemnification of officers, directors, employees and agents of
Cardiff from damages arising from their services to Cardiff.
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to our directors and officers, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable.
ITEM 3.02. UNREGISTERED SALES OF UNREGISTERD SECURITIES
As a result of the Merger, Cardiff has or will issue up to 18,000,000
shares of its common stock to the shareholders of Legacy pursuant to the terms
of the Plan of Merger. The total number of shares that will be issued to
Legacy stockholders may be less than 18,000,000 if any legacy stockholder
exercises his or her dissenters' rights under Nevada corporate law.
Additionally, Cardiff has agreed to issue up to 1,175,000 shares to Corporate
Capital Management, LLC and The Venturebanc, Inc. in exchange for their
payment of $225,000 to Jenson Services, Inc. (the "Indemnification Fee") to
Jenson Services, Inc., a Utah corporation ("Jenson Services"). In
consideration the payment of the Indemnification Fee Jenson Services agreed to
indemnify Legacy and the Consultants from certain liabilities associated with
Cardiff arising prior to the effective date of the Merger. Jenson Services is
a financial consulting firm that owned approximately 37% of the outstanding
common stock of Cardiff prior to the Merger.
19
Legacy was formed as a limited liability company under the State of
California in August, 2001. In April 2005, Legacy was converted into a Nevada
corporation pursuant to the conversion laws of the States of California and
Nevada. At the time of such conversion, all the members of the Legacy limited
liability company had their membership interests converted into shares of
Legacy Card Company, Inc., a Nevada corporation. In connection with the
Merger, the shares of Legacy Card Company, Inc., were converted into shares of
Cardiff. The following list sets forth information about each person who
purchased limited partnership interests in Legacy:
Total Number of
Date of LLC Purchase LLC Interests
Name Investment Price Purchased (1)
Gary Teel 8/29/01 $ 2,283 2,383,205
Daniel Thompson 8/29/01 $ 1,200 1,191,605
James Collins 8/29/01 $ 20 172,495
Lebow Trust (2) $ 175,020 233,000
Michael Coade 8/29/01 $ 20 172,495
Bam Venture Partners 1/1/02 $ 100,000 20,000
Judith Foreman 1/1/02 $ 65,000 13,000
Christopher Gregoire (3) $ 62,500 12,500
Gayle Nagy (4) $ 62,500 12,500
Robert & Kathryn Bregman 1/1/02 $ 75,000 15,000
Kenneth Natori 1/3/02 $ 50,000 10,000
Lucy Gordon & Mark Ptashne 1/4/02 $ 150,000 30,000
Julie Witt & Michael Halpern (5) $ 125,000 25,000
WLD Davis Holdings, LLC (6) $ 100,000 20,000
B. Brand Konheim 1/16/02 $ 125,000 25,000
Jack Kay 7/8/02 $ 25,000 5,000
Dorsar Partners, LP 7/16/02 $ 25,000 5,000
Jerome White 2/18/03 $ 50,000 10,000
Larry & Carol Miller 9/19/03 $ 100,000 20,000
Peggy Scheer 7/15/03 & 7/23/03 $ 96,000 19,200
Jack Polevoi 9/9/03 $ 75,000 15,000
David & Diane Dougherty 9/24/03 $ 50,000 10,000
Ian Robertson, Trustee 11/14/03 $ 50,000 10,000
Ken Chang 11/18/03 $ 50,000 10,000
Jimmy Fung 11/4/03 $ 50,000 10,000
Positive Optical Display, Inc.11/4/03 $ 250,000 50,000
Total Shares Issued 4,500,000
20
(1) From 2001 to 2005, some purchasers of limited company interests
purchased directly from the company subsequently transferred all or a portion
of their interests in trust, by gift or by sale, to family trusts, family
members, friends, other owners of Legacy and others.
(2) 178,000 shares were purchased on November 29, 2001 and 35,000
shares were purchased on July 5, 2002.
(3) 7,500 shares were purchased on January 1, 2002 and 5,000 shares
were purchased on May 1, 2002.
(4) 7,500 shares were purchased on January 1, 2002 and 5,000 shares
were purchased on May 1, 2002.
(5) 12,500 shares were purchased on January 7, 2002, 7,700 shares were
purchased on March 7, 2002 and 5,000 shares were purchased on May 2, 2002.
(6) 15,000 shares were purchased on January 16, 2002 and 5,000 shares
were purchased on August 6, 2002.
(7) 200,000 shares were purchased on March 1, 2003 and 30,000 shares
were purchased on November 14, 2003.
No underwriter or placement agent was involved in the above referenced
transactions. Cardiff is relying on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, a amended, (the "Securities
Act"), and Rule 506 of Regulation D promulgated by the Securities Act.
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT
Upon the closing of the Merger described above on November 1, 2005, the
former shareholders of Legacy, own as a group, 18,000,000 of the 19,900,000
shares of Cardiff issued and outstanding upon the closing of the Merger or
approximately 90.5%. Two former stockholders of Legacy, Gary R. Teel and
Daniel Thompson, who together owned approximately 53.6% of the issued and
outstanding shares of common stock of Legacy, became the owners of 9,838,712
or approximately 49.4% of the outstanding shares of common stock of Cardiff
following the Merger. There are outstanding convertible promissory notes
which had been issued by Legacy prior to the Merger but are convertible into
shares of Cardiff following the Merger. If all of such convertible promissory
notes are converted into shares of Cardiff common stock, additional 1,704,545
shares of Cardiff will be outstanding. No officer or director of Cardiff owns
any of such convertible promissory notes. Following the Merger, there are no
arrangements known to the Company, the operation of which may at a subsequent
date result in a change of control of the Company or which relate to the
election of directors or other matters.
As described in Item 5.02 below, upon the closing of the Merger, the
Board of Directors of the Company consisted of two members, Gary R. Teel and
Daniel Thompson
For the other information required by this Item 5.01, see Item 2.01
above.
21
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICER;
ELECTION OF DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS
On November 11, 2005 in connection with the Merger described above,
Charles Calello, Clay Calello and Kathleen L. Morrison, the officers and
directors of Cardiff prior to the Merger, resigned as officers and directors
of Cardiff. In their place, the following individuals were appointed as
officers and directors of Cardiff:
Name Position
Gary R. Teel Chairman of the Board/Secretary/Treasurer
Daniel Thompson CEO/President/Director
Robert Fallon Chief Marketing Officer
Additional information about the recently appointed officers and
directors of Cardiff is set forth in Item 2.01, Item 5 of this Form 8-K.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS
As the result of the completion of the Merger described in Items 1.01
and 2.01 of this Form 8-K, Cardiff believes it is no longer a shell
corporation as that term is defined in Rule 405 of the Securities Act and Rule
12b-2 of the Securities Exchanges Act of 1934, as amended.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired- Legacy Audited
Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2004 and 2003
Statements of Operations for the years ended December 31, 2004 and 2003
and for the period August 29, 2001 (Date of Inception) to December 31,
2004 and 2003
Statement of Member's' Equity for the years ended December 31, 2004 and
2003 and for the period from August 29, 2001 (Date of Inception) to
December 31, 2004
Statements of Cash Flows for the years ended December 31, 2004 and 2003
and for the period August 29, 2001 (Date of Inception) to December 31,
2004
Notes to Financial Statements
22
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members
Legacy Card Company, LLC
We have audited the accompanying balance sheets of Legacy Card Company, LLC
(a limited liability company in the development stage) (the "Company") as of
December 31, 2004 and 2003 and the related statements of operations, members'
equity and cash flows for each of the years in the two-year period ended
December 31, 2004, and for the period from inception to December 31, 2004.
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 audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide 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 Legacy Card Company, LLC
as of December 31, 2004 and 2003, and the results of its operations and cash
flows for each of the years in the two-year period ended December 31, 2004,
and for the period from inception through December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note A to the financial statements, the Company has sustained operating losses
since its inception and has negative working capital and an accumulated
deficit during the years ended December 31, 2004 and 2003. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding those matters also are described in Note
A. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/Rose, Snyder & Jacobs
Rose, Snyder & Jacobs
A Corporation of Public Accountants
Encino, California
September 29, 2005
23
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
BALANCE SHEETS
December 31, 2004 and 2003
Assets
2004 2003
Current assets:
Cash and cash equivalents $ 5,144 $ (119)
Deposit in escrow account, note C 442,000 0
----------- -----------
Total Current Assets 447,144 (119)
Property & equipment, note D:
Artwork 6,536 6,536
Computer equipment 71,050 71,050
Domain names 1,250 1,250
Furniture and fixtures 70,484 70,484
Leasehold improvements 9,201 9,201
Office equipment 31,180 31,180
Software 1,596 1,596
Accumulated depreciation and amortization (136,146) (90,039)
----------- -----------
Property & equipment, net 55,151 101,258
----------- -----------
Other assets:
Deposits 600 17,030
Loan fees, net, note C 37,500 0
----------- -----------
Total Assets $ 540,395 $ 118,169
=========== ===========
Liabilities and Members' Equity (Deficit)
Current liabilities:
Accounts payable $ 818,387 $ 508,689
Interest payable 27,316 0
Payroll and payroll tax payable 6,205 3,174
Due to / from members, note B 826,591 685,499
Current portion of long term debt, note C 382,000 0
----------- -----------
Current liabilities 2,060,499 1,197,362
Long term debt:
Payable to Legacy Investors, note C 618,000 0
Commitments and contingencies, note D
Members' equity (deficit)
Member units 1,711,962 1,711,962
Deficit accumulated during the development
stage (3,850,066) (2,791,155)
----------- -----------
Total Liabilities and Members' Equity
(Deficit) $ 540,395 $ 118,169
=========== ===========
See accompanying notes.
24
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Years Ended December 31, 2004 and 2003 and the Period
August 29, 2001 (Date of Inception) to December 31, 2004
08/29
Years Ended December 31, (Date of Inception)
2004 2003 to December 31, 2004
Revenue $ 0 $ 0 $ 0
Cost of sales 0 0 0
---------- ---------- -----------
Gross profit 0 0 0
Operating expenses
Legal services 253,956 55,782 409,788
Salaries and wages 45,791 293,164 820,049
Rent 204,951 155,002 406,652
Consulting and outside services 113,784 178,697 633,863
Guaranteed payments 178,561 233,333 323,855
Research and development 36,410 173,623 210,810
Other operating expenses 206,594 475,701 989,244
---------- ---------- -----------
Loss from operations (1,040,047) (1,565,302) (3,794,261)
Other income & expense:
Sublease rental income 55,979 0 55,979
Interest income 0 7 6,768
Interest expense (74,843) (43,587) (118,552)
---------- ---------- -----------
Total other income & expense (18,864) (43,580) (55,805)
---------- ---------- -----------
Loss before income tax (1,058,911) (1,608,882) (3,850,066)
---------- ---------- -----------
Net loss $(1,058,911) $(1,608,882) $(3,850,066)
========== ========== ===========
See accompanying notes.
25
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
STATEMENT OF MEMBERS EQUITY
Years Ended December 31, 2004 and 2003 and the Period
August 29, 2001 (Date of Inception) to December 31, 2004
Membership Accumulated
Interests Deficit Total
BALANCE, AUGUST 29, 2001
(Date of Inception) $ 0 $ 0 $ 0
Issuance of membership interests
for cash, 2001 200,833 0 200,833
Issuance of membership interests
for cash, 2002 1,040,129 0 1,040,129
Net Loss 0 (1,182,273) (1,182,273)
----------- ----------- ------------
BALANCE, DECEMBER 31, 2003 1,240,962 (1,182,273) 58,689
Issuance of membership interests
for cash, 2003 471,000 0 471,000
Net Loss 0 (1,608,882) (1,608,882)
----------- ----------- ------------
BALANCE, DECEMBER 31, 2003 1,711,962 (2,791,155)* (1,079,193)
Net Loss 0 (1,058,911) (1,058,911)
----------- ----------- ------------
BALANCE, DECEMBER 31, 2004 $ 1,711,962 $(3,850,066)* $ (2,138,104)
=========== =========== ============
See accompanying notes
26
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
STATEMENTS OF CASH FLOW
Years Ended December 31, 2004 and 2003 and the Period
August 29, 2001 (Date of Inception) to December 31, 2004
08/29
Years Ended December 31, (Date of Inception)
2004 2003 to December 31, 2004
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,058,911) $(1,608,882) $(3,850,066)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation and
amortization 53,607 45,595 143,646
(Increase) decrease in:
Deposits 16,430 (17,030) (600)
Increase (decrease) in:
Accounts payable 371,270 364,823 879,959
Interest payable 71,908 38,802 113,420
Payroll and payroll tax
payable 3,031 3,174 6,205
----------- ----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES (542,665) (1,173,518) (2,707,436)
CASH FLOW FROM INVESTING ACTIVITIES
Payments for property and
equipment 0 (45,473) (191,297)
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES 0 (45,473) (191,297)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from member advances 96,500 740,295 740,487
Proceeds from Legacy Investors
debentures 451,428 0 451,428
Capital contributions 0 471,000 1,711,962
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 547,928 1,211,295 2,903,877
NET INCREASE (DECREASE) IN CASH 5,263 (7,696) 5,144
CASH AT BEGINNING OF THE PERIOD (119) 7,577 0
----------- ----------- -----------
CASH AT END OF PERIOD $ 5,144 $ (119) $ 5,144
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid in cash $ 2,935 $ 1,778 $ 5,132
=========== =========== ===========
Non-Cash Activities
Accrued interest in the amounts of $44,592, $38,802 and $86,104 were
capitalized to members advances for the years ended December 31, 2004 and
2003, and for the period from August 29, 2001 (inception) to December 31,
2004, respectively.
Out of the $1,000,000 debentures from Legacy Investors, $106,572 was used to
pay loan related fees, and $442,000 remained in an escrow account
at December 31, 2004.
27
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and Nature of Operations
Legacy Card Company, LLC was formed as a Limited Liability Company on August
29, 2001. The purpose of the Company is to develop a co-marketing agreement
with a premier national bank to offer an integrated financial program to
consumers. Legacy Card Company, LLC is a credit card marketing company. The
Company offers a new credit card that takes advantage of Internal Revenue Code
Section 529 educational savings tax-reform legislation, providing significant
tax-free savings and economic incentives for families to save early and often
for college tuition and related expenses. The Company will derive its
revenues from new credit card one-time account fees, new mutual (ESA) one-time
account fees, credit card dollar purchase fees, any negotiated mutual fund
(ESA) annual account management fees and any negotiated credit card annual
renewal fees. The Company expects to commence the launch of their credit card
in a test market in Fall 2005.
Development Stage Activities
The Company is focusing its efforts in two areas during the development stage.
First, the Company is devoting substantial time to the development of the
credit card technology software, which will be used to capture information at
the credit card transaction level. Second, the Company is working to contract
with merchants to participate in the program and add incentives for consumers
to both use the credit card and make purchases from these merchants.
Going Concern
The Company has sustained operating losses since its inception and has
negative working capital and an accumulated deficit. The accompanying
financial statements have been prepared on a going concern basis of
accounting, which contemplates continuity of operations, realization of assets
and liabilities and commitments in the normal course of business. The
accompanying financial statements do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The ability of
the Company to continue as a going concern and appropriateness of using the
going concern basis is dependent upon, among other things, additional cash
infusions. As discussed in note E, the board of directors agreed to enter
into an Agreement and Plan of Merger with Cardiff International, Inc., a
publicly held corporation. Management believes this merger will facilitate
the raising of capital, allowing the Company to pursue the development of its
credit card business.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three (3) months or less to be cash equivalents.
Property and Equipment
Property and equipment are carried at cost. Expenditures for major renewals
and betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation and amortization of property and equipment is
provided using the straight-line method for financial reporting purposes at
rates based on the following estimated useful lives:
Years
Artwork 7
Computer equipment 3
Domain and software 3
Furniture and fixtures 5
Office equipment 5
Leasehold improvements life of lease
During the years ended December 31, 2004 and 2003, depreciation expense was
$46,107 and $45,597, respectively.
28
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Advertising Costs
Advertising costs are charged to expense when incurred. During the years
ended December 31, 2004 and 2003, the amount charged to expense was $23,800
and $140,000, respectively.
Research and Development
Research and development costs are charged to expense when incurred. These
costs primarily include the costs associated with the development of the
credit card software technology. During the years ended December 31, 2004 and
2003, the amount charged to expense was $36,410 and $173,623, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Management uses its
historical records and knowledge of its business in making these estimates.
Accordingly, actual results could differ from those estimates.
Income Taxes
The Company is treated as a partnership for federal income tax purposes.
Consequently, federal income taxes are not payable by, or provided for, the
Company. Members are taxed individually on their shares of the Company's
earnings. The Company's net income or loss is allocated among the members in
accordance with the regulations of the Company.
NOTE B RELATED PARTY TRANSACTIONS
Due to/from Members
The Company borrows funds from Daniel Thompson and Gary Teel, both are Members
and Officers of the Company. The terms of repayment stipulate the loans are
due twenty-four (24) months after the launch of the Legacy Tuition Card at an
annual interest rate of six (6) percent. The balance due to both Daniel
Thompson and Gary Teel at December 31, 2004 and 2003, including accrued
interest, is as follows:
December 31
2004 2003
Daniel Thompson $413,296 $ 342,750
Gary Teel 413,295 342,749
-------- ---------
Total $826,591 $ 685,499
======== =========
Employment Agreements
The employment agreements that both Daniel Thompson and Gary Teel have with
the Company provides for their compensation to be $25,000 each, per month.
Both Daniel Thompson and Gary Teel have waived their right to receive any
unpaid balances.
29
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE C NOTE PAYABLE, ESCROW DEPOSIT & LOAN FEES
On August 5, 2004, the Company entered into a loan agreement with Legacy
Investors, LLC, a Florida limited liability company. The initial loan amount
of $1,000,000 (the "Initial Loan Amount") was made by Legacy Investors, LLC
upon the satisfaction of the post-closing covenant, comprising of a
convertible debenture in the amount of $500,000 and an initial debenture for
the amount of $500,000. Lenders required funds to be deposited into an escrow
account. Disbursements were required to be from an escrow agent.
The convertible debenture in the amount of $500,000 bears an interest rate of
10.00% per year and matures in August 2006, when the principal and accrued
interest is due and payable in full. The indebtedness is convertible into
Series A Preferred Membership interests of the Company.
The initial debenture in the amount of $500,000 bears an interest rate of
10.00% per year. Principal payments shall be payable in thirty-six (36)
consecutive monthly installments, commencing August 2004, and are payable out
of the distributable net cash of the Company.
Under an event of default, the interest rate on both debentures increases to
18% and the terms of repayment and the maturity dates are subject to change.
The Company entered into a security agreement stating that the assets of the
Company as well as the stock pledges are collateral on this loan.
As of December 31, 2004, the Company received $451,428 of these funds and
assumed $106,572 of fees. The balance remaining in the escrow account at
December 31, 2004 was $442,000, of which $382,000 was paid back to Legacy
Investors, LLC in May 2005. See Note E.
The loan fees related to the portion of loan funds that were not received by
the Company as of December 31, 2004, was expensed during the year, leaving an
amortized balance of loan fees of $37,500.
NOTE D COMMITMENTS AND CONTINGENCIES
Operating Lease
On February 1, 2003, the Company signed a lease with Red Bull North America,
Inc. for office space. The lease commenced February 1, 2003 and expires March
31, 2006. The Company vacated the premises in 2004. On April 22, 2003, the
Company signed a lease with Pitney Bowes for mailing equipment. This lease
commenced April 22, 2003 and expires October 30, 2006. Future minimum rental
payments under these leases are:
Year Ending
December 31, Rental
------------ -----------
2005 $ 196,679
2006 50,364
-----------
Total $ 247,043
===========
Rent expense for the years ended December 31, 2004 and 2003 was $201,951 and
$142,346, respectively.
In April 2004, the Company began subletting their office on a month-to-month
basis. During the year ended December 31, 2004, the Company received rental
income of $55,979.
30
LEGACY CARD COMPANY, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE D COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingencies (Continued)
On June 2, 2005, the Company went to trial for a complaint filed by a prior
officer of the Company, alleging that his employment was not terminated in
January 2002, and claiming back wages. The Court issued a ruling and order
that found that the officer was entitled to back pay. At December 31, 2004,
the Company has $261,958 accrued as a payable to this officer, which does not
include interest, should the officer be entitled to interest. The Company is
disputing this claim.
The Company is in negotiation with its landlord, Red Bull North America, Inc.,
who is holding the Company's property and equipment as collateral for balance
owed.
>From time to time, the Company is also involved in claims and litigations
arising during the course of business.
NOTE E SUBSQUENT EVENTS
On April 18, 2005, the Company converted from a California limited liability
company to a Nevada corporation.
On March 28, 2005, the Company entered into a loan agreement of approximately
$1,000,000 with Corporate Capital Management, LLC and VentureBanc, Inc.
Simultaneously with the merger with Cardiff International, Inc., Corporate
Capital Management, LLC and VentureBanc, Inc. agreed to loan an additional
$875,000 to the Company. These notes bear interest at 8% per annum and the
term of the notes is 6 months after receipt of the loan. These notes are
convertible into shares of common stock of the Company at the option of the
holder at the rate of $1.10 per share. In addition, the holders of the notes
will receive warrants to purchase 50% of the shares into which the notes are
convertible. The term of the warrants is 5 years and the exercise price is
$1.75 per share.
In May 2005, the Company re-paid the balance remaining in the escrow deposit
to Legacy Investors. Legacy Investors received payment of $382,000 out of the
$442,000 balance in the escrow account, and $60,000 was paid to the escrow
agent. The Company accrued this $60,000, but management believes that they
are not responsible for the payment of the $60,000 to the escrow agent as of
December 31, 2004.
On September 28, 2005, the board of directors agreed to enter into an
Agreement and Plan of Merger with Cardiff International, Inc. ("Cardiff"), a
publicly held corporation. Under this Plan of Merger, Legacy Acquisition
Corp, a wholly-owned subsidiary of Cardiff, will merge into the Company. At
the effective time of the merger, each outstanding share of the Company will
be converted into the right to acquire four shares of Cardiff. At the
effective time of the Merger, the Company will be a wholly-owned subsidiary of
Cardiff, and all of the Company's stockholders prior to the Merger will be
stockholders of Cardiff after the effective time of the Merger.
On August 3, 2005, Legacy entered into an employment agreement with an
individual. Under the agreement, this individual will be Legacy's Executive
Vice President, Strategic Marketing. The term of the agreement is 60 months.
The agreement provides for a monthly salary of $15,000. In addition to her
base salary, she will be entitled to an annual performance bonus of 1/2 of 1%
of Gross Pre-Tax Profit. The agreement provides for an option to purchase
200,000 shares at $1.25. The option vests six months after employment was
commenced. The agreement provides for a vehicle allowance of $15,000 per year
commencing 30 days after the Legacy Card Company is launched. If she is
terminated without cause or if Legacy is sold, she is entitled to five years
of current salary.
On August 5, 2005, Legacy entered into an employment agreement with another
individual. Under the agreement, he will be Legacy's Vice President of
Corporate Marketing and Sales. The term of the agreement is 60 months. The
agreement provides for a monthly salary of $6,266, which will increase to
$8,333 when the St. Louis Pilot Program is completed. In addition to his base
salary, he will be entitled to an annual performance bonus of 1/2 of 1% of
Gross Pre-Tax Profit. The agreement provides for an option to purchase
125,000 shares at $1.25. If he is terminated without cause, he is entitled to
six months compensation. If Legacy is sold, he is entitled to one year
compensation.
31
Legacy Interim Financial Statements (unaudited)
Balance Sheet as of June 30, 2005 (unaudited)
Statements of Operations for the six months ended June 30, 2005 and 2004
and the period August 29, 2001 (Date of Inception) to June 30, 2005
(unaudited)
Statement of Stockholders' Equity for the six months ended June 30, 2005
and 2004 and the period August 29, 2001 (Date of Inception) to June 30,
2005 (unaudited)
Statements of Cash Flows for the six months ended June 30, 2005 and 2004
and the period from August 29, 2001 (Date of Inception) to June 30, 2005
(unaudited)
Notes to Condensed Financial Statements (unaudited)
32
LEGACY CARD COMPANY
(A Development Stage Company)
BALANCE SHEET (UNAUDITED)
06/30
Assets
06/30
Current assets:
Cash and cash equivalents $ 298,239
----------
Total Current Assets 298,239
Property & equipment, note D:
Artwork 6,536
Computer equipment 71,050
Domain names 1,250
Furniture and fixtures 70,484
Leasehold improvements 9,201
Office equipment 31,180
Software 1,596
Accumulated depreciation and amortization (146,126)
----------
Property & equipment, net 45,171
Other assets:
Deposits 600
Loan fees, net, note C 26,250
----------
Total Assets $ 370,260
==========
Liabilities and Members' Equity (Deficit)
Current liabilities:
Accounts payable $ 812,039
Interest payable 81,429
Due to / from shareholders', note B 653,930
Current portion of long term debt, note C 1,675,699
----------
Current liabilities 3,223,097
Commitments and contingencies, note D
Shareholders' equity (deficit)
Common stock, $0.0001 par value;
100,000,0000 shares authorized; 4,500,000
shares issued and outstanding 450
Additional Paid-in Capital 1,711,512
Deficit accumulated during the development stage (4,564,799)
----------
Total Liabilities and Members' Equity (Deficit) $ 370,260
==========
See accompanying notes.
33
LEGACY CARD COMPANY
(A Development Stage Company)
STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended June 30, 2005 and 2004 and the Period
August 29, 2001 (Date of Inception) to June 30, 2005
08/29
Six Months Ended June 30, (Date of Inception)
2005 2004 to June 30, 2005
Revenue $ 0 $ 0 $ 0
Cost of sales 0 0 0
-------- -------- -----------
Gross profit 0 0 0
Operating expenses
Consulting and outside services 242,281 12,500 876,144
Advertising 200,000 0 363,800
Legal services 52,498 78,380 462,286
Travel and entertainment 48,948 50,204 245,943
Rent 4,934 85,217 411,586
Guaranteed payments 0 191,603 323,855
Salaries and wages 0 23,833 820,049
Research and development 0 2,410 210,810
Other operating expenses 102,253 56,698 730,702
-------- -------- -----------
Loss from operations (650,914) (500,845) (4,445,175)
Other income & expense:
Sublease rental income 0 9,721 55,979
Interest income 0 0 6,768
Interest expense (63,819) (22,891) (182,371)
-------- -------- -----------
Total other income & expense (63,819) (13,170) (119,624)
-------- -------- -----------
Loss before income tax (714,733) (514,015) (4,564,799)
-------- -------- -----------
Net loss $(714,733) $(514,015) $(4,564,799)
======== ======== ===========
Basic and diluted loss per share $ (0.16) $ (0.11)
======== ========
Weighted-average common shares
outstanding
Basic and diluted 4,500,000 4,500,000
========= =========
See accompanying notes.
34
LEGACY CARD COMPANY
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Six Months Ended June 30, 2005 and the Period
August 29, 2001 (Date of Inception) to June 30, 2005
Membership Common stock Additional Accumulated
Interests Shares Amount Paid-in capital Deficit Total
BALANCE, AUGUST
29, 2001 (Date
of Inception) $ 0 $ 0 $ 0
Issuance of
membership
interests for
cash, 2001 200,833 0 200,833
Issuance of
membership
interests for
cash, 2002 1,040,129 0 1,040,129
Net Loss 0 (1,182,273) (1,182,273)
--------- ---------- ----- --------- ----------- ----------
BALANCE,
DECEMBER 31,
2002 1,240,962 0 0 0 (1,182,273) 58,689
Issuance of
membership
interests for
cash, 2003 471,000 0 0 0 0 471,000
Net Loss 0 0 0 0 (1,608,882) (1,608,882)
--------- ---------- ----- --------- ----------- ----------
BALANCE,
DECEMBER 31,
2003 1,711,962 0 0 0 (2,791,155)*(1,079,193)
Net Loss 0 0 0 0 (1,058,911) (1,058,911)
--------- ---------- ----- --------- ----------- ----------
BALANCE,
DECEMBER 31,
2004 1,711,962 0 0 0 (3,850,066)*(2,138,104)
Conversion to
C-Corporation,
April, 2005 (1,711,962) 4,500,000 450 1,711,512 0 0
Net Loss 0 0 0 0 (714,733) (714,733)
--------- ---------- ----- --------- ----------- ----------
BALANCE,
JUNE 30,
2005 $ 0 4,500,000 $ 450$1,711,512 $(4,564,799)$(2,852,837)
========= ========== ===== ========= ============ ==========
See accompanying notes.
35
LEGACY CARD COMPANY
(A Development Stage Company)
STATEMENTS OF CASH FLOW (UNAUDITED)
Six Months Ended June 30, 2005 and 2004 and the Period
August 29, 2001 (Date of Inception) to June 30, 2005
08/29
Six Months Ended June 30, (Date of Inception)
2005 2004 to June 30, 2005
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (714,733) $ (514,015) $ (4,564,799)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation and
amortization 21,230 20,152 164,876
(Increase) decrease in:
Deposits 0 0 (600)
Increase (decrease) in:
Accounts payable 53,652 362,826 933,611
Interest payable 63,777 22,000 177,197
Payroll and payroll tax
payable (6,205) 18,210 0
---------- ----------- -------------
NET CASH USED IN OPERATING
ACTIVITIES (582,279) (90,827) (3,289,715)
CASH FLOW FROM INVESTING ACTIVITIES
Payments for property and
equipment 0 0 (191,297)
---------- ----------- -------------
NET CASH USED IN INVESTING
ACTIVITIES 0 0 (191,297)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds and Repayments
from shareholders' advances (182,325) 88,000 558,162
Proceeds from Legacy
Investors debentures 0 0 451,428
Proceeds from notes payable 1,057,699 0 1,057,699
Capital contributions 0 0 1,711,962
---------- ----------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 875,374 88,000 3,779,251
NET INCREASE (DECREASE) IN CASH 293,095 (2,827) 298,239
CASH AT BEGINNING OF THE PERIOD 5,144 (119) 0
---------- ----------- -------------
CASH AT END OF PERIOD $ 298,239 $ (2,946) $ 298,239
========== =========== =============
SUPPLEMENTAL DISCLOSURES
Interest paid in cash $ 42 $ 891 $ 5,174
========== =========== =============
Non-Cash Activities
Accrued interest in the amounts of $43,633, $22,000 and $133,550 were
capitalized to shareholders' advances for the six months ended June 30, 2005
and 2004, and for the period from August 29, 2001 (inception) to June 30,
2005, respectively.
Out of the $1,000,000 debentures from Legacy Investors, $106,572 was used to
pay loan related fees, and $442,000 remained in an escrow account
at December 31, 2004. In May 2005, $382,000 from the escrow account was
re-paid to Legacy Investors and the remaining $60,000 was paid to the
escrow agent for legal expenses.
See accompanying notes.
36
LEGACY CARD COMPANY
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and Nature of Operations
Legacy Card Company was formed as a Limited Liability Company on August 29,
2001. On April 18, 2005, the Company converted from a California Limited
Liability Company to a Nevada Corporation. The purpose of the Company is to
develop a co-marketing agreement with a premier national bank to offer an
integrated financial program to consumers. Legacy Card Company is a credit
card marketing company. The Company offers a new credit card that takes
advantage of Internal Revenue Code Section 529 educational savings tax-reform
legislation, providing significant tax-free savings and economic incentives
for families to save early and often for college tuition and related expenses.
The Company will derive its revenues from new credit card one-time account
fees, new mutual (ESA) one-time account fees, credit card dollar purchase
fees, any negotiated mutual fund (ESA) annual account management fees and any
negotiated credit card annual renewal fees. The Company expects to commence
the launch of their credit card in a test market in Fall 2005.
Development Stage Activities
The Company is focusing its efforts in two areas during the development stage.
First, the Company is devoting substantial time to the development of the
credit card technology software, which will be used to capture information at
the credit card transaction level. Second, the Company is working to contract
with merchants to participate in the program and add incentives for consumers
to both use the credit card and make purchases from these merchants.
Going Concern
The Company has sustained operating losses since its inception and has
negative working capital and an accumulated deficit. The accompanying
financial statements have been prepared on a going concern basis of
accounting, which contemplates continuity of operations, realization of assets
and liabilities and commitments in the normal course of business. The
accompanying financial statements do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The ability of
the Company to continue as a going concern and appropriateness of using the
going concern basis is dependent upon, among other things, additional cash
infusions. As discussed in note E, the board of directors agreed to enter
into an Agreement and Plan of Merger with Cardiff International, Inc., a
publicly held corporation. The Company also entered into an agreement under
which it will get an additional loan of $875,000 simultaneously with the
merger (see note C). Management believes this merger will facilitate the
raising of capital, and combined with the additional loan, it will allow the
Company to pursue the development of its credit card business.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three (3) months or less to be cash equivalents.
Property and Equipment
Property and equipment are carried at cost. Expenditures for major renewals
and betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation and amortization of property and equipment is
provided using the straight-line method for financial reporting purposes at
rates based on the following estimated useful lives:
Years
Artwork 7
Computer equipment 3
Domain and software 3
Furniture and fixtures 5
Office equipment 5
Leasehold improvements life of lease
37
LEGACY CARD COMPANY
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Property and Equipment (Continued)
During the six months ended June 30, 2005 and 2004, depreciation expense was
$9,980 and $23,048, respectively.
Advertising Costs
Advertising costs are charged to expense when incurred. During the six months
ended June 30, 2005 and 2004, the amount charged to expense was $200,000 and
$0, respectively.
Research and Development
Research and development costs are charged to expense when incurred. These
costs primarily include the costs associated with the development of the
credit card software technology. During the six months ended June 30, 2005
and 2004, the amount charged to expense was $0 and $2,410, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Management uses its
historical records and knowledge of its business in making these estimates.
Accordingly, actual results could differ from those estimates.
Income Taxes
The Company was treated as a partnership for federal income tax purposes up to
April 18, 2005, when it converted to a Nevada Corporation. Consequently,
federal income taxes were not payable by, or provided for, the Company.
Members were taxed individually on their shares of the Company's earnings.
The Company's net income or loss was allocated among the members in accordance
with the regulations of the Company.
Loss Per Share
The Company presents its loss per share, using the weighted average number of
shares outstanding as if the conversion to a Nevada Corporation had occurred
on January 1, 2004.
NOTE B RELATED PARTY TRANSACTIONS
Due to/from Shareholders'
The Company borrows funds from Daniel Thompson and Gary Teel, both are
Shareholders and Officers of the Company. The terms of repayment stipulate
the loans are due twenty-four (24) months after the launch of the Legacy
Tuition Card at an annual interest rate of six (6) percent. The balance due
to both Daniel Thompson and Gary Teel at June 30, 2005, including accrued
interest, is as follows:
Daniel Thompson $ 326,965
Gary Teel 326,965
---------
Total $ 653,930
=========
Employment Agreements
The employment agreements that both Daniel Thompson and Gary Teel have with
the Company provides for their compensation to be $25,000 each, per month.
Both Daniel Thompson and Gary Teel have waived their right to receive any
unpaid balances.
38
LEGACY CARD COMPANY
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
NOTE C NOTE PAYABLE, ESCROW DEPOSIT & LOAN FEES
Legacy Investors, LLC
On August 5, 2004, the Company entered into a loan agreement with Legacy
Investors, LLC, a Florida limited liability company. The initial loan amount
of $1,000,000 (the "Initial Loan Amount") was made by Legacy Investors, LLC
upon the satisfaction of the post-closing covenant, comprising of a
convertible debenture in the amount of $500,000 and an initial debenture for
the amount of $500,000. Lenders required funds to be deposited into an escrow
account. Disbursements were required to be from an escrow agent.
The convertible debenture in the amount of $500,000 bears an interest rate of
10.00% per year and matures in August 2006, when the principal and accrued
interest is due and payable in full. The indebtedness is convertible into
Series A Preferred Membership interests of the Company.
The initial debenture in the amount of $500,000 bears an interest rate of
10.00% per year. Principal payments shall be payable in thirty-six (36)
consecutive monthly installments, commencing August 2004, and are payable out
of the distributable net cash of the Company.
Under an event of default, the interest rate on both debentures increases to
18% and the terms of repayment and the maturity dates are subject to change.
The Company entered into a security agreement stating that the assets of the
Company as well as the stock pledges are collateral on this loan.
In May 2005, the Company re-paid the balance remaining in the escrow deposit
to Legacy Investors. Legacy Investors received payment of $382,000 out of the
$442,000 balance in the escrow account, and $60,000 was paid to the escrow
agent. The Company accrued this $60,000 as of June 30, 2005, but management
believes that they are not responsible for the payment of the $60,000 to the
escrow agent.
The loan fees related to the portion of loan funds that were not received by
the Company as of June 30, 2005 was expensed during the year 2004, leaving an
amortized balance of loan fees of $26,250 at June 30, 2005.
Corporate Capital Management, LLC and VentureBanc, Inc.
On March 28, 2005, the Company entered into a loan agreement of approximately
$1,000,000 with Corporate Capital Management, LLC and VentureBanc, Inc.
Simultaneously with the merger with Cardiff International, Inc. (See Note E),
Corporate Capital Management, LLC and VentureBanc, Inc. agreed to loan an
additional $875,000 to the Company. These notes bear interest at 8% per annum
and the term of the notes is 6 months after receipt of the loan. These notes
are convertible into shares of common stock of the Company at the option of
the holder at the rate of $1.10 per share. In addition, the holders of the
notes will receive warrants to purchase 50% of the shares into which the notes
are convertible. The term of the warrants is 5 years and the exercise price is
$1.75 per share.
At June 30, 2005, the Company has the following loans outstanding:
Legacy Investors, LLC note payable $ 618,000
Corporate Capital Management, LLC and
VentureBanc, Inc. note payable 1,057,699
-----------
Total outstanding, current $ 1,675,699
===========
39
LEGACY CARD COMPANY
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
NOTE D COMMITMENTS AND CONTINGENCIES
Operating Lease
On February 1, 2003, the Company signed a lease with Red Bull North America,
Inc. for office space. The lease commenced February 1, 2003 and expires March
31, 2006. On April 22, 2003, the Company signed a lease with Pitney Bowes for
mailing equipment. This lease commenced April 22, 2003 and expires October 30,
2006. Future minimum rental payments under these leases are:
Year Ending
June 30, Rental
----------- ----------
2006 $ 150,018
2007 1,074
----------
Total $ 151,092
==========
Rent expense for the six months ended June 30, 2005 and 2004 was $4,934 and
$85,271, respectively.
In April 2004, the Company began subletting their office on a month-to-month
basis. During the six months ended June 30, 2005 and 2004, the Company
received rental income of $0 and $9,721, respectively.
Contingencies
On June 2, 2005, the Company went to trial for a complaint filed by a prior
officer of the Company, alleging that his employment was not terminated in
January 2002, and claiming back wages. The Court issued a ruling and order
that found that the officer was entitled to back pay. At June 30, 2005 and
2004, the Company has $261,958 accrued as a payable to this officer, which
does not include interest, should the officer be entitled to interest. The
Company is disputing this claim.
The Company is in negotiation with its landlord, Red Bull North America, Inc.,
who is holding the Company's property and equipment as collateral for balance
owed.
>From time to time, the Company is also involved in claims and litigations
arising during the course of business.
NOTE E SUBSQUENT EVENTS
On September 28, 2005, the board of directors agreed to enter into an
Agreement and Plan of Merger with Cardiff International, Inc. ("Cardiff"), a
publicly held corporation. Under this Plan of Merger, Legacy Acquisition
Corp, a wholly owned subsidiary of Cardiff, will merge into the Company. At
the effective time of the merger, each outstanding share of the Company will
be converted into the right to acquire four shares of Cardiff. At the
effective time of the Merger, the Company will be a wholly owned subsidiary of
Cardiff, and all of the Company's stockholders prior to the Merger will be
stockholders of Cardiff after the effective time of the Merger.
On August 3, 2005, Legacy entered into an employment agreement with an
individual. Under the agreement, this individual will be Legacy's Executive
Vice President, Strategic Marketing. The term of the agreement is 60 months.
The agreement provides for a monthly salary of $15,000. In addition to her
base salary, she will be entitled to an annual performance bonus of 1/2 of 1%
of Gross Pre-Tax Profit. The agreement provides for an option to purchase
200,000 shares at $1.25. The option vests six months after employment was
commenced. The agreement provides for a vehicle allowance of $15,000 per year
commencing 30 days after the Legacy Card Company is launched. If she is
terminated without cause or if Legacy is sold, she is entitled to five years
of current salary.
On August 5, 2005, Legacy entered into an employment agreement with another
individual. Under the agreement, he will be Legacy's Vice President of
Corporate Marketing and Sales. The term of the agreement is 60 months. The
agreement provides for a monthly salary of $6,266, which will increase to
$8,333 when the St. Louis Pilot Program is completed. In addition to his base
salary, he will be entitled to an annual performance bonus of 1/2 of 1% of
Gross Pre-Tax Profit. The agreement provides for an option to purchase
125,000 shares at $1.25. If he is terminated without cause, he is entitled to
six months compensation. If Legacy is sold, he is entitled to one year
compensation.
40
(b) Pro Forma Financial Information
Consolidated Pro Forma Balance Sheets as of June 30, 2005 (unaudited)
Notes to Pro Forma Consolidated Balance Sheet as of June 30, 2005
(unaudited)
BACKGROUND INFORMATION REGARDING PRO FORMA FINANCIAL STATEMENTS
On September 28, 2005, Legacy Card Company (Legacy) approved a merger whereby
Legacy Acquisition Corp (LAC), a wholly-owned subsidiary of Cardiff
International, Inc. (Cardiff), will merge with and into Legacy, with Legacy
surviving as a wholly-owned subsidiary of Cardiff. In the merger, all of the
outstanding shares of Legacy capital stock will be converted into the right to
acquire 4 shares of Cardiff common stock, representing 18,000,000 shares of
Cardiff.
The following unaudited pro forma combined balance sheet reflects the
combination of Legacy and Cardiff and the issuance of shares of Cardiff common
stock to Legacy stockholders. The unaudited pro forma combined balance sheet
has been derived from unaudited consolidated historical financial statements
of both Legacy and Cardiff. The financial statements of Cardiff as of June 30,
2005 are contained in its Quarterly Report on Form 10-Q filed with the SEC on
August 3, 2005. The financial statements of Legacy as of June 30, 2005 are
contained in this filing. The unaudited pro forma condensed combined balance
sheet as of June 30, 2005 was prepared as if the merger had occurred on that
date.
Although from a legal perspective, Cardiff acquired Legacy, from an accounting
perspective, the transaction is viewed as a recapitalization of Legacy
accompanied by an issuance of stock by Legacy for the net assets of Cardiff.
This is because Cardiff did not have operations immediately prior to the
merger, and following the merger, Legacy is the operating company. Legacy's
officers and directors will serve as the officers and directors of the new
combined entity. Additionally, Legacy's stockholders will own approximately
90% of the outstanding shares of Cardiff after the completion of the
transaction.
Given these circumstances, the transaction is accounted for as a capital
transaction rather than as a business combination. That is, the transaction
is equivalent to the issuance of stock by Legacy for the net assets of
Cardiff, accompanied by a recapitalization. The accounting is identical to
that resulting from a reverse acquisition, except that no goodwill or other
intangible is recorded. Because the transaction is accounted for as a capital
transaction, the pro-forma financial statements do not include an income
statement. In addition, the pro forma balance sheet has been prepared in such
a manner that the pro forma equity section reflects the total outstanding
Cardiff shares for the new merged entity. Additional, Cardiff's accumulated
deficit and additional paid-in capital accounts have been eliminated, while
Legacy's accumulated deficit remains.
The unaudited pro forma combined balance sheet has been prepared under the
assumption that 100% of Legacy's shares of common stock will be converted into
Cardiff common stock.
In the opinion of management of Legacy and Cardiff, all adjustments necessary
to present fairly the pro forma combined balance sheet have been made based on
the terms and structure of the transaction.
The unaudited pro forma combined balance sheet is not necessarily indicative
of what actual results would have been had the transaction or issuance of
Cardiff common stock to Legacy occurred at the beginning of the period nor do
they purport to indicate the results of future operations of Cardiff and
Legacy. The unaudited pro forma combined balance sheet should be read in
conjunction with the accompanying notes and historical financial statements
and notes to the financial statements of Cardiff and Legacy.
41
LEGACY CARD COMPANY
(A Development Stage Company)
CONSOLIDATED PRO FORMA BALANCE SHEET (UNAUDITED)
06/30
Assets
Cardiff
Legacy Card International, Pro Forma Pro Forma
Company Inc. Adjustments Combined
Current assets:
Cash and cash equivalents $ 298,239 $ 0 $ 0 $ 298,239
Deposit in escrow account 0 0 0 0
---------- --------- ------- ----------
Total Current Assets 298,239 0 0 298,239
Property & equipment:
Artwork 6,536 0 0 6,536
Computer equipment 71,050 0 0 71,050
Domain names 1,250 0 0 1,250
Furniture and fixtures 70,484 0 0 70,484
Leasehold improvements 9,201 0 0 9,201
Office equipment 31,180 0 0 31,180
Software 1,596 0 0 1,596
Accumulated depreciation
and amortization (146,126) 0 0 (146,126)
---------- --------- ------- ----------
Property & equipment, net 45,171 0 0 45,171
---------- --------- ------- ----------
Other assets:
Deposits 600 0 0 600
Loan fees, net 26,250 0 0 26,250
---------- --------- ------- ----------
Total Assets $ 370,260 $ 0 $ 0 $ 370,260
========== ========= ======= ==========
Liabilities and Members' Equity (Deficit)
Current liabilities:
Accounts payable $ 812,039 $ 0 $ 0 $ 812,039
Interest payable 81,429 7,373 0 88,802
Due to / from members 653,930 42,900 0 696,830
Current portion of long term
debt 1,675,699 0 0 1,675,699
---------- --------- ------- ----------
Current liabilities 3,223,097 50,273 0 3,273,370
Commitments and contingencies
Shareholders' equity (deficit)
Common stock 450 0 (450)(1) 0
Paid-in Capital 1,711,512 545,659 (595,482)(1)1,661,689
Deficit accumulated during
the development stage (4,564,799) (595,932) 595,932(1)(4,564,799)
---------- --------- ------- ----------
Total Liabilities and
Members' Equity (Deficit) $ 370,260 $ 0 $ 0 $ 370,260
========== ========= ======= ==========
42
Notes to Pro Forma Combined Balance Sheet (unaudited)
June 30, 2005
(1) To record the issuance of 18,000,000 shares of Cardiff common stock in
exchange for all the outstanding shares of Legacy common stock, to record the
issuance of 1,175,000 shares of Cardiff common stock to Corporate Capital
Management, LLC and to Venturebanc, Inc. for the cost of an indemnity
agreement with Jenson Services, and to record the recapitalization of Legacy
for the reverse acquisition.
43
(d) Exhibits
Exhibit 10.1 Form Convertible Promissory Note
Exhibit 10.2 Form Warrant
Exhibit 21 Subsidiaries of Cardiff International, Inc.
8-K Current Report dated November 1, 2005, and filed with the Securities
and Exchange Commission on November 1, 2005*
2.1 Agreement and Plan of Merger, dated as of November 1, 2005, by
and among Cardiff International, Inc., a Colorado Corporation,
Legacy Acquisition Corp., a Nevada corporation and wholly-owned
subsidiary of Cardiff International, Inc., and Legacy Card
Company, Inc., a Nevada corporation
99.1 Press Release of Cardiff International, Inc. dated November 1,
2005, regarding the proposed Merger
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2005 CARDIFF INTERNATIONAL, INC.
By: /s/ Daniel Thompson
President
44